THE PR. COMMISSIONER OF INCOME TAX, CIT(A) V. M/S. CITRIX R & D INDIA PVT LTD

ITA/534/2016

AI Insights

The case involves an appeal by the Pr. Commissioner of Income Tax and the Income-Tax Officer against M/s. Citrix R & D India Pvt. Ltd., concerning the interpretation and application of Section 10A of the Income Tax Act, 1961, related to the deduction of expenses from export turnover and total turnover. The primary legal contention was whether expenses incurred in foreign currency and other expenses that were excluded from the export turnover should also be excluded from the total turnover while computing deductions under Section 10A. The Income Tax Appellate Tribunal had previously directed such exclusions, which the Revenue challenged in this appeal. The High Court referenced a Supreme Court decision affirming that deductions allowed from export turnover must also be applied to total turnover to avoid illogical and unjust results.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 746262 (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., M/s.Tata Elxsi Ltd. vs. Asst.Commissioner of Income Tax, CIT v. Tata Elxsi Ltd., 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: SANKARA NARAYANAN
• Assessee Lawyers: ARAVIND V
• Keywords: Comparables; Deduction; Export Turnover; Functional Dissimilarity; Income tax appeal; Total Turnover; Transfer pricing
• Section: 10A; 260-A

Judgement Text

" 1/12 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.534 /2016 BETWEEN : 1. THE PR. COMMISSIONER OF INCOME TAX, CIT(A) 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU - 560 095. 2. THE INCOME-TAX OFFICER WARD -11(1), PRESENT ADDRESS, CIRCLE-2(1)(1), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORAMANGALA, BENGALURU - 560 095. ...APPELLANTS (BY SRI.ARAVIND K V., ADV.) AND M/S. CITRIX R & D INDIA PVT. LTD., PRESTIGE DYNASTY NO.33, ULSOOR ROAD, BENGALURU - 560 100 PAN:AABCN 3639C ... RESPONDENT (BY SRI.S.SANKARA NARAYANAN, ADV.) Date of Judgment 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 2/12 THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:18/03/2016 PASSED IN IT(TP)A NO.841/BANG/2013, FOR THE ASSESSMENT YEAR 2005-2006 ANNEXURE - C. PRAYING TO: 1. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN IT(TP)A NO.841/BANG/2013 DATED:18/03/2016 ANNEXURE - C AND CONFIRM THE ORDER PASSED BY THE INCOME TAX OFFICER, CIRCLE-2(1)(1), BENGALURU AND ETC.,. THIS APPEAL COMING ON FOR HEARING, THIS DAY, Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING: J U D G M E N T Mr.ARAVIND K.V., Adv. for Appellants – Revenue. Mr.SHANKARA NARAYAN , 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, ‘B’ Bench, Bangalore, in IT [TP] A No.841/Bang/2013 dated 18.03.2016 relating to the Assessment Year 2005-06. 2. Though this Appeal was admitted on 28.11.2017 to consider the substantial questions of law framed at paras VI(2), VI(3) and VI(4) by the Revenue in Date of Judgment 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 3/12 the 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 circumstances of the case, the Tribunal is correct in directing the assessing officer to exclude expenses incurred in foreign currency and other expenses that has been excluded from ETO, from the total turnover also and accordingly recomputed the deduction under section 10A without appreciating the fact that there is not provision in sec. 10A that such expenses should be reduced from the total turnover also as clause (iv) of the Explanation 2 to Sec. 10A provides that such expenses are to be reduced only form the export turnover? Date of Judgment 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 4/12 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding comparables namely, Tata Elxsi, Bodhtree Consulting Ltd, Geometric Software Solutions Ltd on the ground of functional dissimilarity even when Transfer Pricing Officer has rightly chosen the same considering its functions which are similar to assessee’s and has satisfied all the required tests and without doing an FAR analysis of the taxpayer with those other cases? 3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding comparables namely Exensys Software Solutions and Third Ware Solutions by on the ground of abnormal profit filter and functional dissimilarity by following decisions in favour of assessee even when the said decisions have not reached finality and TPO has chosen the same after applying all required tests? Date of Judgment 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 5/12 4. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding Infosys Technologies as comparable on the ground that turnover is on higher side by following its earlier order which has not reached finality” 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 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, Date of Judgment 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 6/12 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 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 Date of Judgment 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 7/12 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”. Date of Judgment 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 8/12 4. The learned Tribunal, after discussing the rival contentions of both the Appellant-Revenue and Respondent-Assessee, has returned a finding with regard to question Nos. 2 to 4 as under: “6.2. On considering the rival contentions and order of Ld. CIT(A), we are of the opinion that the TPO is correct in rejecting this comparable on the different financial year filter. AS 21 may allow consideration of accounts and Company Law may permit having different financial year ending for consolidation accounts, but the data available in public domain cannot be adjusted to the financial year of assesee- company. There may be many factors which may affect the results in the intervening period. Unless the data is completely available, averaging the financial results to suit assessee’s financial year may give a distorted picture. Since the public data available pertain to a different financial year, we are of the opinion that the same can not be Date of Judgment 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 9/12 considered as comparable in the absence of suitable financial data. We direct the same to be excluded from the list comparables. We also find that this company is not selected as comparable in the similar cases in this assessment year.” 5. 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 Date of Judgment 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 10/12 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 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 11/12 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. Date of Judgment 04-07-2018, ITA No.534/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Citrix R & D India Pvt. Ltd., 12/12 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. Hence, the Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed. No costs. Sd/- JUDGE Sd/- JUDGE ln. "