Date Of Judgment 02-08-2018, Ita v. M/S. Core Objects India Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 2 DAY OF AUGUST 2018 PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS.JUSTICEK S.SUJATHA I.T.A. No.47/2017 BETWEEN : 1.THE PR. COMMISSIONEROF INCOME TAX,OF INCOME TAX, [‘T]FLOOR BMTC BUILDING,80 FEET, ROAD, KORMANGALABENGALURU - 560 O9)DBENGALURU - 560 O9)D 2.THE INCOME-TAX OFFICER,WARD -11(1), PRESENT ADDRESS|WARD -11(1), PRESENT ADDRESS| CIRCLE — 3 (1) 2,| FLOOR, BMTC BUILDING, FLOOR, BMTC BUILDING,80 FEET ROAD, KORAMANAGALA,|BBENGALURU — 560 095BBENGALURU — 560 095 _ APPBRLLANTS) (BY SRI.K V ARAVIND, ADV.) AND: M/S CORE OBJECTS INDIA PVT. LTD.,SYMPHONY BXCBLLENCK AND INNOVATION CBNTRE|SY.NO. NO.13/1, KADUBESANAHALLI VILLAGE, OUTER RING ROAD, VARTHUR HOBLIBBNGALURU - 560 O87|PAN: AACCC2040B_. RESPONDENT (BY SRI.ANKUR PAI, ADV. FOR SRI. K R VASUDEVAN, ADV. ) Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 2/14 THIS INCOMB TAX APPBAL UNDER SKC.260-A OF|INCOMETAXACT1961,ARISINGOUTOF)ORDER.DATED:15/07/2016 PASSED IN IT(TP)A NO.1229/BANG/2011,.FOR THE ASSESSMENT YBAR 2007-2008 ANNEBEXURE -DPRAYING TO: 1. FORMULATE THE SUBSTANTIAL QUESTIONS)OF LAW STATBKD ABOVE. 2. ALLOW THR APPBAL AND SBTASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN|IT(TP)A NO.1229/BANG/2011 DATED:15/07/2016 ANNEXURE -|D AND CONFIRM THR ORDER OF THR DRP CONFIRMING THE)ORDER PASSED BY THE INCOME -TAX OFFICER, CIRCLE-3(1)(2), BENGALURU. THIS APPEAL COMING ON FOR HEARING, THIS DAY,|S.SUJATHA, J., DELIVERED THE FOLLOWING: JU DGMENT Mr.K V Aravind,Adv. for Appellants — Revenue. Mr.Ankur Pai, Adv. ForMr.K R Vasudevan,Adv. forRespondent — Assessee. This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal,SA?Bench, Bangalore, inIT A No.1229/Bang/2011dated 15.07.2016relating to the Assessment Year|2007-08. 2. This Appeal has been admitted on|10.01.2018 to consider the following substantial questions of law: “1. Whether on the facts and in _ thecircumstances of the case, the Tribunal is right in Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 3/14 law in excluding comparables namely AvaniCimcon Technologies Limited, Celestial LabsLimited, Calls Information System Limited, Lucidsoftware Limited, Infosys Technology Limited andWipro Limited and also E- Zest Solutions Limited,M/s Persistent Systems Limited on the ground offunctional dissimilarity even when the TPO haschosen the same has all the qualitative andquantitative filters are satisfied and selection ofcomparables in a case depends on Assessee)specific FAR analysis and specific facts broughton record by TPO in the case ofAssesse?P 2. Whether on the facts and in thecircumstances of the case, the Tribunal is right inlaw in excluding Ishar Infotech Limited ascomparable by following earlier order instead ofdeciding the comparability of the company onbasis of specificfacts brought on record by TPO ? 3. Whether on the facts and in thecircumstances of the case, the Tribunal is right inlaw in directing the TPO to consider onlysegmental financials of M/s. Mega Soft Limitedas comparable on the ground of FunctionalDissimilarity by following earlier decision in caseofM/s Hewlett Packard Global Soft Put. Ltd when Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 4/14 it satisfies all qualitative and quantitates filtersadopted by the TPO instead of deciding thecomparability of the company on basis of specificfacts brought on record by TPO?”| 3. The learned Tribunal, after discussing the rival contentions oT boththe.Appellants-Revenue|andRespondent-Assessee, has returned the findings as.under: 3. Whether on the facts and in thecircumstances of the case, the Tribunal is right inlaw in directing the TPO to consider onlysegmental financials of M/s. Mega Soft Limitedas comparable on the ground of FunctionalDissimilarity by following earlier decision in caseofM/s Hewlett Packard Global Soft Put. Ltd when Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 4/14 it satisfies all qualitative and quantitates filtersadopted by the TPO instead of deciding thecomparability of the company on basis of specificfacts brought on record by TPO?”