The Pr. Commissioner of Income Tax, CIT(A) and The Income Tax Officer Ward -11(2) V. IPASS India Pvt. Ltd.

ITA/196/2016

AI Insights

This case involves an appeal by the Revenue against the decision of the Income Tax Appellate Tribunal, Bangalore, which had excluded certain companies from the list of comparables for the purpose of determining the arm's length price in international transactions. The Revenue challenged the exclusion of comparables like M/s. Bodhtree Consulting Ltd., M/s. Infosys Ltd., and M/s. Tata Elxsi Ltd., arguing that these companies satisfied all qualitative and quantitative filters applied by the TPO. The Tribunal's decision was based on functional dissimilarities between the assessee, M/s Ipass India Pvt. Ltd., and the excluded companies. The High Court of Karnataka, referencing a prior decision in the case of CISCO Systems (India) Pvt. Ltd., upheld the Tribunal's decision, stating that the excluded companies were functionally different and thus not comparable to a captive software development service provider like the assessee.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 799064 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 04-07-2018
• Assessment Year: misc
• Other Referred Cases: CISCO Systems (India) Pvt. Ltd. in IT (TP) A No.271/Bang/2014, Nethawk Networks Pvt. Ltd. in ITA No.7633/Mum/2012, Wills Processing Services (I) Pvt. Ltd. in ITA No.4547/Mum/2012, 3DPLM Software Solutions P. Ltd. V DCIT in IT (TP) A No.1303/Bang/2013, Softbrands India Pvt. Ltd. in I.T.A. Nos.536/2015 c/w 537/2015
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: ARAVIND V
• Keywords: Comparables; Income tax appeal; International transaction; Substantial questions of law; Operating in Nature
• Section: 260-A

