Date Of Judgment 12-07-2018, Ita v. M/S First Advantage Offshore Services Pvt. 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.433/2013 BETWEEN : 1.THERE COMMISSIONER OF [INCOME TC.R. BUILDING, QUEENS ROAD|BANGALOREC.R. BUILDING, QUEENS ROAD|BANGALORE «|THE Dy. COMMISSIONER OFINCOME TAX, CIRCLE 11(3)RASHTROTHANA BHAVAN|NRUPATHUNGA ROAD |BANGALOREINCOME TAX, CIRCLE 11(3)RASHTROTHANA BHAVAN|NRUPATHUNGA ROAD |BANGALORE _ APPBLLANTS| (BY SRI K.V.ARAVIND, ADV.) AND : M/s FIRST ADVANTAGE OFFSHORESERVICES PVT. LID.(FORMERLY KNOWN ASZAPAPP INDIA PVT. LTD.)LEVEL 1, EXPLORER BUILDING, |INTKBRNATIONAL TKHCH PARKBANGALORE -560 066 _. RESPONDENT. (BY SMT.D.SUJATHA, ADV. FOR SRI MALLAHA RAO K., ADV.) THIS [TA IS FILED UNDER SBKBCTION 260-A OF [INCOTAX ACT 1961, ARISING OUT OF ORDER DATED 30/04/2013PASSED IN ITA NO.1086/BANG/2011, FOR THE ASSESSMENT Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 2/17 YEAR 2007-08 ANNEXURE-D, PRAYING TO: I. FORMULATE THE|SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II.|ALLOW THE APPEAL AND SEI ASIDE THERE ORDER PASSED BTHE ITAT, BANGALORE IN ITA NO.1086/BANG/2011 DATED)30/04/2013 ANNEXURE-D AND CONFIRM THE ORDER OF THE.APPBRELLATEKE COMMISSIONBR CONFIRMING THR ORDER PASBY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(3), BANGALORE.| THIS APPEAL COMING ON FOR HEARING, THIS DAY,|S. SUJATHA, J., DELIVERED THE FOLLOWING: JU DGMENT Mr. K.V. Aravind, Adv. for Appellants — Revenue. |Ms. D. Sujatha, Adv.,{OrMr. Mallaharao.K.,Adv., forRespondent-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’, inIT |[TP|A No.1086/Bang/201dated| 300.04.201, relating to the Assessment Year2007-08 2.This Appeal is filed to consider the following substantial questions of law as framed by the Revenuein the Memorandum of Appeal. “1.Whether on the facts and in thecircumstances of the case, the Tribunal is right in Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 3/17 law in directing assessing authority to excludethe internet charges both from export turnoverand total turnover as well by placing reliance onthe decision of this Hon’ble Court in the case ofTata Elxsi even when sqid order has not reachedfinality P D2 Whether on the facts and in thecircumstances of the case, the Tribunal is right inlaw in excluding companies such as HCL Comentsystem & Services Ltd., Infosys BPO Ltd., WiproLtd.,Accentia.TechnologiesLtd.,InformedTechnologiesIndia,VishalInformationTechnologies Ltd., Bodhtree Consulting Ltd.,Eclerc Services Ltd., Mold Tek Technologies Ltd.,Avant Cimcom Technologies Ltd., even when theTransfer Pricing Officer has rightly chosen thesame as comparables considering the functionsand by applying various tests? 3.|Whether on the facts and in thecircumstances of the case, the Tribunal is right inlaw holding that foreign exchange loss/gain isoperating in nature when, such loss/gain thoughattributable to the operating activity is not derivedfrom the operating activity? Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 4/17 4 |Whetherthe.holdingthattheassessee 1s entitled for registration under Section|I2ZAA of the Act, though the Society had notcommenceditsactivitieswherebythegenuineness of the activities of the trust was notverifiableP” 3.Though this Appeal has been admitted on8.132.2015to consider the substantial questions of lawNos. 2 and 3, learned Counsel for the Appellants-Revenue submits that Substantial Question No.1 iscovered by the Judgment of the Hon’ble Supreme Court © in the case ofCommissioner of Income-tax, Central -— UTDS,HCLTechnologiesLtd.,[2018]93|Taxmann.com 33(SC) Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 4/17 4 |Whetherthe.holdingthattheassessee 1s entitled for registration under Section|I2ZAA of the Act, though the Society had notcommenceditsactivitieswherebythegenuineness of the activities of the trust was notverifiableP” 3.Though this Appeal has been admitted on8.132.2015to consider the substantial questions of lawNos. 2 and 3, learned Counsel for the Appellants-Revenue submits that Substantial Question No.1 iscovered by the Judgment of the Hon’ble Supreme Court © in the case ofCommissioner of Income-tax, Central -— UTDS,HCLTechnologiesLtd.,[2018]93|Taxmann.com 33(SC) 4Learned Counsel for the Appellants-Revenue does not press substantial question No.4. 5.The same is taken on record. Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 5/17 Regarding Substantial Question No.1: 6.The issue is covered by the decision of theHon'blesupremeCourtin.theCaSE€oT|HCL|Technologies Ltd. (supra) T.The relevant portion of the judgment of theHon'blesupremeCourtin.theCaSE€oT|HCL|Technologies Ltd. (supra),is quoted below for readyreference:-. “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 9&8. The tssue before the Karnataka HighCourt was whether the Tribunal was correct|in holding that while computing relief under|section IOA 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| Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 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| Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 7/17 from export