| 3. The learned Tribunal, after discussing the rival contentions oT boththe.Appellants-Revenue|andRespondent-Assessee, has returned the findings as.under: “9, Now, we examine the claim of the assesseeregarding each comparable companies for whichexclusion is being requested by the Ild.AR of theaASSCSSCECRegardingM/sAvaniCimconTechnologies Ltd., discussion is on pages 14-15 ofthe Tribunal order rendered in the case of M/sHPPLtd., (Supra), wherein the Tribunal has notedthat based on information available in thecompany swebsite,It1S|revealedthatthis company has developed software product bythe name 'DXchange" and therefore, the revenueof this company includes revenue from softwareproduct sales, apart from rendering of softwareServicesandtherefore,thisis functionally different from assessee company. In the presentcase also, the assessee company is renderingonly software services and not engaged in Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., software product as such and therefore, byrespectfully following this Tribunal order, wedirect the AO/TPO to exclude this company 1e.M/s Avant Cimcon Technologies Ltd., from thefinal list of comparables. 10. The next company for which exclusion 1sbeing requested is M/s Celestial labs Ltd. and therelevant discussion regarding this company isavailable on pages 16 to 19 of the Tribunal'sorder rendered in the case of M/s HPPLtd.,(Supra). The Tribunal has noted on these pagesthat this company was basically/admittedly inclinical research and manufacture of bio-productsand other products. Under these facts, we find noreason to have a contrary view in the presentcase, and therefore, by respectfully following thisTribunal's order, we direct the AO/TPO in thepresent case also to exclude this company t1.e.M/s Celestial Labs Ltd., (Supra) from the final list)of comparables. ll. The third company for which exclusion isbeing requested is M/s E-Zest Solutions Ltd, andthe discussion about this company is available onpages 19-20 of the Tribunal order rendered in thecase of M/s HPP Ltd., (Supra). It is noted by theTribunal on page-20 of the Tribunal order thatM/s E-Zest Solutions Ltd., is rendering productdevelopment services and high end_ technical Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 6/14 services which come under the category of KPOservices. It has been held by the Co-ordinateBench of this Tribunal in the case of M/s CapitalI-Q Information Systems (India) (P) Ltd., in ITANo.1961/Hyd/2011 dated 23-11-2012 that KPOservicesarenotcomparabletosoftwaredevelopment services. In the present case, ld. DRof the revenue could not pint out any difference in’facts and therefore, by respectfully following this|Tribunal order, we direct the TPO/AO in thepresent case also that this company t.e. M/s E-Zest Solutions Ltd. should not be excluded fromthe list offinal comparables. | Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 6/14 services which come under the category of KPOservices. It has been held by the Co-ordinateBench of this Tribunal in the case of M/s CapitalI-Q Information Systems (India) (P) Ltd., in ITANo.1961/Hyd/2011 dated 23-11-2012 that KPOservicesarenotcomparabletosoftwaredevelopment services. In the present case, ld. DRof the revenue could not pint out any difference in’facts and therefore, by respectfully following this|Tribunal order, we direct the TPO/AO in thepresent case also that this company t.e. M/s E-Zest Solutions Ltd. should not be excluded fromthe list offinal comparables. | 12. The next company for which exclusion isbeing requested is M/s Flextronics SoftwareSystems Ltd (Seg.) and the discussion about thiscompany is available on pages 37 to 38 ofTribunal’s order rendered in the case of M/s HPPLtd., (Supra). On page-3& of the Tribunal's order,it is noted by the Tribunal that in the case ofM/sFlextronics Software Systems Ltd. (Seg.), theannual report for the year ending 31-03-2007 isonly for nine months period and no reconciliationwas attempted by the lower authorities betweenthe figures given in such annual report with thefigures which were made available by the saidcompany to the TPO pursuant to notice issued tothem u/s 133(6) of the Act. Under these facts, itwas held by the Tribunal in that case that M/s Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 7/14 Flextronics Software Systems Ltd., (Seg.) (Supra)could not be considered as a proper comparable.In the present case also, the assessment year issame 1.e. AY: 2007-08 and therefore, respectfullyfollowing the Tribunal's order, we direct theAO/TPO in the present case also that thiscompany t.e. Ms/s Flextronis Software SystemsLtd.,(Seg.)(Supra) should be excluded from the list)offinal comparables. 13. The next company for which exclusion isbeing requested is M/s Infosys Ltd. and thediscussion about this company is available onpages 20 to 22 of the Tribunal's order rendered inthe case of M/s HPP Ltd., (Supra). In this case, itis noted by the Tribunal that this company ownssignificant intangibles and has huge revenuesfromsoftwareproductsandtherefore,byrespectfully following this tribunal order, we holdthat this company t.e. M/s Infosys Ltd., (Supra)also should be excluded from the list of finalcomparables. 