Appeal details
Counselvise Citation
[2017] 128 COUNSELVISE.COM (IT) 2580 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 month(s) 22 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-04-2017
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
19-04-2017
Assessment Year
2012-2013
Appeal Filed On
08-03-2017
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 444/HYD/2017 ASSESSMENT YEAR: 2012-13 ELECTRONIC ARTS GAMES (INDIA) PVT. LTD., HYDERABAD. PAN AABCJ 4279Q VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 17(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : MS. KARISHMA R. PHATARPHEKAR MS. NEHA ARORA & SHRI HARSH R SHAH REVENUE BY : SMT. U. MINICHANDRAN DATE OF HEARING 19-04-2017 DATE OF PRONOUNCEMENT 28-04-2017 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST T HE ORDER PASSED U/S 143(3) R.W.S. 92CA(3) R.W.S.144C(5) OF T HE INCOME TAX ACT, 1961 (IN SHORT ACT) DATED 19/12/2016 RELATIN G TO AY 2012-13. 2. BRIEF FACTS OF THE CASE ARE, THE ASSESSEE COMPA NY IS ENGAGED IN THE BUSINESS OF PROVIDING CONTRACT SOFTWARE DEVE LOPMENT SERVICES, BACK OFFICE SUPPORT SERVICES, CORPORATE IT SUPPORT SERVICES AND MARKETING SUPPORT SERVICES TO GROUP ENTITIES. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME FOR THE AY 2012-13 ON 30 /11/2012 DECLARING AN INCOME OF RS. 9,56,13,570/-. THE CASE WAS SELECT ED FOR SCRUTINY UNDER CASS. A NOTICE U/S 143(2) WAS ISSUED AND DULY SERVED ON THE ASSESSEE. IN RESPONSE TO THE NOTICE, THE AR OF THE ASSESSEE COMPANY APPEARED AND FURNISHED THE INFORMATION CALLED FOR. 2 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. 2.1 DURING THE YEAR UNDER CONSIDERATION, THE ASSESS EE FILED 3CEB REPORT FOR THE YEAR UNDER CONSIDERATION WHEREIN THE INTERNATIONAL TRANSACTIONS INVOLVED WERE MORE THAN RS. 15 CRORES, HENCE, THE CASE WAS REFERRED TO THE TPO TO DETERMINE THE ARMS LENG TH PRICE AFTER OBTAINING THE APPROVAL OF THE CIT II, HYD. 2.2 DURING THE RELEVANT PY, AS PER THE 3CEB REPORT/ TP DOCUMENT, THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE REFL ECTED AS UNDER: A.E. NATURE OF TRANSACTION AMOUNT (RS.) ELECTRONIC ARTS LTD. PURCHASE OF FIXED ASSETS 20,71,242 ELECTRONIC ARTS INC. CONTRACT SOFTWARE RESEARCH AND DEVELOPMENT SERVICES 57,18,55,399 ELECTRONIC ARTS INC. CORPORATE IT SERVICES 3,82,62,985 ELECTRONIC ARTS INC. BACK OFFICE SUPPORT SERVICES. 7,83,75,725 ELECTRONIC ARTS ASIA PACIFIC PTE LTD. MARKETING SUPPORT SERVICES 2,40,70,176 EA SWISS SARL CORPORATE IT SUPPORT SERVICES 1,91,31,493 EA SWISS SARL BACK OFFICE SUPPORT SERVICES 4,18,90,474 EA SWISS SARL REIMBURSEMENT OF EXPENSES 11,50,988 2.2 THE ASSESSEE HAS CARRIED OUT THE ECONOMIC ANALY SIS AND HAS SUMMARIZED IT AS UNDER: NATURE OF INTERNATIONAL TRANSACTION AMOUNT MAM PLI MARGIN OF TAXPAYER MARGIN OF COMPARABLES PURCHASE OF FIXED ASSETS 20,71,242 CUP NA NA NA CONTRACT SOFTWARE DEVELOPMENT SERVICES 57,18,55,399 TNMM OP/OC 11% 10.82% CORPORATE IT SERVICES 3,82,62,985 TNMM OP/OC 9% 11.35% 3 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. BACK OFFICE SUPPORT SERVICES 7,83,75,725 TNMM OP/OC 9% 11.35% MARKETING SUPPORT SERVICES 2,40,70,176 TNMM OP/OC 9% 11.35% CORPORATE IT 1,91,31,493 TNMM OP/OC 9% 