Date Of Judgment 21-08-2018 I.t.a v. M/S.pmc Sierra India Pvt. Ltd 2/14

IN THE HIGH COURT OF KARNATAKA, BENGALURU. DATED THIS THE 21[Ss]DAY OF AUGUST 2018| PRESENT THE HON'BLE Dr. JUSTICE VINEET KOTHARI AND THE HON’BLE Mrs.JUSTICE S.SUJATHA|I.T.A.No.404/2017 BETWEEN: 1.PR. COMMISSIONEBR OF INCOME TAX-4 BMTC COMPLEX, KORMANGALA| BANGALORE. 2.DBPUTY COMMISSIONER OF INCOME TAX. CIRCLE-12(2), BANGALORE. .. APPBLLANT (By Mr. E.I. SANMATHI, ADV.) AND: M/S. PMC SIERRA INDIA PVT LTDoA BLOCK, 2 FLOOR, PRITECHPARKSEZ, BELLANDUR, BANGALORE-9560103PAN: AADCPO8O02ZH . RESPONDENT THIS L.T.A. IS FILED UNDER SEHKCIION J6O0O-A OF THEACT, 1965, PRAYING TO DECIDE THE FOREGOING QUESTIONOF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE.FORMULATED BY THR HON’BLE COURT AS DBEMED FIT AND.sET ASIDE THE APPELLATE ORDER DATED 26-08-2016, VIDEANNBXUREBE-A PASSBKD BY THR [NCOMB TAX APPELLA Date of Judgment 21-08-2018 I.T.A.No.404/2017 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s.PMC Sierra India Pvt. Ltd 2/14 TRIBUNAL, ‘A’ BENCH, BANGALORE, AS SOUGHT FOR, IN THE|RESPONDENT-ASSESSEE'’S CASE, IN APPEAL PROCEEDINGS INIT(TP)A No.882/BANG/2013 FOR A.Y. 2008-09 & GRANT SUCHOTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE& BTC. THIS LT.A. COMING ON FOR ORDERS THIS DAY,S. SUJATHAJT DRBLIVERBD THE FOLLOWING : JUDGMENT Mr.E.I.Sanmathi, Adv. tor Appellants -Revenue | 1. The Appellants-Revenue have filed this appeal u/s.260Aof the Income Tax Act, 1961, raisingpurportedly certain substantial questions of law arisingfrom the order of theITAT, Bangalore Bench ‘A’,Bangalore, dated.26.08.2016passed in|IT(TP)ANo.882/Bang/2013(Dy.Commissioner of Income Taxvs. M/s.PMC —Sierra India Put. Ltd.,)for A.Y.2008-09. 2. The proposed substantial questions of lawframed.1n theMemorandumoT|appealby the Appellants-RevenueaTe€quotedbelowfor.ready reference: - “1.Whether on the facts and in thecircumstances of the case, that the Tribunal isright in law in including the expenditure incurredin foreign currency by relying upon the decisionof this Hon’ble High Court in the case of CIT v/s.Tata Elaxy even when the said decision has notreached finality and no such way of frecomputation as directed by the Tribunal isprovided under the provision of IT Act and whenthe Revenue has preferred appeal before thisHon’ble Court against tts original order?| D2 Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in directing he AO/TPO in directing heAO/TPO to exclude the following comparablenamely M/s. Softsol India Ltd as RPTfilter is 15%even when the without affording any reason toarrive at such conclusion ts given by Tribunal andhas only relied upon its earlier? 3.|Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law.directedAO/ TPOTo|excludecertaincompanies as comparables on the ground of Date of Judgment 21-08-2018 I.T.A.No.404/2017 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s.PMC Sierra India Pvt. Ltd 4/14 functional dissimilarity by following its earlier|orders which has not reached finality even whenthe TPO has chosen the comparables based onFAR Analysis and by application of qualitative an|quantitative testsP” 3. Learned counsel for the Appellants-RevenueMr.B&.Il.Sanmathi submits that in so far as the firssubstantial question of law is concerned, the same iscovered by the decision of the Hon’ble Apex Court in thecase oftCommissioner of Income-tax, Central — III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com33(SC). The relevant portion of the judgment of theHon'blesupremeCourt1nthe.CaSE€ot HCL|Technologies Ltd. (supra),is quoted below for readyreference: - “17. The simular nature of controversy, akin|this 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 3. Learned counsel for the Appellants-RevenueMr.B&.Il.Sanmathi submits that in so far as the firssubstantial question of law is concerned, the same iscovered by the decision of the Hon’ble Apex Court in thecase oftCommissioner of Income-tax, Central — III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com33(SC). The relevant portion of the judgment of theHon'blesupremeCourt1nthe.CaSE€ot HCL|Technologies Ltd. (supra),is quoted below for readyreference: - “17. The simular nature of controversy, akin|this 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 thatwhile computing relief under Section 10A of the ITAct, the amount of communication expensesShould be excluded from the total turnover if thesame are reduced from the export turnover?