PR. COMMISSIONER OF INCOME TAX-VI V. M/S SUNQUEST INFORMATION

ITA/498/2016

AI Insights

The case involves an appeal by the Pr. Commissioner of Income Tax-VI and the Deputy Commissioner of Income Tax against M/s Sunquest Information Systems (India) Private Limited, concerning transfer pricing adjustments for the Assessment Year 2009-2010. The appeal challenged the decision of the Income Tax Appellate Tribunal (ITAT), which had excluded certain comparables and made specific adjustments in the transfer pricing assessment. The Revenue raised several substantial questions of law regarding the Tribunal's approach to comparables and functional analysis. However, the High Court dismissed the appeal, citing the absence of substantial questions of law and referencing a similar case where it was held that such issues do not typically give rise to substantial questions of law under Section 260-A of the Income Tax Act.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 733266 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 30-07-2018
• Assessment Year: misc
• Other Referred Cases: I.T.A. Nos.536/2015 c/w 537/2015 dated 25.06.2018 (Prl. Commissioner of Income Tax & Anr. \\u2013v- M/s Softbrands India Pvt. Ltd.)
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: ANKUR PAI
• Assessee Lawyers: E I SANMATHI
• Keywords: Comparable Companies; Foreign Exchange Gain/Loss; Functional Analysis; Risk adjustment; Transfer pricing
• Section: 260-A

