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Commissioner of Income Tax, Bangalore & Another v/s M/s. Symbol Technologies India Pvt. Ltd., Bangalore

    I.T.A. No. 173 of 2015

    Decided On, 17 July 2018

    At, High Court of Karnataka

    By, THE HONOURABLE DR. JUSTICE VINEET KOTHARI & THE HONOURABLE MRS. JUSTICE S. SUJATHA

    For the Appellants: E.I. Sanmathi, Advocate. For the Respondent: Sandeep Huilgol, T. Suryanarayana, Advocates.



Judgment Text

(Prayer: This Income Tax Appeal is filed under Section 260-A of Income Tax Act 1961, arising out of Order Dated 19/12/2014 Passed in IT(TP)A No.1352/Bang/2011, for the assessment year 2007-08 Annexure-A. Praying To: 1. Decide the foregoing question of law and/or such other questions of law as may be formulated by the Hon'ble Court as deemed fit. 2. Set aside the appellate Orders Dated 19/12/2014 the ITAT, 'A' Bench, Bangalore, in IT(TP)A No.1352/Bang/2011 for assessment year 2007-08 Annexure-A.)

S. Sujatha, J.

Mr. E.I.Sanmathi, Adv. for Appellants - Revenue. Mr. Sandeep Huilgol, Adv. for Mr. T.Suryanarayana, Adv. Respondent - Assessee.

1. This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, Bangalore Bench 'A', Bangalore, in IT[TP]A No.1352/Bang/2011 dated 19.12.2014, relating to the Assessment Year 2007-08.

2. The appeal has been admitted on 08.12.2015 to consider the substantial questions of law No.1 to 6 as indicated in the memorandum of appeal. However, learned counsel for the Revenue seeks to consider all the substantial questions of law framed in the memorandum of appeal, which reads as under:

"1. Whether on the f

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acts and in the circumstances of the case, the Tribunal is right in law directing the TPO to consider only those uncontrolled comparables which are having turnover between Rs.1 to 200 Crores and thereby erred in excluding uncontrolled comparables having turnover of more than Rs.200 Crores in the absence of turnover criterion prescribed in Rule 10B of I.T.Rules and also there being no correlation between turnover and profit margin and without appreciating that the economies of scale is not relevant in software industry?

2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law directing the TPO to examine limit turnover range between 1 to 200 Crores without appreciating that it is against the method of arithmetical average of the PLI's of uncontrolled comparables as per the proviso to section 92C(2) of I.T.Act?

3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law holding that the functions of the assessee are not comparable to the functions of the Accel Transmatics Ltd., Avani Cimcon Technology Ltd., Celestiral Labs Ltd., KALS Information Systems Ltd., Lucid Software Ltd., Infosys Technologies Ltd., Wipro Ltd., IT Segment, TATA Elxsi Ltd., without doing FAR analysis in the instant case even though these comparables satisfy all the qualitative and quantitative filters applied by the TPO and that Tribunal ought to have decided comparability of these companies on the basis of specific facts brought on record by the TPO in the case of assessee?

4. Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that the above companies are functionally different and cannot be taken as comparables even though the Tribunal has held that services are in the nature of software development services and it is not necessary for the TPO to go into the horizontal and vertical segments of the same sub segment, therefore no comparable can be eliminated on the basis of functional differences and that economics of scale are not relevant in the software industry?

5. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in fixing the RPT filter at 10% of total revenue as against 25% RPT applied by the TPO and deleting M/s Ishir Infotech Ltd., and Geomatric Software Ltd., as comparable, by superimposing the decisions of Tribunal in other cases, including those of other benches of Tribunal, without adducing the basis for arriving at the 15% cut off for RPT filter, in the case of the taxpayer and without adducing the basis for arriving at the 10% cut off for RPT filter, in the case of assessee?

