PCIT Vs. Softbrands India P. Ltd (Karnataka High Court
The existence of a substantial question of law is sine qua non for maintaining an appeal before the High Court. While the appeal to High Court under Section 260-A of the Act may be a First appeal in the sense from the order of final fact finding by the Tribunal under the Income Tax Act, whereas the Second Appeal on substantial question of law before High Court under Section 100 would lie against the Judgment and Decree of the first Appellate Court disposing of an appeal against the Judgment and Decree of a Trial Court, but nonetheless it is the third round of consideration at the level of the High Court, where the facts and law both have been screened, discussed and analyzed by the Authorities or the Courts below and therefore the tenor and color of the words “substantial question of law” in both these enactments remains the same.
The High Court has power to not only formulate the substantial questions of law and rather it has the duty to do so and can also frame additional substantial questions of law at a later stage, if such a substantial question of law is involved in the appeal before it under these provisions and the appeal should be heard and decided only on such substantial questions of law after allowing the parties to address their arguments on the same. The extended power given to the High Courts to decide even an issue under Subsection (6) of Section 260-A of the Income Tax Act, which is in pari materia with Section 103 of the Civil Procedure Code and which says that the High Courts may determine any issue which (a)has not been determined by the Tribunal or (b) has been wrongly determined by the Tribunal, can be so determined by the High Court, only if the High Court comes to the conclusion that ‘by reason of the decision on substantial question of law rendered by it’, such a determination of issue of fact also would be necessary and incidental to the answer given by it to the substantial question of law arising and formulated by it.
The argument raised by the learned counsel for the Respondent Assessee before us by making a disjuncted reading of Clause (a) and Clause (b) of Sub- Section (6) of Section 260-A of the Income Tax Act, 1961 to submit that the High Court can touch upon the issues of facts also in an appeal under this provision bereft of substantial question of law, is a misconceived argument.
In our opinion, both the Clause (a) and Clause (b) of Sub-Section (6) of Section 260-A of the Act are circumscribed by the words ‘by reason of the decision on such question of law as is referred to in Subsection (1)’. Therefore, even if an issue which has not been determined by the Tribunal, which was required to be so determined in terms of the answer to the substantial question of law given by the High Court, such an issue not determined by the Tribunal could also be decided by the High Court with reference to Clause (a) and more so, if such an issue has been wrongly decided according to the answer given by the High Court to such a substantial question of law, then also the High Court can set it right to fall in line with the answer given by the High Court to such a substantial question of law raised before it and determined by it in terms of Clause (b) thereof.
Sub-section (6) of Section 260-A of the Act, therefore, does not give any extended power, beyond the parameters of the substantial question of law to the High Court to disturb the findings of fact given by the Tribunal below.
Sub-section (7) inserted in Section 260-A of the Act by the Finance Act of 1999 with effect from 01/06/1999 after a period of about 8 months of substituting the new provisions of Section 260-A to the Act as they now stand by Finance Act of 1998, with effect from 01/10/1998 was only to clarify and support that the parameters of Sections 100 & 103 of the Civil Procedure Code and other provisions of Civil Procedure Code relating to appeals of High Court shall apply to the appeals under Section 260-A of the Income Tax Act also.
The insertion of Sub-section (7) in Section 260-A of the Act does not give any new or extended powers to the High Court and the pre-existing provisions from Sub-section (1) to Sub-section (6) in Section 260-A of the Act already had all the trappings of Sections 100 and 103 of the Civil Procedure Code.
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
This I.T.A. is filed under Section 260-A of Income Tax Act 1961, praying to 1. Decide the foregoing question of law and/or such other questions of law as may be formulated by the Hon’ble Court as deemed fit and set aside the appellate order dated 10/4/2015 passed by the ITAT, ‘A’ Bench, Bangalore, in appeal proceedings No.IT(TP)A No.589/Bang/2012 for Assessment year 2006-2007, as sought for in this appeal; and to grant such other relief as deemed fit, in the interest of justice.
These I.T.As having been heard and reserved on 21-06-2018, coming on for Pronouncement of Judgment, this day, Dr Vineet Kothari, J, delivered the following:
JUDGMENT
Mr. E.I. Sanmathi &
Mr. K.V. Aravind, Advs. for Appellants – Revenue
Mr. Chythanya K.K. Mr.A. Shankar &
Mr. T. Suryanarayana, Advs. for Respondent – Assessees
Introduction:
1. The Revenue – Income Tax Department has filed these two appeals under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’ for short) against the Respondent – Assessee – M/s. Softbrands India Private Limited, Bangalore, purportedly raising certain substantial questions of law arising from the orders of the Income Tax Appellate Tribunal, Bangalore Bench ‘A’ Bangalore, both dated 10/04/2015 in IT(TP)A No.589/Bang/2012/(AY 2006-07) and IT(TP)A No.590/Bang/2012/ (AY 2006-07).
