Appeal details
Counselvise Citation
[2020] 111 COUNSELVISE.COM (IT) 7802 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 17 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
22-01-2020
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
C
Assessment Year
2014-2015
Appeal Filed On
04-01-2019
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES C BENCH: BANGALORE BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER IT (T.P) A. NO. 36 /BANG/201 9 (ASSESSMENT YEAR: 20 14 - 15 ) M/S. ZYNGA GAME NETWORK INDIA PVT. LTD., NO.206, LOGOS BUILDING, M.G. ROAD, BANGALORE - 560 001 .APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2), BANGALORE. RESPONDENT. ASSESSEE BY: SHRI SHARATH RAO, C.A. REVENUE BY: SHRI PRADEEP KUMAR, CIT (D.R) DATE OF HEARING : 07.11 .2019 DATE OF PRONOUNCEMENT : 22 .01 .20 20 O R D E R PER SHRI PAVAN KUMAR GADALE, JM : THE ASSESSEE HAS FILED AN APPEAL AGAINST THE FINAL ASSESSMENT ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 ('THE ACT') IN PURSUANT TO THE DIRECTIONS OF DISPUTE RESOLUTION PANEL (DRP) DT.20.09.2018. THE ASSESSEE HAS RA IS ED GROUNDS OF APPEAL AND ALSO A DDITIONAL GROUND OF APPEAL WHICH ARE AS UNDER : 2 IT (TP) A NO. 36/BANG/2019 3 IT (TP) A NO. 36/BANG/2019 ADDITIONAL GROUND OF APPEAL : 13. THE TPO/AO/DRP WHILE APPLYING THE MINIMUM SERVICE REVENUE FILTER OF ONE CRORES, HAS ERRED IN NOT APPLYING A CAP ON UPPER TURNOVER FI LTER FOR THE ARRIVING AT COMPANIES COMPARABLE TO THE APPELLANT FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH MARGIN OF THE APPELLANT. 2. AT THE TIME OF HEARING , THE LEARNED AUTHORIZED REPRESENTATIVE PRAYED FOR ADMISSION OF ADDITIONAL GROUND OF APPEAL AND REVENUE HAS NO OBJECTIONS , 4 IT (TP) A NO. 36/BANG/2019 ACCORDINGLY ADDITIONAL GROUND OF APPEAL IS ADMITTED AND HEARD. FURTHER LDAR ARGUED FOR EXCLUSION OF FOUR COMPARABLES AND INCLUSION OF TWO COMPARABLES AND I NTEREST CALCULATION UNDER S ECTION 234C OF THE ACT AND SUPPORTED WITH CHART AND PAPER BOOK . 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS 100% EOU UNDER THE STPI SCHEME AT BANGALORE FOR CARRYING OUT SOFTWARE DEVELOPMENT ACTIVITIES AND HAS A BLEND OF SOFTWARE ENGINEERS, GAME DESIGNERS AND GA ME MANAGERS AND MAINLY IN THE BUSINESS OF SOFTWARE AND SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEE COMPANY HAS FILED THE RETURN OF INCOME ON 27.11.2014 WITH TOTAL INCOME OF RS.18,36,09,584. SUBSEQUENTLY THE CASE W A S SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) AND 142(1) OF THE ACT ALONG WITH QUESTIONNAIRE WAS ISSUED. IN COMPLIANCE, THE LEARNED AUTHORIZED REPRESENTATIVE APPEARED FROM TIME TO TIME AND BOOKS OF ACCOUNTS ARE FURNISHED ALONG WITH DETAILS. THE ASSESSEE IS ENGAGED IN THE INTERNATIONA L BUSINESS OF SOFTWARE DESIGN AND SOFTWARE DEVELOPMENT SERVICES TO ITS PARENT COMPANY ZYNE, USA . THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS INTERNATIONAL TRANSAC TIONS AND WITH PRIOR APPROVAL OF PRI. CIT, THE MATTER WAS REFERRED TO THE TRANSFER PRI CI NG OFFICER (TPO). THE TPO DEALT ON THE FINANCIAL STATEMENTS OF ASSESSEE AT PARA 2.2 AND INTERNATIONAL TRANSACTIONS AT 2.3 WHICH ARE AS UNDER : 5 IT (TP) A NO. 36/BANG/2019 6 IT (TP) A NO. 36/BANG/2019 THE TPO EXAMINED THE DOCUMENTATION OF ASSESSEE AND THE INTERNATIONAL TRANSACTIONS IN SOFTWARE DEVELOPMENT SEGMENT AND THE FILTERS.T HE ASSESSEE HAS CONSIDERED 22 COMPANIES AS COMPARABLE ON SOFTWARE DEVELOPMENT SEGMENT FOR BENCH MARKING ANALYSIS. THE INTERNATIONAL TRANSACTIONS ARE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES TO ITS AES.THE ASSESSEE HAS ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) AS MOST APPR OPRIATE METHOD (MAM) AND THE TURNOVER OF SOFTWARE DEVELOPMENT SEGMENT IS RS.109.99 CRORES AND PLI ON OP/OC IS 13.60%. THE TPO APPLIED THE FILTERS ON 22 COMPARABLES SELECTED BY THE ASSESSEE IN SOFTWARE DEVELO PMENT SEGMENT AND AFTER CONSIDERING THE ASSESSEE OBJECTIONS, THE TPO HAS SELECTED FINAL SET OF COMPARABLES IN ORDER AT PAGE 35 PARA 16 WHICH ARE AS UNDER : 7 IT (TP) A NO. 36/BANG/2019 THE TPO COMPUTED THE ARMS LENGTH PRICE (ALP) AT PARA 17.4 AS UNDER : 8 IT (TP) A NO. 36/BANG/2019 THE TPO PASSED THE ORDER UNDER SECTION 92CA OF THE INCOME TAX ACT, 1961 ON 30.10.2017. THE ASSESSING OFFICER AFTER THE RECEIPT OF TPO ORDER UNDER SECT ION 92CA OF THE ACT HAS PASSED D RAFT ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C(1) DT.6.12.2017 D ETERMINING THE TOTAL INCOME OF RS.1 8,36,09,584. AGGRIEVED BY THE D RAFT ASSESSMENT ORDER, THE ASSESSEE HAS FILED OBJECTIONS IN FORM NO.35A WITH THE DISPUTE RESOLUTION PANEL (DRP) AFTER CONSIDERING THE OBJECTIONS OF THE ASSESSEE AND THE FINDINGS OF THE TPO, DRP HAS EXCLUDED ONE COMPARABLE SQS INDIA BFSI LIMITED AND WITH OTHER DIRECTIONS PASSED ORDER UNDER SECTION 144C( 5) OF THE ACT ON 29.9.2018.SUBSEQUENTLY TPO /AO BASED ON THE DIRECTIONS RECOMPUTED THE ALP WITH FINAL TP ADJUSTMENT IN SOFTWARE DEVELOPMENT SEGMENT OF RS.7,45,90,444 AND ASSESSED THE TOTAL INCOME OF RS.25,82,00,028 AND PASSED ORDER UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT DT.30.10.2018. AGGRIEVED BY THE ORDER, THE ASSESSEE HAS FILED AN APPEAL WITH THE TRIBUNAL. 4. AT THE TIME O F HEARING, THE LEARNED AUTHORISED REPRESENTATIVE HAS RESTRICTED HIS ARGUMENTS FOR EXCLUSION OF FOUR COMPARABLES AND INCLUSION OF TWO COMPARABLES AND FILED CHART . CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE TP O ORDER AND FILED WRITTEN SU BMISSIONS. 