11.35% BACK OFFICE SUPPORT SERVICES 4,18,90,474 TNMM OP/OC 9% 11.35% REIMBURSEMENT OF EXPENSES 11,50,988 NA NA NA 2.3 THE ASSESSEE HAS DISCUSSED IN BRIEF THE SEARCH PROCEDURE ADOPTED BY IT IN SEARCH FOR COMPARABLES IN THE T.P. DOCUMENTATION THE TAXPAYER HAS USED PROWESS AND CAPITA LINE PLUS DATA BASE IN SEARCH FOR COMPARABLE COMPANIES. AFTER APPLYING CER TAIN FILTERS, THE ASSESSEE HAS SHORT-LISTED 6 COMPARABLES TO BENCHMA RK THE CONTRACT SOFTWARE RESEARCH AND DEVELOPMENT SERVICES TRANSACT ION WITH ARITHMETIC MEAN PLI (OP/OC) COMPUTED AT 10.82% AS A GAINST THE PLI OF THE ASSESSEE AT 11%. ACCORDINGLY, IT IS STATED T HAT THE SDS TRANSACTIONS ARE AT ARM'S LENGTH. WITH REGARD TO TR ANSACTIONS MENTIONED AT 2 TO 7 ABOVE, THE ASSESSEE HAS SHORT-L ISTED 9 COMPARABLES TO BENCHMARK THE ABOVE MENTIONED TRANSA CTIONS UNDER TNMM WITH ARITHMETIC MEAN PLI (OP/OC) COMPUTED AT 9 % AS AGAINST THE PLI OF THE TAXPAYER AT 11.35%. WITH REGARD TO P URCHASE OF FIXED ASSETS THE TAXPAYER HAS SELECTED CUP AS MAM AND HEL D THAT THE TRANSACTION IS AT ARM'S LENGTH. 2.4 FINANCIAL RESULTS FOR THE AY 2012-13 ARE AS UND ER: DESCRIPTION AMOUNT (RS.) OPERATING REVENUE 77,38,89,655 OPERATING COST 70,11,00,469 OPERATING PROFIT 7,27,89,186 OP/OR (%) 10.38 OP/OC (%) 9.41 4 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. 2.5 TPO NOTICED THAT THE COMPANY HAD THE FOLLOWING TRANSACTION, WHICH WAS NOT REPORTED IN FORM 3CEB BUT NO BENCH MA RKING ANALYSIS HAS BEEN DONE IN THE TP STUDY: A.E. NATURE OF TRANSACTION AMOUNT (RS.) EA SWISS SARL RECEIVABLES 6,10,21,966 ELECTRONIC ARTS ASIA PACIFIC PTE LTD. RECEIVABLES 30,39,452 6,40,61,418 2.6 ON GOING THROUGH THE TP DOCUMENT, THE TPO NOTED THE SEARCH PROCESS IS NOT IN CONFIRMITY WITH THE TP REGULATION S AS ALSO THE CHOICE OF FILTERS WHICH RESULTED IN SELECTION OF INAPPROPR IATE COMPARABLES. IN VIEW OF THE SAME, THE TP DOCUMENT OF THE TAXPAYER W AS REJECTED AND AN INDEPENDENT ANALYSIS HAD BEEN MADE BY AGGREGATIN G ALL THE TRANSACTIONS UNDER TNMM. 2.7 THE FINAL COMPARABLES SELECTED BY TRANSFER PRIC ING OFFICER (TPO) WITH OP TO OC ARE AS UNDER: SL.NO. NAME OF THE COMPANY OP/OC 1. ACROPETAL TECHNOLOGIES LTD. (SEG.) 19.17 2. AKSHAY SOFTWARE TECHNOLOGIES LTD. 9.87 3. CTIL 15.61 4. EVOKE TECHNOLOGIES LTD. 11.60 5. I GATE GLOBAL SOLUTIONS LTD. 15.52 6. L&T INFOTECH LTD. 24.34 7. MINDTREE LTD. (SEG.) 16.21 8. PERSISTENT SYSTEMS LTD. 28.73 9. RS SOFTWARE INDIA LTD. 15.41 10. SASKEN COMMUNICATION TECHNOLOGIES LTD. 17.00 11. ZYLOG SYSTEMS LTD. 30.37 12. SPRY RESOURCES INDIA PVT. LTD. 35.98 13. THIRD WARE SOLUTIONS LTD. 31.08 270.90 20.84 5 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. 2.8 AFTER COMPARING THE AVERAGE MARGINS OF THE COMP ARABLES TO THE FINANCIALS OF THE ASSESSEE, THE TPO COMPUTED THE AD JUSTED ARMS LENGTH MARGIN AS UNDER: DESCRIPTION AMOUNT ARMS LENGTH MARGIN 20.05% LESS: WCA 3.76% ADJUSTED ARMS LENGTH MARGIN 16.29% OPERATION COST (OC) 70,11,00,469 ADJUSTED ARMS LENGTH MARGIN (%) (AALM) 16.29% ARMS LENGTH PRICE = (100+AALM)*OC 81,53,09,735 PRICE RECEIVED (OR) 77,38,89,655 ADJUSTMENT U/S 92CA 4,14,20,080 2.9 ACCORDINGLY, THE TPO WHO PASSED AN ORDER U/S 92 CA(3) OF THE ACT ON 29/01/2016, RECOMMENDED ADJUSTMENT OF RS. 4, 14,20,080/-. THE SAME WAS INCORPORATED BY THE AO IN THE DRAFT AS SESSMENT ORDER. ASSESSEE PREFERRED A PETITION BEFORE THE DISPUTE RE SOLUTION PANEL (DR) RAISING VARIOUS OBJECTIONS. 