Date Of Judgment 26-07-2018 I.t.a v. M/S. Igefi Software India P. Ltd., 2/17

IN THE HIGH COURT OF KARNATAKA, BENGALURU. DATED THIS THE 26[th]DAY OF JULY 2018 PRESENT THE HON'BLE Dr.JUSTICE VINEET KOTHARI AND THE HON’BLE Mrs.JUSTICE S.SUJATHA| I.T.A.No.69/2016 BETWEEN: 1.PR. COMMISSIONBR OF INCOME TAX-5| C.R. BUILDING, QUEENS ROAD BANGALORE -560 OO1. OoTHE INCOME TAX OFFICKBRWARD-11(2), BANGALORE.WARD-11(2), BANGALORE. .. APPBLLANT (By Mr. E.I. SANMATHI, ADV.) AND: M/s. IGEFI SOFTWARE INDIA P. LTD.,(FORMERLY FINCH SOFTWARE INDIA P LTD)# SAFINA TOWERS-2, No.3) 4 &5 FLOORS, ALI ASKAR ROADVASANTH NAGAR, NEAR HIGH GROUNDSBANGALORE -560052PAN: AAACHK4678A. ~.. RESPONDENT (By Mr. BALARAM R. RAO, ADV.) THIS I.T.A. IS FILED UNDER SECTION 260-A OF THE IT|ACT 19601, PRAYING TO DECIDE THE FOREGOING QUESTIONOF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE.RFOURMULATEBED BY THR HON’BLE Court AS DREBMBD FIT Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd., 2/17 SET ASIDE THE APPELLATE ORDER DATED 30/07/2015.PASSED BY THE ITAT, ‘C’ BENCH, BENGALURU, AS SOUGHT|FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN APPEAL|PROCEEDINGS IN IT(TPJA No.1201/BANG/2014 FOR A.Y. 2009-10 ANNBXUREBE-A AND GRANT SUCH OTHBR RBEBLIBFDEEMED FIT, IN THE INTEREST OF JUSTICE. THIS LT.A. COMING ON FOR ADMISSION THIS DAY,S. SUJATHAJ. DELIVERED THE FOLLOWING :- JUDGMENT Mr. E.I. Sanmathi,Adv. for Appellants-Revenue |Mr. Balaram R. Rao, Adv. for Respondent -Assessee | 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 the’ITAT, Bangalore Bench ‘C’,Bangalore, dated30.07.2015passed inIT(TP)ANo.1201/Bang/2014(IGEFI Software India P. Ltd., vs.Income-tax Officer }for.A.Y.2009-10. 2. The proposed substantial questions of lawframed1n the Memorandum|ot appealby the. Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd., 3/17 Appellants-RevenueaTe€quotedbelowfor.ready reference: - “1.Whether,OF|the.factsandcircumstances of the case, the Tribunal was rightin seeking exact comparability while searching forcomparable companies of the assessee underTNMM method whereas requirement of law andinternationaljurisprudencerequireseekingsimilar comparable compantes? D2 Whether,Onlthe.factsandcircumstances of the case, while seeking theexact comparability as mentioned above _ thTribunal was right in fact and in law in imposingcondition beyond law where the requirement oflaw is to acknowledge only those differences thatare likely to materially affect the margin?| 3.|Whether,Onlthe.factsandcircumstances of the case, the Tribunal was rightin law in not acknowledging the determination ofALP by carrying out comparability analysis of thecompanies is an art and not exact science as notwo companies are the sameP 4 |Whether,Onlthe.factsandcircumstances of the case, the Tribunal was rightin law in demanding comparability standards that may itself defeat the purpose of law relatingto determination ofALP under the IT ActP 5.|WhetherOF.the.factsand|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 Vs.Tata Elxsi when the said ruling has not reachedfinality P 6.|Whether on the facts and in thecircumstances of the case, the Tribunal is right inlaw in holding that foreign exchange fluctuationgain is a part of operating revenue as theassessee has its total revenue on account ofexports when, such loss/gain though attributableto the operating activity is not derived from theoperating activity of the assessee and earlierdecision’s of Tribunal on such findings has beenchallenged before this Hon’ble Court in severalcases?| 5.|WhetherOF.the.factsand|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 Vs.Tata Elxsi when the said ruling has not reachedfinality P 6.|Whether on the facts and in thecircumstances of the case, the Tribunal is right inlaw in holding that foreign exchange fluctuationgain is a part of operating revenue as theassessee has its total revenue on account ofexports when, such loss/gain though attributableto the operating activity is not derived from theoperating activity of the assessee and earlierdecision’s of Tribunal on such findings has beenchallenged before this Hon’ble Court in severalcases?