Karnataka High Court
Commissioner Of Income Tax vs M/S Toshiba Embedded Software 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. Nos.500/2013 & 43/2014
BETWEEN :
1. COMMISSIONER OF INCOME TAX
BANGALORE-III, BANGALORE.
2. Dy. COMMISSIONER OF
INCOME TAX, CIRCLE 12(4),
BANGALORE. ...APPELLANTS
(BY SRI JEEVAN J. NEERALGI, ADV.)
AND :
M/s TOSHIBA EMBEDDED SOFTWARE
(I) PRIVATE LIMITED,
NO.10, PRESTIGE ATLANTA, 7TH MAIN,
3RD BLOCK, KORAMANGALA,
BANGALORE-560034. ...RESPONDENT
(BY SRI ANKUR PAI, ADV. FOR SRI K.R.VASUDEVAN, ADV.)
THESE ITAs ARE FILED UNDER SECTION 260-A OF
INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED
10.05.2013 PASSED IN IT(TP)A No.1/BANG/2012, FOR THE
ASSESSMENT YEAR 2005-06, ANNEXURE-A.
THESE APPEALS COMING ON FOR HEARING, THIS
DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014
Commissioner of Income Tax & another Vs.
M/s Toshiba Embedded Software [I] Private Limited
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JUDGMENT
Mr. Jeevan J. Neeralgi, Adv. for Appellants - Revenue. Mr. Ankur Pai, Adv., for Mr. K.R. Vasudevan, Adv., for Respondent - Assessee These Appeals are filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, Bangalore Bench 'A', in IT [TP]A No.1/Bang/2012 dated 10.05.2013, relating to the Assessment Year 2005-06.
2. These Appeals have been admitted on 23.6.2014. The substantial questions of law as framed by the Revenue in the Memorandum of Appeals are as under:
"1. Whether on the facts and in the circumstances of the case, in the absence of financial evidence in annual report, the Tribunal is justified in law in holding on the basis of peripheral evidence such as Director's report and website of the company Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 3/16 that uncontrolled comparable is a product company?
2. Whether on the facts and in the circumstances of the case, the Tribunal is justified in not appreciating that application of filter software service more than 75% and minor income from product sales is acceptable and hence the uncontrolled comparable should not be rejected?
3. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the reimbursement of telecommunication expenses, insurance and foreign travel expenses incurred in foreign currency are to be excluded from total turnover as well as computation of deduction under section 10A whereas such exclusion is permitted to arrive at export turnover only as per the definitions given in section 10A of the IT Act and total turnover has not been defined in the section?
4. Whether the Tribunal is correct in law in holding that the deduction under section 10A Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 4/16 should be computed in the above manner following the judgment of jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd. which has not become final since the same has not been accepted by the Department and SLP is pending before the Hon'ble Supreme Court?"
Regarding Substantial Question Nos. 3 & 4:
3. 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).
4. 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 Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 5/16 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.
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 Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 6/16 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".
Regarding Substantial Question No.1:
5. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under:
"Sankhya Infotech Ltd.,
12. Before the TPO, the assessee has raised objection to adoption of this company as Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 7/16 comparable stating that it is a software product company and is also into R & D services. The TPO brushed aside this objection stating that there are no product sales during the year 2004-05 and that the R & D services rendered by Sankya Infotech Ltd., is of little consequence because as per the assessee's agreement with its AE, the services rendered by the assessee has raised the additional objection that Sankya Infotech does not satisfy the employee cost to sale filter according to which the employee cost to sales should not be less than 25% and that it also incurs expenditure of sale and marketing activities for which adjustment should be given. In support of this contention, the learned counsel for the assessee has drawn out attention to the relevant extract of the annual report of Sankya Infotech which states that the company has engaged very high specialized consultants for the development of very critical projects and products as the result of which, the over heads have increased during the year under review resulting in the marginal decline in Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 8/16 profits as compared to the previous year. As regards the activities also, it is mentioned that the company is engaged in the business of development of software products and training.
