Date Of Judgment 17-07-2018 I.t.a v. I.p. Unity Communications Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU. DATED THIS THE 17 DAY OF JULY 2ZO18 PRESENT THE HON'BLE Dr. JUSTICE VINEET KOTHARI AND THE HON’BLE Mrs.JUSTICE S.SUJATHA| I.T.A.No.37/2015 BETWEEN: 1.THE COMMISSIONER OF INCOME-TAX, |C.R.BUILDING,C.R.BUILDING, QUEENS ROAD,BANGALORE.BANGALORE. 2.THE INCOME-TAX OFFICER,WARD -11(2), RASHTROTHANA BHAVAN,WARD -11(2), RASHTROTHANA BHAVAN, NRUPATHUNGA ROAD,BANGALORE — 560 OO1.BANGALORE — 560 OO1. .. APPBLLANT (By Mr. K.V. ARAVIND, ADV.) AND: I.P. UNITY COMMUNICATIONS PVT. LTD.,.NO. 147, GROUND FLOOR,ANJANEYA TECHNO PARK, OLD AIRPORT ROAD, KODIHALLL,|BANGALORE- 560 OOS.PAN: AABCI 2551G. .. RESPONDENT. (By Mr. SANDEEP HUILGOL, ADV.FOR Mr. PRASHANTHA KUMAR. D. ADV) Date of Judgment 17-07-2018 I.T.A.No.37/2015 The Commissioner of Income-Tax & Anr. Vs. I.P. Unity Communications Pvt. Ltd., 2/14 THIS I.T.A. IS FILED UNDER SECTION 260-A OF INCOME|TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIALQUESTIONS OF LAW STATED ABOVE, ALLOW THE APPEAL ANDSET ASIDE THE ORDERS PASSED BY THE ITAT, BANGALORE IN|LT.(T.P)A|NO.|1535/BANG/2012.DATED21/08/2014ANNEXURE D AND CONHIRM THRE ORDER OF THE DRPCONFIRMING THR ORDER PASSBD BY THR [NCOMB TAX!OFFICER, WARD-11(2), BANGALORE. THIS I.T.A. COMING ON FOR HEARING, THIS DAY | S. SUJATHA JT DRBLIVERBD THE FOLLOWING : JUDGMENT Mr. K.V. Aravind,Adv. for Appellants-RevenueMr. Sandeep Huilgol,Adv. for| Mr. Prashanth Kumar D, Adv. for Respondent-Assessee. The appellants-Revenuehave filed this appealu/s.260Aof the!Income Tax Act, 1961(for short ‘Act’|raising purportedly certain substantial questions of law)arising from the order of theIncome Tax AppellateTribunal, Bangalore Bench ‘C’|(for short ‘Tribunal? 0795021.08.2014passed1n I.T(T.P)ANo.1535/Bang/2012for the|A.Y.2008-2009 Date of Judgment 17-07-2018 I.T.A.No.37/2015 The Commissioner of Income-Tax & Anr. Vs. I.P. Unity Communications Pvt. Ltd., 3/14 2 |Thisappealhas|beenADMITTEDOTL 31.07.2015TO consider.thefollowing.substantialquestions of law.framed by the learned counsel for theAppellants-Revenue. “7.WhetherOTLthefactsandin|the circumstances of the case, the Tribunal wasjustified in law in holding that the size andturnover of the company are deciding factors fortreating a company as a comparable andaccordingly directing the AO/TPO not to include|cases of M/s. itGate Global Solutions Ltd., M/s.InfosysTechnologiesLtd.,M/s.|PersistentoystemsLtd.,M/s.SaskenCommunicationTechnologies:Ltd.,M/s.Tata'ElxsiLtd.,aS|comparables for determining ALP in the case of theassessee without appreciating that the economies|of scale is not relevant in software industry “P| 2. Whether on the facts and in the circumstances|of the case, the Tribunal was right in law in|holding that the functions of the assessee are notcomparable to the functions of M/s. Avant Cincom|Technologies Ltd., M/s. Celestial Biolabs Ltd.,andM/s. KALS Information Systems Ltd., by super'imposing decisions of other benches of Tribunal,without doing any FAR analysis in the instant case even though these comparables satisfy all!the qualitative and quantitative filters applied bythe TPO and the Tribunal ought to have decidedcomparability of these companies on the basis ofspecific facts brought on record by the TPO in thecase of assessee? 3.|Though this Appeal has been admitted on. 31.07.2015|to consider the|substantial questions oflaw Nos. 1 and 2, learned Counsel for the Appellants-Revenue submits thatSubstantial Question of lawNo.3is covered by the Judgment of the Hon’bleSupreme Court in the case ofCommissioner ofIncome-tax, Central — III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC) 4Thesubstantial question of law No.3 framed by the appellants-Revenue is as under “9.Whether, on the facts and in the|circumstances of the case, the Tribunal wasjustified in law in holding that the reimbursementof specific expenses are to be excluded from totalturnover as well as from export turnover for 3.