PR. COMMISSIONER OF INCOME TAX vs. M/S ZYNGA GAME NETWORK INDIA PVT LTD

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ITA/272/2022HC KarnatakaKAHC01022670202224 September 2024Bench: S.G.PANDIT,C.M. POONACHA7 pages
AI SummaryWithdrawn

What did the High Court hold?

The High Court disposed of the appeal based on the submissions made by both parties concerning the tax effect and the applicability of CBDT Circulars. The assessee argued that the appeal should not be entertained due to a tax effect of less than Rs. 2 Crores, citing Circular No. 09/2024. The revenue sought liberty to revive the appeal if the matter fell within the exceptions of the mentioned circulars. The Court, in view of these submissions, disposed of the appeal with the liberty as prayed for by the revenue. The substantial questions of law were kept open to be adjudicated in an appropriate proceeding. Therefore, no specific finding was given on any of the eleven substantial questions of law raised by the revenue. The operative direction was to dispose of the appeal with liberty to revive, and the questions of law remain undecided on merits.

What were the facts?

The Pr. Commissioner of Income Tax and the Deputy Commissioner of Income Tax (Revenue) filed an appeal under Section 260-A of the Income Tax Act, 1961, against an order dated 23.03.2021 passed by the Income Tax Appellate Tribunal (ITAT), 'A' Bench, Bengaluru. The appeal pertains to Assessment Year 2015-2016 and challenges the ITAT's decision in IT(TP)A No. 2573/Bang/2019. The High Court admitted the appeal on 22.08.2022 to consider substantial questions of law related to transfer pricing adjustments, selection of comparables, and treatment of provisions for doubtful debts. The amount in dispute was not explicitly stated, but the tax effect was stated to be less than Rs. 2 Crores.

What were the issues?

The High Court was to decide the following substantial questions of law: 1. Whether the Tribunal was right in not acknowledging that there is no direct relationship between turnover and margin earned by the company (Question of fact and law). 2. Whether the Tribunal was right in ignoring the parameters prescribed under Rule 10B, which are exhaustive, and whether it is legally permissible to bypass them (Question of law). 3. Whether the Tribunal was correct in superimposing decisions of other benches to reject comparables, when selection depends on assessee-specific FAR analysis (Question of law). 4. Whether the Tribunal was correct in directing provision for doubtful debts to be treated as operating in nature, contrary to the TPO's view that it has no direct nexus with revenue (Question of law). 5. Whether the Tribunal was correct in excluding comparables based on a turnover filter, ignoring its own prior decision in M/s. Societe Generale Global Solution Centre (P) Ltd. (Question of law). 6. Whether the Tribunal was correct in excluding comparables on a turnover filter, ignoring the judgment in Chryscapital Investment Advisors (India) Pvt. Ltd. which held that high turnover/profit/loss does not ipso facto lead to exclusion (Question of law). 7. Whether the failure of a turnover filter for one company can be applied to another, disregarding the assessee's actual turnover (Question of law). 8. Whether the Tribunal was right in seeking exact comparability under TNMM and whether the objection to comparable selection is legally sustainable (Question of law and fact). 9. Whether the Tribunal was correct in holding that certain companies (Tata Elxsi, Mindtree Ltd., etc.) cannot be comparables due to turnover exceeding Rs. 200 Crores, without appreciating that higher turnover doesn't necessarily increase profit margin (Question of fact and law). 10. Whether the Tribunal was correct in holding Infobeans Technologies Ltd. as not comparable due to diversified software development, when the TPO considered it after verifying functionality criteria (Question of fact and law). 11. Whether the Tribunal's order was perverse in directing the TPO to exclude comparables chosen in accordance with Section 92 and Rule 10B (Question of law). Assessee's Contention: The tax effect is less than Rs. 2 Crores, making the appeal not maintainable under CBDT Circular No. 09/2024 dated 17.09.2024. Revenue's Contention: Liberty to revive the appeal if the matter falls within exceptions under Circulars No. 09/2024 and 05/2024.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 92

AI-generated summary — verify with the full judgment below

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NC: 2024:KHC:39755-DB ITA No. 272 of 2022

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 24TH DAY OF SEPTEMBER, 2024 PRESENT THE HON'BLE MR JUSTICE S.G.PANDIT AND THE HON'BLE MR JUSTICE C.M. POONACHA INCOME TAX APPEAL NO. 272 OF 2022 BETWEEN:

1.

PR. COMMISSIONER OF INCOME TAX BMTC COMPLEX , KORMANGALA, BENGALURU-560029

2.

THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7 (1) (2) BANGALORE …APPELLANTS (BY SRI. SANMATHI E I.,ADVOCATE) AND:

1.

M/S ZYNGA GAME NETWORK INDIA PVT LTD NO 19, 4TH AND 5TH FLOOR PRESTIGE FALCON TOWERS BRUNTON ROAD RICHMOND ROAD BENGALURU-560001 PAN AAACZ3937G …RESPONDENT (BY SRI. K R VASUDEVAN., ADV. A/W SRI.ANKUR P.D. ADV.)

