Zynga Game Network India Pvt. Ltd. Vs DCIT (ITAT Bangalore)
We note that Ld.AO/TPO has applied filter of more than Rs. 1 crore, but did not put an upper limit to the filter. This Tribunal in case of Genesis Integrating Systems India Pvt Ltd vs DCIT reported in (2012) 53 SOT 159 and various other decisions have held that, companies having turnover in excess of Rs.200 crores cannot be compared with companies having turnover less than Rs.200 crore. This preposition has been accepted by Hon’ble Bombay High Court in case of CIT vs Pentair Water Pvt.Ltd., by order dated 16/09/2015 in ITA No. 18/2015. Hon’ble Court upheld rejection of companies having turnover holding that turnover is a relevant factor in considering comparability of companies.
Objection raised by Ld.CIT.DR has been dealt with by this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT in (2018) 96 taxmann.com 263 for assessment year 2005-06. This Tribunal reviewed gamut of case laws to consider, whether companies having turnover more than Rs.200 crores should be regarded as comparable with a company having turnover less than 200 crore. This Tribunal held as under:
“17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon’ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon’ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon’ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.
17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).”
Ld.AR submitted that though this decision was rendered with reference to AY 2005-06 and 2006-07, same reasoning would apply to AY 2015-16 also and in this regard. Based upon above discussions and the decision relied by Ld.AR herein above. We are of opinion that objection raised by revenue cannot withstand the test of law.
Accordingly we direct Ld. AO/TPO to exclude Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. for having high turnover as compared to a captive service provider like assessee.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeal has been filed by assessee against final assessment order passed by Ld.DCIT dated 30/10/2019 under
section 143 (3) read with section 1 44C (13) of the Act on following grounds of appeal:
“A. TRANSFER PRICING GROUNDS:
The grounds mentioned hereinafter are without prejudice to one another.
1. GROUNDS IN RELATION TO ADJUSTMENT MADE IN THE SOFTWARE DEVELOPMENT SEGMENT:
1.1. The learned Assessing Officer (“Ld AO”), learned Transfer Pricing Officer (“Ld TPO”) and the Hon’ble Dispute Resolution Panel (“Hon’ble DRP”) (together referred to as “lower Authorities”) have erred in facts and in law in determining transfer pricing (“TP) adjustment of Rs 7,76,58,654/- with respect to the international transaction rendered by the Appellant in the software development segment;
1.2. The lower Authorities erred in invoking provisions of section 92C(3) of the Income-tax Act, 1961 (“Act”) and rejecting comparability analysis undertaken by the Appellant in the TP documentation maintained under section 92D of the Act;
1.3. The lower Authorities have acted in an arbitrary manner in selecting comparable companies only if the data pertaining to FY 2014-15 was available;
1.4. The lower Authorities erred in not considering companies having different financial year ending (i.e., not March 31) without appreciating that the relevant data for the concerned financial year could be deduced from the corresponding quarterly financials>, 7
1.5. The lower Authorities erred in facts and in law in considering foreign exchange gain / loss as operating in nature;
1.6.The lower Authorities erred in not considering provision of bad and doubtful debts as operating in nature while computing the operating margin of the Appellant and the comparable companies;
1.7. The lower Authorities erred in applying the following filters for the comparability analysis:
1.7.1 excluding companies whose service income was less than 75 percent of total sales;
1.7.2 exclude companies whose export earning was less than of 75 percent of total sales;
1.7.3 exclude companies whose employee cost was less than 25 percent of total sales;
1.8. The lower Authorities erred in not rejecting companies having abnormal profits;
1.9. The lower Authorities erred in not applying ‘onsite filter’ to exclude companies engaged in onsite activities;
1.10. The lower Authorities while applying a cap on the lower limit on turnover erred in not applying upper limit on sales turnover filter while selecting the comparable companies;
1.11. The lower Authorities erred in not allowing working capital adjustment to account for difference in the working capital of the Appellant vis-à-vis the comparable companies;
1.12. The lower Authorities erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis-à-vis the comparable companies;
1.13. The lower Authorities have erred in including the following companies as comparable to the Appellant in the software development segment, despite the same failing the legally accepted criteria for comparability:
(1) Tata Elxsi Limited
(2) R S Software India Limited
(3) Mindtree Limited
(4) Persistent Systems Limited
(5) Infobeans Technologies Limited
(6) Nihilent Technologies Limited
(7) Aspire Systems India Private Limited
(8) Infosys Limited
(9) Third ware Solution Limited
(10) Cybage Software Private Limited
(11) Larsen & Toubro Infotech Limited
(12) Rheal Software Private Limited
(13) Inteq Software Private Limited
1.14 The lower Authorities have erred in not considering the following companies as comparable to the Appellant, despite being functionally comparable and qualifying the legally accepted criteria for comparability:
(1) Ingenuity Gaming Private Limited
(2) Indiagames Limited
(3) R Systems International Limited
(4) Akshay Software Technologies Ltd.
(5) TVS Infotech Limited
(6) Evoke Technologies Ltd.
(7) 12T2 India Ltd.
(8) FCS Software Solutions Limited
(9) Orion India Systems Private Limited
(10) DCIS Dot Corn Solutions Private Limited
(11)Harbinger Private Limited
2. GROUNDS IN RELATION TO ADJUSTMENT OF NOTIONAL INTEREST ON OUTSTANDING DEBTORS:
2.1 The lower Authorities have erred in facts and in law in imputing notional interest with regard to the trade receivables by the Appellant from its Associated Enterprises (“AE”) outside India when the Appellant has received all trade receipts for FY 2014-15 from its AE within the mutually agreed credit period of 90 days;
2.2 Without prejudice to the above, the lower authorities have erred in facts in not appreciating that no adjustment is warranted on account of notional interest even by adopting the credit period 60 days as considered by the TPO, as Appellant has received all trade receivables for FY 2014-15, within a maximum period of 37 days from the date of invoice;
2.3 The learned TPO has erred in computing the adjustment at Rs 121,372 post the DRP directions, by considering the credit period of 30 days despite himself having adopted a credit period of 60 days while passing the initial TP order which has not been modified by the DRP;
2.4 Without prejudice to the above, the lower Authorities have erred in law and on facts in arbitrarily adopting the rate of LIBOR plus 400 basis points to compute the notional interest on the trade receivables;
B. CORPORATE TAX GROUNDS:
3. INTEREST UNDER SECTION 234B OF THE ACT:
3.1 The learned AO has erred in levying interest under section 234B of the Act amounting to Rs 1,21,70,785/-which is consequential in nature. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds, which may be raised at the time of hearing, it is prayed that necessary relief may be provided.
Brief facts of the case are as under:
2. Assessee is a company registered under the Companies Act 1956 on 26/11/2009. It is a subsidiary of Zynga Luxembourg U.S Assessee is stated to be a software development service provider in the nature of development of modules for online games for testing and maintenance of online games, developed by Zinga Inc.
3. Assessee filed its original return of income for year under consideration on 28/11/2015 declaring total income of Rs. 12,70,81,983/-. The case was selected for scrutiny and notice under section 143(2) was issued to assessee in response to which representative of assessee appeared before Ld.AO. From the details filed by assessee, the Ld.AO observed that assessee entered into international transaction with its associated enterprises seeding this Rs. 15 crores. He therefore referred the issue to the Transfer Pricing officer for determining arms length price of the transaction.
4. On receipt of reference under 92 CA, the Ld.TPO called upon assessee to file economic details of international transaction in Form 3 CEB. The Ld. TPO from the details filed noted that assessee had entered into following international transaction:
