Date Of Judgment 12-07-2018, Ita v. M/S Hcl Eai Services Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 12 DAY OF JULY 2O18| PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A. No.343/2013 BETWEEN : 1.THERE COMMISSIONER OF [INCOME TC.R. BUILDING, QUEENS ROADBANGALORE,C.R. BUILDING, QUEENS ROADBANGALORE, «|THERE DEPUTLY COMMISSIONER OINCOME TAX, CIRCLE-11(4)INCOME TAX, CIRCLE-11(4) RASHTROTHANA BHAVANNRUPATHUNGA ROADBANGALORE _ APPBLLANTS| (BY SRI K.V.ARAVIND, ADV.) AND : M/s HCL EAI SERVICES LTD.,NO.6, CHAMBERS|80 Ft. ROAD, 6 BLOC KKORAMANAGALABANGALORBE-560095_. RESPONDENT. (RESPONDENT SERVED & UNREPRESENTED.) THIS [TA IS FILED UNDER SECTION 260-A OF INCOME|TAX ACT 1961, ARISING OUT OF ORDER DATED 28.02.2013|PASSED IN ITA NO.1348/BANG/2011, FOR THE ASSESSMENTYEAR 2007-08, ANNEXURE-D PRAYING TO: I. FORMULATE THESUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II.| Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., ALLOW THR APPEAL AND SET ASIDE THR ORDER PASSBED BYTHE ITAT, BANGALORE IN ITA NO.1348/BANG/2011 DATED28.02.2013 ANNEXURE-D AND CONHFHIRM THERE ORDER OF APPBRELLATEKE COMMISSIONBR CONFIRMING THR ORDER PASBY THE DEPUTY COMMISSIONER OF INCOME TAX, ©CIRCLE-11(4), BANGALORE. THIS APPEAL COMING ON FOR ADMISSION, THIS DAY,|S. SUJATHA, J., DELIVERED THE FOLLOWING: JU DBiGMENT Mr. K.V.Aravind,Adv. for Appellants — Revenue. © This Appeal is filed by the Revenue purportedlyraising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal, ‘A’ Bench Bangalore, inIT [TPJA No.1348/Bang/2011dated 28.02.2013, relating to the Assessment Year2007-08 ?)ThisAppealhasbeenadmittedOTL 19.11.2013. The substantial questions of law as framed by the Revenue in the Memorandum of Appeal readsthus. aWhether on the facts and in thecircumstances and in law the Tribunal was rightin Super imposing the decisions of the other 3/16 benches and the decision of the ITAT whilerejecting the comparables (i) Megasoft Limited, (it)Avant Cimcon Technologies Limited, (it) KALSInformationsystemsLimited,(iv)AccelTransmatics Limited without appreciating the factthat selection of comparables in a case dependson assessee specific FAR analysis and recorded a’perverse finding? D2 Whether on the facts and in thecircumstances of the case and in law the Tribunalwas right in directing that the segmentalfinancials have to be considered as against theenterprise financials without appreciating the factthat at the enterprise level the comparablesatisfied all the filters applied by the TransferPricing Officer and recorded a perverse finding? 3.|Whether on the facts and in thecircumstances of the case and in law the Tribunalwas right in directing that segmental financialshave to be considered as against the enterpriselevel financials without appreciating the fact theTransfer Pricing Officer attracted the enterpriselevelfinancialsas|againstthe.segmentalfinancials with which he started, on the basis ofthe information gathered under Section 133(6) of Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., 4/16 the act and detailed analysis thereof andrecorded a perverse finding? 4 |Whether on the facts and in thecircumstances of the case and in law Tribunalwas correct in rejecting M/s Lucid SoftwareLimited as a comparable by placing reliance onthe order in the case of the other assessee passedbytheMumbaiITATwithouttakingintoconsiderationthefindingrecordedbytheTransfer Pricing Officer for selecting as acomparable and recorded a perverse finding?| Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., 4/16 the act and detailed analysis thereof andrecorded a perverse finding? 4 |Whether on the facts and in thecircumstances of the case and in law Tribunalwas correct in rejecting M/s Lucid SoftwareLimited as a comparable by placing reliance onthe order in the case of the other assessee passedbytheMumbaiITATwithouttakingintoconsiderationthefindingrecordedbytheTransfer Pricing Officer for selecting as acomparable and recorded a perverse finding?| 5.|Whether on the facts and in thecircumstances of the case and in law the Tribunalwas correct in directing inclusion of VMF Softechas a comparable on the ground that comparablefunctionally similar and is not carrying onoutsourcingactivitywithouttakingintoconsideration that the comparable has failed thefunctionally filter and the major activity is doneon job work basis and recorded a perversefinding? 6. Whether on the facts and in thecircumstances of the case and in law the TribunalWasjustifiedin|fixingthe.relatedpartytransaction filtered at 15% of the total revenue Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., without going into the specific facts in the case ofthe Tax Payer and without adducing the basis forarriving at such cut-off at 15% and recorded aperverse finding? 7 |Whether on the facts and in thecircumstances of the case and in law theTribunal was correct in directing exclusion oftelecommunication expenses and expenditureincurred in foreign currency from export turnoverand total turnover, when the provision does notrefer to exclusion of the expenditure reduced fromexport turnover to reduce the same from totalturnover? Regarding Substantial Question No.7: 3.The issue is covered by the decision of the Hon’ble Supreme Court in the case ofCommissioner of Income-tax, Central -— III vs. HCL Technologies Ltd.,[2018] 93 Taxmann.com 33(SC). 4The relevant portion of the judgment of theHon ’bleSupremeCourt1nthe.CASEoT HCL| 6/16 Technologies Ltd. (supra),is quoted below for ready reference: - “17. The similar nature of controversy,akin this case, arose before the Karnataka|High Court inCIT v. Tata Elxsi Ltd. [2012]204 Taxman 321/17/taxman.com 100/349ITR 98. The tssue before the Karnataka HighCourt was whether the Tribunal was correct|in holding that while computing relief under|Section 1OA of the IT Act, the amount of|communication expenses should be excludedfrom the total turnover if the same arereduced from the export turnover? While|giving the answer to the issue, the HighCourt, inter-alia, held that when a particular|word is not defined by the legislature and an|ordinary meaning 1s 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’ 1s|export turnover. Any other interpretation| would run counter to the legislative intent and|would be impermissible. — TSB. XXXKXX X 19. In the instant case, tf the deductionson freight, telecommunication and insurance|attributable to the delivery of computer'software under Section 10A of the IT Act areallowed only in Export Turnover but not from|the Total Turnover then, it would give rise to|inadvertent,unlawful,meaninglessand.illogical result which would cause grave|injustice to the Respondent which could have|never been the intention of the legislature. 20. Even in common parlance, when theobject of the formula is to arrive at the profit|from export business, expenses excluded fromexport turnover have to be excluded from total|TUTnNOoOValso.Otherwise,arlyotherinterpretation makes the formula unworkable|and absurd. Hence, we are satisfied thatsuch deduction shall be allowed from the totalturnover in same proportion as well”. 19. In the instant case, tf the deductionson freight, telecommunication and insurance|attributable to the delivery of computer'software under Section 10A of the IT Act areallowed only in Export Turnover but not from|the Total Turnover then, it would give rise to|inadvertent,unlawful,meaninglessand.illogical result which would cause grave|injustice to the Respondent which could have|never been the intention of the legislature. 20. Even in common parlance, when theobject of the formula is to arrive at the profit|from export business, expenses excluded fromexport turnover have to be excluded from total|TUTnNOoOValso.Otherwise,arlyotherinterpretation makes the formula unworkable|and absurd. Hence, we are satisfied thatsuch deduction shall be allowed from the totalturnover in same proportion as well”. Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., 8/16 Regarding Substantial Question No.1: 5.The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under: “13. As far as comparables at Sl.Nos.1, 2,3 & 12 of the list of comparables chosen by theTPO are concerned, this Tribunal in the case ofTrilogy E-Business Software India Put. Ltd.(supra)has taken a view that these companies are notcomparable to the software service providercompanies.Thefollowingarethe relevant.observations of the Tribunal in this regard:- | XXXXXX 14, In view of the aforesaid decision of theTribunal, comparables at SI.Nos.1, 2, 3 & 12 ofthe list of comparables chosen by the TPO have tobe excluded for the purpose of comparison whiledetermining the ALP of the impugned transactionin thts appeal.” Regarding Substantial Question No.2: “19. As faras SLNo.16 viz., Megasoft Ltd.of the list of comparables chosen by the TPO is Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., 9/16 concerned, this Tribunal in the case of Trilogy E-Business Software India Put. Ltd. (supra) hadheld that only segmental data should be taken forthe purpose of comparison. Following are therelevant observation of the Tribunal. XNXXXXXX 2O.In view of the aforesaid decision ofthe Tribunal, segmental margins in so far as itrelates to providing software services by Megasoftalone be taken for the purpose of comparison.” Regarding Substantial Question No.3: “21. As far as the comparable chosen bythe TPO at SLNo.25 viz., Thirdware Solutions Ltd.is concerned, the same was opposed by theassessee as not functionally comparable withthat of the assessee. The relevant portion of theorder of the TPO in this regard is at page 149 ofthe TPO’s order. The objection of the assessee isthat the aforesaid company was not a softwareservice provider and that the TPO had usedsegmental data (relating to software development)which was unaudited and provided by thecompany in response to a notice u/s. 133(6) ofthe Act. We find that the TPO’s order on this issueis quite vague and it reads as follows: Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., 10/16 XXXXXXXXX| DQ?It can be seen from the aforesaidorder of the TPO that none of the facts have comeout clearly and the objections of the assessee inadopting this company as a comparable is notappropriately dealt with. We therefore set asidethe order of the TPO and remand the same to theTPO for fresh consideration with liberty to theassessee to substantiate its case. The TPO willafford opportunity of being heard to the assesseefor deciding this issue.” Regarding Substantial Question No.4: Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., 10/16 XXXXXXXXX| DQ?It can be seen from the aforesaidorder of the TPO that none of the facts have comeout clearly and the objections of the assessee inadopting this company as a comparable is notappropriately dealt with. We therefore set asidethe order of the TPO and remand the same to theTPO for fresh consideration with liberty to theassessee to substantiate its case. The TPO willafford opportunity of being heard to the assesseefor deciding this issue.” Regarding Substantial Question No.4: “17. As far as SIlNo.14 of the lst of|comparable chosen by the TPO is concerned viz.,Lucid Software Ltd., ts concerned, this Tribunal in|the.CASECofCSR|India|Ltd.inITANo.1119/Bang/ 2011, order dated 29.01.2013 forAY O7-08, had considered the comparable of thiscompany with a software service provider like theassessee and has come to the conclusion that thesame is not comparable, on the ground that thiscompany was software developer. The followingwere the relevant observations of the Tribunal:-_ NXXXXKXXXX Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., 11/16 1S.Respectfully the aforesaid decision ofthe Tribunal, comparable at Sl.No. 14 of the list ofcomparable chosen by the TPO has to beexcluded for the purpose of comparison whiledetermining the ALP of the impugned transactionin this appeal.” Regarding Substantial Question No.5: “20. The assessee also claims that one of|the comparable chosen by it was VMF SoftechLtd., but the same was rejected by the TPO forthe reason that this company does not satisfy the25% employee cost filter and also for the reasonthatthisCOMpPay?WaspredominantlyoutsourcingItsbusiness.Finally,afterconsidering the taxpayer’s submissions, the TPOhas observed as follows:-| _ XXKXXXXK Regarding Substantial Question No.6: “15. With regard to Sl.No.11 of the list ofcomparable chosen by the TPO viz., [shir InfotechLtd., the Id. counsel for the assessee brought toour notice that this company does not satisfy theemployee cost filter adopted by the TPO. In thisregard, it is seen that at page 120 of the TPO’sorder, the TPO has discussed the comparability of Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., 