|While gwing the answer to the issue, the HighCourt, inter-alia, held that when a particular word|is not defined by the legislature and an ordinarymeaning is to be attributed to it, the said ordinarymeaning is to be in conformity with the context inwhich it is used. Hence, what is excluded from‘export turnover’ must also be excludedfrom ‘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 on|freight,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 Respondent Date of Judgment 21-08-2018 I.T.A.No.404/2017 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s.PMC Sierra India Pvt. Ltd 6/14 which 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”. 4. The learned Tribunal, after discussing the rivalcontentions of both the Appellants-Revenue and theRespondent-Assessee, has given the following findings:- | 7Regarding substantial question of law No.2: 8 2D We have considered the rival|Submissions as well as the relevant material onrecord. We find that this Tribunal in a series ofdecisions has examined the issue of employeescost filter, RPI fiuter as well as _ functionacomparability of these companies and thereforeonce it has been held that these companiescannot be regarded as good comparable on these|contentions then even tf these companies has Date of Judgment 21-08-2018 I.T.A.No.404/2017 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s.PMC Sierra India Pvt. Ltd 7/14 been selected in the TP Study, the assesseecannot be precluded from raising an objectionagainst these companies which are found to benot comparable. This view is supported by thedecision of the Chandigarh Special Bench of thisTribunal in the case of DCIT Vs. Quark SystemsPut. Ltd. 38 SOT 307 in paras 30 and 38 asunder: XNXXXXXXXXXXXKXKX Thus in view of the matter that the|functionalcomparabilityhasalreadybeenexamined by this Tribunal, we admit theadditional groundraisedbytheaAsSSCSSCregarding functional comparability of E-Zestsolutions Ltd. for deciding the same on merits. 14.We|have.consideredtherivalSubmissions as well as the relevant material onrecord. We note that this Tribunal has taken aconsistent view about the threshold limit of RPTat 15%. A similar view has been taken by thisTribunal in the case of Maxim India Put. Ltd.(supra) in para 6 as under: NXXXXXXKKKXXX XNXXXXXXXXXXXKXKX Thus in view of the matter that the|functionalcomparabilityhasalreadybeenexamined by this Tribunal, we admit theadditional groundraisedbytheaAsSSCSSCregarding functional comparability of E-Zestsolutions Ltd. for deciding the same on merits. 14.We|have.consideredtherivalSubmissions as well as the relevant material onrecord. We note that this Tribunal has taken aconsistent view about the threshold limit of RPTat 15%. A similar view has been taken by thisTribunal in the case of Maxim India Put. Ltd.(supra) in para 6 as under: NXXXXXXKKKXXX Following the earlier order of the Tribunal,we direct the TPO to apply the RPTfilter at 15%”. Date of Judgment 21-08-2018 I.T.A.No.404/2017 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s.PMC Sierra India Pvt. Ltd 8/14 7Regarding substantial question of law No.3: “9. . The issue of applying the turnover|filter by the CIT (Appeals) in the range of Rs.1Crore to Rs.200 Crores has been considered bythe co-ordinate bench of this Tribunal in the caseof ITO Vs. Maxim India Integrated Security Put.Ltd.videorder.at.31.3.2016|in|IT(TP)ANo.28/ Bang/ 2012 in paras 11 & 12 as under: NXXXXXXKXXKXX Both the parties have agreed in principle that anappropriate multiple of 10 times of turnover maybeappliedwhile selectingthe comparablecompanies and therefore keeping in view of theturnover of the assessee at Rs.45.85 Crores, thecompany having turnover upto Rs.458.50 Croreson the higher side and Rs.4.58 Crores at thelower side can be considered in the set ofcomparables. In view of the above decision of theco-ordinate bench, we direct the TPO/A.O toapply a multiple of 10 times of the assessee'sturnover on higher as well as lower side ofturnover of the assessee. Even otherwise we findthat the CIT (Appeals) rejected 8 companies byapplying the turnover filter in the range of Rs.1Crore to Rs.2OO Crores as under: | Date of Judgment 21-08-2018 I.T.A.No.404/2017 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s.PMC Sierra India Pvt. Ltd D.@, ©, @, ©, ©, ©, By applying this multiple of 10 to the assessee'sturnover, we find that 3 companies namelySasken Communication Technology Ltd. (Seg.),Persistent Systems Ltd. and Tata Elxsi Ltd. willnot be excluded due to high turnover. Thereforeexcept these 3 companies, other 5 companies arerequiredto.be|excludedfromthelist.of|comparables and to that extent we confirm theorder of the CIT (Appeals) on this issue. For theremaining companies, the learned AuthorisedRepresentative of the assessee has submittedthat an identical set of 20 companies wasconsidered by the co-ordinate bench of thisTribunal for the same assessment year 2008-09in the case of Telelogy India Put. Ltd. Vs. DCITvide.order|at.9.3.2016in|IT(TP)ANo.1599/ Bang/ 2012. Thus the learned A.R. hasubmitted that except the comparability of IndusNetwork Ltd. which was included by the CIT(Appeals) in the set of comparables the functionalcomparability of all other companies have beenexamined by this Tribunal. 