Electronic Arts Games (India) Pvt. Ltd,m Hyd, Hyderabad v. ACIT, Circle-17(1), Hyderabad, Hyderabad

ITA 265/HYD/2015 | 2010-2011
Pronouncement Date: 29-04-2015 | Result: Partly Allowed

Appeal Details

RSA Number 26522514 RSA 2015
Assessee PAN AABCJ4279Q
Bench Hyderabad
Appeal Number ITA 265/HYD/2015
Duration Of Justice 1 month(s) 12 day(s)
Appellant Electronic Arts Games (India) Pvt. Ltd,m Hyd, Hyderabad
Respondent ACIT, Circle-17(1), Hyderabad, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 29-04-2015
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 29-04-2015
Assessment Year 2010-2011
Appeal Filed On 17-03-2015
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A' HYDERABAD BEFORE SHRI P.M.JAGTAP ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY JUDICIAL MEMBER ITA NO.265/HYD/2015 : ASSESSMENT YEAR 2010 - 11 M/S. ELECTRONIC ARTS GAMES (INDIA) PVT. LTD. HYDERABAD (PAN - AABCJ 4279 Q ) V/S. ASSTT. COMMISSIONER OF INCOME - TAX CIRCLE 17(1) HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AJIT KUMAR JAIN & MS. RADHIKA THAKKAR REVENUE BY : SMT. G.APARNA RAO DR DATE OF HEARING 23 . 4 .201 5 DATE OF PRONOUNCEMENT 29.4.2015 O R D E R PER P.M.JAGTAP ACCOUNTANT MEMBER : TH I S A PPEAL F ILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE ASST COMMISSIO NER OF INCOME - TAX CIRCLE 17(1) HYDERABAD (ASSESSING OFFICER) DATED 18.2.2015 PASSED UNDER S.143(3) OF THE ACT READ WITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL(DRP) UNDER S.144C(5) OF THE ACT. 2. OUT OF THE THREE GROUNDS RAISED BY THE ASSESSEE IN THI S APPEAL GROUND NO.1 IS GEN E RAL WHIL E G R OUND N O.3 IS NOT PRESSED BY THE LEARNED COUNSEL FOR TH E ASSESSEE AT THE TIM E O F H E ARING B E FO R E US. SAME ARE ACCORDINGLY DISMISSED. 3. THE ONLY GROUND THAT SURVIVES FOR OUR CONSIDERATION THUS IS G ROUND NO.2 WHICH INVOLVES THE ISSUE RELATING TO ADDITION OF RS.3 23 74 458 MADE TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 2 4 . THE ASSESSEE IN THE PR E SEN T CA S E IS A COMPANY WHICH IS INTO DEVELOPING PUBLISHING MARKET ING AND DISTRIBU T ING INTERACTIVE ENTERTAINMENT SOFTWARE GAMES THAT ARE PLAYABLE BY CONSUMER ON A VARIETY OF HARDWARE PLATFORMS AND O V ER THE INTERNET. IT IS MAINLY ENGAGED IN PROVIDING A CONTRACT SOFTWARE DEVELOPM E N T SERVI C ES BACK OFFICE SUPPORT SERVI C ES AND MARKETING SUPPORT SERVICES TO ITS ASSOCI A TED EN T ERPRISES. IT IS A WHOLLY OWNED SUBSIDIARY OF ELECTRONICS ARTS (INDIA HOLDING ) INC U SA. THE R ETURN OF INCOME FOR THE Y EA R UN D ER CON S I D ERATION WAS FILED BY IT ON 15.10.2010 DECLARING TOTAL INCOME O F R S .3 5 89 206 UN D ER THE NORMAL P R OVIS I ON S OF THE AC T AND BOOK PROFIT OF R S .76 96 515 UN D ER S.115JB OF THE ACT. DURIN G TH E COURSE OF ASSESSMENT P R OCEE D IN G S I T WAS NO T ICED BY THE ASSESSING OFFICER THAT THE ASSESSEE COMPANY HAS ENTER E D INTO THE FOLLO W IN G IN