1/21 IN HIGH COURT OF KARNATAKA, BENGALURU DATED THIS 12TH DAY OF JULY 2018 PRESENT HON BLE DR.JUSTICE VINEET KOTHARI AND HON BLE MRS.JUSTICE S.SUJATHA I.T.A.No.20/2014 BETWEEN : 1. COMMISSIONER OF INCOME-TAX, CIT[A] C.R. BUILDING, QUEENS ROAD BANGALORE. 2. INCOME-TAX OFFICER WARD-11[1] RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE-560001. ...APPELLANTS (BY SRI K.V.ARAVIND, ADV.) AND : M/s. CURAM SOFTWARE INTERNATIONAL PVT. LTD., No.150/1, AL HABEEB INFANTRY ROAD BANGALORE-560001. RESPONDENT (BY Mrs. D.SUJATHA, ADV. FOR SRI NAGESWAR RAO, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 31.07.2013 PASSED IN ITA. No.1280/BANG/2012, FOR ASSESSMENT YEAR 2008-09, ANNEXURE-D, PRAYING TO: 1]. FORMULATE SUBSTANTIAL QUESTIONS OF LAW Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 2/21 STATED ABOVE: 2]. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME-TAX APPELLATE TRIBUNAL, BANGALORE IN ITA No.1280/BANG/2012 DATED 31.07.2013, ANNEXURE-D AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY INCOME TAX OFFICER, WARD-11[1], BANGALORE. THIS APPEAL COMING ON FOR FINAL HEARING, THIS DAY, S. SUJATHA, J., DELIVERED FOLLOWING: JUDGMENT Mr. K.V.Aravind, Adv. for Appellants Revenue. Mrs. D.Sujatha, Adv. for Mr. Nageswar Rao, Adv. for Respondent Assessee. This Appeal is filed by Revenue purportedly raising substantial questions of law arising from Order of Income Tax Appellate Tribunal, Bangalore Bench B , Bangalore, in ITA No.1280/Bang/2012 dated 31.07.2013, relating to Assessment Year 2008-09. 2. appeal has been admitted on 09.06.2015 to consider following substantial questions of law: 1. Whether on facts and in circumstances and in law Tribunal was right Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 3/21 in super imposing decisions of other benches and decision of ITAT while rejecting comparables [(i) M/s. Celestial Bio Labs (ii) KALS Information Systems Limited (iii) M/s. Infosys Technologies Ltd, (iv) M/s. Wipro Ltd and (v) Tata Elxsi Ltd.,] without appreciating fact that selection of comparables in case depends on assessee specific FAR analysis and recorded perverse finding? 2. Whether on facts and in circumstances of case Tribunal was correct in directing transfer pricing officer to provide information obtained under section 133[6] of Act in respect of comparability of M/s. Avani Cimcon Technologies Ltd., without taking into consideration that material relied on by transfer pricing officer was made available to assessee and opportunity of hearing was also provided before same was utilized in computing arms length price and recorded perverse finding? 3. Whether on facts and in circumstances of case Tribunal was correct in holding that Infosys technology Ltd., is functional dissimilar to assessee, without appreciating that comparable is product Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 4/21 developer and therefore is not functionally different from assessee and recorded perverse finding? 4. Whether on facts and in circumstances of case and in law Tribunal was correct in rejecting Tata Elxsi Ltd., as comparable by placing reliance on order in case of other assessee passed by Mumbai ITAT without taking into consideration finding recorded by Transfer Pricing Officer for selecting as comparable as comparable company is in business of software development and satisfies all filters and recorded perverse finding? 5. Whether on facts and in circumstances of case and in law Tribunal was correct in directing transfer pricing officer to make computation of related party transaction in respect of KPIT Cummins INfosystems Ltd., on stand-alone basis to decide comparability, without appreciating fact that segmental financials of comparable were adopted for purposes of comparability under TNMM and recorded perverse finding? Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 5/21 6. Whether on facts and in circumstances of case Tribunal was correct in holding that foreign exchange loss/gain attributable as operative activities without appreciating that foreign exchange loss/gain derived from foreign exchange loss/gain and not from operating expenditure and same cannot be considered as operating income to compute arms length price and recorded perverse finding? 7. Whether on facts and in circumstances of case, Tribunal was correct in remanding issue of market risk adjustment to file of transfer pricing officer to identify risks to bring it at par with comparables and make required adjustments to profit margin without pointing out risk in comparables and without appreciating that transfer pricing regulations in India does not provide for assumptions in respect of adjustments and recorded perverse finding? 8. Whether on facts and in circumstances of case and in law Tribunal was correct in directing exclusion of telecommunication expenses and expenditure incurred in foreign currency from export turnover Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 6/21 and total turnover, when provision does not refer to exclusion of expenditure reduced from export turnover to reduce same from total turnover? Regarding Substantial Question No.8: 3. issue is covered by decision of Hon ble Supreme Court in case of Commissioner of Income-tax, Central III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC). 