Date Of Judgment 18-07-2018 I.t.a v. M/S. Novell Sottware Development (India) Pvt. Ltd., 2/14

IN THE HIGH COURT OF KARNATAKA, BENGALURU. DATED THIS THE 18[TH|]DAY OF JULY ZO18 PRESENT THE HON'BLE Dr. JUSTICE VINEET KOTHARI AND THE HON’BLE Mrs.JUSTICE S.SUJATHA| I.T.A.No.333/2015 BETWEEN Ll.PRINICIPAL COMMISSIONER OF INCOME TAX. CR BUILDING, QUEENS ROAD, BANGALORE -56000 1 iaDBPUTY COMMISSIONBROF INCOME TAX,CIRCLE-12(2), BANGALORE.OF INCOME TAX,CIRCLE-12(2), BANGALORE. _. APPBELLANTS (BY MR. E.I.SANMATHI, ADV.,) AND M/S. NOVELL SOFTWARE>DEVELOPMENT (INDIA) PVT. LTD.,“LAUREL”, BLOCK-D, 65/2,BAGMANE TECH PARK,CV RAMAN NAGAR,BYRASANDRA POST, Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |2/14] BANGALORE -560093.PAN: AAACN 6992 K. ... RESPONDENT (BY MR. SANDEEP HUILGOL, ADV.FOR MR. T.SURYANARAYANA, ADV.) THIS IL.T.AIS FILED UNDER SECTION 260-A OF THE!INCOME-TAX ACT, 1961 PRAYING TO (A) DECIDE THE|FOREGOING QUESTION OF LAW AND / OR SUCH OTHER|QUESTIONS OF LAW AS MAY BE FORMULATED BY THE|HON'BLE COURT AS DEEMED FIT. (B) SET ASIDE THE|APPELLATE ORDER DATED: 13/02/2015 PASSED BY THEITAT, B’ BENCH, BANGALORE, IN APPEAL PROCEEDINGS|NO. IT(TP)A NO. 1105/BANG/2011 ANNEXURE-A. THIS LT.A. COMING ON FOR HEARING, THIS DAYS.SUJATHAJ.T DELIVERED THE FOLLOWING: JUDGMENT Mr. E.I.Sanmathi,Adv. for Appellants-RevenueMr. Sandeep Huilgol,Adv. for T.Suryanarayana, Adv. for Respondent-Assessee This Appeal is filed by the Appellants-Revenue purportedly raising substantial questions of law arisingfrom the Order of the Income Tax Appellate Tribunal,‘Bp Bench, Bangalore, inIT[TPIA No.1105/Bang/2011 dated13.02.2015|relating to the Assessment Year 2005-06. Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |3/14] 2 |Thisappealhas|beenADMITTEDOTL 17.03.2016to consider the following substantialquestions of law framed by the learned counsel for theAppellants-Revenue: “(1)|Whether,OT)the factsand1N the.circumstances of the case, the Hon’ble Tribunal|erred in fixing the RPT filter at 15% of total|revenue, by superimposing the decisions ofTribunal in other cases, including those of other|Benches of Tribunal, without going into specific|facts in the case of the taxpayer and without|adducing the basis for arriving at the 15% cut|off for RPT filter, in the case of the tax payer? (2) Whether,Of}the factsand|1n the circumstances of the case, the Tribunal erred in holding that the size and turnover of the|company are deciding factors for treating a|company as a comparable and accordingly erredin excluding M/s.Igate Global Solutions Ltd.,|Flextronics Software Systems Ltd., and L&T|Infotech Ltd.,? (3) Whether,Of}the factsand|1n the circumstances of the case, the Tribunal in| Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |4/14] excluding Tata Elxsi Ltd., and Sankhya InfotechLtd., on the basis of decision in a different case|foradifferent|financialYCarwhilethecomparable is qualifying all the qualitative and|quantitative filters applied by the TPO and also|erredinnotappreciatingthefunctional]similarity of the taxpayer with that of Tata EIxsiLtd., and Sankhya Infotech Ltd.? (4)Whether,Of}thefactsand|1n thecircumstances of the case, the Tribunal erred in including Melstar Information Technologies Ltd.,on the basis of mere submission of the tax payerand not appreciating that the restructure of the|business has an effect on the margins of the|Melstar?”| 3.|The 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 (4)Whether,Of}thefactsand|1n thecircumstances of the case, the Tribunal erred in including Melstar Information Technologies Ltd.,on the basis of mere submission of the tax payerand not appreciating that the restructure of the|business has an effect on the margins of the|Melstar?”| 3.|The 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 ¢13.We have heard the rival submissions. AS|regards the improper application of the RPT filterby the CIT(A), it is not in dispute before us thatthis Tribunal, in the cases of 24/7 Customer Put.Ltd. (ITA No.227/ Bang/ 2010), and Sony Indi Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |9/14] Private Ltd. reported in (2009) 315 ITR (80) 150(Del.) and various other cases has taken a viewthat comparables having RPT of upto 15% of totalrevenues can be considered. In view thereof, theRevenue’s on this ground has to be allowed. It isheld that the CIT(A) ought to have adopted athreshold limit of 15% of the total revenueattributable to related party transaction asground for rejecting comparable companies.Consequently it.1S heldthatcomparablecompanies having RPI upto 15% of the totalrevenues alone can be included. The Revenue’scontention that comparables with RPT upto 25%can be considered is without any basis.” Regarding substantial question of law No.2: “16.The submission of the Assessee in thisregard and correct and in the light of thedecisions referred in the earlier para, we holdthat igate Global solutions Ltd., Flextronicssoftware Systems Ltd. And L & T Infotech Ltdwould have to be excluded as comparablecompanies as these companies have turnoverabove Rs.200 Crores. So also Tata Elxsi Ltd.,would have to be excluded as not comparable inthe light of the decision in the case of Logica Put.Ltd. (supra).~ Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |6/14] Regarding substantial question of law No.3 Sankhya Infotech Limited |‘Sankhya>} 18It was submitted by the learned counsel for|the Assessee that Sankhya is engaged in thebusiness of development of software products &services and training. The company focuses onthe development of niche products for _ thtransportandaviationindustry. However,segmental information in relation to the abovementioned activities 1s not available in publicdomain. Therefore, as Sankhya engages itself inproducts and services as well as_ softwaretraining, it cannot be considered as a comparableof the Appellant. The products developed and)owned by Sankhya are listed below::::: XXXX 19,The Delhi Tribunal in ITO v. Colt TechnologyServices|India|Put.Ltd.(judgmentdated23.10.2012 in ITA No. 6091I/Del/2011 for theassessment year 2005-06) has held that the saidcompany is not a comparable to the assesseetherein which was also in the business ofsoftware development. Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |7/141 20.The submissions made by the learnedcounsel for the Assessee are considered. Theactivities set out above and the decision of theDelhi ITAT rendered in the context of a softwaredevelopment company such as the Assesseemakes it amply clear that this company Sankhyacannot be regarded as a comparable. The same isdirectedtobeexcludedfromthelist.ofcomparable companies.” Regarding substantial question of law No.4: 21,MelstarInformationTechnologiesLtd.(Melstar): As far as this company is considered,the same was chosen as comparable company bythe Assessee in its TP study. The TPO rejectedMelstar stating the following:-XXXX Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |7/141 20.The submissions made by the learnedcounsel for the Assessee are considered. Theactivities set out above and the decision of theDelhi ITAT rendered in the context of a softwaredevelopment company such as the Assesseemakes it amply clear that this company Sankhyacannot be regarded as a comparable. The same isdirectedtobeexcludedfromthelist.ofcomparable companies.” Regarding substantial question of law No.4: 21,MelstarInformationTechnologiesLtd.(Melstar): As far as this company is considered,the same was chosen as comparable company bythe Assessee in its TP study. The TPO rejectedMelstar stating the following:-XXXX 22.It is the submission of the learned counsel forthe Assessee before us that that Melstar passesall filters applied by the TPO in his order and isfunctionally comparable. The filters applied byTPO and their satisfaction was tabulated asunder: |XXXX Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |8/14] 23.It was further pointed out by him that the)TPOhas.concludedthatMelstar1Snotcomparable on the ground that there was anextraordinary debit of Rs. 2.85 Cr and on theground that the company’s sales are diminishing.A perusal of the revenues of the previous financialyears (page 81 of the TP order) demonstrates thatthe revenues are more or less consistent for thepreviousfinancialYearsandhasonlysubstantially decreased in the financial year2004-05. The relevant extract of the AnnualReport (Page 4) is reproduced below: XXXX XXXX 24.In view of the above, it was submitted that|since Melstar is functionally comparable to theassessee and clears all the filters applied by theTPO, the|SCITIShould.be|consideredas|comparable with Net Cost Plus margin of 3.26%. 25,The submissions are considered and found tobe acceptable. As rightly pointed out by thelearned counsel for the Assessee, Melstar passesall the tests of comparability adopted by the TPO.The extraordinary item of expenditure, if removed,would render this company as a companyrevenues of which are not diminishing. Melstar Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |9/14] thereforedeservesTO be|includedaS|Cmcomparable company. We hold accordingly. 26.The learned counsel for the assesseesubmitted that the Assessee has a policy ofcharging a higher rate of depreciation ascompared to the companies selected by the TPOand the CIT(A). It was therefore submitted by himthat there is a need for making an adjustment toeliminate differences in the accounting policies ofthe assessee and the comparable companies. Thelearned counsel for the Assessee submitted thatthe assessee’s depreciation policy for the yearwas as below (available in the annual report ofthe assessee at page & of the paper book filed):-—XXXX D7.Mostothercompaniesprovidefordepreciationat|the.ratesspecifiedintheCompanies Act. The depreciation policies of a fewcomparables selected by CIT{A), as available intheir annual reports, is as below:- Bodhtree Consulting Ltd. XXXX Lanco Global Systems Ltd. XXXX Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |10/14) Sankhya Infotech Ltd. XXXX Visual Soft Technologies Ltd. XXXX D7.Mostothercompaniesprovidefordepreciationat|the.ratesspecifiedintheCompanies Act. The depreciation policies of a fewcomparables selected by CIT{A), as available intheir annual reports, is as below:- Bodhtree Consulting Ltd. XXXX Lanco Global Systems Ltd. XXXX Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |10/14) Sankhya Infotech Ltd. XXXX Visual Soft Technologies Ltd. XXXX 28.The learned counsel for the Assessee further|submitted the rationale for making depreciationadjustment. He pointed out that RulelOB of theIncome-tax Rules, 1962 /[‘the Rules’] provides themethod in which the comparability analysis is tobe conducted under the Transactional Net MarginMethod. Under sub-clause (i) of Rule 1OB(1)(e), the|net profit margin realised by the taxpayerfrom aninternational transaction is computed havingregard to a relevant base e.g. costs incurred,Sales effected, etc. Under sub-clause (i) of Rule1OB(1}(e), the net profit margin realised by anunrelated enterprise/comparable company|1S computed having regard to the same relevantbase as was Selected in sub-clause (t). 29,sub-clause (it) of the said Rule specifies thatbefore a comparison of the net margins realisedunder sub- clauses (i) and (it) is done, the netmargin realised under sub-clause (iu) must beadjusted to take into account the differenceswhich could materially affect the net profit margin Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |11/14) in the open market. Relevant extracts of RuleLOB(1)}(e)(ut) are reproduced as under:-—XXXX 30. According to ld. counsel for the assessee,|based on the above, there was a need for makingan adjustment on account of difference betweenthe net margin of the assessee and that of thecomparable companies. It was further pointed outby him that Rule 10B(3) of the Rules provides thatan uncontrolled transaction shall be consideredas a comparable tf: a) none of the differences between the|comparable COMpPay?andthecontrolledtransaction are likely to materially affect theprofit arising from such transactions in the openmarket; or b) reasonably accurate adjustments can be|made to eliminate the material effect of suchdifferences.” 4The controversy involved herein is no more res integra)in view of the decision of this Court in | I.T.A.Nos.536/2015c/w537/2015dated 25.06.2018[Prl. Commissioner of Income Tax &|Anr. V/s. M/s.Softbrands India Pvt. Ltd.,]|wherein it Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |12/14 has been observed that unless the finding of theTribunal is found ex facie perverse, the Appeal u/s. 260-A of the Act, is not maintainable. The relevantportion of the Judgment is quoted below for ready5)+)5)17)A § Conclusion: 038. A substantial quantum of internationaltrade and transactions depends upon the fair andquick judicial dispensation in such cases. Had itbeen|OmCaASeofSubstantialquestionofinterpretation of provisions of Double TaxationAvoidance Treaties (DIAA), interpretation ofprovisions of the Income Tax Act or OverridingEffectofthe TreatiesOVEeCtheDomestic.Legislations or _ the questions like TreatyShopping, Base Erosion and Profit Shifting(BEPS), Transfer of Shares in Tax Havens (like inthe case of Vodafone etc.), | based on relevantfacts, such substantial questions of law could |be raised before the High Court underSection|260-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 rightly Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |13/14| Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |13/14| picked up or not, Filters for arriving at the correctlust 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 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-Aof the Act and thus the appealsfiled 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 _ bapplied, even tf such appeals are filed by theAssessees, because, there may be cases wherethe Tribunal giving its own reasons and findings|has found certain comparables to be goodcomparables to arrive at an'‘Arm’s LengthPrice~ in the case of the assessees with which|the assessees may not be satisfied and have filed|such appeals before this Court. Therefore we.clarify that mere dissatisfaction with the findingsoffacts arrived at by the learned Tribunal is notat alla sufficient reason to invokeSection 260-Aof the Act before this Court. Date of Judgment 18-07-2018 I.T.A.No0.333/2019Principal Commissioner of Income Tax & Anr Vs. |M/s. Novell Sottware Development (India) Pvt. Ltd., |14/14| o8. The appeals filed by the Revenue aretherefore dismissed with no order as to costs.” 5In the circumstances, having heard thelearned Counsel appearing for both the sides, We are ofthe considered opinion that no substantial question oflaw arises for consideration in the present case. _ 6. Hence, the Appeal filed by the Appellants-Revenue is liable to be dismissed and is accordinglydismissed.No costs. | TL Sd/-. JUDGE Sd/-| JUDGE