Date Of Judgment 14-8-2018, Ita v. M/S.acusis Software India Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 14 DAY OF AUGUST 2018. PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS.JUSTICEK S.SUJATHA I.T.A. No.444/2017 BETWEEN : 1.THE PR. COMMISSIONER OF INCOME TAX |! FLOOR, BMTC BUILDING,80 FEET ROAD, KORMANGALA,BBNGALURU - 560 095)! FLOOR, BMTC BUILDING,80 FEET ROAD, KORMANGALA,BBNGALURU - 560 095) 2.THR INCOME -TAX OFFICERWARD-11(1), PRESENT ADDRESS,|WARD-1 (1) (1),2 FLOOR, BMTC BUILDING, |80 FEET ROAD, KORMANGALA,BENGALURU - 560 O9)D .. APPELLANTS| (BY SRI.ARAVIND K V, ADV.) AND:| M/S.ACUSIS SOFTWARE INDIA PVT. LTD.NO.17/2, DOLLARS CHAMBERS, LALBAGH ROAD,BENGALURU - 560 027,PAN:AADCA 2415P_. RESPONDENT IBY MR. NAGESWAR RAO, MR. MALLAHARAO & MR. PARTH, ADVS..,| THIS ITA IS FILED UNDER SEKC.2J60-A OF INCOMB TAACT 1961, ARISING OUT OF ORDER DATED:09.11.20160 PASSED Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., IN IT|TPJA NO. 445/BANG/2011 FOR THE ASSESSMENT YEAR:2005-2006 VIDE ANNEXURE - D, PRAYING TO:- I. FORMULATETHE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. II.ALLOW THR APPBAL AND SBT ASIDE THR ORDERS PASSBD BY)THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN.IT|TPIANO.445/BANG/2011_DATEHBD:09.11.201VIDKANNEBEXURE - D CONFIRMING THR ORDER OF THR APPBLLATCOMMISSIONER AND CONFIRM THE ORDER PASSED BY THE!INCOME TAX OFFICER, WARD-1(1)(1), BENGALURU. THIS APPEAL COMING ON FOR ORDERS, THIS DAY,|S. SUJATHA, J©, DELIVERED THE FOLLOWING: JU DBiGMENT Mr. K.V. Aravind,Adv. for Appellants — Revenue. |Mr. Nageswar Rao, Mr. Mallaharao & Mr. Parth,Advs.|for Respondent — Assessee. This Appeal is filed by the Revenue purportedlyraising the substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal, ‘A’ Bench,Bangalore, in|IT [TP|A No.445/Bang/2011dated. 09.11.2016, relating to the Assessment Year2005-06. 2.The substantial questions of law framed bythe Revenue in the Memorandum of Appeal are asunder: Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., 3/13 “1. Whether on the facts and in the circumstancesof the case, the Tribunal is right in law holdingthat the assign authority is not right in includingexpenditure incurred in foreign currency fromexport turnover and from total turnover by relyingupon the decision of this Hon’ble Court in case ofCIT V/s Tata Elsxt even when the assessingauthority has rightly included the according toparameters set out in section 10A and thedecision relied upon by the Tribunal has notreached finality? 2. Whether on the facts and in the circumstancesof the case, the Tribunal ts right in law in erred inexcludingcertaincomparablefromlistof|comparableOF.the.groundoffunctionaldissimilarity by following its earlier orders whichhas not reached finality and when the saidcompanies satisfied qualitative and quantitativefilers applied by Transfer Pricing Officer and theyare functionally similar to that of assesseeP 3.WhetherOnlthefactsandin|the circumstances of the case, the Tribunal ts right inlaw in directing the assessing authority/ transferpricing officer to treat foreign gain as part of operating profit by relying on its earlier decisions|which has not reached finality? 4.WhetherOnlthe factsandin|thecircumstances of the case, the Tribunal ts right in|law in directing the assessing authority to includecertain comparable in list even when the TPO haschosen proper comparable by application of allrequired tests? 5,WhetherOF|the factsandin|the circumstances of the case, the Tribunal is right inlaw in directing the assessing authority toexclude certain comparable in list even when theTPO has chosen proper comparable by applicationof all required tests. 3.WhetherOnlthefactsandin|the circumstances of the case, the Tribunal ts right inlaw in directing the assessing authority/ transferpricing officer to treat foreign gain as part of operating profit by relying on its earlier decisions|which has not reached finality? 4.WhetherOnlthe factsandin|thecircumstances of the case, the Tribunal ts right in|law in directing the assessing authority to includecertain comparable in list even when the TPO haschosen proper comparable by application of allrequired tests? 