Principal Commissioner Of Income Tax-4 & Anr v. M/S. Lsi Technologies India Private Limited

IN THE HIGH COURT OF KARNATAKA, BENGALURU. DATED THIS THE 30[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.506/2016 BETWEEN: 1.PRINCIPAL COMMISSIONER OF INCOME TAX-4,C.R. BUILDING, QUEENS ROAD,|C.R. BUILDING, QUEENS ROAD,| BANGALORE -560001. 2.THE INCOME TAX OFFICER, CIRCLE-11(2), BANGALORE. .. APPBLLANT (By Mr.E.I.SANMATHI, ADV.) AND: M/S. LSI TECHNOLOGIES INDIA PRIVATE LIMITED, GLOBAL TECHNOLOGY PARK,BLOCK C, MARATHAHALLI OUTER RING ROAD,DEVARABEESANAHALLI,BANGALORE -560103. . RESPONDENT (By Mr. SANDEEP HUILGOL, ADV FOR Mr. T. SURYANARAYANA, ADV.) THIS I.T.A. IS FILED UNDER SBCTION 2VJO0-A OF THER ACT, PRAYING TO DECIDE THE FOREGOING QUESTIONS OFLAW AS MAY BR FORMULATBED BY THR HON’BLE COURT ASDBEMBD FIT AND SBT ASIDK THERE APPBRLLATK ORDDATED:13/05/2016|PASSED)BY|THEITAT,“B’|BENCH, Date of Judgment 30-07-2018 I.T.A.No.506/2016 Principal Commissioner of Income Tax-4 & Anr. Vs. M/s. LSI Technologies India Private Limited 2/9 BENGALURU, IN APPEAL PROCEEDINGS NO. IT (TP) A NO.)1380/BANG/2010—KOR,TH EASSESMENTYRAR2006-07ANNEXURE A AS SOUGHT FOR IN THIS APPEAL; AND TO GRANTSUCH OTHBR RELIEF AS DBEMBD FIT IN THR INTKREST OF)JUSTICK & BIC. | THIS LT.A. COMING ON FOR HEARING THIS DAY,S. SUJATHAJT DRBLIVERBD THE FOLLOWING : JUDGMENT Mr.E. I. Sanmathi Adv. for Appellants-Revenue |Mr. sandeep Huilgol Adv. for| Wr. T.Suryanarayana Adv. for Respondent-Assessee | 1. The Appellants-Revenue have filed this appeal u/s.260Aof the Income Tax Act, 1961, raising) purportedly certain substantial questions of law arisingfrom the order of the.ITAT, ‘B’ Bench, Bangalore>.dated|13.05.2016passed1nIT(TP)A No.1380/ Bang/2010(M/s.LSI Technologies India Put.| Ltd. vs. The Income Tax Officer)forA.Y.2006-077 2. This appeal has been admitted on|19.04.2018to consider the following substantial questions of lawframed by the learned counsel for the Appellants-Revenue: - Date of Judgment 30-07-2018 I.T.A.No.506/2016 Principal Commissioner of Income Tax-4 & Anr. Vs. M/s. LSI Technologies India Private Limited 3/9 “1. Whether the Tribunal was right in fact|and in law in seeking exact comparability, whilesearching for comparable companies of theassessee under TNMM whereas the requirementof law and international jurisprudence requireseeking similar comparables companies?| 2. Whether, on the facts and in thecircumstances of the case, the Tribunal is right inlaw in directing the TPO to exclude M/s. KalsInformation Systems India Ltd., Tata Elxi Ltd.,Lucid Software Ltd., Accel Software Ltd., andM/s. Infosys Technologies Ltd, as comparables inthe case of the taxpayer even with the assessingauthority has chosen the same considering thefunctions,FARanalysisandapplyingthe.required tests? 3. Whether, on the facts and in _ thcircumstances of the case, the Tribunal ts right in|law in directing the TPO to re-adjudicate and re-examine the comparability of Flextronics SoftwareLtd, even when the TPO has considered the sameas|comparableafterverificationand|due.application of mind?| 4. Whether, on the facts and in thecircumstances of the case, the Tribunal ts right in| Date of Judgment 30-07-2018 I.T.A.No.506/2016 Principal Commissioner of Income Tax-4 & Anr. Vs. M/s. LSI Technologies India Private Limited 4/9 directing the TPO to exclude certain comparableson the ground of having RPT in excess of 15% ofthe total sales/Revenue ignoring the TPO’sobservation that the basis for determining thethreshold limit for eliminating companies havingRPT transactions more than 25% was through thedetermination of Indian companies with foreignShareholding greater than 26% and, therefore,had its basis in the provisions of the IT Act, 1961,and the Accounting Standards As-18P” 3. In so far as the substantial questions of law 4. Whether, on the facts and in thecircumstances of the case, the Tribunal ts right in| Date of Judgment 30-07-2018 I.T.A.No.506/2016 Principal Commissioner of Income Tax-4 & Anr. Vs. M/s. LSI Technologies India Private Limited 4/9 directing the TPO to exclude certain comparableson the ground of having RPT in excess of 15% ofthe total sales/Revenue ignoring the TPO’sobservation that the basis for determining thethreshold limit for eliminating companies havingRPT transactions more than 25% was through thedetermination of Indian companies with foreignShareholding greater than 26% and, therefore,had its basis in the provisions of the IT Act, 1961,and the Accounting Standards As-18P” 3. In so far as the substantial questions of law Nos.1 to 3 raised by the Revenue are concerned, learnedcounsel for the Revenue submitted that the learned|ITAT in its Order dated13/05/2016has given the|findings, the relevant portion of which is quoted belowfor ready reference:- “15. Havingconsideredthe