Date Of Judgment 30-07-2018, Ita v. M/S Sunquest Information Systems (India) Private Limited

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 30 DAY OF JULY 2O18| PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A. No.497/2016 BETWEEN : 1.Pr. COMMISSIONER OF INCOME TAX-VIC.R.BUILDING, QUEENS ROAD,C.R.BUILDING, QUEENS ROAD, BANGALORE, «|THERE DEPUTLY COMMISSIONER OINCOME TAX, CIRCLE-6(1)(2) BENGALURU_ APPBLLANTS| (BY SRI E.I.SANMATHI, ADV.) AND : M/s SUNQUEST INFORMATION.SYSTEMS (INDIA)PRIVATE LIMITED.,.I FLOOR, EAGLE RIDGE,|HMBASSY GOLD LINKSBUSINESS PARK,|OFF INTERMEDIATE RING ROAD,|BANGALORE -560 071PAN: AABCS2754F.. RESPONDENT. (BY SRI ANKUR PAI, ADV. FOR SRI K.R.VASUDEVAN, ADV.) THIS [TA IS FILED UNDER SECTION 260-A OF INCOME|TAX ACT 1961, ARISING OUT OF ORDER DATED 27/05/2016.PASSEDIN|IT(TP)ANO.1604/BANG/2014,FORTHEASSEHKESSMENT YEAR 2OO9-2010 ANNEXURE-A. PRAYING TO: Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH.OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE|HON BLE COURT AS DEEBKBMED FI. 2. SEI ASIDE THAPPELLATE ORDER DATED:27/05/2016 PASSED BY THE ITAT,.‘AC!BENCH,BENGALURU,AS|SOUGHTFOR, IN|THERESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS|NO. IT(TP)A NO.1604/BANG/2014 FOR A.Y. 2009-10 ANNE XUREA & GRANT SUCH OTHBR RBELIBEF AS DBBMBD R THIS APPEAL COMING ON FOR HEARING, THIS DAY,|S. SUATHA, J., DELIVERED THE FOLLOWING: JU DGMENT Mr. E.I.Sanmathi, Adv. for Appellants — Revenue.Mr. Ankur Pai,Adv. for!Mr. Vasudevan,Adv. forRespondent — Assessee. This Appeal is filed by the Revenue purportedlyraising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal,6A?Bench, |Bangalore, inIT A No.1604/Bang/2014dated 2'7.05.2016relating to the Assessment Year2009-1]. 2. This Appeal has been admitted on|19.03.2018to consider the following substantial questions of law: “1.In the facts and circumstances of the|case, the Tribunal has erred in holding that fewcompanies are functionally different from _ thassessee Companywhen it satisfies all the Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 3/11 qualitative and quantitative filters applied by the!TPO. The Tribunal has used a narrowerfunctionallyfilter than the TPO, but has not tested othercomparables against the narrower functionally filter|applied by it? 2. Whether the Tribunal was right in notsetting aside the matter to TPO for a fresh TP study|after taking a new view on functional matrix whichis narrower than the functionally matrix originallyused by the TPO? 3.|Whether, the Tribunal was right in|directing the exclusion of comparable companieshaving RPT transactions more than 15% withoutasking the TPO to make a fresh TP study, since aquantitative filter, namely, the RPT filter, has been’changed. Changing filter criteria changes thesearch process altogether, and mandates a fresh TPStudy using updated filters? 4.|Whether the Tribunal was right in)excluding CG.VAK Software and Exports Ltd., ascomparable even when the TPO has rightly chosenthe same as comparable after applying the requiredtest? Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 4/11 5.|Whether the Tribunal was right in|providing risk adjustment where there is no reliable|methodTo|convequalitativedifferenceintoquantitative difference and to make adjustment onrecord of risk level? 6. Whether the Tribunal was right in|holding that foreign exchange loss/gain is operatingin nature when such loss/gain that is attributable tothe operating activity is not derived from theoperating activity?’ Regarding Substantial Question Nos.1 to 4: 4.|Whether the Tribunal was right in)excluding CG.VAK Software and Exports Ltd., ascomparable even when the TPO has rightly chosenthe same as comparable after applying the requiredtest? Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 4/11 5.|Whether the Tribunal was right in|providing risk adjustment where there is no reliable|methodTo|convequalitativedifferenceintoquantitative difference and to make adjustment onrecord of risk level? 6. Whether the Tribunal was right in|holding that foreign exchange loss/gain is operatingin nature when such loss/gain that is attributable tothe operating activity is not derived from theoperating activity?’ Regarding Substantial Question Nos.1 to 4: 3. The learned Tribunal, after discussing the rivalcontentions ot boththe.Appellant-RevenueandRespondent-Assessee, has returned a finding as under: oe20. Coming to Bodhtree Consulting Ltd,|argumentof|the|aASSCSSCE1S|thatit.1S|functionally dissimilar. In the case of Lam|Research India P. Ltd, (supra), comparability ofBodhtree Consulting Ltd, was an issue. In the|software development services segment, it was|held as under by this Tribunal at para 18 of its|order: Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 5/11 XAXXKXKK Accordingly we have no hesitation in directing|the exclusion of Bodhtree Consulting Ltd also. 21. Now taking the pleading of theassessee that CG-VAK was unjustly rejected|from the list of comparables, we find that the|said company was also one of the comparables,which had come up before this Tribunal in the|case of Lam Research (India) Lt. Ltd, (supra).This Tribunal had held as under at para 21 of|the order, as under: XXX| Following the above, we direct that CG-VAK can|be considered as a good comparable. 