T ERNATIONAL TRANSAC T ION S WITH ITS ASSOCIATED EN T ERP R ISES DURING TH E Y E AR UN D ER CONSIDERATION - A.E. NATURE OF T RA N S ACTION AMOUNT (RS.) ELECTRONIC ARTS INC. PROVISION OF SOFTWARE DEVELOPM E N T S E RVICES 33 4 4 53 634 ELECTRONIC ARTS INC. PROVISION OF BACK OFFICE SUPPORT S E RVI C ES 8 94 18 867 ELECTRONIC ARTS ASIA PACIFIC PTE. LTD. INC. PROVISION OF MARKETING SUPPORT SERVICES 2 03 38 621 ELECTRONIC ARTS INC. PROVISION OF COR P O RA TE IT SUPPORT SERVICES 25 45 217 ELECTRONIC ART S SWISS SARL PROVISION OF CORPO R ATE IT SUPPORT SERVICES 12 72 609 ELECTRONIC ARTS INC. PURCHASE OF FIXED ASSETS 12 42 724 44 92 71 672 IN ORDER TO DETERMINE THE ARMS LENGTH PRICE (ALP) OF THE ABOVE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS ASSOCIATED ENTERPRISES (AE) A REFERENCE WAS MADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICING OFFICER (TPO) UNDER S.92CA(1) OF THE ACT. IN THE TP STUDY REPORT SUBMITTED BY THE I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 3 ASSESSEE TP A NALYSIS WAS DONE IN RESPECT OF EACH TYPE OF TR A NS A C T ION SEPARATELY ON THE BASIS OF SEGMENTAL DETAILS CLAIMED TO B E MAIN T AIN E D BY THE ASSESSEE . THE SAID ANALYSIS WAS DONE BY APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRI A TE METHOD BY T AKING OPERATING PROFIT TO OPERATING COST (OP/ O C) AS PRICE LEVEL INDICATOR (PLI) . THE SUMMARY O F SUCH ANALYSIS MADE IN TH E TP STUDY R E PO R T SUBMI T TED BY TH E ASSESSEE AS SUMMARIZED BY THE TRANSFER PRICING OFFICER IN HIS ORDER WAS AS UNDER - NATURE OF TRANSACTION AMOUNT MAM PLI MARGIN OF TAX PAYER MARGIN OF COMPARA - BLES PROVISION OF SOFTWARE DEVE - LOPM E N T S E RVICES 33 4 4 53 634 TNMM OP/OC 11.2 12.1 PROVISION OF BACK OFFICE SUPPORT S E RVI C ES 8 94 18 867 TNMM OP/OC 9.09 13.6 PROVISION OF MARKETING SUPPORT SERVICES 2 03 38 621 TNMM OP/OC 9.09 13.6 PROVISION OF COR P O RA TE IT SUPPORT SERVICES 38 17 826 TNMM OP/OCV 5.6 9.9 PURCHASE OF FIXED ASSETS 12 42 724 TNMM OP/OC 11.2 12.1 IN THE ABOVE ANALYSIS DIFFERENT COMPARABLES WERE SELECTED BY TH E ASSESSEE FOR DIFFER E NT TYPE O F TR A N S AC T ION S BY APPLYING CERTAIN FILTERS AND SINCE THE A R ITHM E TIC ME A N OF OP/OC OF THE COMPARABLES WAS W ITHIN TH E RANGE OF + / - 5% TO THE OP/ O C OF THE ASSESSEE IN RELATION TO ITS INTER NATIONAL TRANSACTION S WITH AE IT WAS CLAIMED T H A T NO TP ADJUSTM E N T WAS REQUIRED TO B E M A DE IN RESPECT OF THE SAID TRAN S ACTIONS. I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 4 5 . A F TER GOING THROUGH THE REL E VANT DOCUM E N T S MAINTAIN E D BY THE ASSESSEE A ND AFTER ANLAYSIN G THE R E LE V ANT IN T ERNATIONAL TR A N S ACTIONS THE TPO WAS OF THE OPINION THAT THE METHOD ADOPTED BY TH E ASSESSEE FOR SELECTING THE COMP A RABLES SUFFERED FROM D EFECTS AND THE SAME THEREFORE HAD RESULTED IN SELECTION OF INAPPROPRIATE COMPARABLES AND REJECTION OF APPROPRIATE