PR. COMMISSIONER OF INCOME TAX GURGAON vs. M/S IGH IT SERVICE (INDIA) PVT. LTD.

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ITA/264/2016HC Punjab & HaryanaPHHC01110462201605 December 2016Bench: MR. JUSTICE M.M. AGGARWAL,MR. JUSTICE AVNEESH JHINGAN3 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the appeal did not raise a substantial question of law and dismissed the appeal. The Court upheld the ITAT's exclusion of Vishal Information Technologies Limited, finding that its outsourcing level of approximately 44.81% and a low employee cost of 1.25% of operating revenue made it incomparable to the assessee, whose wages to sales ratio was 53%. The Court found this to be a clear finding of fact that was not erroneous or perverse. Regarding Nucleus Netsoft and GIS (India) Limited, the Court found that over 40% of its business was outsourced, as evidenced by data processing charges constituting over 40% of its total operating and other expenses. The Court referred to its own prior judgment in The Commissioner of Income Tax, Faridabad Vs M/s Mercer Consulting (India) Pvt. Ltd. Gurgaon, which held that the finances of a company outsourcing a major part of its business cannot be compared to one that does not. Therefore, the exclusion of both comparables was justified, and no substantial question of law arose.

What were the facts?

The appeal concerns the assessment year 2006-2007 and challenges an order of the Income Tax Appellate Tribunal (ITAT). The appellant, the Principal Commissioner of Income Tax, Gurgaon, disputes the ITAT's decision to exclude three companies – Nucleus Netsoft and GIS (India) Limited, and Vishal Information Technologies Limited – from the set of comparables used to determine the Arm's Length Price (ALP) of international transactions entered into by the respondent assessee, IHG IT Services (India) Pvt. Ltd., with its associated enterprises. The ITAT had excluded these comparables primarily because a substantial part of their business was outsourced, unlike the assessee's business.

What were the issues?

1. Whether, in law and in the facts and circumstances of the case, the ITAT was correct in excluding M/s Nucleus Netsoft & GIS India Ltd. and M/s Vishal Information Technologies Ltd. from the set of comparables for determining the Arm's Length Price of international transactions entered into by the assessee with its Associated Enterprises, under Section 92C of the Income Tax Act, 1961. Assessee's Contentions: The assessee argued that the ITAT was correct in excluding the comparables. The primary ground for exclusion was that a substantial part of the business of Nucleus Netsoft and GIS (India) Limited, and Vishal Information Technologies Limited, was outsourced (exceeding 40%), which was not the case for the assessee. For Vishal Information Technologies Limited, the assessee highlighted its low employee cost (1.25% of operating revenue) compared to the industry average and the assessee's own wages to sales ratio (53%), indicating a lack of comparability. The assessee also noted that the merger of another company into Nucleus Netsoft and GIS (India) Limited was a further reason for its exclusion. Revenue's Contentions: The revenue contended that the ITAT erred in excluding these comparables. The revenue argued that the ITAT's reasoning for excluding Nucleus Netsoft and GIS (India) Limited was insufficient. The revenue also challenged the exclusion of Vishal Information Technologies Limited, implying it should have been considered a valid comparable.

Which sections of the Income-tax Act were involved?

Section 92C

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA-264-2016 (O&M) Date of decision:- 05.12.2016 The Pr. Commissioner of Income Tax, Gurgaon ...Appellant Versus IHG IT Services (India) Pvt. Ltd. ...Respondent CORAM: HON'BLE MR. JUSTICE S.J. VAZIFDAR, CHIEF JUSTICE HON’BLE MR. JUSTICE DEEPAK SIBAL Present:- Mr. Tajender K. Joshi, Advocate, for the appellant. Mr. Kamal Sawhney, Advocate, Mr. Rahul Srivastava, Advocate, for the respondent. * * * * S.J. VAZIFDAR, C.J. (ORAL) This is an appeal against the order of the Tribunal excluding from consideration two comparables, namely, Nucleus Netsoft and GIS (India) Limited and Vishal Information Technologies Limited. The matter pertains to the assessment year 2006-2007. 2. The appellant contends that the following substantial question of law arises in the appeal:- “Whether in the facts and circumstances of the case and in law, the Hon’ble ITAT was correct in excluding the cases of M/s Nucleus Netsoft & GIS India Ltd. and M/s Vishal Information Technologies Ltd. from the set of comparables, for determining Arm’s Length Price of International Transaction entered into by the assessee with its Associated Enterprises?” Amodh Sharma 2016.12.06 16:03 I attest to the accuracy and authenticity of this document chandigarh

ITA-264-2016 (O&M) 2 3. The Tribunal excluded both the comparables on the ground that a substantial part of their business is outsourced which is not so with the assessee. In each case, the extent of outsourcing exceeded 40%. In the case of Nucleus Netsoft and GIS (India) Limited, the Tribunal held that it is not a valid comparable also on the ground that another company was merged into it. We are informed that the transfree company, M/s Nucleus Netsoft & GIS India Ltd., had its name changed to that of the transferor company. 4. It is not necessary to go into the question of the effect of the merger as the order of the Tribunal can be upheld on the ground that both the companies are not appropriate comparables as a major part of their business is outsourced, whereas the major part of the respondent-assessee’s business is not outsourced. 5. As far as Vishal Information Technologies Limited is concerned, there is no difficulty whatsoever for the Tribunal has come to a clear finding of fact that it outsourced about 44.81% of its business. For instance, it was observed that Vishal Information Technologies Limited has a low employee cost of 1.25% of operating revenue. The Tribunal also observed that the TPO had himself referred to the NASSCOM survey that the average wages and salaries to sales ratio of IT/ITES industry in India was 46.1%. The assessee’s wages to sales is 53% which is not comparable to Vishal Information Technologies Limited whose wages to sales is 1.25%. This is a finding of fact and there is nothing to indicate that the same is erroneous much less perverse. The exclusion of Vishal Information Technologies Limited is, therefore, justified. Amodh Sharma 2016.12.06 16:03 I attest to the accuracy and authenticity of this document chandigarh

ITA-264-2016 (O&M) 3 6. The only contention regarding the exclusion of Nucleus Netsoft and GIS (India) Limited is that there is no reasoning. This, however, is not even a ground taken in the appeal filed before us. In any event, we perused the 22nd Annual Report for the year 2005-2006 of Nucleus Netsoft and GIS (India) Limited. Schedule 12 furnishes the operating & other expenses. The data processing charges are ` 1.04 crores out of the total operating & other expenses of about ` 2.41 crores. Thus, an amount of over 40% is outsourced. The finding of the Tribunal, therefore, cannot be held to be perverse. 7. By our order and judgement dated 24.08.2016 in ITA-101-2015 titled as The Commissioner of Income Tax, Faridabad Vs M/s Mercer Consulting (India) Pvt. Ltd. Gurgaon, we, inter alia, held that the finances of the company that outsources a major part of its business cannot be compared to one that does not. 8. In these circumstances, a substantial question of law does not arise. 9. The appeal is accordingly dismissed. (S.J. VAZIFDAR) CHIEF JUSTICE (DEEPAK SIBAL) JUDGE 05.12.2016 Amodh Whether speaking/reasoned Yes/No Whether reportable Yes/No Amodh Sharma 2016.12.06 16:03 I attest to the accuracy and authenticity of this document chandigarh

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