| 7 |Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in excluding comparable’s namely, KalsInformation Systems Ltd, Bodhtree Consulting Ltdand other companies on the ground offunctionaldissimilarity even when selection of comparable Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd., 5/17 in a case for determining Arms Length Pricedepends on assessee specific FAR analysis andqualitative and quantitative tests are satisfied in|case of each comparable’s chosen by TransferPricing Officer?.” 3. The learned counsel appearing for theAppellants — Revenue Mr.E.].Sanmathi submitted thatin so far as the fifth substantial question of law isconcerned, the same is covered by the decision of theHon'ble Apex Court in the case ofCommissioner ofIncome-tax, Central -— III vs. HCL Technologies Ltd.,[2018] 93 Taxmann.com 33(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 6/17 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 7/17 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. In so far as the substantial question of lawNos.1 to 4 raised by the Revenue are concerned, learnedcounsel for the Revenue submitted that the learned|ITAT in its Order dated.30.07.2015has given thefindings, the relevant portion of which is quoted belowfor ready reference:- “13. We have perused the orders andheard the rival contentions. Profile of theassessee as it appears at pages 2 of the order ofTPO reads as under: NMXXXXKXXXKXMXX 8/17 4. In so far as the substantial question of lawNos.1 to 4 raised by the Revenue are concerned, learnedcounsel for the Revenue submitted that the learned|ITAT in its Order dated.30.07.2015has given thefindings, the relevant portion of which is quoted belowfor ready reference:- “13. We have perused the orders andheard the rival contentions. Profile of theassessee as it appears at pages 2 of the order ofTPO reads as under: NMXXXXKXXXKXMXX 8/17 14.The method by which the AO hadworked out the PLI of 12.7% for the assessee hasbeen reproduced at para OS above. Whole of theTevenueofaASSCS SCWasfromsoftwaredevelopment services rendered to its AE, inMauritius. Assessee in its TP study had adoptedTNMM for justifying its international transactionsand selected nine comparable companies and)after making working capital adjustment, theaverage PLI of the comparables selected by theassessee came to 5.18%. Since assessee’s PLIwas much higher than this, as per the assessee,there was no requirement for adjustment oftransfer pricing. Comparables selected by theassessee were as under in its TP study: NXXXXXXKKKXXX However the TPO rejected all except R Ssoftware (India) Ltd out of the comparablesconsidered by the assessee, for various reasonslike RPT exceeding 20%, export sales lesser than79%, different financial year being consideredetc., TPO thereafter made his own study on theprowess and capitaline data base and arrived ata list of 11 comparables. List of 11 comparablesconsidered by the TPO and the adjusted average|PLI is given as under: Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd., 9/17 XXXXXXXXXXXXX| 15.WorkingcapitaladjustmentWasconsidered by the TPO based on average PLRadopted by SBI. TPO did not allow anyadjustment on account of risk. ALP and theShortfall worked out by the TPO was as under:XXXXXXXXXXXNXX TPO thus recommended an adjustment of|Rs. 1,34,50,581/-. AO accordingly completed theassessment. In its appeal before the CIT (A), oneof the grounds of the assessee sought exclusionof comparables which had turnover in excess ofRs.200 crores. As per the assessee, its turnoverwas only Rs.15.17 crores and could not bebracketed with companies having large turnoverin excess of Rs.200 crores. Assessee had alsoargued for exclusion of M/s. Kals Informationsystems