Karnataka High Court
Commissioner Of Income Tax vs M/S Sap India Pvt Ltd on 9 July, 2018
Bench: Vineet Kothari, S.Sujatha
1/21
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.23/2011
Between:
1. Commissioner of Income Tax,
C.R. Building, (Central) Queens Road,
Bangalore - 560 001.
2. Assistant Commissioner
of Income Tax, Circle 12(3),
Bangalore.
...Appellants
(By Mr. E.I. Sanmathi. Advocate)
And:
M/s SAP India Pvt. Ltd.,
No.138, Export Promotion
Industrial Park, White field,
Bangalore - 560 066.
...Respondent
(By Mr. P.Dinesh, Advocate -Absent)
This I.T.A. is filed under Section 260-A of Income Tax
Act 1961, praying to: Formulate the substantial questions of
law; Set aside the appellate order dated:30-08-2010 passed
Date of Judgment 09-07-2018 I.T.A.No.23/2011
Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd.,
2/21
by the ITAT, 'A' Bench, Bangalore, in appeal proceedings ITA
No.418/Bang/2008, Annexure -A & grant such other relief
as deemed fit in the interest of justice & etc.
This I.T.A. coming on for hearing, this day
Dr. Vineet Kothari J. delivered the following:-
JUDGMENT
Mr. E.I. Sanmathi. Adv. for Appellants - Revenue Mr. P.Dinesh. Adv. for Respondent - Assessee
1. The Appellants - Revenue have filed this appeal raising purported substantial questions of law arising from the Order of the learned Income Tax Appellate Tribunal Bangalore Bench "A", Annexure A dated 30/08/2010 in ITA.No.418/Bang/2008 for AY 2003-
04.
2. The Revenue has suggested ten substantial questions of law in the present appeal which are quoted below for ready reference:-
"a. Whether under the facts and circumstances of the cases, the tribunal is justified in law in including foreign exchange gain as part of operating revenues even though foreign exchange gain is not related to Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 3/21 the business operations of the company and is dependent on external factors like money supply, inflation, Govt. policy etc?
b. Whether under the facts and circumstances of the case, the tribunal is justified in law in equating business income/sales with operating revenues and thus concluding that foreign exchange gain forms part of operating revenues even when the same is not permissible under law?
c. Whether on the facts and circumstances of the case the tribunal is justified in law in concluding that the assessee company is a risk mitigated entity without appreciating the facts of the case that the assessee company is also assuming risks like single customer risk and political country risks, which otherwise are not assumed by the comparable companies selected by the TPO/AO.
d. Whether on the facts and circumstances of the case tribunal is justified in law in rejecting Hinduja TMT Ltd., and Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 4/21 Aftek Infosys Ltd., as a comparable stating that these companies earned super profits without mentioning the bench marked for profitability above which a company can be considered as earning super profits in the software services industry in which the taxpayer is operating?
e. Whether the tribunal is justified in law in rejecting Hinduja TMT Ltd. and Aftek Infosys Pvt. Ltd., as a comparable stating that these companies earned super profits without mentioning any peculiar economic circumstances that resulted so called high/super profits?
f. Whether tribunal is right in law in holding that arm's length price adjustment is to be made only after allowing +/-5% from the arithmetic mean price as per the proviso to section 92C(2) even when the price charged by the assessee falls beyond +/-5% from the arithmetic mean price?
g. Whether tribunal is right in law in holding that arm's length price adjustment is to be made only after allowing +/-5% from the Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 5/21 arithmetic mean price as per the proviso to section 92C(2) even when they said proviso is amended to clarify the position as it was?
h. Whether the tribunal is right in law in holding that the amended proviso to section 92C(2) is not applicable to the A.Y.2003-04 as the amendment is made effective from 01-10-2009 even though it is a clarificatory amendment as evidenced by Memorandum to the Finance Bill (2) of 2009?
i. Whether the tribunal erred in rejecting Geometric Software Solutions Co. Ltd., as a comparable, without giving any valid reasons and also when the company is functionally similar to the assessee?
j. Whether on the facts and in the circumstances of the case, the tribunal is correct in law in directing the assessing office to exclude Telecommunication expenses of Rs.35,83,051/- which are incurred for delivery of software from total turnover also since the definitions given in section 10A of the I.T.Act has not defined total turnover for the purpose of the section 10A of the I.T.Act?"
Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 6/21
3. The appeal was admitted by the Co-ordinate Bench of this Court on 12-12-2011 with the following four Substantial Questions of law:-
"a. Whether on the facts and circumstances of the case, the Tribunal is correct in law in holding that foreign exchange fluctuation gains constitute part of operating revenue of the assessee for purpose of determination of arms length price under the provisions of Section 92-C of the Income Tax Act, 1961?
b. Whether Tribunal is justified in rejecting comparable cases adopted by transfer pricing officer for purpose of determination of arms length price and whether the rejection of such comparables by the Tribunal is sustainable in law?
c. Whether the Tribunal is correct in law in interpreting the proviso to sub-section (2) of Section 92-C of the Income Tax Act as mandatorily providing for deduction of +/-5% benefit and whether such interpretation is sustainable having regard to subsequent Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 7/21 amendment by the Finance Act, 2009 being of clarificatory in nature?
d. Whether the Tribunal is correct in law in directing the Assessing Officer to exclude Telecommunication expenses in the computation of deduction under section 10A of the I.T.Act?"
4. In so far as the substantial question of law (a) to (c) framed by the Co-ordinate Bench of this Court is concerned, the learned ITAT in its Order dated 30/08/2010 has given the findings, the relevant portion of which is quoted below for ready reference:-
"42. We considered the issue carefully. The foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business. This proposition has been time and again considered in cases arising in the context of sec.80HHC. The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-
Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 8/21 assessee. Useful reference may be made to the decisions of Bombay High Court in the case of Shah Brothers Vs. CIT, [259 ITR 741]; that of Gujarat High Court in the case of CIT Vs. Ambha Infex, [284 ITR 144] and that of Mumbai ITAT Spl. Bench in the case of ACIT Vs. Prakash L Shah, [306 ITR (AT) 01]. In all the above cases, the dominant question considered was the year of deduction on the accepted proposition that the foreign exchange fluctuation gains computed by an assessee in a relevant previous year should be treated as part of the operating income and thereby it would contribute to the operating margin of the assessee company. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company. This contention of the assessee is accepted.
43 to 52 ... ... ...
53. We considered the issue. It is to be seen that the assessee company does not have much open market operations like other Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 9/21 independent competitors operating in the market. The assessee is one of the world centers established by its holding company, M/s SAP AG in India to provide R & D and Software Technology Services, almost carrying on, back office operations. The agreement between the assessee and its holding company stipulates the remuneration at cost plus 6% or total wages bill, whichever is higher. Therefore, it is to be seen that the assessee company, as such, working in Bangalore is having only a limited role in generating what is called 'commercial profit' and, therefore, it cannot be compared with other leaders plying in the market. It is also relevant to note that the assessee company is working in a risk-mitigated environment. When this is the position, TPO/AO cannot select extreme cases as comparables to examine the ALP of the assessee company under TNMM method.
54. The TPO/AO has selected M/s Hinduja TMT Ltd., as one of the comparables. The reported margin of the said company is Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 10/21 111.45%. This is an extreme case of super profit. Likewise, another company selected by the TPO/AO as comparable is M/s Atek Infosys Ltd. In this case, the margin is 69.70%, which is again very much on the higher side. The TPO/AO has normalized their Profit Limit Indicator (PLI) to 31.78% adopting the margin reported in the case of M/s Infotech Enterprises Ltd. At the same time, the TPO/AO has not explained the common thread running through all these four entities to bring out a functional similarity. In these circumstances, it is our considered view that such super profit making companies can not be considered as comparables in the present case. Therefore, we exclude M/s Hinduja TMT Ltd. and M/s Aftek Infosys Ltd. from the list of comparables.
55 to 62 ... ... ...
63. The first limb of the old proviso and the first limb of the present proviso is regarding arriving at the arithmetical mean which is the same. There is no change with regard to that. The change is with reference to the second Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 11/21 limb. The old proviso says that at the option of the assessee, the assessee may adopt a price different from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean i.e the assessee has an option to claim the tax payer's marginal relief at 5% with reference to the arithmetical mean irrespective of the range of actual deviation between the margin disclosed by the assessee and the Average Mean Margin. Therefore, in effect, this marginal relief takes the character of a standard deduction of 5%. For eg. in a case, average mean of the ALP determined by TPO/AO is 20% and that one disclosed by the assessee is 10%. The assessee will get a standard deduction of 5% and the assessee's ALP will be increased to 15% and thereafter the difference of 5% between 20% and 15% along shall be added as ALP adjustment. This is the theme of the old proviso. But under the newly substituted proviso, the marginal relief of 5% will not Act as standard deduction. If the price determined by the Average Mean Prince is 20% and that of the assessee is 10%, then the Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 12/21 difference of 10% is more than 5% and, therefore, the assessee will not get the marginal relief and the entire difference of 10% will be added as ALP adjustment. If the ALP determined by TPO/AO is 15% and that of the assessee is 11%, the difference of 4% is less than 5% and in that case, the rate disclosed by the assessee at 11% shall be taken as ALP. This is the position after the amendment.
