Karnataka High Court
The Commissioner Of Income Tax vs M/S Kodiak Networks (India) Pvt Ltd on 9 July, 2018
Bench: Vineet Kothari, S.Sujatha
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IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 9TH DAY OF JULY 2018
PRESENT
THE HON'BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON'BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.265/2012
BETWEEN :
1. THE COMMISSIONER OF INCOME TAX
C.R.BUILDING, QUEENS ROAD,
BANGALORE
2. THE ASSISTANT COMMISSIONER
OF INCOME-TAX, CIRCLE-11(5),
C.R. BUILDING, QUEENS ROAD,
BANGALORE ...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s KODIAK NETWORKS (INDIA) PVT. LTD.,
NO. 401, 4TH FLOOR,
"PRESTIGE SIGMA",
3, VITTAL MALLYA ROAD,
BANGALORE-560001 ...RESPONDENT
(BY SRI TATA KRISHNA, 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 16.03.2012
PASSED IN ITA NO.970/BANG/2011, FOR THE ASSESSMENT
YEAR 2007-2008 ANNEXURE-D, PRAYING TO: I. FORMULATE
THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II.
ALLOW THE APPEAL AND SET ASIDE THE ORDER DATED
Date of Judgment 09-07-2018, ITA No.265/2012
The Commissioner of Income Tax & another Vs.
M/s Kodiak Networks (India) Pvt. Ltd.
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16.03.2012 PASSED BY THE ITAT, BANGALORE IN ITA
NO.970/BANG/2011 ANNEXURE-D AND CONFIRM THE ORDER
OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER
PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX,
CIRCLE -11(5), BANGALORE.
THIS APPEAL COMING ON FOR HEARING, THIS DAY,
Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING:
JUDGMENT
Mr. K.V.Aravind, Adv. for Appellants - Revenue. Mr. Tata Krishna, Adv. for Mr. Chythanya K.K., Adv. for 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, 'B' Bench, Bangalore, in IT [TP] A No.970/Bang/2011 dated 16.03.2012 relating to the Assessment Year 2008-09.
2. This Appeal has been admitted on 28.01.2013 raising the following substantial questions of law as framed by the Revenue in the Memorandum of Appeal:
" 1. Whether the Tribunal was correct in holding that the communication expenses and travelling expenses in foreign currency reduced Date of Judgment 09-07-2018, ITA No.265/2012 The Commissioner of Income Tax & another Vs. M/s Kodiak Networks (India) Pvt. Ltd.3/12
from export turnover should be reduced from the total turnover also, in the absence of any provisions to this effect in Section 10A of the Act?
2. Whether the Tribunal correct in remitting back all the issues to the file of AO when there are no fresh facts brought before the Hon'ble ITAT apart from those which are already discussed in the order of the Assessing Officer/Transfer Pricing Officer ?
3. Whether the Tribunal correct in directing the AO to consider only those uncontrolled comparables which are having turnover between Rs.1 crore to Rs.200 crores, without appreciating that the direction is against the method of arithmetical average of the operating margins and profit level indicators of uncontrolled comparables as per the proviso to section 92C(2) of the Act ?
4. Whether the Tribunal was correct in directing the Assessing Officer to apply turnover filter of turnover between Rs.1 crore to Rs.200 crores without any evidence in support of a correlation Date of Judgment 09-07-2018, ITA No.265/2012 The Commissioner of Income Tax & another Vs. M/s Kodiak Networks (India) Pvt. Ltd.4/12
between the turnover and the profitability margin ?
5. Whether the Tribunal correct in holding that the assessee is eligible for a standard deduction of 5% from the Arm's Length price under the proviso to Section 92C(2) of the Act, without considering the corrigendum dated 30.04.2010 to the circular 5/2010 issued by the Board in this regard ?
6. Whether the Tribunal was correct in directing cross examination in the case of comparables where information was gathered in terms of provisions of Section 133(6) of the Act, without appreciating that no cross examination is warranted as it was a process of gathering information and any examination of evidence is not involved and recorded a perverse finding ?"
Regarding Substantial Question No.1:
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. Date of Judgment 09-07-2018, ITA No.265/2012 The Commissioner of Income Tax & another Vs. M/s Kodiak Networks (India) Pvt. Ltd. 5/12 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 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 Date of Judgment 09-07-2018, ITA No.265/2012 The Commissioner of Income Tax & another Vs. M/s Kodiak Networks (India) Pvt. Ltd.6/12
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 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 Date of Judgment 09-07-2018, ITA No.265/2012 The Commissioner of Income Tax & another Vs. M/s Kodiak Networks (India) Pvt. Ltd.7/12
are satisfied that such deduction shall be allowed from the total turnover in same proportion as well".
4. The learned Tribunal, after discussing the rival contentions of both the Appellant-Revenue and Respondent-Assessee, has returned a finding with regard to question Nos. 2 to 6 as under:
"We have carefully considered the rival submissions and also diligently perused the relevant records as well as the case laws on which the Ld.A R had placed reliance. It is a fact, as conceded by both the counsels, that most of the issues raised under the heads 'transfer pricing adjustments' have also cropped up in the assessee's own case for the AY 2006-07 wherein the earlier Bench had, after due consideration of the facts and for the reasons recorded therein, remitted back the issues to the TPO for fresh consideration. In consonance with the findings of the earlier Bench, we are of the firm view that the issues listed out by the appellant require fresh consideration at the level of the TPO.
Date of Judgment 09-07-2018, ITA No.265/2012 The Commissioner of Income Tax & another Vs. M/s Kodiak Networks (India) Pvt. Ltd.8/12
Accordingly, we remit back the entire issues to the file of the TPO for needful. It is needless to reiterate that the directions of the earlier Bench contained its findings in the assessee's own case for the AY 2006-07 hold- good for this assessment year under consideration also. The specific directions in assessee's case for assessment year 2006- 07, for ready reference reproduced below:-
[i] the operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered;
[ii] the comparables having the turnover of more than Rs.1 crore, but, less than Rs.200 crores only shall be taken into consideration;
[iii] all the information relating to comparables which were sought to be used against the appellant shall be furnished to the appellant;
[iv] the appellant shall also be extended an opportunity to cross-examine the parties whose replies were sought to be used against the appellant;
Date of Judgment 09-07-2018, ITA No.265/2012 The Commissioner of Income Tax & another Vs. M/s Kodiak Networks (India) Pvt. Ltd.9/12
[v] to consider the objections of the appellant that relate to additional comparables sought to be adopted by the TPO and to pass a detailed order; and [vi] to give the standard deduction of 5% under the proviso to s.92C[2] of the Act.
The TPO shall also keep in view the findings handed down in the case of M/s. Genisys Integrating Systems [India] Ltd., v. DCIT [ITA No.1231[Bang]/2010 dated
05.08.2011] while considering the appellant's case afresh."
5. 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:
Date of Judgment 09-07-2018, ITA No.265/2012 The Commissioner of Income Tax & another Vs. M/s Kodiak Networks (India) Pvt. Ltd.10/12
"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 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 Date of Judgment 09-07-2018, ITA No.265/2012 The Commissioner of Income Tax & another Vs. M/s Kodiak Networks (India) Pvt. Ltd.11/12
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.
57. 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 Date of Judgment 09-07-2018, ITA No.265/2012 The Commissioner of Income Tax & another Vs. M/s Kodiak Networks (India) Pvt. Ltd.12/12
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.
Hence, the Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/-
JUDGE Sd/-
JUDGE ln.