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1/20 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 26TH DAY OF JUNE 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. Nos.152 – 153/2015
BETWEEN : 1. THE COMMISSIONER OF INCOME TAX
C.R. BUILDINGS
BANGALORE.
THE INCOME TAX OFFICER
WARD 12(2)
BANGALORE.
...APPELLANTS
(BY SRI E.I. SANMATHI, ADV.)
AND : M/s VENDIO TECHNOLOGIES [INDIA] PVT. LTD., [FORMERLY KNOWN AS ANDALE INFORMATION TECHNOLOGIES PVT. LTD] PRESTIGE BLUE CHIP SOFTWARE PARK 2ND BLOCK, 4TH FLOOR, No.9, HOSUR ROAD BANGALORE-560029 PAN: AADCA6424G.
…RESPONDENT
THESE INCOME TAX APPEALS ARE FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 19.09.2014 PASSED IN IT[TP]A NO.1374/BANG/2011 AND C.O.NO.58/B/2012, FOR THE
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ASSESSMENT YEAR 2005-2006 PRAYING TO I. DECIDE THE FOREGOING QUESTION OF LAW AND OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT. II. SET ASIDE THE APPELLATE ORDER DATED 19.09.2014 PASSED IN IT[TP]A No.1374/BANG/2011 AND C.O.NO.58/B/2012 FOR A.Y.2005- 2006, BY THE ITAT, ‘B’ BENCH, BANGALORE AS SOUGHT FOR, IN THE ABOVE CASE.
THESE APPEALS COMING ON FOR ORDERS, THIS DAY, S.SUJATHA, J, DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. E.I.SANMATHI, Adv. for Appellants – Revenue.
These Appeals are filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, ‘B’ Bench, Bangalore, in IT[TP]A NO.1374/Bang/2011 and C.O.No.58/Bang/2012, dated 19.09.2014, relating to the Assessment Year 2005-06.
The proposed substantial questions of law framed by the Revenue in the Memorandum of Appeals are as under: “1. Whether, the Tribunal, on the facts and in the circumstances of the case was right in
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excluding the comparables adopted by TPO by following its earlier decision in the case of M/s. Genesys Integrating Systems [India] Pvt. Ltd., in directing the assessing authority to apply the upper limit of 200Cr with regard to turnover filter even though the said order has not reached finality the said comparables satisfy all the requirements in the case of assessee?
Whether on the facts and in the circumstances of the case, the Tribunal is right in not setting aside the whole issue to the TPO after changing the RPT filter form 25% without giving an opportunity for fresh search of databases?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law excluding certain comparables on the ground of functional dissimilarity?”
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The learned Tribunal, after discussing the rival contentions of both the Appellant-Revenue and Respondent-Assessee, has returned a finding, the relevant portions of which read as under: “9.7.2. As per the profit and loss account of the assessee, its turnover in the relevant period is Rs.11,31,75,171. We find that the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. in its order in ITA No.1231/Bang/2010 dt.5.8.2011 held that companies having turnover of more than Rs.200 Crores should not be considered as a comparables in respect of an assessee having turnover of less than Rs.200 Crores holding at para 9 of this as under: 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 understand as to why there should not be an upper limit also. What
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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 32 ITA No.1231(B)/2010 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 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
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and the companies having a turnover of Rs.100 core to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purposes of making TP study.
The above decision has been followed by other co-ordinate benches of this Tribunal in the following cases: i. Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011 dt.23.11.2012) ii. Bearing Point Business Consulting P. Ltd. (ITA No.1124/Bang/2011) iii. Kodiak Networks (India) Pvt. Ltd. (ITA No.1413/Bang/2010) iv. CSR India Pvt. Ltd. (IT(TP)A No.1119/Bang/2011) v. Mercedes Benz Research & Development India Pvt. Ltd. (IT(TP)A No.1222/Bang/2011)
Following the decisions of the co-ordinate bench in the case of Genisys Integrating Systems P. Ltd. (supra) and other decisions, we hold that
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the above five companies listed at para 9.1 of this order, having turnover of more than Rs.200 Crores, should be excluded from the list of comparables. We also concur with the view of the learned CIT (Appeals) in excluding M/s Satyam Computer Services Ltd. from the list of comparables in view of the admission by its auditors that the accounts of the company cannot be relied upon. In view of our above finding, upholding the order of the learned CIT (Appeals) in excluding the above 5 companies, having turnovers in excess of Rs.200 Crores, we consequently dismiss ground at S.No.3 of revenue’s appeal.
