Date Of Judgment 10-07-2018, Ita v. M/S. Trilogy E-Business Software India Private Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 10 DAY OF JULY 2O18| PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A.No.171/2013 BETWEEN : 1.COMMISSIONER OF INCOME TAX-IIL REVENUE BUILDINGS| QUEENS ROAD BANGALORE -560001. «|THERE DEPUTLY COMMISSION OF INCOME TAX. CIRCLE 12/4} BANGALORE. _ APPBLLANTS| (BY SRI E.L.SANMATHI, ADV.) AND : M/s. TRILOGY E-BUSINESSSOFTWARE INDIA PRIVATE LTD.,No.1/2, LALITHA NILAYA%[‘T]CROdsS»s, RMV STAGEBHOOPASANDRABANGALORE-560094._. RESPONDENT. (BY SRI S.SHARATH, ADV. FOR SRI CHYTHANYA.K.K., ADV.) THIS INCOMB TAX APPBAL IS FILED UNDER SECTION|2600-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDERDATED 23.11.2012, PASSED IN ITA No.1094/BANG/2011, FOR:THE ASSESSMENT YEAR 2007-08, ANNE XURE-A, PRAYING TO: Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 2/14 1.) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN; i.) SET ASIDE THE APPELLATE ORDER,DATED23.11.2012PASSED|BY|‘THEITAT, “A?BENCH,BANGALORE,IN|APPEALPROCBBRDINGSITA|No.1054/BANG/2011, ANNEXURE-A, AS SOUGHT FOR IN THIS.APPEAL. THIS APPEAL COMING ON FOR HEARING, THIS DAY,|S. SUJATHA, J., DELIVERED THE FOLLOWING: JU DGMENT Mr. E.I.Sanmathi,Adv. for Appellants — Revenue.Mr. S.Sharath,Adv. tor | Mr. Chythanya.K.K., Adv. for Respondent — Assessee. This Appeal is filed by the Revenue purportedlyraising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal, Bangalore Bench ‘A’, Bangalore, inITA No.1054/Bang/2011dated|23.11.2012, relating to the Assessment Year200'7-O a2Theappealhas|beenadmitted|OTL 08.07.2013 to examine the substantial questions of lawas indicated in the memorandum of appeal.| Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 3/14 3.The substantial questions of law framed by the Revenue in the Memorandum of Appeal are asunder: “1.WhetherOnlthefactsandin|the circumstances of the case, the Tribunal wasjustified in law in holding that the size andturnover of the company are deciding factors fortreating a company as a comparable andaccordingly directing the Assessing Officer/TPOnot to includes cases of M/s. Flextronics Softwaresystems Ltd., M/s. IGate Global Solutions Ltd.,M/s. Mindtree Ltd., M/s. Persistent Systems Ltd.,M/s. Sesken Communication Technologies Ltd.,M/s. Tata Elxsi Ltd., M/s. Wipro Ltd., and M/s.Infosys Ltd., as comparables for determining ALPin the case of the assessee? Dd WhetherOnlthefactsandin|the circumstances of the case, the Tribunal was rightin law in super imposing the decision of otherbenches of the Tribunal in the case of theassessee to reject the four cases of comparablesnamely, M/s. Megasoft Ltd., M/s. Avant CimconTechnology Ltd., M/s. Kals Information SystemsLtd., and M/s. Accel Transmatics Ltd., when Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 4/14 selection of comparables in a case for determiningALP depends on assessee specific FAR analysis?| 3.|WhetherOnlthe factsandin|thecircumstances of the case, the Tribunal was rightin law in relying on the decision of other benchesof the Tribunal to reject the four cases ofcomparables namely, M/s. Megasoft Ltd., M/s.AvantCimconTechnologyLtd.,M/s.KalsInformationsystems|Ltd.,andM/s.AccelTransmatics Ltd., without considering the specificfacts brought on record by the TPO in the case ofassessee for deciding the comparability of thelesP compan 4 |WhetherOnlthe factsandin|thecircumstances of the case the Tribunal was rightin law in holding that the foreign exchangeloss/gain is operating in nature when, suchloss/gain though attributable to the operatingactivity, is not derwed form the _ operatingactivity?” 4The learned Tribunal, after discussing the 3.|WhetherOnlthe factsandin|thecircumstances of the case, the Tribunal was rightin law in relying on the decision of other benchesof the Tribunal to reject the four cases ofcomparables namely, M/s. Megasoft Ltd., M/s.AvantCimconTechnologyLtd.,M/s.KalsInformationsystems|Ltd.,andM/s.AccelTransmatics Ltd., without considering the specificfacts brought on record by the TPO in the case ofassessee for deciding the comparability of thelesP compan 4 |WhetherOnlthe factsandin|thecircumstances of the case the Tribunal was rightin law in holding that the foreign exchangeloss/gain is operating in nature when, suchloss/gain though attributable to the operatingactivity, is not derwed form the _ operatingactivity?” 4The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue andRespondent-Assessee, has returned a finding as under:| Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 5/14 &Regarding first substantial question of law: [1]|Turnover Filterll.The learned counsel for the assesseesubmitted that the TPO has applied a lowerturnover filter of Rs.1 crore, but has not chosen toapply any upper turnover limit. In this regard, itwas submitted by him that under rule 1OB/3/ tothe Income-tax Rules, it was necessary forcomparing an uncontrolled transaction with aninternational transaction that there should not bedifferencebetweenthetransactionscompared or the enterprises entering into suchtransaction, which are likely to materially affectthe price or cost charged or paid or profit arisingfrom such transaction in the open market.Further, it is also necessary to see that whereverthere are some differences such differencesShouldbecapableofreasonableaccurateadjustment in monetary terms to eliminate theeffect of such differences. It was his submissionthat size!Wasan.important facet of thecomparability exercise. It was submitted thatsignificant differences in size of the companieswould impact comparability. In this regard ourattention was drawn to the decision of the SpecialBench of the ITAT Chandigarh Bench in the case)of DCIT v. Quark Systems Put. Ltd., 38 SOT 207, Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 6/14 wherein the Special Bench had laid down that itis improper to proceed on the basis of lower limitof 1 crore turnover with no higher limit onturnover, as the same was not reasonableclassification.Severalother|decisionsWwef’referred to in this regard laying down identicalproposition. We are not referring to _ thosdecisions as the decision of the Special Bench onthis aspect would hold the field. Reference wasalso made to the OECD TP Guidelines, 2010wherein it has been observed as follows:- KVeVNKK” 12.The ICAI TP Guidelines note on this aspectlay down in para 15.4 that a transaction enteredinto by a Rs.1,000 crore company cannot becompared with the transaction entered into by aRs.10 crore company. The two most obviousreasons are the size of the two companies andthe relative economies of scale under which theyoperate. The fact that they operate in the samemarketnotmake.them.comparableenterprises. The relevant extract is as follows |[onRule 1OB [3]/: KVeVNKK” Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 7/14 13.It was further submitted that the TPO’s|range |[Rs.1 crore to infinity] has resulted inselection of companies like Infosys which ts 277times bigger than the Assessee /turnover ofRs.13,149 crores as compared to Rs.47.47 croresofAssessee].It|WasSubmittedthatan.appropriate turnover range should be applied inselecting comparable uncontrolled companies. KVeVNKK” Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 7/14 13.It was further submitted that the TPO’s|range |[Rs.1 crore to infinity] has resulted inselection of companies like Infosys which ts 277times bigger than the Assessee /turnover ofRs.13,149 crores as compared to Rs.47.47 croresofAssessee].It|WasSubmittedthatan.appropriate turnover range should be applied inselecting comparable uncontrolled companies. 14.Reference was made to the decision of the|ITAT Bangalore Bench in the case of Genesis|Integrating Systems [India] Put. Ltd., v. DCIT, ITA}No.1231/Bang/2010, wherein relying on Dunand Bradstreet’s analysis, the turnover of Rs.1crore to Rs.200 crores was held to be proper. Thefollowing relevant observations were brought toour notice:- KVeVNKK” 1S.It was brought to our notice that the aboveproposition has also been followed by theHonourable Bangalore ITAT in the followingCAaSCS, KVeVNKK” It was finally submitted that companieshaving turnover more than Rs.200 crores ought to Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 8/14 berejectedas|not.comparable|with.theAssessee.” &Regarding substantial question of law Nos.2 and 3: “38. Neither the TPO nor the DRP have noticedthat there is bound to be a difference between theAssessee and Megasoft and the profit arising tothe Megasoft as a result of the existence of thesoftware product segment and no finding hasbeen given that reasonably accurate adjustmentscan be made to eliminate the material effects ofsuch differences. For this reason, we are inclinedto hold that the profit margin of 23.11% which 1sthe margin of the software service segment betaken for comparability. In view of the aboveconclusion, we do not wish to go into the questionas to whether less than 25% of the revenues ofthe comparable are from software products andtherefore the comparable satisfied TPO’s filter ofmore than 75% of revenues from’ softwaredevelopment services. 41.We have given a careful consideration to|the submissions made on behalf of the Assesseeand are of the view that the same deserves to beaccepted. The reasons given by the Assessee forexcluding this company as comparable are found Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 9/14 to be acceptable. The decision ofITAT [Mumbai inthe case of Telcordia Technologies Put. Ltd., v.ACIT |[supra/ also supports the plea of theassessee. We therefore accept the plea of theASSeCSSECTo|rejectthisCOMpPay?aS|Cmcomparable. 5.On similar grounds, the Tribunal has distinguished the other comparables also. &Regarding fourth substantial question of law: “BITreating foreign exchange gain or loss andprovision for bad debts as non-operating innature and fringe benefit tax as part of operatingCOST: As far as foreign exchange gain/loss beingconsidered as not forming part of the operatingcost, the reasoning of the revenue is that suchloss or gain cannot be said to be one realizedfrom international transaction though they mayform part of the gain/loss of the enterprise andthereforetheyShouldbe|excludedwhile|determining operating cost. On the above issuewe find that the Bangalore Bench of ITAT in thecase of Sap Labs India /|P/ Ltd., Vs. ACIT [2011]44 SOT 156 /[Bang.