5,WhetherOF|the factsandin|the circumstances of the case, the Tribunal is right inlaw in directing the assessing authority toexclude certain comparable in list even when theTPO has chosen proper comparable by applicationof all required tests. onWhetherOnlthefactsandin|the circumstances of the case, the Tribunal ts right inlaw in following its earlier decision in case of24/7 Customer.com.p.ltd which has not reachedfinality P” T.Learned Counsel for the Appellants-Revenue does not press substantial question of law No.4. 8.The same is taken on record. Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., 5/13 QOJThe learned Tribunal, after discussing therival contentions of both the Appellants-Revenue andRespondent-Assessee, has returned findings as under: Regarding Substantial Question of law No.1: 10,The issue is covered by the decision of theHon’ble Supreme Court in the case ofCommissioner of Income-tax, Central —- III vs. HCL Technologies Ltd.,[2018] 93 Taxmann.com 33(SC). 11.The relevant portion of the judgment of theHon'bleSupremeCourtin.theCaSE€oT|HCL|Technologies Ltd. (supra),is quoted below for readyreference:- “17. The stmilar nature of controversy, akinthis case, arose before the Karnataka High CourtinCIT v. Tata Elxsi Ltd. [2012] 204 Taxman|3S21/17/taxman.com 100/349 ITR 98. The issuebefore the Karnataka High Court was whetherthe Tribunal was correct in holding that whilecomputing relief under Section IOA of the IT Act,the amount of communication expenses should beexcluded from the total turnover tf the same are. Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., reduced from the export turnoverP While givingthe answer to the issue, the High Court, inter-alia,held that when a particular word is not definedby the legislature and an ordinary meaning 1s tobe attributed to it, the said ordinary meaning is tobe in conformity with the context in which it isused. Hence, what is excluded from ‘exportturnover’ must also be excluded from ‘totalturnover’, since one of the components of ‘totalturnover’1Sexportturnover.Anyotherinterpretation would run counter to the legislativeintent and would be impermissible. | 1S. XXXXXX 19, In the instant case, if the deductions onfreight,telecommunicationand|insuranceattributable 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 theobject of the formula ts to arrive at the profit fromexport business, expenses excluded from export Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., turnover 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”. Regarding Substantial Question of law Nos.2, 5 & 6: “AQ XXXX XXXX 20. Even in common parlance, when theobject of the formula ts to arrive at the profit fromexport business, expenses excluded from export Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., turnover 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”. Regarding Substantial Question of law Nos.2, 5 & 6: “AQ XXXX XXXX We heard the rival submissions and perused thematerial on record. This company was consideredby the coordinate bench, Mumbai in the case ofACIT V. Maersk Global Service Centre (India) PLtd [2011] 16 taxmann.com 47 (Mum), wherein itwas held that the company cannot be consideredas comparable, as it outsources major of itsactivities. This decision was subsequently followedby the coordinate benches in the case of ITO vNextlkinxIndia.PoutLtdDTS-722-ITAT-2012(Bang)-TP, Nomura Fin Services (India) (P.)Ltd. v ACIT [2013] 33 taxmann.com 4 (Mum- Trib.)and ACIT v M/s. Hapag Lloyd Global Services PutLtd TS-47-ITAT-2013 (Mum)-TP and respectivelyfollowing the decisions, we direct that thiscompany cannot be included in the list of Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., 8/13 comparables with that of the assessee companyand accordingly, we uphold the decision of theCIT(A) to delete this company from the list ofcomparables, though on a different reasoning. u. Nucleus Net Soft and GIS Ltd: It was)contended that it is a functionally differentcompany as it is engaged in the development