3. THE DRP VIDE ORDER DATED 31/10/2016 DIRECTED TO EXCLUDE THE FOLLOWING COMPARABLE COMPANIES SELECTED BY THE TPO. SL.NO. NAME OF THE COMPANY 1. ACROPETAL TECHNOLOGIES LTD. (SEG.) 2. EVOKE TECHNOLOGIES LTD. 3. I GATE GLOBAL SOLUTIONS LTD. 4. ZYLOG SYSTEMS LTD. 5. SPRY RESOURCES INDIA PVT. LTD. 6. THIRD WARE SOLUTIONS LTD. 7. AKSHAY SOFTWARE TECHNOLOGIES LTD. 8. CTIL 9. SASKEN COMMUNICATION TECHNOLOGIES LTD. 6 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. HOWEVER, THE DRP ARRIVED AT THE MEAN MARGIN OF THE RESIDUAL COMPARABLES SELECTED BY THE TPO AT 19.48% WHICH IS MUCH HIGHER THAN THE MARGIN OF THE TAXPAYER. HENCE, RELIEF OUT OF DRP ORDER WILL BE RS. NIL AND THE ORIGINAL ADJUSTMENT MADE U/S 92CA O F THE ACT VIDE TPO PROCEEDINGS DT. 29/02/2016 HOLDS GOOD. 3.1 CONSIDERING THE ABOVE FINDINGS OF DRP, THE AO H AS KEPT THE ADJUSTMENT U/S 92CA AT RS. 4,14,20,080/-. 4. AGGRIEVED WITH THE ABOVE ORDER, ASSESSEE IS IN A PPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER PASSED BY THE LEARNED AO / LEARNED TRANSF ER PRICING OFFICER ('TPO') IE. DEPUTY COMMISSIONER OF INCOME-T AX (TRANSFER PRICING) - 3 AND THE DIRECTIONS ISSUED BY THE HON'B LE DRP IS NOT IN ACCORDANCE WITH THE LAW AND IS CONTRARY TO THE F ACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND IN ANY CASE I N VIOLATION OF THE PRINCIPAL OF EQUITY AND NATURAL JUSTICE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED AO HAS ERRED IN ASSESSING THE INCOME OF THE APPELLANT FOR THE RELEVANT AY AT INCOME OF INR 13,70,33,650 A S AGAINST RETURNED INCOME OF INR 9,56,13,570. 3. THE LEARNED AO / HON'BLE DRP / LEARNED TPO HAVE ERRED IN LAW AND ON FACTS IN MAKING AN ADJUSTMENT OF INR 4,1 4,20,080 TO THE ARM'S LENGTH PRICE DETERMINED BY THE APPELLANT IN RESPECT OF THE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE ('AE'). IN DOING SO, THE LEARNED AO / HON'BLE DRP / LEARNED TPO HAVE ERRED IN LAW AND IN FACTS AS FOLLOWS: 3.1. REJECTING THE DETAILED TRANSFER PRICING ANALYS IS UNDERTAKEN BY THE APPELLANT WITHOUT GIVING COGENT REASONS. 3.2. REJECTING THE COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT IN THE TRANSFER PRICING REPORT, DESPITE O F IT MEETING THE TEST OF COMPARABILITY. 3.3. SELECTING NEW COMPANIES WHILE DETERMINING THE ALP WHICH WERE FAILING THE TEST OF COMPARABILITY. 3.4. REJECTING / MODIFYING THE FILTERS ADOPTED BY T HE APPELLANT AND PROPOSING ADDITIONAL FILTERS WHILE CONDUCTING A FRESH BENCHMARKING ANALYSIS DURING THE COURSE OF THE TRAN SFER PRICING ASSESSMENT PROCEEDINGS. 7 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. 3.5. COMPUTING INCORRECT MARGIN OF THE COMPANIES SE LECTED WHILE DETERMINING THE ALP. 3.6. REJECTING THE ADJUSTMENT FOR DIFFERENCES IN WO RKING CAPITAL AS CLAIMED BY THE APPELLANT. 3.7. REJECTING THE ADJUSTMENT FOR DIFFERENCES IN RI SK PROFILE. 