Loading judgment…
No AI summary yet for this case.
1/21 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 26TH DAY OF JUNE 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.548/2016
BETWEEN:
Pr. COMMISSIONER OF INCOME TAX-7 BMTC COMPLEX, KORMANGALA BANGALORE.
INCOME TAX OFFICER WARD-7(1)(4), BANGALORE.
…APPELLANTS (By Mr. SANMATHI E.I. ADV.)
AND:
M/S. ZYME SOLUTIONS P. LTD. No.38/1/23, VENKATAMMA COMPLEX SOUTH END ROAD, BASAVANAGUDI BANGALORE-560004 PAN: AAACZ2465R.
…RESPONDENT (By Mr. NARENDRAKUMAR JAIN, ADV.)
THIS I.T.A IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, PRAYING TO 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, AND SET ASIDE THE APPELLATE ORDER DATED 22/01/2016 PASSED BY THE ITAT, ‘B’ BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
2/21
APPEAL PROCEEDINGS IN IT(TP)A No.466/Bang/2015 FOR A.Y. 2010-11 & GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.
THIS I.T.A. COMING ON FOR ORDERS, THIS DAY Dr. VINEET KOTHARI J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. Sanmathi E.I. Adv. for Appellants-Revenue Mr. Narendrakumar Jain, Adv. for Respondent-assessee
The appellants-Revenue have filed this appeal u/s. 260A of the Income Tax Act, 1961 (for short ‘Act’) raising purportedly certain substantial questions of law arising from the order of the Income Tax Appellate Tribunal, Bangalore Bench ‘B’ Bangalore (for short ‘Tribunal’) dated 22.01.2016 passed in I.T (TP)A No.465/Bang/2015 for the A.Y.2010-11.
The proposed substantial questions of law framed in the memorandum of appeal by the appellants- Revenue is quoted below for ready reference:
“(1) Whether on the facts and in the circumstances of the case, the Tribunal erred in holding that M/s. Accentia Technologies Ltd., is
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
3/21
different from assessee – company, when it satisfies all the qualitative and quantitative filters applied by the TPO and the Tribunal has used a narrower functionality filter that the TPO, but has not tested other comparables against the narrower functionality filter applied by it?”
(2) Whether on the facts and in the circumstances of the case, the Tribunal was right in not setting aside the matter to the TPO for fresh Transfer Pricing study after taking a new view on functional matrix which is narrower than the functionality matrix originally used by the TPO?
(3) Whether on the facts and in the circumstances of the case, changes in any filter – either qualitative or quantitative – by any appellate authority should be followed by fresh TP study, or whether the Tribunal can selectively apply their modified qualitative filter to only few comparables challenged by the assessee, or whether a fresh TP study has to be done?
(4) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that foreign exchange fluctuation loss/gain is to be considered as operating in nature while determining the margin in the case
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
4/21
of the assessee by following its earlier order which has not reached finality?”
The learned Tribunal, after discussing the rival contentions of both the appellants-Revenue and the Respondent-assessee, has given the following findings with regard to various issues raised before it with regard to ‘Transfer Pricing’ and ‘Transfer Pricing Adjustments’ made by the concerned authorities below. We consider it appropriate to quote the relevant portions hereunder:
“17. We have perused the orders and heard the rival contentions. Ground taken by the Revenue is that foreign exchange loss/gain was not attributable to the operating activity of the assessee. Sole business revenue of the assessee was from the billings on its AE abroad for the services rendered by it. Nothing has been brought on record to show that any of the foreign exchange loss/gain had come from any hedging activity or any other line of activity undertaken by the assessee.
Unless rebutted a safe presumption can be made that foreign exchange
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
5/21
loss/gain arose out of the business activity of the assessee which was entirely providing ITES services to its principal abroad. We cannot say that foreign exchange loss/gain had no nexus with such activity. We are therefore of the view that the DRP took a correct view on this issue. DRP had accepted the submission of the assessee that such gains/losses were closely linked to its business operation did and not relate to any extra ordinary or abnormal events. Grounds 3 and 4 stand dismissed.
There is no dispute that assessee was providing ITES to its principal abroad. The profile of M/s. Rampgreen Solutions P. Ltd compares favourably with that of assessee’s since they were also a wholly owned subsidiary company of an US company and was providing ITES to such principal. Assessment year involved was also very same. We are therefore of the opinion that the above directions of the Tribunal would squarely apply here also. We direct the lower authorities to exclude Accentia Technologies Ltd, from the list of comparables.