|Though this Appeal has been admitted on. 31.07.2015|to consider the|substantial questions oflaw Nos. 1 and 2, learned Counsel for the Appellants-Revenue submits thatSubstantial Question of lawNo.3is covered by the Judgment of the Hon’bleSupreme Court in the case ofCommissioner ofIncome-tax, Central — III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC) 4Thesubstantial question of law No.3 framed by the appellants-Revenue is as under “9.Whether, on the facts and in the|circumstances of the case, the Tribunal wasjustified in law in holding that the reimbursementof specific expenses are to be excluded from totalturnover as well as from export turnover for Date of Judgment 17-07-2018 I.T.A.No.37/2015 The Commissioner of Income-Tax & Anr. Vs. I.P. Unity Communications Pvt. Ltd., 5/14 computation of deduction under section 10Awhereas such exclusion is permitted to arrive atexport turnover only as per the definitions givenin section 1OA of the IT Act and total turnover hasnot been defined in the Section and decision incase of CIT v/s. Tata Elxsi is challenged beforeApex Court by RevenuePr” 5The relevant portion of the judgment of the|Hon'blesupremeCourtin.theCaSE€oT|HCL|Technologies Ltd. (supra),is quoted below for readyreference:-. “17. The similar nature of controversy, akinthis case, arose before the Karnataka High CourtinCIT v. Tata Elxsit Lt. (2012) 204 Taxman3S21/17/taxman.com 100/349 ITR 98. The issuebefore the Karnataka High Court was whether theTribunal was correct in holding that whilecomputing relief under Section 10A of the IT Act,the amount of communication expenses should beexcluded from the total turnover if the same arereduced from the export turnoverr While giwingthe answer to the issue, the High Court, inter-alia,held that when a particular word is not defined bythe legislature and an ordinary meaning is to beattributed to it, the said ordinary meaning is to be| 6/14 in conformity with the context in which it is used. —Hence, what is excluded from ‘export turnover’must also be excluded from ‘total turnover’, sinceone of the components of ‘total turnover’ is export!turnover. Any other interpretation would runcounter to the legislative intent and would beimpermissible. | LSE, XXXXXX 19. In the instant case, if the deductions on)freight,telecommunicationandinsuranceattributable to the deliwery of computer softwareunder Section 10A of the IT Act are allowed only inExport Turnover but not from the Total Turnoverthen, it would give rise to inadvertent, unlawful,meaningless and illogical result which wouldcause grave injustice to the Respondent whichcould 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 as well”. 7/14 6. The learned Tribunal, aiter discussing the| rival contentions of both the Appellants-Revenue and)Respondent-Assessee, has returned the findings as)under: Regarding substantial question of law No.1; 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 as well”. 7/14 6. The learned Tribunal, aiter discussing the| rival contentions of both the Appellants-Revenue and)Respondent-Assessee, has returned the findings as)under: Regarding substantial question of law No.1; “77.3We have heard the rival submissions|and perused and carefully considered _ thmaterial on record including the judicial decisionscited (supra). The co-ordinate bench of this|Tribunal in the case of Genisys Integrating|systems India (P) Ltd. (supra) held that onlycompanies within the range of Rs.1 Crore to 200|Crores should be taken into consideration forbeing adopted as comparables to the assessee tifits turnover was within this range. In the case onhand, as per the TPO’s report the assessee’s|turnover is reportedly approx. Rs.15.50 Crores,whereas the turnover of this company which theTPO included in the final set of comparables is.about PRs.954 Crores which 1s outside theturnover range of Rs.1 to 200 Crores, specified inthe cited cases. Therefore following the decisionof the co-ordinate bench in the case of GenitsysIntegrating Systems India (P) Ltd. (supra), which| Date of Judgment 17-07-2018 I.T.A.No.37/2015 The Commissioner of Income-Tax & Anr. Vs. I.P. Unity Communications Pvt. Ltd., 8/14 Squarely covers the issue involved, we direct the|Assessing Officer/ TPO that only those companieshaving a turnover of Rs.1 Crore to 200 Crores areto be taken as comparable companies to theASSESSEE,inthe CaASeOnlhandandTo|consequently exclude this company, Flextronics|(Aricent) from the final set of comparables. 