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

ITA 380 AND CO 31 OF 2015 ELECTRONIC ARTS GAMES IND IA P LTD HYDERABAD PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH HYDERABAD BEFORE SMT. P. MADHAVI DEVI JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN ACCOUNTANT MEMBER ITA NO.380/HYD/2015 (ASSESSMENT YEAR: 2010-11) ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 17(1) HYDERABAD VS M/S. ELECTRONIC ARTS GAMES INDIA PVT LTD HYDERABAD PAN: AABCJ 4279 Q C.O. NO.31/HYD/2015 (ARISING OUT OF ITA NO.380/HYD/2015) (ASSESSMENT YEAR: 2010-11) M/S. ELECTRONIC ARTS GAMES INDIA PVT LTD HYDERABAD PAN: AABCJ 4279 Q VS ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 17(1) HYDERABAD FOR REVENUE: SHRI A. SRINIVAS DR FOR ASSESSEE: SHRI AJIT KUMAR JAIN O R D E R PER SMT. P. MADHAVI DEVI J.M. THIS IS REVENUES APPEAL FOR THE A.Y 2010-11 AND TH E CROSS OBJECTION IS OF THE ASSESSEE. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY ENGAGED IN THE BUSINESS OF EXPORT AND SALE OF DEVEL OPED SOFTWARE FILED ITS RETURN OF INCOME FOR THE A.Y 2010-11 ON 15 .10.2010 ADMITTING TOTAL INCOME OF RS.35 89 206 UNDER THE NO RMAL DATE OF HEARING : 01.08.2016 DATE OF PRONOUNCEMENT : 30.09.2016 ITA 380 AND CO 31 OF 2015 ELECTRONIC ARTS GAMES IND IA P LTD HYDERABAD PAGE 2 OF 7 PROVISIONS AND AN AMOUNT OF RS.76 96 515 U/S 115JB OF THE ACT. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT THE AO OBSERVED THAT THE ASSESSEE HAS ENTE RED INTO INTERNATIONAL TRANSACTION WITH ITS AE. HE THEREFORE REFERRED THE DETERMINATION OF THE ALP OF THE TRANSACTION TO THE TPO U/S 92CA OF THE ACT. THE TPO VIDE ORDER DATED 24.09.2013 C OMPUTED THE ALP ADJUSTMENT AND ACCORDINGLY PROPOSED THE ADJUSTM ENT OF RS.3 83 08 894. IN ACCORDANCE WITH THE SAID ORDER THE DRAFT ASSESSMENT ORDER WAS PASSED AGAINST WHICH THE ASSES SEE PREFERRED ITS OBJECTIONS BEFORE THE DRP. THE DRP U /S 144C OF THE ACT HAS GRANTED PARTIAL RELIEF TO THE ASSESSEE. AG AINST THE RELIEF GRANTED BY THE DRP THE REVENUE IS IN APPEAL BEFORE US WHILE THE ASSESSEE IS IN CROSS OBJECTION SUPPORTING THE ORDER OF THE DRP THOUGH ON DIFFERENT GROUNDS. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER: 1. THE ORDER OF HONOURABLE DRP IS ERRONEOUS BOTH IN LAW AND ON THE FACTS OF THE CASE. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DRP IS JUSTIFIED IN REJECTING THE COMPARABLE COMPANIES M/S INFOSYS TECHNOLOGIES LTD AND M/S L& T INFOTECH LTD ON THE GROUND OF EXCEPTIONALLY LARGE SCALE OF OPERATIONS AND THEREBY IGNORING THE FACT THAT HIGH OR LOW TURNOVER DO NOT INFLUENCE THE MARGINS OF THE COMPARABLES? 3. WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE DRP IS CORRECT IN LAW IN HOLDING THAT THE TELECOMMUNICATION CHARGES AND OTHER EXPENDITURE SHOULD BE EXCLUDED FROM THE 'TOTAL TURNOVER' FOR THE PURPOSE OF COMPUTATION OF ALLOWABLE DEDUCTION UNDER SECTION 10 A OF THE INCOME TAX ACT 1961 WHEN THERE IS NO SUCH SPECIFIC PROVISION TO REDUCE THE 'TOTAL TURNOVER'? 4. WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE DRP IS CORRECT IN LAW IN HOLDING THAT ITA 380 AND CO 31 OF 2015 ELECTRONIC ARTS GAMES IND IA P LTD HYDERABAD PAGE 3 OF 7 EXPENDITURE TOWARDS STOCK-BASED COMPENSATION (ESOPS) IS REVENUE EXPENDITURE WHEN THE JURISDICTIONAL ITAT IN THE CASE OF MEDHA SERVO DRIVES PRIVATE LIMITED VERSUS ACIT UPHELD THE ADDITION ON ACCOUNT OF ESOPS AS BEING CAPITAL IN NATURE. 3. THE CROSS OBJECTION OF THE ASSESSEE ARE AS UNDER : THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE RESPONDENT CROSS-OBJECTS THE GROUNDS OF APPEAL FILED BY THE APPELLANT BEFORE APPELLATE TRIBUNAL FOR FOLLOWING REASONS: I. THE HON'BLE DRP/LEARNED AO OUGHT TO HAVE REJECTED COMPANIES NAMELY INFOSYS TECHNOLOGY LTD AND L&T INFOTECH LTD AS THEY WERE FUNCTIONALLY NOT COMPARABLE. II. III. THE HON'BLE DRP/LEARNED AO OUGHT TO HAVE CONSIDERED THE FACT THAT INTERNET AND TELEPHONE CHARGES DO NOT FORM PART OF THE EXPORT TURNOVER AND THEREBY SHOULD NOT BE REDUCED FROM THE EXPORT TURNOVER. 4. AS REGARDS GROUND NO.2 OF THE REVENUES APPEAL I S CONCERNED IT IS THE CASE OF THE REVENUE THAT THE D RP OUGHT NOT TO HAVE DIRECTED EXCLUSION OF THESE TWO COMPANIES ON T HE BASIS OF THE TURNOVER. THE ASSESSEE HAS ALSO RAISED CROSS OBJECT ION NO.1 THAT THE DRP OUGHT TO HAVE REJECTED THESE TWO COMPANIES ON THE GROUND OF FUNCTIONAL DISSIMILARITIES. 5. HAVING HEARD AND HAVING GONE THROUGH THE MATERIA L ON RECORD WE FIND THAT THE COMPARABILITY OF INFOSYS T ECHNOLOGIES LTD HAD ARISEN IN THE CASE OF AGNITY INDIA TECHNOLOGIES (P) LTD BEFORE THE HON'BLE DELHI HIGH COURT FOR THE A.Y 2006-07 AND THE HON'BLE HIGH COURT TAKING NOTE OF THE FUNCTIONAL DISSIMILA RITIES AS WELL AS ITA 380 AND CO 31 OF 2015 ELECTRONIC ARTS GAMES IND IA P LTD HYDERABAD PAGE 4 OF 7 EXCEPTIONALLY HIGH TURNOVER HAS DIRECTED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABLES. WE FIND THAT EVEN FOR THE RELEVANT A.Y THERE IS NO CHANGE IN THE ACTIVITIES OF INFOSYS TECHNOLOGIES LTD AND THAT IT IS CARRYING ON DIVERS IFIED ACTIVITIES OF BOTH THE SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT AND HAS HUGE TURNOVER AS COMPARED TO THE ASSESSEE. FURTHER THIS TRIBUNAL IN THE CASE OF VIRTUSA INDIA PRIVATE LIMI TED VS. DCIT IN ITA NO.409/HYD/2015 FOR THE VERY SAME A.Y 2010-11 HAS ALSO CONSIDERED THE COMPARABILITY OF THIS COMPANY WITH T HE ASSESSEE THEREIN WHICH HAS A SIMILAR ACTIVITY AS THE ASSESSE E BEFORE US AND AFTER TAKING INTO CONSIDERATION THE FUNCTIONAL DISS IMILARITIES AS WELL AS TURNOVER HAS DIRECTED THE AO TO EXCLUDE TH E SAME FROM THE LIST OF COMPARABLES. 6. AS REGARDS THE COMPARABILITY OF L&T INFOTECH LTD THIS TRIBUNAL IN THE ABOVE CASE OF VIRTUSA INDIA PVT. LT D HAS OBSERVED THAT THE L&T INFOTECH LTD HAS NO SEGMENTAL DATA AND THEREFORE WAS REJECTED BY THE TPO IN EARLIER YEARS ON THIS GR OUND. THEREFORE THE TRIBUNAL HAS DIRECTED THE EXCLUSION OF L&T INFO TECH LTD ALSO FROM THE FINAL LIST OF COMPARABLES IN THE CASE OF V IRTUSA 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 DIREC TIONS OF THE DRP TO EXCLUDE INFOSYS TECHNOLOGY LTD. L & T I