THE PR.COMMISSIONER OF INCOME TAX V. M/S E4E BUSINESS SOLUTIONS INDIA PVT LTD

ITA/352/2016

AI Insights

The case involves an appeal by the Pr. Commissioner of Income Tax and the Deputy Commissioner of Income Tax against M/s. E4E Business Solutions India Pvt. Ltd. concerning the determination of Arm's Length Price (ALP) under the Transaction Net Margin Method (TNMM) for the Assessment Year 2009-10. The appellants challenged the decision of the Income Tax Appellate Tribunal, Bengaluru, which had rejected certain comparable cases used for determining ALP. The substantial questions of law raised pertained to the strict comparability under TNMM and the classification of foreign exchange transactions as operating in nature. The High Court, after considering the arguments and relevant material, dismissed the appeal, stating that the questions did not meet the criteria for substantial questions of law under Section 260-A of the Income Tax Act.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 763312 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 26-07-2018
• Assessment Year: misc
• Other Referred Cases: I.T.A. Nos.536/2015 c/w 537/2015, Maersk Global Services, Rusabh Diamonds, Lam Research (India) Pvt. Ltd.
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A SHANKAR
• Assessee Lawyers: K V ARAVIND
• Keywords: ALP; Comparable cases; Foreign exchange transactions; Operating nature; TNMM
• Section: 260-A

