1[CASE NUMBER]22 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 28th DAY OF JUNE 2018 PRESENT THE HON'BLE Dr.JUSTICE VINEET KOTHARI AND THE HON'BLE Mrs.JUSTICE S.SUJATHA [CASE NUMBER] Between: 1. [ENTITY]. 2. The [ENTITY]. Appellants (By Mr. [ENTITY], Advocate) And: M[CASE NUMBER]s [ENTITY]. Respondent (By Mr. [ENTITY], Advocate) Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], 2[CASE NUMBER]22 This I.T.A. is filed under [SECTION] of [ACT], praying to (a) 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. (b) Set aside the appellate order dated:18[CASE NUMBER]03[CASE NUMBER]2016 passed by the ITAT, 'B' Bench, Bengaluru, in [CASE NUMBER] [CASE NUMBER][CASE NUMBER][CASE NUMBER] 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 and etc. This I.T.A. coming on for Admission, this day Dr. [ENTITY] J. delivered the following:- JUDGMENT
Mr. [ENTITY]. Adv. for Appellants - Revenue Mr. [ENTITY]. Adv. for Respondent-[ENTITY]
1. The Appellants - Revenue have filed this appeal raising purported substantial questions of law arising from the Order of the learned Income Tax Appellate Tribunal "B" Bench: Bangalore, Annexure A dated 18[CASE NUMBER]03[CASE NUMBER]2016 in IT(TP)A.No.1388[CASE NUMBER][CASE NUMBER] for AY 2005-06.
2. The appellants - Revenue have suggested three substantial questions of law which are quoted below for ready reference: -
Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], "(1) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the assessing authority to reduce the expenses so incurred, both from export turnover as well as from total turnover in accordance with the decision of this Hon'ble Court in case of CIT Vs. [ENTITY] even when said order has not reached finality and there is no such computation prescribed under the provisions of [SECTION]?
(2) Whether on the facts and in the circumstances the Tribunal is right in directing the Transfer Pricing Officer to exclude the companies as comparables namely, Bodhtree Consulting Ltd. [ENTITY] Software Solutions Ltd. Sankhya Infotech Ltd.
Foursoft Ltd., Thirdware Solutions Ltd. Tata Elxi Ltd. Infosys Technologies Ltd. Flextronics Ltd. and Geometric Software Solutions company Ltd. even when the TPO has chosen the said comparables as all the required tests are satisfied?
Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], (3) Whether on the facts and in the circumstances of the case, the Tribunal is rejecting the comparables chosen by TPO by not appreciating specific information collected under [SECTION] of the [ACT] from companies chosen as comparables by TPO and ignoring that the principle that comparability of the comparables depends in transfer pricing on assessee specific FAR analysis and specific facts brought out on record by the TPO in the case of the assessee?"
3. The learned counsel for the appellants-
Revenue, Mr. [ENTITY], by way of a Memo has proposed an additional substantial question of law, which is quoted below for ready reference:-
"Whether on the facts and in the circumstances of the case, the Tribunal is right in law in confirming order of the CIT (A) allowing standard deduction of +[CASE NUMBER]- 5% as per [SECTION] of the Act by following its earlier decision in the case of [PRECEDENT] Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], Pvt.Ltd. V[CASE NUMBER]s. ACIT (reported in 6 [CASE NUMBER]"
4. The learned counsel appearing for the appellants- Revenue submitted that he does not press the third substantial question of law raised in the present appeal.
5. In so far as the first purported substantial question of law raised by the Revenue is concerned, the same is covered by the Division Bench decision of this Court in the case of M[CASE NUMBER]s.[ENTITY] Ltd., Vs. Asst.Commissioner of Income Tax, decided on 20[CASE NUMBER]10[CASE NUMBER]2015 (2015) 127 DTR 0327 (Kar), which has been affirmed by the Hon'ble Supreme Court in the case of [PRECEDENT].
The relevant portion of the judgment of this Court in the case of M[CASE NUMBER]s.[ENTITY] (supra), is quoted below for ready reference:-
Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], "20. From the aforesaid provisions, it is clear that if a assessee wants to claim the benefit of [SECTION], firstly he must export articles or things or computer software.
Secondly, the said export may be done directly by him or through other exporter after fulfilling the conditions mentioned therein. Thirdly, such an export should yield foreign exchange which should be brought into the country. If all these three conditions are fulfilled, then the object of enacting [SECTION] is fulfilled and the assessee would be entitled to the benefit of exemption from payment of [ACT] on the profits and gains derived by the Undertaking from the export.
