Gameloft Software Private Limited, Hyd, Secunderabad V. ACIT, Circle-2(2), Hyderabad, Hyderabad

ITA 598/HYD/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2703 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 27-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K ASHOK KUMAR
• Assessee Lawyers: RAGHUNATHAN
• Keywords: Transfer pricing; Double taxation relief
• Section: 143(3); 133(6)

Judgement Text

ITA NO 598 OF 2016 GAMELOFT SOFTWARE P LTD HYDERABAD. PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.598/HYD/2016 (ASSESSMENT YEAR: 2011-12) M/S. GAMELOFT SOFTWARE PRIVATE LIMITED HYDERABAD PAN: AACCG 4168 L VS ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 2(2) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI RAGHUNATHAN, S FOR REVENUE : SHRI K. ASHOK KUMAR, DR O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2011-12. IN T HIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 92CA(4) R.W.S. 144C(13) OF THE I. T. ACT, DATED 10.02.2016. THE ASSESSEE HAS RAISED THE FOLLOWING G ROUNDS OF APPEAL: 1. THE DRP HAS ERRED IN LAW AND FACTS OF THE CASE IN NOT AFFORDING AN OPPORTUNITY OF HEARING AND DIRECTING THE TPO TO REWORK THE ADJUSTMENT U/S 92C(A) OF THE ACT. 2. THE DRP AS WELL AS THE TPO HAS NOT GIVEN AN OPPORTUNITY OF HEARING FOR THE ENHANCEMENT OF THE ADJUSTMENT AS PER LAW, THEREFORE THE ADJUSTMENT IS BAD IN LAW. DATE OF HEARING: 03.01 . 201 8 DATE OF PRONOUNCEMENT: 10.01.2018 ITA NO 598 OF 2016 GAMELOFT SOFTWARE P LTD HYDERABAD. PAGE 2 OF 6 3. YOUR APPELLANT SUBMITS THAT THE TPO HAD REJECTED THE TRANSFER PRICING STUDY OF THE APPELLANT ON THE GROUND THAT THE APPELLANT'S SEARCH PROCESS IS NOT I N CONFORMITY WITH THE TP REGULATIONS. 4. YOUR APPELLANT SUBMITS THAT THE TPO AND DRP ERRED IN LAW ON FACTS OF THE CASE IN NOT ACCEPTING THE FILTERS ADOPTED BY YOUR APPELLANT. 5. YOUR APPELLANT HAS IN FACT APPLIED AN UPPER CAP OF RS. 200 CRORES ON THE TURNOVER FILTER WHICH THE TPO HAS NOT APPLIED AT ALL. HENCE THE TPO HAS ERRED IN NOT ADOPTING AN UPPER CAP ON TURNOVER FILTER IN THE COMPARABILITY ANALYSIS AND THE DRP OUGHT TO HAVE RESTRICTED THE UPPER LIMIT ON TURNOVER FILTER TO HAVE COMPARABLES WITHIN THE LIMITED MAGNITUDE. THEREBY THE FILTERS ADOPTED ARE WRONG IN LAW. 6. YOUR APPELLANT SUBMITS THAT THE TAX PAYER STRONGLY REFUTES THE DRP'S CONTENTION THAT IT DO NO T FIND ANY INFIRMITY IN TAKING SUPER PROFIT MAKING COMPARABLE. THE TPO OUGHT TO HAVE APPLIED SUPER PROFIT FILTER WHEN HE HAS EXCLUDED SOME COMPARABLES ON THE BASIS OF APPLICATION OF PERSISTENT LOSSES FILTER/DIMINISHING RETURNS FILTER . 