5. WE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE LEARNED AUTHORISED REPRESENTATIVE ARGUED FIRST ON THE COMPARABLES TO BE EXCLUDED 9 IT (TP) A NO. 36/BANG/2019 IN SOFTWARE DEVELOPMENT SEGMENT FOR DETERMINATION OF ALP. THE LEARNED AUTHOR ISED REPRESENTATIVE MADE SUBMISSIONS IN RESPECT OF EXCLUSION OF - (I) PERSISTENT SYSTEM LIMITED. WE FIND THE TURNOVER OF THE COMPARABLE IS RS.1184.11 CRORES AND THE MARGIN IS 35.10%. THE COMPANY IS FUNCTIONALLY DIFFERENT AS IT PROVIDES COMPLETE LIFE CY CLE SERVICES AND HAS SPECIALIZED SOFTWARE PRODUCT AND TECHNOLOGY INNOVATION. THE INFORMATION UNDER SECTION 133(6) OF THE ACT WAS FURNISHED IN RESPECT OF OUTSOURCE PRODUCT DEVELOPMENT WHICH IS DIFFERENT FROM SOFTW ARE DEVELOPMENT SERVICES.FURTHER ENTIRE REV ENUE OF THE COMPARABLE COMPANY IS FROM OUTSOURCED PRODU CT DEVELOPMENT AND HAS PRESENCE OF INTANGIBLES, BRAND OWNERSHIP AND PROVISION OF APPLIED SOLUTIONS AND FURTHER HOLDS PROPRIETARY PRODUCTS. A NEW BUSINESS UNIT WAS ESTABLISHED IN THE SAID YEAR EXCLUSIV ELY FOR THE PRODUCT BUSINESS ENGAGED IN R & D AND ALSO HAS ONSITE ACTIVITIES AND NO SEGMEN TAL INFORMATION IS AVAILABLE. D URING THE YEAR THERE ARE EXTRAORDINARY EVENTS OF ACQUISITIONS OF CLOUD SQUADS AND FAILS THE TURNOVER FILTER OF MORE THAN RS.200 CRORES . THE LEARNED AUTHORISED REPRESENTATIVE RELIED ON CO - ORDINATE BENCH DECISION OF N I ELS EN SPORTS (INDIA) PVT. LTD. VS DCIT IN IT(TP)A NO .196/BANG/2017 AND IN LG SOFT INDIA PVT. LTD. VS. DCIT IN IT(TP)A NO.3122/BANG/2018 FOR THE ASSESSMENT YEAR 2014 - 15 DT.28.5.2019 T HE TRIBUNAL HAS AT PAGE 3 PARA 7 & 7.1 HELD AS UNDER : 7. IN AY 2008 - 09, THE CO - ORDINATE BENCH HAS EXCLUDED M/S PERSISTENT SYSTEMS LTD AL SO BY FOLLOWING THE DECISION RENDERED IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS 10 IT (TP) A NO. 36/BANG/2019 LTD (SUPRA), WHERE IN IT WAS HELD THAT M/S PERSISTENT SYSTEMS LTD IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES WHILE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVI CE PROVIDER. FURTHER, THE SEGMENTAL DETAILS WERE NOT AVAILABLE. 7.1 IT WAS STATED THAT THERE IS NO CHANGE IN FACTS. ACCORDINGLY, FOLLOWING THE DECISION RENDERED IN THE ASSESSEES OWN CASE IN AY 2008 - 09, WE DIRECT EXCLUSION OF M/S PERSISTENT SYSTEMS LTD. (II) R S SOFTWARE INDIA LIMITED TURNOVER IS RS.351.88 CRORES WITH MARGIN OF 28.25% . T HE LD. AR SUBMITTED THAT IT IS FUNCTIONALLY DIFFERENT AS THE COMPANY OFFERS LIFE CYCLE MANAGEMENT SERVICES AND IS INVOLVED IN PROVIDING QUALITY ASSURANCE SERVI CES WHICH INCLUDE TESTING SERVICES ALONG WITH MAINTENANCE AND SUPPORT STATISTICAL DATA ANALYSIS , FURTHER OWNS PRODUCTS AND BRANDS AND HAS PRE SENCE OUTSIDE INDIA. OUT OF TOTAL TURNOVER OF RS.284.39 CRORES, FOREIGN BRANCH EXPENDITURE IS RS.203.37 CRORES , AND FAILS THE TURNOVER FILTER OF MORE THAN RS.200 CRORES. THE COMPARABLE WAS EXCLUDED IN THE CASE OF NIELSEN SPORTS (INDIA) PVT. LTD. IN IT(TP)A NO .196/BANG/2017 ( SUPRA) . (III) CIGNITY TECHNOLOGIES LIMITED ; - WHERE THE TURNOVER I S RS.54.63 CRORES AND MARGIN IS 27.62%. THE COMPANY IS FUNCTIONALLY DIS SIMILAR AND OFFERS PUBLICATION NET WORK SERVICES AND SOLUTIONS AND HAS EXPANDED THE BUSINESS OPERATIONS IN AUSTRALIA AND UK .THE COMPANY HAS EXTRAORDINARY EVENTS WITH ACQUISITION OF TWO COMPANIES . THE LEARN E D AUTHORISED REPRESENTATIVE RELIED ON DECISION OF M/S LG SOFT TECH LTD. VS. DCIT (SUPRA) AND WE FOUND THE CO - ORDINATE BENCH OF TRIBUNAL HAS OBSERVED AT PAGE 4 PARA 9 WHICH READ AS UNDER : 11 IT (TP) A NO. 36/BANG/2019 9. WE HAVE NOTICED THAT THE ASSESSEE SEEKS EXCLUSION OF M/S CIGNITI TECHNOLOGIES LTD. IT IS PERTINENT TO NOTE THAT THE ASSESSEE ITSELF HAD SELECTED THIS COMPANY AS A COMPARABLE AND IT HAS URGED FOR EXCLUSION OF THE SAME ONLY BEFORE LD DRP. THE LD A.R SUBMITTED THAT THE LD DRP DID NOT ADDRESS THE SAME. THE LD A.R SUBMITTED THAT M/S CIGNITI TECHNOLOGIES LTD IS A TESTING COMPANY AND HENCE IT CANNOT BE CONSIDERED AS A COMPARABLE. HOWEVER, WE NOTICE THAT THIS CONTENTION HAS BEEN RAISED BY THE ASSESSEE FOR THE FIRST TIME BEFORE LD DRP AND THERE WAS NO OCCASION FOR THE TPO TO EXAMINE THE SAME. ACCORDINGLY WE RESTORE THIS COMPARABLE TO THE FILE OF AO/TPO FOR EXAMINING IT AFRESH. (IV) THE FOURTH COMPARABLE TO BE EXCLUDED IS THIRD WARE SOLUTIONS LIMITED WHERE THE TURNOVER OF RS.206.75 CRORES AND THE MARGIN IS 44.6 8% .T HE COMPARABLE IS FUNCTIONALLY DIFFERENT AND HAS DIVERSIFIED ACTIVITIES AND EARNS REVENUE FROM EXPORT OF S ERVICES, TRANSCRIPTION AND PROVIDES CONSULTANCY SERVICES AND THERE IS NO SEGMENTAL DATA .FURTHER DELIVERY LOCATIONS ARE OUTSIDE INDIA AND HAS AN EXTRAORDINARY EVENTS AND FAILS THE TURNOVER FILTER OF MORE THAN RS.200 CRORES. THE LEARNED AUTHORISED REPRESENTATIVE RELIED ON M/S LG SOFT PRIVATE LTD. (SUPRA) AND NIELSEN SPORTS (INDIA) PVT. LTD. (SUPRA). WE FOUND THAT THE TRIBUNAL IN THE CASE OF LG SO FT PVT LTD. (SUPRA) HAS OBSERVED AT PAGE 4 PARAS 8 & 8.1 AS UNDER : 8. WE ALSO NOTICE THAT IN AY 2008 - 09, THE CO - ORDINATE BENCH HAS EXCLUDED M/S THIRDWARE SOLUTIONS LTD ALSO BY FOLLOWING THE DECISION RENDERED IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS LTD (SUPRA), WHERE IN IT WAS HELD THAT M/S THIRDWARE SOLUTIONS LTD IS ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES AND SUBSCRIPTION. FURTHER, THE SEGMENTAL DETAILS WERE NOT AVAILABLE. 