Date Of Judgment 28-08-2018, Ita v. M/S Goldman Sachs Services Pvt., Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 28 DAY OF AUGUST 2018. PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS.JUSTICEK S.SUJATHA I.T.A. No.495 /2017 BETWEEN: 1. The Pr.Commissioner ot Income-tax 5[th]Floor, BMTC Building,| 80 feet Road, Koramangala, Bengaluru 560 O95 2. The Deputy Commissioner of Income-Tax, Circle-3(1)(2), 2[&0]Floor, BMTC Building,80 Feet Road, Koramangala, |Bengaluru 560 09580 Feet Road, Koramangala, |Bengaluru 560 095 .. APPBLLANT (By Mr. Dilip Adv., for K.V. Aravind, Adv.) AND: M/s Goldman Sachs Services Pvt. Ltd.,Crystal Downs, Embassy Gold Links,Business Park, Off: Intermediate Ring Road,Bengaluru 560 071.PAN: AACCG 2435N . RESPONDENT (By Mr. SANDEEP HUILGOL FOR T SURYANARAYANA,ADV.) Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 2/18 THIS I.T.A. IS FILED UNDER SECTION 260-A OF THE IT|ACT, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONSOF LAW; ALLOW THE APPEAL AND SET ASIDE THE ORDERSPASSED)BYTHEINCOME-TAX.APPBRLLATBTRIBUNAL, BANGALORE IN IT (TP)A NO.267/BANG/2015 DATED 06.01.2017 |ANNEBEXURE-D AND CONFIRM THR ORDER OF THR DRCONFIRMING|TH EORDERPASSEDBY|TH EDEBPUTYCOMMISSIONBR.OF|INCOMEBWTAX,|CIRCLE-3(1)(2)5BENGALURU. THIS LT.A. COMING ON FOR HEARING THIS DAY,S. SUJATHAJT DRBLIVERBD THE FOLLOWING : JUDGMENT Mr.K.V. ARAVIND FOR DILIP,Adv. for Appellants-Revenue |MrSANDEEP HUILGAL FOR T SURYANARAYANA>Adv. for Respondent-Assessee 1. The Appellants-Revenue have filed this appealu/s.260Aof the Income Tax Act, 1961, raisingpurportedly certain substantial questions of law arisingfrom the order of the.ITAT, ‘A’ Bench, Bangalore>.dated06.01.2017passed1n IT(TP)A|No.267/Bang/2015.(Goldman Sachs Services P. Ltd., vs.Deputy Commissioner of Income-tax )forA.Y.JZO010-1 2. This appeal has been admitted on 17.01.2018to consider the following substantial questions of law Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 3/18 framed.1n theMemorandumoT|appealby theAppellants-RevenueaTe€quotedbelowfor.readyreference:-. 1) Whether on the facts and in_ thecircumstances of the case, the Tribunal ts rightin law in setting aside the disallowance madeunder section 14A read with Rule 83(2) (it) ofthe Act by holding that neither assessingauthority nor Dispute Resolution Panel hasrecorded specific finding as to whether theassessee has incurred specific expenditure ornot even when the ingredients of section 14Aare satisfied in the case of the assessee andthe assessing authority has_ categoricallySpecifiedtheexpenditureforsuchdisallowance r” 2) Whether on the facts and in thecircumstances of the case, the Tribunal ts rightin law in setting aside the directions of theDRP with regard to comparables, namely,ICRA online, Infosys BPO and Micro LandLimited even when the decisions relied uponby the Tribunal has not reached finality and Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 4/18 all the required tests are satisfied with regardto aforesaid comparablesP” 3) Whether on the facts and in_ thecircumstances of the case, the Tribunal ts rightin law in directing the Transfer Pricing Officerto grant Market Risk Adjustment withoutappreciating the risk adjustment involves twovitalpre-conditions|Leé.,withregardtodifference in risk level exist between testedparty and the uncontrolled comparables whichis possible to calculate in terms of numbersand the adjustment can be made in suchcircumstances only and in the present caseboth the aspects were not established by theassessee? Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 4/18 all the required tests are satisfied with regardto aforesaid comparablesP” 3) Whether on the facts and in_ thecircumstances of the case, the Tribunal ts rightin law in directing the Transfer Pricing Officerto grant Market Risk Adjustment withoutappreciating the risk adjustment involves twovitalpre-conditions|Leé.,withregardtodifference in risk level exist between testedparty and the uncontrolled comparables whichis possible to calculate in terms of numbersand the adjustment can be made in suchcircumstances only and in the present caseboth the aspects were not established by theassessee? 4) Whether on the facts and in _ thecircumstances of the case, the Tribunal ts rightin law in directing the Transfer Pricing Officerto exclude M/s Accentia Technologies Limitedas comparable by following its earlierdecision in the case of M/s ISG Nova SoftTechnologies ssLImited which has not reachedfinality even when the said comparablesatisfies qualitative and quantitative filters”?| Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 5/18 3. The learned Tribunal, after discussing the rivalcontentions of both the Appellants-Revenue and theRespondent-Assessee, has given the following findings:- | 4Regarding substantial question of law No.1: “13. We have heard rival submissions. The|fact remains that assessee’s investment as.on 31.3.2009 was at Rs.1,51,46,000/- whichremained so as on 31.3.2010 also. Itresponded to the AO saying that it has not|earned any exempt income, no expenditure isincurred in relation to tax exempt investments|and hence, disallowance u/s 14A rw Rule8D is not warranted. Neither the AO nor the|DRP_ recorded specific finding as to whetherthe assessee incurred specific expenditure(s)|or not. There is not even an attempt to say|what has happened on this tissue in theearlier year (s) or in the subsequent year (s).In view of the facts and circumstances, theattempt to say what has happened on this|issue in the earlier year (s) or in _ thsubsequent year (s). In view of the facts and| Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 6/18 circumstances, the impugned addition 1s|deleted and the corresponding appeal ground|1s allowed.” 4. The controversy involved regarding this issue is squarely covered by the recent Judgment of thisCourt in ITA No. 342/2016, dated 12.60.2018 in thecase oftThe Pr. Commissioner oft [Income Tax another Vs. M/s Advaith Motors Pvt. Ltd., wherebyconsidering the arguments’ of both learned counselappearing for the parties, it has been held that nosubstantial question of law required for furtherconsideration by this Court. The relevant portion of the judgment is quoted herein for ready reference: | ce4. Learned counsels at the bar broughtto our notice that the said controversy 1s no|longer res integra and the Division Bench of|this Court in two matters has already held in|favour of the assessee that the disallowanceunder Rule-8D of the Rules r/w Section 14A.of the Act cannot exceed the expendituredirectly relatable to earn the exempted Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 7/18 income in the form of ‘Dividend’ as computed|in accordance with Rule-8D of the Rules. 5. The relevant portions of the following twojudgments are quoted belowfor ready reference-:-| (1) Commisstoner of Income Tax & Anr. Vs. Microlabs Ltd., [2016] 383 ITR490 (Karn). “99. Aggrieved by the order of CIT{(A), theassessee has raised ground No.2. Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 7/18 income in the form of ‘Dividend’ as computed|in accordance with Rule-8D of the Rules. 5. The relevant portions of the following twojudgments are quoted belowfor ready reference-:-| (1) Commisstoner of Income Tax & Anr. Vs. Microlabs Ltd., [2016] 383 ITR490 (Karn). “99. Aggrieved by the order of CIT{(A), theassessee has raised ground No.2. 40.We haque heard the rival submissions. Acopy of the availability offunds and investmentsmade was filed before us which ts at pages 38 to42 of the assessee’s paperbook and the same isenclosed asANNEAURE0IIT to this orderIt isclearfrom the said statement that the availabilityof profit, share capital and reserves & surpluswas much more than investments made by theassessee which could yield taxfree income. 41.|TheHon’bleBombayHighCourt|in|Reliance Utilities & Power Ltd. 313 ITR 340 (Bom)has held that where the interest free funds farexceed the value of investments, it should beconsidered that investments have been made outof interest free funds and no disallowance u/s. Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 14A towards any interest expenditure can bemade. This view was again confirmed by theHon’ble Bombay High Court in CIT v. HDFC BankLtd., ITA No.330 of 2012, judgment dated23.7. 14,wherein1t|was held.thatwheninvestments are made out of common pool offunds and non-interest bearing funds were morethan the investments in tax free securities, nodisallowance of interest expenditure u/s. 14Acan be made. 4?In the light of above said decisions, we areof the view that disallowance of interestexpenses in the present case of Rs.49,42,473made under Rule 8D(2)(it) of the LT. Rules shouldbe deleted. We order accordingly.” The aforesaid shows that the Tribunal has|followed a decision of the Bombay High Court inthe case ofCIT v. HDFC Bank Ltd., (ITANo.330/2012 disposed of on 23/7/2014)When the issue is already covered by a decisionof the High Court of Bombay with which weconcur, we do not find any substantial questionoflawWould|ariseforconsiderationas|canvassed. 6. In view of the above observations, the appeal|1s dismissed.” Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 9/18 (11)M/s.Pragatht Krishna Gramin Bank vs. Joint Commissioner of Income Tax(ITANos.100001/2018&| 100002/2018decided by the DivisionBench of this Court at Dharwad Bench|(1nwhich, one of us, Justice Vineet Kothari was a party)also, the Court held in favour|of the assessee in the following terms:-. “13. The manner in which the aforesaiddisallowance has been made by the assessingauthority and has been upheld by the appellate|authorities leques much to the desired and thesame cannot be sustained and therefore the)matter deserves to be remanded back to theAssessing Authority. 14.|We|make.It|clearthattheexpenditure for earning exempted income has tohave a reasonable proportion to the income, soearned, going by the common financial prudence.Therefore, even if the Assessing Authority has tomake an estimate of such an _ expenditurincurred to earn exempted income, it has to have Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 10/18 was a party)also, the Court held in favour|of the assessee in the following terms:-. “13. The manner in which the aforesaiddisallowance has been made by the assessingauthority and has been upheld by the appellate|authorities leques much to the desired and thesame cannot be sustained and therefore the)matter deserves to be remanded back to theAssessing Authority. 14.|We|make.It|clearthattheexpenditure for earning exempted income has tohave a reasonable proportion to the income, soearned, going by the common financial prudence.Therefore, even if the Assessing Authority has tomake an estimate of such an _ expenditurincurred to earn exempted income, it has to have Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 10/18 a rational nexus with the amount of incomeearned itself. Disallowance under Section 14A ofRs.2,48,85,000/- as expenses to earn exemptedDwidend income of Rs.1,80,30,965/- is per seabsurd and hypothetical. The disallowanceunder Section 8D cannot exceed the expenses|claimed by assessee under the Proviso to Rule8D. Therefore, where the assessee claimed thatassessee did not incur any such expenditureduring the year in question to earn Dividends ofRs. 1,80,30,965/-, the burden was upon theassessing authority to compute the interest onsuch borrowed funds which were dedicatedlyused for investment in securities to earn suchexempted Dividend income. The disallowanceunder Section 14A cannot be a wild guessworkbereft of ground realities. It has to have areasonable and close nexus with the factuallyincurredEXPEMNSeEsIt1SNOT|deemeddisallowance under Section 14A of the Act butan enabling provision for assessing authority tocompute the same on the given facts and figuresin the regularly maintained Books of Accounts.The assessing authority also could not havecalled upon the Assessee himself to undertakethe exercise of computing the disallowance undersection 8D of the Rules. Such abdication of duty Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 11/18 in not permissible in law. Since no such exercisehas been undertaken by the assessing authority,the case calls for a remand. 15.|In this view of the matter, thefindings of all the three authorities below forsection 14A of the Act are set aside and thematter is remanded back to the AssessingAuthority for re-computing the disallowance ofexpenditure, if any, under Section 14A of the Act,in accordance with lat.” o. In view of the aforesaid two decisions, We|do not find any substantial questions of law|arising in the present appeal requiring our|further consideration. The order passed by.the learned Trnbunal in this’ regard is therefore confirmed7 | Regarding substantial questions of law Nos.2 and 5)° “O6.Grounds No.4 & 7 of the Revcenue areagainst the DRP’s direction to the TPO to|exclude ICRA online Ltd., Infosys BPO Ltd &|Microland Ltd as comparables. In this regardthe relevant portion of the DRP directions are|extracted as under: XXXXXKXKXXXX Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 12/18 o. In view of the aforesaid two decisions, We|do not find any substantial questions of law|arising in the present appeal requiring our|further consideration. The order passed by.the learned Trnbunal in this’ regard is therefore confirmed7 | Regarding substantial questions of law Nos.2 and 5)° “O6.Grounds No.4 & 7 of the Revcenue areagainst the DRP’s direction to the TPO to|exclude ICRA online Ltd., Infosys BPO Ltd &|Microland Ltd as comparables. In this regardthe relevant portion of the DRP directions are|extracted as under: XXXXXKXKXXXX Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 12/18 O7. The AR submitted that the assessee earns99.88% of its revenue from export, the TPO hasapplied export filter of 75% for both software andES segment in ay2008-09, he has to beconsistent, the DRP also upheld 75% export filterin AY 2YOOYI-120 etc. We have considered thrial submissions, gone through relevant orders,material and find that the DRP’s above decisionto exclude ICRA online Ltd and infosys BPO Ltd.,as a comparable is justified on the basis of theratios of the cases relied on/supra, and henceconfirm it. On Mircroland Ltd., the AR submittedthat the DRP, suo moto, directed the TPO toexclude it as acomparable. It is submitted thatexport information for the said company isavailable which is more than 75% of the totalrevenue. The segment information for the ITESservices 1s also available in the audited financialstatement which should also be considered forthe inclusion and relied on the cases lawreported in ISG Novasoft Technologies Ltd in ITin IT NO.185(B)/2015) a y 2010-11(BangalreITAT). The relevant portion of that order isextracted as under: XuXXXXX©XXXX| Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 13/18 Following the above decision, we set aside|the directions of the DRP in this regard and|direct the TPO to consider M/s Microland Ltd.,as a good comparable for the purpose of|analyzing the pricing of the international|transaction undertaken by the assessee. |Thus, appeal ground nos 4 & /7/ of thRevenue are partly allowed. Assessee’sappeal ground no.4.4 ts allowed. — OS. With regard to Accentia Technologies|Ltd., the AR submitted that it is functionally|different from it as that company is also|engaged in medical coding which is a niche|function requiring understanding of medicalterminologies. Further, it is also engaged in|KPO.Services.includinglegalProcess|outsourcing, and high end software services|and also operates from onsite locations in US,UK,and.Middleeast.No}segmentalinformation is reported by that company in its|financial statement, it owns IPs and duringthe year itamalgamatedwith AsscentInfoserve and relied on the following cases: Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 14/18 ISG Novasoft Technologies Ltd (IT)No. 185(B).2015)AY|2010-11)(Bangalore ITAT)No. 185(B).2015)AY|2010-11)(Bangalore ITAT) Amba Research (India) Private Limited|(IT no.286/ Bang/ 201S) (AY 2010-11(Bangalore ITAT)(IT no.286/ Bang/ 201S) (AY 2010-11(Bangalore ITAT) Goldman Sachs Services P Ltd Vs DCIT|(IT(TP) A No.1659/B/2012 (AY 2008-OY) (Bangalore ITAT)(IT(TP) A No.1659/B/2012 (AY 2008-OY) (Bangalore ITAT) Ramapgreen Solutions Put. Ltd. (ITANo. 1066/ Del/ 201(AY)2008-09)(Delhi High Court).No. 1066/ Del/ 201(AY)2008-09)(Delhi High Court). O9. The relevant portion of the orderfrom ISG|NovasoftTechnologies:Ltd., in|ITNo.185(B)2015) a y 2010-11(Bangalore ITAT)|1s extracted under: KXXXXXXXKXXX| Following the above decision, we direct theTPO to exclude Ms Acentia Tech Ltd., from the|list of comparables, while analyzing the|pricing of the international transactionundertaken by the assessee in the ITES|segment. Thus appeal ground no. 4.2 of theassessee’s appeal is allowed. Goldman Sachs Services P Ltd Vs DCIT|(IT(TP) A No.1659/B/2012 (AY 2008-OY) (Bangalore ITAT)(IT(TP) A No.1659/B/2012 (AY 2008-OY) (Bangalore ITAT) Ramapgreen Solutions Put. Ltd. (ITANo. 1066/ Del/ 201(AY)2008-09)(Delhi High Court).No. 1066/ Del/ 201(AY)2008-09)(Delhi High Court). O9. The relevant portion of the orderfrom ISG|NovasoftTechnologies:Ltd., in|ITNo.185(B)2015) a y 2010-11(Bangalore ITAT)|1s extracted under: KXXXXXXXKXXX| Following the above decision, we direct theTPO to exclude Ms Acentia Tech Ltd., from the|list of comparables, while analyzing the|pricing of the international transactionundertaken by the assessee in the ITES|segment. Thus appeal ground no. 4.2 of theassessee’s appeal is allowed. Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 15/18 Regarding substantial question of law No.3 “10. The next issue is on the Working Capital|Adjustment:Adjustment: The Revenue objected to the restriction of working|capital adjustment to the 1.01% as against the|actual working capital adjustment carried out by|TPO at 2.23%. The TPO has in principle agreed to |the claim of the assessee for granting the working|capital adjustment and has consequently granted|the same. However, it is seen that the working|capital adjustment was restricted to 1.01% which|is the average cost of capital of the comparable|selected by the TPO. In this regard, the DRP has|held as under: XXXXX| The assessee relied on the decision of this|Tribunal in Moong Controls India P Ltd., ITA|991/ Bang/ 201ay2OLIOat27.11.2015,wherein this Tribunal directed the TPO to allow|actual adjustment towards the differences in the|working capital position between the assessee|and the entrepreneurial companies selected as|comparable. We direct the TPO to follow this| Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 16/18 decision. Thus Revenue’s appeal ground nos 5|and 6 are dismissed. ” 8. However, this Court in a recent judgment in ITA No.536/2015 C/w ITA No.537/2015delivered on 25.06.2018 (Pri. Commissioner of Income Tax &Anr. Vs. M/s. Softbrands India Pvt. Ltd.,)1 has heldthat in these types of cases, unless anex-facleperversity in the findings of the learned Income TaxAppellate Tribunal is established by the appellant, theappeal at the instance of an assessee or the Revenue underSection 260-Aot the Act is not maintainable. The relevant portion of the said judgment is.quoted below for ready reference: “§ Conclusion: oo. A substantial quantum of international trade andtransactions depends upon the fair and quick judicialdispensation in such cases. Had it been a case ofsubstantial question of interpretation of provisions ofDoubleTaxationAvoidance.Treaties(DTAA),interpretation of provisions of the Income Tax Act orOverriding Effect of the Treaties over the Domestic Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 17/18 Legislations or the questions like Treaty Shopping,Base Erosion and Profit Shifting (BEPS), Transfer ofshares in Tax Havens (like in the case of Vodafoneetc.), if based on relevant facts, such substantialquestions of law could _ be raised before the HighCourt under|Section 260-Aof 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 towhether the comparables have been rightly picked upor 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 substantialquestion of law. 17/18 Legislations or the questions like Treaty Shopping,Base Erosion and Profit Shifting (BEPS), Transfer ofshares in Tax Havens (like in the case of Vodafoneetc.), if based on relevant facts, such substantialquestions of law could _ be raised before the HighCourt under|Section 260-Aof 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 towhether the comparables have been rightly picked upor 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 substantialquestion of law. 56. We are therefore of the consideredopinion that the present appeals filed by theRevenue do not give rise to any substantial|question of law and the suggested substantialquestions of law do not meet the requirements of.Section 260-Aof the Act and thus the appealsfiled by the Revenue are found to be devoid of|merit and the same are liable to be dismissed. | 37. We make it clear that the same yardsticks and|parameters will have to be applied, even if suchappeals are filed by the Assessees, because, theremay be cases where the Tribunal giving its own) Date of Judgment 28-08-2018, ITA No.495./2017 The Pr.Commissioner of Income Tax & Another Vs. M/s Goldman Sachs Services Pvt., Ltd., 18/18 reasons and findings has found certain comparablesto be good comparables to arrive at an|7s “ArmLength Price“ in the case of the assessees withwhich the assessees may not be satisfied and havefiled such appeals before this Court. Therefore weclarify that mere dissatisfaction with the findings offacts arrived at by the learned Tribunal is not at allasufficient reason to invokeSection 260-Aof the Act|before this Court. o8. The appeals filed by the Revenue are thereforedismissed with no order as to costs.” 9. Having heard the learned counsels for theparties, we are therefore of the opinion that nosubstantial question of law arises in the present casealso. The appeal filed by the Appellants-Revenue isliable to be dismissed and it is56)=6))"5accordinglyNo costs. Sd/-.JUDGE| Sd/-.JUDGE| psg*