Date Of Judgment 16-8-2018, Ita v. M/S Textron India Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 16 DAY OF AUGUST 2018. PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS.JUSTICEK S.SUJATHA I.T.A. No.245/2017 BETWEEN : 1.Pr. COMMISSIONER OF INCOME TAX-/C.R. BUILDINGS, QUEENS ROADBANGALORE -560 OO]C.R. BUILDINGS, QUEENS ROADBANGALORE -560 OO] «|DEPUTY COMMISSIONER ~OF INCOME TAX, CIRCLE-12(4), |BANGALORE_ APPBLLANTS| (BY SRI E.I.SANMATHI, ADV.) AND : M/s. TEXTRON INDIA PVT. LTD.,|FLOOR-2, BLOCK B (TOWER-2)SEZ CAMPUS, GLOBAL VILLAGE|RVCE POsT, MYLASANDRERORK MYSORE ROADBANGALORBE-560059PAN: AACCT O118M._. RESPONDENT. THIS [TA IS FILED UNDER SECTION 260-A OF INCOME|TAX ACT 1961, ARISING OUT OF ORDER DATED 22.07.2016)PASSED IN IT(TPJA NO.477/BANG/2012, FOR THE ASSESSMENT)YEAR: 2007-2008 VIDE ANNEXURE-A, PRAYING DECIDE THEFOREGOING QUESTION OF LAW AND/OR SUCH OTHER,QUESTIONS OF LAW AS MAY BE FORMULATED BY THE) Date of Judgment 16-8-2018, ITA No.245/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd. HON'BLKE COURT AS DEBEBMBD FIT AND SHBT ASIDE APPELLATK ORDER DATED 22.07.2016 PASSED BY THE.INCOME TAX APPELLATE TRIBUNAL, B BENCH, BANGALORE,IN APPEAL PROCEEDINGS IN IT(TP)A NO.477/BANG/2012 FOR:ASSESSMENT YEAR 2007-2008 VIDE ANNEXURE-A, AS SOUGHT|FOR IN THIS APPEAL. THIS APPEAL COMING ON FOR ADMISSION, THIS DAY,|S. SUJATHA, J., DELIVERED THE FOLLOWING: JU DBiGMENT Mr. E.I. Sanmathi, Adv. for Appellants — Revenue. | This Appeal is filed by the Revenue purportedlyraising the substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal, Bangalore Bench ‘B’, Bangalore, inIT [TPIA No.477/Bang/2012dated22..07.201, relating to the Assessment Year2007-08. ? The substantial questions of law framed bythe Revenue in the Memorandum of Appeal are asunder: aWhether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in adopting high turnover and brand valuecriteria for excluding Infosys Technologies as a comparable in absence of turnover criteria in RuleIOB of the Income Tax Rules and also when thesale of the turnover and profit margins are notlinked in the software industry unlike capitalintensive compantes? D2 Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in holding that Tata Elxsi Limited cannot betaken as comparables on the basis of facts of adifferent case for different assessee withoutmaking any specific FAR analysis vis-d-vis heassesse-company in contrast to the fact that TataElxst Limited satisfy all the qualitative andquantitative filters applied by the TPOP| 3.|Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in directing the TPO to apply RPTfilter of 15%by superimposing the decisions of Tribunal inother cases without going into specific facts of the|taxpayer and without adducing the basis forarriving at the 15% cut offRPTfilter?| 4 |Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in rejecting few companies chosen byTransfer Pricing Officer as comparables on the Date of Judgment 16-8-2018, ITA No.245/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd. basis of functional dissimuarity by following itsearlier order which has not reached finality evenwhentheSaInesatisfiedqualitativeandquantitative tests in the case of the assessee. 5.|Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in excluding Mega Soft Ltd. has to beincluded as comparable by placing reliance on itsearlier order in case ofM/s Triology E-Businesseven when said order has not reached finality?| 6. Whether the Tribunal is right in lawis setting aside 10A re-computation by followingof this Hon’ble Court in case of CIT vs. Tata Elxstwhich has not reached finality?” 3.Learned counsel for appellant-Revenue has| not pressed substantial question of law No.6 and thesame is placed on record. basis of functional dissimuarity by following itsearlier order which has not reached finality evenwhentheSaInesatisfiedqualitativeandquantitative tests in the case of the assessee. 5.|Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in excluding Mega Soft Ltd. has to beincluded as comparable by placing reliance on itsearlier order in case ofM/s Triology E-Businesseven when said order has not reached finality?| 6. Whether the Tribunal is right in lawis setting aside 10A re-computation by followingof this Hon’ble Court in case of CIT vs. Tata Elxstwhich has not reached finality?” 