2. These two appeals from the host of such appeals filed mostly by Income Tax Department and some of them even by the Assessees are essentially in the realm of International Taxation on such international transactions between Indian Companies and their Associate Enterprises in Foreign Countries.
Preamble:
3. The Indian Income Tax Act, 1961 contains Special Provisions relating to Avoidance of Tax in Chapter X of the Act comprising of Sections 92 to 94-B with regard to assessment to be done for computation of income from international transactions on the principles of ‘Arm’s Length Price’ (ALP) and the relevant Rules for computation of such income under the aforesaid provisions of Chapter X are enacted in the form of Rule 10-A to 10-E in the Income Tax Rules, 1962.
Perspective of International Trade and Transactions:
4. With the ever increasing international Trade and transactions, particularly, in the Software Industries and Bangalore, being the Silicon Valley of India where many big, small and medium size Software Industries have their Offices and Units in this Software Industry, and Bengaluru is a hub of this Service Industry and essentially the Indian Companies have business linkages with large Companies spread worldwide particularly in the Western Hemisphere of the Globe.
5. The implementation of the Tax laws in this field in a smooth, clear and quick manner is of utmost importance to build an image of an efficient Tax Administration both at Departmental level and in Judicial Courts so that the economic activity in such borderless trade thrives and enures to the benefit of the Indian economy at large and Software Industry in particular.
6. While the special provisions have been made for computation of ‘Arm’s Length Price’ to arrive at a fair assessment of income taxable in the hands of the Indian Resident Companies and these special provisions also provide for an elaborate and in-depth analysis of huge data of the comparable cases of other similarly situated Companies to arrive at a fair ‘Arm’s Length Price’ and for that, Special Cells and designated Authorities have been created under the Income Tax Act, 1961, but still retaining the normal provisions for assessments of appeals in the Indian Income Tax Act about the remedial Forums or the appeal mechanisms and the Income Tax Appellate Tribunal constituted under Section 253 of the Act continues to be the final fact finding body under the Act even with regard to the assessments of the international transactions under the Special Chapter X as aforesaid and the appeal to the Constitutional Courts as provided in Section 260-A to High Court and Section 261 to the Hon’ble Supreme Court are applicable to these special assessments under Chapter X as well.
Suggested Substantial Questions of Law by the Revenue:
7. In this perspective, we are called upon to decide the purported substantial questions of law arising from the order of the Income Tax Appellate Tribunal.
8. We quote below the suggested substantial questions of law under International Taxation issue in the present appeals as framed by the Revenue for our consideration.
(1) “Whether on the facts and in the circumstances of the case the Tribunal is right in law rejecting comparables namely, Kals Information systems Ltd, Tata Elxsi Ltd. M/s. Accel Information Systems Ltd, M/s. Bodhtree Consulting by following its earlier order and without appreciating that the reasonings of TPO/AO for adopting the said comparables which have been brought out in the TPO’s order and without appreciating that TPO has chosen the same after application of mind and materials on record”?
(2) “Whether the Tribunal was justified in fixing the RPT at 15% of total revenue and deleting Geomatric Software Ltd (Seg) and Megasoft Ltd as comparables without going into specific facts in the case of taxpayer and without adducing the basis for arriving 15% cut off RPT Filter, the case of taxpayer”?
Rival Contentions:
9. The learned counsels appearing for the Respondent Assessee even though they were appearing in the other similar appeals and the learned standing counsels on the side of the Revenue have addressed the arguments, firstly on the question whether the questions as suggested and quoted above really come up to the level of definition of ‘substantial questions of law’ as elaborately discussed by a series of judgments from the Apex Court in the light of the provisions of Section 260-A providing for an appeal to the High Court are in pari- materia with Sections 100 and 103 of the Code of Civil Procedure, 1908 which provides for Second Appeal to the High Court on substantial questions of law against the Decrees passed by the Subordinate Courts.