14, The next company for which exclusion 1sbeing requested is M/s Ishir Infotech Ltd. and thediscussion about this company is available onpages 23-24 of the tribunal's order rendered inthe case of M/s HPOP Ltd., (Supra). It is noted bythe Tribunal on these pages that M/s _ IshiInfotech Ltd., is outsourcing its work and has not Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 8/14 satisfied 25% employee cost filter and thus has tobe excluded from the lst of comparables.Respectfully following this Tribunal order, wedirect the TPO/AO in the present case also toexclude this company from the list of finalcomparables. 15. The next company for which exclusion 1sbeing requested is M/s Kals Information SystemsLtd., Regarding this company, it was submittedby the Id. AR of the assessee that relevantdiscussion is on page 25 to26 of the Tribunalorder rendered in the case of M/s HPP Ltd.,(Supra). On these pages, it is noted by theTribunal that this company was _ developinsoftware products and not purely or mainlysoftware development service provider. Therefore,respectfully following this Tribunal's order, wedirect the AO/TPO in the present case also thatthis company te. M/s Kals Information SystemsLtd (Supra) should be exclude from the list offinalcomparables. 15. The next company for which exclusion 1sbeing requested is M/s Kals Information SystemsLtd., Regarding this company, it was submittedby the Id. AR of the assessee that relevantdiscussion is on page 25 to26 of the Tribunalorder rendered in the case of M/s HPP Ltd.,(Supra). On these pages, it is noted by theTribunal that this company was _ developinsoftware products and not purely or mainlysoftware development service provider. Therefore,respectfully following this Tribunal's order, wedirect the AO/TPO in the present case also thatthis company te. M/s Kals Information SystemsLtd (Supra) should be exclude from the list offinalcomparables. 16. The next company for which exclusion 1sbeing requested is M/s Lucid Software Ltd.Regarding this company also, it was submittedby the ld. AR of the assessee that the discussionabout this company is available on pages 23-24of the Tribunals order rendered in the case ofM/sHPP Ltd., (Supra). On these pages, it is noted by Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 9/14 the Tribunal that M/s Lucid Software Ltd.,(Supra)is involved in the development of software ascompared to the assessee which is only intosoftware services. Therefore, in the present casealso, by respectfully following this Tribunal order,we direct the AO/TPO to exclude this companyue. M/s Lucid Software Ltd., from the list offinalcomparables. 17. The next company for which exclusion isbeing requested is M/s Megasoft Ltd. It issubmitted by the ld.AR of the assessee that aboutthis company, the discussion is available onpages 34 to 36 of the Tribunal order rendered inthe case of M/s HPP Ltd., (Supra). We find that inthis case, it was held by the Tribunal that M/sMegasoft Ltd. should be considered as a goodcomparable after segmentation and therefore, inthe present case, we direct the AO/TPO toconsider this company t.e. M/s Megasoft Ltd.,(Supra) as a comparable after segmentation of itsresult.. 1&8. The next company for which exclusion 1sbeing requested is M/s R Systems InternationalLtd.,(Seg.). It was submitted by the ld. AR of theassessee that the discussion about this companyis available on pages 38-39 of the Tnbunal'sorder rendered in the case of M/s HPPLtd.(Supra). In para-SO of the Tribunal order, it is Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 10/14 noted by the Tribunal that as per the annualreport of the said company placed by _ thassessee in paper book , it is seen that finalaccounts are being prepared on calendar yearbasis and the P&L account is for calendar yearending 31-12-2008 and under these facts, byrespectfully following this Tribunal order, it washeld that this company cannot be considered as aproper comparable. 19. The ld. DR of the revenue could not point outas to how the Tribunal order on this issue is notto be followed in the present case and therefore,by respectfully following this Tribunal order, wedirect the AO/TPO that this company te. RsystemsInternational|Ltd.,(Seg.)shouldbe|excludedfrom the list offinal comparables. 