Judgement Text

" 1/15 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.196/2016 BETWEEN : 1. THE PR COMMISSIONER OF INCOME TAX , CIT(A) 5TH FLOOR, BMTC BUILDING, 80FEET ROAD, KORAMANGALA, BANGALORE – 560 095 2. THE INCOME TAX OFFICER WARD -11(2) 2ND FLOOR, BMTC BUILDING 80 FEET ROAD, KORAMANGALA BANGALORE – 560 095 ... APPELLANTS (BY SRI.ARAVIND K V., ADV.) AND : M/S IPASS INDIA PVT. LTD., UNIT 501, LEVEL V NO.6, BRUNTON ROAD, BANGALORE - 560 001 PAN:AABCG 3659 H ... RESPONDENT (RESPONDENT SERVED) Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 2/15 THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:04/09/2015 PASSED IN ITA NO.1292/BANG/2014, FOR THE ASSESSMENT YEAR 2009-2010 ANNEXURE –D. PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. II. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BANGALORE IN ITA NO.1292/BANG/2014 DATED:04/09/2015 ANNEXURE – D AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE INCOME TAX OFFICER, WARD-11(2), BENGALURU AND ETC.,. THIS APPEAL COMING ON FOR FINAL 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, Bangalore Bench ‘B’, Bangalore, in IT [TP]A No.1292/Bang/2014 dated 04.09.2015, relating to the Assessment Year 2009-10. 2. This Appeal has been admitted on 3.10.2017 to consider following substantial questions of law Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 3/15 formulated by the Revenue in the Memorandum of Appeal. “1. Whether, on the facts and in the circumstances of the case, that the Tribunal is right in law in excluding M/s.Bodhtree Consulting Ltd., M/s.Infosys Ltd and M/s. Tata Elxy Ltd., even when the decision following by the Tribunal in the case of M/s.Cisco Systems India (ITA No.271/B/14) has not reached finality and TPO had adopted the said comparables as they satisfied all the qualitative and quantitative filters applied by the TPO?” 2. Whether, on the facts and in the circumstances of the case, that the Tribunal was right in law in holding that foreign exchange transactions are to be considered as operating in nature, when Rule 10B (2) (d) stipulates that the net profit margin realized by the taxpayer in the international transaction shall alone be computed for comparability analysis under transaction net margin method?” Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 4/15 3. Learned Counsel for the Appellants-Revenue does not press substantial question No.2. 4. Submission is taken on record. Regarding Substantial Question No.1: 5. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under: “13. Bodhtree Consulting Ltd. (Bodhtree) 13.1 This company was selected by the TPO as a comparable inspite of the assessee’s objections to its inclusion in the final list of comparables. The learned CIT (Appeals) upheld the TPO’s action in selecting this company as comparable. 13.2 Before us, the learned Authorised Representative of the assessee contended that this company ought to be excluded from Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 5/15 the final set of comparables as it was functionally different from the assessee. The learned Authorised Representative drew the attention of the Bench to page 12 of the Annual Report of “Bodhtree’ – “ segment wise and product wise performance” wherein it is stated that:- :” Bodhtree has only one segment, namely software development. Being a software solutions company, it is engaged in providing open and end-to-end web solutions, off shoring Data Management, Data Warehousing, Software Consultancy, design and development of solutions, using latest technologies.” 13.2.2 The learned Authorised Representative further submitted that the website of ‘Bodhtree’ suggests that it is a global IT consulting and product engineering services provider with its key areas being product engineering, analytics, cloud and enterprise services. The services offered include:- Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 6/15 \u0001 Product engineering – outsourced product development, Microsoft Share Point Services, SOA Services and Q & A managed testing services. \u0001 Analytic Services – includes SAP BOBJ, OBIEE, Big Data, etc. \u0001 Cloud services – including clout applications and platforms, social enterprise, etc. \u0001 Enterprise Services – including Oracle implementation services, R12 upgrade services, Oracle Enterprise integration services, etc. \u0001 Provides software solutions like Share Tree, Tele Tree, Seems Tree, Apps Scale and MIDAS. \u0001 ‘Outlook’ Section of Annual Report at Page 15 states that this company has ventured into new areas like business intelligence, speed data management and data clearing operations. 13.3.3 The learned Authorised Representative submits that considering the fact that ‘Bodhtree’ provides varied business Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 7/15 solutions and services as laid out above, it is prayed that it may be excluded from the final list of comparables as it is functionally different from the assessee, in the case on had, who is a captive software development service provider to its AE. In this regard, the assessee, placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. in IT (TP) A No.271/Bang/2014 dt.14.8.2014 for Assessment Year 2009-10 wherein this company was excluded from the list of comparables Tribunal to a software development service provider as it is a software product company. 13.4 Per contra, the learned Departmental Representative supported the orders of the authorities below in retaining this company as a comparable to the assessee in the case on hand. 13.5.1 We have heard the rival contentions and perused and carefully considered the material on record: including the judicial pronouncement relied on by the Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 8/15 assessee. We find that a co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10, following the decisions of the Mumbai Benches of the ITAT in Nethawk Networks Pvt. Ltd. in ITA No.7633/Mum/2012 dt.6.11.2013 and Wills Processing Services (I) Pvt. Ltd. in ITA No.4547/Mum/2012 had omitted this company from the list of comparables to a software development service provider as it was established to be in software product company. At para 26.1 of its order, the co- ordinate bench held as under : xxxxxxxxxxxxx 13.5.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10, we hold that ‘Bodhtree’ cannot be regarded as a comparable to a software development service provider, like the assessee in the case on hand, as it is a software product company and consequently direct the Assessing Officer Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 9/15 /TPO to exclude this company from the final list of comparables.” xxxx xxxx 14.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited. We find that a co- ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) for Assessment year 2009-10, following the decision of an earlier co-ordinate bench in the case of 3DPLM Software Solutions P. Ltd. V DCIT in IT (TP) A No.1303/Bang/2013 dt.28.11.2013, has omitted this company from the list of comparables to a mere software development service provider since it was found to be functionally dis-similar and different, being a market leader engaged in software products, owned significant IPRs and intangibles, had significant R& D activities, brand attributable profits etc. At para 26.2 of its order the co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) has held as under:- Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 10/15 xxxxxxxxxxxxxx 14.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of CISCO India Pvt. Ltd. (supra) for Assessment Year 2009-10, we hold that ‘Infosys’ cannot be regarded as a comparable to a captive software development service provider, like the assessee in the case on had, and consequently direct the Assessing Officer/ TPO to exclude this company from the list of comparables.” 15.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied upon by the assessee. We find that a co-ordinate bench of this Tribunal in the case of CISCO Systems (India)Pvt. Ltd. (supra), following the decision in that assessee’s own case for Assessment Year 2007-08 (ITA No.1076/Bang/2011 dt.29.03.2013) has held ‘Tata Elxsi’ being into software development service segments such as embedded product design services, Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 11/15 industrial design and engineering services, systems integrating services, Visual Computing Labs, etc. cannot be regarded as comparable to a pure software development service provider, like is the assessee in the case on hand. At para 26.4 of its order the co-ordinate bench in CISCO Systems (India) Pvt. Ltd. (supura) for Assessment Year 2009- 10 has held as under:- xxxxxxxxxxxxx 15.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10, we hold that ‘Tata Elxsi Ltd.’ cannot be regarded as comparable to the assessee in the case on had who is a captive software service provider and consequently direct the Assessing Officer/TPO to exclude this company form the list of comparables.” 6. 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.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 12/15 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 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 Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 13/15 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. 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 Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 14/15 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.” 7. 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. 8. Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs. Date of Judgment 04-07-2018, ITA No.196/2016 The Pr. Commissioner of Income Tax & another Vs. M/s. Ipass India Pvt. Ltd., 15/15 A copy of this Order shall be sent to the Respondent-Assessee. Sd/- JUDGE Sd/- JUDGE AN/- "