Karnataka High Court
The Commissioner Of Income Tax vs M/S Huawei Technologies on 23 July, 2018
Bench: Vineet Kothari, S.Sujatha
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IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 23rd DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON'BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.503/2014
BETWEEN:
1. THE COMMISSIONER OF INCOME-TAX
C.R. BUILDING, QUEENS ROAD
BANGALORE.
2. THE INCOME-TAX OFFICER
WARD-11(2)
RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE-560 001.
...APPELLANTS
(By Mr. K.V. ARAVIND, ADV.)
AND:
M/S HUAWEI TECHNOLOGIES
INDIA PRIVATE LIMITED
LEVEL-3, LEELA GALLERIA
THE LEELA PALACE, 23
AIRPORT ROAD, BANGALORE-560008.
...RESPONDENT
(By Mr. S. SHARATH, ADV., FOR
Mr. CHYTHANYA K.K. ADV.,)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF THE IT
ACT, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS
OF LAW STATED ABOVE. ALLOW THE APPEAL AND SET ASIDE
Date of Judgment 23-07-2018 I.T.A.No.503/2014
The Commissioner of Income-Tax & Anr.
Vs. M/s. Huawei Technologies India Private Limited
2/14
THE ORDERS PASSED BY THE INCOME-TAX APPELLATE
TRIBUNAL, BANGALORE IN ITA No.583/BANG/2012 DATED 18-
07-2014, AND CONFIRM THE ORDER OF THE APPELLATE
COMMISSIONER CONFIRMING THE ORDER PASSED BY THE
INCOME TAX OFFICER, WARD-11(2), BANGALORE.
THIS I.T.A. COMING ON FOR ORDERS, 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. for Respondent - Assessee
1. The Appellants-Revenue have filed this appeal u/s.260A of the Income Tax Act, 1961, raising purportedly certain substantial questions of law arising from the order of the ITAT, 'A' Bench, Bangalore, dated 18.07.2014 passed in IT(TP)A No.583/Bang/2012 (M/s. Huawei Technologies India Private Limited vs. The Income Tax Officer) for A.Y.2007-08.
2. This appeal has been admitted on 08.09.2015 to consider the following substantial questions of law Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr. Vs. M/s. Huawei Technologies India Private Limited 3/14 framed by the learned counsel for the Appellants-
Revenue:-
"1. Whether on the facts and circumstances of the case the Tribunal was correct in excluding Rs. Systems International Ltd., (Seg) from the list of comparables chosen by the TPO without adjudicating on the ground of appeal of the revenue on the issue of exclusion of this comparable by the Commissioner of Income Tax (Appeals) which was included by the TPO in the list of comparables?
2. Whether on the facts and circumstances of the case, the Tribunal was correct in reducing the number of comparables to 8 from the 26 comparables adopted by the TPO by applying/rejecting various filters without appreciating that if any filter or criteria applied by the assessee for search of comparables is accepted or if any filter or criteria applied by the TPO is relaxed, the entire accept/reject matrix changes resulting in a new set of comparables including such comparables which were neither taken either by the assessee or by the TPO and which may not be finding a place in the TPO order?
Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr. Vs. M/s. Huawei Technologies India Private Limited 4/14
3. Whether on the facts and circumstances of the case, the Tribunal was correct in reducing the number of comparables to 8 from the 26 comparables adopted by the TPO by applying/rejecting various filters without appreciating that any disturbance in any one of the criteria of the assessee or the TPO results in a fresh comparability analysis and such a piecemeal approach negates the whole concept of comparability analysis?
4. Whether on the facts and circumstances of the case, the Tribunal was correct in relying upon the decisions in the case of other assessees to reject the comparables without appreciating that selection of comparables in a case depends on assessee specific FAR analysis and that the Tribunal ought to have decided the comparability of the companies on the basis of the specific facts brought on record by the TPO in the case of the assessee?
5. Whether on the facts and circumstances of the case, the Tribunal was correct in holding that KALS Information Systems Ltd., Acccel Transmatics Ltd., Lucid Software Ltd., Avani Cimcon Technology Ltd., Celestial Labs Ltd., Thirdware Solutions Ltd., cannot be Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr. Vs. M/s. Huawei Technologies India Private Limited 5/14 taken as a comparable as they are functionally different without appreciating that the said comparables satisfies all the qualitative and quantitative filters applied by the TPO?
6. Whether on the facts and circumstances of the case, the Tribunal was correct in holding that Thirdware Solutions cannot be functionally comparable by relying on the decision of the Hyderabad Tribunal in the case of Intoto Software India Pvt. Ltd., in ITA No.2102/Hyd/2011 for assessment year 2007- 08 without appreciating that the comparable is a pure software services provider just like the assessee company?
7. Whether on the facts and circumstances of the case, the Tribunal was correct in excluding Geometric Ltd., (Seg) and Ishir Infotech Ltd., from the list of comparables without adjudicating on the comparability of these companies?
8. Whether on the facts and circumstances of the case, the Tribunal was correct in relying upon the decisions in the case of other assessees to reject the comparables without appreciating that selection of comparables in a Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr. Vs. M/s. Huawei Technologies India Private Limited 6/14 case depends on assessee specific FAR analysis and that the Tribunal ought to have decided the comparability of the companies on the basis of the specific facts brought on record by the TPO in the case of the assessee?."