business, expenses excluded fromexport turnover have to be excluded from total|CTUTNOVETalso.Otherwise,anyotherinterpretation makes the formula unworkable|and absurd. Hence, we are satisfied thatsuch deduction shall be allowed from the totalturnover in same proportion as well”. Regarding Substantial Question No.2: 8.The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue andRespondent-Assessee, has returned findings as under: 99 |As regards the objection of theassessee on the adoption of comparables forcomputation of ALP relating to ITES segment, theassessee has filed a chart which is taken onrecord. The chart tabulates the comparables into3 categories which are to be excluded on thebasis of the decision of the Tribunal in the case ofTrilogy E-Business Software India Put. Ltd. Firstgroup of companies consists of — I)HCL Comnet Systems & Services Ltd.,#AInfosys BPO Ltd.,/AWipro Ltd. Regarding Substantial Question No.2: 8.The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue andRespondent-Assessee, has returned findings as under: 99 |As regards the objection of theassessee on the adoption of comparables forcomputation of ALP relating to ITES segment, theassessee has filed a chart which is taken onrecord. The chart tabulates the comparables into3 categories which are to be excluded on thebasis of the decision of the Tribunal in the case ofTrilogy E-Business Software India Put. Ltd. Firstgroup of companies consists of — I)HCL Comnet Systems & Services Ltd.,#AInfosys BPO Ltd.,/AWipro Ltd. Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 8/17 30.According to the learned counsel forthe assessee these companies are to be excludedfrom the list of the comparables by the application|of ‘turnover filter’. We have already held in thecase of software segment that the turnover filteris to be applied for both software development aswell as ITES segment. 3S.Respectfully following the decision ofthe Tribunal in the assessee’s own case for theassessment year 2006-07, these companies aredirectedTo|beexcludedfromthelistofcomparables. 32.Thegroup.Qoconsistsofthe companies which are to be excluded by applyingthe employees cost filter, these companies are — 1) Accentia Technologies Ltd., 2) Informed Technologies India 3) Vishal Information Technologies Ltd. 35.Having heard both the parties andhaving considered their rival contentions and thematerial on record, we find that this issue hadarisen in the assessee’s own case for theassessment year 2006-07. This Tribunal has held|that employee cost filter is to be the same even forITES segment also. The learned DR’s argumentthat the employee cost filter is applicable only to Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 9/17 software development segment and not to ITESsegment is not acceptable. Though it is withoutany dispute that the software development wouldrequire skilled employees and, therefore, theemployee cost would definitely be more than 25%of the total expenses, it cannot be said that thesaid filter is not applicable to ITES segment,where comparably less skilled employees areemployed. In the ITES segment, the entire work isto be done by the employees and, therefore, eventhough they may be less skilled compared tosoftware development segment, the number ofemployees would definitely be more and thus theemployee cost would be high and thus applicationof employees cost filter to the ITES sector is alsojustified. In view of the same, we direct the TPOto apply the employee cost filter to excludecompanies with employee cost of less than 25%from the list of comparables for the computation ofALP. 36.As faras 3[ra]group is concerned, thelearned counsel for the assessee submitted thatthis group consists of— 1) Bodhtree Consulting Ltd.2) Exlerx Services Ltd.3) Mold Tek Technologies Ltd. Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 10/17 36.As faras 3[ra]group is concerned, thelearned counsel for the assessee submitted thatthis group consists of— 1) Bodhtree Consulting Ltd.2) Exlerx Services Ltd.3) Mold Tek Technologies Ltd. Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 10/17 37.According to the learned counsel forthe assessee, these companies are functionallydifferent from the assessee. He submitted thatthe assessee 1s basically a ‘call centre’, whereasthese three companies are into the business of‘knowledge process out sourcing (KPO). Hesubmitted that while the assessee is into simpleactivities like credit check, in house supoort, billsearch, people search, high check, automatedservices, document management etc. while the‘knowledgeProcess.outsourcing‘|includesspecialized customer & technical services. Hesubmitted that Bodhtree Ltd. provides softwaresolutions such as data cleansing, e-learning ande-paper solution and also earns revenue fromsoftware products. As far as Eclerx Services Ltd.is concerned, he submitted that it is engaged inproviding data process and analytics services asis evident from the website of the company. Asregard Mold Tek Technologies Ltd., is concerned,he submitted that it is providing high-endengineering design and detailing services whichareappropriately categorizedaS|StructuralengineeringSECYLVICEandarehighendengineering services and cannot be considered as|comparable to the ITES services rendered by theassessee. Thus, according to him, these three Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., companies being functionally different from theassessee are to be excluded from the list ofcomparables. In support of his contention, heplaced reliance upon the decision of ‘A’ Bench ofthe Tribunal at Hyderabad in the case of M/sCapital IQ Information Systems (India) Put. Ltd. inITANo. 