ofsoftware products. Thus it was submitted thatthis company cannot be compared with that ofITES company like that of assessee company.However we find that no material was filedbeforeUS|establishingthis|fact.In|the circumstances, we remand this issue back to thefile of TPO/AO to examine whether the companyis engaged in the software development. If it isfound so, then to exclude it from the lst ofcomparables. wu Transworks Information Service Ltd: The|appellant pleaded for the inclusion of thiscompany in the list of comparables. There is nodispute about the functional comparability withthat of assessee company. The only ground onwhich the CIT(A) had directed exclusion of thiscompany from the list of comparables is that thecompany is making very low margins. As held byus in the assessee's own case for the assessment Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., 9/13 year 2004-05, no company can be excluded forthe reasons of making high profit and low profitmaking companies. Therefore the reasoning of theCIT(A) does not stand the test of the law laiddown by the special bench in the Quark Systems.In the circumstances, we direct the TPO/AO toinclude this company in the list of comparablesfor the purpose of computing ALP. 43. In the result, the appeal filed by the assesseein IT(TPJA No. 442/Bang/2011 is partly allowedfor statistical purpose. The appeals filed byrevenue in IT(IPJA No. 444/Bang/2011 forassessment year 2004-05 and in IT(TP)A No.|445/Bang/2011 for assessment year 2005-06are partly allowedfor statistical purposes.” Regarding Substantial Question of law No.3: “40. Ground Nos. 4, 5 and 6: The issue raised inthe ground Nos. 4, 5 and 6 is with regard to thedirection of the learned CIT(A) to treat the gain onaccount of foreign exchange fluctuations arisingout of exports made as a part of operating profit.This issue is already decided by us in favour ofthe assessee company in the assessment year2004-05 in ITA No. 442/Bang/2011. Followingthe same, we dismiss this ground of appeal.” Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., 10/13 Regarding Substantial Question of law No.3: “40. Ground Nos. 4, 5 and 6: The issue raised inthe ground Nos. 4, 5 and 6 is with regard to thedirection of the learned CIT(A) to treat the gain onaccount of foreign exchange fluctuations arisingout of exports made as a part of operating profit.This issue is already decided by us in favour ofthe assessee company in the assessment year2004-05 in ITA No. 442/Bang/2011. Followingthe same, we dismiss this ground of appeal.” Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., 10/13 12.However, this Court in a recent judgment inI.T.A. Nos.536/2015 c/w 537/2015delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. —v- M/s Softbrands India Pvt. Ltd.») has held that inthese type of cases, unless an ex-facie perversity in thefindings of the learned Income Tax Appellate Tribunal isestablished by the appellant, the appeal at the instanceof an assessee or the Revenue under Section J60-A otthe Act is not maintainable. The relevant portion of thesaid 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 — Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., 11/13 questions like Treaty Shopping, Base Erosionand Profit Shifting (BEPS), Transfer of Shares|in Tax Havens (like in the case of Vodafone|etc.), uf 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|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 anysubstantial 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| Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., 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. “ArLength Price“in the case of the assesseeswith which the assessees may not be|satisfied and have filed such appeals beforethis 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.” appearing for the parties, we are therefore of the opinion Date of Judgment 14-8-2018, ITA No.444 /2017 The Pr. Commissioner of Income –Tax & another Vs. M/s.Acusis Software India Pvt. Ltd., 13/13 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. AN /- Sd/-.JU DGE Sd/-.JU DGE