3.8. IGNORING THE PROVISIONS OF THE RULE 10B(4) OF THE INCOME-TAX RULES, 1962 ('RULES') WHICH AUTHORIZES USAGE OF MUL TIPLE YEAR DATA FOR THE PURPOSE OF DETERMINATION OF THE ALP UN DER SECTION 92F OF THE ACT. 3.9. FAILING TO GRANT THE BENEFIT OF +/-5 PERCENT R ANGE AS ENVISAGED BY THE PROVISIONS OF SECTION 92C(2) OF TH E ACT. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED DRP ERRED BY ADOPTING APPROACH FOLLOWED BY THE LEARNED TPO DESPITE OF DELIVERING CONTRARY VIEWS IN THEIR O WN DRP DIRECTIONS. 5. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDER SECT IONS 234B AND 234C OF THE ACT. APPELLANT SEEKS RELIEF ON THE AFORESAID GROUNDS AN D IS PRAYED THAT IT BE HELD THAT THE AFORESAID ADJUSTMENTS ARE BAD IN LAW AND THE SAME SHOULD BE DELETED. APPELLANT CRAVES FOR LEAVE TO ADD, AMEND, VARY, OM IT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS APPEAL AT A NY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 5. THE LD. AR SUBMITTED THAT ASSESSEE PREFERS TO OB JECT TO COMPARABLES RETAINED BY DRP AND PRAYS TO INCLUDE ON E COMPARABLE. SHE SUBMITTED THAT THE OTHER GROUNDS RAISED WERE AC ADEMIC IN NATURE. HENCE, THE LD. AR OBJECTED TO THE SELECTION OF FOLL OWING COMPARABLES BY THE TPO. THEREFORE, WE WILL DEAL WITH EACH OF TH E COMPANY THAT WAS OBJECTED BY THE ASSESSEE. 1. LARSEN & TOUBRO INFOTECH LTD., 1.1 OBJECTING TO THE AFORESAID COMPANY AS COMPARABL E, THE AR OF THE ASSESSEE SUBMITTED THAT THE SAID COMPANY IS REJ ECTED BY THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR AY 2010-11. IT WAS SUBMITTED THAT THE COMPANY HAS SIGNIFICANT AMOUNT OF INTANGIB LES. FURTHER THIS COMPANY IS ALSO INVOLVED IN SOFTWARE PRODUCTS AND T HE COMPANY IS 8 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. UNDERTAKING SIGNIFICANT AMOUNT OF BRANDING. IT IS A LSO SUBMITTED THAT THIS COMPANY DOES NOT HAVE SEGMENTAL DETAILS AVAILA BLE FOR ITS BUSINESS ACTIVITIES. SHE SUBMITTED THE ITAT HAS REJ ECTED THIS COMPANY IN THE FOLLOWING CASES: 1. ACIT VS. M/S ELECTRONIC ARTS GAMES (INDIA) PRIVA TE LTD., (ITA NO. 380/HYD/2015. 2. CIT VS. INTOTO SOFTWARE INDIA PVT. LTD., ITTA NO . 233 OF 2014, HIGH COURT OF TELENGANA AND AP. 3. ALCATEL LUCENT INDIA LTD. VS. DCIT, ITA NO. 6856 /DEL/2015. 1.2 LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES AND FURTHER SUBMITTED THAT THE ASSESSEE HAS OBJECTED TO INCLUDE THIS COMPANY ON THE BASIS OF TURNOVER BEFORE TPO/DRP. SHE SUBMITTED THAT THE TURNOVER OR ECONOMICAL ACTIVITIES OF THE COMPANIES ARE IRRELEVANT AS IT HAS NO BEARING ON THE PROFITABILITY. SHE SUPPORTED THE VIEWS OF THE DRP. 1.3. CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD. THE ASSESSEE RAISED OTHER OBJECTIONS AND DECIDED TO DROP THE TURNOVER FILTER BEFORE US. ACCO RDINGLY, WE CANNOT ADJUDICATE ON THE TURNOVER FILTER AT THE MOMENT. WE FIND THAT THE COORDINATE BENCH IN THE CASE OF M/S ELECTRONIC ARTS GAMES (INDIA) PVT. LTD., (SUPRA) HAS HELD AS UNDER: 6. AS REGARDS THE COMPARABILITY OF L&T INFOTECH LTD , THIS TRIBUNAL IN THE ABOVE CASE OF VIRTUSA INDIA PVT. LTD HAS OBSERVED THAT THE L&T IN FOTECH LTD HAS NO SEGMENTAL DATA AND THEREFORE, WAS REJECTED BY THE TPO IN EARLIER YEARS ON THIS GROUND. THEREFORE, THE TRIBUNAL HAS DIRECTED THE EXCLUSION OF L&T INFOTECH LTD ALSO FROM THE FINAL LIST OF COMPARABLES IN THE CASE OF VIRTUSA INDIA (P) LTD. F OR THE SAKE OF READY REFERENCE, PARA 7 TO 9 OF THE SAID ARE REPRODUCED HEREUNDER: 7. COMING TO THE REVENUE'S APPEAL AGAINST THE DIR ECTIONS OF THE DRP TO EXCLUDE INFOSYS TECHNOLOGY LTD., L & T INFOTECH LTD., AND TATA ELXS I LTD., FROM THE FINAL LIST OF COMPARABLES, WE FIND THAT THE DRP HAS DIRECTED THAT THESE COMPANIES TO BE EXCLUDED ON THE GROUND OF FUNCTIONAL DISSIMILARITY. THE ASSESSE E HAS RELIED UPON THE DECISION OF THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE A.Y. 2007-0 8 WHEREIN THE TRIBUNAL HAS DIRECTED THAT INFOSYS TECHNOLOGY LTD., BE EXCLUDED FROM THE LIST OF COMPARABLES ON ACCOUNT OF FUNCTIONAL DISSIMILARITY AND OWNING OF SIGNIFICANT INTANGIBLES AND BRAND VALUE. AS REGARDS L & T INFOTECH LTD. IS CONCERNED, THIS TRIBUNAL HAS DIRECTED THAT L & T INFOTECH LTD., BE EXCLUDED AS SEGMENTAL DATA IS NOT AVAILABLE AND WAS REJECTED BY THE TPO IN THE EARLIER YEARS ON THIS GROUND ALONE. AS REGARDS TATA ELXSI L TD., THE TRIBUNAL HAS DIRECTED THAT THIS COMPANY BE EXCLUDED ON FUNCTIONAL DISSIMILARITY. 9 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. 8. THE LD. D.R., THOUGH, HAS RELIED UPON THE ORDER OF THE TPO AND A.O., HAS NOT BEEN ABLE TO BRING ANY EVIDENCE ON RECORD TO SHOW THAT THE FA CTS IN THIS YEAR ARE IN ANY WAY DIFFERENT FROM THE FACTS IN THE A.Y. 2007-08. 9. HAVING REGARD TO THE RIVAL CONTENTIONS WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE DRP AND THE REVENUE'S APPEAL IS ACCORD INGLY DISMISSED 7. AS FACTS AND CIRCUMSTANCES ARE SIMILAR IN THE C ASE BEFORE US, WE ARE SATISFIED THAT THERE IS FUNCTIONAL DISSIMILARITY BETWEEN THE ASSES SEE AND INFOSYS TECHNOLOGIES LTD INCLUDING THE HIGH TURNOVER AND THEREFORE, THE SAID COMPANY HAS TO BE EXCLUDED. SIMILARLY, IN THE CASE OF L&T INFOTECH, THIS TRIBUN AL HAS ALREADY CONSIDERED THAT FOR THE VERY SAME A.Y, THERE IS NO SEGMENTAL DATA AVAILABLE AND HENCE IS NOT COMPARABLE. THEREFORE, RESPECTFULLY FOLLOWING THE SAME, WE DO N OT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE DRP. THUS, GROUND OF APPEAL NO.2 O F THE REVENUE IS DISMISSED AND CROSS OBJECTION NO.1 OF THE ASSESSEE IS ALLOWED. 1.4 FOLLOWING THE DECISION OF THE COORDINATE BENCH, IT HAS REJECTED THIS COMPANY AS COMPARABLE DUE TO NON-AVAILABILITY OF S EGMENTAL DATA. IN THE CURRENT AY ALSO, THERE IS NO SEGMENTAL DATA AVAILAB LE. HENCE, WE ALSO FIND IT APPROPRIATE TO DIRECT THE AO/TPO TO EXCLUDE THE SA ID COMPANY FROM THE LIST OF COMPARABLES AS COMPARABLE. 2. PERSISTENT SYSTEMS LTD.: 2.1 OBJECTING TO THE AFORESAID COMPANY AS COMPARABL E, THE AR OF THE ASSESSEE SUBMITTED THAT THIS COMPANY HAS HAD EX TRA ORDINARY EVENTS IN THE NATURE OF MERGER IN THIS YEAR IN THE NATURE OF ACQUISITIONS. IT IS SUBMITTED THAT THIS COMPANY IS INVOLVED IN DEVELOPMENT OF PRODUCTS NAMELY EMEE & KLISMA FOR WH ICH SIGNIFICANT R&D IS ALSO BEING INCURRED. IT IS SUBMITTED THAT TH IS COMPANY IS ALSO INVOLVED IP-LED BUSINESS (SOFTWARE PRODUCTS). IT IS SUBMITTED THAT THIS COMPANY DERIVES SIGNIFICANT REVENUE FROM EXPORT OF SOFTWARE SERVICES AND PRODUCTS, FOR WHICH NO SEGMENTAL IS AVAILABLE A ND THE COMPANY IS ALSO OWNING SIGNIFICANT INTANGIBLE ASSETS. HE SUBMI TTED THAT IN THE FOLLOWING CASES THIS COMPANY WAS REJECTED AS COMP ARABLE: 1. CIT VS. INTOTO SOFTWARE INDIA PVT. LTD., IITTA N O. 233 OF 2014, HIGH COURT OF TELENGANA AND AP. 2. ALCATEL LUCENT INDIA LTD. VS. DCIT, ITA NO. 6856 /DEL/2015 3. SYMANTEC SOFTWARE AND SERVICES INDIA PVT. LTD. V S. DCIT, ITA NO. 614/MDS/2016 10 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. 2.2 LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES AND FURTHER SUBMITTED THAT IT IS OBSERVED BY DRP, THIS COMPANY HAS NOT CHARGED THE R&D EXPENSES TO P&L A/C. SHE ALSO SUBMITTED THA T IP LED BUSINESSES ARE SIMILAR TO SOFTWARE SERVICES AND ALS O SIMILAR TO THE BUSINESS CARRIED ON BY THE ASSESSEE. SHE SUBMITTED THAT THE PRESENCE OF IPS WILL NOT HAVE ANY IMPACT. 2.3 CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD. WE FIND THAT THE COORDINA TE BENCH OF ITAT CHENNAI BENCH IN THE CASE OF M/S SYMANTEC SOFTWARE AND SERVICES INDIA PVT. LTD. (SUPRA) HELD AS UNDER: 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIG N SERVICES WHILE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVIC ES PROVIDER. WE FIND THAT, AS SUBMITTED BY THE ASSESSE E, THE SEGMENTAL DETAILS ARE NOT GIVEN SEPARATELY. THEREFO RE, FOLLOWING THE PRINCIPLE ENUNCIATED IN THE DECISION OF THE MUM BAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. L TD., (SUPA) THAT IN THE ABSENCE OF SEGMENTAL DETAILS/INFORMATIO N A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANAL YSIS, WE HOLD THAT THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. OUGH T TO BE OMITTED FROM THE SET OF COMPARABLES FOR THE YEAR UN DER CONSIDERATION. IT IS ORDERED ACCORDINGLY. 2.4 IN VIEW OF THE ABOVE DECISION OF THE ITAT CHENN AI BENCH AND ALSO AR OF THE ASSESSEE BROUGHT TO OUR NOTICE THAT THIS COMPANY PERSISTENT SYSTEMS LTD. OPERATING WITH THE HELP OF IP SOLUTIONS LIKE EMEE AND KLISMA. THE SAME WAS DECLARED BY THE COMPA NY IN ITS SIGNIFICANT EVENT IN THE AREA OF RESEARCH AND DEVEL OPMENT IN PAGE 964 OF THE PAPER BOOK. FURTHER, SHE BROUGHT TO OUR NOTI CE THAT THIS COMPANY HAS CARRIED ON RESEARCH AND DEVELOPMENT ACT IVITIES TO SUPPORT THAT SHE SUBMITTED THE DETAILS OF EXPENDITU RE IN CAPITAL AND REVENUE, WHICH ARE GIVEN IN PAGE 966 OF THE PAPER B OOK. 2.5 FURTHER, SHE BROUGHT TO OUR NOTICE THAT THE COM PANY HAS TAKEN A CONSTANT DECISION ON INVESTING IN NEW IP SOLUTIONS, WHICH HAS GIVEN 11 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. GOOD REWARDS IN MANY FOLDS. FURTHER, SHE BROUGHT TO OUR NOTICE THAT THE COMPANY HAS ENGAGED IN PROVIDING OUTSOURCED SOF TWARE PRODUCT DEVELOPMENT SERVICES AND TECHNOLOGY SOLUTIONS TO IN DEPENDENT SOFTWARE VENDORS (ISVS) AND ENTERPRISES. IT IS SUB MITTED THAT THIS COMPANY DERIVES SIGNIFICANT PORTIONS OF ITS REVENUE FROM EXPORT OF SOFTWARE SERVICES AND PRODUCTS. 2.6 LD. AR BROUGHT TO OUR NOTICE THAT NOTES FORMING PART OF FINANCIAL STATEMENTS IN RELATION TO REVENUE RECOGNITION, THE COMPANY HAS DECLARED THAT REVENUE FROM LICENSING OF PRODUCT REC OGNIZED ON DELIVERY OF PRODUCTS. IT SHOWS THAT THE COMPANY IS DEALING WITH THE PRODUCT ALSO. FURTHER, SHE BROUGHT TO OUR NOTICE TH AT THIS COMPANY USES INTANGIBLE ASSETS (REFER PAGE 1047 OF PAPER BO OK). 