1/17 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. THE COMMISSIONER OF INCOME-TAX, 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BANGALORE-560 095. 2. THE INCOME-TAX OFFICER, WARD - 11(2), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BANGALORE-560 095. APPELLANTS (By Mr.[ENTITY], ADV.) AND: M/S. ACTIANCE INDIA PVT. LTD., LE PARC RICHMONDE, III FLOOR, 51, RICHMOND TOWN, BANGALORE-560 025. RESPONDENT THIS I.T.A IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE, ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN ITA No.1056/Bang/2011 DATED 12/06/2015 ANNEXURE-D AND Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], 2/17 CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE INCOME TAX OFFICER, WARD-11(2), BENGALURU & 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 'A', Bangalore, dated 12.06.2015 passed in [CASE NUMBER]/Bang/2011 (M/s.[PRECEDENT] ) for A.Y.2007-08.
2. This appeal has been admitted on 24.03.2016 to consider the following substantial questions of law framed by the learned counsel for the Appellants-
Revenue:-
"1. Whether, the Tribunal, on the facts and in the circumstances of the case was right in excluding M/s Accel Transmatics Ltd., (seg.), Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], M/s.Avani Cimcon Technologies Ltd., M/s.Celestial Labs Ltd., M/s.KALS Info Systems Limited; M/s.E-Zest Solutions Ltd., M/s.Quintegra Solutions Ltd., M/s.Thirdware Solutions Ltd., M/s Helios & Matheson Information Technology Ltd., M/s.Ishir Infotech Ltd., and M/s.Lucid Software Ltd., from the list of comparables, holding that they are functionally different, without appreciating that the comparables satisfy all the qualitative and quantitative filters applied by the TPO and the selection of comparables in a case depends on assessee specific FAR analysis?
2. Whether, the Tribunal, on the facts and in the circumstances of the case was right in excluding M/s Accel Transmatics Ltd., (seg.), M/s.Avani Cimcon Technologies Ltd., M/s.Celestial Labs Ltd., M/s.KALS Info Systems Limited; M/s.E-Zest Solutions Ltd., M/s.Quintegra Solutions Ltd., M/s.Thirdware Solutions Ltd., M/s Helios & Matheson Information Technology Ltd., M/s.Ishir Infotech Ltd., and M/s.Lucid Software Ltd., from the list of comparables, by relying on various decisions of Tribunal Benches and not deciding the selection of the comparables on the basis of specific facts brought on record by the TPO?
Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY],
3. Whether the Tribunal, was right in facts and law in excluding the comparables without considering the assessee specific information collected under [SECTION] of the Act from the comparables, wherein clear facts were submitted to state that the comparables are all into software development services in one way or the other and all are functionally similar to that of the assessee?
4. Whether the Tribunal was right in directing to exclude M/s.Ishir Infotech Ltd., M/s. Thirdware Solutions Ltd., by placing reliance on other benches of Tribunal, without considering the assessee specific information collected under [SECTION] of the Act, based on which the TPO had concluded that it satisfies all the filters including employee cost filter?
5. Whether the Tribunal was right in directing to consider only the segmental margin of [ENTITY] Ltd., without considering the assessee specific information received from M/s.[ENTITY] Ltd., wherein it was stated the entire total operating income is out of its software development services only?
6. Whether the Tribunal, on the facts and in the circumstances of the case, was right in Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], not appreciating the acceptance of the enterprise level financials of [ENTITY] Ltd., as proper uncontrolled comparable when the enterprise level financials were adopted after a detailed analysis supplemented by information obtained under [SECTION]?
7. Whether, on the facts and circumstances of the case, the Tribunal was correct in not appreciating the facts that if any filter or criteria applied by the assessee for search of comparables is accepted or any filter or criteria applied by the TPO is relaxed, the entire accept/reject matrix changes resulting in a new comparable set including those companies which are neither taken by the assessee nor by the TPO in his final comparable set and which may not be finding place in the TP order under [SECTION]? Substantial question No.8 framed by the Revenue reads thus:
8. Whether the Tribunal is justified in directing the assessing officer to recomputed the deduction under [SECTION] after reducing those expenses that were reduced only from export turnover, to reduce from the total turnover also, without appreciating that there is no provision in [SECTION] to the effect that such expenses should also be reduced from the total turnover, as clause (iv) of the Explanation to [SECTION] Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], provides that such expenses have to be reduced only from the export turnover?"
