Karnataka High Court
Commissioner Of Income Tax-Iii vs M/S. Yodlee Infotech Pvt. Ltd. on 25 July, 2018
Bench: Vineet Kothari, S.Sujatha
1/17
IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 25TH DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON'BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.174/2015
BETWEEN:
1. COMMISSIONER OF INCOME TAX-III,
CENTRAL REVENUE BUILDINGS,
QUEENS ROAD,
BANGALORE-560 001.
2. THE INCOME TAX OFFICER,
WARD -12(2),
BANGALORE.
...APPELLANTS
(BY Mr.E.I.SANMATHI, ADV.)
AND:
M/S. YODLEE INFOTECH PVT.LTD.,
PRESTIGE TECHNOLOGY PARK,
MERCURY (2B) BLOCK, 1ST FLOOR,
SARJAPUR, MARATHAHALLI RING ROAD,
BANGALORE-560 087.
PAN:AAACY 1273E.
...RESPONDENT
(BY Mr. MALLAHA RAO, ADV.
Mr. PARTH, ADV)
Date of Judgment 25-07-2018 I.T.A.No.174 /2015
Commissioner of Income Tax-III & Anr.,
Vs. M/s. Yodlee Infotech Pvt. Ltd.,
2/17
THIS I.T.A. IS FILED UNDER SECTION 260-A OF INCOME
TAX ACT 1961, PRAYING TO DECIDE THE FOREGOING
QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF
LAW AS MAY BE FORMULDATED BY THE HON'BLE COURT AS
DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED
12/12/2014 PASSED BY THE ITAT, 'A' BENCH, BANGALORE IN
APPEAL PROCEEDINGS NO. IT (TP)A NO. 108/BANG/2014 FOR
ASSESSMENT YEAR 2009-10.
THIS I.T.A. COMING ON FOR ORDERS, THIS DAY
Dr. VINEET KOTHARI J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr.E.I.Sanmathi, Adv. for Appellants-Revenue Mr.Mallaha Rao and Mr. Parth, Advs. for Respondent-Assessee The Appellants - Revenue have filed this appeal raising purported substantial questions of law arising from the Order of the learned Income Tax Appellate Tribunal Bench 'A', Bangalore, Annexure A dated 12/12/2014 in IT(TP)A.No.108(Bang.)/2014 for AY 2009-10.
2. The substantial questions of law raised in the Memorandum of appeal by the Appellants-Revenue are quoted below for ready reference:-
Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 3/17 "1. "Whether on the facts and in the circumstances on the case, the Tribunal is right in law in setting aside the exclusion made by assessing authority in respect of forex gain/loss while arriving at the profit level indicator (PLI) of the assessee and directing the TPO/AO to include the same for determining the PLI relying on its earlier decision in the case of M/s. Triology E-Business Software V/s DCIT reported in 140 ITD page 540 even when the said decision has not reached finality and without appreciating the fact that the forex/gain is not an operating expenditure/income to be eligible for inclusion while calculating the PLI in transfer pricing analysis and Foreign Exchange Gain or loss does not form part of profits realized from international transactions as the billing by the taxpayer is done in foreign currency (for example US Dollars) and not following the rules prescribed under the I.T Rules?
(2) Whether on the facts and in the circumstances of the case the Tribunal is right Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 4/17 in law in accepting the claim of assessee to adopt turnover filter of Rs.200 Crores following the decision of Co-ordinate Bench in the case of M/s. Genisys Pvt. Ltd v/s DCIT reported in 64 DTR page 225 even when said decision has not reached finality and without appreciating that the turnover is not a relevant filter in the software industry, as the size of the turnover and margins are not linked and the Economics of scale are relevant factor only in capital intensive companies which have substantive fixed assets in the form of plant and machinery?
(3) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in not considering that Bodhtree Consulting Ltd as comparable by following the decision in the case of Nethawk Network Pvt. Ltd V/s. ITO even when the said decision is not applicable to instant case?
(4) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in not accepting the CG-VAK Software & Exports Ltd as a comparable by Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 5/17 following its earlier decision in the case of M/s. Cisco Systems Pvt. Ltd even when same is not applicable to facts of present case?"
3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under:
Regarding substantial question of law No.1:
"25. As for inclusion of Forex loss/income while working out the operating margin, we are of the opinion that the assessee has to succeed. In the case of M/s Triology E-Business Software Ltd., Vs DCIT (2011) 140 ITD 540 it was held as under, with regard to forex gain/loss.
xxxx
26. Before parting, it will be inappropriate, if we do not deal with the decision of Bombay Bench of the Tribunal in the case of M/s Capgemini Ltd., Vs ACIT(2014) 147 ITD 337 strongly relied on by the learned DR. No doubt, it was held by the Tribunal in the above decision that Dun & Bradstreet classification according to the size of the company could not be accepted, since there was no empirical Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 6/17 evidence to suggest relation between margin and turnover. But in the said case, revenue was able to show through a graph plotted between margin and turnover for each of the comparables selected by the assessee that there was no linear relationship between margin and turnover. This exercise has not been done here by the assessee. Therefore, we are of the opinion, that the decision in the case of M/s Capgemini Ltd., (supra) would not further the case of the revenue.
27. We therefore, direct the TPO to re-work the average margins of the comparables as per our direction in the proceeding paras and proceed in accordance with law."
