1/12 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 19TH DAY OF JULY 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-VI, C.R.BUILDING, QUEENS ROAD, BANGALORE. 2. THE INCOME-TAX OFFICER, WARD - 12(2), BANGALORE. APPELLANTS (By Mr. E.I. SANMATHI, ADV.) AND: M/S. SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED, 1ST FLOOR, EAGLE RIDGE, EGL BUSINESS PARK, OFF INTERMEDIATE RING ROAD, BANGALORE - 560 071 PAN: AAECS2754F. RESPONDENT THIS I.T.A IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, PRAYING TO DECIDE THE FOREGOING SUBSTANTIAL QUESTION OF LAW AND/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 22.06.2015 PASSED BY THE ITAT, 'B' BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY] 2/12 NO.[CASE NUMBER]/BANG/2011 FOR A.Y.2007-2008 ANNEXURE-A & 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/[SECTION] of the [ACT], raising purportedly certain substantial questions of law arising from the order of the ITAT, Bangalore Bench 'B', Bangalore, dated 22.06.2015 passed in [CASE NUMBER]/Bang/2011 (M/s.[ENTITY] vs. The Income-Tax Officer) for A.Y.2007-08.
2. Though the appeal has been admitted on 11.03.2016 to consider the substantial questions of law Nos.2 to 4 framed in the memorandum of appeal, the learned counsel for the Appellants-Revenue seeks to consider all the substantial questions of law framed by the Revenue, which reads thus:-
Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY] "(1) Whether, on the facts and in circumstances of the case, the Tribunal is justified in directing the assessing officer to exclude reimbursement of traveling expenses incurred in foreign currency, both from the Export Turnover and Total Turnover for the purpose of computation of deduction under [SECTION], 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] warranting exclusion of the above expenses from the Total Turnover?
(2) In the facts and in the circumstances of the case, the Tribunal erred 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 narrower functionally filter than the TPO, but has not tested other comparables against the narrower functionality filter applied by it?
(3) 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 the functional matrix, which is narrower than the functionality matrix originally used by the TPO?
Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY] (4) Whether, the Tribunal was right 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, namely, the RPT filter, has been changed. Changing filter criteria changes the search process altogether, and mandates a fresh TP study using updated filters"?
3. The learned counsel appearing for the Appellants - Revenue Mr.[ENTITY] submitted 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 Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY] in [PRECEDENT] Tata Elxsi Ltd. [PRECEDENT]. The issue before the Karnataka High Court was 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, Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY] 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".
4. In so far as the substantial question of law Nos. 2 and 3 raised by the Revenue are concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 22.06.2015 has given the findings, the relevant portion of which is quoted below for ready reference:-
" 9. Let us now consider the companies, which according to the assessee, are not comparable to the assessee. As far as comparable companies list at Sl.No.1,2,3 and 12 Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY] of the final list of comparable companies chosen by the TPO viz., M/s.Accel Transmatic Limited (seg), Avani Cincom Technologies Ltd., Celestial labs limited and KALS Infosystems Ltd., are concerned, the ld counsel for the assessee has relied upon the decision of this tribunal in the case of [PRECEDENT] in [CASE NUMBER]. We find that this Tribunal, in the case of [PRECEDENT] (cited supra) has followed in earlier decision in the case of [PRECEDENT] for AY 07-08, wherein it was held that the aforesaid companies are not comparable companies in the case of software development services provider. The nature of services rendered by the [ENTITY] in this appeal and the [ENTITY] in the case of First Advantage Offshore Services Pvt. Ltd., (supra) are one and the same. This fact would be clear from the fact that the very same 26 companies were chosen as comparables in the case of [ENTITY] as well as in the case of NXP Semiconductors India P. Ltd. as well as First Advantage Offshore Services Pvt.
Ltd.(supra). In coming to the aforesaid conclusion that these companies are to be excluded, the Tribunal in the case of First Advantage Offshore Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY] Services Pvt. Ltd.(supra) followed its earlier decision rendered in the case of [PRECEDENT] for AY 07-08 order dated 23.11.2012. The following were the relevant observations in the case of First Advantage Offshore Services Pvt. Ltd. (supra):
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10. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP".
5. In so far as the fourth substantial question of law raised by the Revenue is concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 22.06.2015 has given the findings, the relevant portion of which is quoted below for ready reference:-
"19. As regards the comparable company at Sl.No.7 viz Geometric Ltd. is concerned, the ld counsel for the assessee has relied upon the Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY] decision of this tribunal in the case of 24/7 customer Com private Ltd. In [CASE NUMBER] on the ground that it exceeds related party transactions of more than 15% and therefore is not comparable to the assessee. We find that this tribunal in the case of 24/7 customer Com private Ltd.(supra), has followed the decision of this tribunal at Delhi in the case of Sony India (P) Ltd. in 2008-TIOL-439-ITAT-Delhi dt.23-12-2008 wherein it was held as under:
Xxxxxxxxxxxx Respectfully following the decision of the coordinate bench in the case of 24/7 customer Com private Ltd., we find that this company has RPT of 19.99% and therefore, we direct the AO/TPO to exclude this company from the final list of comparable companies".
6. However, this Court in a recent judgment in [CASE NUMBER] C/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 Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY] 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 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 Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY] 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 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 [ENTITY]s, 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.
Date of Judgment 19-07-2018 [CASE NUMBER] [ENTITY] Vs. M/s. [ENTITY]
58. The appeals filed by the Revenue are therefore dismissed with no order as to costs." [
7. 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 liable to be dismissed and it is dismissed accordingly. No costs.
Copy of this order be sent to the Respondent- [ENTITY] forthwith.
JUDGE Sd/-
JUDGE Srl.