3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to 'Transfer Pricing' and 'Transfer Pricing Adjustments' made by the concerned authorities below. We consider it appropriate to quote the relevant portions hereunder:-
" 17. Respectfully following the decision of the Tribunal referred to above, we hold that the comparable chosen by the TPO given in para-12 of this order at Sl.Nos. 6,9,10,17,18, 22, 24 & 26 have to be excluded as comparables for the purpose of determining the ALP of the impugned transaction in this appeal.
18. 2 comparables at sl.no.14, 22 of the chart of comparable chosen by the TPO viz., Accel Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr. Vs. M/s. Huawei Technologies India Private Limited 7/14 transmatic Ltd. And KALS Information Systems Ltd. (Seg.) have been held to be functionally dissimilar to that of a pure software service provider in the decision of the Tribunal in assessee's own case for AY 2006-07 and also in the case of Triology E-Business Software India P. Ltd (ITA No.1338/Bang/2010) for same assessment year. The relevant observations of these two comparable companies in the case of Triology E-Business Software India Pvt.Ltd. (supra) are as follows:
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19. In view of the aforesaid decision of the Tribunal, comparable at Sl.No.14 and 22 of the Chart given at Para-12 of this order is directed to be excluded from the list of comparables.
20. As far as comparable at Sl.No.23 of the list of comparable companies chosen by the TPO listed in para-12 of this order viz., Lucid Software Ltd. from the list of comparables chosen by the TPO is concerned, 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 Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr.
Vs. M/s. Huawei Technologies India Private Limited 8/14 Lucid Software Ltd. with similar software services provider and the Tribunal held as follows:-
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21. In view of the aforesaid decision of the Mumbai Bench of the Tribunal, which is also in relation to A.Y. 2007-08, we are of the view that the said company Sl.No.23 of the list of comparable listed by the TPO at para-12 of this order is to be excluded as a comparable while determining the ALP of the international transaction impugned in this appeal.
22. As far as comparables at Sl.Nos.16 & 21 viz., Avani Cimcon Technologies Ltd. And Celestial Labs Ltd., of the chart of comparable chosen by the TPO listed in para-12 of this order, 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. The following are the relevant observations of the Tribunal in this regard:-
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23. In view of the aforesaid decision of the Tribunal, comparables at Sl.Nos.16 and 21of the Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr.
Vs. M/s. Huawei Technologies India Private Limited 9/14 list of comparables chosen by the TPO listed para- 12 of this order have to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal.
24. As far as comparable company listed as Sl.NO.20 in the chart of comparable companies chosen by the TPO at para-12 of this order viz., M/S.Thirdware Solutions Ltd. Is concerned, the same has been held to be functionally not comparable with a pure software service provider like that of the Assessee by the Hyderabad Bench of ITAT in the case of Intoto Software India Private Ltd. Vs. ACIT ITA No.2102/Hyd/2011 for AY 07-08. In view of the aforesaid decision, we direct that the comparable company at S.No.20 of the list of comparable company chosen by TPO be excluded from the comparable companies.
25. As far as companies at Sl.No.10 of the list of comparable chosen by the TPO give in para-12 of this order is concerned viz., M/S.Helios & Matheson Information Technology Ltd., the export revenue is less than 75% and therefore applying the filter of export turnover of less than 75% of the total revenue, this company has to be excluded from the list of comparable Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr. Vs. M/s. Huawei Technologies India Private Limited 10/14 companies. This filter is an accepted filter in the matter of choosing comparable companies.
26. As far as Sl.No.24 viz., Megasoft Ltd. of the list of comparables chosen by the TPO given in the chart at para-12 of this order is concerned, this Tribunal in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) had held that only segmental data should be taken for the purpose of comparison. Following are the relevant observations of the Tribunal:-
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27. In view of the aforesaid decision of the Tribunal, segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison.
28. As far as comparable company chosen by the TPO listed as Sl.no.8 in the list of comparable companies chosen by TPO given in para-12 of this order viz., M/S.Mediasoft Ltd., it is the plea of the Revenue as well as the Assessee before us that it has to be included in the list of comparable companies. The CIT(A) directed its exclusion for the reason that the margin of this company was less than that of the Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr. Vs. M/s. Huawei Technologies India Private Limited 11/14 Assessee's margin. This Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) had held that functional comparability has to be seen and low or high margin cannot be the criteria to include or exclude a company for the purpose of comparability. In the view of the above decision, we direct inclusion of this company as a comparable company.
29. Out of the 26 comparables chosen by the TPO and after excluding the comparables referred to in the earlier paragraphs, the comparable companies that would remain for comparison would be 8 (as given in the chart at para-13 of this order) with arithmetic mean of 14.28% which is within the (+) (-) 5% range of the Net margin of the Assessee which is 9.43% . Consequently the addition made by the AO and confirmed by the CIT(A) by way of adjustment to the Arm's length price deserves to be deleted and is hereby deleted. The relevant grounds of appeal of the Assessee are accepted and those of the Revenue to the extent mentioned in this order are rejected".
4. However, this Court in a recent judgment in ITA No.536/2015 C/w ITA No.537/2015 delivered on Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr. Vs. M/s. Huawei Technologies India Private Limited 12/14 25.06.2018 (Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable.
The relevant portion of the said 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 in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr.
Vs. M/s. Huawei Technologies India Private Limited 13/14 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.
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 Date of Judgment 23-07-2018 I.T.A.No.503/2014 The Commissioner of Income-Tax & Anr. Vs. M/s. Huawei Technologies India Private Limited 14/14 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."
5. Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly.
No costs.
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JUDGE Sd/-
JUDGE Srl.