COMPARABLES. HE AL SO WAS OF THE OPINION THAT IT WAS MORE APPROPRIATE TO CONSOLIDATE ALL THE INTERNATIONAL TR A N S ACTION S O F TH E ASSESSEE COMPANY WITH ITS AE FOR THE PURPOSE O F TR A NSFER PRICING ANALYSIS AND SUCH ANALY S IS SHOULD BE DON E BY TAKING INTO CON S I D E R ATION TH E MARGIN EARNED BY THE ASSESSEE AT ENTITY LEVEL. HE ACCORDINGLY CONFRONTED THE ASSESSEE WITH HIS OBSERVATIONS IN THIS REGARD SEEKING THE LATTERS EXPLANATION/OBJECTIONS AND AFTER TAKING INTO CONSIDERATION THE OBJECTIONS RAISED BY THE ASSESSEE HE PROCEEDED TO DO THE EXERCISE OF TRANSFER PRICING ANALYSIS. WH I LE DOING SO H E CAL C UL A TED THE OP/OC OF TH E ASSESSEE C O MPANY AT ENTITY L E VEL AT 10.26% AND AFTER TAKING INTO CONSIDERATION THE NEW SEARCH F OR SELECTING T H E APPROPRI A TE COM P A RA BL E S AS WELL AS ON THE B A SIS OF A NAYSIS OF DATA BASE THE REL E V ANT A NNUAL REPORTS AND O T H E R IN F ORM A TION COLLECTED BY HIM THE TPO FILANALLY S EL E CTED THE FOLLO W IN G 18 ENTITIES AS COMPARABLES WITH ARITHM E TIC ME A N OF THEIR O P / O C AT 22.69%. SL. NO. COMPANY NAME O P/OC 1. A VANI CIMCON TECHNOLOGIES LTD. 3.39 2. CAT TECHNOLOGIES LTD. 13.04 3. COMP - U - LE A RN TECH INDIA LTD. 19.96 4 . E - INFOCHIPS BANGALORE LTD. 72.32 5 . EVOK TECH 18.61 6 . E - ZEST SOLUTIONS LTD. 22.1 7 . INFOSYS T E CHNOLOGY LTD. 45.44 I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 5 8 . KALS INFORMATION SYSTEMS LTD. (SEG.) 22.05 9 . KULIZA TECH. 25.92 10 . L&T I N FOTECH LT D. 19.97 1 1 . MINDTREE LTD.(SEG.) 20.47 1 2 . PERSISTENT SYSTEMS & SOLUTIONS LTD.(MERGED) 11.37 13 . R.S. SOFTWARE (INDIA) LTD. 9.88 14. SASKEN COMMUNICATION TECHNOLOGIES LTD. 25.23 15. TATA ELXSI LTD. (SEG) 17.24 16. THINKSOFT GLOBAL SERVICES LTD. ` 11.22 17. ZYLOG SYSTEMS LTD. 18.62 18. PERSISTENT SYSTEMS LTD. 31.57 TOTAL 408.4 AVERAGE 22.69 6 . AFTER ALLOWING WORKING CAPITAL ADJUSTMENT OF 3 % ARITHMETIC MEAN MARGIN OF THE SELECTED COMPARABLES AT 19.69 % WAS TAKEN BY THE TPO AS ADJUSTED ARMS LENGTH MARGIN AND APPLYING THE SAME TO THE CORRESPONDING OPERATING COST OF RS. 40 63 31 225 TH E ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS AE WAS WORKED OUT BY HIM AT RS. 48 63 37 843 AS AGAINST THE PRICE OF RS. 44 80 28 949 CHARGED BY THE ASSESSEE. THE DIFFERENCE OF RS.3 8 3 08 894 ACCORDINGLY WAS WORKED O UT BY THE TPO AS TP ADJUSTMENT THAT WA S REQUIRED TO BE MADE IN RESPECT OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES. 7 . WHEN THE ADDITION ON ACCOUNT OF TP ADJUSTMENT WORKED OUT BY THE TPO WAS PROPOSED TO BE MADE BY THE ASSESSING OFFICE R TO THE TOTAL INCOME OF THE ASSESSEE IN THE DRAFT ASSESSMENT OBJECTIONS WERE FILED BY THE ASSESSEE BEFORE THE DISPUTE RESOLUTION PANEL WHICH INTER ALIA INCLUDED THE OBJECTIONS OF THE ASSESSEE IN I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 6 RESPECT OF COMPARABILITY ANALYSIS CARRIED OUT BY THE TPO AND