Income Tax Appellate Tribunal - Hyderabad
Electronic Arts Games India Private ... vs Acit, Circle-17(1), Hyderabad, ... on 28 April, 2017
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) vs. Asst. Commissioner of
Pvt. Ltd., Hyderabad. Income-tax, Circle - 17(1),
Hyderabad.
PAN - AABCJ 4279Q
(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 RDE R
PER S. RIFAUR RAHMAN, A.M.:
This appeal is preferred by the assessee against the order passed u/s 143(3) r.w.s. 92CA(3) r.w.s.144C(5) of the Income Tax Act, 1961 (in short 'Act') dated 19/12/2016 relating to AY 2012-13.
2. Brief facts of the case are, the assessee company is engaged in the business of providing contract software development 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 selected 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/2017Electronic Arts Games India Pvt. Ltd., Hyd.
2.1 During the year under consideration, the assessee 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' length 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 reflected as under:
A.E. Nature of transaction Amount (Rs.)
Electronic Arts Ltd. Purchase of fixed 20,71,242
assets
Electronic Arts Inc. Contract software 57,18,55,399
research and
development
services
Electronic Arts Inc. Corporate IT 3,82,62,985
Services
Electronic Arts Inc. Back office support 7,83,75,725
services.
Electronic Arts Asia Marketing support 2,40,70,176
Pacific Pte Ltd. services
EA Swiss SARL Corporate IT support 1,91,31,493
services
EA Swiss SARL Back office support 4,18,90,474
services
EA Swiss SARL Reimbursement of 11,50,988
expenses
2.2 The assessee has carried out the economic analysis and has
summarized it as under:
Nature of Amount MAM PLI Margin of Margin of
international taxpayer comparables
transaction
Purchase of 20,71,242 CUP NA NA NA
fixed assets
Contract 57,18,55,399 TNMM OP/OC 11% 10.82%
software
development
services
Corporate IT 3,82,62,985 TNMM OP/OC 9% 11.35%
Services
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ITA No. 444 /Hyd/2017
Electronic Arts Games India Pvt. Ltd., Hyd.
Back Office 7,83,75,725 TNMM OP/OC 9% 11.35% support services Marketing 2,40,70,176 TNMM OP/OC 9% 11.35% support services Corporate IT 1,91,31,493 TNMM OP/OC 9% 11.35% Back office 4,18,90,474 TNMM OP/OC 9% 11.35% support services Reimbursement 11,50,988 NA NA NA of expenses 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 certain filters, the assessee has short-listed 6 comparables to benchmark the contract software research and development services transaction with arithmetic mean PLI (OP/OC) computed at 10.82% as against the PLI of the assessee at 11%. Accordingly, it is stated that the SDS transactions are at arm's length. With regard to transactions mentioned at 2 to 7 above, the assessee has short-listed 9 comparables to benchmark the above mentioned transactions under TNMM with arithmetic mean PLI (OP/OC) computed at 9% as against the PLI of the taxpayer at 11.35%. W ith regard to purchase of fixed assets the taxpayer has selected CUP as MAM and held that the transaction is at arm's length.
2.4 Financial results for the AY 2012-13 are as under:
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
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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 marking analysis has been done in the TP study:
A.E. Nature of transaction Amount (Rs.)
EA Swiss Receivables 6,10,21,966
SARL
Electronic Arts Receivables 30,39,452
Asia Pacific
Pte Ltd.
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 regulations as also the choice of filters which resulted in selection of inappropriate comparables. In view of the same, the TP document of the taxpayer was rejected and an independent analysis had been made by aggregating all the transactions under TNMM.
2.7 The final comparables selected by Transfer Pricing Officer (TPO) with OP to OC are as under:
Sl.No. Name of the company OP/OC
1. Acropetal Technologies Ltd. 19.17
(seg.)
2. Akshay Software Technologies 9.87
Ltd.
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 17.00
Technologies Ltd.
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
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ITA No. 444 /Hyd/2017
Electronic Arts Games India Pvt. Ltd., Hyd.