THE ADVOCATE FOR THE APPELLANT HAS FILED THE ABOVE INCOME TAX APPEAL UNDER SEC.260-A OF INCOME

Digitally signed by B LAVANYA Location: HIGH COURT OF KARNATAKA

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NC: 2024:KHC:39755-DB ITA No. 272 of 2022

TAX ACT 1961, ARISING OUT OF ORDER DATED 23/03/2021 PASSED IN IT(TP)A NO.2573/BANG/2019, FOR THE ASSESSMENT YEAR 2015-2016, PRAYING THIS HONBLE COURT TO DECIDE THE FOREGOING QUESTIONS OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 23/03/2021 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'A' BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN IT(TP)A NO. 2573/BANG/2019 FOR ASSESSMENT YEAR 2015-2016 (ANNEXURE-A) AND GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.

THIS APPEAL, COMING ON FOR FINAL HEARING, THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER:

CORAM: HON'BLE MR JUSTICE S.G.PANDIT and HON'BLE MR JUSTICE C.M. POONACHA

JUDGMENT (PER: HON'BLE MR JUSTICE S.G.PANDIT)

Heard the learned counsel Sri.Sanmathi.E.I., for appellants/Revenue and learned counsel Sri.K.R.Vasudevan along with Sri. Ankur P.D., learned counsel for respondent/assessee.

2.

The Revenue is in appeal under Section 260-A of the Income Tax Act, 1961 (for short, ‘the Act’) questioning the correctness and legality of order dated

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NC: 2024:KHC:39755-DB ITA No. 272 of 2022

23.03.2021 passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Bengaluru (for short, ‘Appellate Authority’) in IT(TP)A.No.2573/Bang/2019 for the assessment year 2015-16.

3.

This

Court,

admitted the appeal on 22.08.2022 to consider the following substantial questions of law: “I. Whether the Hon'ble Tribunal was right in fact and in law in not acknowledging that there is no direct relationship between turnover and the margin earned by the company?

II. Whether the Hon'ble ITAT was right in law to ignore the parameters of analysis prescribed under Rule 10B, which are exhaustive and if so, whether it is legally permissible to bypass the same partially or by implication?

III. Whether the Hon'ble ITAT, Bangalore, is correct in super Imposing the decision of other benches of ITAT in the case of assessee, to reject these comparable companies when selection of comparable companies in transfer pricing study depends on assessee specific FAR analysis?

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NC: 2024:KHC:39755-DB ITA No. 272 of 2022

IV. Whether the Hon'ble Tribunal, Bangalore, is correct in its direction for provision for doubtful debts to treat it as operating in nature. Whereas TPO has considered it non-operating because the provisions have no direct nexus with the revenue of business. It is merely a provision and not the actual expense incurred during the previous year concerned?

V. Whether the Hon'ble Tribunal was correct in its direction to exclude certain comparables on application of turnover filter ignoring its own decision in the case of M/s. Societe General Global Solution Centre (P) Ltd vs. DCIT, Circle-12(3), Bangalore vide IT(TP)A No.118(Bang)201?

VI. Whether the Hon'ble ITAT was correct in its direction to exclude certain comparables on application of turnover filter ignoring the Judgment in Chryscapital Investment Advisors (India) Pvt. Ltd in ITA No.417 of 2014, which held that the mere fact that an entity makes high/extremely high 7 profits/losses/turnover does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP?

VII. Whether the failure of turnover filter in certain comparables with respect to one company

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decided by the Hon'ble Tribunal can be applied to other company, completely disregarding the actual turnover of the assessee company?

VIII. Whether the Hon'ble ITAT was right in law and in fact in seeking exact comparability under TNNM and whether the objection to the selection of comparable is legally sustainable?

IX. Whether in the facts and circumstances of the case, the Hon'ble ITAT is correct in holding that M/s. Tata Elxsi, Mindtree Ltd., Larsen and Toubro Infotech Ltd., R S Software India, Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage Software Pvt. Ltd. cannot be taken as a comparable as the company is having turnover of more than 200 Crores without appreciating the fact that the higher turnover does not necessarily mean that it would increase the profit margin?

X. Whether in the facts and circumstances of the case, the Hon'ble ITAT is correct in holding that M/s Infobeans Technologies Ltd cannot be taken as the comparable, as the company is engaged in the diversified range under the software development which is different from that of the taxpayer's. However, the company has categorized itself under broad range of the software development and the TPO had considered after

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verifying functionality criteria of the comparable. Whether the Hon'ble ITAT is right and verifying the comparability analysis under TNMM along with the functions, assets and risk parameter of the taxpayer?

XI. Whether on the facts and in the circumstances of the case, can the order passed by Tribunal be said as perverse in nature since Tribunal has directed the Transfer Pricing Officer to exclude certain comparable's which are chosen by the said officer in accordance with parameters set out in section 92 and Rule 10B?”

4.

Learned counsel for the assessee submits that the tax effect in this appeal is less than Rs.2 Crores and therefore, the appeal should not be entertained at the instance of the revenue in view of the Circular No.09/2024 dated 17.09.2024 issued by the Central Board of Direct Taxes. It is also submitted that the aforesaid Circular binds the revenue.

5.

On the other hand, learned counsel for the revenue submits that he be granted liberty to revive the appeal in case the matter falls within the exceptions under

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NC: 2024:KHC:39755-DB ITA No. 272 of 2022

the aforesaid Circular dated 17.09.2024 and Circular No.5/2024 dated 15.03.2024.

6.

In view of the aforesaid submissions, the appeal is disposed of with liberty as prayed for by the learned counsel for the revenue. However, the question of law is kept open to be adjudicated in an appropriate proceeding.

Sd/- (S.G.PANDIT) JUDGE

Sd/- (C.M. POONACHA) JUDGE [ [

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