rivalSubmissions as well as relevant material onrecord, we find that the functional comparabilityof these 3 companies have been examined by thisTribunal in a series of decisions and thereforeonce these companies are found to be functionallynot comparable to that of software developmentservices provider in the capacity of captive service Date of Judgment 30-07-2018 I.T.A.No.506/2016 Principal Commissioner of Income Tax-4 & Anr. Vs. M/s. LSI Technologies India Private Limited 5/9 provider, then mere inclusion of these companies|in the TP study analysis would not bar theassessee from raising such a plea before the DRP.as well as this Tribunal. Accordingly, followingthe decision of the Special Bench in the case of.DCIT v. Quark Systems (P.) Ltd. [2010/ 38 SOT307 (CHD) (SB,) we admit the additional groundraised by the assessee for adjudication on merits. 17.Flextronics Software System Ltd. NXXXXXXKXXKXX 24. Since the functional comparability of 5companies which are in dispute before us havebeen discussed by the coordinate Bench of thisTribunal in case cited supra for the assessmentyear under consideration, therefore in view of thefinding of the coordinate Bench of this Tribunal,we direct the AO/TPO to exclude 4 companiesfrom the list of comparables for determination ofALPandre-examinethe.comparabilityofFlextronics Software Ltd. in the light of thedirections given by the coordinate Bench”. 4. In so far as the fifth substantial question of law raised by the Revenue is concerned, learned counsel forthe Revenue submitted that the learned ITAT in its) Date of Judgment 30-07-2018 I.T.A.No.506/2016 Principal Commissioner of Income Tax-4 & Anr. Vs. M/s. LSI Technologies India Private Limited Order dated13/05/2016has given the findings, the. relevant portion of which is quoted below for readyreference:- “19. Wehaveconsideredthe|rivalSubmissions as well as material on record. At theoutset, we note that an identical issue of applyingRPT filter at 15% or 25% has been considered bythe coordinate Bench of this Tribunal in the caseof Textron India Put. Ltd. (supra) in paras 12 & 13as under:- NXXXXXKXKXXXMXMXK 2O.In view of the consistent opinion ofthis Tribunal on this issue, we concur with theview of the coordinate Bench that when asufficient number of comparable companies areavailable for determination of arm’s length price(ALP), then the tolerance limit of RPT at 15% isproper in the case of assessee. Accordingly, wedirect the AO/TPO to exclude the following threecompanies from the list of comparables havingmore than 15% RPT. 1. Aztec Software Ltd. 2. Geometric Software Ltd. (Seg.) 3. Megasoft Ltd”. Date of Judgment 30-07-2018 I.T.A.No.506/2016 Principal Commissioner of Income Tax-4 & Anr. Vs. M/s. LSI Technologies India Private Limited 7/9 Oo. 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 & 2O.In view of the consistent opinion ofthis Tribunal on this issue, we concur with theview of the coordinate Bench that when asufficient number of comparable companies areavailable for determination of arm’s length price(ALP), then the tolerance limit of RPT at 15% isproper in the case of assessee. Accordingly, wedirect the AO/TPO to exclude the following threecompanies from the list of comparables havingmore than 15% RPT. 1. Aztec Software Ltd. 2. Geometric Software Ltd. (Seg.) 3. Megasoft Ltd”. Date of Judgment 30-07-2018 I.T.A.No.506/2016 Principal Commissioner of Income Tax-4 & Anr. Vs. M/s. LSI Technologies India Private Limited 7/9 Oo. 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 ot 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: § Conclusion: 038. 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 OverridingEffectofthe TreatiesOVEeCtheDomestic.Legislations or _ the questions like TreatyShopping, Base Erosion and Profit Shifting Date of Judgment 30-07-2018 I.T.A.No.506/2016 Principal Commissioner of Income Tax-4 & Anr. Vs. M/s. LSI Technologies India Private Limited 8/9 (BEPS), Transfer of Shares in Tax Havens (like inthe case of Vodafone etc.), if based on relevantfacts, such substantial questions of law couldbe raised before the High Court underSection260-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 consideredopinion that the present appeals filed by theRevenue 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 findings Date of Judgment 30-07-2018 I.T.A.No.506/2016 Principal Commissioner of Income Tax-4 & Anr. Vs. M/s. LSI Technologies India Private Limited 9/9 has 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 findingsoffacts 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 aretherefore dismissed with no order as to costs.” 6. Having heard the learned counsels for the parties, we are therefore of the opinion that nosubstantial 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. Sd/-. JUDGE Sd/-| JUDGE Srl.