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1/22 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 26th DAY OF JUNE 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.363/2017
Between:
The Pr. Commissioner of Income-tax, CIT(A) 5th floor, BMTC Building 80 Feet Road, Kormangala Bengaluru-560 095.
The Addl. Commissioner of Income-Tax Range-11, Present Address DCIT, C-2(1)(2), 2nd Floor BMTC Building, 80 Feet Road Kormangala, Bengaluru-560 095.
…Appellants (By Mr. Aravind K.V. Advocate)
And:
M/s. Broadcom India Pvt. Ltd., Campus 3A, RMZ Ecospace 5th Floor, Bellandur Village Varthur Hobli, Bengaluru-560037 PAN: AABCB 6063E.
…Respondent
This I.T.A. is filed under Section 260-A of Income Tax Act 1961, praying to 1. Formulate the substantial questions
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of law stated above. 2. Allow the appeal and set aside the orders passed by the Income-Tax Appellate Tribunal, Bengaluru in IT(TP)A No.1514/Bang/2010 dated 19-10-2016 and confirm the order of the DRP confirming the order passed by the Deputy Commissioner of Income Tax, Circle- 1(1)(2), Bengaluru & etc.
This I.T.A. coming on for Admission, this day Dr. Vineet Kothari J. delivered the following:-
J U D G M E N T
Mr. Aravind K.V. Adv. for Appellants - Revenue
The Appellants - Revenue have filed this appeal raising purported substantial questions of law arising from the Order of the learned Income Tax Appellate Tribunal Bangalore Bench “B”, Annexure D dated 19/10/2016 in IT(TP)A.No.1514/Bang/2010 for AY 2006-07. 2. The Revenue has suggested four substantial questions of law, which 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
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to re-calculate the deducation 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 10A provides that such expenses are to be reduced only form the export turnover?
Whether in the facts and circumstances of the case, the Tribunal is right in law in excluding the comparables, namely, M/s. Infosys Technologies Ltd, Kals Information Systems Ltd, Tata Elxsi Ltd, Persistent Systems Ltd on the ground of functional dissimilarity by following its earlier order which has not reached finality and even when the TPO had chosen the comparables as it satisfies qualitative and quantitative filters applied by the TPO and Tribunal ought
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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?
Whether in the facts and circumstances of the case, the Tribunal is right in law in excluding the comparable, namely, M/s. Megasoft by following its earlier decision in case of assessee itself whereby the tribunal had followed its decision in case of M/s. First Advantage Offshore P. Ltd which has not reached finality and when the said comparables are chosen after applying required tests by TPO and without appreciating that the sales turnover of the company does not have any impact on the margins earned and there is no correlation between size of the company and the profit margins reported when the said companies have satisfied all the qualitative and quantitative filters?”
Whether on the facts and in the circumstances of the case, the Tribunal is
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right in excluding comparable namely M/s. Flextronics Software Systems Ltd and directing the TPO to apply turnover filter in respect of said comparable by following its earlier order which has not reached finality and even when the TPO had rightly chosen said comparable?”
The learned counsel appearing for the Appellants – Revenue, Mr.K.V. Aravind submitted that he does not press the third and fourth Substantial Questions of Law raised by him in the present appeal. 4. In so far as the first purported substantial question of law raised by the Revenue is concerned, the same is covered by the Division Bench decision of this Court in the case of M/s.Tata Elxsi Ltd., Vs. Asst.Commissioner of Income Tax, decided on 20/10/2015 (2015) 127 DTR 0327 (Kar), which has been affirmed by the Hon’ble Supreme Court in the case of Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).
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The relevant portion of the judgment of this Court 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.
Clause 6.11 of Exim Policy dealing with entitlement for supplies from the DTA states that supplies from the DTA to
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EOU/EHTP/STP/BTP units will be regarded as ‘deemed export’, besides being eligible for relevant entitlements under paragraph 6.12 of the 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
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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 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
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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”.
In so far as the 2nd substantial question of law is concerned, the learned ITAT in its Order dated 19/10/2016 has given the following findings, the relevant portion of which is quoted below for ready reference:-
“9 Infosys Technologies Ltd. 9.1 This company was selected as a comparable by the TPO in spite of the assessee’s objections to its inclusion as a comparable on the grounds of its scale of operations and brand attributable profit margins. The TPO, however, brushed aside the assessee’s objections on the ground that turnover and brand aspects were not materially relevant in the software development services segment.
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9.2 Before us, the learned Authorised Representative contended that this company ought to be omitted from the list of comparables as it is not functionally comparable to the assessee since it commands substantial brand value, owns IPR’s and is a market leader in software development activities, whereas the assessee in the case on hand is merely a provider of software services to its AEs and does not possess any brand value or own any intangibles or IPR’s. In support of this proposition, the learned Authorised Representative placed reliance on the decision of a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra).
