Date Of Judgment 04-07-2018, Ita v. M/S.electronic For Imaging India Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 4 DAY OF JULY 2018 PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A. No.538/2016 BETWEEN: 1.THE PR. COMMISSIONER OF INCOME-TAX, CIT (A)$[‘T]FLOOR, BMTC BUILDING,80 FEET ROAD, KORMANGALA,$[‘T]FLOOR, BMTC BUILDING,80 FEET ROAD, KORMANGALA, BBNGALURU - 560 O95. «|THER DEPUTLY COMMISSIONER OF INCOME-TACIRCLE - 3(1)(2), 2 FLOOR, ~BMTC BUILDING, 80 FEET ROAD,KORMANGALA,BBRNGALURU - 560 095.... APPELLANTS|CIRCLE - 3(1)(2), 2 FLOOR, ~BMTC BUILDING, 80 FEET ROAD,KORMANGALA,BBRNGALURU - 560 095.... APPELLANTS| (BY SRI ARAVIND K.V., ADV.) AND M/s ELECTRONICS FOR IMAGING |INDIA PVT. LTD.,.KALYANI PLATINA, 4[‘T]FLOOR,BLOCK-I, NO.4, EPIP ZONE,PHASE II, WHITEFIELD,BBNGALURU - 560 O66.PAN: AAACG 6053E _. RBSPONDENT (BY SRI S.SHARATH, ADV.) Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 2/20 THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A|OF INCOME TAX ACT 1961, ARISING OUT OF ORDERDATED:24/02/2016 PASSED IN IT(TP)A NO.212/BANG/2015,.FOR THERE ASSHSSMENT YEAR 2010-2011 ANNBEXURE - PRAYING 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.212/BANG/2015 DATED:24/02/2016 ANNEXURE - E.CONFIRMING THR ORDBR OF THR DRP AND CONFIRM THE!ORDER PASSED BY THR DBPUTY COMMISSIONER OF [INCOMETAX, CIRCLE-3(1)(2), BENGALURU. THIS APPEAL COMING ON FOR HEARING, THIS DAY, | THIS APPEAL COMING ON FOR HEARING, THIS DAY, |Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING: JU DGMENT Mr.K.V.ARAVIND,Adv. for Appellants — Revenue. Mr.S.SHARATH,Adv. for Respondent — Assessee. This Appeal is filed by the Revenue purportedlyraising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal,‘BpBench,Bangalore, in|IT A No.212/Bang/2015dated|24.02.2016relating to the Assessment Year2010-11. Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 3/20 2. The substantial questions of law framed| by the Revenue in the Memorandum of Appeal are asunder: 1.“Whether, on the facts and in thecircumstances of the case, the Tribunal 1isjustified in directing the assessing officer torecomputed the deduction under section 10A.after reducing those expenses that were|reduced only from export turnover from the|total turnover also, without appreciating that|there is no provision in section 10A to the|effect that such expenses should also be|reduced from the total turnover, as clause (tv)of the Explanation 2 to section 1OA provides|that such expenses have to be reduced only|from the export turnover and the decision ofthis Hon’ble Court in the case of Tata Elxs1|Ltd., 349 ITR 98 (Karnataka) has not reachedfinality since SLP has been filed against suchorder on this 1ssue?| |Whether, on the facts and in thecircumstances of the case, the Tribunal 1isjustified in excluding comparables such has. Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 4/20 ICRA|TechnoAnalyticsLtd,SaskenCommunication Technologies Ltd, Infosys Ltd,Kals Information Systems Ltd, Persistentsystems Ltd, Tata Elxsi Ltd by relying on its|earlier order which even though the said|orders have not reached finality and when|the TPO has rightly chosen the same as|comparable by applying all required tests?| |Whether, on the facts and in thecircumstances of the case, the Tribunal 1isjustified in excluding comparables such has. Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 4/20 ICRA|TechnoAnalyticsLtd,SaskenCommunication Technologies Ltd, Infosys Ltd,Kals Information Systems Ltd, Persistentsystems Ltd, Tata Elxsi Ltd by relying on its|earlier order which even though the said|orders have not reached finality and when|the TPO has rightly chosen the same as|comparable by applying all required tests?| 3.Whether on the facts and in thecircumstances of the case, the Tribunal 1isright in excluding comparables such has|HCCA Bussiness Services Pvt. Ltd, KillickAgencies:CGMarketingLtdand.ASian.Bussiness Exhibition & Conference Ltd bytrelying on the decision of Mumbai ITAT in|case of RGA services India Put. Ltd in ITA|No.22/Mum/2015 dated 10/11/2015 byerroneously holing that the said companies|are functionally different even when the said|company’s functions are similar to that of|assessee? 4 Whether on the facts and in thecircumstances of the case, the Tribunal is| Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 5/20 right in law in directing the TPO/AO to|consider the foreign exchange fluctuation as|operating in nature by following its earlier|order in case of Obopay Mobile Technology|India Ltd in IT(TP). A.No.469/ Bang/ 2015dated 8/1/2016 even though the said order|has not reached finality”| 5)Whether on the facts and in thecircumstances of the case, the Tribunal 1isright in including few comparables by holding|that in normal circumstances the tolerance|range of RPT should not be more than 15%|even when the TPO has rightly applied RPTfuter as 25% and the decision relied upon bythe tribunal has not reached finality” 3. Though the appeal has been admitted on28.11.2017to consider the substantial questions of lawNos.2 to 5, learned counsel for the appellant submitsthat he does not press substantial question No.o andquestion No.1 may also be considered as the same iscovered by the decision of the Hon’ble Supreme Court © Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 6/20 1n Commissioner of Income-tax, Central — III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC). Regarding Substantial Question No. 1: 4. The issue raised in the present appeal as to thededuction of expenditure incurred for.