Judgement Text

" 1/17 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 26TH DAY OF JULY 2018 PRESENT THE HON'BLE Dr.JUSTICE VINEET KOTHARI AND THE HON’BLE Mrs.JUSTICE S.SUJATHA I.T.A.No.352/2016 BETWEEN: 1. THE PR. COMMISSIONER OF INCOME TAX, 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BANGALORE-560 095. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(3), 2ND FLOOR, BMTC BUILDING,80 FEET ROAD, KORMANGALA, BANGALORE-560 095. …APPELLANTS (By Mr. K.V. ARAVIND, ADV.) AND: M/S. E4E BUSINESS SOLUTIONS INDIA PVT.LTD., (Formerly I-Seva Systems Pvt. Ltd.,) MARUTHI CHAMBERS, 17/4C, RUPENA AGRAHARA, BANGALORE - 560 068. PAN: AAAC 16324A. …RESPONDENT (By Mr. A.SHANKAR, ADV. FOR Mr. M.LAVA, ADV.) Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 2/17 THIS I.T.A. IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW; ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN IT(TP)A NO. 1845/BANG/2013 DATED 10/11/2015, ANNEXURE – D AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(3), BENGALURU & ETC. THIS I.T.A. COMING ON FOR HEARING, THIS DAY S. SUJATHA J. DELIVERED THE FOLLOWING:- JUDGMENT Mr. K.V. Aravind, Adv. for Appellants-Revenue Mr. A.Shankar, and Mr. M. Lava, Advs. for Respondent-Assessee The appellants-Revenue have filed this appeal u/s. 260A of the Income Tax Act, 1961 (for short ‘Act’) raising purportedly certain substantial questions of law arising from the order of the Income Tax Appellate Tribunal, Bangalore Bench ‘B’ (for short ‘Tribunal’) dated 10.11.2015 passed in I.T(TP)A No.1845/Bang/2013 for the A.Y.2009-10. Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 3/17 2. This appeal has been ADMITTED on 06.12.2017 to consider the following substantial questions of law as formulated in the appeal memo: “1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in rejecting comparable cases by insistence on strict comparability under TNMM defeats the very purpose of the law relating to determination of ALP under the Act? 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in seeking exact comparability which reading for comparable companies the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies? 3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the foreign exchange transactions are to be considered as operating in nature, when the Rule 10 B (2)(d) stipulates that the net profit margin realized by the taxpayer in the international transaction shall alone be Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 4/17 computed for comparability analysis under Transaction Net Margin Method?” 3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned the findings as under: Regarding substantial question of law Nos.1 and 2: 11. Now, we will take up the objections raised by the assessee against various companies selected by the TPO and included in the set of comparables. At the time of hearing, learned AR of the assessee has submitted that the assessee will confine its arguments only with respect to the 4 comparables viz: (1) Accentia Technologies (2) Comic Global Ltd. (3) Eclerx Services Ltd., and (4) Infosys BPO Ltd. The comparability of each of these companies are dealt with one by one as under: Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 5/17 11.1 Accentia Technologies Ltd. i) We have considered the rival submissions as well as relevant material on record. The first objection has been raised by the learned AR of the assessee on account of extraordinary event of acquisition/purchase of business by Accentia Technologies Ltd., whereby M/s. Oak Technologies Inc, USA has been acquired by this company during the year under consideration. Though the extraordinary event of merger of acquisition, if influenced the business as well as the revenue of a company then said company is not considered as a good comparable for the purpose of determination of the ALP however, in this case, it is not clear from the Annual Report whether the business of M/s. Oak Technologies and has been acquired and merger with the said company during the year under consideration. It appears that Accentia Technologies Ltd., has purchased up to 96% of the share holding of M/s. Oak Technologies. If it is only a transaction of purchase of shares of the said company then it is only a Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 6/17 transaction of purchase of shares of the said company then its may be a case of purchase of ongoing business of Accentia Technologies Ltd. In the absence of the relevant fact that the business of the said company has been merged with Accentia Technologies Ltd., it may be a case of acquiring the shares and M/s. Oak Technologies still remains an independent entity and business activity. Therefore, in the absence of complete relevant facts, it cannot be held that the so called acquisition of M/s. Oak Technologies can be considered as an extraordinary event having impact on the revenue as well as business activity of Accentia Technologies Ltd. Accordingly, this argument of the learned AR of the assessee is rejected for want of complete facts. (iii) As regards the functional dissimilarity, we note that Accentia Technologies Ltd is engaged in diversified activity of medical transcription, medical coding, billing, and receivable management. Thus it is clear that the said company is engaged in the healthcare Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 7/17 activity and providing BPO service in the healthcare sector, that too by providing specific services of the medical transcription, medical coding, medical billing etc. We note that these activities are quite different from the service of contact centre provided by the assessee to its AE which is purely in the nature of call centre. Therefore, we are of the view that the company Accentia Technologies Ltd cannot be considered as a functionally comparable company with the services provided by the assessee to its AE. The TPO is directed to exclude this company from the set of comparables. 11.2 Eclerx Services Ltd. ii) We have considered the rival submissions as well as relevant material on record. We find that the company Eclerx Services Ltd. is engaged in diversified activity of providing services including analytic services and data process solutions to its global clients. The service provided by Eclerx Services Ltd., is in various areas including Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 8/17 capital market and therefore, the services are in the nature of consultancy and end to end support through trade centre including trade confirmation, settlement, transaction, maintenance and analytic and reporting. Thus it is apparent from the nature of the activity of this company that it is not providing a simple service of data processing but it is engaged in the activity of providing high-end services involving decision making analysis which requires thought process and evaluation of various facts and factors. Functional comparability of this company with that of simple BPO’s service providing company has been examined by the Special Bench in the case of Maersk Global Services (supra) in paras. 