64. In view of the above discussion, we find that second limb of the proviso to sec. 92C(2) gives an option to the assessee to claim a marginal variance of 5% as standard deduction. This ground of the assessee is accepted and we hold that this benefit of deduction of 5% has to be given to the assessee, if the circumstances, so warrant."
5. In so far as the substantial question of law (d) framed by the Co-ordinate Bench of this Court is concerned, the same is covered by the Division Bench decision of this Court in the case of M/s.Tata Elxsi Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 13/21 Ltd., Vs. Asst.Commissioner of Income Tax, decided on 20/10/2015 (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 this Court in the case of M/s.Tata Elxsi (supra), is quoted below for ready reference:-
"20. From the aforesaid provisions, it is clear that if a assessee wants to claim the benefit of Section 10A, firstly he must export articles or things or computer software. Secondly, the said export may be done directly by him or through other exporter after fulfilling the conditions mentioned therein. Thirdly, such an export should yield foreign exchange which should be brought into the country. If all these three conditions are fulfilled, then the object of enacting Section 10A is fulfilled and the Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 14/21 assessee would be entitled to the benefit of exemption from payment of Income Tax Act on the profits and gains derived by the Undertaking from the export.
21. Clause 6.11 of Exim Policy dealing with entitlement for supplies from the DTA states that supplies from the DTA to EOU/EHTP/STP/BTP units will be regarded as 'deemed export', besides being eligible for relevant entitlements under paragraph
6.12 of the Policy. They will also be eligible for the additional entitlements mentioned therein. What is of importance is when a supply is made from DTA to STP, it does not satisfy the requirements of export as defined under the Customs Act. However, for the purpose of Exim Policy, it is treated as 'deemed export'. Therefore, when Section 10A of the Act was introduced to give effect to the Exim Policy, the supplies made from one STP to another STP has to be treated as 'deemed export' because Clause 6.19 specifically provides for export through Status Holder. It provides that an Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 15/21 EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through other exporter or Status holder recognized under this policy or any other EOU/EHTP/STP/BTP unit. What follows from this provision is that to be eligible for exemption from payment of income tax, export should earn foreign exchange. It does not mean that the undertaking should personally export goods manufactured / software developed by it outside the country. It may export out of India by itself or export out of India through any other STP Unit. Once the goods manufactured by the assessee is shown to have been exported out of India either by the assessee or by another STP Unit and foreign exchange is directly attributable to such export, then Section 10A of the Act is attracted and such exporter is entitled to benefit of deduction of such profits and gains derived from such export from payment of income tax. Therefore, the finding of the authorities that the assessee has not directly exported the computer software outside Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 16/21 country and because it supplied the software to another STP unit, which though exported and foreign exchange received was not treated as an export and was held to be not entitled to the benefit is unsustainable in law. The substantial question of law is answered in favour of the assessee and against the revenue. The appeal is allowed. The impugned orders are set aside. The assessee is held to be entitled to deduction of such profits and gains derived from the export of the computer software. No costs".
6. 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 Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 17/21 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.
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 Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 18/21 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".
7. However, this Court in a recent judgment in I.T.A.No.536/2015 c/w. I.T.A.No.537/2015 (Pr.Commissioner of Income Tax, Bangalore and Another Vs. M/s. Softbrands India P.Ltd.,) rendered on 25-06-2018, 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 Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 19/21 maintainable and 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 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 Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 20/21 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 the assessees may not be satisfied and have filed such appeals before Date of Judgment 09-07-2018 I.T.A.No.23/2011 Commissioner of Income-Tax & anr.
Vs. M/s. SAP India Pvt. Ltd., 21/21 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."
8. In view of the above, no substantial question of law would arise in the present case and the appeal filed by the Revenue is therefore, liable to be dismissed.
Accordingly, it is dismissed.
No costs.
The Copy of this judgment may be sent to the Respondent - Assessee forthwith.
Sd/-
JUDGE Sd/-
JUDGE BMV*