‘Export TurnOver’is also required to be deducted from‘Total TurnOver’for the purpose of computing the deduction|u/s.1OAof the Act, the controversy is no longer |res integraand is covered by the decision of the DivisionBench of this Court in the case of.M/s.Tata Elxsti Ltd., vs. Asst.Commisstoner of Income Tax,decided on20.10.2015since reported in.(2015) 127 DTR 0327(Kar], which has been affirmed by the Hon’ble SupremeCourt in the case otfCommissioner of Income-tax,Central - III vs. HCL Technologies Ltd., [2018] 93Taxmann.com 33(SC). The relevant portion of the judgment of theHon ’bleSupremeCourt1nthe.CASEoT HCL| Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 7/20 Technologies Ltd. (supra),is quoted below for ready reference: - vs. Asst.Commisstoner of Income Tax,decided on20.10.2015since reported in.(2015) 127 DTR 0327(Kar], which has been affirmed by the Hon’ble SupremeCourt in the case otfCommissioner of Income-tax,Central - III vs. HCL Technologies Ltd., [2018] 93Taxmann.com 33(SC). The relevant portion of the judgment of theHon ’bleSupremeCourt1nthe.CASEoT HCL| Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 7/20 Technologies Ltd. (supra),is quoted below for ready reference: - “17. The similar nature of controversy, akinthis case, arose before the Karnataka High CourtinCIT v. Tata Elxsi Ltd[2012] 204 Taxman321/17/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 giwing|the answer to the issue, the High Court, inter-alia,held that when a particular word is not definedby the legislature and an ordinary meaning is tobe attributed to it, the said ordinary meaning is tobe in conformity with the context in which it is.used. Hence, what is excluded from ‘exportturnover must also be excluded from ‘totalturnover’, since one of the components of ‘totalturnover|1S|exportTurnover,Anyother|interpretation would run counter to the legislativeintent and would be impermissible. 1S. XXXXXX 19, In the instant case, if the deductions onfreight,telecommunicationand|insurance Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 8/20 attributable to the delivery of computer softwareunder Section 10A of the IT Act are allowed onlyin Export Turnover but not from the TotalTurnover then, it would give rise to inadvertent,unlawful, meaningless and illogical result whichwould cause grave injustice to the Respondentwhich could have never been the intention of thelegislature. 20. Even in common parlance, when the|object of the formula is to arrive at the profit fromexport business, expenses excluded from exportturnover have to be excluded from total turnoveralso. Otherwise, any other interpretation makesthe formula unworkable and absurd. Hence, weare satisfied that such deduction shall be allowedfrom the total turnover in same proportion aswell”. o. The learned Tribunal, after discussing the rivalcontentionsoT|boththeAppellant-RevenueandRespondent-Assessee, has returned a finding withregard to question Nos. 2 to 4 as under: “13. We shall deal with each comparable|which has been disputed by the Revenue one|by one as under: | Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 9/20 (1) ICRA Techno Analytics Ltd. (seg) 14, At the outset, we note that apart from|having the related party revenue at 20.94% ofthe total revenue, this company was also|found to be functionally not comparable withsoftware development services segment of theassessee. The DRP has given its finding at|pages 13 to 14 as under: - NXXXXXXXXKXKX 15. We find that the facts recorded by the|DRP in respect of business activity of thiscompany are not in dispute. Therefore, when|this company is engaged in _ diversifieactivities|of|softwaredevelopmentandconsultancy,engineeringservices,webdevelopment & hosting and _ substantialldiversified itself into domain of business|analysis and business process outsourcing,then the same cannot be regarded as|functionally comparable with that of theaSsSSCSSCwho1S|renderingsoftwaredevelopment services to its AE. Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 10/20 NXXXXXXXXKXKX 15. We find that the facts recorded by the|DRP in respect of business activity of thiscompany are not in dispute. Therefore, when|this company is engaged in _ diversifieactivities|of|softwaredevelopmentandconsultancy,engineeringservices,webdevelopment & hosting and _ substantialldiversified itself into domain of business|analysis and business process outsourcing,then the same cannot be regarded as|functionally comparable with that of theaSsSSCSSCwho1S|renderingsoftwaredevelopment services to its AE. Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 10/20 16. In view of the above facts, we don not|find any error or illegality in the findings ofthe DRP that this company is functionally not|comparable with that of a pure software|development service provider. (2)Infosys Ltd 17. =Theassessee objectedagainst theselection of this company on the ground thatthis company has a big name and brand|value and therefore it has a_ bargatininpower. It also contended that the turnover ofthis company is Rs.21,140 Crores, which 1s 442 times higher than the assesseeé. 