THE APPLICATION OF ADDITIONAL FILTERS BY THE TPO WHICH ACCORDING TO THE ASSESSEE RESULTED IN INCLUSION OF CERTAIN COMPANIES IN THE COMPARABILITY ANALYSIS WHICH DID NOT SATISFY THE TEST OF COMPARABILITY. THESE OBJECTIONS RAISED BY THE ASSESSEE WERE FOUND TO BE ONLY PARTLY SUSTAINABLE BY THE DISPUTE RESOLUTION PANEL AND ACCORDINGLY THE ASSESSING OFFICER/TPO WAS DIRECTED BY THE DRP TO EXCLUDE TWO ENTIT I ES NAMELY INFOSYS TECHNOLOG Y L TD. A ND L & T INFOTECH LTD. FROM THE FINAL LI S T OF COMPARABLES. 8 . AS PER THE DIR E CTION S O F TH E DRP THE ASSESSING OFFICER RECO MPUT ED THE ARMS LENGTH PRICE OF THE IN T ERNATIONAL TR A NSACTION S O F TH E ASSESSEE COMPANY WITH ITS AE AT R S .48 04 05 4 07 BY APPLYING AVERAGE OP/OC OF 18.23% OF THE FINAL 16 COMP A RABLES TO THE C ORRESPON D IN G OPERATING COST AND BASED ON TH A T ADDITION OF RS .3 23 76 458 WAS MADE BY THE ASSESSING OFFICER TO THE TOTAL IN C OM E O F THE ASSESSEE ON ACCOUNT OF TP ADJUSTMENT IN THE ASSESSMENT MADE BY HIM VI D E ORDER DATED 18.2.2015 PASSED UN D ER S.143(3) REA D WITH S.92CA(3) AND S.144C(5) OF THE ACT. AGGRIEVED BY THE SAME ASSESSEE HAS PREFERRED THIS APPEAL B E FORE THE TRIBUNAL . 9 . THE LEARNED COUN S EL FOR THE ASSESSEE AT THE OUTSET SU B M I T T ED THAT ALTHOUGH THE TRANSFER PRICING ANALYSIS DON E IN TH E TP R E PO R T SUBMI T TED BY THE ASSESSEE IN RESP E CT O F EACH TYPE O F TR A N S ACTION SEPARATELY WAS REJECTED BY THE TRANSFER PRICING OFFICER WITHOU T ASSI G N I N G ANY REASONS THE ASSESSEE IS NO T REALLY INTERESTED TO CHALLENGE TH E ACTION OF TH E TPO ON THIS ASPECT OF THE MATTER . HE CONTENDED THAT THE LIMITED ISSUE WHICH TH E ASSESSEE WANTS TO RAISE IS ABOUT THE IN C LU S ION OF ON E ENTITY NAMELY M/S. E - INFOCHIPS BANGALORE LTD. IN TH E LI S T OF FINAL COMP A RABLES . HE CONTEND E D THAT THIS ENTITY IS NO T FUNC T IONALLY COMPARABLE TO THE ASSESSEE COMPANY I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 7 AND TH E RELE V ANT DATA IN RESP E CT OF THE SAID ENTITY NO T BEING FULLY AVAILA B L E IN THE PUBLIC DOMAIN THE SAME IS LIABLE TO B E E X CLU D ED F R OM THE LI S T O F COMP A RABLES WHILE WORKING OUT TH E ARMS LENGTH PRICE OF THE RELEVANT TR A NSAC T ION S O F TH E ASSESSEE COMPANY WITH ITS AE. IN THIS REGARD H E INVITED OUR ATTENTION TO TH E RELEVANT PO R TION OF THE SUBMI S SION S MADE BEFORE THE DRP P L ACED AT PAGE NOS.79 TO 83 OF THE APPEAL MEMO TO POINT OUT THAT ELABORATE SUB M I S SION S WERE MADE BY TH E ASSESSEE BEF ORE THE DRP TO HIGHLIGHT THE DIFFERENCE IN FUNC T I ON AL PROFILE O F THE SAID ENTITY AS WEL L AS NON - AVAILABILITY O F REL E VANT DAT A . HE CONTENDED THAT THE DRP HO WE VER HAS COMPL E TELY IGNORED THE SUBMI S SION S MADE BY THE ASSESSEE AND UPHELD TH E ACTION OF TH E ASSESSING OFFICER/TPO TO IN C LU D E M/S. E - INFOCHIPS BANGALORE LTD. IN THE LI S T OF FINAL COMPARABLES. 