12.I-Gate Global Solutions Ltd. 12.3We have heard the rival submissions andperused and carefully considered the material on|record including the judicial decisions cited(supra). The co-ordinate bench of this Tribunal inthe case of Genisys Integrating Systems Indtia(P)Ltd. (supra) held that only companies within the|range of Rs.1 Crore to 200 Crores should betaken into consideration for being adopted ascomparables to the assessee tf its turnover was|within this range. In the case on hand, as per theTPO’s.reporttheassessee’sturnover1Sreportedly approx. Rs.15.50 Crores, whereas theturnover of this company which the TPO includedin the final set of comparables is about Rs.15.50Crores, whereas the turnover of this company|which the TPO included in the final set ofcomparables is about Rs.782 Crores which 1s| 9/14 outside the turnover range of Rs.1 to 200 Crores,specified in the cited cases. Therefore following|the decision of the co-ordinate bench in the caseofGenisysSIntegratingoystemsIndia.(P)Ltd.(supra), which squarelycovers the 1ssueinvolved, we direct the Assessing Officer/TPOthat only those companies having a turnover ofRs.1 Crore to 200 Crores be taken as comparable|companies to the assessee, in the case on handand to consequently exclude this company, I-GateGlobal Solutions Ltd. from the final set ofcomparables. 13.Infosys Technologies Ltd. 13.3We haque heard the rival submissions and|perused and carefully considered the material onrecord including the judicial decisions cited(supra). The co-ordinate bench of this Tribunal in|the case of Genisys Integrating Systems India(P)|Ltd, (supra) held that only companies within therange of Rs.1 Crore to 200 Crores should be taken|intoconsiderationforbeingadoptedascomparables to the assessee tf its turnover waswithin this range. In the case on hand, as per theTPO’s report the assessee’s turnover ts reportedly|approx.Rs.15.50 Crores, whereas the turnover ofthis company which the TPO included in the finalset of comparables in about Rs.15,672 Crores 10/14 13.Infosys Technologies Ltd. 13.3We haque heard the rival submissions and|perused and carefully considered the material onrecord including the judicial decisions cited(supra). The co-ordinate bench of this Tribunal in|the case of Genisys Integrating Systems India(P)|Ltd, (supra) held that only companies within therange of Rs.1 Crore to 200 Crores should be taken|intoconsiderationforbeingadoptedascomparables to the assessee tf its turnover waswithin this range. In the case on hand, as per theTPO’s report the assessee’s turnover ts reportedly|approx.Rs.15.50 Crores, whereas the turnover ofthis company which the TPO included in the finalset of comparables in about Rs.15,672 Crores 10/14 which is outside the turnover range of Rs.1 Croreto 200 Crores, specified in the cited cases.Therefore following the decision of the co-ordinatebench in the case of Genisys Integrating Systems|India (P) Ltd. (supra), which squarely covers the|ISSUEinvolved,WE|directthe.ASSe€SSINgOfficer/TPO that only those companies having aturnover of Rs.1 Crore to 200 Crores be taken as.comparable companies to the assessee, in the|case on hand and to consequently exclude thiscompany, Infosys Technologies Ltd, from the finalset of comparables.” Regarding substantial question of law No.2: “We now proceed to examine and considereach of the comparable companies so highlighted|by the learned Authorised Representative of theassessee in its chart and submissions. 