18.The DRP accepted the objections of theassessee and by following the decision of the|Delht Benches of the Tribunal in the case ofAgnity India Put. Ltd. V. ITO (2015) 58taxmann.com 167 (Delhi — Trib), directed theTPO to exclude this company from the list of|comparables. Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 11/20 19. We have heard the ld. Dras well as Id. |AR and considered the relevant material on'record. We note that in the case of Agnity|India Put. Ltd. (supra), the Delht Bench of the|Tribunal has considered the comparability ofthis company and the findings of the Delht|Bench of the Tribunal has been confirmed bythe Hon’ble Delht High Court. The Hon'ble|Delht High Court has observed that thiscompany having brand value as well as|intangible assets cannot be compared with an|ordinary entity provide captive service. We|further note that this company provides endto end business solutions that leverage|cutting edge technology thereby enabling|clients to enhance business performance.This company also provides solutions that|Spa?»theentiresoftwarelifecycleencompassing technical consulting, design,|development, re-engineering, maintenance,systems integration, package evaluation andimplementation, testing and _ infrastructurmanagementService.In|addition,thecompany offers software product for banking|industry. Thus, this company is engaged in| Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 12/20 diversified services including design as well|as technical consultancy, consulting, reengineering,|maintenance,systemsintegration as well as products for banking|industry. 20. In view of the above facts that InfosysLtd.havingFIhugebrandvalue.and.intangibles as ell as having bargaining|power, the same cannot be compared with the|assessee who 1s providing services to its AE. !)"| KALS Information Systems Lt 21. The assessee raised objections againstthis company on the ground that this|company is engaged in the development of|software and software products. Further,|this company consists of STPI unit and also|having a training centre engaged in training|of software professionals on online products. —Thus, when this company is having revenue|from software services as well as softwareproduct, the same cannot be considered as| Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 13/20 comparablewith.softwaredevelopmentservice providing company. !)"| KALS Information Systems Lt 21. The assessee raised objections againstthis company on the ground that this|company is engaged in the development of|software and software products. Further,|this company consists of STPI unit and also|having a training centre engaged in training|of software professionals on online products. —Thus, when this company is having revenue|from software services as well as softwareproduct, the same cannot be considered as| Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 13/20 comparablewith.softwaredevelopmentservice providing company. 22. The DRP has directed the AO to exclude|this company from the list of comparables by|taking note of the fact that there were|inventories in the books of accounts of this|company which shows that this company 1s|in the software product business. Further, by|following the decision of this Tribunal in the.case of Trilogy e —business Software India|Ltd. v. DCIT, ITA No.1054/Bang/2011 dated23.11.2012, this company was found to benot comparable with that of the assessee. 3.We have heard the Id. DR as well as Id.AR and considered the relevant material on'record. The Id. DR has not disputed the fact|that comparability of this company has been|examined by this Tribunal in a series of|decisions including in the case of Trilogy e-business Software India Ltd. (supra). We|further note that in the balance sheet of thisCOMLPDAras|OF|31.05.2010,thereareinventories of Rs.60,47,977. Therefore, when|this company is in the business of software| Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 14/20 products, the same cannot be compared with.(ODUTEsoftwaredevelopmentSeCTVICESprovider. Accordingly, we do not find anyerror or illegality in the impugned findings ofthe DRP. !*"| Persistent Systems Lt 24. We have heard the Id. DR as well as ID. |AR and considered the relevant material on'record.TheaASSCSSCEraisedobjections:against selection of this company on the|ground that this company is functionally notcomparable as engaged in the _ producdevelopment. The segmental information for|SCTUICES|andproduct1S not.available. —Further, the assessee has also pointed out|thatthereWasartacquisitionandrestructuring duringthe|YE|underconsideration. YS.The DRP has noted the fact that|this company has reported the entire receipt|from|salesandsoftwareSeCTUVICEandproduct. Therefore, no segmental informationwas found to be available for sale of software| Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 15/20 services and product. Further, the dRP has.noted that as per Note 1 of Schedule 15, this|COMmpany1S|predominantly|engaged|in|OUTSOUYLCEsoftwaredevelopmentService.Apartfromthe|Tevenuefromsoftwareservices, it also earns income from licence of.products, royalty on sale of products, income.from maintenance contract, etc. These factsrecorded by the DRP has not been disputed|before us. 26. Therefore, when this company isengaged in diversified activities and earning|revenue from various activities including|licencing of products, royalty on sale of|products as well as income from maintenance|contract, etc., the same cannot be consideredas|functionallycomparablewiththeassessee. Further, this company also earns|income from outsource product development.