Ltd, Akshay Software Technologies Ltd,M/s. Bodhtree Consulting Ltd and R S Software(India) Ltd, on a premise that these companiesfailed the functional test and had functionsdissimilar to that of the assessee. CIT (A) was ofthe opinion that assessee’s contention withregard to exclusion of comparables havingTurnoverinCeXCECSOf|Rs.200|CrTOTesWdasacceptable in view of the decision of the Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd., 10/17 coordinatebenchintheCASECofGenesisIntegrating Systems v. DCIT (15 ITR (Trib) 475).However, according to him, contention of theassessee that the four companies mentionedabove were functionally dissimilar could not beaccepted since the line of business of the thesecompanies fell within the realm of softwaredevelopment services segment. The result of thedirections of the CIT (A) was that followingcompanies got excluded on turnoverfilter’. Oo. In so far as the sixth substantial question oflaw raised by the Revenue is concerned, learned counselfor the Revenue submitted that the learned ITAT in its|Order dated|30.07.2015has given the findings, the|relevant portion of which is quoted below tor readyreference: - « 8.|We have perused the orders andheard the rival contentions. Audited profit andloss account filed by the assessee placed atpaper book page no.9 shows the gains arising outof the foreign exchange fluctuations as a negativefigure. Effectively it means that such amountStand deducted from the expenditure. If suchgain shown as a negative expenditure under the 11/17 Oo. In so far as the sixth substantial question oflaw raised by the Revenue is concerned, learned counselfor the Revenue submitted that the learned ITAT in its|Order dated|30.07.2015has given the findings, the|relevant portion of which is quoted below tor readyreference: - « 8.|We have perused the orders andheard the rival contentions. Audited profit andloss account filed by the assessee placed atpaper book page no.9 shows the gains arising outof the foreign exchange fluctuations as a negativefigure. Effectively it means that such amountStand deducted from the expenditure. If suchgain shown as a negative expenditure under the 11/17 expenditure column is placed under the incomehead, then the revenues of the assessee, wouldincreasefromRs.157,816,363/-To Rs.160, 943,265/-. Operating cost would go up fromRs.12,55,18,778/- to Rs. 13,46,63,741/-. Thefigures considered by the AO for working out thePLI of assessee were as under:| NXXXXKXKXXX Ll.Visa-a-vis exclusion of a few of thecomparables remaining out of the list, after givingeffect to the directions of the CIT (A), Ld. ARsubmitted that Kals Information Systems Ltd andBodhtree Consulting Ltd were held by variouscoordinate benches in a host of decisions to befunctionally different from software developmentservice provider. As per the Ld. AR assessee wasa wholly owned subsidiary of one Finch SoftwareMauritius P. Ltd., and it was doing softwaredevelopmentandmaintenanceServicesforvarious products of one M/s. IGEFI, on behalf ofFinchsoftwareMauritiusPlLtd.,Ld.AR|submitted that TPO had accepted it to beasoftware development services company. Relyingon the following decisions, Ld. AR submitted thatboth M/s. Kals Information Systems Ltd and M/s. Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd., 12/17 BodhtreeConsultingLtdWerefunctionallydifferentfrom the assessee: 1.CISCO Systems (India) Private Limited vDCIT IT(TP)No.271/ Bang/ 2014 dated 14-8-2014 D2 Mindtech (India)LtdDDCITIT(TPJANo. 70/Bang/ 2014 dated 21-08-20143.|ASM Technologies Ltd v. DCIT —- IT(TP)ANo.158/ Bang/ 2014, dt 30-09-2014 4 |Airbus India Operations Private Limited v|DCIT IT(TP)A No.35/Bang/2014 dated 10-10-2O14.. 5.|Aptean Software India Put. Ltd v ITO -|IT(TP)A No.207/ Bang/ 2014 dated 31-10-2014 6. Torry Harris Business Solutions P Ltd vDCIT - IT(TPJ)A No.13/ Bang/ 2014 dated 21-YO14 7 |Yodlee infotech P Ltd v ITO IT(TP)JANo. 108/Bang/ 2014 dated 12-12-2014 5.