Karnataka High Court
The Pr. Commissioner Of Income Tax ... vs M/S Ids Software Solutions India Pvt Ltd on 11 October, 2018
Bench: Chief Justice, S G Pandit
ITA.No.496/2017
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 11TH DAY OF OCTOBER , 2018
PRESENT
HON'BLE MR.JUSTICE DINESH MAHESHWARI, CHIEF JUSTICE
AND
HON'BLE MR.JUSTICE S.G.PANDIT
I.T.A. NO.496 OF 2017
BETWEEN:
1. THE PR. COMMISSIONER OF INCOME TAX, CIT(A)
5TH FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560 095.
2. THE INCOME TAX OFFICER
WARD-11(2), PRESENT ADDRESS
ACIT, CIRCLE 3(1)(1)
2ND FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560 095. ... APPELLANTS
(BY SRI. ARAVIND K.V., ADVOCATE )
AND:
M/S. IDS SOFTWARE SOLUTIONS INDIA PVT. LTD.,
6TH FLOOR, TOWER D
DIAMOND DISTRICT
AIRPORT ROAD
BENGALURU-560 066
PAN: AABCI 2430G. ... RESPONDENT
(BY SRI. ANKUR PAI D, ADVOCATE FOR
SRI. K R VASUDEVAN, ADVOCATE )
+++++
ITA.No.496/2017
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THIS ITA IS FILED UNDER SECTION 260-A OF INCOME
TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL
QUESTIONS OF LAW STATED ABOVE; ALLOW THE APPEAL AND
SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX
APPELLATE TRIBUNAL, BENGALURU IN IT(TP)A
NO.154/BANG/2015 DATED: 28.11.2016, ANNEXURE-D
CONFIRMING THE ORDER OF THE DRP AND CONFIRM THE
ORDER PASSED BY THE ASST. COMMISSIONER OF INCOME
TAX, CIRCLE-3(1)(1), BENGALURU.
THIS ITA COMING ON FOR ADMISSION, S.G.PANDIT.J.,
DELIVERED THE FOLLOWING:
ORDER
The Revenue seeks to maintain this appeal against the order dated 28.11.2016, as passed by the Income Tax Appellate Tribunal, Bengaluru (hereinafter referred to as 'the Tribunal' for short), in IT(TP)A No.154/Bang/2015, while suggesting the following substantial questions of law in this appeal:
1. "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the re-computation of 10A deduction made by the assessing authority by following the decision of this Hon'ble High Court in the case of CIT v/s. M/s. Tata Elxy (349 ITR page
98) even when the said decision has not reached the finality?"
2. "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in allowing the claim of write off of rental deposits of Rs.20 lakhs by holding that the loss of money is in the course of business even when the ingredients of section 37(1) of the Act are not ITA.No.496/2017 -3- satisfied as the nature of expenditure is capital in nature?"
3. "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that certain comparables are functionally different and liable to be excluded from the list of comparables by following its earlier orders which has not reached finality and even when the Transfer Pricing Officer has chosen the comparables as qualitative and quantitative filters are fully satisfied in the case of each comparables?"
4. "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the Transfer Pricing Officer to grant Market Risk Adjustment without appreciating that risk adjustment involves two vital pre-conditions i.e., with regard to difference in risk level exist between tested party and the uncontrolled comparables which is possible to calculate in terms of numbers and the adjustment can be made in such circumstances only and in the present case both the aspects were not established by the assessee?"
The relevant background aspects of the matter are as follows:
The respondent-assessee who is in the business of software development filed e-return for the assessment year 2010-2011 declaring NIL income after claiming deduction under Section 10A of the Income-Tax Act, 1961 (hereinafter referred to as 'the Act' for short). The case of the assessee was taken up for scrutiny. The assessee made available the necessary ITA.No.496/2017 -4- information and records before the Assessing Officer. The Assessing Officer considered it necessary to refer the computation of the Arms Length Price in relation to the international transaction of the assessee to the Transfer Pricing Officer (for short 'the TPO'). After obtaining prior approval of the Commissioner of Income Tax, the assessing officer by his letter dated 13.08.2012 referred the case of the assessee under Section 92CA of the Act to the TPO. The TPO issued show-
cause notice dated 17.09.2013 proposing to make necessary transfer pricing adjustment rejecting the transfer pricing documents produced by the assessee. The assessee submitted his reply dated 07.11.2013 to the above show-cause notice.
The TPO held that transfer pricing documents of the assessee is based on unreliable data and rejected the transfer pricing documents and proceeded to determine the arms length price of the international transactions of the assessee on the basis of the material available on record.
The assessee raised objection before the Dispute Resolution Panel (for short 'the DRP') on the finding of the TPO.