4. relevant portion of judgment of Hon ble Supreme Court in case of HCL Technologies Ltd. (supra), is quoted below for ready reference:- 17. similar nature of controversy, akin this case, arose before Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxman.com 100/349 ITR 98. issue before Karnataka High Court was whether Tribunal was correct in holding that while computing relief under Section 10A of IT Act, amount of communication expenses should be excluded from total turnover if same are Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 7/21 reduced from export turnover? While giving answer to issue, High Court, inter-alia, held that when particular word is not defined by legislature and ordinary meaning is to be attributed to it, said ordinary meaning is to be in conformity with context in which it is used. Hence, what is excluded from export turnover must also be excluded from total turnover , since one of components of total turnover is export turnover. Any other interpretation would run counter to legislative intent and would be impermissible. 18. XXXXXX 19. In instant case, if deductions on freight, telecommunication and insurance attributable to delivery of computer software under Section 10A of IT Act are allowed only in Export Turnover but not from Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to Respondent which could have never been intention of legislature. 20. Even in common parlance, when object of formula is to arrive at profit from Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 8/21 export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from total turnover in same proportion as well . 5. learned Tribunal, after discussing rival contentions of both Appellants-Revenue and Respondent-Assessee, has returned findings as under: Regarding Substantial Question Nos.1, 3 and 4: 10. [2] Celestial Biolabs Ltd. 10.5.1 We have heard both parties and carefully perused and considered material on record including judicial decisions cited. As discussed earlier, there is merit in contention of learned Departmental Representative that ruling of co-ordinate bench of this Tribunal in case of Triology E- Business Software India Pvt. Ltd., [supra], was with respect to facts relevant to earlier financial year and there cannot be assumption that it would continue to be applicable to all other Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 9/21 assesses for this year as well. At same time, we find that TPO also seems to have selected this company as comparable, based on reasoning given in TPO s order for earlier year i.e., F.Y. 2006-07. Evidently, in this view of matter, TPO has not conducted any independent FAR analysis for this company for year under consideration and therefore selection process adopted by TPO is defective. 10.5.2 Further, besides relying on decision of co-ordinate bench in case of Triology E-Business Software India Pvt. Ltd., [supra], assessee has demonstrated that finding given therein for Assessment Year 2007- 08 is applicable for this year also. Further, assessee has also brought on record substantial evidence by quoting from various portions of Annual Report that this company is functionally different from assessee and hence is not comparable to assessee in case on hand. We agree with submissions made by assessee, that as per details from Annual Report of this company, it is functionally different from assessee. In view of fact that financial profile and other parameters of this company have not changed during year under Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 10/21 consideration, which fact has been demonstrated by assessee, following decision of co- ordinate bench of this Tribunal in case of Triology E-Business Software India Pvt. Ltd., [supra], we hold that company ought to be excluded from list of comparables. It is ordered accordingly. 11.0 [3] KALS Information Systems Ltd., 11.4 We have heard both parties and perused and carefully considered material on record including judicial decisions cited. As discussed earlier in this order, there is merit in contention of learned Departmental Representative that ruling rendered in case of Triology E-Business India Pvt. Ltd., [supra] was with respect to earlier period i.e., F.Y. 2006-07 and there cannot be assumption or presumption that it is applicable for year under consideration as well. At same time, we find that TPO has drawn conclusions on basis of information obtained under Sectio 133[6] of Act, which was not in public domain and could not have been used by TPO, when same is contrary to Annual Report of company as has been highlighted by Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 11/21 assessee in its submissions. We also find that co-ordinate bench of this Tribunal in case of Trilogy E-Business Software India Pvt. Ltd., [supra] has held that this company was developing software products and was not purely or mainly software development service provider. Further, apart from relying on decision of Trilogy E-Business Software India Pvt. Ltd., [supra], assessee has brought on record substantial evidence quoting from various portions of Annual Report of that this company is functionally dis-similar and different from assessee and hence is not comparable and therefore finding rendered in respect of this company in case of Trilogy E-Business Software India Pvt. Ltd., for Assessment Year 2007-08 is applicable for this year i.e., Assessment Year 2008-09 also. In view of facts and circumstances of case as discussed above, we hold that this company i.e., KALS Information Systems Ltd., is to be omitted from set of comparable companies. 