Karnataka High Court
The Pr. Commissioner Of Income Tax vs M/S Hewlett Packard(India) on 30 July, 2018
Bench: Vineet Kothari, S.Sujatha
1/17
IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 30TH DAY OF JULY 2018
PRESENT
THE HON'BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON'BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.206/2016
BETWEEN :
1. THE Pr. COMMISSIONER
OF INCOME-TAX
5TH FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BANGALORE-560095.
2. THE DEPUTY COMMISSIONER
OF INCOME-TAX
CIRCLE-11[4], 2ND FLOOR
BMTC BUILDING, 80 FEET ROAD
KORMANGALA
BANGALORE-560095. ...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s. HEWLETT-PACKARD [INDIA]
GLOBAL SOFT PVT. LTD.,
PLOT No.39/40, ELECTRONIC CITY-PHASE-II
HOSUR ROAD, BANGALORE-560100
PAN: AAACD 4078L. ...RESPONDENT
(BY SRI SANDEEP HUILGOL, ADV. FOR
SRI T. SURYANARAYANA, ADV.)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME
TAX ACT 1961, ARISING OUT OF ORDER DATED 23.09.2015
Date of Judgment 30-07-2018, ITA No.206 /2016
The Pr. Commissioner of Income-tax & Another Vs.
M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd.,
2/17
PASSED IN ITA No.1031/BANG/2011, FOR THE ASSESSMENT
YEAR 2007-08, ANNEXURE-D, PRAYING TO: 1. FORMULATE THE
SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE; 2. ALLOW
THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE
ITAT, BENGALURU IN ITA No.1031/BANG/2011 DATED
23.09.2015, ANNEXURE-D AND CONFIRM THE ORDER OF THE
DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY
COMMISSIONER OF INCOME TAX, CIRCLE-3[1][2], BENGALURU;
AND ETC.
THIS APPEAL COMING ON FOR ORDERS, THIS DAY,
S. SUJATHA, J., DELIVERED THE FOLLOWING:
JUDGMENT
Mr. K.V.Aravind, Adv. for Appellants - Revenue. Mr. Sandeep Huilgol, Adv. for Mr. T.Suryanarayana, 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, Bangalore Bench 'A', Bangalore in IT[TP]A No.1031/Bang/2011 dated 23.09.2015, relating to the Assessment Year 2007-08 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, the Tribunal has Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 3/17 correctly allowed the software development expenses in foreign currency to exclude from the computing export turnover under section 10A of the Act to arrive at the total turnover at allowable deduction under section 10A of the Act?
2. Whether on the facts and in the circumstances of the case, the Tribunal erred in excluding comparables such as Kals Information Systems Ltd., Infosys Technologies Ltd., Tata Elxsi Ltd., Accel Transmatics Ltd., and Megasoft Ltd., Avani Transmatic Ltd., Celestial Labs Ltd., Ishir Infotech Ltd., Lucid Software Ltd., Wipro Ltd., E-Zest Solutions Ltd., Persistent Systems Ltd., Quintegra Solutions Ltd., Thirware Solutions Ltd., Helios & Matheson Information Technology Ltd., Flextronics Software Systems Ltd., and R.Systems Ltd and Sasken Communications Technologies Ltd., when the comparables chosen by TPO satisfies all the required tests and rejecting comparables on a filter which was not applied by the assessee themselves and TPO had based comparables on quantitative filter when company was similar?
3. Whether on the facts and in the circumstances of the case, the Tribunal erred in excluding comparables such M/s. Maple e-
Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 4/17 Solutions Ltd., Bodhtree Consulting Ltd., Goldstone INfratech Ltd., Spanco Ltd., Eclerx Service Ltd., Wipro Ltd., HCL Connect Systems and Caliber Point Business Ltd., when the said comparables are directly similar to assessee company activities and analyses?
4. Whether on the facts and circumstances of the case, the Tribunal is right in directing the TPO to apply turnover filter without any evidence in support of correlation between turnover and the profitability?
5. Whether on the facts and circumstances of the case, the Tribunal is right in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding the comparables?"
Regarding Substantial Question No.1:
2. The issue is covered by the decision of 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).
Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 5/17
3. 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 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.
Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 6/17
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".
4. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under:
Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 7/17 Regarding Substantial Question Nos.2, 4 & 5:
"23. We have perused the orders and heard the rival contentions. In so far as Accel Transmatic Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd,, Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Quintegra Solutions Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd (seg) and Wipro Ltd (seg) are concerned, the issue of comparability of these companies had come up before this Tribunal in the case of NXP Semiconductors India P. Ltd (supra). Analysis done in the said decision was also for software development services segment and the TPO in the said case had also selected the very same set of 26 companies. Said decision being for the very same assessment year 2007-08, we are of the opinion that it can be taken as a good precedence for deciding the issue of comparability raised by the assessee herein, in so far as these companies are concerned. This Tribunal had observed as under :
xxxxx Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 8/17
24. No doubt if we follow the above decision M/s. Accel Transmatic Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-
Zest Solutions Ltd,, Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Quintegra Solutions Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd (seg) and Wipro Ltd (seg) have to be excluded from the list of comparables. However out of these, M/s. Accel Transmatics Ltd (seg), Quintegra Solutions Ltd and Tata Elxsi Ltd (seg) were a part of assessee's own TP study. Hon'ble Punjab & Haryana High Court in CIT v. Quark Systems India (P) Ltd (supra), upheld the Special Bench decision in DCIT v. Quark Systems (P) Ltd [(2010) 42 DTR 414], noting that latter had only remitted the issue of comparability of comparables considered in assessee's own TP study, back to TPO. Hence we are of the opinion that the issue of comparability of these three companies have to go back to AO / TPO for consideration afresh. However M/s. Avani Cimcon Technologies Ltd, Celestial Lab Ltd, E- Zest Solutions Ltd, Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 9/17 Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Thirdware Solution Ltd (seg) and Wipro Ltd (seg) have to be excluded by virtue of coordinate bench decision in the case of NXP Semiconductors India Ltd (supra). Comparability of M/s. Accel Transmatics Ltd (seg), M/s. Quintegra Solutions Ltd and M/s. Tata Elxsi Ltd (seg) is remitted back to the AO / TPO for consideration afresh as per law. Ordered accordingly.