|In the absence of any segmental data of thiscompany, we do notfind any error or illegalityin the findings of the DRP that this company|cannot be compared with the assessee and| 16/20 the same is directed to be excluded from the|set of comparables. (S)sasken Communication Technologies Ltd 26. Therefore, when this company isengaged in diversified activities and earning|revenue from various activities including|licencing of products, royalty on sale of|products as well as income from maintenance|contract, etc., the same cannot be consideredas|functionallycomparablewiththeassessee. Further, this company also earns|income from outsource product development.|In the absence of any segmental data of thiscompany, we do notfind any error or illegalityin the findings of the DRP that this company|cannot be compared with the assessee and| 16/20 the same is directed to be excluded from the|set of comparables. (S)sasken Communication Technologies Ltd aTThe assessee raised objection that thiscompany has revenue from software Services,software products and other services. TheDRP has come to the conclusion that this|company earned revenue from 3 segments. |However,TlLsegmentalinformation|1S available. Accordingly the DRP directed the|AO to exclude this company from thecomparables. IS,We have hard the Id. DR as well as Id.AR and considered the relevant material on'record. The DRP has reproduced the break-up of revenue in the impugned order as|under:- Amount in Rs. Lakhs| Year endedYear endedMarch 3]J2010 March 3]JDQOLIsoftware Services97,736.2240,531,20software products2,041.00 |6,146.45Other services —BI2D.7f |1,297.05|Total revenues40J150.89*@J974.68| Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 17/20 29. Thus, there is no dispute that thiscompany earns revenue from 3 segments.However, the segmental operating margins.are not available. Therefore, in the absence|of segmental relevant data and particularly|operatingmargins,thiscomposite|data|cannot be considered as comparable with theassessee for software development service|segment. Accordingly, we do not find any.error or illegality in the findings of the DRP.” 6. For the similar reasons, the Tribunal hasexcluded other comparables also. 7. The controversy involved herein is no moreTeSintegrain view of the decision of this Court inI1.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 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 18/20 not maintainable. The relevant portion of the Judgment is quoted below for ready reference: “Conclusion: 55.Asubstantial quantumof|international trade and transactions dependsupon the fair and quick judicial dispensation|in such cases. Had it been a case oOf|substantialquestionof|interpretation of|provisions of Double Taxation AvoidanceTreaties (DTAA), interpretation ofprovisions ofthe Income Tax Act or Overriding Effect of the|Treaties over the Domestic Legislations or the |questions like Treaty Shopping, Base Erosionand Profit Shifting (BEPS), Transfer of Shares|in Tax Havens (like in the case of Vodafone|etc.), tf based on relevant facts, such|substantial questions of law could beraised before the High Court underSection260-Aof the Act, the Courts could have|embarked upon such exercise offraming and|answering such substantial question of law.On the other hand, the appeals of the present|tenor as to whether the comparables have. Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 19/20 been rightly picked up or not, Futers for|arriving at the correct list of comparables|have been rightly applied or not, do not in our|consideredopinion, giverisetO arysubstantial question of law. Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 19/20 been rightly picked up or not, Futers for|arriving at the correct list of comparables|have been rightly applied or not, do not in our|consideredopinion, giverisetO arysubstantial question of law. 06. Weare therefore of the consideredopinion that the present appeals filed by the|Revenue do not give rise to any substantialquestionof|lawand.theSuggested|substantial questions of law do not meet therequirements ofSection 260-A|of the Act andthus 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 beapplied, even tf 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|7s “ArmLength Price“in the case of the assesseeswith which the assessees may not be|satisfied and have filed such appeals before Date of Judgment 04-07-2018, ITA No.538/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Electronic for Imaging India Pvt. Ltd. 20/20 this Court. Therefore we clarify that mere|dissatisfaction with the findings of facts|arrived at by the learned Tribunal ts not at all| a sufficient reason to invoke.Section 260-Aof the Act before this Court. o8. The appeals filed by the Revenue are|therefore dismissed with no order as_ tocosts.” 8. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of the considered 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. Sd/-.JUDGE| Sd/-.JUDGE|