3. The learned counsel appearing for the Appellants - Revenue Mr.[ENTITY] submitted that in so far as the Eighth 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 whether the Tribunal was correct in holding that while computing relief under [SECTION] of the [ACT], the amount of communication expenses Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], 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 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 Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], 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. 1, 2, 3 and 4 raised by the Revenue are concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 12.06.2015 has given the findings, the relevant portion of which is quoted below for ready reference:-
"12. We have perused the materials on record and considered the rival submissions. There is no dispute that assessee as well as Triology E-Business Software India Ltd were both in software development services. Profile of the assessee, as mentioned by the TPO clearly admits this. Hence, in our opinion, the decision of the coordinate bench in the case of Triology E- Business Software India (supra), which was for the very same assessment year 2007-08, would Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], apply on facts here as well. This Tribunal had held as under in the aforesaid decision as under.
b) Avani Cimcon Technologies Ltd.
41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of [PRECEDENT] (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable.
c) Celestial Labs Ltd
45. From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/[SECTION] of the Act in which it has said that it is in the business of providing software development services. The Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Beside the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other details in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable.
For other comparable companies, the learned Tribunal has given the similar findings.
Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY],
5. In so far as the substantial question of law Nos. 5 and 6 raised by the Revenue are concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 12.06.2015 has given the findings, the relevant portion of which is quoted below for ready reference:-
"25. Vis-a vis [ENTITY] Ltd, Ld. Counsel for the assessee submitted that the said company had different segments and its software development services was only with regard to Blue Ally division. According to him, in Triology E- Business Software India Ltd, this Tribunal had held that though [ENTITY] could be considered as a proper comparable, segmental results considering blue alley alone should be reckoned for the purpose.
32. We have considered the rival submissions. First we will consider the submission of the Assessee that companies with abnormal margins should not be regarded as a comparable. In the case of Quark Systems Pvt. Ltd. (supra), the Special Bench had to deal with cases where the results were abnormal. The special Bench observed as follows:
Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], xxxxxxxxxxxx Accordingly, we direct that TPO/AO should work out segmental results of [ENTITY] Ltd, and consider the software development segment alone for comparison.
6. In so far as the substantial question of law No. 7 raised by the Revenue is concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 12.06.2015 has given the findings, the relevant portion of which is quoted below for ready reference:-
"29. In view of the discussion above, we direct the AO/TPO to exclude Accel Transmatics Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd, Flextronics software System Ltd (seg), Helios & Matheson Information Technology Ltd, iGate Global Solutions Ltd (seg), Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd, Lucid Software Ltd, Mindtree Consulting Ltd, Persistent Systems Ltd, Quintgra Solutions Ltd, Sasken Communication Technologies Ltd (seg), Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], Tata Elxsi Ltd (seg), Thirdware Solutions Ltd and Wipro Ltd from the list of comparables. This will leave Datamatics Ltd, Geometric Ltd (seg), Lanco Global Systems Ltd, Mediasoft Solutions (P) Ltd, [ENTITY] Ltd, R S Software India Ltd, R-Systems International Ltd (seg) and SIP Technologies and Exports Ltd, as the proper comparables that are to be considered for making the TP analysis of the international transactions undertaken by the assessee. Vis vis, [ENTITY] as already mentioned by us, the AO/TPO has to consider its segmental results considering its blue alley segment. Thereafter, assessee has to be given the working capital adjustments based on the average cost of capital of the selected comparables. If the percentage so worked out is within +/- 5% range, then no adjustment shall be made u/[SECTION] of the Act directed accordingly. As a result, grounds 5 to 15 of the assessee are treated as partly allowed for statistical purpose".
7. However, this Court in a recent judgment in [CASE NUMBER] C/w [CASE NUMBER] delivered on 25.06.2018 ([PRECEDENT],) has held Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], 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 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 Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], 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 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 Date of Judgment 19-07-2018 [CASE NUMBER] The [ENTITY] Vs. M/s.[ENTITY], 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."
8. 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-
Assessee forthwith.
JUDGE Sd/-
JUDGE Srl.