Karnataka High Court
The Commissioner Of Income Tax vs M/S Logica Private Ltd. on 12 July, 2018
Bench: Vineet Kothari, S.Sujatha
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IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 12TH DAY OF JULY 2018
PRESENT
THE HON'BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON'BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.338/2013
BETWEEN :
1. THE COMMISSIONER OF INCOME TAX
C.R. BUILDING, QUEENS ROAD
BANGALORE
2. THE ASSISTANT COMMISSIONER OF
INCOME TAX, CIRCLE- 11 (5)
RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE ...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s LOGICA PRIVATE LTD.,
DIVYASREE TECHNOPOLIS
NO.124-125, YEMLUR P.O.,
OFF AIRPORT ROAD
BANGALORE-560037 ...RESPONDENT
(BY SMT.MANASA ANANTHAN, ADV. FOR
SRI T.SURYANARAYANA, ADV.)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME
TAX ACT 1961, ARISING OUT OF ORDER DATED 28/02/2013
PASSED IN ITA NO.1129/BANG/2011, FOR THE ASSESSMENT
YEAR 20007-08, PRAYING TO: I. FORMULATE THE
Date of Judgment 12-07-2018, ITA No.338/2013
The Commissioner of Income Tax & another Vs.
M/s Logica Private Ltd.,
2/16
SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II.
ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY
THE ITAT, BANGALORE IN ITA NO.1129/BANG/2011 DATED
28/02/2013 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,
S. SUJATHA, J., DELIVERED THE FOLLOWING:
JUDGMENT
Mr. K.V. Aravind, Adv. for Appellants - Revenue. Ms. Manasa Ananthan, 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, 'A' Bench Bangalore, in IT [TP]A No.1129/Bang/2011 dated 28.02.2013, relating to the Assessment Year 2007-08.
2. This Appeal has been admitted on 24.03.2014. The substantial questions of law as framed by the Revenue in the Memorandum of Appeal read as under:
Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 3/16 "1. Whether on the facts and in the circumstances of the case and in law the Tribunal was right in super imposing the decisions of the other benches and the decision of the ITAT while rejecting the comparables (i) Accel Transmactic Limited, (ii) Avani Cimcon Technologies Limited,
(iii) Celestial Labs Limited (iv) KALS Information Systems Limited, (v) Lucid Software Limited (vi) Infosys Technologies Limited (vii) Wipro Limited -
IT Segment and (viii) Tata Elxsi Limited without appreciating the fact that selection of comparables in a case depends on assessee specific FAR analysis and recorded a perverse finding?
2. Whether on the facts and in the circumstances of the case and in law the Tribunal was right in directing that the segmental financials have to be considered as against the enterprise financials without appreciating the fact that at the enterprise level the comparable satisfied all the filters applied by the Transfer Pricing Officer and recorded a perverse finding?
3. Whether on the facts and in the circumstances of the case and in law the Tribunal was right in directing that segmental financials Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 4/16 have to be considered as against the enterprise level financials without appreciating the fact the Transfer Pricing Officer attracted the enterprise level financials as against the segmental financials with which he started, on the basis of the information gathered under Section 133(6) of the Act and detailed analysis thereof and recorded a perverse finding?
4. Whether on the facts and in the circumstances of the case and in law 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 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 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 5/16
6. Whether on the facts and in the circumstances of the case and in law the Tribunal was right in excluding Infosys Technologies Limited and Wipro Limited from the list of comparables due to premium branding without taking into consideration that brand is not a variable to determine the profit margin and recorded a perverse finding?
7. Whether on the facts and in the circumstances of the case and in law the Tribunal was correct in not appreciating the law laid down by the ITAT Vizag in the case of LG Polymers India Limited, wherein it held that "....brand is only one of the factors affecting profitability and not the only factor which affects profitability" and recorded a perverse finding?
8. Whether on the facts and in the circumstances of the case and in law the Tribunal was right in excluding Tata Elxsi Limited as a comparable on the ground that comparable is equal to product development, when the comparable was in software development like assessee and only the segmentals were considered and recorded a perverse finding?
Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 6/16
9. Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in allowing the deduction claimed under Section 10A of the Act by the assessee in respect of recruitment charges while re-allocating the entire expenses on the basis of turnover of 10A and non 10A units by the Assessing Officer, when the assessee has failed to provide the details of the employees recruited to STPI and non-STPI units alongwith the expenditure incurred on such recruitments?
10. Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in allowing the deduction claimed under Section 10A of the Act by the assessee with regard to the travel and conveyance charges while re-allocating the entire expenses on the basis of turnover of 10A and non 10A units by Assessing Officer when the assessee has not maintained a list of expenditures incurred on all such employees of the 10A units who have travelled outside on projects or used cars locally or utilized the per-diem expenses and recorded a perverse finding?"
Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 7/16 Regarding Substantial Question No.9:
3. The allocation of recruitment cost for Section 10A units deriving STPI and Non STPI units of the same Assessee is just and fair. We do not find any substantial question of law to be arising out of the said Order of the learned Tribunal.