2.7 IN CONTINUATION OF THE ABOVE SUBMISSIONS, LD. A R ALSO BROUGHT TO OUR NOTICE THAT THIS COMPANY HAS DECLARED SEGMENTAL REPORT BASED GEOGRAPHICAL LOCATION OF CUSTOMERS INSTEAD OF INDUS TRIAL VERTICAL SEGMENTATION I.E. BASED ON SERVICES AND PRODUCT. 2.8. AFTER CONSIDERING THE FACTS ON RECORD, IN OUR VIEW, THIS COMPANY I.E. PERSISTENT SYSTEMS LTD. CANNOT BE A COMPARABLE COMPANY TO THE ASSESSEE COMPANY. ACCORDINGLY, THIS COMPANY IS DIRE CTED TO BE REMOVED FROM THE LIST OF COMPARABLE COMPANIES. 6. LD. AR RAISED GROUND NO. 3.4 PRAYING FOR INCLUSI ON OF THE COMPANY I.E. EVOKE TECHNOLOGIES PVT. LTD. AS THE SA ME IS A COMPARABLE COMPANY TO THE ASSESSEE COMPANY AS ITS P ROFILE IS SIMILAR TO THE OTHER COMPANIES RETAINED BY DRP. 7. THE FACTS ARE, THIS COMPANY WAS SELECTED BY TPO AFTER REJECTING TP STUDY OF ASSESSEE. HOWEVER, ASSESSEE OBJECTED TO INCLUSION OF THIS COMPANY AS COMPARABLE COMPANY BEFORE THE TPO B Y MAKING A SUBMISSION THAT THIS COMPANY IS INTO PROVISION OF V ARIOUS OTHER 12 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. SERVICES INCLUDING SOFTWARE DEVELOPMENT SERVICES. T HIS COMPANY DOES NOT HAVE SEGMENTAL INFORMATION IN RESPECT OF ALL TH E SERVICES. HOWEVER, TPO REJECTED THE SUBMISSIONS OF THE ASSESS EE AND INCLUDED THE SAME AS COMPARABLE COMPANY. 8. AGGRIEVED WITH THE DECISION OF THE TPO, ASSESSEE FURTHER OBJECTED TO INCLUSION OF THIS COMPANY BEFORE THE DR P. BEFORE THE DRP THE ASSESSEE SUBMITTED AS UNDER: THE COMPANY WAS REJECTED BY THE ASSESSEE, WHILE C ONDUCTING A REVIEW OF THE COMPANIES DUE TO NON-AVAILABILITY OF SEGMENTAL INFORMATION. THE LEARNED TPO HAS OBSERVED THAT THE INFORMATION AVAILABLE ON THE COMPANY'S WEBSITE AND IN THE MANAGEMENT DISCUSS IONS CANNOT BE RELIED UPON FOR DETERMINING THE COMPARABI LITY OF THE COMPANY. IN THIS CONNECTION THE ASSESSEE HUMBLY SUB MITS THAT THE INFORMATION AVAILABLE ON THE WEBSITE AND IN THE MANAGEMENT DISCUSSION IS CONSIDERED TO BE THE INFORMATION AVAI LABLE IN THE PUBLIC DOMAIN AND THIS INFORMATION PROVIDES CRUCIAL INFORMATION THAT HELPS IN DETERMINING THE FUNCTIONAL COMPARABIL ITY OF THE COMPANY. ACCORDINGLY, DISREGARDING THE SAID INFORMA TION WOULD TANTAMOUNT TO CHERRY PICKING OF THE SELECTIVE INFOR MATION. FURTHER, ON REVIEW OF THE COMPANY'S WEBSITE IT IS OBSERVED THAT THE COMPANY IS ENGAGED IN PROVISION OF VARIOUS OTHE R SERVICES INCLUDING SOFTWARE DEVELOPMENT SERVICES WHICH ARE A S FOLLOWS: ORACLE CONSULTING SERVICES; MICROSOFT CONSULTING SE RVICES; MOBILITY; - JAVA CONSULTING SERVICES; IT STAFFING SOLUTIONS; QA AND TESTING SERVICES; OPEN SOURCE SERVICES; BIG DA TA & ANALYTICS SOLUTIONS; AND BUSINESS PROCESS MANAGEME NT. FURTHER, THE COMPANY DOES NOT REPORT SEGMENTAL IN FORMATION IN RESPECT OF THE SERVICES LISTED ABOVE. GIVEN THIS, T HE MARGIN EARNED BY THE COMPANY FROM PROVISION OF SOFTWARE DE VELOPMENT SERVICES IS NOT ASCERTAINABLE. IN LIGHT OF THE ABOVE, THE ASSESSEE HUMBLY SUBMIT S THAT THIS COMPANY SHOULD NOT BE CONSIDERED WHILE COMPUTING TH E ARM'S LENGTH MARGIN. 13 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. 