25. Vis-a-vis Megasoft Ltd, we find that coordinate bench of this Tribunal in the very case case of NXP Semi conductors India Ltd (supra) relying on its own earlier decision in Trilogy E- Business Software India Pvt.Ltd. Vs. DCIT [ITA No.1064/Bang/2011 for AY 07-08 order dated 23.11.2012] held it to be a good comparable, but had directed segmentation of its results. This Tribunal had directed that only the Blue Ally segment of the said company could be considered for comparison. Relevant findings of the Tribunal as it appears in the decision of NXP Semiconductors India Ltd (supra) is reproduced hereunder:
xxxxx Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 10/17
26. Now taking up the question of exclusion of Flextronics Software Systems Ltd (seg), it is true that the decision of Motorola Solutions (India) P. Ltd (supra) also was for the very same year and also on software development services sector. This Tribunal held as under:
xxxxx
27. Rule 10D(3) specifies the information and documents that are to be maintained by a person who is entering into international transactions. These are official publications, published accounts or those which are in public domain except for agreements and contracts to which assessee is privy. Once the annual report of a company is for a year different from the financial year ending 31st March, then without doubt, it will cease to be a good comparable, unless the information received in pursuance to a notice u/s.133(6) of the Act from such company, is reconciled with the figures available in such annual report.
28. In the case of Flextronics Software Systems Ltd (seg), no doubt the annual report was for the year ending 31.03.2007. However it was only for a nine months period. No Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 11/17 reconciliation was attempted by the lower authorities between the figures given in such annual report with the figures which were made available by the said company to the TPO pursuant to notice issued to them u/s.133(6) of the Act. No doubt at page 123 of TP order, TPO has stated that the software development service revenues were more than 75% based on the following figures :
xxxxx But how this segmentation was done by the TPO and the reconciliation of the said segmentation with the annual report of the assessee was never attempted or done. In such a situation we are of the opinion that Flextronics Software Solutions Ltd (seg) could not be considered as a proper comparable. We direct exclusion thereof.
29. Vis-a-vis R Systems International Ltd (seg), Mumbai bench of this Tribunal had held as under at para 7.1 and 7.2 in the case of Hapag Lloyd Global Services Pvt. Ltd (supra) :
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30. No doubt the above decision was for A. Y. 2005-06, but the annual report of the said company placed by the assessee at paper book page No.599 show that its final accounts were being prepared on a calendar year basis even after that. Profit and Loss account is for calendar year ending 31.12.2008 for the same reason as mentioned by the coordinate bench of Mumbai in the case of Hapag Lloyd Global Services P. Ltd (supra), we are of the opinion that R Systems International Ltd (seg) could not be considered as a proper comparable. We direct exclusion thereof.
31. As for Sasken Communication Technologies Ltd (seg), this Tribunal in the case of Motorola Solutions (India) P Ltd (supra), held as under at para 12 its order :
xxxxx If we follow the coordinate bench decision in the case of Motorala Solution (India) P. Ltd, Sasken Communication Technologies Ltd needs to be excluded. However, as mentioned by us at para 24 above, where the contested comparable formed part of assessee's own study, then the AO / TPO has to be given a chance for verification, in view of judgment of Hon'ble Pun jab & Haryana Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 13/17 High Court in the case of Quark Systems India P. Ltd (supra). Accordingly we remit the issue of comparability of Sasken Communication Technologies Ltd back to the AO / TPO for consideration afresh as per law. Ordered accordingly."
Regarding Substantial Question No.3:
"42. We have perused the orders and heard the rival contentions. Coordinate bench of this Tribunal has held in First Advantage Offshore Services P. Ltd (supra) that employee cost filter is one which had to be applied while selecting comparables in ITES segment. Tribunal held as under in its order :
xxxxx Above decision was also for A. Y. 2007-08. Thus there is doubt that employee cost filter necessarily has to be applied for ITES segment. However, what we find is that lower authorities had not applied this filter at all and also not worked out proportion of the employee cost with the total cost and total revenue. As per the assessee, if the employee cost filter of 25% is applied, Accentia Technologies Ltd, Asit C Mehta Financial Services Ltd, Informed Technologies Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 14/17 India Ltd, Spanco Ltd (seg) and Vishal Information Technologies Ltd, would go out of the list of comparables. We are of the opinion that this requires a fresh look by the AO / TPO. We therefore set aside the issue of comparability of the above five companies in the ITES segment and remit it back to the AO / TPO for consideration of the employee cost filter after verifying the work out submitted by the assessee in this regard. Ordered accordingly."
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/s.
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 Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 15/17 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 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 Date of Judgment 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 16/17 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 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 30-07-2018, ITA No.206 /2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Hewlett-Packard [India] Global Soft Pvt. Ltd., 17/17
7. Hence, the Appeal filed by the Appellants-
Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/-
JUDGE Sd/-
JUDGE AN/-