9.3 Per contra, the learned Departmental Representative supported the order of the TPO/DRP in including this company in the list of comparables to the assessee.
9.4.1 We have heard both parties and perused and carefully considered the material
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on record; including the judicial pronouncement relied on by the assessee. We find that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd, (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables as it has huge revenue’s from software product development, Owned IPR’s and was not purely a provider of software services by observing at paras 11.4 thereof as under:- … ... ... … … … 9.4.2. Following the above decision of the co- ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer to omit this company from the list of comparables in the case on hand.
10 KALS Information Systems Ltd.
10.1 This is a comparable selected by the TPO inspite of the assessee’s objections to its inclusion in the list of comparables on the
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grounds that it is functionally different and that the segment details were inconsistent with respect to software services revenue and software products revenue.
The TPO, however, rejected the assessee’s objections and included this company in the list of comparables by relying on the information received in reply to notice under Section 133(6) of the Act.
10.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables as it is functionally different, being into software products, whereas the assessee in the case on hand is merely into provision of software development services. It was submitted that the rejection of this company as a comparable to providers of software development services has been upheld by a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra)
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10.3 Per contra, the learned Departmental Representative supported the TPO’s action in including this company in the final list of comparables.
10.4.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decision relied on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables as it was into development of software products and hence not comparable to a provider of software services; observing as under at para 10.4 of the order:- … … … … … …. 10.4.2. Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer to omit this
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company from the list of comparables in the case on hand.
Persistent Systems Ltd.
12.1 This company was selected as a comparable by the TPO over-ruling the objections of the assessee that this company, being into development of software products engaged in product design and analytic services is functionally different form the assessee who is only a provider of software development services. The TPO rejected the assessee’s objections on the ground that this company is mainly, a software development service company, and as per the details filed/obtained under Section 133(6) of the Act 96% of its revenues are from software development services.
12.2 Before us, the assessee objected to the inclusion of this company in the list of comparables on the ground that it is functionally different, being engaged in software designing and analytic services and
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is therefore not comparable to a provider of software development service provider, as is the assessee in the case on hand. The learned Authorised Representative submitted that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) Assessment Year 2008-09 has held that this company, being engaged in product development and product design services, is to be omitted from the list of comparables to providers of software development services.
12.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparables.
12.4.1. We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment
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Year 2008-09 has held that this company is to be omitted from the list of comparables as it is functionally different from a provider of software development services, being engaged in product development and product design services. At para 17.3 of this order the co-ordinate bench has held as under:- … … … … … … 12.4.2. Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables in the case on hand.
15 Tata Elxsi Ltd. (Seq)
15.1. This company was a comparable selected by the TPO inspite of the assessee’s objections to its inclusion in the set of comparables on the ground that it is a product company which has significant R & D activity, IPR’s, etc and is therefore functionally
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dissimilar from the assessee who is a provider of software development services. The TPO, however, rejected the contentions put forth by the assessee and included this company in the set of comparables on the ground that he has taken only the software development and services segment for comparability purposes.
15.2 Before us, it was submitted that this company is not functionally comparable to the assessee as it performs a variety of activities under the software development and services segment, namely, product design, innovation design engineering and visual computing labs, as is reflected in the Annual Report of the company and therefore it is not purely a provider of software development services like the assessee. The learned Authorised Representative also submitted that the co- ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) has held that this company is to be omitted from the list of comparables for providers of
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software development services, like the assessee in the case on hand.
15.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparable companies.
15.4.1. We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision relied on by the assessee. We find that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables to a provider of software development holding as under at paras 13.4.1 and 13.4.2. of its order extracted hereunder:- … … … … … … 15.4.2. Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd.
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(supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables n the case on hand.
However, this Court in a recent judgment in I.T.A.No.536/2015 c/w. I.T.A.No.537/2015 (Pr.Comissioner of Income Tax, Bangalore and Another Vs. M/s. Softbrands India P.Ltd.,) rendered on 25-06-2018, has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable and the relevant portion of the said judgment is quoted below for ready reference: “Conclusion: 55.
A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation
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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
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Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of 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.
We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an ‘Arm’s Length Price’ in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court.
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The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
Having heard the learned counsel for the appellant – Revenue, this Court is satisfied that no substantial question of law would arise in the present case and the appeal filed by the Revenue is therefore, liable to be dismissed. Accordingly, it is dismissed. No costs. The copy of this judgment be sent to the Respondent – Assessee forthwith.
Sd/- JUDGE
Sd/-
JUDGE
BMV*