6. Whether on the facts and in the circumstances of the case, the Tribunal is right in law rejecting the companies as a comparable without identifying any extraordinary variable which would distinguish this company from the taxpayer in terms of functions performed, assets used and risk undertake i.e. quantitative and qualitative analysis?

7. Whether on the facts and in the circumstances of the case the Tribunal is right in law following the decision of this Hon'ble Court in case of TATA Elaxsi even when the matter is pending Supreme Court and such the Tribunal ought to have awaited the decision of Apex Court?"

Regarding Substantial Question of law No.7:

3. The issue is covered by the decision of 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).

4. 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:-

"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.

18. XXXXXX

19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only 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".

5. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned the findings as under:

Regarding Substantial Question of law Nos.1 and 2:

"9. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Trilogy E-Business Software India [P] Ltd., [supra], this Tribunal on application of the turnover-filter while selecting comparable companies for comparability analysis held as follows:

"xxxxx"

10. Respectfully following the aforesaid decision of the Tribunal in the case of Trilogy E- Business Software India Pvt. Ltd., [supra], we hold that the following companies whose turnover is admitted beyond Rs.200 Crores, should be excluded from the list of comparable companies.

[1] Flextronics Software Systems Ltd.

[2] iGate Global Solutions Ltd.

[3] Mindtree Ltd.

[4] Persistent Systems Ltd.

[5] Sasken Communication Technologies Ltd."

Regarding Substantial Question of law Nos.3, 4 & 6:

"15. The facts and circumstances under which the aforesaid company were considered as comparable is identical in the case of the Assessee as well as in the case of Logica Private Ltd., [supra]. Respectfully following the decision of the Tribunal referred to above in the case of Logica Pvt. Ltd., [supra], we direct that the company viz., Lucid Software Ltd., be excluded from the list of 20 comparable arrived at by the TPO."

Regarding Substantial Question of law No.5:

"16. As far as comparable company chosen by the TPO viz., Geometric Software Ltd., [Seg.] & Ishir Infotech Ltd., are concerned, it is not in dispute before us that the related party transaction in the case of companies exceeds 15% [19.98% in the case of Geometric Software Ltd., and 21.97% in the case of Ishir INfotech Ltd.] and in view of the decision of the Tribunal in the case of 24 X 7 Customer.Com Pvt. Ltd., in ITA No.227/Bang/2010, followed by this Tribunal in the case of Logica Private Ltd., [supra] wherein it was held that where the RPT exceeds 15%, such companies should not be taken as comparable companies. The learned DR however submitted before us that the Mumbai Tribunal in the case of Willis Processing Services [I] Pvt. Ltd., V/s. DCIT ITA No.4420 & 4847/Mum/2012 order dated 01.03.2013 in para 21.8 has held that when comparable companies are available in large numbers then the RPT filter can be applied adopting 10% RPT as threshold limit. We have perused the said decision and find that the ratio of the said decision, even if applied to the present case, the aforesaid two companies have to be excluded because the RPT of the aforesaid comparable companies are above 10% and the comparable companies available are abundant. Following the decision cited by the learned counsel for the Assessee, we hold that Ishir Infotech Ltd., and Geometric Ltd., [Seg.] comparable companies chosen by the TPO be excluded from the list of comparable companies while working out the ALP."

6. The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Nos.536/2015 c/w 537/2015 dated 25.06.2018 [Prl. Commissioner of Income Tax & Anr. V/s. M/s.Softbrands India Pvt. Ltd.,], wherein it has been observed that unless the finding of the Tribunal is found ex facie perverse, the Appeal u/s. 260-A of the Act, is not maintainable. The relevant portion of the 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 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 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.

57. 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.

58. The appeals filed by the Revenue are therefore dismissed with no order as to costs."

7. In the circumstances, having heard the learned Counsel appearing for both the sides, we are of the considered opinion that no substantial question of law arises for consideration in the present case.

8. Hence, the Appeal filed by the Appellants-Revenue is liable to be dismissed and is accordingly dismissed. No costs.
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