1/14 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 16TH DAY OF AUGUST 2018 PRESENT THE HON’BLE DR.JUSTICE VINEET KOTHARI AND THE HON’BLE MRS.JUSTICE S.SUJATHA I.T.A. No.613/2017 BETWEEN:
1. PR. COMMISSIONER OF INCOME TAX-5 BMTC COMPLEX, KORMANGALA, BANGALORE.
2. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE -12(2) BANGALORE. ... APPELLANTS (BY SRI.SANMATHI E I, ADV.) AND:
M/S.NOVELL SOFTWARE DEVELOPMENT (INDIA) PVT. LTD., LAUREL BLOCK D 65/2, BAGMANE TECH PARK, C.V.RAMAN NAGAR, BYRASANDRA, BANGALORE - 560 093 PAN AAACN6992K ... RESPONDENT THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:10.02.2017 PASSED IN IT[TP]A NO.1313/BANG/2012, FOR THE ASSESSMENT YEAR:2002-2003, VIDE ANNEXURE –A, PRAYING TO: (1) 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 AND SET ASIDE THE APPELLATE ORDER DATED: 10.02.2017 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'A' BENCH, BANGALORE, AS SOUGHT FOR, IN THE RESPONDENT- ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN IT[TP]A NO.1313/BANG/2012 FOR A.Y: 2002-2003 VIDE ANNEXURE –A.
THIS APPEAL COMING ON FOR ORDERS, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T Mr. E.I. Sanmathi, Adv. for Appellants – Revenue.
This Appeal is filed by the Revenue purportedly raising the substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, Bangalore Bench ‘A’, in IT [TP]A No.1313/Bang/2012 dated 10.02.2017, relating to the Assessment Year 2002-03.
2. The substantial questions of law framed by the Revenue in the Memorandum of Appeal are as under:
“1. Whether in the facts and circumstances of the case and in law, the Tribunal was justified in removing certain comparable from the list of comparable on the basis of functional dissimilarity which satisfied all filters applied by the Transfer Pricing and without doing any FAR analysis of the tax prayer with those other cases?
2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the assessing authority to include telecommunication charges incurred in foreign currency from ETO only while arriving for deduction under section 10A of the Act by following decision of this Hon’ble Court in case of CIT V/s Tata elxsi which has been challenged before Apex Court by Revenue?
3. Whether on the facts and in the circumstances of the case, the Tribunal was justified in directing the exclusion of comparables companies having RPT transactions more than 15% ignoring the TPO’s observation that the basis for determining the threshold limit for eliminating companies having RPT transactions more than 25% was through the determination of Indian companies with foreign shareholding greater that 26% and therefore had its basis in the provisions of the Act and accounting standards AS-18?
4. Whether on the facts and in the circumstances of the case, the Tribunal was justified in directing the assessing authority/TPO to exclude certain comparable companies by applying turnover filter which is not permitted under the provisions of the Act?”
5. Learned Counsel for the Appellants-Revenue seeks to suggest additional substantial question of law which reads as under:
“ Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the assessing authority/Transfer Pricing Officer to grant depreciation charged by the assessee in comparison to the comparable companies after taking into consideration corresponding expenditure on repairs and maintenance as well as lease rentals if any?”
Regarding Substantial Question of law No.2:
6. The issue is covered by the decision of the Hon’ble Supreme Court in the case of Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).
7. 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 Elxsi Ltd. [2012] 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.
18. XXXXXX 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”.
8. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under:
“7. We have considered the rival submissions as well as the relevant material on record. The revenue has not disputed the fact that this company is having a substantial expenditure on ‘on site software development as well as R & D expenditure’. This fact has been recorded by the CIT (Appeals) in para 4.4.13 as under:
xxxxxxxxx The facts recorded by the CIT (Appeals) clearly shows that 56% of expenses have been incurred in respect of on site software development therefore the business model of this company is different from the assessee who is captive service provider. Further this company has also incurred R & D expenditure to the extent of 4.96% of sale which is also a relevant aspect to be considered while deciding the comparability of this company. In view of the above facts and circumstances, we do not find any error or illegality in the order of CIT (Appeals) qua this issue.”
“16. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that the RPT transaction of this company is at 16.40%. This fact has not been disputed by the revenue. Accordingly, in view of the 15% tolerance range of RPT applied by us, this company is required to be excluded and consequently we do not find any reason to interfere with the order of the CIT(Appeals)qua this issue?”
Regarding Substantial Question of law No.4:
“ 13. Having considered the rival submissions as well as the relevant material on record, we find that this issue of functional comparability in the case of M/s.Infosys Technologies Ltd. as well as M/s. Satyam Computer Services Ltd. has been considered by Hon’ble Delhi High Court in the case of CIT Vs. Agnity India Technology Enterprises Pvt. Ltd. (supra) therefore in view of the settled finding on this issue, we don not find any reason to interfere with the order of the CIT (Appeals) in excluding these two companies from the set of comparables.”
Regarding Additional Substantial Question of law: “20. We have considered the rival submissions as well as the relevant material on record. At the outset, we note that this issue has been consistently raised in assessee’s own case for the Assessment Years 2005-06, 2006-07 & 2010-11 and the Tribunal has taken a consistent view on this issue. For the Assessment Year 2010-11 vide order dt:30.09.2016 in IT(TP)A No.281/Bang/2015 & C.O. No.101/Bang/2015, this Tribunal after considering the decision of the Hyderabad Bench of the Tribunal held as under: xxxxxxxxxx Thus it is clear that in the earlier order as well as for the Assessment Year 2010-2011, the Tribunal has directed the Assessing Officer to rework the depreciation for appropriate adjustment in respect of variation of rate of depreciation charged by the assessee as well as comparables. There is a specific finding of the Tribunal that the DRP erred in directing to exclude the depreciation from the cost of the assessee as well as comparables.
Further it is pertinent to note that the depreciation may vary for various reasons depending upon the facts and circumstances of each case. In case of newly installed plant and machinery, the depreciation is obviously more than the depreciation charged in case of old machinery. However corresponding expenditure on maintenance and repairs will be higher in case of old plant and machinery in comparison to new one. Therefore in case of exclusion of depreciation it cannot be excluded in isolation without taking into consideration the repair and maintenance cost as well as lease rentals if any paid by the assessee or any of the comparables for hiring the plant and machinery. We further note that the assessee had claimed that it’s rate of depreciation is more than the comparables however, the comparative details of depreciation charged by the assessee as well as comparables has not been produced either before the authorities below or before us. In view of the above facts and circumstances of the case and by following the earlier orders of this. Tribunal, we direct the TPO/A.O. to grant appropriate adjustment if any in respect of difference of depreciation charged by the assessee in comparison to the comparable companies after taking into consideration corresponding expenditure on repairs and maintenance as well as lease rentals if any.”
9. However, this Court in a recent judgment in I.T.A. Nos.536/2015 c/w 537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. –v- 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:
“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 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 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 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 260-A 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 appearing 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.
Sd/- JUDGE Sd/- JUDGE AN/-