10. THE LEARNED COUN S EL FOR THE ASSESSEE THEN PROCEEDED TO EXPLAIN AS TO HOW THE FUNCTIONAL P R OFILE OF M/S. E - INFOCHIPS BANGALORE LTD. IS DIFFERENT FROM THAT OF THE ASSESSEE COMPANY. I N THIS REGARD H E INVITED OU R ATTENTION THE RELE V AN T PAGES OF THE PRINT OUT TAKEN FROM TH E WEBSITE OF THE SAID ENTITY PLACED AT PAGES 286 TO 288 A OF TH E PAPE R - BOOK AND POINTED OUT THAT THE SAID ENTITY IS MAINLY ENGAGED INTO PRO D U C T DEVELOPMENT W ITH SPECIALIZATION IN OFFERING END TO END PRODUCT LI F E CYCLE MANAGEMEN T SERVICES RANGING FROM CONCEPTUALIZATION AND FEASIBILITY ANALY SI S PRODUCT DESIGN TO PRO D U C T LA U NCH. HE ALSO POI N TED OUT THAT THE END TO END PRODUCT DESIGN SERVICES PROVIDED BY THE SAID E NTITY IN C LU D E HARDWARE DESIGN SOFTWARE DESIGN INCLUDING SOFTWARE ARCHITECTURE DESIGN SOFTWARE STACK DEVELOPMENT SOFTWARE QA MIDDLEWARE AND FIRMWARE DE S IG N AND APPLICATION DEVEL OPMENT. HE SUBMITTED THAT AS PER THE INFORM A TION A VAILABLE ON TH E WEBSITE THE SAID ENTITY OVER THE L A ST 16 Y EARS HAS CL A IM E D TO HAVE BECOME A TRUSTED NEW PRO D U C T DEVELOPMENT PARTNER FOR COMPANIES ACROSS THE GLOBE WHO SEEK A LONG TERM PARTNERSHIP. HE C ON T ENDED T H A T THE ASSESSEE I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 8 COMPANY ON THE OTHER HAND AS PER THE TRANSFER PRICING OFFICER S REPORT ITSELF IS ENGAGED IN PROVIDING CONTRACT SOFTWARE DEVELOPM E N T SER V ICES BACK OFFICE SUPPORT SERVICES AND MARKETING SUPPO R T SERVI C ES TO ITS AE WHICH ARE ENT IRELY DIFFERENT AND DI S TINCT FUNCT I ON S P E R F ORMED AS COMPARED TO M/S. E - INFOCHIPS BANGALORE LTD. HE CONTENDED THAT THE FUNCTIONAL P RO FILE OF THE SAID ENTITY THUS IS ENTIREL Y DIFFER E NT F R OM TH E ASSESSEE COMPANY AND THE SAME IS LIABLE TO B E EXCLUDED FROM THE LI S T O F FINAL COMPA R ABLES IN. IN SUPPO R T O F THI S CON T ENTION HE RELIED ON THE DECISION O F THE HON'BLE ANDHRA PRADESH HIGH C OU R T IN THE CA S E OF CIT V/S. INOTOTO SO F TWARE INDIA PRIVATE LTD. (ITTA 233 OF 2014 DATED 27.3. 2014) WHEREIN THE DECISION O F TH E TRIBUNAL TO EXCLUDE AN ENTITY F R OM TH E LI S T OF COMPA RA BLES TAKING INTO CON S I D ERATION THE DISSIMILARITY BETWEEN TH E PRODUCT COMPANY AND THE SOFTWARE S E RVICES COMPANY WAS UPHELD BY THEIR LORDSHIPS. 1 1 . IN ORD E R TO SUPPORT AN D SUBSTANTIATE THE CA S E OF THE ASSESSEE THA T THE RELEVANT FIN A N C I A L DATA OF M/S. E - INFOCHIPS BANGALORE LTD. IS NO T AV A ILABL E IN TH E PUBLIC DOMAIN THE LEARNED COUN S EL FO R THE ASSESSEE IN V ITED OU R ATTENTION TO THE RELEVANT PO R TION OF TH E ANNUAL REPORT OF T HE SAID ENTITY PL A CED AT PA G E 296 O F THE PAPER - B OOK. HE POI N TED OUT THAT THE INCOME E A RNED BY THE SAID ENTITY FROM SOFTWARE SERVI C ES AS WELL AS THE EXPEN SE S INCURRED ON SOFTWARE DEVELOPMENT A RE GIVEN IN THE PROFIT & LOSS ACCOUNT WITH A MENTION THAT FURTH ER DETAILS O F THE SAME ARE GIVEN IN SCHEDULE 7 