10.We|have.consideredthe.rivalSubmissions as well as the relevant material onrecord. The ld. D.R. has submitted that the TPO Date of Judgment 21-08-2018 I.T.A.No.404/2017 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s.PMC Sierra India Pvt. Ltd 10/14 hasalreadyexaminedthe.functionalcomparability of these companies and it wasfound that the main actwity of all thesecompanies are software development servicesand therefore in significant revenue from productand other service is immaterial for the purpose ofselecting the comparable company when the TPOhad applied the filter of revenue of 75% from thesoftware development services. Thus the ld. D.R.has contended that none of these companieswhich are excluded by the CIT (Appeals) and fourTTLOTcompaniesexclusion|soughtbytheaSSCSSCEhaveTeECVeCHfromthesoftwaredevelopment services less than 75%. ll. At the outset we note that the.functional comparability of 12 companies havebeen considered by the co-ordinate bench in thecase ofTelelogic India Put. Ltd.(supra) in para10 as under: hasalreadyexaminedthe.functionalcomparability of these companies and it wasfound that the main actwity of all thesecompanies are software development servicesand therefore in significant revenue from productand other service is immaterial for the purpose ofselecting the comparable company when the TPOhad applied the filter of revenue of 75% from thesoftware development services. Thus the ld. D.R.has contended that none of these companieswhich are excluded by the CIT (Appeals) and fourTTLOTcompaniesexclusion|soughtbytheaSSCSSCEhaveTeECVeCHfromthesoftwaredevelopment services less than 75%. ll. At the outset we note that the.functional comparability of 12 companies havebeen considered by the co-ordinate bench in thecase ofTelelogic India Put. Ltd.(supra) in para10 as under: D.@, ©, @, ©, ©, © Accordingly by following the earlier order ofthis Tribunal for the same assessment year, wedirect the TPO/A.O to exclude 12 companies fromthe list of comparables on functional dis-similarity. Apart from the above 12 companies in Date of Judgment 21-08-2018 I.T.A.No.404/2017 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s.PMC Sierra India Pvt. Ltd 11/14 which 2 companies namely Infosys Ltd. andWipro Ltd. are common as also excluded on theground of high turnover. Therefore the _ totacompanies which are directed to be excluded are15 out of the 20 of the TPO’s set of comparables”. Oo. However, this Court in a recent judgment inITA No.536/2015 C/w ITA No.537/2015delivered on25.06.2018 (Pri. Commissioner of Income Tax &Anr. Vs. M/s. Softbrands India Pvt. Ltd.,)1 has heldthat in these type of cases, unless anex-facleperversityin the findings of the learned Income Tax AppellateTribunal is established by the appellant, the appeal atthe instance ot an assessee or the Revenue under!Section 260-Aot the Act is not maintainable. The relevant portion of the said 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|OmCaASeofSubstantialquestionof interpretation 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 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 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 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 filedsuch appeals before this Court. Therefore we.clarify that mere dissatisfaction with the findingsoffacts arrived at by the learned Tribunal is notat all a sufficient reason to invoke|Section 260-Aof the Act before this Court. 58. The appeals filed by the Revenue are|therefore dismissed with no order as to costs.” 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 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 filedsuch appeals before this Court. Therefore we.clarify that mere dissatisfaction with the findingsoffacts arrived at by the learned Tribunal is notat all a sufficient reason to invoke|Section 260-Aof the Act before this Court. 58. The appeals filed by the Revenue are|therefore dismissed with no order as to costs.” 6. Having heard the learned counsel for the Appellants-Revenue, we are therefore of the opinion thatno substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue is liable to be dismissed and it isaismissedaccordinglyNo costs. Copy of this order be sent to the Respondent-Assessee forthwith. Srl. Sd/-.JUDGESd/-|JUDGE