10. The learned counsels addressed their arguments on the said preliminary question as to whether these questions as raised are at all substantial questions of law or not and we have heard both the sides learned counsels at length and with the able assistance rendered by them with the help of various case laws cited at the bar which we would be discussing hereinafter, we intend to first decide whether these type of questions at all can be entertained and whether the High Court should enter into these appeals to go into the merits and factual aspects of the case for answering the alleged substantial questions of law which if necessary, the Court has the power to reframe also under Section 260-A(4) of the Act.
Aspects to be considered:
11. Before we advert to the arguments raised by the learned counsels on both the sides and the relevant case laws, we would dilate upon the following relevant aspects of the matter.
[I] The analysis of the provisions relating to the Transfer Pricing/ determination of the ‘Arm’s Length Price’;
[II] The Scheme of procedure of assessment and appeals to the Tribunal and High Court/Supreme Court.
[III] The scope of interference by High Court under Section 260-A of the Act in these type of cases.
Findings of the Tribunal:
12. We find it appropriate to quote some portions of the Order passed by the learned Tribunal to indicate how in the present case the Income Tax Appellate Tribunal has dealt with the issues of comparables raised before it in this regard.
“11. We have perused the orders and considered the rival contentions. It is not disputed that after the exclusions directed by the CIT (A) what were left as comparable companies selected by the TPO were KALS Info Systems Ltd., Bodhtree Consulting Ltd., and Synphosys Business Solutions Ltd., Admittedly, assessee was a software development company and not a software product company. With regard to Kals-Info Systems Ltd., and Bodhtree Consulting Ltd., Mumbai Bench of the Tribunal in the case of Nethawk Network India Ltd., v. ITO (ITA No.7633/Mumb/2012; dt 06-11-2014), had held as under:
“Kals Information Systems Limited (Seg.)
26. In this regard, Sri Lohia, Ld. Counsel for the assessee argues that this company is also engaged in development of software and software products and no segmental details are available.
27. On the other hand, the case of the Revenue is that the revenues on account of software development is 2.05 Crs and there is no breakup for the same to know the revenue’s for software services and the software products. Ld DR brought our attention to the details under the head – inventories and mentioned that Work in Progress is NIL for the period ending March, 2008; but the fact is that there are no segment details relating to software products out of the segmental information under the head “application in software”. Considering all the information available in public domain, we are of the opinion that this case cannot be considered as a good comparable. As such, the fact that the company is producing the ERP software products called Shine, the internationally proven ERP software and other software products called Docuflo (Document Management Software) etc are brought revenue to the assessee in the year under consideration. Therefore, considering the absence of data as well as the unfavourable FAR analysis to the TPO, this case cannot be considered as comparable. We direct the AO to exclude the same from the list of comparables.
Bodhtree Consulting Limited
21. On this comparable, case of the assessee is that the company is not a good comparable in view of the software products produced by the company. As such, no segmental data is adequately available too.
22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc. to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take different stand in this case. In this regard, we have perused the para 29 of the order of the Tribunal in the case of M/s. Wills Processing Services (I) P Ltd (supra) wherein it was mentioned that the TPO described this company is engaged in the business of software products, not the software development services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under.
29.1 The ld Sr. Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The ld AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e. software development. Therefore, the ld AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables.
29.2 On the other hand, the ld DR has filed the information collected u/s 133(6) of the IT Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs.2,94,85,528/-. Therefore, this company is a good comparable having functional similarity.
29.3 …. ……
30. We have considered the rival submissions as well as the relevant material on record. The details filed by the ld DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application……
23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO.
Hon’ble Mumbai Bench of the Tribunal had held that Bodhtree Consulting Ltd., was engaged in web services integration, data client services, data management services and e-paper solutions, which were completely different from software development services. M/s. Kals Info Systems was held to be into production of ERP software products. We are, therefore, of the opinion that KALS Info Systems and Bodhtree Consulting Ltd., have to be excluded from the comparables.
13. With regard to application of RPT filter, we find that 15% outer limit was held to be proper one by this Tribunal in the case of 24/7 Customers.com P. Ltd., (supra), this Tribunal had held as under at para 13.0 of its order, which read as under:
In respect of the ground raised at S.No.1 regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO’s setting a limit of 25 percent on related party transactions. He objected to the inclusion of comparable being related party transactions in excess of 15 percent of sales/revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon’ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT Delhi dt. 23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that –
“…… We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15 percent of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison what is to be judged is the impact of the related party transactions vis-à-vis sales and not profit since profit of an enterprise is influenced by large number of other factors.
Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd (supra), the Assessing Officer/TPO are directed to excluded after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15 percent of total revenues for the financial year 2003-04.
By application of the above filter, the following companies do come into the list of comparables that could be considered:
