Ita/271/2017 Of Pr Commissioner Of Income Tax-5 v. M/S Novell Software Development (India) Pvt.ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 16 DAY OF JANUARY 2071PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’‘’BLE MR. JUSTICE NATARAJ RANGASW A BETWEEN: LT.A. NO.271 OF 2017 1.|PR. COMMISSIONER OF INCOME TAX-5. BMTC COMPLEX, KORAMANGALA BANGALORE. 2.|DEPUTY COMMISSIONER OF INCOME TAXCIRCLE 5(1)(2), BANGALORE.CIRCLE 5(1)(2), BANGALORE. (BY SRI. T.N.C. SRIDHAR, ADV., FOR- SRI. SANMATHI E.I. ADAV.,) .., APPELLANTS~ AND* M/S. NOVELL SOFTWARE DEVELOPMENT|(INDIA) PVT. LTD.‘LAUREL, BLOCK-D, 65/2BAGMANE TECH PARKC.V. RAMAN NAGAR|BYRASANDRA, BANGALORE-QY3. .., RESPONDENT (BY SRI. T. SURYANARAYANA, ADV.) THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX|ACT 1961, ARISING OUT OF ORDER DATED 30.09.2016 PASSEDIN IT(TP)A NO.281/BANG/2015 FOR THE ASSESSMENT YEAR2010-11, VIDE ANNEXURE-A, PRAYING TO: | (1) DECIDE THE FOREGOING QUESTION OF LAW AND/OR-SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BYTHE HON BLE COURT AS DEEMED FIT. | (ii) SET ASIDE THE APPELLATE ORDER DATED 30.09.2016.PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, A’ BENCH,BENGALURU, LN|APPEAL|PROCEEDINGSNO.IT(TP)ANO.281/BANG/2015 FOR ASSESSMENT YEAR 2010-11 VIDEANNEXURE-A AS SOUGHT FOR IN THIS APPEAL AND TO GRANT.SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OFJUSTICE. THIS ILT.A. COMING ON FOR’ HEARING, THIS DAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income Tax Act,1961 (hereinafter referred to as the Act for short) has beenpreferred py the revenue. The subject matter of the appealpertains to the Assessment year 2010-11. The appeal wasadmitted by a bencn of thnis Court vide order dated09.11.2018 on the following substantial questions of law: "(1) Whether on the facts and in thecircumstances of the case, the Tribunal Isright in law in setting aside disallowance ofdepreciation claimed on Software Expenses|under Section 40(a)(ia) of the Act by followingIts earlier order in case of Kawasaki MIcro|Flectronics in IT(TP)A No.1512/Bang/2010dated26.06.7015CVeCTwhenassessingautnorityrigntlyheldthatpayment.for purchase of software was in the nature of.Toyalty' in terms of Explanation 2 to Section 9(1)(vi) of the Act? (2)Whether on the facts and in thecircumstances of the case, the Tribunal Itsrignt in setting aside disallowance made under|Section 14A of the Act without the same Is made in accordance with Rule 8D of I[.T.Rules". Thereafter, additional substantial question of law wasformulated which reads as under: “Whether the direction issued by tne Tribunal|to the Transfer Pricing Officer to exclude|depreciation from the cost of tax payer as wellas comparables and directing the Assessing|Officer / Transfer Pricing Officer to re-work tnedepreciation following its case in|MARKETRESEARCH TOOLS PVT. LTD.Jis perverseon 2. Facts leading to filing of this appeal briefly statedare that assessee namely Novell Software Development|(India) Pvt. Ltd. is a subsidiary of Novell Inc. U.S.|(hereinafter referred to as ‘the Novell U.S.' for short) and is acapital service provider. Tne assessee is engaged in thne| Thereafter, additional substantial question of law wasformulated which reads as under: “Whether the direction issued by tne Tribunal|to the Transfer Pricing Officer to exclude|depreciation from the cost of tax payer as wellas comparables and directing the Assessing|Officer / Transfer Pricing Officer to re-work tnedepreciation following its case in|MARKETRESEARCH TOOLS PVT. LTD.Jis perverseon 2. Facts leading to filing of this appeal briefly statedare that assessee namely Novell Software Development|(India) Pvt. Ltd. is a subsidiary of Novell Inc. U.S.|(hereinafter referred to as ‘the Novell U.S.' for short) and is acapital service provider. Tne assessee is engaged in thne| business of providing software development and support|services to its associative enterprises namely Novell U.S.During the relevant previous year the assessee providedsoftware development and support devices to Novell U.S. On|the basis of the transfer pricing study conducted by the|assessee, it conciuded tnat the transaction was at arms|length. The assessee had incurred an expenditure ofRs./7,61,728/- towards purchase of software which wascapitalized and depreciation was claimed thereon. TneTransfer Pricing Officer, by an order dated 30.01.2014,|determined tnat the transfer pricing adjustment amounting|toRs.8,50,32,504/-WaSnecessalyinthe.software development services sector. The Assessing Officer, in thedraft assessment order dated 10.03.2014, made an additionof a sum of Rs.8,50,32,504/- to the income disclosed by theassessee and also made aisallowances under Section|40(a)(i)(a) of the Act. Thus, the Assessing Officer made a|total addition of Rs.8,72,47,691/- and total income of the|assessee was determined at Rs.21,51,59,/62/-. 