Regarding Substantial Question No.10:
4. Similarly, insofar as travel and conveyance expenses are concerned, the matter has been remanded by the learned Tribunal to the Assessing Authority vide paragraph-38 of the said order which is quoted below for ready reference.
"38. As far as travel and conveyance expenses are concerned, the basis of allocation is on the basis of employees travelling for projects of 10A unit. There can be no objection for this allocation. As far as hotel expenses included in Travel and conveyance expenses is concerned, the basis of allocation is proportionate basis i.e., travel expenditure of 10A unit to the total travel expenditure. As rightly contended on behalf of the Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 8/16 revenue when the details of persons travelling for project of 10A unit is available there should be no difficulty in identifying the hotel expenses of employees travelling for project of 10A unit. But allocating such costs on the basis of turnover would also be not appropriate. We are of the view that it would be just and appropriate to set aside the order of the AO on this issue and direct the Assessee to give the details of hotel expenses of employees who travelled for projects of 10A unit and allocate expenses on the basis of available evidence direct or circumstantial."
We do not find any substantial question of law to be arising out of the said Order of the learned Tribunal.
Regarding Substantial Question Nos.1, 3, 4, 6, 7 & 8:
5. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under:
"12. The next aspect which was highlighted by the ld. counsel for the assessee was that out of the 26 comparables, comparables at Sl.No.1, 2, 3 & 12 have to be rejected as they were held to be functionally not similar to a software services Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 9/16 provider as held by this Tribunal in the case of Trilogy E-business Software India Pvt. Ltd., IT No.1054/Bang/2011. The relevant paragraphs 39 to 50 of the aforesaid order of the Tribunal are as follows:-
xxx xxx xxx
13. So also, the comparables listed at Sl.Nos. 10, 14 and 26 have to be rejected as functionally not comparable with that of the assessee in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. in ITA No.7821/MUM/2011, wherein it was held as under:-
xxx xxx xxx 14. As far as comparable at Sl.No.6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:-
xxx xxx xxx Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 10/16
15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable.
16. On the above submissions of the ld. counsel for the assessee, the ld. DR submitted that as far as functional comparability is concerned, it is not enough only to look at the fact that in the decisions relied upon by the ld. counsel for the assesse, also dealt with the case of software development and the assessee is also a software developer rendering software development services. It was his submission that the aforesaid companies even if they are engaged in providing software services, can be engaged in different sectors to which they cater, like software development in telecommunication, automobile manufacturing sector, etc. It was his submission that it was also necessary to consider as to whether the sectors in which the comparable chosen by the TPO belong and the sector to which the Assessee caters.
Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 11/16
17. We have considered the submissions of the ld. counsel for the assessee and the ld. DR. We are of the view that the comparables which are sought to be excluded by the ld. counsel for the assessee have been held to be not comparable with the case of software service provider, in as much as these companies did not satisfy the functional similarity test. E.g., in the case of company at Sl.No.2 of the list of comparables chosen by the TPO viz., Avani Cincom Technologies Ltd., this Tribunal had taken a view that income of this company from rendering software services and sale of software was not available and therefore this was rejected as a comparable company. Similarly, in the case of Celestial Labs Ltd., the Tribunal took a view that this company was engaged in R&D activity and cannot be compared with a software service provider. It is thus clear that the reason given by the Tribunal in the cases referred to by the ld. counsel for the assessee will equally apply to the present case also. We therefore accept the submissions made on behalf of the assessee and hold that companies at Sl.No.1, 2, 3, 10, 12, 14, 24 & 26 be excluded from the list of comparables chosen by the TPO while computing the ALP."
Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 12/16 Regarding Substantial Question No.2:
"18. As far as Sl.No.16 viz., Megasoft is concerned, only software services segment margin is to be taken as held by this Tribunal in the case of Trilogy E-business Software India Pvt. Ltd. (supra). The relevant observations of the Tribunal are at paragraphs 24 to 38 of the order of the Tribunal in that case which reads as under:-
xxx xxx xxx"
Regarding Substantial Question No.5:"19. As far as comparables at Sl.No.7 & 11
are concerned, it is not in dispute before us that the related party transaction in the case of companies exceed 15% and in view of the decision of the Tribunal in the case of 24 X 7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010, that where the RPT exceeds 15%, such companies should not be taken as comparables, we hold that companies at Sl.Nos. 7 and 11 of the list of the comparables chosen by the TPO be excluded from the list of comparable companies while working out the ALP."
Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 13/16
6. 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 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 Date of Judgment 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 14/16 (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 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 15/16
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."
7. 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 12-07-2018, ITA No.338/2013 The Commissioner of Income Tax & another Vs. M/s Logica Private Ltd., 16/16
8. Hence, the Appeal filed by the Appellants-
Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/-
JUDGE Sd/-
JUDGE AN/-