THE PR COMMISSIONER OF INCOME TAX CIT(A) V. M/S ELECTRONICS FOR IMAGING

ITA/537/2016

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The case involves an appeal by the Pr. Commissioner of Income-Tax and the Deputy Commissioner of Income-Tax against M/s. Electronics for Imaging India Pvt. Ltd. concerning transfer pricing adjustments and the exclusion of certain comparables in determining the Arm's Length Price (ALP). The appellants challenged the ITAT's decision which had excluded certain comparables based on functional dissimilarity and directed the assessing officer to exclude foreign currency expenditure from both export turnover and total turnover. The High Court of Karnataka, referencing decisions from the Supreme Court and its own previous judgments, upheld the ITAT's decision, finding no substantial question of law that warranted interference under Section 260-A of the Income Tax Act, 1961.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 728451 (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., Kodiak Networks India Pvt. Ltd. v. DCIT, Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S SHARATH
• Assessee Lawyers: K V ARAVIND
• Keywords: Comparables; Export Turnover; Functional Dissimilarity; Total Turnover; Transfer pricing
• Section: 10A; 260-A

Judgement Text

" 1/11 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.537/2016 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(3), PRESENT ADDRESS CIRCLE-2(1)(2), 2ND FLOOR BMTC BUILDING, 80 FEET ROAD KORMANGALA, BENGALURU-560 095. …APPELLANTS (BY Mr. K.V. ARAVIND, ADV.) AND: M/S. ELECTRONICS FOR IMAGING INDIA PVT. LTD., KALYANI PLATINA, 4TH FLOOR BLOCK-I, No.24, EPIP ZONE PHASE II, WHITEFIELD, BENGALURU-560 066 PAN: AAACG 6053E. …RESPONDENT (BY Mr. S. SHARATH, ADV.) Date of Judgment 03-07-2018 I.T.A.No.537/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Electronics for Imaging India Pvt. Ltd., 2/11 THIS I.T.A. IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961, PRAYING TO I) FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED ABOVE II) ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN IT(TP)A No.285/Bang/2013 DATED 22/04/2016, ANNEXURE-E CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(2), BENGALURU & ETC. THIS I.T.A. COMING ON FOR ADMISSION, THIS DAY Dr. VINEET KOTHARI J. DELIVERED THE FOLLOWING:- JUDGMENT Mr. K.V. Aravind, Adv. for Appellants-Assessee Mr. S. Sharath, Adv. for Respondent-Revenue The Appellants-Revenue have filed this appeal u/s.260A of the Income Tax Act, 1961, raising purportedly certain substantial questions of law arising from the order of the ITAT, ‘A’ Bench, Bangalore, dated 22.04.2016 passed in IT(TP)A No.285/Bang/2013 (The Deputy Commissioner of Income Tax vs. M/s.Electronics for Imaging India Pvt. Ltd.) for A.Y.2008-09. 2. The proposed substantial questions of law framed in the Memorandum of appeal by the Date of Judgment 03-07-2018 I.T.A.No.537/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Electronics for Imaging India Pvt. Ltd., 3/11 Appellants-Revenue are quoted below for ready reference:- “1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in directing the assessing officer to exclude the expenditure in foreign currency from the export turnover and the total turnover when there is no provision in section 10A which requires the said expenses to be reduced from the total turnover also? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in excluding comparables namely, Avani Cimcom Technologies Ltd, Celestial Biolabs Ltd, E-Zest Solutions Ltd, Infosys Solutions Ltd, Kals Information Systems Ltd, Lucid Software Systems Ltd, Persistent Systems Ltd, Quintegra Solutions Ltd, Softsol India Ltd, Tata Elxsi Ltd, Thirdware Solutions Ltd, Wipro Ltd on the ground of functional dissimilarity without considering that TPO has chosen the same since all the required tests are satisfied and based upon FAR analysis in assessee specific case? Date of Judgment 03-07-2018 I.T.A.No.537/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Electronics for Imaging India Pvt. Ltd., 4/11 3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in excluding comparables namely VGL Softech, Flextronics Ltd, IGate Global Solutions Ltd, Mind Tree ltd, Sasken Communication technologies Ltd, by following its earlier order which has not finality and even when the TPO has rightly chosen the same by applying all the required tests?” 3. Regarding 1st substantial question of law:- 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). Date of Judgment 03-07-2018 I.T.A.No.537/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Electronics for Imaging India Pvt. Ltd., 5/11 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 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. Date of Judgment 03-07-2018 I.T.A.No.537/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Electronics for Imaging India Pvt. Ltd., 6/11 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”. 5. Regarding substantial question of law Nos.2 and 3:- The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Date of Judgment 03-07-2018 I.T.A.No.537/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Electronics for Imaging India Pvt. Ltd., 7/11 Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to ‘Transfer Pricing’ and ‘Transfer Pricing Adjustments’ made by the concerned authorities below. We consider it appropriate to quote the relevant portions hereunder: “14. From the above para 25 of the Tribunal’s order reproduced. It is seen that out of same 20 comparables, it was held by the Tribunal that 12 companies are required to be excluded from the list of comparables for determining the ALP. No difference in facts could be pointed out by the ld. DR of Revenue in the present case and in that case i.e. Kodiak Networks India Pvt. Ltd. v. DCIT (supra). In that case also, the issue in dispute was regarding TP adjustment in respect of software development activity of the assessee as in the present case. The 20 comparables selected by the TPO in the present case and in that case are the same. The reasoning given by the tribunal in that case for exclusion of 12 comparables is this that these companies are Date of Judgment 03-07-2018 I.T.A.No.537/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Electronics for Imaging India Pvt. Ltd., 8/11 functionally dis-similar and different. In the present case, the function of the assessee company is claimed to be similar to that company i.e. Kodiak Networks India Pvt. Ltd. v. DCIT (supra) and the learned DR of the revenue could not point out any difference in the function of the present assessee company and that company i.e. Kodiak Networks India Pvt. Ltd. v. DCIT (supra). Therefore, by respectfully following that tribunal order, we hold that in the present case also, the same 12 comparables are to be excluded for working out the ALP, as was held by the Tribunal in that case.” 6. This Court in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) 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 Date of Judgment 03-07-2018 I.T.A.No.537/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Electronics for Imaging India Pvt. Ltd., 9/11 the Act is not 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 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. Date of Judgment 03-07-2018 I.T.A.No.537/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Electronics for Imaging India Pvt. Ltd., 10/11 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 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 I.T.A.No.537/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. Electronics for Imaging India Pvt. Ltd., 11/11 7. Having heard the learned counsel for the parties, we are therefore of the opinion that no substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs. Sd/- JUDGE Sd/- JUDGE TL "