On consideration of the objections of the assessee, the DRP directed the Assessing Officer to exclude telecommunication ITA.No.496/2017 -5- and foreign travel expenses from 'total turnover' for computing deduction under Section 10A of the Act. With regard to deposit of Rs.20,00,000/- for occupying additional space, the DRP held that the loss on account of the deposit being advanced for lease of additional space cannot be said to be capital in nature and as the loss of money is in the course of business, the same has to be allowed as deduction from profit having been written off as irrecoverable. In respect of set off of brought forward losses, the DRP directed the Assessing Officer that only unabsorbed loss allowed to be carried forward to assessment year 2010-2011, should be set-off against the taxable income, as per law. The Assessing Officer accordingly passed the assessment order dated 24.12.2014.
Aggrieved by the order of the Assessing Officer dated 24.12.2014, the Revenue filed appeal before the Income-Tax Appellate Tribunal, Bengaluru Bench, Bengaluru in IT(TP) A No.154/Bang/2015. The assessee filed cross-objection in C.O.No.107/B/15. The Tribunal by its order dated 28.11.2016 partly allowed the Revenue's appeal directing the TPO to rework the PLI after taking into consideration finding of the Tribunal with respect to the comparable companies and affirmed the order of ITA.No.496/2017 -6- the Assessing Officer in all other respects. The Cross-appeal of the assessee was dismissed as infructuous. The Revenue, aggrieved by the order of the Tribunal is before this Court in this appeal suggesting the above substantial questions of law.
Having heard the learned counsel for the appellants and having perused the material placed on record, we are clearly of the view that the questions of law, as proposed, do not arise in this matter and this appeal does not merit admission.
So far question No.1 is concerned, it remains indisputable that the Hon'ble Supreme Court in the case of Commissioner of Income-tax, Central-III v. HCL Technologies Ltd.: (2018) 93 taxmann.com 33 (SC), at paragraphs 10, 12, 15, 17, 19, 20 and 21 has held as follows:
"10. The question arises here that when the particular term has not been defined in any particular Section, is it allowed to import the meaning of such term from the other provisions of the same Act? Section 10A of the IT Act is a special beneficial provision and the purpose of deduction under such Section is to encourage and boost the new business undertakings situated in the free trade zone of this Nation by providing suitable deductions to such business entities. Sometimes, while calculating the deduction, disputes arise regarding the methodology of deduction which ought to be followed. Undisputedly, it is a matter of record that the Respondent is engaged in the activity of trading ITA.No.496/2017 -7- of generic software and providing customized software development services for domestic as well as for foreign clients through its two units situated in Software Technology Park, Gurgaon (now Gurugram) which falls under the definition of the Section 10A of the IT Act. The contention of the Respondent is that it incurred expenditure in foreign exchange in sending professionals abroad as per the agreements with the foreign constituents.
12. It is undisputed fact that the Respondent was engaged in the business of software development for its customers engaged in different activities at software development centres of the Respondent. However, in the process of such customized software development, certain activities were required to be carried out at the sight of customers on site, located outside India for which the employees of the branches of the Respondent located in the country of the customers are deployed. It is true that it is not defined that which activity will be termed as providing technical services outside India. Moreover, after delivery of such softwares as per requirement, in order to make it fully functional and hassle free functioning subsequent to the delivery of softwares in many cases, there can be requirement of technical personnel to visit the client on site. The Assessing officer could not bring any evidence that the Respondent was engaged in providing simply technical services independent to software development for the client for which the expenditures were incurred outside India in foreign currency.
15. A Statute is the intention of the legislature who enacts it after having regard to various facts and circumstances. It is a cardinal principle of law that the interpretation by the Court shall be done in such a way that the intention of the legislature shall prevail and no injustice occurred with parties. The rule of harmonious construction is the thumb rule to ITA.No.496/2017 -8- interpretation of any statue. An interpretation which makes the enactment a consistent whole, should be the aim of the Courts and a construction which avoids inconsistency or repugnancy between the various sections or parts of the statute should be adopted.
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.com100/349 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 form 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.
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.ITA.No.496/2017 -9-
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.
21. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover".
In the above decision, the Apex Court has taken note of the decision of this Court in TATA ELXSI LTD., and has approved the same holding that what is excluded from 'export turnover' must also be excluded from 'total turnover', since one of the components of 'total turnover' is export turnover. Hence, the substantial question of law as suggested at (1) would no more survives for consideration.