21. Clause 6.11 of Exim Policy dealing with entitlement for supplies from the DTA states that supplies from the DTA to EOU[CASE NUMBER]EHTP[CASE NUMBER]STP[CASE NUMBER]BTP units will be regarded as 'deemed export', besides being eligible for relevant entitlements under paragraph 6.12 of the Policy. They will also be eligible Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], for the additional entitlements mentioned therein. What is of importance is when a supply is made from DTA to STP, it does not satisfy the requirements of export as defined under the [ACT]. However, for the purpose of Exim Policy, it is treated as 'deemed export'. Therefore, when [SECTION] of the Act was introduced to give effect to the Exim Policy, the supplies made from one STP to another STP has to be treated as 'deemed export' because Clause 6.19 specifically provides for export through Status Holder. It provides that an EOU[CASE NUMBER]EHTP[CASE NUMBER]STP[CASE NUMBER]BTP unit may export goods manufactured[CASE NUMBER]software developed by it through other exporter or Status holder recognized under this policy or any other EOU[CASE NUMBER]EHTP[CASE NUMBER]STP[CASE NUMBER]BTP unit. What follows from this provision is that to be eligible for exemption from payment of income tax, export should earn foreign exchange. It does not mean that the undertaking should personally export goods manufactured [CASE NUMBER] software developed by it outside the country. It may export out of Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], India by itself or export out of India through any other STP Unit. Once the goods manufactured by the assessee is shown to have been exported out of India either by the assessee or by another STP Unit and foreign exchange is directly attributable to such export, then [SECTION] of the Act is attracted and such exporter is entitled to benefit of deduction of such profits and gains derived from such export from payment of income tax. Therefore, the finding of the authorities that the assessee has not directly exported the computer software outside country and because it supplied the software to another STP unit, which though exported and foreign exchange received was not treated as an export and was held to be not entitled to the benefit is unsustainable in law. The substantial question of law is answered in favour of the assessee and against the revenue. The appeal is allowed. The impugned orders are set aside. The assessee is held to be entitled to deduction of such profits and gains derived from the export of the computer software. No costs".
Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY],
6. 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. [ENTITY] 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 Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], 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 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 Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], such deduction shall be allowed from the total turnover in same proportion as well".
7. In so far as the second substantial question of law is concerned, the learned ITAT in its Order dated 18[CASE NUMBER]03[CASE NUMBER]2016 has given the following findings, the relevant portion of which is quoted below for ready reference:-
" Satyam Computers Ltd:
10.1. Out of the above comparables, Satyam Computer Services Ltd. was excluded by CIT(A) on the basis of non-reliability of financial data. Revenue has accepted the same and has not contested. So, the said company has been rightly excluded.
Infosys Technologies Ltd [ENTITY] Software Solutions Ltd."
10.2. Ld.CIT(A) has excluded Infosys and [ENTITY], on the basis of functional dissimilarity and having extraordinary event Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], during the year [ENTITY] was having extraordinary profits by way of amalgamation of companies during the year. Infosys was excluded having different functionality of products, having high turnover and brand name. Following the decision of [PRECEDENT] AS APPROVED BY THE Hon'ble Delhi High Court, Infosys cannot be considered as comparable. The same view was held by Co-ordinate Bench in the case of [PRECEDENT]s. Sunquest Information Systems (India), Private Limited, in [CASE NUMBER] dt.11.06.2015 (supra). Since the orders of Ld.CIT(A) is in agreement with the decision on these two comparables by various co-ordinate Benches, we uphold the same.
Bodhtree Consulting Ltd.
10.3. This company was retained by Ld.CIT(A) but [ENTITY] objects on the basis of functionality. However, as seen from the orders of co-ordinate Benches in the case of [PRECEDENT]s. Sunquest Information Systems Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], (India)Private Limited in [CASE NUMBER][CASE NUMBER] dt.11-06-2015 (supra)as well as [PRECEDENT] in IT (TP)A No.1[CASE NUMBER]Bang[CASE NUMBER]2012 dt.10-05-2013, Bodhtree Consulting Ltd., was accepted as a comparable. However in the case of Cordys Software India P. Ltd. in [CASE NUMBER] dt.13-06-2014 (where one of us, AM is the author) has considered in detail and excluded the same for the following reasons:
Considering the above, we direct that the above company has to be excluded on the reason of RPT of more than 25% and functionality.
Lanco Global Systems Ltd:
10.4. This Company even though included by TPO and has not been objected to by [ENTITY], was rejected by the CIT (A) on the reason of low profit margin. This is not a Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY]
Vs. M[CASE NUMBER]s.[ENTITY], valid ground. Only continuous loss making companies are being excluded from the comparability. It this argument was accepted, the high profit making companies are also to be excluded. This is not the purpose for which TP analysis is being undertaken. Therefore, keeping the principles laid down by the Special Bench of ITAT in the case of [PRECEDENT], we consider the same as comparable and retain it in the list.
