1[CASE NUMBER]14 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 21st DAY OF AUGUST 2018 PRESENT THE HON'BLE Dr.JUSTICE VINEET KOTHARI AND THE HON'BLE Mrs.JUSTICE S.SUJATHA [CASE NUMBER] BETWEEN: 1. PR. COMMISSIONER OF INCOME TAX-4 BMTC COMPLEX, KORMANGALA BANGALORE. 2. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-12(2), BANGALORE. APPELLANTS (By Mr. E.I. SANMATHI, ADV.) AND: M[CASE NUMBER]S. PMC SIERRA INDIA PVT LTD 5A BLOCK, 2ND FLOOR, PRITECHPARK SEZ, BELLANDUR, BANGALORE-560103 PAN: AADCP6802F. RESPONDENT THIS I.T.A. IS FILED UNDER SECTION 260-A OF THE IT ACT, 1965, PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND[CASE NUMBER]OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 26-08-2016, VIDE ANNEXURE-A PASSED BY THE INCOME TAX APPELLATE Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] 2[CASE NUMBER]14 TRIBUNAL, 'A' BENCH, BANGALORE, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN C.O.No.173[CASE NUMBER]BANG[CASE NUMBER]2015, IT(TP)A No.882[CASE NUMBER]BANG[CASE NUMBER]2013 FOR A.Y. 2008-09 & GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE & ETC. THIS I.T.A. COMING ON FOR ORDERS THIS DAY, S. SUJATHA J. DELIVERED THE FOLLOWING:- JUDGMENT
Mr. [ENTITY], Adv. for Appellants - Revenue
1. The Appellants-Revenue have filed this appeal u[CASE NUMBER][SECTION] of the [ACT], raising purportedly certain substantial questions of law arising from the order of the ITAT, Bangalore Bench 'A', Bangalore, dated 26.08.2016 passed in C.O. No.173[CASE NUMBER]Bang[CASE NUMBER]2015 IT(TP)A No.882[CASE NUMBER]Bang[CASE NUMBER]2013 ([PRECEDENT],) for A.Y.2008-09.
2. The proposed substantial questions of law framed in the Memorandum of appeal by the Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] Appellants-Revenue are quoted below for ready reference:-
"1. Whether on the facts and in the circumstances of the case, that the Tribunal is right in law in including the expenditure incurred in foreign currency by relying upon the decision of this Hon'ble High Court in the case of [PRECEDENT] even when the said decision has not reached finality and no such way of re- computation as directed by the Tribunal is provided under the provision of [ACT] and when the Revenue has preferred appeal before this Hon'ble Court against its original order?
2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing he AO[CASE NUMBER]TPO in directing he AO[CASE NUMBER]TPO to exclude the following comparable namely M[CASE NUMBER]s. Softsol India Ltd as RPT filter is 15% even when the without affording any reason to arrive at such conclusion is given by Tribunal and has only relied upon its earlier?
3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law directed AO[CASE NUMBER]TPO to exclude certain companies as comparables on the ground of Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] functional dissimilarity by following its earlier orders which has not reached finality even when the TPO has chosen the comparables based on FAR Analysis and by application of qualitative an quantitative tests?"
3. Learned counsel for the Appellants-Revenue Mr.[ENTITY] submits that in so far as the first substantial question of law is concerned, the same is covered by the decision of the Hon'ble Apex Court in the case of [PRECEDENT].
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 [PRECEDENT] [PRECEDENT]. The issue before the Karnataka High Court was Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] whether the Tribunal was correct in holding that while computing relief under [SECTION] of the [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] of the [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 Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] 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".
4. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-Assessee, has given the following findings:-
Regarding substantial question of law No.2:-
"8.2 We have considered the rival submissions as well as the relevant material on record. We find that this Tribunal in a series of decisions has examined the issue of employees cost filter, RPT filter as well as functional comparability of these companies and therefore once it has been held that these companies cannot be regarded as good comparable on these contentions then even if these companies has Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] been selected in the TP Study, the assessee cannot be precluded from raising an objection against these companies which are found to be not comparable. This view is supported by the decision of the Chandigarh Special Bench of this Tribunal in the case of [PRECEDENT] in paras 30 and 38 as under :
xxxxxxxxxxxxxxx Thus in view of the matter that the functional comparability has already been examined by this Tribunal, we admit the additional ground raised by the assessee regarding functional comparability of E-Zest Solutions Ltd. for deciding the same on merits.