|McAfee Software India P. Ltd v. DCIT -|IT(TPJA 1009/ Bang/ 2014, dt 24-04-2015 6. In so far as the seventh substantial question of law raised by the Revenue is concerned, learned counsel for the Revenue submitted that the learned [TAT in its|Order dated|30.07.2015has given the findings, the| Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd., 13/17 relevant portion of which is quoted below tor readyreference: - “16. Vis-a-vis pleading of the assessee thatM/s.KalsInformationoystemsLtd.andM/s.Bodhtree Consulting Ltd. had to beexcluded, we find that the case of the assesseestands on a strong wicket. In the case pf CiscoSystems (India) P. Ltd., (supra), this Tribunal inrelation to Bodhtree Consulting Ltd. held as underin para 26. 1:- MAXXKXKXKXNXKKKNK 17. Vis-a-vis Kals Information Systems|Ltd., it was held as under: XXXKKKKKKKK| 18. Case of Cisco System (India) P. Ltd.,|also related to software development servicesand was for the very same assessment year. Weare, therefore, of the opinion that the said caseCanbe|consideredas|Omgood precedent;M/s.Bodhtree Consulting Ltd., and M/s.KalsInformation Systems Ltd., are directed to beexcluded from the list of comparables in the caseof assessee also. Ordered accordingly. Oncethese two companies are excluded, that would 14/17 remain in the list of comparables are set outhereunder: | AXXKXKXKKKKN MAXXKXKXKXNXKKKNK 17. Vis-a-vis Kals Information Systems|Ltd., it was held as under: XXXKKKKKKKK| 18. Case of Cisco System (India) P. Ltd.,|also related to software development servicesand was for the very same assessment year. Weare, therefore, of the opinion that the said caseCanbe|consideredas|Omgood precedent;M/s.Bodhtree Consulting Ltd., and M/s.KalsInformation Systems Ltd., are directed to beexcluded from the list of comparables in the caseof assessee also. Ordered accordingly. Oncethese two companies are excluded, that would 14/17 remain in the list of comparables are set outhereunder: | AXXKXKXKKKKN 19. TPO ts directed to verify the workingsas given above and if these are found to becorrect, then no adjustment whatsoever need bemade on the ALP pricing. Grounds 3 to 10 of theassessee are treated as allowed for statisticalpurposes”. 7. However, this Court in a recent judgment in ITA No.536/2015 C/w ITA No.537/2015delivered on 25.06.2018 (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 of 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: 15/17 § Conclusion: 55. 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 OverridingEffectoftheTreatiesOVECTthe|Domestic.Legislations or _ the questions like TreatyShopping, Base Erosion and Profit Shifting(BEPS), Transfer of Shares in Tax Havens (like inthe case of Vodafone etc.), tf 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 considered|opinion that the present appeals filed by the Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd., 16/17 Revenue 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 findingshas 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 findings|offacts arrived at by the learned Tribunal is notat all a sufficient reason to invokeSection 260-Aof the Act before this Court. o8. The appeals filed by the Revenue are)therefore dismissed with no order as to costs.” 8. Having heard the learned counsels for the parties, we are therefore of the opinion that no Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd., 17/17 substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue isliable to be dismissed and it is=-$,-$$.=accordinglyNo costs. Srl. o8. The appeals filed by the Revenue are)therefore dismissed with no order as to costs.” 8. Having heard the learned counsels for the parties, we are therefore of the opinion that no Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd., 17/17 substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue isliable to be dismissed and it is=-$,-$$.=accordinglyNo costs. Srl. Sd/-.JUDGESd/-|JUDGE