(Prayer: This I.T.A is filed under Section 260-A of I.T. Act, 1961, Praying to 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 & set aside the appellate order dated: 11/06/2015 passed by the ITAT, ‘A’ Bench, Bengaluru in C.O.No. 92/BANG/2012 filed in Appeal proceedings No. I.T.(TP) A No. 1302/BANG/2011 Annexure – A for Assessment year 2005-06, As sought for in this Appeal and to grant such other relief as deemed fit, in the interest of justice & Etc.)
1. The Appellants-Revenue have filed this appeal u/s.200A of the Income Tax Act, 1961, raising purportedly certain substantial questions of law arising from the order of the ITAT, ‘A’ Bench, Bangalore, dated 11.06.2015 passed in IT(TP)A No.1302/Bang/2011 (The Income Tax Officer vs. M/s. Sunquest Information Systems (India) Pvt.Ltd.,) for A.Y.2005-06.
2. The proposed substantial questions of law framed in the Memorandum of appeal by the Appellants-Revenue are quoted below for ready reference;-
'1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in directing the exclusion of comparable companies having RPT transactions more than 15% without asking the TPO to make a fresh TP study, since a quantitative filter, viz, RPT filter, has been changed. Changing filter criteria changes the search process altogether and mandates a fresh TP study using updated filters?
2. Whether on the facts and in the circumstances of the case the Tribunal was justified in confirming the Commissioner of Income Tax (Appeals)’s view that companies with high margin profitability are not comparable, even though there is no legal basis on which a high margin company can be declared to be one with ‘abnormal profit making?
3. Whether on the facts and in the circumstances of the case, the Tribunal was correct in creating the legal fiction of ‘abnormal profit making companies’ that cannot be held comparable even if they satisfy the functions-assts-risk comparability factors?
4. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable and accordingly in excluding M/s. Infosys Technologies Ltd, as a comparable on this ground also?
5. Whether on the facts and circumstances of the case, the Tribunal was right in holding that few companies are functionally different from the assessee company when it satisfies all the qualitative and quantitative filters applied by the TPO. The Tribunal has used a narrow functionality filters than the TPO, but has not tested other comparables against the narrower functionality filter applied by it?
6. Whether the Tribunal was right in not setting aside the matter to the TPO for a fresh TP study after taking a new view on functionally matrix which is narrower than the functionality matrix originally used by the TPO?
7. Whether change in any filter – quantitative or qualitative – by any appellate authority should be followed by fresh TP study, or whether the Tribunal can selectively apply their modified qualitative filter to only few comparables challenged by the assessee, or whether a fresh TP study has to be done?
8. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in directing the assessing officer to exclude reimbursement of certain expenditure incurred in foreign currency, both from the Export Turnover and Total Turnover, without appreciating the fact that the statute allows exclusion of such expenditure expressly only from the Export turnover by way of specific definition of export turnover defined in the Act, while there is no specific provision in Section 10A warranting exclusion of the above expenses from the Total Turnover?'
3. 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 from the order of Tribunal rejecting the Application seeking a review before Tribunal as hereunder:-
Regarding substantial question of law Nos. 1 to 7-
'13. We have heard the rival submissions. As far as the grounds of appeal of the Revenue are concerned, ground No.2 with regard to improper application of the RPT filter by the CIT(A), it is not in dispute before us that this Tribunal, in the cases of 24/7 Customer Pvt. Ltd. (ITA No.227/Bang/2010), Sony India Private Ltd. reported in (2009) 315 ITR (80) 150 (DeL) and various other cases has taken a view that comparables having RPT of upto 15% of total revenues can be considered. In view thereof, the Revenue’s grievance on this issue as projected in ground No.2 has to be allowed. It is held that the CIT(A) ought to have adopted a threshold limit of 15% of the total revenue attributable to related party transaction as ground for rejecting comparable companies. Consequently it is held that comparable companies having RPT upto 15% of the total revenues alone can be excluded.
14. Ground No. 3 raised by the Revenue is misconceived and the issue does not arise out of the order of the CIT(A). As we have already seen the CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software Solutions Ltd. Infosys Technologies Ltd., was excluded for reasons of high turnover and high risk profile. Sayam Computer Services Ltd, has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. In doing so, the CIT(A) followed the decision of this Hon’ble Tribunal in Agnity India Technologies v. ITO (ITA 3856/Del/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Therefore, the grievance as projected by the Revenue in ground No.3 is misconceived. On the facts of the present case, we are of the view that the CIT(A) rightly excluded Exensys Software Solutions Ltd., Infosys Technologies Ltd., and Satyam Computers Ltd., from the list of comparable companies.
24. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarly between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company. he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO’s Order, the said company has derived income from software licence also and AMCs.
25. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products.
26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarly between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables.'
33. 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 should be excluded from the list of comparable companies I gate Global Solutions LTd., Flextronics Software Systems Ltd, L & T Infotech Ltd and Infosys Ltd will have to be rejected applying the upper limit of Rs.200 crores turnover. Flextronics Software Systems Ltd, was also held to be functionally not comparable with a software development service provider such as the Assessee by the ITAT Hyderabad Bench in the case of CN O IT Services (India) P. Ltd. Vs. DCIT (2014) 43 Taxmann com 231 (Hyderabad-Trib). Infosys Ltd, has also been held to be dissimilar to a captive service providing software development company by the ITAT Bangalore Bench in the case of DCIT Vs. Texcron Global Technology Centre Pvt. Ltd ITA No.29/Bang/2012 order dated 20.3.2015.
4. Regarding substantial question of law No.8-
Learned counsel for the Appellants-Revenue Mr.E.I.Sanmanthi submits that he does not press the substantial question of law No.8, 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, Central – III vs. HCL Technologies Ltd.,  93 Taxmann.com 33(SC).
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 Elxst Ltd  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.
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. This court in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 (PrL Commissioner of Income Tax & Anr Vs. M/s. Softbrands India Pvt. Ltd.,) 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.
The relevant portion of the said judgment is quoted below for ready reference:
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
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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 assesses with which the assesses may 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.' 6. Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present case also. The appeal filed by te Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs.