Karnataka High Court
The Pr Commissioner Of Income Tax Cit A vs M/S Aol Online India Pvt Ltd on 3 July, 2018
Bench: Vineet Kothari, S.Sujatha
1/15
IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 3RD DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON'BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.463/2016
BETWEEN:
1. THE PR. COMMISSIONER OF INCOME-TAX, CIT(A)
5TH FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BANGALORE-560 095.
2. THE DEPUTY COMMISSIONER OF INCOME-TAX
CIRCLE-11(1), PRESENT ADDRESS
CIRCLE - 1(1)(1),2ND FLOOR
BMTC BUILDING, 80 FEET ROAD
KORMANGALA, BENGALURU-560 095.
...APPELLANTS
(BY Mr. K.V. ARAVIND, ADV.)
AND:
M/S. AOL ONLINE INDIA PVT. LTD.,
RMZ ECOSPACE CAMPUS 1A
OUTER RING ROAD, BELLANDUR
BENGALURU.
PAN: AABCN 2578G.
...RESPONDENT
(BY Mr. B.S. BALACHANDRAN, ADV.)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF INCOME
TAX ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL
QUESTIONS OF LAW STATED ABOVE. ALLOW THE APPEAL
Date of Judgment 03-07-2018 I.T.A.No.463/2016
The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd.,
2/15
AND SET ASIDE THE ORDERS PASSED BY THE ITAT,
BENGALURU IN IT(TP)A No.1036/Bang/2011 DATED
18/03/2016, ANNEXURE-D AND CONFIRM THE ORDER OF THE
DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY
COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BENGALURU
& ETC.
THIS I.T.A. COMING ON FOR ADMISSION, THIS DAY
Dr. VINEET KOTHARI J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. K.V. Aravind, Adv. for Appellants-Assessee Mr. M.S. Balachandran, Adv. for Respondent-Revenue The Appellants-Revenue have filed this appeal u/s.260A of the Income Tax Act, 1961, raising purportedly certain substantial questions of law arising from the order of the ITAT, 'B' Bench, Bangalore, dated 18.03.2016 passed in IT(TP)A No.1036/Bang/2011 (AOL Online India Private Limited vs. Deputy Commissioner of Income Tax) for A.Y. 2007-08.
2. The proposed substantial questions of law framed in the Memorandum of appeal by the Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 3/15 Appellants-Revenue are quoted below for ready reference:-
1. "Whether on the facts and in the circumstances of the case, the Tribunal erred in holding that the assign authority is not right in including expenditure incurred in foreign currency from export turnover and from total turnover by relying upon the decision of this Hon'ble Court in case of CIT V/s Tata Elxsi even when the assessing authority has rightly included the according to parameters set out in section 10A and the decision relied upon by the Tribunal has not reached finality?
2. Whether on the facts and in the circumstances of the case, the Tribunal erred in directing the Transfer Pricing Officer to exclude the comparables such as Accel Transmatic Ltd, Avani CimcomTechnologies Ltd, Celetial Labs Ltd, E-Zest Solutions Ltd, Helios Solutions Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd, Lucid Software Ltd, Megasoft Ltd, Persistent Systems Ltd, Tata Elxsi Ltd, Thirdware Solution Ltd and Wipro Ltd even when the TPO has rightly Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 4/15 chosen the said comparables after being satisfied with all the tests"?
3. Whether on the facts and in the circumstances of the case, the Tribunal erred in directing the Transfer Pricing Officer to exclude the comparables such as Accentia Technologies Ltd, Asit C Mehta Financial Services, Bodhtree Consulting Ltd, Eclerx Services Ltd, HCL Comnet Systems & Services Ltd, Informed Technologies Ltd, Infosys BPO Ltd, Mapple Esolutions Ltd, Mold-Tek Technologies Ltd, Triton Corp Ltd, Vishal Information Technologies Ltd, Wipro Ltd, Spanco Ltd, Accurate Data Converters Ltd even when the TPO has rightly chosen the said comparables after being satisfied with all the tests and failing to determine FAR analysis and specific facts brought on record by TPO?
4. Whether on the facts and in the circumstances of the case, the Tribunal erred in directing the exclusion of comparable companies having RPT transactions of more than 15% ignoring the TPO's observation that the basis for determining the limit for eliminating companies having RPT transactions than 25% was Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 5/15 through the determination of Indian Companies with foreign shareholding greater than 26% and therefore had its basis in the provisions of the I.T.aCt.1961 and the accounting standards AS-18 and further the Tribunal erred in disregarding the position of law that there could be difference between the enterprises compared under TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprise?"
3. Regarding 1st substantial question of law:-
The controversy is no longer res integra and is covered by the decision of the Division Bench of this Court in the case of M/s.Tata Elxsi Ltd., vs. Asst.
Commissioner of Income Tax, decided on 20.10.2015 since reported in (2015) 127 DTR 0327 (Kar), which has been affirmed by the Hon'ble Supreme Court in the case of Commissioner of Income-tax, Central - III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).
Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 6/15
4. The relevant portion of the judgment of the Hon'ble Supreme Court in the case of HCL Technologies Ltd. (supra), is quoted below for ready reference:-
"17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxman.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from 'export turnover' must also be excluded from 'total turnover', since one of the components of 'total turnover' is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.
Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 7/15
18. XXXXXX
19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well".
5. Regarding substantial question of law Nos. 2 to 4:-
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 8/15 Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to 'Transfer Pricing' and 'Transfer Pricing Adjustments' made by the concerned authorities below. We consider it appropriate to quote the relevant portions hereunder:
"It was admitted that these objections were considered in the Co-ordinate Bench decision in the case of i. Stream International Services (P) Ltd., [53 taxmann.com 19 (Mumbai-Trib) ;
ii. M/s. Capital IQ Information (Systems) India Pvt. Ltd., - Hyd Trib. (AY. 2007-08) (ITA No. 1961/Hyd/2011);
iii. Avineon India (P) Ltd., Vs. DCIT - Hyd Trib (AY. 2007-08) (ITA No. 1989/Hyd/2011;
iv. Zavata India (P) Ltd., Vs. DCIT - Hyd Trib (AY. 2007-08) (ITA No. 1781/Hyd/2011;
In all these decision of the Co-ordinate Benches, the objections as stated in the above column were examined in detail and the above said companies were held to be not comparable to the functionality of the said assessee's IT(TP)A No. Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 9/15 1036/Bang/2011 Page 16 of 20 company. Since the facts are similar and assessee's business is also similar and TPO has selected the same comparables, we are of the opinion that the said comparables listed above cannot be considered as suitable for inclusion in the list for TP analysis. AO/TPO is directed to exclude the above comparables.
6.3. The assessee is also objecting to the following comparables of Allsec Technologies Ltd (Sr. No. 3):
Assessee has objected to the above comparable on the reason that it incurs marketing expenses, developed in-house software and sales and returns are fluctuating over a period of five to six years. It relied on the cases pertaining to AY. 2006-07 for exclusion of the same. However, after examining the TPO's report and the data available on record, we are of the opinion that assessee has not made out a case to exclude the above comparable. Hence, this comparable is directed to be retained.
Apollo Healthstreet Ltd (Sr. No. 5):
Assessee objects to the above comparable on the reason of RPT filter. Even though RPT filter Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 10/15 at 15% is accepted in some of the cases by the Co-ordinate Benches, the RPT filter can be considered upto 25% depending on the facts of the case. As worked out by assessee, RPT filter is only 17.7%. How it is worked out is not available. Since TPO has given valid reasons to include the above comparable, we are of the opinion that IT(TP)A No. 1036/Bang/2011 Page 17 of 20 the same cannot be excluded. Moreover, as seen from the other orders also, no other assessee has objected to inclusion of the above company may be on the reason that its margin is a negative margin. Be that as it may, we are of the opinion that there is no need to exclude that comparable from the list of comparables selected by the TPO.
I-Services India Pvt. Ltd (Sr. No. 18):
Assessee objects to the above comparable on the reason that there were abnormal profits. As seen from the report of the TPO and objection of assessee, we are not convinced with the argument that the company may be excluded only on the basis of abnormal profits. As seen from the TPO's margin also it is not abnormal and therefore, we are of the opinion that there are no reasons to exclude the above comparable.
Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 11/15 Spanco Ltd (Sr. No. 22): The objections of assessee is about functionality of the above comparable. It fails employee cost filter, adopted by the TPO in IT segment but not in ITeS segment. It was submitted that employee cost of 7.20% of sales which indicate outsourcing of services. Moreover, the companies involved in telecom business, BPO services. It was submitted that principle of employee cost filter was upheld in Co- ordinate Bench decision in the case of First Advantage Offshore Services P. Ltd., Vs. DCIT in ITA No.1086/Bang/2011. Considering that assessee is also having BPO services IT(TP)A No. 1036/Bang/2011 Page 18 of 20 and employee cost is very less when compared to similar businesses. We are of the opinion that this comparable can be excluded from the list of comparables.
Accurate Data Convertors Ltd (Sr. No. 27):
This comparable was objected to on the basis of employee cost filter as well as being in software development services. Considering the turnover of only Rs. 4.33 Crores, as compared to assessee's turnover of Rs. 161 Crores, we are of the opinion that this comparable is at the lower end of the turnover filter of ten times to assessee's turnover.
Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 12/15 In addition that considering the low employee's cost, we are of the opinion that this comparable can be excluded.
7. TPO is directed to rework out the Arithmetic Mean of the selected comparables and make the adjustment if any, after considering the proviso to Section 92C(2) of the I.T. Act. With these directions, the grounds and additional grounds raised by the assessee in this segment are considered partly allowed."
6. This Court in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd., has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable and the relevant portion of the said judgment is quoted below for ready reference:
Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 13/15 " 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 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 14/15 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."
7. Having heard the learned counsels for the parties, we are therefore of the opinion that no Date of Judgment 03-07-2018 I.T.A.No.463/2016 The Pr. Commissioner of Income-tax, CIT(A) & Anr.
Vs. M/s. AOL Online India Pvt. Ltd., 15/15 substantial question of law arises in the present case.
The appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs.
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JUDGE Sd/-
JUDGE TL