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

ITA/319/2016

AI Insights

This case involves an appeal by the Pr. Commissioner of Income Tax and the Deputy Commissioner of Income Tax against M/s Ikanos Communication India Pvt. Ltd. concerning the Income Tax Appellate Tribunal's decision on the computation of section 10A deduction and the selection of comparables in transfer pricing. The appellants challenged the Tribunal's exclusion of certain companies from the list of comparables and the method of computing deductions under section 10A. The High Court of Karnataka, after considering the substantial questions of law framed by the appellants and relevant precedents, dismissed the appeal, affirming the Tribunal's decision.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 726893 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 04-07-2018
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-tax, Central \\u2013 III vs. HCL Technologies Ltd., CIT V/s Tata Elxsi, CIT v. Agnity India Technologies P. Ltd, Pegasystems Worldwide India P. Ltd, Softbrands India Pvt. Ltd
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: ARAVIND V
• Keywords: Income tax appeal; Section 10A Deduction; Comparables in Transfer Pricing; Exclusion of Companies from Comparables
• Section: 10A; 260-A

Judgement Text

" 1/13 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 4TH DAY OF JULY 2018 PRESENT THE HON’BLE DR.JUSTICE VINEET KOTHARI AND THE HON’BLE MRS.JUSTICE S.SUJATHA I.T.A. No.319/2016 BETWEEN: 1. THE PR. COMMISSIONER OF INCOME TAX CIT(A), 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BANGALORE - 560 095. 2. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE - 3 (1) (1), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BANGALORE - 560 095. ... APPELLANTS (BY SRI.ARAVIND K V., ADV.) AND: M/S IKANOS COMMUNICATION INDIA PVT. LTD. 3RD FLOOR, CORPORATE MILLER, NO.332/1, THIMMAIAH ROAD, VASANTHNAGAR, BANGALORE - 560 052. PAN:AABCI 1928 ... RESPONDENT (SERVED) Date of Judgment 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 2/13 THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:10/11/2015 PASSED IN IT(TP)A NO.137/BANG/2015, FOR THE ASSESSMENT YEAR 2010-2011 ANNEXURE - D. PRAYING TO: 1. FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN IT(TP)A NO.137/BANG/2015 DATED:10/11/2015 ANNEXURE –D, CONFIRMING THE ORDER OF THE DRP AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BENGALURU. THIS APPEAL COMING ON FOR HEARING, 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. This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, ‘C’ Bench, Bangalore, in IT [TP] A No.137/Bang/2015 dated 10.11.2015 relating to the Assessment Year 2010-11. 2. Though this Appeal was admitted on 10.10.2017 to consider the substantial questions of law framed at paras VI(2) by the Revenue in the Date of Judgment 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 3/13 Memorandum of Appeal, learned counsel for the appellant submits that even substantial question No.1 also may be considered as it is covered by the decision of the Hon’ble Supreme Court in Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC). The substantial questions of law as framed by the Revenue in the Memorandum of Appeal are as under: 1. “ Whether on the facts and in the circumstances on the case, the Tribunal is right in law in setting aside the computation of section 10A deduction made by assessing authority without appreciating that judgment of this Hon’ble Court in CIT V/s Tata Elxsi has not reached finality and moreover section 10A does not permit the assessee to reduce expenses incurred in foreign currency from both from export and total turnover.? 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding Persistent Systems Date of Judgment 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 4/13 and Solutions Ltd, ICRA Techro Analytics Ltd, Kals Information Systems Ltd and Infosys Ltd from list of comparables chosen by TPO on the ground that these companies are functionally different and cannot be considered as comparable even though the it satisfied all the qualitative and quantitative filters adopted by the TPO and when selection of comparables in a case of depends in assessee specific Far analysis and specific facts brought on record by the TPO in the case of assessee”? Regarding Substantial Question No. 1: 3. The issue raised in the present appeal as to the 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 Date of Judgment 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 5/13 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). 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 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 Date of Judgment 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 6/13 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 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”. 4. The learned Tribunal, after discussing the rival contentions of both the Appellant-Revenue and Date of Judgment 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 7/13 Respondent-Assessee, has returned a finding with regard to question No. 2 as under: “07. We have perused the orders and heard the rival contentions. It is not disputed that Infosys brand has a significant intangible value and it had revenue from software product segment also. Hon’ble Delhi High Court in the case of CIT v. Agnity India Technologies P. Ltd (93 DTR 375), while affirming a decision of this Tribunal where it was held that Infosys Ltd could not be considered as a comparable, had upheld the view that it was a giant company in the area of development of software, assuming all risks leading to higher profits. Further in the case of Pegasystems Worldwide India P. Ltd (supra), which was also for the very same assessment year, this Tribunal had held as under at para 22 of its under: XXXX Accordingly we are of the opinion that DRP was justified in directing exclusion Date of Judgment 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 8/13 of Infosys Ltd from the list of comparables. 10. We have perused the orders and heard the rival contentions. Notes to accounts of ICRA Techno Analytics Ltd forming a part of its audited financial statement of accounts and annual report for year ended 31.03.2010 mentions as under: xxxxxxxxx In the note detailing of the revenue recognition which also form a part of its annual report it has been stated that its revenue stream consisted of software development consultancy, engineering services, web development and hosting. Thus ICRA Techno Analytics had more than one segment. There is not case for the Revenue that the segmental results were separately available in public domain or was not obtained by the TPO from the said company, invoking the powers vested on him. In such a situation the DRP, in our opinion, was justified in directing exclusion of ICRA Techno Analytics Ltd from the list of comparables. Date of Judgment 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 9/13 13. We have perused the orders and heard the rival contentions. In the annual report for F. Y. 2009-19 of Kals Information Systems Ltd. background of the said company has been mentioned as under: xxxxxxxxxxx 14. Said company was having significant inventory coming to 27% of its current assets. Inventory held by Kals Information Systems Ltd came to Rs.60,47,977/- . We also find that Hyderabad bench in the case of Pegasystems Worldwide India P. Ltd (supra) had held as under at para 10.1 of its order vis-à-vis the comparability of M/s. Kals Information Systems Ltd: xxxxxxxxxxx Accordingly we are of the opinion that DRP was correct in directing exclusion of the said company from the list of comparables. ” 5. The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Date of Judgment 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 10/13 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 in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such Date of Judgment 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 11/13 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 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 12/13 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.” 6. 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 04-07-2018, ITA No.319/2016 The Pr. Commissioner of Income Tax & another Vs. M/s Ikanos Communication India Pvt. Ltd. 13/13 Hence, the Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed. No costs. A copy of this order shall be sent to the respondent-assessee. Sd/- JUDGE Sd/- JUDGE ln. "