THE PR COMMISSIONER OF INCOME TAX V. M/S BROCADE COMMUNICATION

ITA/309/2017

AI Insights

The case involves an appeal by the Pr. Commissioner of Income Tax and the Deputy Commissioner of Income Tax against M/s Brocade Communication Systems Pvt. Ltd., concerning the assessment year 2009-2010. The appeal was based on the Income Tax Appellate Tribunal's decision which directed the Assessing Officer to re-calculate the deduction allowable under section 10A of the Income Tax Act. The Revenue raised substantial questions of law regarding the exclusion of certain expenses from total turnover and the comparability of certain companies for transfer pricing. The High Court dismissed the appeal, referencing decisions that such issues do not constitute substantial questions of law under Section 260-A.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 732854 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 03-07-2018
• Assessment Year: misc
• Other Referred Cases: M/s.Tata Elxsi Ltd. vs. Asst. Commissioner of Income Tax, Commissioner of Income-tax, Central \\u2013 III vs. HCL Technologies Ltd., Moog Controls (India) Pvt. Ltd. vs. DCIT, Prl. Commissioner of Income Tax & Anr. V/s. M/s.Softbrands India Pvt. Ltd.
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MANASA ANANTHAN
• Assessee Lawyers: K V ARAVIND
• Keywords: Export Turnover; Functional Dissimilarity; Income Tax; Technical Services; Total Turnover; Working Capital Adjustment
• Section: 10A; 260-A

Judgement Text

" 1/12 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 3RD DAY OF JULY 2018 PRESENT THE HON’BLE DR.JUSTICE VINEET KOTHARI AND THE HON’BLE MRS.JUSTICE S.SUJATHA I.T.A. No.309/2017 BETWEEN : 1. THE Pr. COMMISSIONER OF INCOME TAX, CIT(A), 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560 095. 2. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(2), PRESENT ADDRESS 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560 095. ...APPELLANTS (BY SRI K.V.ARAVIND, ADV.) AND : M/s BROCADE COMMUNICATION SYSTEMS PVT. LTD., 7TH FLOOR, \"A\" WING, TOWER 3, PHASE 1, VRINDAVAN TECH VILLAGE VARTHUR HOBLI, BENGALURU-560037. PAN:AACCB 4490N. …RESPONDENT (BY SMT.MANASA ANANTHAN, ADV.) THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 09.11.2016 Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 2/12 PASSED IN ITA NO.71/BANG/2014, FOR THE ASSESSMENT YEAR 2009-2010 ANNEXURE-D. PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BENGALURU IN IT(TP)A NO.71/BANG/2014 DATED 09.11.2016 ANNEXURE-D CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(2), BENGALURU. THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING: J U D G M E N T Mr. K.V.Aravind, Adv. for Appellants – Revenue. Mrs. Manasa Ananthan, 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, Bangalore Bench ‘B’, Bangalore, in IT [TP]A No.71/Bang/2014 dated 09.11.2016, relating to the Assessment Year 2009-10. 2. The proposed substantial questions of law framed by the Revenue in the Memorandum of Appeal are as under: Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 3/12 “1. Whether in the facts and circumstances of the case, the Tribunal is right in law in directing the Assessing Officer to re-calculate the deduction allowable to the assessee under section 10A of the Act by reducing the total turnover also by the same amount by which export turnover was reduced by the assessing officer in respect of foreign currency expenses incurred towards technical services rendered outside India, without appreciating the fact that there is no provision in Section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the Explanation 2 to Section 10A provides that such expenses are to be reduced only from the export turnover? 2. Whether in the facts and circumstances of the case, the Tribunal is right in law in excluding the comparables, namely, M/s Bodhtree Consulting Ltd., Persistent Systems Ltd., Infosys Ltd., and Larsen & Toubro Infotech Ltd. on the ground of functional dissimilarity by following its earlier order which has not reached finality and even when the TPO had chosen the Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 4/12 comparables as it satisfies qualitative and quantitative filters applied by the TPO and Tribunal ought to have decided the comparability of these companies on the basis of specific facts brought out on record by the TPO in the case of the assessee? 3. Whether in the facts and circumstances of the case, the Tribunal erred in excluding the comparables, namely, in not considering the ground raised by Revenue with respect to working capital adjustment by holding that the same is decided in appeal preferred by assessee even when the same was required to be adjudicated and Tribunal ought to have seen that assessee had not been able to demonstrate that the working capital differences had impacted its profits?” 3. Learned Counsel for the Appellants-Revenue does not press substantial question No.2. 4. Submission is taken on record. Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 5/12 Regarding Substantial Question No.1: 5. Learned Counsel for the Appellants-Revenue submits that the issue regarding deduction of expenditure incurred for ‘Export Turn Over’ is also required to be deducted from ‘Total Turn Over’ for the purpose of computing the deduction u/s.10A of the Act, the controversy is no longer res integra and is covered by the decision of the Division Bench of this Court in the case of M/s.Tata Elxsi Ltd., vs. Asst. Commissioner of Income Tax, decided on 20.10.2015 since reported in (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). 6. The relevant portion of the judgment of the Hon’ble Supreme Court in the case of HCL Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 6/12 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 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 Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 7/12 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. 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.3: 7. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under: Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 8/12 “5. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. While determining the Arm’s Length Price (‘ALP’), the TPO in principle agreed to grant the working capital adjustment however the working capital adjustment was restricted to 1.71% which is the average cost of capital of the comparable companies selected by the TPO. The assessee challenged the action of the TPO before the DRP. The DRP has directed the A.O./TPO to work out the working capital adjustment as per the actual figure without putting any upper cap. 6. The learned Departmental Representative has relied upon the order of the TPO whereas the learned Authorised Representative has relied upon the decision dt.22.11.2015 of this Tribunal in the case of Moog Controls (India) Pvt. Ltd. vs. DCIT in ITA No.551/Bang/2015. 7. At the outset, we note that the co- ordinate bench of this Tribunal in the case of Moog Controls (India) Pvt. Ltd. vs. DCIT (supra) has considered an identical issue in paras 28 & 29 are as under: Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 9/12 xxxxx In view of the above decision of the Tribunal, we find no error or illegality in the directions of the DRP qua this issue.” 8. 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 Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 10/12 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 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 Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 11/12 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 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.” Date of Judgment 03-07-2018, ITA No.309/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Brocade Communication Systems Pvt. Ltd. 12/12 9. 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. 10. Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs. Sd/- JUDGE Sd/- JUDGE AN/- "