11.1. Related Party Transaction (RPT) The ground No.2 of revenues’ appeal and ground No.6(a) of the assessee’s C.O. challenge the order of the learned CIT (Appeals) in directing the Assessing Officer/TPO to exclude the following companies from the list of comparables by applying the RPT filter of more than 0%; as he was of the view that even a single instance of RPT should lead to their rejection from the list of comparables: i. Geometric Software Solutions Co. Ltd. ii. Sasken Network Systems Ltd.
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iii. Four Soft Ltd. iv. R.S.Software (India) Ltd. v. Thirdware Solutions Ltd. vi. Tata Elxsi Ltd. (Seg) and vii. Sasken Communication Technologies Ltd.
11.2. We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited and relied on in the context of the issue of RPT. It was submitted before us, that in the decision of the co- ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 dt.9.11.2012, it was held that the RPT filter should be applied at 15%. In doing so, the co-ordinate bench followed the decision of the ITAT, Delhi Bench in the case of Sony India P. Ltd. (2008-TIOL-439-ITAT-Del) wherein it was held that companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparables. The relevant observation/conclusions of the co- ordinate bench in the case of 24/7 customer.com Pvt. Ltd. (supra) at para 13 thereof are extracted hereunder:
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“13.0. Related Party Transactions In respect of the ground raised at S.No.1 regarding acceptance of comparable companies having related party transaction as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transaction which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO’s setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of sales/revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon’ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that –
“……..We are further of the view that an entity can be taken as uncontrolled if its
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related party transactions do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison what is to be judged is the impact of the related party transactions vis- à-vis sales and not profit since profit of an enterprise is influenced by large number of other factors…..”
Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd. (supra) the Assessing Officer/TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15% of total revenues for the financial year 2003-04.”
11.3. The above decisions acknowledge that RPT upto a certain limit should not lead to the rejection of a company as a comparable. The above decision was followed in the decision of another co-ordinate bench in the case of 3DPLM Software Solutions Ltd. in IT(TP)A No.1303/Bang/2013 dt.28.11.2013 holding that companies having
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RPT in excess of 15% of total revenues should be excluded from the list of comparables. Other decisions that have upheld the application of RPT filter of 15% are: i. ITO V CRM Services India (P) Ltd. (2011) 14 Taxman.Com 96 (Del) ii. Logica Pvt. Ltd. (TS-131-ITAT-Bang-TP) iii. CSR India (P) Ltd. (2013) 31 Taxmann.Com 265 (Bang) iv. Huawai Technologies India P. Ltd. IT(TP)A No.1338/Bang/2010 v. Wills Processing Services (India) P. Ltd. [TS-49- ITAT-2013(Mum)] vi. Sakata Inx (India) Ltd. (2012) 21 Taxmann.Com 37 (JP)
11.4. Following the above decisions, we hold that the RPT filter should be considered at 15% of the Total revenue and companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparables. In this view of the matter, the order of the learned CIT (Appeals) holding that companies are not to be considered as comparables even if they have a single RPT i.e., that the RPT is in excess of 0% is reversed.
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11.5. In respect of the following these companies which formed part of the TPO’s list of comparables: 1. Sasken Communication Technologies Ltd. (Seg) 2. R.S.Software (India) Ltd. and 3. Sasken Network Systems Ltd.
the above comparables were excluded by the learned CIT (Appeals) on the ground that they had RPT in excess of 0%. We find from a perusal of the order of the TPO u/s.92CA of the act, at page 90 thereof, that the RPT transaction of these companies are below 15% of total sales. This fact is also not disputed by the assessee before us. In view of our finding that the RPT filter should be applied in cases when it occurs in excess of 15% the above three companies undisputedly having less than 15% RPT are to be included in the list of comparables. The A.O./TPO are accordingly directed.
