Date Of Judgment 8-8-2018, Ita v. M/S. Logica Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 8 DAY OF AUGUST 2018 PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A. No.336/2017 BETWEEN : 1.THE Pr. COMMISSIONER OF INCOMETAX, 3[‘L]FLOOR, BMTC BUILDING,80 FEET ROAD, KORAMANGALA,BBNGALURU — 560 095. «|THE ASST. COMMISSIONER OFINCOME-TAX, CIRCLE-2(1)(1),INCOME-TAX, CIRCLE-2(1)(1), ~ FLOOR, BMTC BUILDING, | 80 FEET ROAD, KORAMANGALA,BENGALURU — 560 O95. |. APPELLANTS| (BY SRI K.V.ARAVIND, ADV.) AND : M/s LOGICA PVT. LTD.,E-CITY, TOWRE-2,95/1 & 95/2, ELECTRONIC CITY,|PHASE-1(WEST), BENGALURU. _. RESPONDENT. (BY SRI SANDEEP HUILGOL, ADV. FOR | SRI T.SURYANARAYANA, ADV.) THIS [TA IS FILED UNDER SECTION 260-A OF INCOME|TAX ACT 1961, ARISING OUT OF ORDER DATED 21.10.2010PASSED IN IT(TP)A NO.1663/BANG/2014 ANNEXURE-D, FOR.THEASSESSMENTYEAR2006-2007,PRAYING TO: | Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATEDABOVE. [I]. ALLOW THR APPKAL AND SBT ASIDEB THR ORDERPASSED|BYTHE;INCOME-TAX|APPELLATETRIBUNAL, BBENGALURUIN|IT(TP)ANO.1663 /BANG/2014DATEHD21.10.2016 ANNBEXURE -—-D AND CONFIRMING THE ORDER OTHR APPBLLATK COMMISSIONBR CONFIRM THR ORDER)PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX,|CIRCLE-2(1)(1), BENGALURU. THIS APPEAL COMING ON FOR HEARING, THIS DAY,|S. SUATHA, J., DELIVERED THE FOLLOWING: JU DGMENT Mr. K.V.Aravind,Adv. for Appellants — Revenue. ©Mr.Sandeep Huilgol,Adv., forMr. T. Suryanarayana,Adv. for Respondent — Assessee. | This Appeal is filed by the Revenue purportedlyraising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal, BangaloreBench ‘B’, Bangalore inIT[TP|A No.1663/ Bang/201dated21.10.2016, relating to the Assessment Year2006-07. 2.ThisAppealhasbeenadmittedOT)24.01.2018to consider the following substantial|questions of law. Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., 3/11 “1. Whether in the facts and circumstances ofthe case, the Tribunal is right in law in holdingthat the assessee is eligible for allowances onsoftware expenses of Rs.3,58,71,548/- as itis arevenue expenditure by following its earlier orderwhich has not reached finality and furtherwithout appreciating that the assessee had gotenduring benefit from the purchase of the saidsoftware and same was in the nature of capitalexpenditure? aWhether in the facts and circumstances ofthe case, the Tribunal is right in law in excludingthe.comparables,namely,KalsInformationsystems Ltd., Persistent Systems Ltd., Tata ElaxtLtd. and Flextronics Soft Systems Ltd. on theground offunctional dissimilarity by following its|earlier order which has not reached finality andeven when the TPO had chosen the comparables|as it satisfies qualitative and quantitative filtersapplied by the TPO and Tribunal ought to havedecided the comparability of these companies onthe basis of specific facts brought out on recordby the TPO in the case of the assessee?P 3.|Whether in the facts and circumstances ofthe case, the Tribunal is right in law in excludingthe comparable, namely, M/s Infosys Ltd., and Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., has erroneously directed TPO to apply turnoverfilter in respect of said comparable by followingits earlier decision which has not reached finalityeven when the said comparable is chosen afterapplying required tests by TPO and withoutappreciating that the sales turnover of thecompany does not have any impact on themargins earned and there is no_ correlationbetween size of the company and the profitmargins reported when the said companies havesatisfied all the qualitative and quantitativefilters? 3.|Whether in the facts and circumstances ofthe case, the Tribunal is right in law in excludingthe comparable, namely, M/s Infosys Ltd., and Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., has erroneously directed TPO to apply turnoverfilter in respect of said comparable by followingits earlier decision which has not reached finalityeven when the said comparable is chosen afterapplying required tests by TPO and withoutappreciating that the sales turnover of thecompany does not have any impact on themargins earned and there is no_ correlationbetween size of the company and the profitmargins reported when the said companies havesatisfied all the qualitative and quantitativefilters? 4Whether in the facts and circumstances ofthe case, the Tribunal is right in law in excludingthe comparables, namely, Aztec Software Ltd.,Geometric Software Ltd., Accel Transmatics Ltd.and Megasoft Ltd. by holding that the saidcomparables have related party transaction orcontrolled transactions in excess of 15% of totalrevenues of total revenues for the financial year2005-06 ignoring that the correct basis fordetermining the threshold limit for eliminatingcompanies having RPI transactions more than25% was through the determination of IndianCompanies with foreign share holding greaterthan 26% and, therefore, had its basis in the Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., 5/11 provisionsofthe ActandtheaccountingStandards AS-18°?” ?)Learned Counsel for the Appellants-Revenue does not press substantial Question of law No.1. 3.The same is taken on record. 