Date Of Judgment 20-07-2018, Ita v. M/S.e4E Business Solutions India Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 20 DAY OF JULY 2O18| PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A. No.711/2015 BETWEEN: 1.THERE COMMISSIONER OF [INCOME-I OTH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGAL| BANGALORE - 560 095 2.THR DEPUTY COMMISSIONER OF INCOME-lITACIRCLE — 11 (3)2ND FLOOR, BMTC BUILDING,80 FEET ROAD, KORMANGAL|BANGALORE - 560 095|_. APPBLLANTS|CIRCLE — 11 (3)2ND FLOOR, BMTC BUILDING,80 FEET ROAD, KORMANGAL|BANGALORE - 560 095|_. APPBLLANTS| (BY SRI. K V ARAVIND, ADV.) AND:| M/S E4E BUSINESS SOLUTIONSINDIA PVT. LTD.,.MARUTHI CHAMBERS, 4[‘L]FLOOR, |# 17/9B,17/4B,RUPENA AGRAHARA,|HOSUR ROAD,BANGALORE — 560 068|PAN: AAACI! 6324A_. RESPONDENT(BY MS. MANASA ANANTHAN, ADV. FOR|SRI.T. SURYANARAYANA, ADV.) Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 2/14 THIS [TA IS FILED UNDER SECTION 260-A OF INCOME|TAX ACT 1961, ARISING OUT OF ORDER DATED:26/05/20195PASSED IN ITA NO.819/BANG/2011, FOR THE ASSESSMENT)YRAR 20O07-JOO8 ANNBXURE - D. PRAYING TO: I. FORMULATETHE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. II.|ALLOW THR APPBAL AND SBT ASIDE THR ORDERS PASSBD BY)THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN ITANO. 819/BANG/2011 DATED:26/05/2015 ANNEXURE - D AND.CONFIRM THR ORDER OF THR DRP CONFIRMING THR ORDER|PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX,|CIRCLE-11(3), BENGALURU. THIS APPEAL COMING ON FOR HEARING, THIS DAY,|S. SUJATHA, J., DELIVERED THE FOLLOWING: JU DBiGMENT Mr. K.V.Aravind,Adv. for Appellants — Revenue. |Ms. Manasa Ananthan,Adv., for — Mr. T. Suryanarayana,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 inIT|TPIA No.819/Bang/2011dated26.05.2015, relating to the Assessment Year 2007-08. a2ThisAppealhas|beenadmitted|OTL 12.04.2017to consider the following substantial Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 3/14 questions of law as framed by the Revenue in the Memorandum of Appeal. “1) Whether, the Tribunal was right in fact and nlawinseekingexact|comparabilitywhtlesearching for comparable companies of theassessee under Transaction Net Margin Methodwhereas requirement of law and internationaljurisprudencerequireseekingcomparableles? compan 2) Whether while seeking the exact comparabilityas mentioned above the Tribunal was right in factand in law in imposing condition beyond lawwhere the requirement of law is to acknowledgeonly those differences that are likely to materiallyaffect the margin? 3) Whether, the Tribunal was right in law in notacknowledging that determination ofArms LengthPrice by levying out comparability analysis of thecompanies is an art and not exact science as notwo companies are exactly sameP substantial question of law No.4 framed by the Revenue is as under: 4) Whether on the facts and in the circumstancesof the case, the Tribunal erred in allowing holding| Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 4/14 that the telecommunication charges excluded fromexport turnover should also be excludedfrom totalturnover by relying on the decision in the case ofTata Elxsi Ltd. ?” Regarding Substantial Question No.4: 3.The issue is covered by the decision of theHon’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.CaSE€ot HCL|Technologies Ltd. (supra),is quoted below for readyreference:-. Revenue is as under: 4) Whether on the facts and in the circumstancesof the case, the Tribunal erred in allowing holding| Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 4/14 that the telecommunication charges excluded fromexport turnover should also be excludedfrom totalturnover by relying on the decision in the case ofTata Elxsi Ltd. ?” Regarding Substantial Question No.4: 3.The issue is covered by the decision of theHon’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.CaSE€ot HCL|Technologies Ltd. (supra),is quoted below for readyreference:-. “17. The simular nature of controversy, akin|this case, arose before the Karnataka High CourtinCIT v. Tata Elxsi Ltd. [2012] 204 Taxman|3S21/17/taxman.com 100/349 ITR 98. The issuebefore the Karnataka High Court was whetherthe Tribunal was correct in holding that whilecomputing relief under Section IOA of the IT Act,the amount of communication expenses should beexcluded from the total turnover tf the same are. Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 5/14 reduced from the export turnoverP While givingthe answer to the issue, the High Court, inter-alia,held that when a particular word is not definedby the legislature and an ordinary meaning 1s tobe attributed to it, the said ordinary meaning is tobe in conformity with the context in which it isused. Hence, what is excluded from ‘exportturnover’ must also be excluded from ‘totalturnover’, since one of the components of ‘totalturnover’1Sexportturnover.Anyotherinterpretation would run counter to the legislativeintent and would be impermissible. | LSE, XXXXXX 19. In the instant case, if the deductions on|freight,telecommunicationand|insuranceattributable to the delivery of computer softwareunder Section 10A of the IT Act are allowed onlyin Export Turnover but not from the TotalTurnover then, it would give rise to inadvertent,unlawful, meaningless and illogical result whichwould cause grave injustice to the Respondentwhich could have never been the intention of thelegislature. 20. Even in common parlance, when theobject of the formula ts to arrive at the profit from Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 6/14 export business, expenses excluded from exportturnover have to be excluded from total turnoveralso. Otherwise, any other interpretation makesthe formula unworkable and absurd. Hence, weare satisfied that such deduction shall be allowedfrom the total turnover in same proportion aswell”. Regarding Substantial Question Nos.1, 2 & 3: 5.The learned Tribunal, after discussing therival contentions of both the Appellants-Revenue andRespondent-Assessee, has returned findings as under: “15. The Assessee next seeks exclusion of thefollowingfourcompaniesfromthe list.ofcomparable companies by applying the employeecost to sales filter, viz., Asit C.Mehta Financialservices Ltd., (previous known as Nucleus Netsoftand GIS Limited), Informed Technologies Ltd.,Vishal Information Technologies Limited (nowknown as Coral Hub Limited) and AccentiaTechnologies Ltd. The employee cost filter is anacceptedfilterinthematterof|choosingcomparables. In the case of First AdvantageOffshore Services Put.Ltd., Vs. DCIT IT (TP)A.No.1086/ Bang/ 2011 for AY O7-O8 order date30.4.2013 in para- 35, this tribunal has held that 7/14 in ITES sector also the compantes which has lessthan 25% of the sales as employee cost shouldnot be selected for comparability analysis fordetermination ofALP. — “15. The Assessee next seeks exclusion of thefollowingfourcompaniesfromthe list.ofcomparable companies by applying the employeecost to sales filter, viz., Asit C.Mehta Financialservices Ltd., (previous known as Nucleus Netsoftand GIS Limited), Informed Technologies Ltd.,Vishal Information Technologies Limited (nowknown as Coral Hub Limited) and AccentiaTechnologies Ltd. The employee cost filter is anacceptedfilterinthematterof|choosingcomparables. In the case of First AdvantageOffshore Services Put.Ltd., Vs. DCIT IT (TP)A.No.1086/ Bang/ 2011 for AY O7-O8 order date30.4.2013 in para- 35, this tribunal has held that 7/14 in ITES sector also the compantes which has lessthan 25% of the sales as employee cost shouldnot be selected for comparability analysis fordetermination ofALP. — 16. As far as the percentage of employee cost tosales is concerned, the Assessee has filed a chartshowing the employee cost to sales in respect ofthe aforesaid four companies. The said chart isgiven as Annexure-II to this order. In respect ofthe percentage of employee cost to turnover thereis dispute in the case of Asit C.Mehta about thepercentage of employee cost to turnover. Inrespect of Asit C.Mehta the learned DR submittedthat the Data processing charges mentioned inochedule-12 of the Profit and Loss Account shouldalso be considered as employee cost and thepercentage worked out accordingly. In respect ofAccentia technologies Ltd., also the issue shouldbe remanded as the employee cost to turnoverissue was not raised before the DRP/TPO by theAssessee and the figures given by the Assessee|before Tribunal needs verification. We are of theview that the plea put forth by the learned DR isacceptable and in respect of these two companiesthe employee cost to sales should be examinedafresh by the AO/TPO after due opportunity to Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 8/14 the Assessee. In respect of the other twocompanies there is no dispute that the employeecost to sales is less than 25% and therefore thesetwo companies are directed to be excluded fromthe list of comparable companies. 17. As far as comparable company at SI..No. 5, 14&16 of the chart of comparable companies chosenby the TPO viz., Appollo Health Street Ltd.,M/S.HCL Comnet and M/s.Informed TechnologiesIndia Ltd., are concerned, it is not in disputebefore us that the related party transaction in thecase of companies exceeds 15% ( 17.77 % in thecase of Appollo Health Street Ltd., 21.52% in thecase of HCL Comnet and 15.93% in the case ofInformed Technologies India Ltd.) and in view ofthe decision of the Ltd. (supra) wherein it washeld that where the RPI exceeds 15%, suchcompanies should not be taken as comparable|companies. Following the said decision, we holdthat companies at Sl.Nos. 5, 14 & 16 referred toabove of the list of the comparable companieschosen by the TPO be excluded from the list ofcomparable companies while working out theALP. In respect of comparable company CaliberPoint, which is at SLNo.9 of the lst ofcomparables chosen by the TPO, the related party Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 9/14 Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 9/14 transaction is shown by the TPO is 13.70%. TheAssessee has filed a chart before us showing RPTat 15.44%. The same is given as ANNEXURE-III tothis order. We _ therefore remand for fresconsideration by the TPO the RPT in the case ofthis company after affording opportunity of beingheard to the Assessee. In the event of RPT beingmore than 15%, the said company has to beexcluded from the list of comparable companies.Tribunal in the case of 24 X 7 Customer.Com Put.Ltd. in ITA No.227/Bang/2010, followed by thisTribunal in the case of Logica Private Ltd. (supra)wherein it was held that where the RPT exceeds15%, such companies should not be taken ascomparablecompanies.FollowingtheSaiddecision, we hold that companies at SL. Nos. 5, 14& 16 referred to above of the list of thecomparable companies chosen by the TPO beexcluded from the list of comparable companieswhile working out the ALP. In respect ofcomparable company Caliber Point, which is atol.No.9 of the list of comparables chosen by theTPO, the related party transaction is shown bythe TPO is 13.70%. The Assessee has filed achart before us showing RPT at 15.44%. Thesame is given as ANNEXURE-III to this order. Wetherefore remand for fresh consideration by the Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 10/14 TPO the RPT in the case of this company afteraffording opportunity of being heard to theAssessee. In the event of RPT being more than15%, the said company has to be excluded fromthe list of comparable companies. NXXXNX XXXX XXX 19. As can be seen from the aforesaid decision,the two companies viz., (1) Eclerx ServicesLimited; (2) Mold-Tek Technologies Limited (Seg.)were considered as not comparable because ofthe distinction that lies between a KnowledgeProcess|Outsourcing(KPO)companyandBusiness Process Outsourcing (BPO) company.The Special Bench of the ITAT Mumbai Bench inthe case of Maersk Global Centres (India) Pvt.Ltd.Vs.ACIT in ITA No. 7466/Mum/2012 order dated7.3.2014 considered the question whether therecan be any distinction in the matter of comparisonbetween a KPO and a BPO. The Special Benchheld that there cannot be any such distinctionand even KPO companies can be considered as|comparable. The Special Bench however wentinto the comparability of the aforesaid twocompanies in IT enabled services sector renderingshared Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 11/14 service center, transaction processing, data entryreconciliation of statements, audit of shippingdocuments and other similar support services andconcluded at para-&3 of its order that theaforesaid two companies are not comparable. Asto whether the nature of services rendered by theAssessee in the present case ts similar to the onerendered by M/s..Maersk Global Centres (India)Put. Ltd., ts an aspect which in our view will have|to be looked into by the TPO/AO. We accordinglyremand the issue of deciding the comparability oftheaforesaidTWOcompaniesforfreshconsideration in the light of the decisions referredto above.” 6.The controversy involved herein is no moreres integrain view ot 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, is 12/14 not maintainable. The relevant portion of the Judgment is quoted below for ready reference: “Conclusion: 6.The controversy involved herein is no moreres integrain view ot 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, is 12/14 not maintainable. The relevant portion of the Judgment is quoted below for ready reference: “Conclusion: oo. A substantial quantum of international tradeand transactions depends upon the fair and quickjudicial dispensation in such cases. Had it beena case of substantial question of interpretation ofprovisions of Double Taxation Avoidance Treaties(DTAA), interpretation of provisions of the IncomeTax Act or Overriding Effect of the Treaties overthe Domestic Legislations or the questions likeTreaty Shopping, Base Erosion and Profit Shifting(BEPS), Transfer of Shares in Tax Havens (like inthe case of Vodafone etc.), | based on relevantfacts, such substantial questions of law couldbe raised before the High Court underSection260-A|of the Act, the Courts could haveembarked upon such exercise of framing and)answering such substantial question of law. Onthe other hand, the appeals of the present tenoras to whether the comparables have been rightlypicked up or not, Filters for arriving at the correctlist of comparables have been rightly applied ornot, do not in our considered opinion, give rise toany substantial question of law. Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 13/14 56. We are therefore of the consideredopinion that the present appeals filed by theRevenue do not give rise to any substantialquestion of law and the suggested substantialquestions of law do not meet the requirements ofSection 260-A.of the Act and thus the appealsfiled by the Revenue are found to be devoid ofmerit 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 theAssessees, because, there may be cases where)the Tribunal giving its own reasons and findingshas found certain comparables to be goodcomparables to arrive at an‘Arm’s LengthPrice“ in the case of the assessees with whichthe assessees may not be satisfied and have filedsuch appeals before this Court. Therefore weclarify that mere dissatisfaction with the findings|offacts arrived at by the learned Tribunal is notat all a sufficient reason to invokeSection 260-Aof the Act before this Court. 58 The appeals filed by the Revenue aretherefore dismissed with no order as to costs.” Date of Judgment 20-07-2018, ITA No.711/2015 The Commissioner of Income Tax & another Vs. M/s.E4E Business Solutions India Pvt. Ltd. 14/14 T.In the circumstances, having heard the learned Counsel appearing for both the sides, We are of 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. AN /- Sd/-.JUDGE| Sd/-.JUDGE|