7. YOUR APPELLANT REFUTES TO THE INCLUSION OF OPERATING COST PERTAINING TO NIODA CENTRE IN THE TPQ'S ORDER, THOUGH THE APPELLANT IS RESPONSIBLE FO R LOCAL GAME DOWNLOAD AND IN NO WAY CONNECTED TO EXPORT EARNINGS. THE DRP OUGHT TO HAVE APPRECIATED THE FACT THAT THE APPELLANT INCLUDED PROVISION OF SERVICES TO AE AND EXCLUDED THE PAYMENT OF ROYALTY TO ITS AE ON THE PREMISE THAT IT IS PAID FOR EARNING DOMESTIC REVENU E. 8. YOUR APPELLANT OBJECTS TO THE TPQ'S CLAIM THAT T HE INTANGIBLE TRANSACTION RELATING LA PAYMENT OF ROYAL TY IS AGGREGATED WITH THE TRANSACTION OF SOFTWARE DEVELOPMENT. THE ELIGIBLE ASSESSEE HAD CALCULATED THE PLI BY EXCLUDING THE REVENUE FROM GAME ITA NO 598 OF 2016 GAMELOFT SOFTWARE P LTD HYDERABAD. PAGE 3 OF 6 DOWNLOADS AS WELL AS THE PAYMENT OF ROYALTY AND FOREIGN EXCHANGE LOSS. 9. YOUR APPELLANT OBJECTS TO THE INCLUSION OF THE COMPARABLES WHO OWN THE INTELLECTUAL PROPERTY RIGHTS, WHEREAS THE APPELLANT DOES NOT OWN ANY JP RIGHTS IN ITS NAME. THE DRP OUGHT TO HAVE EXCLUDED THE COMPARABLE OWING JP RIGHTS AND ALLOWED A DOWNWARD ADJUSTMENT IN THIS REGARD. 10. YOUR APPELLANT IS INTO A HIGHLY TECHNICAL ORIENTED DEVELOPMENT OF SOFTWARE USED IN MOBILES ONLY UNLIKE THE OTHER GENERAL SOFTWARE DEVELOPERS. THE APPELLANT HAS SPENT MORE ON RENT DURING THE CURRENT FINANCIAL YEAR IN ANTICIPATION OF MORE BUSINESS IN THE ENSUING YEAR. BOTH THE TPQ AND DRP HAD NOT GIVEN APPROPRIATE CONSIDERATION TO UNDERUTILIZATION OF INFRASTRUCTURE BY THE APPELLANT . THEREFORE, THE TPQ AND DRP OUGHT TO HAVE ACCEPTED THE TP STUDY SUBMITTED BY YOUR APPELLANT. 11. YOUR APPELLANT SUBMITS THAT IN ABSENCE OF ANY OTHER SIMILAR COMPARABLE IN THE DATABASE, THE TPQ AND THE DRP OUGHT TO HAVE CONSIDERED INTERNATIONAL COMPARABLES AS SUBMITTED BY YOUR APPELLANT DURING THE PROCEEDINGS. YOUR APPELLANT SUBMITS THAT IN THE INTERNATIONAL SCENARIO ESPECIAI1Y IN GAMING SOFTWARE INDUSTRY, THE MARGINS HAVE VERY LOW MARGINS. IN VIEW OF THIS, THE MARGINS ARRIVED BY TH E TPO AND DRP ARE ON HIGHER SIDE. 12. YOUR APPELLANT SUBMITS THAT ON INCREASING THE MARGINS OF YOUR APPELLANT WOULD RESULT IN TAXING TH E SAME TWICE ONCE IN THE HANDS OF YOUR APPELLANT AND AGAIN IN THE HANDS OF THE ASSOCIATED ENTERPRISE IN THE OTHER JURISDICTION THUS DEFEATING THE OBJECTIVE OF DTAA AND OTHER INTERNATIONAL CONVENTIONS ENTERED INTO BY VARIOUS COUNTRIES ONLY TO AVOID DOUBLE TAXATION. HENCE THE ADJUSTMENTS UPHELD BY DRP ARE AGAINST THE SPIRIT OF INTERNATIONAL LAW. 13. YOUR APPELLANT OBJECTS TO THE DISALLOWANCE OF INTERCOMPANY EXPENSES RS 24.47,030/- AS THE ITA NO 598 OF 2016 GAMELOFT SOFTWARE P LTD HYDERABAD. PAGE 4 OF 6 SAME HAS BEEN INCURRED FOR BUSINESS PURPOSES OF GAME DOWN LOADS AND HENCE CANNOT BE DISALLOWED. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING YOUR APPELLANT PRAYS THAT THE INCOME BE COMPUTED AS PER LAW. 2. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS NOT PRESSIN G GROUND OF APPEAL NO.13. IT IS ACCORDINGLY REJECTED. 3. AS REGARDS THE OTHER GROUNDS, THE LEARNED COUNSE L FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS MAINLY AGITATING ON THE GROUNDS 3, 4, 5 & 7 AND IF THESE GROUNDS ARE AD JUDICATED IN FAVOUR OF THE ASSESSEE, THE ASSESSMENT WOULD HAVE T O BE REMANDED TO THE FILE OF THE AO/TPO. HE SUBMITTED TH AT VERY SAME ISSUE HAD COME UP IN THE ASSESSEES OWN CASE FOR TH E A.YS 2008- 09, 2010-11 & 2012-13 AND THE COORDINATE BENCHES OF THIS TRIBUNAL HAVE REMANDED THE ISSUE TO THE FILE OF THE AO FOR RE- EXAMINING THE ISSUE OF TP ADJUSTMENT AFRESH AFTER G IVING DUE OPPORTUNITY TO THE ASSESSEE. COPIES OF THE SAID ORD ERS ARE FILED BEFORE US. 4. WE FIND THAT THE COORDINATE BENCH OF THIS TRIBUN AL IN THE ASSESSEES OWN CASE HAS CONSIDERED THE ISSUE AT LENGTH FOR THE A.YS 2008-09, 2010-11 AND 2012-13 TO REMAND THE ISS UE TO THE FILE OF THE AO. WE BOTH ARE SIGNATORIES TO ONE OF S UCH ORDERS. FOR THE SAKE OF CLARITY AND READY REFERENCE, PARA-8 OF THE ORDER OF THE TRIBUNAL FOR THE A.Y 2012-13 IS REPRODUCED HEREUNDE R: ITA NO 598 OF 2016 GAMELOFT SOFTWARE P LTD HYDERABAD. PAGE 5 OF 6 8. COMING TO OTHER GROUNDS ON THE MERITS OF THE TP ADDITION MADE, IT WAS FAIRLY SUBMITTED THAT ASSESSE E IS IN THE SPECIFIED BUSINESS AND THE COMPARABLE COMPANIES ARE NOT AT ALL COMPARABLE. THIS ISSUE WAS DISCUSSED BY THE CO-ORDINATE BENCH IN ASSESSEE'S OW N CASE FOR THE AYS. 2008-09 AND 2010-11. THE DECISION OF THE CO-ORDINATE BENCH OF ITAT, HYDERABAD IN PARA 17 ONWARDS IS AS UNDER: '17. GROUND NO. 9 IS WITH REGARD TO COMPARABLES SEL ECTED UNDER SECTION 133(6) OF THE INCOME TAX ACT, 1961. LD. AR SUBMITTED THAT AT THE TIME OF TP STUDY ASSESSEE HAD NO ACCESS TO SUCH DATA THEREFORE SUCH DATA CANNOT BE CONSIDER ED AS COMPARABLES. THE TPO ALSO HAS SELECTED GENERAL SOFT WARE DEVELOPMENT SERVICES COMPANIES AND ALSO SERVICES PR OVIDERS. THERE ARE NO GAMING COMPANIES DURING THAT PERIOD. H ENCE, THE TP STUDY OF ASSESSEE HAS TO BE ACCEPTED. IN THI S CONNECTION, LD. AR RELIED ON THE DECISION OF HEWLET T PACKARD INDIA SOFTWARE OPERATION PVT. LTD VS ACIT 67 TAXMAN N.COM 309 (BANG TRIB). 18. LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES. 19. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF REVENUE AU THORITIES. WE AGREE WITH THE ASSESSEE THAT THE ASSESSEE IS A S OFTWARE DEVELOPER IN GAMING SECTOR AND CANNOT BE COMPARED W ITH THE GENERAL SOFTWARE DEVELOPMENT OR SERVICE PROVIDERS. IT IS UNIQUE IN TERMS OF UTILIZATION OF TECHNICAL MANPOWE R, ETC. IT CAN BE DISTINGUISHED AS WE DISTINGUISH THE SOFTWARE DEVELOPMENT AND KPO. BOTH ARE SIMILAR BUT DISTINCT. WE DIRECT THE AO/TPO TO ELIMINATE ALL THOSE GENERAL SO FTWARE COMPANIES AS COMPARABLES AND IDENTIFY ONLY THOSE CO MPANIES WHICH ARE EXCLUSIVELY INVOLVED IN THE DEVELOPMENT O F GAMES SOFTWARE. TPO CAN TAKE THE HELP OF ASSESSEE TO IDEN TIFY THESE COMPARABLES AND DETERMINE THE ALP. ACCORDINGLY, THI S GROUND OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPO SES. '. 8.1. SINCE THE VERY BASIS OF THE SELECTION OF COMPA RABLES IS QUESTIONED, THE CONSEQUENT ISSUES OF FILTERS, WO RKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENTS BECOME ACADEMIC. IN LINE WITH THE DECISION OF THE CO-ORDIN ATE BENCH IN OTHER ASSESSMENT YEARS AS STATED SUPRA, WE ARE OF THE OPINION THAT EXERCISE OF SELECTION OF COMPARABLES HAS TO BE DONE SPECIFICALLY KEEPING IN MIND THE SPECIAL NATURE OF ASSESSEE'S BUSINESS IN ITA NO 598 OF 2016 GAMELOFT SOFTWARE P LTD HYDERABAD. PAGE 6 OF 6 DEVELOPING GAMING SOFTWARE. THE AO IS DIRECTED TO KEEP THE DETAILED ORDERS OF THE CO- ORDINATE BENCH IN AYS. 2008-09 & 2010-11 (SUPRA) AND CAN RE- EXAMINE THE ISSUE OF TP ADJUSTMENT AFRESH AFTER GIVING DUE OPPORTUNITY TO ASSESSEE. FOR THESE REASONS, THE ISS UES ON MERITS ARE CONSIDERED ALLOWED AND THE ORDER OF T HE TPO/AO WITH REFERENCE TO TP ADJUSTMENT IS SET ASIDE WITH A DIRECTION TO RE-DO IT AFRESH AS DIRECTED ABO VE. 5. AS THE FACTS AND CIRCUMSTANCES IN THE A.Y BEFORE US ARE THE SAME, WE DEEM IT FIT AND PROPER TO REMAND T HE ISSUE OF THE T.P. ADJUSTMENTS TO THE AO/TPO FOR RE-EXAMINATION O F THE ISSUE AFRESH AFTER GIVING A REASONABLE OPPORTUNITY OF HEA RING TO THE ASSESSEE. 6. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH JANUARY, 2018. SD/- SD/- (B. RAMAKOTAIAH) ACCO UNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 10 TH JANUARY 2018. VINODAN/SPS COPY TO: 1 M. ANANDAM & CO. CAS, 7A SURYA TOWERS, SARDAR PAT EL ROAD, SECUNDERABAD 500003 2 ACIT, CIRCLE 2(2) HYDERABAD 3 4 5 DRP, HYDERABAD DIRECTOR OF INCOME TAX (IT & TP) HYDERABAD ADD. CIT (TP) HYDERABAD 7 GUARD FILE BY ORDER