3.Learned counsel for appellant-Revenue has| not pressed substantial question of law No.6 and thesame is placed on record. 4.The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under: Regarding Substantial Question of law No.1: “15. The next company for which exclusion|is being requested is M/s Infosys Ltd., In supportof his claim for exclusion of this company, it wassubmitted that in assessee’s own case, in IT(TP)ANo.49(Bang)/2012 for AY 2006-07 available on)page 882 of case law compendium, it was heldby the tribunal in para-16 of this Tribunal orderthat this company should be excluded from thelist offinal comparables and apartfrom this, in somany cases, the Tribunal has taken consistentVIEWbecauSeofVArlousfactorssuch|as|branding, ownership of intangibles and R&D andsoftware products, this company cannot beconsidered as a comparable. We therefore, directthe AO/TPO in the present case also to excludethis company from the list offinal comparables.” Regarding Substantial Question of law No.2: “20. The next company for which exclusion|is being requested is M/s Tata Elxsi Ltd.,(Seg.).For this company, reliance has been placed ontwo Tribunal orders in assessee’s own case forAY: 2005-06 & 2006-07, copy available on pages|854 -— 873 of the case law compendium. Inaddition to this, reliance is also placed on the Date of Judgment 16-8-2018, ITA No.245/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd. Tribunal order rendered in the case of M/sTelecoradiaTech.Indiq.Put.Ltd.,in|ITANo. 7821/Mum/ 2011, copy available on page 83of case law compendium and this Tribunal orderis for the same assessment year 1.e. AY: 2007-08.As per this Tribunal order rendered in the case ofM/s Telecordia Tech. India Put. Ltd., itis noted by|the Tribunal that this company is engaged in thedevelopment of niche product development andrelatedSETVICES,as|in|thepresentCASE.Therefore, by respectfully following this Tribunalorder, we direct the AO/TPO in the present casealso to exclude this company t1.e. M/s Tata Elxs1Ltd., also from the list offinal comparables.” | Regarding Substantial Question of law No.3: “14. The next company for which exclusionis sought for is M/s Geometric Ltd.,(Seg.)(Supra).Exclusion of this company is requested on thisbasis that RPT percentage in this case is 17% andas per various Tribunal orders, any companyhaving RPT percentage of more than 15% is to beexcluded and therefore, we direct the AO/TPO toexcludethisCOTTLPAP1.e.|M/sGeometricLtd.,(Seg.)(Supra)fromthe.listof|finalcomparables because of higher RPT percentage at17%. 7 Regarding Substantial Question of law No.4: Regarding Substantial Question of law No.3: “14. The next company for which exclusionis sought for is M/s Geometric Ltd.,(Seg.)(Supra).Exclusion of this company is requested on thisbasis that RPT percentage in this case is 17% andas per various Tribunal orders, any companyhaving RPT percentage of more than 15% is to beexcluded and therefore, we direct the AO/TPO toexcludethisCOTTLPAP1.e.|M/sGeometricLtd.,(Seg.)(Supra)fromthe.listof|finalcomparables because of higher RPT percentage at17%. 7 Regarding Substantial Question of law No.4: “13. Wehave.consideredtherivalsubmissions. We find that in the case ofDE ShawIndia Pvt. Ltd.,(Supra), it was held by theTribunal that M/s Flextronics Software SystemsLtd.,(Seg.) cannot be considered as a comparablebecausethiscompany1S|into|productdevelopment. The Tribunal in that case hasfollowed another Tribunal order rendered in thecase of M/s Intoto Software India Put. Ltd., andthe ld. DR of the revenue could not pint out anydifference in facts in the present case and in thecase of M/s DE Shaw India Put. Ltd.(Supra).Hence, respectfully following these Tribunalorders as well as the judgment of the Hon’bleTelangana0%AndhraPradeshHigh Courtrendered in the case of DE Shaw India Put.Ltd.,(Supra), we direct the AO/TPO that in thepresent case also, this company tue. M/sFlextronics Software Systems Ltd., (Seg.) (Supra)Should be excluded from the lst of finalcomparables.” Regarding Substantial Question of law No.5: “19. The next company for which theexclusion is requested is M/s Megasoft Ltd., and Date of Judgment 16-8-2018, ITA No.245/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd. 8/12 in this regard, reliance has been placed on theTribunal order rendered in the case ofM/s TrilogyE-Business Software India Put. Ltd.,(Supra) and itwas pointed out that the relevant discussion is onpage no.916 to 924 of case law compendium. Wefind that in this case, as per para-S& of theTribunal order, it was held by the Tribunal thatprofit margin of 23.11% which is the margin ofsoftwareSeCTVICESsegmentbe|takenjorcomparability. Hence, it is seen that regardingthis company te. M/s Megasoft Ltd.,(Supra), thisis not the decision of the Tribunal that thiscompany should be excluded and in fact, theTribunal decision is this that this company shouldnot be excluded but the profit margin in thiscompany should be considered in respect ofsoftware services segment only and the profitmargin of that segment has been noted as23.11%. Accordingly, in the present case also, wedirect the AO/TPO to consider the profit margin ofsoftware services segment only of this companyue. M/s Megasoft Ltd., (Supra) which has beennoted at 23.11%.” Date of Judgment 16-8-2018, ITA No.245/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd. 9/12 5.However, this Court in a recent judgment in I.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 is"established 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: 038. A substantial quantum of internationaltrade and transactions depends upon the fair andquick judicial dispensation in such cases. Had itbeen|aCaSeofsubstantialquestion.Of|interpretation of provisions of Double TaxationAvoidance Treaties (DIAA), interpretation ofprovisions of the Income Tax Act or OverridingEffectofthe TreatiesOVETthe|Domestic.Legislations or _ the questions like TreatyShopping, Base Erosion and Profit Shifting Date of Judgment 16-8-2018, ITA No.245/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd. 10/12 “Conclusion: 038. A substantial quantum of internationaltrade and transactions depends upon the fair andquick judicial dispensation in such cases. Had itbeen|aCaSeofsubstantialquestion.Of|interpretation of provisions of Double TaxationAvoidance Treaties (DIAA), interpretation ofprovisions of the Income Tax Act or OverridingEffectofthe TreatiesOVETthe|Domestic.Legislations or _ the questions like TreatyShopping, Base Erosion and Profit Shifting Date of Judgment 16-8-2018, ITA No.245/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd. 10/12 (BEPS), Transfer of Shares in Tax Havens (like inthe case of Vodafone etc.), if based on relevantfacts, such substantial questions of law couldbe raised before the High Court underSection260-A|of the Act, the Courts could haveembarked upon such exercise of framing andanswering such substantial question of law. Onthe other hand, the appeals of the present tenoras to whether the comparables have been rightlypicked up or not, Filters for arriving at the correctlist of comparables have been rightly applied ornot, do not in our considered opinion, give rise toany substantial question of law. 56. We are therefore of the consideredopinion that the present appeals filed by theRevenue do not give rise to any substantialquestion of law and the suggested substantialquestions of law do not meet the requirements ofSection 260-A.of the Act and thus the appealsfiled by the Revenue are found to be devoid ofmerit 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 theAssessees, because, there may be cases wherethe Tribunal giving its own reasons and findings Date of Judgment 16-8-2018, ITA No.245/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd. has found certain comparables to be goodcomparables to arrive at an‘Arm’s LengthPrice“in the case of the assessees with whichthe assessees may not be satisfied and have filedsuch appeals before this Court. Therefore weclarify that mere dissatisfaction with the findingsoffacts arrived at by the learned Tribunal is notat all a sufficient reason to invokeSection 260-Aof the Act before this Court. 58 The appeals filed by the Revenue aretherefore dismissed with no order as to costs.” 6.Having heard the learned Counsel appearingfor the Appellants-Revenue, we are therefore of theopinion that no substantial question of law arises in thepresent case also. The Appeal filed by the Appellants-|Revenue is liable to be dismissed and it is dismissed|accordingly. No costs. 12/12 AN /- Copy of this order be sent to the Respondent- Assessee, forthwith. Sd/-.JUDGE. Sd/-.JUDGE.