Continuing his argument for exclusion, Ld. AR submitted that Acropetal Technologies Ltd (seg) had substantial income from Engineering
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
6/21
Design Service (‘EDS’ in short). As per the Ld. AR, EDS done by Acropetal Technologies Ltd., took it out of the list of comparables. Ld. AR submitted that EDS was high-end services within the BPO which required high skills whereas assessee here was doing routine low end analytical work. Reliance was placed on the decision of coordinate bench in the case of Symphony Marketing Solutions India P. Ltd v. ITO[(2013) 27 ITR (Trib) 753] and also that of capital IQ Information Systems (India) P. Ltd v. ACIT and vice versa in ITA.124/Hyd/2014 & ITR 170/HYd/2014, dt.31-07-2014 of the Hyderabad bench. According to him, the financial results of the above company for the previous year relevant to the impugned assessment year also show that it had significant revenue from EDS.
Per contra Ld. DR submitted that segmental results were available, in the published final accounts of M/s Acropetal Technologies Ltd. There was no reason why the above company should be excluded from the list of comparables.
We have perused the orders and heard the rival contentions. Argument of the assessee is that Acropetal Technologies Ltd (seg) was
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
7/21
predominantly doing EDS which was of a high-end and not the type of services that was being done by the assessee. Observations of Hyderabad bench of the Tribunal in the case of Capital IQ Infomration Systems (India) P. Ltd (supra) which was for A.Y.2009-10, relied on by the Ld. AR is reproduced hereunder:
“(5) Acropetal Technologies Ltd. (Seg.)
The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
8/21
between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports.
It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper.
20.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
9/21
opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company.”
Segmental revenue of Acropetal Technologies Ltd for F.Y. 2009-10 has been reported by it as Schedule 17 of its audited financial accounts, copy of which has been placed before us. Its income from EDS came to Rs.46,39,36,810/-. Its income from ITES came to Rs.60,10,62,523/-. Its income from health-care services came to Rs.32,98,709/-. No doubt against total revenue of Rs.1,06,82,90,204/- about 43% alone came from EDS. It has also given the segmental revenue for its preceding financial year viz., year ending 31-3-2009. Income for that year from EDS was Rs.32,14,94,320/- and ITES was Rs.57,15,45,299/- totaling to Rs.89,30,39,529/-. Proportion of revenue from EDS was lower at 36% in F.Y. ending 31-3-2009 when compared to 43% for year ending 31-3-2010. Coordinate bench in the case of capital IQ Information Systems (India) P. Ltd, (supra) had directed its exclusion for A.Y. 2009-10, when its EDS revenue was low.
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
10/21
However, in our opinion when segmental results were available, where expenditure have also been allocated, it would be improper to exclude the company only for a reason that it was into high-end services. Within a given segment there cannot be further classification based on high-end and low-end services. Further data analytical services done by the assessee can in no way be classified as a lower-end service. In taking this view we are fortified by the Special Bench decision in the case of Maersk Global Centres (India) P. Ltd v. ACIT [ITA.7466/Mum/2012, dt.07-03-2012]. Further analysis of voluminous data and deciphing meaningful information there from which helps build core business strategy is a highly skilled function, requires advanced programming skills and knowledge of data mining. Data analytics is no ordinary job like daily business accounting or book-keeping. It is in no way comparable to a low end-business outsource function. Accordingly, we are of the opinion that Acropetal Technologies Ltd (seg), cannot be excluded from the list of comparables. Ordered accordingly.
Continuing his arguments seeking exclusion, Ld. AR submitted that ICRA Online Ltd,
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
11/21
though it was one of the two comparables which formed a part of assessee’s own TP study, it had to be excluded since its export sales were below 75% of its total revenues. Ld. AR submitted that the TPO had in its TP study for A.Y.2012-13 had accepted export sales filter of 75% on sales. Reliance was also placed on the decision of Mumbai bench decision in the case of Vodafone India Services P. Ltd v. ACIT [ITA.7514/Mum/2013, dt.10-12-2014].
Per contra Ld. DR submitted that I C R A was a part of assessee’s study and assessee could not turn around and say that it should be excluded.
Ad libitum reply of the Ld. AR was that assessee could raise such a pleading considering the decision of Special Bench in the case of DCIT vs Quark Systems Pvt. Ltd [42 DTR 414]. 36. We have perused the orders and heard the rival contentions. Filters adopted by the TPO has been mentioned at para 5.1 of his order dt.23-01-2014. Relevant para in so far as it relates to application of export sales filter is reproduced here under:
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
12/21
“companies who have export sales less than 25% of the sales were excluded This has been done primarily to exclude predominantly domestic companies which cannot be compared with taxpayers, having major earnings from exports. This is because economic circumstances of such companies are different. Rule 10B(2) also supports this view”.
It is an accepted position that the TPO had desired to exclude companies with export sale less than 25% of the operating revenues. Case of the assessee is that the filter has to be set at 75% and if so, I C R A Online Ltd, was its own comparable would go out of the comparables. It is not disputed that M/s. I C R A Online Ltd, had export sales which were less than 75% of its total revenues. The question whether an assessee can seek exclusion of a comparable which was in its own list, in our opinion, stands answered by the Special Bench in the case of DCIT v. Quark Systems P. Ltd (supra). Relevant para of the order reads as under:
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
13/21
“38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the AO. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before Revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the AO for consideration of claim of the taxpayer and make a de novo adjudication of the ALP after providing reasonable opportunity of being heard to the assessee. We order accordingly.”
