THE PR COMMISSIONER OF INCOME TAX vs. M/S BROCADE COMMUNICATION

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IN THE HIGH COURT OF KARNATAKA, BENGALURU

DATED THIS THE 28th DAY OF JUNE 2018

PRESENT

THE HON'BLE Dr.JUSTICE VINEET KOTHARI

AND

THE HON’BLE Mrs.JUSTICE S.SUJATHA

I.T.A.No.330/2017

BETWEEN:

…APPELLANTS (BY Mr. ARAVIND K.V. ADV.)

AND:

M/S. BROCADE COMMUNICATION SYSTEMS PVT. LTD., 4TH FLOOR, ‘A’ WING, TOWER 3, PHASE I VRINDAVAN TECH VILLAGE SEZ OUTER RING ROAD, DEVARABEESANAHALLI VILLAGE VARTHUR HOBLI, BENGALURU-560 037 PAN:AACCB 4490N.

…RESPONDENT (BY Ms. TANMAYEE RAJKUMAR, ADV.)

THIS I.T.A IS FILED U/S.260-A OF INCOME TAX ACT, 1961 PRAYING TO (i) FORMULATE THE SUBSTANTIAL

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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QUESTION OF LAW STATED THEREIN. (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BENGALURU IN IT(TP)A No.331/Bang/2015 DATED 21/10/2016 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(1), BENGALURU & ETC.

THIS I.T.A. COMING ON FOR ADMISSION, THIS DAY Dr. VINEET KOTHARI J. DELIVERED THE FOLLOWING:-

JUDGMENT

Mr. Aravind K.V. Adv. for Appellants Ms. Tanmayee Rajkumar, Adv. for Respondents

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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Appellants-Revenue are quoted below for ready reference:- “(1) Whether in the facts and circumstances of the case, the Tribunal is right in law in directing the assessing officer to recalculate the deduction allowable to the assessee under section 10A of the Act by reducing the total turnover also by the same amount by which export turnover was reduced by the assessing officer in respect of foreign currency expenses incurred towards technical services rendered outside India, without appreciating the fact that there is no provision in Section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the Explanation 2 to Section 10B provides that such expenses are to be reduced only from the export turnover? (2) Whether in the facts and circumstances of the case, the Tribunal is right in law in directing the assessing officer to exclude the comparable namely, M/s.Asian Business Exhibition & Conferences Ltd., as comparable by relying upon its own decision in the case of M/s.Electronics for Imaging India Pvt. Ltd., on the ground of functional dissimilarity even though the TPO had chosen the comparables as it satisfies

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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qualitative and quantitative filters applied by the TPO and Tribunal ought to have decided the comparability of these companies on the basis of specific facts brought out on record by the TPO in the case of the assessee?”

Learned counsel for the Appellants-Revenue Mr.K.V.Aravind submits that he does not press the 1st substantial question of law, as the issue regarding deduction of expenditure incurred for ‘Export Turn Over’ is also required to be deducted from ‘Total Turn Over’ for the purpose of computing the deduction u/s.10A of the Act, the controversy is no longer res integra and is covered by the decision of the Division Bench of this Court in the case of M/s.Tata Elxsi Ltd., vs. Asst.Commissioner of Income Tax, decided on 20.10.2015 since reported in (2015) 127 DTR 0327 (Kar), which has been affirmed by the Hon’ble Supreme Court in the case of Commissioner of Income-tax,

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC). The relevant portion of the judgment of the Division Bench in the case of M/s.Tata Elxsi (supra), is quoted below for ready reference:- “20. From the aforesaid provisions, it is clear that if a assessee wants to claim the benefit of Section 10A, firstly he must export articles or things or computer software. Secondly, the said export may be done directly by him or through other exporter after fulfilling the conditions mentioned therein. Thirdly, such an export should yield foreign exchange which should be brought into the country. If all these three conditions are fulfilled, then the object of enacting Section 10A is fulfilled and the assessee would be entitled to the benefit of exemption from payment of Income Tax Act on the profits and gains derived by the Undertaking from the export. 21. Clause 6.11 of Exim Policy dealing with entitlement for supplies from the DTA states that supplies from the DTA to EOU/EHTP/STP/BTP units will be regarded as ‘deemed export’, besides being eligible for relevant entitlements under paragraph 6.12 of the

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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Policy. They will also be eligible for the additional entitlements mentioned therein. What is of importance is when a supply is made from DTA to STP, it does not satisfy the requirements of export as defined under the Customs Act. However, for the purpose of Exim Policy, it is treated as ‘deemed export’. Therefore, when Section 10A of the Act was introduced to give effect to the Exim Policy, the supplies made from one STP to another STP has to be treated as ‘deemed export’ because Clause 6.19 specifically provides for export through Status Holder. It provides that an EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through other exporter or Status holder recognized under this policy or any other EOU/EHTP/STP/BTP unit. What follows from this provision is that to be eligible for exemption from payment of income tax, export should earn foreign exchange. It does not mean that the undertaking should personally export goods manufactured / software developed by it outside the country. It may export out of India by itself or export out of India through any other STP Unit.

Once the goods manufactured by the assessee is shown to have

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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been exported out of India either by the assessee or by another STP Unit and foreign exchange is directly attributable to such export, then Section 10A of the Act is attracted and such exporter is entitled to benefit of deduction of such profits and gains derived from such export from payment of income tax. Therefore, the finding of the authorities that the assessee has not directly exported the computer software outside country and because it supplied the software to another STP unit, which though exported and foreign exchange received was not treated as an export and was held to be not entitled to the benefit is unsustainable in law. The substantial question of law is answered in favour of the assessee and against the revenue. The appeal is allowed. The impugned orders are set aside. The assessee is held to be entitled to deduction of such profits and gains derived from the export of the computer software. No costs”.

The relevant portion of the judgment of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. (supra), is quoted below for ready reference:-

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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“17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxman.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from ‘export turnover’ must also be excluded from ‘total turnover’, since one of the components of ‘total turnover’ is export turnover.

Any other interpretation would run counter to the legislative intent and would be impermissible.

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. 20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well”.

The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to ‘Transfer Pricing’ and ‘Transfer Pricing Adjustments’

made by the concerned authorities below. We consider it appropriate to quote

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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from the order of Tribunal rejecting the Application seeking a review before Tribunal as hereunder:-

“11. Having carefully examined the orders of lower authorities in the light of rival submissions, we find that undisputedly the assessee is engaged in providing support functions to sales organizations with the objective of converting every sales opportunity effectively and efficiently to its AE; whereas ABEC Ltd. is engaged in the organizing exhibitions and events or conferences. The issue whether ABEC Ltd. can be called to be a good comparable with the assessee where the assessee is engaged in support services was examined by the Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra) and it was categorically held that ABEC Ltd. cannot be considered to be as good comparable with the assessee. The relevant observation of the Tribunal is extracted hereunder for the sake of reference:-

Xxxxxxxxxxxxxxx

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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comparable with the assessee, therefore we direct the TPO/AO to exclude it while computing the fresh ALP”.

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed.

Date of Judgment 28-06-2018 I.T.A.No.330/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Brocade Communication Systems Pvt. Ltd.,

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liable to be dismissed and it is dismissed accordingly. No costs.

Sd/- JUDGE

Sd/-

JUDGE

Srl.