8.1 IT WAS STATED THAT THERE IS NO CHANG E IN FACTS. ACCORDINGLY, FOLLOWING THE DECISION RENDERED IN THE ASSESSEES OWN CASE IN AY 2008 - 09, WE DIRECT EXCLUSION OF M/S THIRDWARE SOLUTIONS LTD. 12 IT (TP) A NO. 36/BANG/2019 CONSIDERING THE FACTS, FINDINGS AND JUDICIAL DECISIONS , WE ARE OF THE OPINION THAT THE FOLLOWING THRE E COMPARABLES ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR DETERMINATION OF ALP BY THE TPO. (I) PERSISTENT SYSTEMS LTD. (II) R S SOFTWARE (INDIA) LTD. (III) THIRDWARE SOLUTIONS LTD. AND (IV) CIGNITY TECHNOLOGIES LTD IS RESTORED TO THE FILE OF TPO FOR FRESH CONSIDERATION. THE LEARNED AUTHORIZED REPRESENTATIVE ARGUED FOR INCLUSION OF TWO COMPARABLES. THE FIRST COM PANY TO BE INCLUDED IS EVOKE TECHNOLOGIES LIMITED WHERE THE TURNOVER IS RS.45.46 CRORES AND THE MARGIN IS AT 10.64%. THE COMPANY IS FUNCTIONALLY C OMPARABLE AND RENDERED SOFTWARE SERVICES AND PASSES ALL THE FILTERS OF TPO AND THE DATA IS AVAILABLE IN PUBLIC DOMAIN AND IS A SUB - SET OF AN ENTITY. DRP HAS INTERPRETED EXPORTS AT 20.34% WHICH IS INCORRECT AS THE EXPORT REV ENUE IS MAINLY FROM U S A . WE FOUND THE DRP HAS DEALT ON THE COMPARABLE AT PAGE 9 OF THE ORDER . T HE LEARNED AUTHORIZED REPRE SENTATIVE DEMONSTRATED THE ANNUAL REPORT AT PAGE 1253 AND PAGE 1254 OF PAPER BOOK , WHERE THE REVENUE FROM SOFTWARE DEVELOPMENT SERVICES HAS BEEN DISCLOSED. THE LEARNED AUTHORISED REPRESENTATIVE ARGUED ON SECOND COMPARABLE TO BE INCLUDED IS CAT TECHNOLOGIES LTD. WHERE THE TURNOVER IS RS.4.09 CRORES AND THE COMPANY IS FUNCTIONALLY COMPARABLE AND THE 13 IT (TP) A NO. 36/BANG/2019 REVENUE IS DERIVED ENTIRELY FROM PROVISIONS OF IT SERVICES REFERRED AT PAGE 1205 OF PAPE R BOOK AND HAS NOT EARNED ANY INCOME FROM MEDICAL TRANSCRIPTION SERVICES . T HERE IS NO SEGMENTAL INFORMATION AS ALL THE INCOME IS EARNED FROM P ROVISION OF IT SERVICES AND QUALIFIES THE EXPORT TURNOVER FILTER. WHEREAS THE DRP HAS CONSIDERED THE COMPARABLE AT PAGE 9 OF DRP ORDER THAT IT IS IN MEDICAL TR ANSCRIPTION BUSINESS. AND WAS REJEC TED . CONSIDERI NG THE MATERIAL FACTS, DR, AND THE INFOR MATION IN ANNUAL REPORT, WE ARE OF THE OPINION THAT THESE FACTS HAVE TO BE DEALT IN DETAIL BY THE TPO AND ACCORDINGLY R ESTORE THESE TWO COMPARABLES I.E. EVOKE TECHNOLOGIES LTD. AND CAT TECHNOLOGIES LTD. TO THE FILE OF THE TPO FOR FRESH ADJUDICATION AND EXAMINATION. 6. T HE LEARNED AUTHORISED REPRESENTATIVE HAS ARGUED ON THE CALCULATI ON OF INTEREST UNDER SECTION 234C, WE DIRECT THE ASSESSING OFFICER TO CALCULATE INTEREST AS PER THE PROVISIONS OF LAW. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN CO URT ON 2 2 N D JAN., 2019. S D / - S D / - ( B.R. B ASKARAN ) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2 2 .01. 2019. *REDDY GP 14 IT (TP) A NO. 36/BANG/2019 COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. CIT (A) 4. PR. CIT 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE TRIBUNAL BANGALORE
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