THE COMMISSIONER OF INCOME TAX vs. M/S FIRST ADVANTAGE OFFSHORE SERVICES PVT LTD

1/13 IN THE HIGH COURT OF KARNATAKA, BENGALURU

DATED THIS THE 10TH DAY OF JULY 2018

PRESENT

THE HON'BLE Dr.JUSTICE VINEET KOTHARI

AND

THE HON’BLE Mrs.JUSTICE S.SUJATHA

I.T.A.No.264/2012 BETWEEN:

…APPELLANTS (By Mr. K.V. ARAVIND, ADV.)

AND:

M/S. FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD., (FORMERLY KNOWN AS ZAP APP INDIA PVT. LTD.,) LEVEL-1, EXPLORER BUILDING INTERNATIONAL PARK WHITEFIELD, BANGALORE-560066.

…RESPONDENT (By Mr. SANKEERTH VITTAL, ADV., FOR Mr. ARUN SRIKUMAR, ADV.,)

THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE ORDER DATD 30/03/2012 PASSED BY THE ITAT,

Date of Judgment 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

2/13

BANGALORE IN ITA No.1252/Bang/2010 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, IN THE INTEREST OF JUSTICE AND EQUITY.

THIS I.T.A. COMING ON FOR HEARING, THIS DAY S. SUJATHA J. DELIVERED THE FOLLOWING:-

JUDGMENT

Mr. K.V. Aravind, Adv. for Appellants- Revenue Mr. Sankeerth Vittal, Adv. for Mr. Arun Srikumar, Adv. for Respondent - Assessee

passed in I.T.A No.1252/Bang/2010 (M/s.First Advantage Offshore Services Pvt. Ltd.,, vs. The Deputy Commissioner of Income-tax) for A.Y.2006-07.

Date of Judgment 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

3/13

Appellants-Revenue are quoted below for ready reference:- “ 1. Whether the Tribunal was correct in holding that the communication expenses reduced from export turnover should be reduced from the total turnover also, in the absence of any provisions to this effect in Section 10A of the Act? 2. Whether the Tribunal correct in remitting bank all the issues to the file of AO When there are no fresh facts brought before the Hon’ble ITAT apart from those which are already discussed in the order of the Assessing Officer/Transfer Pricing Officer? 3. Whether the Tribunal correct in directing the AO to consider only those uncontrolled comparables which are having turnover between Rs.1 crore to Rs.200 crores, without appreciating that the direction is against the method of arithmetical average of the operating margins and profit level indicators of uncontrolled comparables as per the proviso to section 92C(2) of the Act?. 4. Whether the Tribunal was correct in directing the Assessing Officer to apply turnover filter of turnover between Rs. 1 crore to Rs. 200 crores without any evidence in support of a

Date of Judgment 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

4/13

correlation between the turnover and the profitability margin? 5. Whether the Tribunal correct in holding that the assessee is eligible for a standard deduction of 5% from the Arm’s length price under the proviso to Section 92C(2) of the Act, without considering the corrigendum dated 30-04-2010 to the circular 5/2010 issued by the Board in this regard? 6. Whether the Tribunal was correct in directing cross examination in the case of comparables where information was gathered in terms of provisions of section 133(6) of the Act, without appreciating that no cross examinations is warranted as it was a process of gathering information and any examination of evidence is not involved and recorded a perverse finding?”.

Date of Judgment 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

5/13

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 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

6/13

turnover’ is export turnover.

Any other interpretation would run counter to the legislative intent and would be impermissible.

Date of Judgment 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

7/13

Mr.K.V.Aravind also submits that he does not press the substantial question of law No.2. His submission is recorded.

Date of Judgment 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

8/13

direction to reconsider the transfer pricing adjustment in the light of the guidelines given therein. For the purpose of convenience, the relevant paragraphs of the M/s Genisys Integrating Systems (India) Pvt.Ltd.,(supra), is given as under;

xxxxxxxxxxxxxxxx

7.1 Further, as regards the direction of the Tribunal to the TPO to give an opportunity to the assessee to cross examine the parties whose statements are to be used against the assessee, if the assessee so desires, we wish to clarify the said direction to the effect that the TPO shall call for the clarification from the parties (whose statements were called for u/s 133(6) of the IT Act and were used against the assessee) on the objections raised by the assessee on such statements and the opportunity of cross examining shall be the last resort, only if the appropriate clarification is not given by these parties. Thus, the grounds relating to transfer pricing adjustments are remitted back to the file of the AO/TPO for reconsideration in the light of our observations in the above paragraphs. 8. As regards the standard deduction of plus or minus 5% to be given to the assessee,

Date of Judgment 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

9/13

while making the transfer pricing adjustment, we find that this issue is also covered by the decision of the Tribunal in the case of M/s Tatra Vectra Motors Ltd., in ITA No.12184(B)/2010 for the AY: 2006-07 dated 31-01-2012. Respectfully, following the same, the AO is 26 ITA No.1252(B)2010 directed to give appropriate relief. The assessee shall be given a fair opportunity of hearing and the assessee’s appeal is accordingly, allowed for statistical purposes. 6.1 Having heard both the parties and having considered their rival contentions, we find that the basic and main grievance of the assessee is that the comparables adopted by the assessee have not been considered by the TPO in proper perspective and that the comparables adopted by the TPO were not exactly comparables. We find that in the case of some of the comparables, they are stated to be in the business activity of software development, but they have not given any details or any bifurcation of their development and trading activities separately. In such a case, if the activity of product development would be compared with the software development services offered by the assessee which are both functionally different, we are of the opinion that grave injustice would be done.

Date of Judgment 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

10/13

According to us, the comparison should be amongst the equals on the same footing and for this purpose standard comparison filters should be used for similar the type of activities. The TPO cannot adopt or pick and choose different methodology or different filters for analyzing the transfer pricing adjustment for the same or similar type of activities. Similarly, it cannot also be said that the same set of filters would suffice for another set of activities having different functions, nature and characteristics. However, if the nature of activity is one and the same is having the same functions such as software development & IT enables services the TPO has to adopt the same or similar set of filters and cannot adopt one filter for rejecting some comparables for software development & adopt the same filter for selecting the comparables for IT enabled services”.

Date of Judgment 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

11/13

findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable. The relevant portion of the said 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 substantial question of law. On

Date of Judgment 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

12/13

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 10-07-2018 I.T.A.No.264/2012 The Commissioner of Income-tax & Anr. Vs. M/s. First Advantage Offshore Services Pvt., Ltd.,

13/13

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.”

Sd/- JUDGE

Sd/-

JUDGE

Srl.