11.9.3. We have carefully considered the submission made by the assessee seeking the exclusion of this company as comparable for the reason that it has high profits of 66.09% during the year under consideration. A similar matter of ‘super profits’ was considered by a co-ordinate bench of this Tribunal in the case of 24/7
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Customer.Com Pvt. Ltd. reported in ITA No.227/Bang/2010 dt.9.11.2012 with the comparability of a company Ultra Marine Products Ltd. In that case, the Tribunal had held that a comparable company cannot be eliminated just because it was a loss making unit or had earned higher profits and it was for the assessee to demonstrate with material evidence to support its claim that the company’s profits were abnormally high due to the occurrence of an extraordinary event or circumstance. In respect of high or super profit companies, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), following the decisions of another co- ordinate bench of this Tribunal in the case of Netliux India Pvt. Ltd. (ITA No.454/Banga/2011) and the case of the Mumbai Tribunal in the case of Exxor Mobile Company India Pvt. Ltd. (ITA No.8311/Mum/2010 dt.10.6.2011) has at para 17.8 of its order held as under:
“17.8. ……..We have carefully considered the submission made seeking the exclusion of this company as a comparable for the reason that it has high profits of 63.27% and that it has various segmental apart form ITES and that there
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were a catera of decisions in support of the assessee’s proposition. A similar matter of ‘Supre Profits’ was considered by a co- ordinate bench of this Tribunal in the case of M/s Netlinx India Pvt. Ltd. (ITA No.454/Bang/2011) to which both of us were a party. In that order, it was held that the word ‘super’ is a superlative word which denotes something extraordinary and noted that in all the cases/decisions where these super profit making companies were directed to be excluded, the TPO was comparing cases like Infosys, Wipro etc., where the turnover was more than 10 times that of the assessee or the profit margin was abnormally high.
In the case of Exxon Mobile Company India Pvt. Ltd. Vs. DCIT (ITA No.8311/Mum/2010 dt.10.6.2011), the ITAT, Mumbai held that: “A comparable cannot be eliminated just because the comparable company earned higher profits that the average. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables unless, there are specific reasons for
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eliminating the same which is other than the general reason that the comparable has incurred loss or made abnormal profits.”
Further, India TP Rules specifically deviate from OECD guidelines in this aspect and specify the Arithmetic Mean for determining ALP. In the Quartile Method, the companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartile are retained for comparability thereby automatically eliminating outlines whereas in the Arithmetic Mean Method all companies that are in the sample are considered, without exception, and the average of all the companies are considered as ALP. Therefore, as a general rule that companies with abnormal profits should be excluded may be in line with the principles enumerated in the OECD guidelines, but cannot be said to be in true with Indian TP regulations. The assessee has not been able to establish or demonstrate with any evidence any reason to support the proposition that the profit of the comparable company was abnormally high. It must not be overlooked that high profits reflect better
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business sense and practices also. The net Arithmetic Mean margin of 36.49% was arrived at after taking into account both 63.27% and also 3.44% which is the lowest in the relevant ITES industry. We also find from the material on record that this company has a clearly demarcated call centre segment and segmental results are available in the audited financial statements of the Company. We, therefore, see no reason why the M/s Ultra Marine Pigments Ltd. should not be considered as a comparable and therefore reject the assesse’s grounds seeking its exclusion. This company is, therefore, directed to be retained as a comparable for the assessee for Assessment Year 2004-05.”
In the case on hand, we find that the assesse has not demonstrated that the company’s profits were abnormally high due to any extraordinary event or reason and the fact that the learned CIT (Appeals) merely has excluded this company as a comparable on the grounds of it having a high profit is not tenable in the light of the decisions of the co-ordinate benches of this Tribunal cited above. Therefore following the ratio of the
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aforesaid decision in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we reverse the order of the learned CIT (Appeals), excluding this company as a comparable on grounds of high profit margins since the assessee has failed to demonstrate that the company’s abnormal/high profits were due to any extraordinary events or circumstances. It is ordered accordingly.”
The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Nos.536/2015 and 537/2015 dated 25.06.2018, 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
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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 Revenue do not give rise to any substantial
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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.
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.
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The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
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.
Hence, the Appeals filed by the Appellants- Revenue are liable to be dismissed and are accordingly dismissed. No costs.
Copy of this order shall be sent to the Respondent- Assessee.
Sd/- JUDGE
Sd/- JUDGE AN/-