7.0Avant Cincom Technologies Ltd. 1.4We have carefully considered the rivalSuUbDmMISSIOandperusedandcarefullyconsidered the material on record and the judicial|decisions cited. We find that the co-ordinatebench of this Tribunal in the case of M/s. 3DPLMsoftware Solutions Ltd. (supra) for Assessment Date of Judgment 17-07-2018 I.T.A.No.37/2015 The Commissioner of Income-Tax & Anr. Vs. I.P. Unity Communications Pvt. Ltd., 11/14 Year 2008-09 has held that this company its to beomitted from the list of comparables for the reasonthat this company is to be omitted from the list ofcomparables for the reason that this company is intosoftwareproductsand1Sthereforefunctionally different from mere software services|providers. The relevant observations of paras|7.6.1 and 7.6.2 of the order are extractedhereunder:- XXXXXXXX Following the above decision of co-ordinate benchof this Tribunal in the case of M/s. 3DPLMsoftware Solutions Ltd. (supra), we hold that this|company cannot be considered as a comparableto the assessee in this case and therefore directthe Assessing Officer to omit this company fromthe final list of comparables.” TT.similarly, the Tribunal has considered and|excluded the other comparables also. 8.|The controversy involved herein is no more| res integrain view oft the decision of this Court inI1.T.A.Nos.536/2015 c/w 537/2015dated |25.06.2018[Prl.| Date of Judgment 17-07-2018 I.T.A.No.37/2015 The Commissioner of Income-Tax & Anr. Vs. I.P. Unity Communications Pvt. Ltd., 12/14 Commissioner.of|IncomeTaxaAnr.V/s. M/s.Softbrands India Pvt. Ltd.,]|wherein it has been|observed that unless the finding of the Tribunal is found|ex facie perverse, the Appeal u/s. 260-A of the Act, is not)maintainable. The relevant portion of the Judgment is)quoted below for ready reference: § Conclusion: TT.similarly, the Tribunal has considered and|excluded the other comparables also. 8.|The controversy involved herein is no more| res integrain view oft the decision of this Court inI1.T.A.Nos.536/2015 c/w 537/2015dated |25.06.2018[Prl.| Date of Judgment 17-07-2018 I.T.A.No.37/2015 The Commissioner of Income-Tax & Anr. Vs. I.P. Unity Communications Pvt. Ltd., 12/14 Commissioner.of|IncomeTaxaAnr.V/s. M/s.Softbrands India Pvt. Ltd.,]|wherein it has been|observed that unless the finding of the Tribunal is found|ex facie perverse, the Appeal u/s. 260-A of the Act, is 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|(OCAaSEofSubstantialquestionofinterpretation of provisions of Double TaxationAvoidanceTreaties(DTAA),interpretation ofprovisions of the Income Tax Act or OverridingEffectof|theTreatiesOVECTthe.DomesticLegislations or the questions like Treaty Shopping,Base Erosion and Profit Shifting (BEPS), Transferof Shares in Tax Havens (like in the case ofVodafone etc.), | based on relevant facts, suchsubstantial questions of law could be raisedbefore the High Court underSection 260-Aof theAct, the Courts could have embarked upon such'exerciseofframingandansweringsuch|substantial question of law. On the other hand, 13/14 the appeals of the present tenor as to whether thecomparables have been rightly picked up or not,Filtersfor|arriving at.the.correctlistofcomparables have been rightly applied or not, donot in our considered opinion, give rise to anysubstantial question of law. 56. We are therefore of the considered|opinion 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 cleqr 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 findingshas found certain comparables to be goodcomparables to arrive at an‘Arm’s Length Pricein the case of the assessees with which theassessees 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 not at all a sufficient reason to invokeSection 260-Aofthe Act before this Court. o8. The appeals filed by the Revenue are)therefore dismissed with no order as to costs.” OQ In the circumstances, having heard the| learned Counsel appearing for both the sides, We are ofthe considered opinion that no substantial question of)law arises for consideration in the present case. | 10.|Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly|dismissed.No costs. | Sd/-. JUDGE| Sd/-. JUDGE|