AND 8 I. HE SUBMI TT ED THAT THE INFORMATION STATED TO BE GIVEN IN S C HE D ULE 7 AND 8 HOWEVER IS NOT AVAILABLE IN TH E PUBLIC DOMAIN. HE SUBMI TT ED THAT SIMILARLY S C HEDULE 9 GIVING D E TAIL S O F ADMIN I STRATIVE AND OTHER EXP E N S ES AS M E NTION ED IN THE PROFIT & LOSS ACCOUNT OF M/S. E - INFOCHIPS BANGALORE LTD. IS NOT M ADE AVAI L ABL E IN THE PUBLIC DOMAIN. HE ALSO POIN TE D OUT FROM THE REL E VANT PO R TION OF THE ANNUAL REPO R T PL A CED AT PAGE 304 OF HIS PAPER BOOK THAT THE I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 9 SAID ENTITY IS CL A IM E D TO BE PRIMARILY ENGAGED IN SOFTWARE DEVELOPM E N T AND IT ENABLED SERVI C ES BUT SEGMENTAL DETAILS ARE STATED TO B E NOT MAINTAINED AS THE SOFTWARE DEVELOPM E N T AND IT ENABLED SERVIC E S ARE CON S I DER ED AS ON E REPORTABLE BUSINESS SEGM E NT. HE ALSO POIN TE D OUT THAT THE AMOUNT OF CONSULTANCY CHARGES GIVEN ON THE SAME PAGE AND RELIED UPON BY THE TPO TO WORK OUT THE PERCENTAGE O F CONSULTANCY INCOME OF THE SAID ENTITY IS ACTUALLY IN RESPECT OF RELATED P A RTY AND NO T IN RESPECT OF ALL TH E PARTIES. HE CONTENDED THAT SUFFICIENT DATA OF M/S. E - INFOCHIPS BANGALORE LTD. AS RELEVANT FOR THE PU R PO S ES OF COMP A RABILITY ANALYSIS THUS I S NO T AVAILABLE IN PUBLIC DOMAIN AND TH E TPO I S NO T JU S TIFIED IN INCLU D IN G TH E SAID ENTITY IN TH E LI S T OF COMP A RABLES ON THE BAS IS OF INSUFFICIENT DATA. HE ALSO POIN TE D F ROM THE ANNUAL R EPORT OF M/S. E - INFOCHIPS BANGALORE LTD. THAT COMPLETE AND SUFFICIENT DATA GIVING EXACT FUNCTIONAL PROFILE OF TH E SAID ENTITY I S NO T AVAILABL E IN THE ANNUAL REPORT. HE CONTENDED THAT M/S. E - INFOCHIPS BANGALORE LTD. THUS IS LIABLE TO BE EXCLUDED BESIDES DUE TO FUNCTIONAL DIFFERENCES EVEN ON THE BASIS OF INSUFFICI E NT INFORMATION AVAILABLE IN TH E PUBLIC DOMAIN FROM THE LI S T OF CO M P A RABLES. 1 2 . THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAN D STRONGLY SUPPO R TED T H E ORDER O F TH E TRANSFER PRICING OFFICER IN SUPPO R T O F THE R E VENUES CA S E THAT M/S. E - INFOCHIPS BANGALORE LTD. IS RIGHTLY INCLUDED IN TH E LI S T OF FINAL CO MPA R ABLES. SH E INVITED OU R ATTENTION TO PAGE 8 O F TH E TPOS ORDER TO POINT OUT THAT TH E ASSESSEE HAS NOT GONE VER T IC A L OR HORIZ O N T AL WITHIN THE SOFTWARE INDUSTRY FOR ITS COMP A RAB ILITY STUDY. SH E ALSO INVITED OU R ATTENTION TO PAGE NO.10 OF THE TPOS REPORT TO SHOW TH AT THE CRITERIA ADOPTED BY THE TPO FOR SEL E CTION OF TH E COMPARABLES COVERED VERTIC A L AS WELL AS HORIZ O N T ALS WITHIN THE SO F TWARE IN D U S TRY. SH E CON T EN D ED THAT BOTH M/S. E - INFOCHIPS BANGALORE LTD. AND THE ASSESSEE CO M P A NY ARE BASICALLY REN D ERING SOFTWARE DEVELOPM E N T SERVI C ES AS HIGHLIGHTED I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 10 BY THE TPO AND THE S AID ENTITY THEREFORE I S RIGHTLY TAKEN AS COMPARABLE COMPANY . 