12/16 this company. One of the filters applied by theTPO was that if the employee cost of acomparable company is less than 25% of itsrevenue, then the same cannot be treated as acomparable. According to the TPO, the employeecost was more than 25% of the total revenue andtherefore the same should be taken as acomparable with the assessee. The assessee’sobjection is that in applying the 25% employeecost filter, the TPO has taken the professionalfees paid to external third parties as part of theemployees cost. The assessee’s submission isthat payment ofprofessional fees to external thirdparties for the performance of services is not apayment on its own behalf and who are notemployees of the organization, ought not to havebeen taken into consideration while arriving atthe 25% employee cost filter. The order of the TPOon this aspect is not very clear as to how he hasgot over the aforesaid objection of the assessee.The TPO seems to have relied on the reply givenby the company to the notice issued u/s. 133(6) ofthe Act. It was further brought to our notice thatthe Bangalore Bench of the Tribunal in the case ofCSR India Ltd. in ITA No.1119/Bang/ 2011, orderdated 29.01.2013 for AY O7-08, had consideredthe comparable of this company with a software service provider like the assessee and has cometo the conclusion that the same is not comparable,on the ground that it does not satisfy the relatedparty transaction filter. The following are theobservations of the Tribunal:-NXXXXXKXX service provider like the assessee and has cometo the conclusion that the same is not comparable,on the ground that it does not satisfy the relatedparty transaction filter. The following are theobservations of the Tribunal:-NXXXXXKXX 16.Respectfully the aforesaid decision ofthe Tribunal, comparable at Sl.No.11 of the list ofcomparable chosen by the TPO has to beexcluded for the purpose of comparison whiledetermining the ALP of the impugned transactionin thts appeal.” 6.The controversy involved herein is no moreres integrain view oft the decision of this Court inI1.T.A.Nos.536/2015 c/w 537/2015dated25.06.2018 [Prl. Commissioner of Income Tax & Anr. V/s.M/s.Softbrands India Pvt. Ltd.,]wherein 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: Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., 14/16 “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 ofinterpretation ofprovisions of Double Taxation|Avoidance Treaties (DTAA), interpretation ofprovisions of the Income Tax Act or Overriding|Effect of the Treaties over the DomesticLegislations or the questions like TreatyShopping, Base Erosion and Profit Shifting|(BEPS), Transfer of Shares in Tax Havens|(like in the case of Vodafone etc.), if based onrelevant facts, such substantial questions|of law could be raised before the High|Court underSection 260-Aof the Act, theCourts could have embarked upon such.exercise of framing and answering such|substantial question of law. On the otherhand, the appeals of the present tenor as to|whether the comparables have been rightly|picked up or not, Filters for arriving at thecorrect list of comparables have been rightly|applied or not, do not in our considered| opinion, give rise to any substantial question|of law. 06. Weare therefore of the consideredopinion that the present appeals filed by the|Revenue do not give rise to any substantialquestionof|law.andthe|Suggested|substantial questions of law do not meet therequirements ofSection 260-A|of the Act andthus the appeals filed by the Revenue are|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 “ArmLength 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| Date of Judgment 12-07-2018, ITA No.343/2013 The Commissioner of Income Tax & another Vs. M/s HCL EAI Services Ltd., a sufficient reason to invoke.Section 260-Aof the Act before this Court. o8. The appeals filed by the Revenue are|therefore dismissed with no order as_ tocosts.” T.In the circumstances, having heard the learned Counsel appearing for both the sides, We are ofthe considered opinion that no substantial question oflaw 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. Copy of this Order be sent to the Respondent- Assessee forthwith. AN /- Sd/-.JUDGE| Sd/-.JUDGE|