20. The next company for which exclusion isbeing requested is M/s Wipro Ltd., It is submittedby the ld. AR of the assessee that discussionabout this company is available on pages 32 to33of the Tribunal order rendered in the case of M/sHPP Ltd., (Supra). On these pages, it is noted bythe Tribunal that this company owns intellectualproperty in the form of registered patents andseveral pending applications for grant ofpatents.Therefore, respectfully following this Tribunalorder, we direct the AO/TPO that in the presentcase also, this company te. M/s Wipro Ltd., Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., Should be excluded from the final list ofcomparables. 20. The next company for which exclusion isbeing requested is M/s Wipro Ltd., It is submittedby the ld. AR of the assessee that discussionabout this company is available on pages 32 to33of the Tribunal order rendered in the case of M/sHPP Ltd., (Supra). On these pages, it is noted bythe Tribunal that this company owns intellectualproperty in the form of registered patents andseveral pending applications for grant ofpatents.Therefore, respectfully following this Tribunalorder, we direct the AO/TPO that in the presentcase also, this company te. M/s Wipro Ltd., Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., Should be excluded from the final list ofcomparables. 21. The next company for which exclusion isbeing requested is M/s Persistent Systems Ltd., Itwas submitted by the ld. AR of the assessee thatthe discussion about this company is available onpages 26 to 27 of the Tribunal order rendered inthe case of M/s HPP Ltd. (Supra). On page 27 ofthis Tribunal order, it is noted by the Tribunalthatthis companyis engagedin|productdevelopment and product design services, whilethe assessee is a software development serviceprovider.Facts|beingsimilar, respectfullyfollowing this Tribunal order, we direct theAO/TPO that in the present case also, thiscompany t.e. M/s Persistent Systems Ltd., shouldbe excluded from the list offinal comparables.” 4. The controversy involved herein is no moreTeSintegrain view of the decision of this Court inI.T.A.Nos.536/2015 c/w 537/2015dated.25.06.2018 (Prl. Commissioner of Income Tax & Anr. -v- M/s’Softbrands India Pvt. Ltd.,) Wherein it has beenobserved that unless the finding of the Tribunal is foundex facie perverse, the Appeal u/s. 260-A of the Act, is Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., not maintainable. The relevant portion of the Judgment is quoted below for ready reference: “Conclusion: 55. A substantial quantum of internationaltrade and transactions depends upon the fair andquick judicial dispensation in such cases. Had itbeen|FTCASEof|substantialquestionof|interpretation of provisions of Double Taxation|AvoidanceTreaties(DTAA),interpretationof|provisions of the Income Tax Act or QOverridingEffectof|theTreatiesOVEeTthe|DomesticLegislations:Orthe|questionslikeTreatyShopping, 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 underSection 260-A of the Act, the Courts could have embarked upon such|exerciseof|framingand|answeringsuchsubstantial question of law. On the other hand,|the appeals of the present tenor as to whether thecomparables have been rightly picked up or not,|Filtersforarrivingatthe|correct|list.of| Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 13/14 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 ofSection 260-Aof the Act and thus the appeals|fled by the Revenue are found to be devoid of|merit and the same are liable to be dismissed. Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., 13/14 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 ofSection 260-Aof the Act and thus the appeals|fled by the Revenue are found to be devoid of|merit and the same are liable to be dismissed. o7. We make it clear that the same yardsticks|and parameters will have to be applied, even tfsuch appeals are filed by the Assessees, because,there may be cases where the Tribunal giving itsown reasons and findings has found certain|comparables to be good comparables to arrive at|an‘Arm’s Length Price“ in the case of theassessees with which the assessees may not besatisfied and have filed such appeals before this|Court.Therefore|We|clarifythatme.Tedissatisfaction with the findings offacts arrived atby the learned Tribunal is not at all a sufficient Date of Judgment 02-08-2018, ITA No.47/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Core Objects India Pvt. Ltd., reason to invokeSection 260-Aof the Act before|this Court. o8. The appeals filed by the Revenue are|therefore dismissed with no order as to costs.” o. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of theconsidered opinion that no substantial question of lawarises for consideration in the present case. © Hence, the Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed. —No costs. In. Sd/-.JUDGE| Sd/-.JUDGE|