THE COMMISSIONER OF INCOME TAX, VIJAYAWADA vs. M/S. PADMAVATHI MANSION (P) LTD., VIJAYAWADA

1/15 IN THE HIGH COURT OF KARNATAKA, BENGALURU

DATED THIS THE 5TH DAY OF JULY 2018

PRESENT

THE HON'BLE Dr.JUSTICE VINEET KOTHARI

AND

THE HON’BLE Mrs.JUSTICE S.SUJATHA

I.T.A.No.700/2017

BETWEEN:

…APPELLANTS (By Mr. Aravind K.V. Advocate)

AND:

M/s. Global E-Business Operations Pvt. Ltd., Kalyani Platina, Phase 2 Building, Survey No.1, 6 & 24, Kundalahalli Village, K R Puram Hobli, Bengaluru-560 056. PAN: AABCG 2843D.

…RESPONDENT

(By Ms. Manasa Ananthan, Advocate.)

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THIS I.T.A IS FILED UNDER SECTION 260-A of Income Tax Act 1961, PRAYING TO 1. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN IT(TP)A NO.160/BANG/2014 DATED 28-02-2017 ANNEXURE - D CONFIRMING THE ORDER PASSED BY THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(2), BENGALURU & ETC.

THIS I.T.A. COMING ON FOR ADMISSION, THIS DAY Dr. VINEET KOTHARI J. DELIVERED THE FOLLOWING:-

JUDGMENT

Mr.Aravind K.V. Adv. for Appellants-Revenue Ms.Manasa Ananthan, Adv. for Respondent-Assessee

The Appellants-Revenue have filed this appeal u/s.260A of the Income Tax Act, 1961, raising purportedly certain substantial questions of law arising from the order of the ITAT, Bengaluru Bench ‘A’, Bengaluru, dated 28.02.2017 passed in IT(TP)A No.160/Bang/2014 (Deputy Commissioner of Income Tax vs. Global e-Business Operations P. Ltd.,) for A.Y.2009-10.

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Appellants-Revenue are quoted below for ready reference:-

“(1) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the expenses and foreign exchange loss reduced from the Export Turnover has to be reduced from the Total Turnover also following the ratio laid down by laid down by this Hon’ble Court in the case of CIT v/s. M/s.Tata Elxsi Ltd. even when said decision has been challenged before Apex Court by Revenue and no provision under section 10A provides for exclusion of such expenses from total turnover?

(2) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding certain comparable from list of comparable adopted by TPO on the ground of functional dissimilarity by following its earlier decision which has not reached finality and all the requires tests are satisfied in the case of assessee?

(3) Whether on the facts and in the circumstances of the case, the Tribunal is right in

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law in erred in allowing working capital adjustment without an upper cap?”

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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 turnover’ is export turnover.

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

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would cause grave injustice to the Respondent which could have never been the intention of the legislature. 20. 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”.

The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Revenue 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

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from the order of Tribunal rejecting the Application seeking a review before Tribunal as hereunder:-

“7.3 We have considered the above submissions and perused the relevant orders. The relevant portion of this Tribunal order from e4e Business Solutions India P. Ltd. v. DCIT, Circle 11(3), Bangalore for a y 2009-10 dt 10.11.2015 is extracted as under:

xxxx

11.1 Accentia Technologies Ltd.

xxxx

11.2 Eclerx Services Ltd. xxxx

Thus it is clear that the Special Bench found that this company is not comparable with BPO company which are engaged only in low end services of data processing. Accordingly, we direct the AO/TPO to exclude Eclerx Services Ltd. from the list of comparables for the purposes of determining ALP.”

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“Thus it is clear that the revenue earned by this company is from the activity inclusive of operation primarily relates to providing business process management services to other organization engaged in outsourcing business process. This company is not engaged in direct activity of BPO but it provides service to BPOs and that too management service to BPO. Therefore, in our considered view, this company is engaged in a different nature of activity to that of the assessee provided to its AE. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables.”

11.4 Cosmic Global Ltd.

The learned AR of the assessee submitted that the assessee raised objection against inclusion of this company in the list of comparables before the TPO on the ground that this company has major revenue from translation services. Therefore, this company is functionally different from the services provided by the assessee to its AE. The learned AR of the assessee has referred to the Annual report of this company and submitted that out of the total revenue of Rs.7,37,02,584/-, this company has

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earned revenue from translation charges to the tune of Rs. 6,99,35,756/-. Therefore, substantial part of the revenue has been earned from the activity of translation. The learned AR of the assessee has further pointed out that even otherwise this company is outsourcing the work of translation as it is evident from the profit and loss account of this company that an amount of Rs.3,00,25,326/- has been paid on account of translation charges. Thus, learned AR of the assessee has submitted that this company cannot be considered as functionally comparable with the assessee has submitted that this company cannot be considered as functionally comparable with the assessee for the purpose of determining the ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Lam Research (India) Pvt. Ltd. vs. DCIT in ITA No.1437/Bang/2014 dated 30/4/2015.

i) On the other hand, learned Departmental Representative has submitted that the comparability of this company has been examined by the TPO as well as by the DRP. The TPO has rejected the objections raised by the assessee in respect of this

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company by holding that the translation service are in the nature of ITeS and therefore, it qualifies all the filters applied by the TPO. He has relied upon the orders of the authorities below. ii) We have considered the rival submissions as well as the relevant material on record. There is no dispute that this company is in the business of providing service of medical transcription and consultancy services, translations services and accounts BPO. The segmental revenue from the operations are given in schedule 8 to the Profit & Loss account which reveals that major revenue of Rs.6,99,35,756/- out of total revenue of Rs.7.37 crores has been earned by this company from the activity of translation services. We further note that the company has debited an expenditure of more than Rs.3 crore on account of translations charges paid. Thus it is clear that this company is outsourcing its services of translation work which is the main activity of this company yielding major revenue earned during the year. Thus it is manifest from the record that this company is in the entirely different nature of activity and

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cannot be compared with the activity of providing contact centre of the assessee to its AE. In the case of Lam Research (India) Pvt. Ltd. (supra) the co-ordinate bench of this Tribunal had occasion to examine the comparability of this company in para. 34 as under:” xxxxx

Thus, the assessee has made out a case in its favour and accordingly, we direct the TPO to exclude the above 4 comparable companies as they are functionally different.”

9.1 The AR placed reliance on the decision of the Bangalore Tribunal in the case of Moog Controls (India) Private Limited [IT(TP)A No 551/Bang/2015, wherein, the Hon’ble Tribunal at para 23 has held that risk adjustment can be allowed if the comparable companies remaining after the exclusion were independent risk bearing entities. The assessee therefore prayed that the

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TP Officer may be directed to provide risk adjustment to the assessee.

9.2 The Hon’ble Tribunal in the case of Moog Controls (India) Private Limited (supra) at para 29 have directed to allow the actual adjustment towards the differences in the working capital position between the assessee and the entrepreneurial companies selected by the TP Officer. The assessee accordingly prayed that the TP Officer may be directed to provide actual working capital adjustment i.e., without restrictions.

9.3 We have considered the above submissions and found merit in them. In view of that the revised ground No 11 of the assessee’s appeal is allowed and the ground No 2 of the Revenue’s appeal is dismissed.”

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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 and 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

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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.

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Sd/- JUDGE

Sd/-

JUDGE