2.8 After comparing the average margins of the comparables to the financials of the assessee, the TPO computed the adjusted arm's length margin as under:
Description Amount
Arm's Length Margin 20.05%
Less: WCA 3.76%
Adjusted Arm's Length 16.29%
Margin
Operation Cost (OC) 70,11,00,469
Adjusted Arm's Length 16.29%
Margin (%) (AALM)
Arm's Length Price = 81,53,09,735
(100+AALM)*OC
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 92CA(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 assessment order. Assessee preferred a petition before the Dispute Resolution 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.
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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 of the Act vide TPO proceedings dt. 29/02/2016 holds good.
3.1 Considering the above findings of DRP, the AO has kept the adjustment u/s 92CA at Rs. 4,14,20,080/-.
4. Aggrieved with the above order, assessee is in appeal before us raising the following grounds of appeal:
1. The order passed by the learned AO / learned Transfer Pricing Officer ('TPO') ie. Deputy Commissioner of Income-tax (Transfer Pricing) - 3 and the directions issued by the Hon'ble DRP is not in accordance with the law and is contrary to the facts and circumstances of the present case and in any case in violation of the principal of equity and natural justice.
2. On the facts and circumstances of the case and in 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 as 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 4,14,20,080 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 analysis undertaken by the Appellant without giving cogent reasons.
3.2. Rejecting the comparable companies identified by the Appellant in the transfer pricing report, despite of 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 the Appellant and proposing additional filters while conducting a fresh benchmarking analysis during the course of the transfer pricing assessment proceedings.7 ITA No. 444 /Hyd/2017
Electronic Arts Games India Pvt. Ltd., Hyd.
3.5. Computing incorrect margin of the companies selected while determining the ALP.
3.6. Rejecting the adjustment for differences in working capital as claimed by the Appellant.
3.7. Rejecting the adjustment for differences in risk profile. 3.8. Ignoring the provisions of the Rule 10B(4) of the Income-tax Rules, 1962 ('Rules') which authorizes usage of multiple year data for the purpose of determination of the ALP under section 92F of the Act.
3.9. Failing to grant the benefit of +/-5 percent range as envisaged by the provisions of Section 92C(2) of the Act.
4. On the facts and circumstances of the case and in law, the learned DRP erred by adopting approach followed by the learned TPO despite of delivering contrary views in their own DRP directions.
5. That on facts and circumstances of the case and in law, the learned AO has erred in levying interest under sections 234B and 234C of the Act."
Appellant seeks relief on the aforesaid grounds and 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, omit or substitute any of the aforesaid grounds appeal at any time before or at the time of hearing of the appeal."
5. The ld. AR submitted that assessee prefers to object to comparables retained by DRP and prays to include one comparable. She submitted that the other grounds raised were academic in nature. Hence, the ld. AR objected to the selection of following comparables by the TPO. Therefore, we will deal with each of the company that was objected by the assessee.
1. Larsen & Toubro Infotech Ltd., 1.1 Objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is rejected by this Tribunal in the assessee's own case for AY 2010-11. It was submitted that the company has significant amount of intangibles. Further this company is also involved in software products and the company is 8 ITA No. 444 /Hyd/2017 Electronic Arts Games India Pvt. Ltd., Hyd.
undertaking significant amount of branding. It is also submitted that this company does not have segmental details available for its business activities. She submitted the ITAT has rejected this company in the following cases:
1. ACIT Vs. M/s Electronic Arts Games (India) Private 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 authorities 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. Accordingly, 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 InfoTech 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. For the sake of ready reference, Para 7 to 9 of the said are reproduced hereunder:
"7. Coming to the Revenue's appeal against the directions of the DRP to exclude Infosys Technology Ltd., L & T InfoTech Ltd., and Tata Elxsi 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 assessee has relied upon the decision of this Tribunal in assessee's own case for the A.Y. 2007-08 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 Ltd., 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 facts 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 accordingly dismissed"
7. As facts and circumstances are similar in the case before us, we are satisfied that there is functional dissimilarity between the assessee 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 Tribunal 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 not see any reason to interfere with the order of the DRP. Thus, ground of appeal No.2 of 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 segmental data. In the current AY also, there is no segmental data available. Hence, we also find it appropriate to direct the AO/TPO to exclude the said company from the list of comparables as comparable.