Judgement Text

" 1/11 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 30TH DAY OF JULY 2018 PRESENT THE HON’BLE DR.JUSTICE VINEET KOTHARI AND THE HON’BLE MRS.JUSTICE S.SUJATHA I.T.A. No.498/2016 BETWEEN : 1. Pr. COMMISSIONER OF INCOME TAX-VI C.R. BUILDING, QUEENS ROAD, BANGALORE 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-6(1)(2) BENGALURU ...APPELLANTS (BY SRI E.I.SANMATHI, ADV.) AND : M/s SUNQUEST INFORMATION SYSTEMS (INDIA) PRIVATE LIMITED 1ST FLOOR, EAGLE RIDGE, EMBASSY GOLD LINKS BUSINESS PARK, OFF INTERMEDIATE RING ROAD, BANGALORE-560 071 PAN:AAECS2754F …RESPONDENT (BY SRI ANKUR PAI, ADV. FOR SRI K.R.VASUDEVAN, ADV.) THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 27/05/2016 PASSED IN IT(TP)A NO.1666/BANG/2014, FOR THE ASSESSMENT YEAR 2009-2010 ANNEXURE-A. PRAYING TO: (1) Date of Judgment 30-07-2018, ITA No.498/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 2/11 DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT. (2) SET ASIDE THE APPELLATE ORDER DATED 27/05/2016 PASSED BY THE ITAT, 'A' BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS NO. IT(TP)A NO. 1666/BANG/2014 FOR A.Y.2009-2010 ANNEXURE-A & GRANT SUCH OTHER RELIEF AS DEEMED FIT. THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING: J U D G M E N T Mr. E.I.Sanmathi, Adv. for Appellants – Revenue. Mr. Ankur Pai, Adv. for Mr. K.R.Vasudevan, Adv. 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.1666/Bang/2014 dated 27.05.2016 relating to the Assessment Year 2009-10. 2. This Appeal has been admitted on 06.02.2018 to consider the following substantial questions of law: “1. In the facts and circumstances of the case, the Tribunal has erred in holding that few companies are functionally different from the assessee company when it satisfies all the Date of Judgment 30-07-2018, ITA No.498/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 3/11 qualitative and quantitative filters applied by the TPO. The Tribunal has used a narrower functionally filter than the TPO, but has not tested other comparables against the narrower functionally filter applied by it? 2. Whether the Tribunal was right in not setting aside the matter to TPO for a fresh TP study after taking a new view on functional matrix which is narrower than the functionally matrix originally used by the TPO? 3. Whether, the Tribunal was right in directing the exclusion of comparable companies having RPT transactions more than 15% without asking the TPO to make a fresh TP study, since a quantitative filter, namely, the RPT filter, has been changed. Changing filter criteria changes the search process altogether, and mandates a fresh TP study using updated filters? 4. Whether the Tribunal was right in excluding CG.VAK Software and Exports Ltd., as comparable even when the TPO has rightly chosen the same as comparable after applying the required test? Date of Judgment 30-07-2018, ITA No.498/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 4/11 5. Whether the Tribunal was right in providing risk adjustment where there is no reliable method to convert qualitative difference into quantitative difference and to make adjustment on record of risk level? 6. Whether the Tribunal was right in holding that foreign exchange loss/gain is operating in nature when such loss/gain that is attributable to the operating activity is not derived from the operating activity?” Regarding Substantial Question Nos.1 to 4: 3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under: “20. Coming to Bodhtree Consulting Ltd, argument of the assessee is that it is functionally dissimilar. In the case of Lam Research India P. Ltd, (supra), comparability of Bodhtree Consulting Ltd, was an issue. In the software development services segment, it was held as under by this Tribunal at para 18 of its order: Date of Judgment 30-07-2018, ITA No.498/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 5/11 Xxxxxxx Accordingly we have no hesitation in directing the exclusion of Bodhtree Consulting Ltd also. 21. Now taking the pleading of the assessee that CG-VAK was unjustly rejected from the list of comparables, we find that the said company was also one of the comparables, which had come up before this Tribunal in the case of Lam Research (India) Lt. Ltd, (supra). This Tribunal had held as under at para 21 of the order, as under: Xxxx Following the above, we direct that CG-VAK can be considered as a good comparable. 22. As a result of the above discussion, we direction exdclusion of Bodhtree Consulting Ltd, Tata Elxsi Ltd (seg), Sasken Communication Technologies Ltd (seg), Presistent Systems Ltd, Zylog Systems Ltd, Mindtree Ltd (seg), L & T Infotech Ltd, and Infosys Ltd from the list of comparables and direct inclusion of M/s. CG- VAK as a good comparable. Ordered accordingly.” Date of Judgment 30-07-2018, ITA No.498/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 6/11 Regarding Substantial Question No.5: “27. Vide its ground 4, Revenue is aggrieved on the directions of the CIT (A) to give a risk adjustment to the assessee. CIT (A) had directed the TPO to give risk adjustments at prevailing norms suitable/applicable to the assessee. As per the CIT (A), there was no working capital adjustment actually given by the TPO since the adjustment carried out was negative in its impact. On this issue what we find is that TPO at para 3.7 of his order had clearly stated that working capital adjustment is restricted to 1.71% considering the uncontrolled comparables selected by him. However, in the actual working of the adjustment u/s 92CA of the Act, reproduced by us at para six above, working capital adjustment has been made at (-) 5,12%. In such a situation, we cannot say that risk adjustment directed by the CIT (A) was incorrect. TPO having not restricted himself to a working capital adjustment of 1.71% as mentioned by him at para 3.7 of his order ought to have Date of Judgment 30-07-2018, ITA No.498/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 7/11 considered assessee’s plea for a risk- adjustment, if found reasonable. In such circumstances, we find that direction given by the CIT (A) was justified and we do not find any reason to interfere. Ground 4 of the Revenue stands dismissed.” Regarding Substantial Question No.6: “ 23. Coming to the pleading of the assessee that foreign exchange adjustment once allowed as operational in nature should also be considered while working out the operating margin of the comparables, we are inclined to agree. This is because comparability should be done based on equal footing and if foreign exchange gains/losses are considered as part of operational income/loss of the assessee, then such items of expenditure, are also to be considered as operational in nature in the case of comparables also. TPO is therefore directed to work out the margin of the comparables that are left in the list after considering foreign exchange gains/losses as operational in nature. Ordered accordingly.” Date of Judgment 30-07-2018, ITA No.498/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 8/11 4. 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- 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 Date of Judgment 30-07-2018, ITA No.498/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 9/11 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 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 30-07-2018, ITA No.498/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 10/11 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.” 5. 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 30-07-2018, ITA No.498/2016 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sunquest Information Systems (India) Private Limited 11/11 Hence, the Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed. No costs. Sd/- JUDGE Sd/- JUDGE ln. "