196/ Hyd/ 20dated23.11.2012,wherein the Tribunal has directed that Mold TekTechnologies Ltd. is to be excluded from the list ofcomparables because of ‘exceptional financialresult’ due to merger/demerger and also onaccount of ‘super normal profit’ of 113%. Heplaced reliance upon the decision of this Tribunalin the case of Mercedes Benz Research &Development India Put. Ltd., wherein it has beenheld that the companies showing abnormalprofits cannot be treated as comparable. 3S.The learned DR, on the other hand,supported the orders of the authorities below andsubmitted that the assessee has failed toestablish that the nature of actwities performedby the assessee are different from the companieswhich according to the assessee are functionallydifferent. He submitted that it is the boundenduty of the assessee to establish that thecomparables selected by the TPO are _ nocomparable to the assessee. Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 12/17 3S.The learned DR, on the other hand,supported the orders of the authorities below andsubmitted that the assessee has failed toestablish that the nature of actwities performedby the assessee are different from the companieswhich according to the assessee are functionallydifferent. He submitted that it is the boundenduty of the assessee to establish that thecomparables selected by the TPO are _ nocomparable to the assessee. Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 12/17 39.Having heard both the parties andhaving considered their rival contentions, we findthat the assessee had raised elaborate objectionsto each of the comparables in group 3 before theTPO. The TPO has also reproduced the saidobjections in his order para 6.5.1 of page 178 ofhis order. He has rejected the contention of theassessee by holding that every function withinBPO sector can be from low end to high end andthe.activitiesoftheaASSCCSSCEsuchaS|accounting,webmanagement,networkmanagement are BPO services using technologybut these services are not categorized as KPO. Heheld that a call centre may offer support serviceslike telemarketing to high end _ services liktechnical support services, where not only thelevel of knowledge, skill required would be high,but the technical knowledge as well would behigh. According to him, back office transactionprocess services may be as remarkable and ascomplicated as insurance/market transactionprocessing services. He, therefore, rejected thecontention of the asseessee and treated the BPOas equivalent to KPO services. Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 13/17 Regarding Substantial Question No.3: “As far the issue of considering the foreign|exchange fluctuation as operating revenue isconcerned, we hold that this amount is to beconsidered as part of operating revenue in view ofthe decision of this Bench of the Tribunal in thecase Trilogy E-Business Software India Put. Ltd..Therefore, the AO shall re-compute the ALP bytakingintoaccounttheforeignexchangefluctuation also as operating revenue. As far asthe result of Mega Soft is concerned, we havealready directed that the ALP shall be computedin the case of software segment after makingcorrection to the net margin of Mega Soft Ltd., onthe basis of the order this Tribunal in the case ofTrilogy E-Business India Put. Ltd.:° QOThe 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 found Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 14/17 ex 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: 05. 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 (DIAA), interpretation of|provisions 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 suchexercise of framing and answering such| Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 15/17 Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 15/17 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|lawand.theSuggested|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 saqme'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 | “A Date of Judgment 12-07-2018, ITA No.433/2013 The Commissioner of Income Tax & another Vs. M/s First Advantage Offshore Services Pvt. Ltd., 16/17 Length 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 Revenue are|therefore dismissed with no order as_ tocosts.” 10,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. | 11.Hence, the Appeal filed by the Appellants-Revenue is liable to be dismissed and is accordinglydismissed. Nocosts. 17/17 Copy of this Order be sent to the Respondent-Assessee forthwith. Sd/-.JUDGE.Sd/-.JUDGE.AN /-