2. Persistent Systems Ltd.:
2.1 Objecting to the aforesaid company as comparable, the AR of the assessee submitted that this company has had extra 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 which significant R&D is also being incurred. It is submitted that this 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 and the company is also owning significant intangible assets. He submitted that in the following cases this company was rejected as comparable:
1. CIT Vs. Intoto Software India Pvt. Ltd., IITTA No. 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. Vs. 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 authorities 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 that "IP" led businesses are similar to software services and also similar to the business carried on by the assessee. She submitted that the presence of IP's 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 coordinate 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 perused 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 design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd., (supa) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly."
2.4 In view of the above decision of the ITAT Chennai 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 company in its significant event in the area of research and development in page 964 of the paper book. Further, she brought to our notice that this company has carried on research and development activities to support that she submitted the details of expenditure in capital and revenue, which are given in page 966 of the paper book.
2.5 Further, she brought to our notice that the company 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 software product development services and technology solutions to independent software vendors (ISV's) and enterprises. It is submitted 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 recognized on delivery of products. It shows that the company is dealing with the product also. Further, she brought to our notice that this company uses intangible assets (refer page 1047 of paper book).
2.7 In continuation of the above submissions, ld. AR also brought to our notice that this company has declared segmental report based geographical location of customers instead of industrial 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 directed to be removed from the list of comparable companies.
6. Ld. AR raised ground No. 3.4 praying for inclusion of the company i.e. Evoke Technologies Pvt. Ltd. as the same is a comparable company to the assessee company as its profile 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 by making a submission that this company is into provision of various other 12 ITA No. 444 /Hyd/2017 Electronic Arts Games India Pvt. Ltd., Hyd.
services including software development services. This company does not have segmental information in respect of all the services. However, TPO rejected the submissions of the assessee 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 DRP. Before the DRP the assessee submitted as under:
• The company was rejected by the Assessee, while conducting 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 discussions cannot be relied upon for determining the comparability of the company. In this connection the Assessee humbly submits that the information available on the website and in the management discussion is considered to be the information available in the public domain and this information provides crucial information that helps in determining the functional comparability of the company. Accordingly, disregarding the said information would tantamount to cherry picking of the selective information.
• Further, on review of the company's website it is observed that the company is engaged in provision of various other services including software development services which are as follows:
Oracle Consulting Services; Microsoft Consulting Services; Mobility; - Java Consulting Services; IT Staffing Solutions; QA and Testing Services; Open Source Services; Big Data & Analytics Solutions; and Business Process Management.
• Further, the company does not report segmental information in respect of the services listed above. Given this, the margin earned by the company from provision of software development services is not ascertainable.
• In light of the above, the Assessee humbly submits that this company should not be considered while computing the 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 include this company as comparable by bringing on record that this company 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 are no separate reportable segment as per AS-17 as entire operations of the company relate to one segment only i.e. software development (refer page 673 of paper book).
10. Ld. DR submitted that Evoke Technologies Pvt. Ltd. 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 this company has not submitted any segmental information. This company 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 the material facts on record. We find that the assessee is into contracts software development services, backup office support services, marketing support services, corporate IT etc., whereas the company 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 assessee has got information that this company involves in oracle consultancy services, Microsoft consultancy services, java consultancy services, IT staffing solutions, etc., which were submitted before the DRP. 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 crores whereas employee benefit expenses is declared as 42.61 crores, 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 expenses is Rs. 19.04 crores, which is equivalent to 63.36% of gross 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% of the total revenue. That means, this company has incurred 70.38% on software development charges. Even on this count, this company cannot be included as comparable to the assessee company. Accordingly, 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 grounds raised by the assessee are rejected as same are academic in nature, 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 ACCOUNTANT MEMBER
Hyderabad, Dated: 28 th April, 2017
kv
Copy to:-
1) Electronic Arts Games (India) Pvt. Ltd., Plot No. 17, 7 th Floor, Vega Block Ascendas IT Park, Madhapur, Hyderabad - 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., Hyderabad.
5) Guard File 15 ITA No. 444 /Hyd/2017 Electronic Arts Games India Pvt. Ltd., Hyd.
Description Date Intls
S.No.
1. Draft dictated on Sr.P.S./P.S
2. Draft placed before author Sr.P.S/PS
Draft proposed & placed before the JM/AM
second Member
3
4 Draft discussed/approved by second JM/AM
Member
5 Approved Draft comes to the Sr.P.S./P.S
Sr.P.S./PS
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