1 3 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE LIMITED CONTENTION R AISED BY THE LEARNED COUNSEL FOR TH E ASSESSEE IS THAT THE ENTITY M/S. E - INFOCHIPS BANGALORE LTD. TAKEN BY THE ASSESSING OFFICER/ TPO AS COMPARABLE SHOULD BE EXCLUDED FROM THE LI S T OF FINAL COMPA RA BLES FOR THE PURPO SE S OF TRANSFER PRICIN G ANALYSIS ON TH E GROUND OF FUNCT I ONAL DIFFER E N C E S AS WELL AS ON THE G R OUND OF IN S U FF ICIENT INFORMATION AVAILABLE IN RESPECT OF TH E SAID ENTITY IN PUBLIC DOMAIN. IN ORDER TO SUPPORT AND SUBSTANTIATE HI S CON TE NTION OF FUNCTIONAL DISSIMILARITY THE LEARNED COUNSEL FOR THE ASSESSEE HAS HEAVILY RELIED ON THE CONTENTS OF THE WEBSITE WW W. E INFOCHIP. COM. THE PRINT OUT OF RELE V ANT PO R TION OF WHICH IS PLACED ON RECORD BEFORE US. ON THE B A SIS OF TH E SAID CONTENT S H E HAS MADE AN ATTEMPT TO POINT OUT THAT M/S. E - INFOCHIPS BANGALORE LTD. IS FUNCTIONALLY DIFFERENT FORM TH E ASSESSEE COMPANY IN AS MUCH AS THE SAID COMPANY IS MAINLY INTO DEVELOPM E N T OF NEW PRODUCT S WHEREAS THE ASSESSEE COMPANY IS MAINLY PROVIDING SOFTWARE DEVELOPM E N T SERVICES. AFTER HAVING GONE THROUGH THE WEBSITE WW W . E INFOCHIP.COM. WE HOWEVER FIND THAT THE SAME IS IN RESPECT OF THE ENTIRE GROUP OF E - INFOCHIPS OF WHICH M/S. E - INFOCHIPS BANGALORE LTD. IS ONLY A PART. THE FUN C TIONAL PROFILE GIVEN ON TH E SAID WEBSITE THUS IS THAT OF T HE EN T IRE GROUP AND NOT JUST OF THE M/S. E - INFOCHIPS BANGALORE LTD. THE CONTENT OF THE SAID WEBSITE IN OUR OP INION TH EREFORE CANNOT B E RELIED UPON TO ASCERTAIN THE FUNCTIONAL PROFILE OF M/S. E - INFOCHIPS BANGALORE LTD. ESPECIALLY WHEN THE NATURE OF FUNCTIONS/SERVI C ES GIVEN THERE ARE MATERIALL Y DIFFERENT F R OM THE FUN C TION S /SERVICES STATED TO B E RENDERED BY M/S. E - INFOCHIPS BANGALORE LTD. IN ITS ANNUAL REPORT. EVEN THE DETAILS O F SERVICES STATED TO BE RENDERED BY M/S. E - INFOCHIPS BANGALORE LTD. AT DIFFERENT PL A CES IN ITS ANNUAL REPORT ARE I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 11 VERY SKETCHY AND IT IS VERY DIFFICULT TO ASCERTAIN FROM THE SAME EXACT NATU RE OF SERVICES RENDERED BY THE SAID ENTITY . 1 4 . IT IS ALSO PERTINENT TO NO T E HERE THAT A D ETAILED SUBMI S SION WAS MADE BY THE ASSESSEE BEFORE THE DRP IN SUPPORT OF I T S CA S E FOR EXCLUSION OF M/S. E - INFOCHIPS BANGALORE LTD. FROM THE LI S T OF FINAL COMPARABLES ON THE G R OUN D OF FUN C TION A L DIFFERENCES AS WEL L AS INSUFFICI E NT DATA/IN F O R M A TION AVAILABL E IN TH E PUBLIC DOMAIN. A PERUSAL OF TH E ORDER O F THE DRP HO WE VER SHOWS THAT NO FIN D IN G /OB S ERVA T ION HAS BEEN RECORDED BY TH E M ON TH E S E VITAL ASPECTS OF TH E MATTER. IT IS ALSO WORTHWHILE TO NOTE HERE THAT OUT OF THE 16 CO MPARA BLES FINALLY SELECTED PROFIT MARGIN(OP / OC) OF 15 ENTITIES TAKEN AS COMP AR ABLES IS IN THE RANGE OF 3 % TO 32 % WH E REAS THE PROFIT MARGIN OF M/S. E - INFOCHIPS BANGALORE LTD. IS 72.32%. THE PROFIT MARGIN SHOWN BY M/S. E - INFOCHIPS BANGALORE LTD. THUS IS ABNORMALLY HIGH AND ALTHOUGH THE SAID ENTITY CANNOT B E E X CLUDED F R OM THE LI S T OF FINAL COMPARABLES MERELY ON THE G R OUND O F HIGH OR ABNORMAL P R O F ITS AS HELD BY THE SP E CIAL B EN C H OF ITAT IN THE CA S E O F MAERSK GLOBAL SERVICE CENTRE (INDIA) PRIVATE LIMI T ED IN ITA N O .7466/MUM/12 DATED 7.3.201 4 IT SHOULD TRIGGER FURTHER INVESTIGATION IN ORD E R TO ESTABLISH W HE T HER IT CAN BE TAKEN AS COMPARABLE OR NOT. AS FURTHER HELD BY THE SP E CIAL BENCH IN TH E CASE OF MAERSK GLOBAL CENTRES (INDIA) P. LTD. SUCH INVESTIGATIONS S HOUL D BE TO ASCERTAIN AS TO WH E TH E R EARNING OF SUPER PROFITS REFLECT S NORMAL BU S INESS CONDITION OR WH E THER IT IS THE RESULT OF SOME ABNORMAL CON D IT I ON PREVAILING IN TH E REL E VANT YEAR. T HE P R O F I T MARGIN OF SUCH ENTITY IN THE IMM ED I A TELY P R ECEDING YEAR(S) MAY ALSO B E TAKEN INTO CONSIDERATION AND THE F AR ANALYSIS IN SUCH CA S ES MAY BE REVIEWED TO ENSURE THAT THE POTENTIAL CO M P A RABLE EARNING HIGHER PROFIT SATISFIE S THE COMPARABILITY CON D IT I ON. SIN C E THIS EXERCISE HAS NOT BE EN DONE EITHER BY TH E AO/TPO OR THE DRP IN THE PR E SEN T CA S E WE ARE O F THE VIEW THAT THE MATTER SHOU L D GO BACK TO I TA NO. 265/H YD/20 15 M/S.ELECTRONIC ARTS GAMES(INDIA) PVT. LTD. HYDERABAD 12 THE ASSESSING OFFICER/TPO FOR FRESH CON S I DE RATION. THIS IN OUR OPINION WILL ALSO TAKE CARE O F THE GRIEV ANCE O F THE ASSESSEE RELATING TO THE LACK OF SUF F ICIENT INFORMATION IN RESPECT OF M/S. E - INFOCHIPS BANGALORE LTD. AVAILABLE IN TH E PUBLIC DOMAIN IN AS MUCH AS THE TPO CAN OBTAIN SUCH IN F O R M A TION IN TH E FORM OF RELEVANT SCHEDULES OF THE PROFIT & LOSS ACCOUN T OF THE SAID ENTITY AS WELL AS THE SEGMENTAL DETAILS IF ANY DIRECTLY F R OM TH E SAID ENTITY. W E TH E R E FORE SET ASI D E THE IMPU G N E D ORDER OF THE ASSESSING OFFICER AS WELL AS THE DIRECTION GIVEN BY THE DRP ON THIS ISSUE AND RESTORE THE MAT T ER TO THE FIL E O F THE ASSESSING OFFICER/TPO FOR DECI D ING THE S AME AFRESH IN TH E LIGHT OF THE OBSERVATIONS ALREADY MADE BY US AFTER GIVING THE ASSESSEE PROPER AND SUFFI C I E N T OPPORTUNITY O F B EI N G H E ARD. GROUN D NO.2 OF TH E ASSESSEE S APPEAL IS AC C OR D INGLY ALLOWED FOR S TATI S TICAL PU R PO S ES. 1 5 . IN THE RESULT ASSESSEES APPEAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 29 TH APRIL 2015 SD/ - SD/ - ( SAKTIJIT DEY ) ( P.M.JAGTAP ) JUDICIAL MEMBER ACCOUNTANT MEMBER D T/ - 29 TH APRIL 201 5 COPY FORWARDED TO: 1. M/S. ELECTRONIC ARTS GAMES (INDIA) PVT. LTD. 7 TH FLOOR VEGA BLOCK ASCENDAS IT PARK MADHAPUR HYDERABAD 500 081. 2 . ASSTT. COMMISSIONER OF INCOME - TAX CIRCLE 17(1) HYDERABAD 3. 4. DISPUTE RESOLUTION PANEL HYDERABAD DIRECTOR GENERAL OF INCOME - TAX INTERNATIONAL TAXATION HYDERABAD 500 004. 5. DEPARTMENTAL REPRESENTATIVE ITAT HYDERABAD. B.V.S