12. [4] Infosys Technologies Ltd., 12.4 We have heard rival submissions and perused and carefully considered material on record. We find that assessee has Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 12/21 brought on record sufficient evidence to establish that this company is functionally dis-similar and different from assessee and hence is not comparable and finding rendered in case of Trilogy E-Business Software India Pvt. Ltd., [supra] for Assessment Year 2007-08 is applicable to this year also. argument put forth by assessee s is that Infosys Technologies Ltd., is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that break up of revenue from software services and software products is not available. In this view of matter, we h old that this company ought to be omitted from set of comparable companies. It is ordered accordingly. 13.0 [5] Wipro Limited 13.4.1 We have heard both parties and carefully perused material on record. We find merit in contentions of assessee for exclusion of this company from set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on segmental bifurcation of revenue from sale of product and software Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 13/21 services. TPO appears to have adopted this company as comparable without demonstrating how company satisfies software development sales 75% of total revenue filter adopted by him. Another major flaw in comparability analysis carried out by TPO is that he adopted comparison of consolidated financial statements of Wipro with stand alone financials of assessee; which is not appropriate comparison. 13.4.2 We also find that this company owns intellectual property in formo of registered patents and several pending applications for grant of patents. In this regard, co-ordinate bench of this Tribunal in case of 24/7 Customer.Com Pvt. Ltd., [ITA No.227/Bang/2010] has held that company owning intangibles cannot be compared to low risk captive service provider who does not own any such intangible and hence does not have additional advantage in market. As assessee in case on hand does not own any intangibles, following aforesaid decision of co-ordinate bench of Tribunal i.e., 24/7 Customer.Com Pvt. Ltd., [supra], we hold that this company cannot be considered as comparable Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 14/21 to assessee. We, therefore, direct Assessing Officer/TPO to omit this company from set of comparable companies in case on hand for year under consideration. 14.0 [6] Tata Elxsi Ltd. 14.4.1 We have heard both parties and carefully perused and considered material on record. From details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. details in Annual Report show that segment software development services relates to design services and are not similar to software development services performed by assessee. Regarding Substantial Question No.2: 9.5.1 We have heard both parties and perused and carefully considered material on record. It is seen from record that TPO has included this company in final set of comparables only on basis of information obtained under section 133[6] of Act. In these circumstances, it was duty of TPO to have necessarily furnished information so gathered to assessee and taken its Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 15/21 submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing information obtained under section 133[6] of Act to assessee has vitiated selection of this company as comparable. Regarding Substantial Question No.5: 17.0 [9] KPIT Cummins Infosystems Ltd. 17.3 We have heard submissions of both learned Departmental Representative for revenue and learned Authorised Representative for assessee. We find from record that TPO has neither explained computation in order nor has TPO explained how RPT filter fails in this case. However, we do not find contention of assessee, that computation has to be done on consolidated basis, to be acceptable. This is for reason that when he comparability is between specific segments, there is no requirement to take consolidated financials for computation. We agree with view of TPO that computation of RPT filter has to be on standalone basis. With this finding, we restore issue back to file of Assessing Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 16/21 Officer/TPO to make computation on stand along basis, taking into consideration decisions rendered by co-ordinate bench of this Tribunal in this