| has taken the view that Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 10/14 “BITreating foreign exchange gain or loss andprovision for bad debts as non-operating innature and fringe benefit tax as part of operatingCOST: As far as foreign exchange gain/loss beingconsidered as not forming part of the operatingcost, the reasoning of the revenue is that suchloss or gain cannot be said to be one realizedfrom international transaction though they mayform part of the gain/loss of the enterprise andthereforetheyShouldbe|excludedwhile|determining operating cost. On the above issuewe find that the Bangalore Bench of ITAT in thecase of Sap Labs India /|P/ Ltd., Vs. ACIT [2011]44 SOT 156 /[Bang.| has taken the view that Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 10/14 Foreign Exchange Fluctuation gains are required|to be added to operating revenue. Following thesame, the AO is directed to accept the claim of the|Assessee in this regard. As far as provision forbad debts are concerned, the TPO has acceptedthat the same would be part of operatingexpenses provided the same is incurred everyyear for at least three years and the manner inwhich provision is made is consistent. TheAssessee in reply to the query of the TPO on theabove aspect has not furnished any details. Weare of the view that the Assessee should beafforded opportunity to explain its position on theabove and the AO is directed to consider thesame in accordance with law. As far as FringeBenefit Tax is concerned, the same was notconsidered by the TPO as part of operating cost inthe case of comparables and therefore the sameShould also not be considered as part of operatingcost of the Assessee. We hold accordingly anddirect the AO to compute the operating cost of theASSeSSEeE. [CfNot|making Prope,radjustmentjorenterpriselevelandtransactionalleveldifferences:betweentheAssesseeandcomparable companies. Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 11/14 [D]Adjustment for differential in risk to begiven. ” 6.The controversy involved herein is no moreres integrain view of the decision of this Court in 1.T.A.Nos.536/2015 c/w 537/20155<>:529.06.2018 [Prl..Commissioner.of|Income.TaxaAnr.V/s.M/s.Softbrands India Pvt. Ltd.,]2wherein it has beenobserved that unless the finding of the Tribunal is foundex facie perverse, the Appeal u/s. 260-A of the Act, isnot maintainable. The relevant portion of the Judgmentis quoted below for ready reference: “Conclusion: 55.Asubstantial quantumof|international trade and transactions depends|upon the fair and quick judicial dispensation|in such cases. Had it been a case oOf|Substantialquestionof|interpretation|of|provisions of Double Taxation AvoidanceTreaties (DTAA), interpretation ofprovisions ofthe Income Tax Act or Overriding Effect of the|Treaties over the Domestic Legislations or the | Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 12/14 questions like Treaty Shopping, Base Erosionand Profit Shifting (BEPS), Transfer of Shares|in Tax Havens (like in the case of Vodafone|etc.), uf based on relevant facts, such|substantial questions of law could beraised before the High Court underSection260-Aof the Act, the Courts could have|embarked upon such exercise offraming 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, Futers for|arriving at the correct list of comparables|have been rightly applied or not, do not in our|consideredopinion, giveriseTo anysubstantial question of law. 06. Weare therefore of the consideredopinion that the present appeals filed by the|Revenue do not give rise to any substantialquestionof|lawand.theSuggested|substantial questions of law do not meet therequirements ofSection 260-A|of the Act andthus the appeals filed by the Revenue are| 06. Weare therefore of the consideredopinion that the present appeals filed by the|Revenue do not give rise to any substantialquestionof|lawand.theSuggested|substantial questions of law do not meet therequirements ofSection 260-A|of the Act andthus the appeals filed by the Revenue are| Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd., 13/14 found to be devoid of merit and the same are.liable to be dismissed. 57. We make it clear that the same'§yardsticks and parameters will have to beapplied, even tf 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|7S. “ArLength Price“ in the case of the assesseeswith which the assessees may not be|satisfied and have filed such appeals beforethis Court. Therefore we clarify that mere|dissatisfaction with the findings of facts|arrived at by the learned Tribunal ts not at all|a sufficient reason to invoke.Section 260-Aof the Act before this Court. o8. The appeals filed by the Revenueare therefore dismissed with no order as to|costs.” T.In the circumstances, having heard the learned Counsel appearing for both the sides, we are of 14/14 the considered opinion that no substantial question of law arises for consideration in the present case. 8.Hence, the Appeal filed by the Appellants-Revenue is liable to be dismissed and is accordinglydismissed. Nocosts.| NC. Sd/-.JU DGE Sd/-.JU DGE