82 & 83 as under: xxxx xxxx Thus it is clear that the Special Bench found that this company is not comparable with BPO company which are engaged only in low end services of data processing. Accordingly, we direct the AO/TPO to exclude Eclerx Services Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 9/17 Ltd. from the list of comparables for the purposes of determining ALP. 11.3 Infosys BPO Ltd. xxxx xxx ii) We have considered the rival submissions as well as relevant material on record. We note that in para 16.2.15 of the Annual Report of this company, it has been reported that there was amalgamation w.e.f 1/4/2008. The relevant part of the information provided in the Annual Report reads as under: xxxx xxxx Thus it is clear that the revenue earned by this company is from the activity inclusive of operation primarily relates to providing business process management services to other organization engaged in outsourcing business process. This company is not engaged in direct activity of BPO but it provides services to BPOs and that too management service to BPO. Therefore, in our Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 10/17 considered view, this company is engaged in a different nature of activity to that of the assessee provided to its AE. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables. 11.4 Cosmic Global Ltd. xxxx xxxx ii) We have considered the rival submissions as well as the relevant material on record. There is no dispute that this company is in the business of providing service of medical transcription and consultancy services, translations services and accounts BPO. The segmental revenue from the operations are given in schedule 8 to the Profit & Loss account which reveals that major revenue of Rs.6,99,35,756/- out of total revenue of Rs. 7.37 crores has been earned by this company from the activity of translation services. We further note that the company has debited an expenditure of more than Rs.3 crore on account of translations Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 11/17 charges paid. Thus it is clear that this company is outsourcing its services of translation work which is the main activity of this company yielding major revenue earned during the year. Thus it manifest from the record that this company is in the entirely different nature of activity and cannot be compared with the activity of providing contact centre of the assessee to its AE. In the case of Lam Research (India) Pvt. Ltd. (supra) the co-ordinate bench of this Tribunal had occasion to examine the comparability of this company in para.34 as under: xxxx xxxx In view of the above discussion as well as the order of the co-ordinate bench of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables for the purpose of determining the ALP.” Regarding substantial question of law No.3: “10. We have considered the rival submission as well as the relevant material Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 12/17 on record. There is no dispute about the fact that as far as the amount of foreign exchange gain is concerned the same pertains to the income from service provided to the AE. Thus, it is clear that the foreign exchange gain has a direct nexus with international transaction and service provided by the assessee to the AE. As regards the contention of the learned Departmental Representative that the foreign exchange gain or loss depends on extraneous factors like market conditions, RBI policy, World market, micro economic conditions etc., the same factors are also affecting the business transactions and price determination between the parties and particularly when the transactions are cross-border transactions. Therefore, the extraneous factors which are taken as the reason for not considering foreign exchange gain as part of the operating revenue are also influencing the business activity of the assessee in respect of international transaction. Therefore, we do not agree with the contentions of the learned Departmental Representative that foreign exchange gain is not dependent on the Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 13/17 operations of the assessee. It is pertinent to note that the foreign exchange gain has arisen only because of the export transactions in the nature of international transaction and therefore, it has a direct nexus and outcome of the transactions between the assessee and the AE. An identical issue has been considered by the Mumbai Benches of the Tribunal in the case of Rusabh Diamonds (supra) in paras. 10 to 10.2 as under. xxxx In view of the above discussion as well as the decision of the co-ordinate bench of this tribunal in the case of Rusabh Diamonds (supra), we hold that the foreign exchange gain/income from service provided to the AE will be part of the operating revenue/income of the assessee and consequently it will be part of the operating profit of the assessee for the purpose of determining the ALP in respect of the international transaction. However, the related aspect on the issue is also to be kept in mind that while taking the margins of the Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 14/17 comparables, the effect of foreign exchange in the margins of the comparables should also be taken into account. Therefore, we direct the AO/TPO to re-compute the margin of the assessee by including foreign exchange gain but exclude other incomes on account of interest etc and further to consider the operating margin of the comparable after giving effect to foreign exchange gain or loss in their respective margins to arrive at the mean margin. Accordingly, this issue of the assessee is partly allowed.” 4. The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Nos.536/2015 c/w 537/2015 dated 25.06.2018 [Prl. Commissioner of Income Tax & Anr. V/s. M/s.Softbrands India Pvt. Ltd.,] wherein it has been observed that unless the finding of the Tribunal is found ex facie perverse, the Appeal u/s. 260-A of the Act, is not maintainable. The relevant portion of the Judgment is quoted below for ready reference: Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 15/17 “ 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 of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of 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 to whether the comparables have been rightly picked up or 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 substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 16/17 Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus 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 be applied, even if 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 ‘Arm’s Length Price’ in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs.” 5. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of Date of Judgment 26-07-2018 I.T.A.No.352/2016 The Pr. Commissioner of Income-Tax & Anr., Vs. M/s. E4E Business Solutions India Pvt., Ltd., 17/17 the considered opinion that no substantial question of law arises for consideration in the present case. 6. Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs. Sd/- JUDGE Sd/- JUDGE TL "