Karnataka High Court
The Commissioner Of Income Tax vs M/S Huawei Technologies on 10 July, 2018
Bench: Vineet Kothari, S.Sujatha
1/12
IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 10TH DAY OF JULY 2018
PRESENT
THE HON'BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON'BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.451/2013
BETWEEN :
1. THE COMMISSIONER OF INCOME TAX
C.R. BUILDING, QUEENS ROAD,
BANGALORE
2. THE INCOME-TAX OFFICER
CIRCLE-11(2)
RASHTROTHANA BHAVAN,
NRUPATHUNGA ROAD,
BANGALORE ...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s HUAWEI TECHNOLOGIES
INDIA PVT. LTD., LEVEL-3,
LEELA GALLERIA,
THE LEELA PALACE,
23 AIRPORT ROAD,
BANGALORE-560 008 ...RESPONDENT
(BY SRI S.SHARATH, ADV. FOR SRI CHYTHANYA K.K., ADV.)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME
TAX ACT 1961, ARISING OUT OF ORDER DATED 30.04.2013
PASSED IN ITA NO.1338/BANG/2010, FOR THE ASSESSMENT
YEAR 2006-2007, ANNEXURE-D PRAYING TO: I. FORMULATE
Date of Judgment 10-07-2018, ITA No.451/2013
The Commissioner of Income Tax & another Vs.
M/s Huawei Technologies India Pvt. Ltd.
2/12
THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II.
ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY
THE ITAT, BANGALORE IN ITA NO.1338/BANG/2010 DATED
30.04.2013 ANNEXURE-D AND CONFIRM THE ORDER OF THE
APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED
BY THE INCOME TAX OFFICER, CIRCLE-11(2), BANGALORE.
THIS APPEAL COMING ON FOR HEARING, THIS DAY,
S. SUJATHA, J., DELIVERED THE FOLLOWING:
JUDGMENT
Mr. K.V.Aravind, Adv. for Appellants - Revenue. Mr. S.Sharath, Adv. for Mr. Chythanya K.K., Adv. Respondent - Assessee.
This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, 'A' Bench, Bangalore, in IT [TP] A No.1338/Bang/2010 dated 30.04.2013 relating to the Assessment Year 2006-07.
2. This Appeal has been admitted on 14.03.2014 to consider the following substantial questions of law as framed by the Revenue in the Memorandum of Appeal:
"1. Whether on the facts and in the circumstances of the case and in law the Tribunal Date of Judgment 10-07-2018, ITA No.451/2013 The Commissioner of Income Tax & another Vs. M/s Huawei Technologies India Pvt. Ltd.3/12
was right in super imposing the decisions of the other benches and the decision of the ITAT while rejecting the comparables (i) Accel Transmatic Limited, (ii) KALS Information Systems Limited (iii) Lucid Software Limited and (iv) Tata Elxsi Ltd. without appreciating the fact that selection of comparables in a case depends on assessee specific FAR analysis?
2. Whether on the facts and in the circumstances of the case and in law the Tribunal was correct in holding that Accel Transmatic Limited and KALS Information Systems Limited cannot be taken as comparables on the ground of functional difference without appreciating the fact it satisfies all the quantitative and qualitative filters applied by the Transfer Pricing Officer while segmental results have been used and recorded a perverse finding?
3. Whether on the facts and in the circumstances and of the case in law the Tribunal was justified in fixing the related party transaction filtered at 15% of the total revenue without going into the specific facts in the case of the Tax Payer and without adducing the basis for arriving at such cut-off at 15% and recorded a perverse finding?
Date of Judgment 10-07-2018, ITA No.451/2013 The Commissioner of Income Tax & another Vs. M/s Huawei Technologies India Pvt. Ltd.4/12
4. Whether on the facts and in the circumstances of the case and in law the Tribunal was correct in rejecting M/s Lucid Software Limited as a comparable by placing reliance on the order in the case of the other assessee passed by the Mumbai ITAT without taking into consideration the finding recorded by the Transfer Pricing Officer for selecting as a comparable and recorded a perverse finding?
5. Whether on the facts and in the circumstances of the case and in law the Tribunal correct in holding that the expenses excluded from export turnover has to be reduced from total turnover for computing deduction under Section 10A of the Act contrary to the provisions of Section 10A of the Act?"