So far question Nos.3 and 4 are concerned, it again remains indisputable that this Court in the case of Principal Commissioner of Income Tax, Bangalore v. Softbrands India (P) Ltd.: (2018) 94 taxmann.com 426 (Karnataka), at paragraphs 44, 45 and 54 has held as follows: ITA.No.496/2017
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"44. This court cannot be expected to undertake the exercise of comparison of the comparables itself which is essentially a fact finding exercise. Neither the sufficient Data nor factual informations nor any technical expertise is available with this Court to undertake any such fact finding exercise in the said appeals under Section 260-A of the Act. This Court is only concerned with the question of law and that too a substantial one, which has a well defined connotations as explained above and findings of facts arrived at by the Tribunal in these type of assessments like any other type of assessments in other regular assessment provisions of the Act, viz. Sections 143, 147 etc. are final and are binding on this Court. While dealing with these appeals under Section 260-A of the Act, we cannot disturb those findings of fact under Section 260-A of the Act, we cannot disturb those findings of the fact under Section 260-A of the Act, unless such findings are ex-facie perverse and unsustainable and exhibit a total non-application of mind by the Tribunal to the relevant facts of the case and evidence before the Tribunal.
45. Otherwise if the High Court takes the path of making such a comparative analysis and pronounces upon the questions as to which Filter is good and which comparable is relay comparable case or not, it will drag the High Courts into a whirlpool of such Data analysis defeating the very purpose and purport of the provisions of Section 260-A of the Act. Therefore what we observed above appears to us to be the sustainable view that the key to the lock for entering into the jurisdiction of High Court under Section 260-A of the Act is the existence of a substantial question of law involved in the matter. The key of ex-facie perversity of the findings of the Tribunal duly established with the relevant evidence and facts. Unless it is so, no other key or for that matter, even the in-consistent view taken by the Tribunal in different cases depending upon the relevant facts available before ITA.No.496/2017
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it cannot lead to the formation of a substantial question of law in any particular case to determine the aspects of determination of 'Arm's Length Price' as is sought to be raised before us.
54. The procedure of assessment under Chapter X relating to international transactions as indicated above is already a lengthy one involves multiple Authorities of the Department. A huge, cumbersome and tenacious exercise of Transfer Pricing Analysis has to be undertaken by the Corporate Entities who have to comply with the various provisions of the Act and Rules with a huge Data Bank and in the first instance they have to satisfy that the profits or the income from transactions declared by them is at 'Arm's length' which analysis is invariably put to test and inquiry by the Authorities of the Department and through the process of Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) and the Tribunal at various stages, the assessee has cumbersome task of compliance and it has to satisfy the Authorities that what has been declared by them is true and fair disclosure and much of the Transfer Pricing Adjustments is not required but the tax Authorities have their own view on the other side and the effort on the part of the Tax Revenue Authorities is always to extract more and more revenue. This process of making huge Transfer Pricing Adjustments results in multi layer litigation at multiple Fora. After the lengthy process of the same, the matter reaches the Tribunal which also takes its own time to decide such appeals. In the course of this dispute resolution, much has already been lost in the form of time, man-hours and money, besides giving an adverse picture of the sluggish Dispute Resolution process through these channels. If appeals under Section 260-A of the Act were to be lightly entertained by High Court against the findings of the Tribunal, without putting it to a strict scrutiny of the existence of the substantial questions of law, it is likely to open the flood-gates for this litigation to spill ITA.No.496/2017
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over on the dockets of the High Courts and up to the Supreme Court, where such further delay may further cause serious damage to the demand of expeditious judicial dispensation in such cases."
In view of the above, the substantial questions of law as suggested at (3) and (4) do not remain for consideration.
So far as question No.2 is concerned, it is noticed that Rs.20,00,000/- has been paid as advance for occupying additional space. The assessee claimed deduction of the said amount. It is the claim of the assessee that the advance was given to landlord for occupying additional floor space for expanding its business, which would have increased its overall profitability. But the contract got terminated which resulted in loss of the said amount of Rs.20,00,000/- paid to the landlord. In the draft assessment order, the Assessing Officer had held that the rental deposit is in the nature of capital investment and it is not adjustable out of future rental expenditure. But the DRP held that advance deposit for lease of additional space would not amount to capital in nature and allowed deduction from profit. The Tribunal found that the amount is towards advance for lease of additional space and the loss of money is in the course of business which amount has been written off as ITA.No.496/2017
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workable capital. It is not in dispute that the assessee had paid a sum of Rs.20,00,000/- towards advance for lease of additional space for its business expansion. Due to breach of contract the assessee has suffered loss of Rs.20,00,000/- as the assessee could not recover the same, which amount is written off as irrecoverable. The finding arrived at by the Tribunal as well as the Commissioner is a finding of fact which would not give rise to any substantial question of law.
In view of the above, the appeal fails and is, therefore, dismissed.
Sd/-
CHIEF JUSTICE Sd/-
JUDGE mpk/-*CT:SK