regard. Regarding Substantial Question No.6: 21. Foreign Exchange Gain / Loss [Ground of appeal : 14] 21.2.1 We have heard both parties and given careful consideration to material on record. We find that TPO in his order has not given any reasoning for treating foreign exchange gain / loss as non-operating item of income / expense. In remand report submitted to DRP, TPO has merely stated that exchange loss / gain could be on account of hedging / speculative activity owing to which it has been treated as non-operating in nature. In rejoinder to remand report, assessee had submitted that assessee receives remuneration from its AEs for rendering of services in foreign currency. foreign exchange gain / loss relates entirely to rendering of services and there is no speculative hedging activity. Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 17/21 21.2.2 Before us, it was reiterated that foreign exchange gain should be considered as on operating income while computing operating margins of assessee and comparable companies. We have carefully considered submissions made. From reasons given by TPO in remand report, it is clear that TPO has considered foreign exchange income as non-operating income based on assumptions and surmises. As pointed out by assessee, there are several decisions of this and other Tribunals which hold that foreign exchange gain related to business activities are to be treated as operating income. In this view of matter, we hold that foreign exchange gain is to be treated as operating income in view of facts in case on hand and margins are to be computed accordingly. Regarding Substantial Question No.7: 22.2 As regards risk adjustment, TPO has not allowed any adjustment by observing that this has been considered and discussed in detail in order for earlier years. We find that on similar facts, different co-ordinate benches of this Tribunal in case of Intellinet Technologies India Pvt. Ltd., [ITA No.237/Bang/2010] and Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 18/21 Bearing Point Business Consulting Pvt. Ltd., [ITA No.1124/Bang/2011] have held that TPO ought to have given risk adjustment to margins of comparables for bringing them on par with assessee and remanded issue back to file of TPO. Following decisions in aforementioned cases of co- ordinate benches of this Tribunal [supra], we remand issue of market risk adjustment to file of Assessing Officer/TPO for examining issue in light of decisions cited. 6. controversy involved herein is no more res integra in view of 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/s. M/s.Softbrands India Pvt. Ltd.,] wherein it has been observed that unless finding of Tribunal is found ex facie perverse, Appeal u/s. 260-A of Act, is not maintainable. relevant portion of Judgment is quoted below for ready reference: Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 19/21 Conclusion: 55. substantial quantum of international trade and transactions depends upon fair and quick judicial dispensation in such cases. Had it been case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of Income Tax Act or Overriding Effect of Treaties over Domestic Legislations or questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before High Court under Section 260-A of Act, Courts could have embarked upon such exercise of framing and answering such substantial question of law. On other hand, appeals of present tenor as to whether comparables have been rightly picked up or not, Filters for arriving at correct list of comparables have been rightly applied or not, do not in our considered Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 20/21 opinion, give rise to any substantial question of law. 56. We are therefore of considered opinion that present appeals filed by Revenue do not give rise to any substantial question of law and suggested substantial questions of law do not meet requirements of Section 260-A of Act and thus appeals filed by Revenue are found to be devoid of merit and same are liable to be dismissed. 57. We make it clear that same yardsticks and parameters will have to be applied, even if such appeals are filed by Assessees, because, there may be cases where Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at Arm s Length Price in case of assessees with which assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with findings of facts arrived at by learned Tribunal is not at all Date of Judgment 12-07-2018, ITA No.20/2014 Commissioner of Income-tax & Another Vs. M/s. Curam Software International Pvt. Ltd., 21/21 sufficient reason to invoke Section 260-A of Act before this Court. 58. appeals filed by Revenue are therefore dismissed with no order as to costs. 7. In circumstances, having heard learned Counsel appearing for both sides, we are of considered opinion that no substantial question of law arises for consideration in present case. 8. Hence, Appeal filed by Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs. Sd/- JUDGE Sd/- JUDGE NC. Commissioner of Income-tax, CIT[A] Bangalore. / Income-tax Officer Ward-11[1], Bangalore v. Curam Software International Pvt. Ltd