Regarding Substantial Question No. 5:
3. The controversy is no longer res integra and is covered by the decision of the Division Bench of this Court in the case of M/s.Tata Elxsi Ltd., vs. Asst.Commissioner of Income Tax, decided on 20.10.2015 since reported in (2015) 127 DTR 0327 (Kar), which has been affirmed by the Hon'ble Supreme Date of Judgment 10-07-2018, ITA No.451/2013 The Commissioner of Income Tax & another Vs. M/s Huawei Technologies India Pvt. Ltd.5/12
Court in the case of Commissioner of Income-tax, Central - III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).
The relevant portion of the judgment of the Hon'ble Supreme Court in the case of HCL Technologies Ltd. (supra), is quoted below for ready reference:-
"17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxman.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from 'export turnover' must also be excluded from 'total Date of Judgment 10-07-2018, ITA No.451/2013 The Commissioner of Income Tax & another Vs. M/s Huawei Technologies India Pvt. Ltd.6/12
turnover', since one of the components of 'total turnover' is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.
18. XXXXXX
19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well".
Date of Judgment 10-07-2018, ITA No.451/2013 The Commissioner of Income Tax & another Vs. M/s Huawei Technologies India Pvt. Ltd.
7/124. The learned Tribunal, after discussing the rival contentions of both the Appellant-Revenue and Respondent-Assessee, has returned a finding as under:
Regarding Substantial Question Nos.1, 2 & 4:
"12. In so far Kals Info Systems Ltd., and Accel Transmatics Ltd. chosen by the TPO as comparables, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies as they are functionally different. The following are the relevant observations of the Tribunal in this regard:
xxxxx
14. As far as Lucid Software Ltd. and Tata Elxsi Ltd. chosen by the TPO as comprables, we find that the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Pvt. Ltd. (supra) while dealing with the case of software services provider like the assessee, considered the comparability of Lucid Software Ltd. with similar software services provider and the Tribunal held as follows:
Date of Judgment 10-07-2018, ITA No.451/2013 The Commissioner of Income Tax & another Vs. M/s Huawei Technologies India Pvt. Ltd.8/12
xxxx
15. In view of the aforesaid decision of the Mumbai Bench of the Tribunal, which is in relation to A.Y.2006-07, we are of the view that Lucid Software Ltd. and Tata Elxsi Ltd. are also to be excluded as comparables while determining the ALP of the international transaction impugned in this appeal."
Regarding Substantial Question No.3:
"16. As far as Megasoft Ltd., Aztec Software Ltd. and Geometric Software Ltd., .chosen by the TPO as comparables are concerned, it is not in dispute that the related party transactions of these comparable companies was more than 15%. This Tribunal in the case of 24/7 Customer Com Pvt. Ltd., ITA No.227/Bang/2010 (supra), had held that where comparables have related party transactions which are in excess of 15% of its total receipts, then such companies cannot be chosen for the purpose of comparison. Following are the relevant observations of the Tribunal :-
xxxxxx"
Date of Judgment 10-07-2018, ITA No.451/2013 The Commissioner of Income Tax & another Vs. M/s Huawei Technologies India Pvt. Ltd.
9/125. The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Nos.536/2015 c/w 537/2015 dated 25.06.2018 (Prl.
Commissioner of Income Tax & Anr. -v- M/s Softbrands India Pvt. Ltd.,) wherein it has been observed that unless the finding of the Tribunal is found ex facie perverse, the Appeal u/s. 260-A of the Act, is not maintainable. The relevant portion of the Judgment is quoted below for ready reference:
"Conclusion:
55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares Date of Judgment 10-07-2018, ITA No.451/2013 The Commissioner of Income Tax & another Vs. M/s Huawei Technologies India Pvt. Ltd.10/12
in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing 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, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law.
56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed.
Date of Judgment 10-07-2018, ITA No.451/2013 The Commissioner of Income Tax & another Vs. M/s Huawei Technologies India Pvt. Ltd.
11/1257. We make it clear that the same yardsticks and parameters will have to be applied, even if 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 'Arm's Length Price' in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this 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-A of the Act before this Court.
58. The appeals filed by the Revenue are therefore dismissed with no order as to costs."
6. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of the considered opinion that no substantial question of law arises for consideration in the present case.
Date of Judgment 10-07-2018, ITA No.451/2013 The Commissioner of Income Tax & another Vs. M/s Huawei Technologies India Pvt. Ltd.
12/12Hence, the Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed.
No costs.
Sd/-
JUDGE Sd/-
JUDGE ln.