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1/17 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 16TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.7/2014
BETWEEN : 1. COMMISSIONER OF INCOME TAX-III, C.R. BUILDINGS, QUEENS ROAD BANGALORE 560 001.
INCOME TAX OFFICER, WARD 12(2) BANGALORE.
... APPELLANTS
(BY SRI JEEVAN J NEERALGI, ADV.)
AND : M/s. SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD., (PRESENTLY MERGED WITH GENPACT INDIA), BLOCK No.2 SALARPURIA SOFTZONE BELLANDUR VATHUR HOBLI BANGALORE 560087.
... RESPONDENT
(BY SRI K.R.VASUDEVAN, ADV.)
THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 14.08.2013 PASSED IN IT(TP)A NO.1316/BANG/2012, FOR THE ASSESSMENT YEAR 2008-09, ANNEXURE-A, PRAYING TO: 1.]
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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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. 2.] SET ASIDE THE APPELLATE ORDER DATED: 14.08.2013 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'C' BENCH, BANGALORE, IN APPEAL PROCEEDINGS NO. IT(TP)A No.1316/BANG/2012 FOR ASSESSMENT YEAR 2008-09, ANNEXURE-A.
THIS APPEAL COMING ON FOR HEARING, THIS DAY, S.SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. Jeevan J. Neeralgi, Adv. for Appellants – Revenue. Mr. K.R.Vasudevan, 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, ‘C’ Bench, Bangalore, in IT.[T.P]A.No.1316/Bang/2012 dated 14.08.2013 relating to the Assessment Year 2008-09.
The substantial questions of law framed by the Revenue in the Memorandum of Appeal are as under: “[1] Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding Accential Technologies Ltd., as
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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comparable on the basis of order of the ITAT Hyderabad in the case of Capital IQ Information Systems India Pvt. Ltd., without appreciating that the merger had no effect on the margins of the Accentia Technologies Ltd.,?
[2] Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding Acropetal Technologies Ltd., Eclerx Services Ltd., and Cross Domain Solutions Ltd., as comparables by holding that the functions of the assessee cannot be classified as KPO without appreciating the nature of the services rendered by the assessee?
[3] Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding Coral Hubs Ltd., as a comparable by comparing the business models of one comparable with that of another comparable and not the FAR analysis of these comparable and also applying employee cost filter of 25% selectively only to this comparable when neither the assessee nor the TPO applied the employee cost filter in the selection process?
[4] Whether on the facts and in the circumstances of the case, the Tribunal is right in
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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law in excluding Eclerx Technologies Ltd., as comparable on the basis of supernormal profit without appreciating that under the India Transfer Pricing Regulations, there is no concept of high margin and low margin but only the averaging concept of the PLIs of the comparable?
[5] Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding Genesys International Corporation Ltd., and Moldtek Technologies Ltd., by holding that the functions of the assessee can be classified as a routine ITeS provider without appreciating the nature of services rendered by the assessee?
[6] Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly directing the AO/TPO not to include cases of M/s. Infosys BPO Ltd., and M/s. Wipro Ltd., as comparables for determining ALP in the case of the assessee without appreciating that the assessee is not engaged in any brand developing activity and he economies of scale does not affect the margins in software industry?
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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[7] Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the reimbursement of travelling and internet charges incurred in foreign currency are to be excluded both from total turnover as well as from export turnover for computation of deduction u/s. 10A whereas such exclusion is permitted to arrive at export turnover only as per the definitions given in Sec. 10A of the IT Act and total turnover has not been defined in the Section?
[8] Whether the Tribunal is correct in law in holding that the deduction u/s.10A should be computed in the above manner following the judgment of jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs filed by the revenue on this issue are pending before the Hon’ble Supreme Court?”
Regarding Substantial Question Nos.7 and 8: 3. These issues are covered by the decision of the Hon’ble Supreme Court in the case of
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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Commissioner of Income-tax, 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 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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turnover’ is export turnover.
Any other interpretation would run counter to the legislative intent and would be impermissible.
XXXXXX
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.
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 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned the findings as under: Regarding Substantial Question No.1: “11. We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable.”
Regarding Substantial Question No.2: “13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No.15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO].”
Regarding Substantial Question No.3: “14. This company is listed at Sl.No.6 of the list of comparable companies chosen by the TPO. As far as this company is concerned, it is seen that this company was earlier known as Vishal Information Technologies Ltd. The comparability of this company in the case of an ITES company by name 24 x 7 Customer.com Pvt. Ltd. was considered by the Tribunal in ITA No.227/Bang/2010 and by order dated 09.11.2012 the Tribunal held that this company is not functionally comparable with ITES for the following reason:-
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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“xxxxx”
Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library & Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:-
“xxxxx”
Applying the aforesaid decisions, we are of the view that Coral Hubs Ltd. cannot be considered as a comparable.”
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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Regarding Substantial Question No.4: “20. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:-
“xxxxx”
We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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comparable for the reason that it was functionally different.”
Regarding Substantial Question No.5:
“23. It is thus clear from the aforesaid decision of the Tribunal that among the ITES companies there is a hierarchy in terms of skill required to provide services. It ranges from providing routine services where no skills and required and providing services where highly professionalized skills are required. Depending on the skills required to perform ITES the comparability has to be done. In view of the above, we are of the view that this company cannot be regarded as a comparable and deserves to be excluded from the list of comparables.”
Regarding Substantial Question No.6: “24. This company is listed at Sl.13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit & loss account of this
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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company for the F.Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F.Y. 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at Rs.31,863 Crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comaparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable.”
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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For similar reasons, M/s. Wipro Ltd., is also excluded from the comparables.
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/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
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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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. 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.
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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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. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
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.
Date of Judgment 16-07-2018, ITA No.7/2014 Commissioner of Income Tax-III & Another Vs. M/s. Symphony Marketing Solutions India Pvt. Ltd.,
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Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE
NC.