22. Asa result of the above discussion, we.direction exdclusion of Bodhtree Consulting Ltd,Tata Elxst Ltd (seg), Sasken Communication|Technologies Ltd (seg), Presistent Systems Ltd,|Zylog Systems Ltd, Mindtree Ltd (seg), L & T|Infotech Ltd, and Infosys Ltd from the list of|comparables and direct inclusion of M/s. CG;VA Kas(Ogood|comparable.Orderedaccordingly.” Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 6/11 Regarding Substantial Question No.5: “2/. Vide its ground 4, Revenue is aggrieved|on the directions of the CIT (A) to give a risk|adjustment to the assessee. CIT (A) haddirected the TPO to give risk adjustments at|prevailing norms’ suitable/applicable to _ tassessee. As per the CIT (A), there was no)working capital adjustment actually given bythe TPO since the adjustment carried out wasnegative in its impact. On this issue what wefind is that TPO at para 3.7 of his order had)clearly stated that working capital adjustment|1S restrictedto1.71%|consideringtheuncontrolled comparables selected by him.—However,In|the|actualworkingof|the|adjustment u/s 92CA of the Act, reproduced by|USatparaSIX.above,workingcapitaladjustment has been made at (-) 5,12%. In such}a situation, we cannot say that risk adjustmentdirected by the CIT (A) was incorrect. TPO)having not restricted himself to a _workingcapital adjustment of 1.71% as mentioned by|him at para 3.7 of his order ought to have| Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 7/11 consideredassessee’spleaforarisk-adjustment, tf found reasonable. In such|circumstances, we find that direction given by|the CIT (A) was justified and we do not find any|reason to interfere. Ground 4 of the Revenue|Stands dismissed.” Regarding Substantial Question No.6: Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 7/11 consideredassessee’spleaforarisk-adjustment, tf found reasonable. In such|circumstances, we find that direction given by|the CIT (A) was justified and we do not find any|reason to interfere. Ground 4 of the Revenue|Stands dismissed.” Regarding Substantial Question No.6: “23. Coming to the pleading of the assessee|that foreign exchange adjustment once allowedas operational in nature should also be|considered while working out the operating|margin of the comparables, we are inclined toagree. This is because comparability should be|done based on equal footing and tf foreign|exchange gains/losses are considered as part|of operational income/ loss of the assessee, thensuch items of expenditure, are also to be|considered as operational in nature in the case|of comparables also. TPO is therefore directed|to work out the margin of the comparables thatare left in the list after considering foreign|exchange gains/ losses as operational in nature. Ordered accordinglv. ” Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 8/11 4.The controversy involved herein is no moreTeS integrain view oft the decision of this Court inI.T.A. Nos.536/2015 c/w 537/2015dated|25.06.2018 (Prl.Commissioner of Income Tax & Anr. -v- 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: “Conclusion: 55.Asubstantial quantumof|international trade and transactions depends|upon the fair and quick judicial dispensation|in such cases. Had it been a case oOf|Substantialquestionof|interpretation|of|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| Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 9/11 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|consideredopinion,giveT1SEtoQMlysubstantial question of law. 06. Weare therefore of the consideredopinion that the present appeals filed by the|Revenue do not give rise to any substantialquestionof|lawandthe|suggested|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. Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 10/11 06. Weare therefore of the consideredopinion that the present appeals filed by the|Revenue do not give rise to any substantialquestionof|lawandthe|suggested|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. Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 10/11 57. We make it clear that the same'§yardsticks and parameters will have to be.applied, even lf 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 “ArmLength 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 is not at all|a sufficient reason to invoke.Section 260-Aof the Act before this Court. o8. The appeals filed by the Revenue are|therefore dismissed with no order as_ tocosts. o. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of the considered opinion that no substantial question of lawarises for consideration in the present case. © Date of Judgment 30-07-2018, ITA No.497/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 11/11 Hence, the Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed. —No costs. In. Sd/-.JUDGE Sd/-.JUDGE