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
14/21
Accordingly we are of the opinion that assessee cannot be estopped from praying for exclusion of a comparable though it was originally selected by it. Vis-à-vis the question whether a filter of 75% of foreign exchange earnings to sales could be applied, decision of Mumbai Bench in the case Vodafone of India Services P. Ltd (supra) is very relevant, which is as under: “The assessee is a captive service provide of call centre to its AE, therefore, the entire revenue of the assessee’s call centre comes from the export. Accordingly, the filter of minimum 75% export earning applied by TPO was logical and reasonable and it is not going to effect the interest of any party as is applicable for all the comparables whether it was selected by TPO or by the assessee.”
Nevertheless, we are of the opinion that the question whether the foreign exchange earnings of ICRA was above or below the limit of 75% was not verified by any of the lower authorities. We are therefore of the opinion that the issue
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
15/21
regarding comparability of ICRA Online Ltd, requires a fresh look by the AO/TPO. We set aside this issue back to the file of AO/TPO for consideration afresh so that he can correctly calculate the export sales ratio of the said company to its total revenues for applying the 75% filter. Grounds 7(c)7(d) and 7(e) are treated as partly allowed.
In support of his ground 7(h) Ld. AR submitted that when rental income was excluded while calculating the PLI of the assessee, corresponding rental expenditure was also required to be excluded. We find that the AO in the assessment done pursuant to the DRP directions had excluded rental income from the business income. As per the assessee it had incurred expenditure of Rs.23,75,000/- which is relatable to the earning of rental income. We are of the opinion that once rental income is excluded from the business income of the assessee while calculating the PLI of the assessee, as a natural corrolary expenditure incurred for earning such rental income is also required to be excluded. We therefore set aside the orders of authorities below and direct the AO/TPO to rework the PLI by excluding both rental income and the expenditure
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
16/21
relatable to the rental income after proper verification. Ground 7(h) of the assessee is treated as allowed for statistical purpose.
Ld. AR supporting its ground 7(i) submitted that working capital adjustment though directed by the TPO to be given in the order passed u/s.92CA of the Act, was not given by AO, when he passed the assessment order. Vis-à-vis working capital adjustment that was required to be made observations of the TPO were as under:
“The Balance payables not considered in calculation of net working capital of the tested party is due to the fact that they are invested either in fixed assets or in the current assets having no cost, wherein Transfer Pricing those receivables are taken into consideration that reduce the working capital requirement and accordingly the cost of the working capital that must be recovered from the customers by factoring in the sales price. Any excessive advance which is received from the Holding company by the WOS cannot be factored in reducing the sales price
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
17/21
and less sales price cannot be defended on the ground that due to negative cost of capital it is managing to have arm’s length profit margin even if it is having low profit margin oil activity as discussed in the example given above. In a related party scenario, the entire payables/advances cannot be considered in working capital adjustment as in any business there is an optimum working capital that can be found out only on the basis of comparison with third parties as third parties alone represent the optimum working capital requirement.
Accordingly the working capital adjustment is restricted to 0.23%.”
It is clear that TPO had accepted a working capital adjustment of .25%. Nevertheless while the AO when he passed the final assessment order pursuant to the directions of the DRP calculated the ALP of ITES as under:
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
18/21
Arm’s Length Mean Margin o on cost 22.67% Less:Risk adjustment 1.00% Adjusted Margin 21.67% Operating Cost 154,806,930 Arm’s Length Price (ALP) 121.67% of Operating Cost 188,353,591 Price Received 166,532,973 Shortfall being adjustment u/s 92CA
21,820,618
It is clear that AO had omitted to give the working capital adjustment. We therefore direct the AO to give working capital adjustment of 0.23% as recommended by the TPO. Accordingly ground 7(i) of the assessee stands allowed.”
This Court in ITA No.536/2015 C/W ITA No.537/2015 decided on 25.06.2018 (Pr. Commissioner of Income Tax, Bangalore –vs- M/s. Softbrands India P. Ltd.,) has held that in these type of findings of the learned Tribunal remain the final fact findings of the learned Tribunal and are binding on the lower authorities of the Department as well as this Court and unless an established ex facie perversity is
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
19/21
found in the findings of the learned Tribunal, the appeal u/s. 260A 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 the other hand, the appeals of the present tenor as to whether the comparables have been rightly
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
20/21
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 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.
Date of Judgment 26-06-2018 I.T.A.No.548./2016 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Zyme Solutions P. Ltd.
21/21
The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
Having heard the learned counsels for the parties, we are of the opinion that no substantial questions of law arises in the present case also. The appeal filed by the appellants-Revenue is liable to be dismissed and it is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/-
JUDGE