Sankhya Infotech Ltd Thirdware Solution Ltd & [ENTITY] Ltd
10.5. These three companies are rejected as comparables on functionality in the case of [PRECEDENT]s. Sunquest Information Systems (India) Private Limited, in [CASE NUMBER] dt.11-06-2015 (supra) (paras 19-20, 22-26, 27-30 respectively) and in the case of Cordys Software India P. Ltd., in [CASE NUMBER] dt.13-06-2014 Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], (supra) at para.No.13. The analysis by the Co-ordinate Benches is as under:
10.6. Four Soft Ltd.
10.7. The objection by [ENTITY] is that this company is a product company was analysed and accepted in the case of [PRECEDENT]s. Sunquest Information Systems (India) Private Limited, in [CASE NUMBER] dt.11-06-2015 (supra)para 22. It was held that the said company has derived income from software license and AMCs. Since functionality was already analysed, respectfully following the Co-ordinate Benches also, the same was to be excluded.
i. Intoto Software India Pvt.Ltd. [CASE NUMBER];
ii. Cordys Software India P. Ltd. [CASE NUMBER] Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], Geometric Software Solutions Company Ltd.
10.8. Even though this company was accepted as comparable in [PRECEDENT]s. Sunquest Information Systems (India) Private Limited, in [CASE NUMBER] dt.11-06-2015 (supra) and Cordys Software India P.Ltd. in [CASE NUMBER] dt.13- 06-2014 (supra) and was not objected to, we find that the Co-ordinate Bench at Banalore in the case of [PRECEDENT] dt.10-05-2013 has considered that this is in product development. We have perused the TPO's order. In page 85 and 86 of the order, this comparable was analysed. TPO records that there are product sales to be extent of 18%. Segmental profits are not available. On assumptions, this company was retained. We are of the opinion that being a product based company, the same is not strictly comparable to a service company like [ENTITY]. In the absence of segmental profit Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], of service income, we have to exclude the same. Following the decision in the case of [PRECEDENT] in [CASE NUMBER] dt.10-05- 2013 (supra), this company is accordingly excluded.
Igate Global Solutions Ltd. & L & T Infotech:
10.9. These two companies are found comparable in many orders of the Co-ordinate Benches, but excluded on the basis of turnover filter of Rs.200 crores limit in [PRECEDENT]s. Sunquest Information Systems (India)Private Limited in [CASE NUMBER] dt.11-06-2015 (supra), we have considered the same.
[ENTITY]'s turnover is about 63 Crores. The turnover of Igate Global Solutions Ltd.(Seg) is about 405 crores and L & T Infotech Ltd is of 562 Crores. This is with the range of ten times the upper limit. Moreover, assessee counsel has not pressed on turnover filter of Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], Rs.200 crores. Therefore, these two are retained.
Flextronics Software Systems Ltd.
10.10. This company was objected to on functional dissimilarity. This was considered in [PRECEDENT]s. Sunquest Information Systems (India) Private Limited, in [CASE NUMBER] dt.11-06-2015 (supra) as under:
Respectfully following, we exclude the same."
8. In so far as the additional substantial question of law proposed by the learned counsel appearing for the appellants - Revenue is concerned, the learned ITAT in its Order dated 18[CASE NUMBER]03[CASE NUMBER]2016 has given the following findings, the relevant portion of which is quoted for ready reference:-
"11.2. Not only that, the explanation brought in by [ACT] w.e.f. 01-04- Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], 2015 also specifies that the provisions of second proviso shall also be applicable to all assessments or reassessments proceedings pending before the AO as on the first day of October 2009. The present proceedings were concluded before that day. So, the second proviso to [SECTION] does not apply to the impugned order. The pre-amended proviso, as interpreted by various authorities does permit standard deduction of (+) or (-) 5% to [ENTITY]. The order of Ld.CIT(A) is confirmed. The revenue's ground is rejected accordingly."
9. However, this Court in a recent judgment in [CASE NUMBER] c[CASE NUMBER]w. [CASE NUMBER] ([PRECEDENT] [ENTITY].,) rendered on 25-06-2018, 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 Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], or the Revenue under [SECTION] of the Act is not maintainable and 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 Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], 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 [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 Date of Judgment 28-06-2018 [CASE NUMBER] [ENTITY], 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."
10. Having heard the learned counsel for the parties, this Court is satisfied that no substantial question of law would arise in the present case and the appeal filed by the Revenue is therefore, liable to be dismissed. Accordingly, it is dismissed. No costs.
Sd[CASE NUMBER]-
JUDGE Sd[CASE NUMBER]-
JUDGE BMV*