4.The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under: Regarding Substantial Question of Law No.2: “Now, we examine the claim of the assessee|regarding exclusion of various comparables on thebasis offunctional dissimilarity and in this regard, |reliance has been placed by the id. AR of theassessee on the Tribunal order rendered in the'case of M/s Infinera India Put. Ltd. (Supra). As per|the functional profile of the assessee company.noted by the TPO on page-2 & 3 of his order, theassessee company is rendering software services|and the Id. DR of the revenue could not point outany difference in facts in the present case and inthe case ofM/s Infinera India Put. Ltd. (Supra) and Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., 6/11 therefore, we hold that this Tribunal order is.applicable in the present case. As per para — 9 of this Tribunal order, it was|held by the Tribunal that M/s Kals Info Systems,Ltd. its functionally dissimilar because, it derives itsrevenue primarily from software services andsoftware products and segmental information was|not available. Similarly, as per Para — 11 of theTribunal order, it was held by the Tribunal thatM/s Persistent Systems Ltd. is not a _ goocomparable because the turnover of this company|is reported in a combined matter as a sale ofsoftwareSeCYLVICEandproducts(export)ofRs.209.17 Croresinthepresentyearandsegmental information is not available in _ thannual report. Thereafter, in para — 13 of this|Tribunal order, the Tribunal held that M/s Tata|Elxsi Ltd. (Seg.) cannot be considered as goodcomparable because, this company is functionally|dissimilar and for holding so, the Tribunal|considered and followed two Tribunal orderrenderedinthe.CaASeof|M/sTelecordiq.Technologies India Put. Ltd. Vs DCIT in ITA|No.78121/Mum/ 2011 and in the case of EMC DataStorage systems (Ind.) Put. Ltd. Vs DCIT (IT(TP)A|No.1274(Bang)/2010. Thereafter, in para-19 The Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., 7/11 Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., 7/11 Tribunal held that M/s Flesxtronics Softwaresystems Ltd. is also not a good comparablebecause, this company incurred large amount of R|& D expenditure of Rs.40.23 Crores and it isfunctionally dissimilar as was held by the Tribunal|in the case of M</s Intoto Software India Put. Ltd. Vs ACIT in ITA No. 1196/ Hyd)/ 201 Respectfully following this Tribunal order, we|hold that these companies 1.€.. a)M/s Kals Information Systems Ltd. b)M/s Presistent Systems Ltd. CcM/s Tata Elxsi Ltd. (Seg.) d)Ms/s Flextronics Software Systems Ltd. Should be excluded from the lst of finalcomparablesOF|thebasisOf|functionaldissimilarity. ” Regarding Substantial Question of Law Nos.3 & 4: “We have considered the rival submissions.Regarding ITP issues as per ground No.1 to 4 ofthe assessee’s appeal and as per appeal of therevenue, we hold that by applying RPT filter of15% following four companies are to be excluded1.e. a)Aztec Software Ltd. 8/11 b}Geometric Software Ltd. CcAccel Transmatics Ltd. d)Megasoft Ltd. similarly, on the basis of turnover filter of 10 times|of the turnover of the assessee company, Wweuphold the order of the Id. CIT(A) regarding|exclusion of M/s Infosys Ltd. (Supra) because, this|company is having a turnover of Rs.9028 Crores|as against the assessee’s turnover of Rs.195Crores.” 5.However, this Court in a recent judgment in I.T.A. Nos.536/2015 c/w 537/2015delivered on25.06.2018 (Prl. Commissioner of Income Tax & Anr. —v- M/s Softbrands India Pvt. Ltd.») has held that inthese type of cases, unless an ex-facie perversity in thefindings of the learned Income Tax Appellate Tribunal isestablished by the appellant, the appeal at the instanceof an assessee or the Revenue under Section J60-A ot Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., 9/11 the Act is not maintainable. The relevant portion of the said judgment is quoted below for ready reference: “Conclusion: 55.Asubstantial quantumof|international trade and transactions dependsupon 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|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. Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., 10/11 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,|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 clear that the same'§yardsticks 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 “ArmLength Price“in the case of the assesseeswith which the assessees may not be|satisfied and have filed such appeals before 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 clear that the same'§yardsticks 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 “ArmLength Price“in the case of the assesseeswith which the assessees may not be|satisfied and have filed such appeals before Date of Judgment 8-8-2018, ITA No.336/2017 The Pr. Commissioner of Income Tax & another Vs. M/s. Logica Pvt. Ltd., 11/11 this 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 Revenue are|therefore dismissed with no order as_ tocosts.” 6.Havingheardthelearnedcounsels. appearing for the parties, we are therefore of the opinionthat no substantial question of law arises in the presentcase also. The Appeal filed by the Appellants-Revenueis liable to be dismissed and it is dismissed accordingly. —No costs. AN /- Sd/-.JUDGE. Sd/-.JUDGE.