The appeal filed by the Revenue against the judgment of the Hon'ble Tribunal in the case of M/s.Triology E-business Software V/s. DCIT reported in 140 ITD page 540 has been considered by this Court in ITA No.171/2013 and the same has been dismissed on 10.07.2018 as no substantial questions of law arose for consideration.
Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 7/17 Regarding substantial question of law No.2:
"20. We have to hold that assessee can seek exclusion of comparables which were a part of its own list, at a later stage, and therefore, we are constrained to reject the line of argument of the learned DR. Coming to the arguments of the learned AR that M/s Tata Elxsi Ltd., M/s Sasken Communication Ltd., M/s Persistent Systems Ltd., M/s L & T Infotech and M/s Infosys Ltd., had turnover in excess of Rs. 200 Crores and were to be excluded, we are of the opinion that turnover filter can be applied for selection of comparables. This has been the view consistently taken by the Co-ordinate Benches of this Tribunal in a number of cases. In the case of M/s Genisys Pvt Ltd Vs DCIT(2011)64 DTR 225 it was held by this Tribunal as under at paras-8 to 09 of its order:
8. According to learned counsel for the assessee size is an important fact of an enterprise level difference. He submitted that comparables should have something similar or equivalent and should possess same or almost the same characteristics. To use a simile, he Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 8/17 submitted that a Maruti 800 car cannot be compared to a Benz car, even though both are cars only. He submitted that unusual pattern, stray cases, wide disparities have to be eliminated as they do not satisfy the test of comparability. Companies operating on large scale benefit from economies of scale, higher risk taking capabilities, robust delivery and business models as opposed to the smaller or medium sized companies and therefore, size matters.
Two companies of dissimilar size therefore, cannot be assumed to earn comparable margins and the impact of difference in size could be removed by a quantitative adjustment to the margins or price being compared if it is possible to do so reasonably accurately. He submitted that size as one of the selection criteria has also been approved by various Benches of the Tribunal, in the following cases:
xxxx Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 9/17 xxxx xxxx 8.1 He further submitted that size as a criteria for selection of comparables is also recommended by OCED in its TP guidelines. The observation of OCED in para 3.43 of the chapter on guidelines reads as follows:
xxxx 8.2 The learned counsel for the assessee submitted that similar observations were also made by ICAI in para 15.4 of TP guidance note. He submitted that TPO's range of Rs. 1 crore to infinity has resulted in selection of companies like M/s Infosys which is having a turnover of Rs. 9,028 crores which is 1,1007 times bigger than the assessee company which has a turnover of Rs. 8.15 crores. He further submitted that NASSCOM has also categorized the companies based on the turnover as follows:
xxxx Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 10/17 xxxx 8.3 The learned Departmental Representative rebutted this argument and submitted that the Act or Rules does not provide for the turnover filter. He submitted that as rightly pointed out by the TPO in the case of service sector, the size of the company does not matter because, the infrastructure layout is very less and it will not affect the profit ratio in any way. He drew out attention to the particular portion of TPO's order wherein the TPO has the reasoning given for rejecting the turnover filter.
9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 11/17 understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various Benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM have given different ranges. Taking the Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 12/17 Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1 Crore to Rs. 200 crores have to be taken as a particular range and the assessee being in the range having turnover of Rs. 8.15 crores, the companies which also have turnover of Rs. 1 to Rs. 200 crores only should be taken into consideration for the purpose of making TP study.
The appeal filed by the Revenue against the judgment of the Hon'ble Tribunal in the case of M/s.Genisys Pvt. Ltd. Vs. DCIT (2011) 64 DTR 225 has been considered by this Court in ITA No.17/2012 and the same has been dismissed on 09.07.2018 as no substantial questions of law arose for consideration.
Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 13/17 Regarding substantial question of law Nos.3 and 4:
"21. As for M/s Bodhtree Consulting Ltd., learned DR has not rebutted the argument of the assessee that it was software product company and functionally different from the assessee which was into software development services. In the case of M/s Cisco System Pvt. Ltd., Vs DCIT(ITA No.271/Bang/2014 dated 14-08-2014 which was also a company rendering software development services with regard to adoption of M/s Bodhtree Consulting Ltd., as a comparable, it was held as under at para-20 of the order;
20. We have perused the orders and heard the contentions. There is no dispute that the M/s.Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though the said company was having other business also, with regard to its Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 14/17 software development segment, this Tribunal held Bodhtree Consulting Ltd. Infosys Ltd, Kals Information Systems Ltd and Tata Elxsi Ltd to be not proper comparables. Relevant paras of the order dated 14.08.2014 is reproduced hereunder:
xxxx Accordingly, we direct that M/s. Bodhtree Consulting Ltd., being functionally different is to be excluded from the comparables."
The appeal filed by the Revenue against the judgment of the Hon'ble Tribunal in the case of M/s.Cisco System Pvt. Ltd. vs. DCIT has been considered by this Court in ITA No.1/2015 and the same has been dismissed on 16.07.2018 as no substantial questions of law arose for consideration.
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 Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 15/17 [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:
" 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 Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 16/17 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 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 Date of Judgment 25-07-2018 I.T.A.No.174 /2015 Commissioner of Income Tax-III & Anr., Vs. M/s. Yodlee Infotech Pvt. Ltd., 17/17 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 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.
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