14. We have considered the rival submissions as well as the relevant material on record. We note that this Tribunal has taken a consistent view about the threshold limit of RPT at 15%. A similar view has been taken by this Tribunal in the case of Maxim India Pvt. Ltd. (supra) in para 6 as under:
xxxxxxxxxxxxx Following the earlier order of the Tribunal, we direct the TPO to apply the RPT filter at 15%".
Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] Regarding substantial question of law No.3:-
" 9. . The issue of applying the turnover filter by the CIT (Appeals) in the range of Rs.1 Crore to Rs.200 Crores has been considered by the co-ordinate bench of this Tribunal in the case of [PRECEDENT] vide order dt.31.3.2016 in [CASE NUMBER][CASE NUMBER][CASE NUMBER] in paras 11 & 12 as under :
xxxxxxxxxxxx Both the parties have agreed in principle that an appropriate multiple of 10 times of turnover may be applied while selecting the comparable companies and therefore keeping in view of the turnover of the assessee at Rs.45.85 Crores, the company having turnover upto Rs.458.50 Crores on the higher side and Rs.4.58 Crores at the lower side can be considered in the set of comparables. In view of the above decision of the co-ordinate bench, we direct the TPO[CASE NUMBER]A.O to apply a multiple of 10 times of the assessee's turnover on higher as well as lower side of turnover of the assessee. Even otherwise we find that the CIT (Appeals) rejected 8 companies by applying the turnover filter in the range of Rs.1 Crore to Rs.200 Crores as under :
Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] xxxxxxxxxxxxxxxxxx By applying this multiple of 10 to the assessee's turnover, we find that 3 companies namely Sasken Communication Technology Ltd. (Seg.), Persistent Systems Ltd. and Tata Elxsi Ltd. will not be excluded due to high turnover. Therefore except these 3 companies, other 5 companies are required to be excluded from the list of comparables and to that extent we confirm the order of the CIT (Appeals) on this issue. For the remaining companies, the learned Authorised Representative of the assessee has submitted that an identical set of 20 companies was considered by the co-ordinate bench of this Tribunal for the same assessment year 2008-09 in the case of [PRECEDENT] vide order dt.9.3.2016 in [CASE NUMBER]. Thus the learned A.R. has submitted that except the comparability of Indus Network Ltd. which was included by the CIT (Appeals) in the set of comparables the functional comparability of all other companies have been examined by this Tribunal.
10. We have considered the rival submissions as well as the relevant material on record. The ld. D.R. has submitted that the TPO Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] has already examined the functional comparability of these companies and it was found that the main activity of all these companies are software development services and therefore in significant revenue from product and other service is immaterial for the purpose of selecting the comparable company when the TPO had applied the filter of revenue of 75% from the software development services. Thus the ld. D.R. has contended that none of these companies which are excluded by the CIT (Appeals) and four more companies exclusion sought by the assessee have revenue from the software development services less than 75%.
11. At the outset we note that the functional comparability of 12 companies have been considered by the co-ordinate bench in the case of Telelogic India Pvt. Ltd. (supra) in para 10 as under :
xxxxxxxxxxxxxxxx Accordingly by following the earlier order of this Tribunal for the same assessment year, we direct the TPO[CASE NUMBER]A.O to exclude 12 companies from the list of comparables on functional dis- similarity. Apart from the above 12 companies in Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] which 2 companies namely Infosys Ltd. and Wipro Ltd. are common as also excluded on the ground of high turnover. Therefore the total companies which are directed to be excluded are 15 out of the 20 of the TPO's set of comparables".
5. However, this Court in a recent judgment in [CASE NUMBER] C[CASE NUMBER]w [CASE NUMBER] delivered on 25.06.2018 ([PRECEDENT],) 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] of the Act is not maintainable.
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 in such cases. Had it been a case of substantial question of Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] interpretation of provisions of [ACT] (DTAA), interpretation of provisions of the [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 [ENTITY] etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under [SECTION] 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] of the Act and thus the appeals Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] 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] 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 counsel for the Appellants-Revenue, we are therefore of the opinion that no substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue is Date of Judgment 21-08-2018 [CASE NUMBER] [ENTITY] Vs. M[CASE NUMBER]s. [ENTITY] liable to be dismissed and it is dismissed accordingly. No costs.
Copy of this order be sent to the Respondent- Assessee forthwith.
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JUDGE Sd[CASE NUMBER]-
JUDGE Srl.