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1/17 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 12TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.433/2013
BETWEEN :
THE COMMISSIONER OF INCOME TAX C.R. BUILDING, QUEENS ROAD BANGALORE
THE Dy. COMMISSIONER OF INCOME TAX, CIRCLE 11(3) RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE
...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. (FORMERLY KNOWN AS ZAPAPP INDIA PVT. LTD.) LEVEL 1, EXPLORER BUILDING, INTERNATIONAL TECH PARK BANGALORE-560 066
…RESPONDENT
(BY SMT.D.SUJATHA, ADV. FOR SRI MALLAHA RAO K., ADV.)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 30/04/2013 PASSED IN ITA NO.1086/BANG/2011, FOR THE ASSESSMENT
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YEAR 2007-08 ANNEXURE-D, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA NO.1086/BANG/2011 DATED 30/04/2013 ANNEXURE-D AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 11(3), BANGALORE.
THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. K.V. Aravind, Adv. for Appellants – Revenue. Ms. D. Sujatha, Adv., for Mr. Mallaharao.K., 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, Bangalore Bench ‘A’, in IT [TP]A No.1086/Bang/2011 dated 30.04.2013, relating to the Assessment Year 2007-08.
This Appeal is filed to consider the following substantial questions of law as framed by the Revenue in the Memorandum of Appeal. “1. Whether on the facts and in the circumstances of the case, the Tribunal is right in
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law in directing assessing authority to exclude the internet charges both from export turnover and total turnover as well by placing reliance on the decision of this Hon’ble Court in the case of Tata Elxsi even when said order has not reached finality?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding companies such as HCL Coment System & Services Ltd., Infosys BPO Ltd., Wipro Ltd., Accentia Technologies Ltd., Informed Technologies India, Vishal Information Technologies Ltd., Bodhtree Consulting Ltd., Eclerc Services Ltd., Mold Tek Technologies Ltd., Avani Cimcom Technologies Ltd., even when the Transfer Pricing Officer has rightly chosen the same as comparables considering the functions and by applying various tests?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law holding that foreign exchange loss/gain is operating in nature when, such loss/gain though attributable to the operating activity is not derived from the operating activity?
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Whether the holding that the assessee is entitled for registration under Section 12AA of the Act, though the Society had not commenced its activities whereby the genuineness of the activities of the trust was not verifiable?”
Though this Appeal has been admitted on 8.12.2015 to consider the substantial questions of law Nos. 2 and 3, learned Counsel for the Appellants- Revenue submits that Substantial Question No.1 is covered by the Judgment of the Hon’ble Supreme Court in the case of Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).
Learned Counsel for the Appellants-Revenue does not press substantial question No.4.
The same is taken on record.
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Regarding Substantial Question No.1:
The issue is covered by the decision of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. (supra).
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
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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 turnover’ is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.
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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
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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”.
Regarding Substantial Question No.2: 8. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under: “29. As regards the objection of the assessee on the adoption of comparables for computation of ALP relating to ITES segment, the assessee has filed a chart which is taken on record. The chart tabulates the comparables into 3 categories which are to be excluded on the basis of the decision of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. First group of companies consists of – 1) HCL Comnet Systems & Services Ltd., 2) Infosys BPO Ltd., 3) Wipro Ltd.
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According to the learned counsel for the assessee these companies are to be excluded from the list of the comparables by the application of ‘turnover filter’. We have already held in the case of software segment that the turnover filter is to be applied for both software development as well as ITES segment.
Respectfully following the decision of the Tribunal in the assessee’s own case for the assessment year 2006-07, these companies are directed to be excluded from the list of comparables.
The group 2 consists of the companies which are to be excluded by applying the employees cost filter, these companies are – 1) Accentia Technologies Ltd., 2) Informed Technologies India 3) Vishal Information Technologies Ltd.
Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee’s own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR’s argument that the employee cost filter is applicable only to
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software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employees cost filter to the ITES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP.
As far as 3rd group is concerned, the learned counsel for the assessee submitted that this group consists of –
1) Bodhtree Consulting Ltd.
2) Exlerx Services Ltd.
3) Mold Tek Technologies Ltd.
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According to the learned counsel for the assessee, these companies are functionally different from the assessee. He submitted that the assessee is basically a ‘call centre’, whereas these three companies are into the business of ‘knowledge process out sourcing (KPO)’. He submitted that while the assessee is into simple activities like credit check, in house supoort, bill search, people search, high check, automated services, document management etc. while the ‘knowledge process outsourcing’ includes specialized customer & technical services. He submitted that Bodhtree Ltd. provides software solutions such as data cleansing, e-learning and e-paper solution and also earns revenue from software products. As far as Eclerx Services Ltd. is concerned, he submitted that it is engaged in providing data process and analytics services as is evident from the website of the company. As regard Mold Tek Technologies Ltd., is concerned, he submitted that it is providing high-end engineering design and detailing services which are appropriately categorized as structural engineering services and are high end engineering services and cannot be considered as comparable to the ITES services rendered by the assessee. Thus, according to him, these three
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companies being functionally different from the assessee are to be excluded from the list of comparables. In support of his contention, he placed reliance upon the decision of ‘A’ Bench of the Tribunal at Hyderabad in the case of M/s Capital IQ Information Systems (India) Pvt. Ltd. in ITA No.196/Hyd/2011 dated 23.11.2012, wherein the Tribunal has directed that Mold Tek Technologies Ltd. is to be excluded from the list of comparables because of ‘exceptional financial result’ due to merger/demerger and also on account of ‘super normal profit’ of 113%. He placed reliance upon the decision of this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd., wherein it has been held that the companies showing abnormal profits cannot be treated as comparable.
The learned DR, on the other hand, supported the orders of the authorities below and submitted that the assessee has failed to establish that the nature of activities performed by the assessee are different from the companies which according to the assessee are functionally different. He submitted that it is the bounden duty of the assessee to establish that the comparables selected by the TPO are not comparable to the assessee.
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Having heard both the parties and having considered their rival contentions, we find that the assessee had raised elaborate objections to each of the comparables in group 3 before the TPO. The TPO has also reproduced the said objections in his order para 6.5.1 of page 178 of his order. He has rejected the contention of the assessee by holding that every function within BPO sector can be from low end to high end and the activities of the asseessee such as accounting, web management, network management are BPO services using technology but these services are not categorized as KPO. He held that a call centre may offer support services like telemarketing to high end services like technical support services, where not only the level of knowledge, skill required would be high, but the technical knowledge as well would be high. According to him, back office transaction process services may be as remarkable and as complicated as insurance/market transaction processing services. He, therefore, rejected the contention of the asseessee and treated the BPO as equivalent to KPO services.
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Regarding Substantial Question No.3: “As far the issue of considering the foreign exchange fluctuation as operating revenue is concerned, we hold that this amount is to be considered as part of operating revenue in view of the decision of this Bench of the Tribunal in the case Trilogy E-Business Software India Pvt. Ltd.. Therefore, the AO shall re-compute the ALP by taking into account the foreign exchange fluctuation also as operating revenue. As far as the result of Mega Soft is concerned, we have already directed that the ALP shall be computed in the case of software segment after making correction to the net margin of Mega Soft Ltd., on the basis of the order this Tribunal in the case of Trilogy E-Business India Pvt. Ltd.:”
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
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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 Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such
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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.
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
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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.
Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs.
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Copy of this Order be sent to the Respondent- Assessee forthwith.
Sd/- JUDGE
Sd/- JUDGE AN/-