3. The assessee filed objections before the DisputeResolution Panel, which vide direction dated 23.12.2014.reduced the transfer price adjustment made by the Transfer|Pricing OfficerDygrantingan)adjustment.towardsdepreciation as prayed by the assessee and the disallowancemade under Section 40(a)(i)(a) of the Act was confirmed|whereas disallowance under Section 14A of the Act wasdeleted. The Assessing Officer thereafter passed a final|order of assessment on 29.01.2015. The revenue thereuponfiled an appeal before the Income Tax Appellate Tribunal. On|receipt of notice of the appeal! filed py the revenue, tneassessee filed cross-objections to the revenue's appeal in|which grounds were urged that the order passed by the|Transfer Pricing Officer be confirmed and disallowance under|Section 14(a)(i)(a) of the Act be made. The Tribunal, by anorder dated 30.09.2016, dismissed the appeal preferred Dy the revenue and allowed the cross-objection preferred by theassessee. In the aforesaid factual background, this appeal|has been filed.. 4. Learned counsel for the revenue fairly submittedthat the first substantial question of law does not arise for|consideration in this appeal. However, with regard to thethird substantial question of law, it is submitted tnat the|Tribunal has not considered whether tne depreciation policiesof the assessee are similar to that of comparables and nas|not given independent finding regarding reasons assigned by the Transfer Pricing Officer. It is further submitted that the|Tribunal failed to note that depreciation cannot be excluded|from the cost of tax payer as well as comparables and Rule10B(1)(e)(iii) of the Income Tax Rules nowhere provides to exclude the depreciation as it will materially affect the|adjustments and therefore, the same cannot be excluded.With regard to second substantial question of law it is arguedthat assessee has not determined the expenditure incurred inrelation to exempt income and Assessing Authority has|rightly held that even though there is no dividend income|from tne investment, the assessee was required to determineexpenditure as per Section 14A read with Rule 8D of the|Rules. In support of aforesaid submission, reliance nas been.placedonthe.decisionOf|tnis|Courtin‘THE COMMISSIONER|OF|INCOME-TAX|Ys.M/s.KINGFISHERFINVEST|INDIALTD,‘INITA|NO.100/2015 DECIDED ON 29.09.2020 COMMISSIONER|OF|INCOME-TAX|Ys.M/s.KINGFISHERFINVEST|INDIALTD,‘INITA|NO.100/2015 DECIDED ON 29.09.2020 5. On the other hand, learned counsel for the assesseesubmitted that Rule 10B of the Rules provides for the methodin which comparability analysis is to De conducted under tne|transactional net margin metnod. It is pointed out that|under sub-clause (i) of Rule 10B(1)(e) of the Rules, the net|profit margin realized by the tax payer from an internationaltransaction is computed having regard to a relevant basethat is cost incurred and sales effected, etc. It is further|submitted that since the assessee has a policy of charging a|higher rate of depreciation as compared to the companies|selected by the Transfer Pricing Officer, there is a definiteimpact on the net margins of the assessee as compared to comparable companies. Therefore, there is a need of makingan adjustment to eliminate differences into accounting|policies of the assessee and the comparable companies in|terms of the Rules. It is also argued that Tribunal has rightly|accepted the aforesaid submission by relying on decision of Hyderabad Bench of the Tribunal in-MARKET RESEARCHTOOLS PVT. LTD.and no errors nave been pointed out in)the aforesaid provision. It is also urged that the Tribunal has|rightly deleted the disallowance made under Section 14A of tne Act as the assessee had not incurred any exemptincome. In support of aforesaid submissions, reliance Nas|been placed on the decision of the Supreme Court in'CITVs. CHETTINAD LOGISTICS (P) LTD. (2018) 95°TAXMANN.COM 250 (SC),decisions of Madras High CourtIn |CIT Vs. CHITTANAD LOGISTICS (P) LTD. (2017) 80°TAXMANN.COM 221 (MADRAS), REDINGTON (INDIA)|LTD.Vs.ACIT|(2017)y iTAXMANN,COM257(MADRAS),decisions of Delhi High Court in ‘CHEMINVEST|LTD. Vs. CIT (2015) 61 TAXMANN.COM 118 (DELHI)|AND ‘CIT Vs. HLCIM INDIA (P) LTD.’ (2015) 57|TAXMANN.COM 28 (DELHI). | 6. We nave considered the SUDMISSIONS made on potn|sides and have perused the record. Admittedly, the first|substantial question of law does not arise for consideration.Tnerefore, we need not deal with the same. Sofar as second substantial question of law is concerned, this Court in ITA|No.416/2014 decided on 12.01.2021, has held that if no.exempt income has accrued to the assessee the provisions of Section 14A do not apply. However, reliance placed by tne|learned counsel for the revenue on the decision in the case ofKINGFISHER FINVEST LTD., supra, iS concerned, suffice it.to say that reliance was placed in the aforesaid decision on the.decisionIn MAXOPPINVESTMENT|LTD,Vs.COMMISSIONER OF INCOME-TAX, NEW DELHI (2018)402 ITR 640 (SC). It is pertinent to note tnat the decisionMAXOPP INVESTMENT LTD,SUPId,does not deal with tne|issue of applicability of Section 14A of the Act. The|subsequent decisions of Madras High Court as well as Delhi|Hign Court, namely in.CHETTINAD LOGISTICS (P) LTD.fFSUDIdandCHEMINVEST LTD.JSUDId, Nave been affirmedby the Supreme Court subsequently. Therefore, taking intoaccount the fact thatMAXOPP INVESTMENT LTDfFSUPIadoes not deal with the issue with regard to applicability of Section 14A of the Act, we are in respectful agreement with tne view taken by the High Court of Madras and High Court|of Delhi. Since no exempt income has accrued to the, assessee, therefore we hold that the provisions of Section|14A of the Act do not apply to the fact situation of the case. |In the result, the second substantial question of law is|answered against the revenue and in favour of the assessee. assessee, therefore we hold that the provisions of Section|14A of the Act do not apply to the fact situation of the case. |In the result, the second substantial question of law is|answered against the revenue and in favour of the assessee. 7. Now we may advert to the third substantial questionof law. Rule 10B of the Income Tax Rules, 1962 provides themethod in wnich comparability analysis is to be conducted|under transactional net margin metnod. Under sub-clause (i)of Rule 10B(1)(e), the net profit margin realized by the tax|payer from an international transaction is computed having|regard to the relevant base that is costs incurred and saleseffected, etc. Under sub-clause (ii) of Rule 1OB(1)(e), the|net profit margin is realized by an unrelated enterprise /comparable company is computed naving regard to the samerelevant Dase as was selected in sub-clause (i). Sub-clause|(iil) of said Rule specifies that before a comparison of net|margins realized under sub-clauses (1) and (ii) is done, tne|net margin realized under sub-clause (ii) must be adjusted totake into account the differences which could materially|affect the net profit margin in the open market. So also, in| terms of Rule 10B(3), an uncontrolled transaction shall be|considered comparable if none of the differences between thecomparable companies and the controlled transaction are|likely to materially affect the profit arising from sucn.transactions in the open market or reasonably accurateadjustments can be made to eliminate the material effect of such differences. Since the respondent has a policy of|charging a higher rate of depreciation as compared to the|companies selected py the TPO, there is a definite impact onthe net margins of the respondent as compared to the|comparable companies. Tnus, there is a need for making anadjustment to eliminate the differences in the accounting|policies of the appellant and the comparable companies, in|terms of the above Rules, especially given that in the bench|marked international transaction is the sales by a captiveservice provider to its associated enterprises, on whicn|depreciation would nave no bearing and thus can bpeexcluded altogether. 8. Tne Tribunal, Dy placing reliance on the HyderabadBencn of the Tribunal in the case ofMARKET RESEARCH TOOLS PVT. LTD.nas held that the Dispute Resolution Panel erred in directing to exclude depreciation from the cost|of tax payer as well as comparables. The aforesaid finding|cannot be said to be perverse warranting interference of tne|Court in this appeal. 9. In view of preceding analysis, the third substantial question of law is answered against the revenue and in| favour of the assessee. In the result, we do not find any merit in this appeal. | The same fails and is hereby dismissed. Sd/-—JUDGE. Sd/- JUDGE