9. NOW, THE ASSESSEE IS PRAYING BEFORE US TO INCLUD E THIS COMPANY AS COMPARABLE BY BRINGING ON RECORD THAT THIS COMP ANY HAS DECLARED REVENUE FROM OPERATION ONLY ON SOFTWARE DEVELOPMENT CHARGES WHICH IS SIMILAR TO THE ASSESSEE. FURTHER, SHE BROUGHT TO OUR NOTICE THAT THIS COMPANY DECLARED IN NOTES ON ACCOUNTS THAT THERE AR E NO SEPARATE REPORTABLE SEGMENT AS PER AS-17 AS ENTIRE OPERATION S OF THE COMPANY RELATE TO ONE SEGMENT ONLY I.E. SOFTWARE DEVELOPMEN T (REFER PAGE 673 OF PAPER BOOK). 10. LD. DR SUBMITTED THAT EVOKE TECHNOLOGIES PVT. L TD. IS FUNCTIONALLY DISSIMILAR TO THE ASSESSEE COMPANY AS IT IS IN THE BUSINESS OF CONSULTANCY SERVICES AND OTHER SEGMENTS LIKE ORACLE CONSULTANCY, MICROSOFT CONSULTANCY ETC. FOR WHICH T HIS COMPANY HAS NOT SUBMITTED ANY SEGMENTAL INFORMATION. THIS COMPA NY INVOLVES IN LOW END OPERATION OF CONSULTANCY SERVICES NOT LIKE ASSESSEE COMPANY. SHE RELIED ON THE ORDER OF DRP. 11. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. WE FIND THAT THE ASSESSEE IS INTO CONTRA CTS SOFTWARE DEVELOPMENT SERVICES, BACKUP OFFICE SUPPORT SERVICE S, MARKETING SUPPORT SERVICES, CORPORATE IT ETC., WHEREAS THE CO MPANY EVOKE TECHNOLOGIES PVT. LTD. IS INTO SOFTWARE DEVELOPMENT SERVICES AS PER THE DECLARED FINANCIAL STATEMENT AS BROUGHT TO OUR NOTICE BY THE LD. AR. HOWEVER, WE ARE NOT SURE FROM WHERE THE ASSESSE E HAS GOT INFORMATION THAT THIS COMPANY INVOLVES IN ORACLE CO NSULTANCY SERVICES, MICROSOFT CONSULTANCY SERVICES, JAVA CONSULTANCY SE RVICES, IT STAFFING SOLUTIONS, ETC., WHICH WERE SUBMITTED BEFORE THE DR P. THESE DETAILS WERE NOT DECLARED ANYWHERE IN THE FINANCIAL REPORT, WHICH IS AVAILABLE IN THE PUBLIC DOMAIN. HOWEVER, WE FIND THAT IN THE P&L A/C DECLARED BY THE ASSESSEE, REVENUE FROM OPERATION IS 77.36 CR ORES WHEREAS EMPLOYEE BENEFIT EXPENSES IS DECLARED AS 42.61 CROR ES, WHICH IS EQUIVALENT TO 55% OF THE REVENUES, WHEREAS, IN THE EVOKE TECHNOLOGIES PVT. LTD., THE REVENUE FROM OPERATION DECLARED IN P&L 14 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. A/C IS RS. 30.36 CRORES WHEREAS EMPLOYEE BENEFIT EX PENSES IS RS. 19.04 CRORES, WHICH IS EQUIVALENT TO 63.36% OF GROS S REVENUE. ON TOP OF THAT, WE FIND THAT THIS COMPANY HAS INCURRED RS. 2.11 CRORES ON CONSULTANCY CHARGES, WHICH IS EQUIVALENT TO 7.02% O F THE TOTAL REVENUE. THAT MEANS, THIS COMPANY HAS INCURRED 70.3 8% ON SOFTWARE DEVELOPMENT CHARGES. EVEN ON THIS COUNT, THIS COMPA NY CANNOT BE INCLUDED AS COMPARABLE TO THE ASSESSEE COMPANY. ACC ORDINGLY, GROUND RAISED BY THE ASSESSEE IS DISMISSED. 12. CONSIDERING THE ABOVE, WE ALLOW GROUND NO. 3.3 AND REJECT GROUND NO. 3.4 RAISED BY THE ASSESSEE. ALL OTHER GR OUNDS RAISED BY THE ASSESSEE ARE REJECTED AS SAME ARE ACADEMIC IN N ATURE, AS SUBMITTED BY THE ASSESSEE. 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 28 TH APRIL, 2017. SD/- SD/- (D. MANMOHAN) (S. RIFAUR RAHMAN ) VICE PRESIDENT ACCOU NTANT MEMBER HYDERABAD, DATED: 28 TH APRIL, 2017 KV COPY TO:- 1) ELECTRONIC ARTS GAMES (INDIA) PVT. LTD., PLOT N O. 17, 7 TH FLOOR, VEGA BLOCK ASCENDAS IT PARK, MADHAPUR, HYDERAB AD 500 081. 2) ACIT, CIRCLE 17(1), 9 TH FLOOR, SIGNATURE TOWERS, KONDAPUR, HYD. 500 004. 3) DRP, HYDERABAD 4) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 5) GUARD FILE 15 ITA NO. 444 /HYD/2017 ELECTRONIC ARTS GAMES INDIA PVT. LTD., HYD. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER
