Date Of Judgment 24-07-2018, Ita v. M/S. Netdevices India Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE: 2 DAY OF JULY 2O18| PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A.No.64/2016 BETWEEN : 1.Pr. COMMISSIONER ©OF INCOME TAX-oC.R. BUILDING, QUEENS ROADBANGALORE-560001. «|THERE INCOME TAX OFFICERWARD - 12 (1)WARD - 12 (1) BANGALORE. _ APPBLLANTS| (BY SRI E.L.SANMATHI, ADV.) AND : M/s. NETDEVICES INDIA PVT. LTD., SILVER OAK - A WINGMANYAIA AMBASSY BUSINESS PARK|NAGAWARA VILLAGEKASABA HOBLIOUTER RING ROAD >BANGALORE - 560045.PAN: AACCN2O0O25 _. RESPONDENT. (BY SRI K.R.VASUDEVAN AND SRI ANKUR PAI, ADVS.)| THIS INCOME TAX APPEAL IS FILED UNDER SECTION|2600-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDERDATED 30/06/2015 PASSED IN ITA NO.1485/BANG/2010, FOR: Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., THE ASSESSMENT YEAR 2006-07, ANNEXURE-A, PRAYING TO:1. DECIDE THE FOREGOING QUESTION OF LAW AND / OR.SUCH OTHER QUESTIONS OF LAW As MAY BE FORMULATEDBY THR HON'BLE COURT AS DBEBMEBED FIT AND SKHT ASIDE APPELLATE ORDER DATED: 30/06/2015 PASSED BY THE ITAT,‘AC!BENCH,BENGALURU,AS|SOUGHTFOR, IN|THERESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN|ITA NO.1485/BANG/2010 FOR A.Y. 2006-07, ANNEXURE-A &GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THEINTKBREST OF JUSTICE. THIS APPEAL COMING ON FOR ADMISSION, THIS DAY,S. SUJATHA, J., DELIVERED THE FOLLOWING: JU DBiGMENT Mr. E.I.Sanmathi,Adv. for Appellants — Revenue.Mr. K.R.Vasudevan &Mr. Ankur Pai,Advs. for Respondent — Assessee. This Appeal is filed by the Revenue purportedlyraising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal, Bangalore Bench ‘A’, Bangalore, inIT[TP|A No.1485/Bang/2010 dated|30.06.2015, relating to the Assessment Year2006-07. 2.The substantial questions of law framed by the Appellants-Revenue in the Memorandum of Appealare as under: Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., 3/13 aWhetherOF.thefactsand|circumstances of the case the Tribunal has erredin holding that the functions of taxpayer is notcomparable to the functions of KALS Informationsystems Ltd., Accel Transmatics Ltd., and TataElx Ltd. ? D2 Whether the Hon’ble Tribunal wascorrect in imposing the decision of its co-ordinate|benches rendered in other cases to the facts ofthe taxpayer without doing any FAR analysis ofthe taxpayer with those other cases? 3.|Whether the Tribunal, Bangalore,erred in directing the exclusion of comparablecompanies having RPI transactions more than)15% ignoring the TPO’s observation that the basisfor determining the threshold limit for eliminating|companies having RPI transactions more than)25% was through the determination of Indiacompanies with foreign shareholding greater than26% and therefore had its basis in the provisionsof the IT Act, 1961 and the accounting standards|AS-187? 4 |Whether the Tribunal, Bangalore,erred in super imposing the decision otherBenches of Tribunal in the case of assessee to Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., 4/13 reject these comparables when _ selection ocomparables in a case depends in transfer pricingassessee specific FAR analysis?| 5.|Whether, the Tribunal, Bangalore,instead of relying on decision of Benches ofTribunal ought to have decided the comparabilityof these companies on the basis of specific factsbrought on record by the TPO in the case of theassessee? 6.|WhetherOTLthefactsand|circumstances of the case, the Tribunal ts right in|giving relief to assessee in respect of computation|of section IOA deduction by relying upon thedecision of this Hon’ble Court in case of CIT V/s.Tata Elxst when the said ruling has not reachedfinality P” Regarding Substantial Question of Law No.6: 4/13 reject these comparables when _ selection ocomparables in a case depends in transfer pricingassessee specific FAR analysis?| 5.|Whether, the Tribunal, Bangalore,instead of relying on decision of Benches ofTribunal ought to have decided the comparabilityof these companies on the basis of specific factsbrought on record by the TPO in the case of theassessee? 6.|WhetherOTLthefactsand|circumstances of the case, the Tribunal ts right in|giving relief to assessee in respect of computation|of section IOA deduction by relying upon thedecision of this Hon’ble Court in case of CIT V/s.Tata Elxst when the said ruling has not reachedfinality P” Regarding Substantial Question of Law No.6: 3.The issue is covered by the decision of the Hon’ble Supreme Court in the case ofCommissioner of Income-tax, Central -— III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC). Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., 5/13 4The relevant portion of the judgment of theHon'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 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.reduced from the export turnoverPr 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 is tobe attributed to it, the said ordinary meaning is tobe in conformity with the context in which it is.used. Hence, what is excluded from ‘export|turnover’ must also be excluded from ‘totalturnover’, since one of the components of ‘total|turnover’1Sexportturnover.Anyotherinterpretation would run counter to the legislativeintent and would be impermissible. | Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., 6/13 LSE, 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 wulogical result whichwould cause grave injustice to the Respondentwhich 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”. 5.The learned Tribunal, after discussing therival contentions of both the Appellants-Revenue andRespondent-Assessee, has returned the findings asunder: Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., 7/13 Regarding Substantial Question of Law Nos.1 and 2: “13. Having regard to the rival contentions|and the material on record, we find that being thevery same assessment year viz., 2006-07 in thecase of M/s.Ariba Technologies India Put. Ltd.this Tribunal had occasion to go into thecomparability of these companies with the saidcompany and the Tribunal has held it to befunctionally dissimilar from the similar activity ofsoftware development service. We find that theTribunal, at para.12 & 13 of its order, has held as’under: XXXXX (a)KALS Information Systems Ltd. XXXXX Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., 7/13 Regarding Substantial Question of Law Nos.1 and 2: “13. Having regard to the rival contentions|and the material on record, we find that being thevery same assessment year viz., 2006-07 in thecase of M/s.Ariba Technologies India Put. Ltd.this Tribunal had occasion to go into thecomparability of these companies with the saidcompany and the Tribunal has held it to befunctionally dissimilar from the similar activity ofsoftware development service. We find that theTribunal, at para.12 & 13 of its order, has held as’under: XXXXX (a)KALS Information Systems Ltd. XXXXX We have given a careful consideration tothe submission made on behalf of the Assessee.We find that the TPO has drawn conclusions onthe basis of information obtained by issue ofnotice u/s.133(6) of the Act. This informationwhich was not available in public domain couldnot have been used by the TPO, when the same iscontrary to the annual report of this company ashighlighted by the Assessee in its letter dated 8/13 21.6.2010 to the TPO. We also find that in thedecision referred to by the learned counsel for theAssessee, the Mumbai Bench of ITAT has held)that this company was developing softwareproducts and not purely or mainly softwaredevelopment service provider. We therefore acceptthe plea of the Assessee that this company is notcomparable. (e)Accel Transmatic Ltd. 48. With regard to this company, the)complaint of the assessee is that this company isNOT(OpuresoftwaredevelopmentService company. It is further submitted that in a MumbatTribunal Decision of Capgemini India (F) Ltd v Ad.CIT 12 Taxman.com 51, the DRP accepted thecontention of the assessee that Accel TransmaticShould be rejected as comparable. The relevantobservations of DRP as extracted by the ITAT inits order are as follows: © “In regard to Accel Transmatics Ltd. the|assessee submitted the company profile and itsannual report for financial year 2005-06 fromwhich the DRP noted that the business activitiesof the company were as under. XXXXX 9/13 7.7,Tata Elixsi Limited. XXXXX 18. In view of the aforesaid decision, wehold that Tata Elxsi has to be excluded from thelistofcomparable|chosen.bytheTPO.Respectfully following the same, we direct the AOto exclude these companies from the final list ofcomparables.” Regarding Substantial Question of Law Nos.3, 4 & 5: “14. Further, as regards Mega Soft Ltd.,|Aztec Software Ltd., and Geometric SoftwareLtd.(segment) are concerned, it is stated by thelearned counsel for the assessee that RPT ofthese companies is 17.08%, 17.78% and 19.34%respectively. He stated that this Tribunal, in anumber of cases has been holding that if the RPTare more than 15%, then such comparablecompanies have to be excluded from the final listof comparables. In support of this contention also,the learned counsel for the assessee has placedreliance upon the decision of the co-ordinatebench of the Tribunal in the case of M/s.AribaTechnologies India Put. Ltd. Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., 10/13 The learned Departmental Representative,|however, supported the orders of the authoritiesbelow. — 15. On going through the decision of theTribunal, in the case of M/s.Ariba TechnologiesIndia Put. Ltd., we find that at para.15 of itsorder, the Tribunal has held as under: KVVXKK” As facts and circumstances before us aresimilar, respectfully following the same, we directthe AO to exclude these companies also from thefinal list of comparables.” 6.The controversy involved herein is no moreres integrain view of the decision of this Court in|1.T.A. Nos.536/2015 c/w 537/2015dated25.06.2018 [Prl. Commissioner of Income Tax & Anr. V/s. Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., 10/13 The learned Departmental Representative,|however, supported the orders of the authoritiesbelow. — 15. On going through the decision of theTribunal, in the case of M/s.Ariba TechnologiesIndia Put. Ltd., we find that at para.15 of itsorder, the Tribunal has held as under: KVVXKK” As facts and circumstances before us aresimilar, respectfully following the same, we directthe AO to exclude these companies also from thefinal list of comparables.” 6.The controversy involved herein is no moreres integrain view of the decision of this Court in|1.T.A. Nos.536/2015 c/w 537/2015dated25.06.2018 [Prl. Commissioner of Income Tax & Anr. V/s. M/s.Softbrands India Pvt. Ltd.,]|wherein it has beenobserved that unless the finding of the Tribunal is foundex facie perverse, the Appeal u/s. 260-A of the Act, isnot maintainable. The relevant portion of the Judgmentis quoted below for ready reference: Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., 11/13 “Conclusion: 55.Asubstantialquantumof|international trade and transactions dependsupon the fair and quick judicial dispensation|in such cases. Had it been a case oOf|substantial questionof|interpretationof|provisions of Double Taxation AvoidanceTreaties (DTAA), interpretation ofprovisions ofthe Income Tax Act or Overriding Effect of the|Treaties over the Domestic Legislations or the |questions like Treaty Shopping, Base Erosionand Profit Shifting (BEPS), Transfer of Shares|in Tax Havens (like in the case of Vodafone|etc.), tf 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| Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd., 12/13 consideredopinion,|giverisetO arysubstantial 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|found to be devoid of merit and the same are.liable to be dismissed. 57. We make it cleqr that the sameyardsticks 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 | “ALength 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 Revenueare therefore dismissed with no order as to|costs.” T.In the circumstances, having heard the learned Counsel appearing for both the sides, we are of the considered opinion that no substantial question oflaw arises for consideration in the present case. 8.Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordinglydismissed. No costs. | NGC. Sd/-.JU DGE Sd/-.JU DGE