13. The learned counsel for the assessee has also mentioned various products developed by the company which are listed in the website of the company. It is also stated by the learned counsel for the assessee that the employee cost to sale ratio of Sankya Infotech is 23.03% and, therefore, does not satisfy the employee cost to sales being more than 25%. Further objection is that the Sankhya incurred the expenses amounting to 17% of turnover in sale and marketing activities and hence it is exposed to market risks and such risk adjustment has to be made before taking the said company as a comparable. He also drew our attention to the annual report of Sankya Infotech and the fixed asset schedule of the company to demonstrate that the company owns software product and the total net block value of these Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 9/16 product is 52% of the revenue of the company and hence has to be treated as a software product company. He submitted that the TPO himself has not considered this company as a comparable in the subsequent year on the ground that it is a software product company.
14. The learned DR, however, supported the orders of the authorities below.
15. Having heard both the parties and having considered the rival contentions and the material on record, we find that Sankya Infotech Ltd., is admittedly into development of products. Merely because the said company did not show any product sale in its profit and loss account, it cannot be said that it has not incurred any expenditure for development of such products and that such expenditure has not been influenced the net margin of the said company. As held by the 'A' Bench of the Tribunal at Pune in the case of E-gain Communication Pvt. Ltd., [cited supra] if there are material differences between the assessee and the comparable Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 10/16 companies, those differences are to be considered and suitable adjustments made to the profits of the comparables under Rule 10D of IT Rules before making the TP adjustment on the basis of such results. Further Sankya Infotech is also exposed to market risks as against the assessee and, therefore, risk adjustment has to be made before taking the said company as a comparable. As Sankya Infotech is a software product company, we find that it is functionally different from assessee company. Therefore, we direct the AO/TPO to exclude this company from the list of comparables."
Regarding Substantial Question No.2:
"16. The assessee has raised objections before the TPO that this company is functionally different as it is primarily a product development company. The TPO brushed aside this argument of the assessee holding that the margin earned by the comparable company in the software services segment is more than the overall margins earned by the company if the product Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 11/16 segment is excluded. He held that in view of the uniform filter of more than 75% software services income, the overall margins of the company were to be considered. He also held that the related party transactions are less than 25% of its turnover and hence is comparable to the assessee. Before us, the learned counsel for the assessee stated that the company is engaged in software product development and is functionally different from the assessee which is a software development services provider. In support of this contention, he has drawn our attention to the extract from the 'Directors report' of the company reproduced in his written submissions before us, wherein it is also stated that the company is engaged in 'sale of licences' of software products. It is also mentioned that the company being knowledge-based, the intellectual properties are its vital components. The learned counsel for the assessee prayed that the RPT filter of more than 15% is also to be applied as held by the Bangalore Bench of the Tribunal in the case of 24/7 Customer Pvt. Ltd., for the Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 12/16 assessment year 2004-05. On perusal of the objections of the assessee, we find that the company Foursoft Ltd., is into development of software product and merely because 75% of its revenue is from software services, it cannot be said that it is comparable with the assessee. It has been held in various decisions of the Tribunal that the comparable companies have to be brought on par with the assessee company before making comparison for the purpose of TP study. The Assessing Officer/TPO cannot adopt the company Foursoft Ltd., without making suitable adjustments to its net margins on account of product development. The AO/TPO has taken the combined net margins of this company which in our opinion does not reflect the correct financial results of the company for its software services segment and make it comparable to the assessee. Further, the revenue of this company is also from 'sale of licences' unlike the assessee. In view of the same, we direct AO/TPO to exclude this company from the list of comparables. As far as RPT Filter of more than 15% is concerned, Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 13/16 we find that in the case of 24/7 Customer Pvt. Ltd., it was held that the companies with RPT of more than 15% are to be excluded whereas in certain other cases it was held that RPT should not be more than 25%. As RPT to sales ratio of the comparable company is 19.86%, we are not inclined to give any finding as regards application of this filter to this company."
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:
Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 14/16 "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 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 Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 15/16 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 this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all Date of Judgment 12-07-2018, ITA Nos.500/2013 & 43/2014 Commissioner of Income Tax & another Vs. M/s Toshiba Embedded Software [I] Private Limited 16/16 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.
8. Hence, the Appeals filed by the Appellants-
Revenue are liable to be dismissed and are accordingly dismissed. No costs.
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JUDGE Sd/-
JUDGE AN/-