NFOTECH LTD. AND TATA ELXSI LTD. FROM THE FINAL LIST OF C OMPARABLES WE FIND THAT THE DRP HAS DIRECTED THAT THESE COMPAN IES TO BE EXCLUDED ON THE GROUND OF FUNCTIONAL DISSIMILARITY. THE ASSESSEE HAS RELIED UPON THE DECISION OF THIS TRIBU NAL IN ASSESSEE'S OWN CASE FOR THE A.Y. 2007-08 WHEREIN TH E 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 ITA 380 AND CO 31 OF 2015 ELECTRONIC ARTS GAMES IND IA P LTD HYDERABAD PAGE 5 OF 7 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 ALON E. AS REGARDS TATA ELXSI LTD. THE TRIBUNAL HAS DIRECTED THAT THIS COMPANY BE EXCLUDED ON FUNCTIONAL DISSIMILARITY. 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 O N RECORD TO SHOW THAT THE FACTS IN THIS YEAR ARE IN ANY WAY DIF FERENT 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 T HE REVENUE'S APPEAL IS ACCORDINGLY DISMISSED 7. AS FACTS AND CIRCUMSTANCES ARE SIMILAR IN THE CA SE BEFORE US WE ARE SATISFIED THAT THERE IS FUNCTIONA L DISSIMILARITY BETWEEN THE ASSESSEE AND INFOSYS TECHNOLOGIES LTD I NCLUDING THE HIGH TURNOVER AND THEREFORE THE SAID COMPANY HAS T O BE EXCLUDED. SIMILARLY IN THE CASE OF L&T INFOTECH T HIS TRIBUNAL HAS ALREADY CONSIDERED THAT FOR THE VERY SAME A.Y THERE IS NO SEGMENTAL DATA AVAILABLE AND HENCE IS NOT COMPARABL E. THEREFORE RESPECTFULLY FOLLOWING THE SAME WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE DRP. THUS GROUND O F APPEAL NO.2 OF THE REVENUE IS DISMISSED AND CROSS OBJECTION NO. 1 OF THE ASSESSEE IS ALLOWED. 8. AS REGARDS GROUND NO.3 WE FIND THAT THE DRP HAS DIRECTED FOR EXCLUSION OF TELECOMMUNICATION CHARGES AND OTHER EXPENDITURE BOTH FROM THE EXPORT TURNOVER AS WELL A S FROM THE TOTAL TURNOVER IN ACCORDANCE WITH THE DECISION OF T HE SPECIAL BENCH OF THE TRIBUNAL AT CHENNAI IN THE CASE OF INC OME TAX OFFICER VS.SAK SOFT LTD REPORTED IN 313 ITR 353 (A T). WE FIND THAT THIS ISSUE IS ALSO COVERED BY THE DECISION OF THE H ON'BLE KARNATAKA ITA 380 AND CO 31 OF 2015 ELECTRONIC ARTS GAMES IND IA P LTD HYDERABAD PAGE 6 OF 7 HIGH COURT IN THE CASE OF TATA ELXSI LTD. 349 ITR 9 8 (KARN.) AND THEREFORE WE SEE NO REASON TO INTERFERE WITH THE S AME. THE REVENUES GROUND OF APPEAL NO.2 IS THEREFORE REJEC TED. 9. CROSS OBJECTION NO.2 OF THE ASSESSEE IS THAT THE ABOVE TELECOMMUNICATION AND INTERNET CHARGES SHOULD NOT B E EXCLUDED FROM THE EXPORT TURNOVER ITSELF. HOWEVER SINCE WE HAVE DIRECTED THAT INTERNET AND TELEPHONE CHARGES ARE TO BE EXCLU DED FROM BOTH THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER THER E IS NO PREJUDICE CAUSED TO THE ASSESSEE. THEREFORE THE CROSS OBJECT ION IS ALSO REJECTED. 10. AS REGARDS GROUND NO.4 WITH REGARD TO THE CLAIM OF THE ASSESSEE THAT THE EXPENDITURE INCURRED TOWARDS EMPL OYEES STOCK (ESOPS) IS REVENUE EXPENDITURE WE FIND THAT THIS I SSUE IS ALSO COVERED BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL AT BANGALORE IN THE CASE OF BIOCON LTD (35 TAXMANN.COM 335 (BANGALORE) WHICH HAS BEEN TAKEN NOTE OF BY THE DRP IN DIRECTING THE AO TO ALLOW THE SAME AS REVENUE EXPENDITURE. TH EREFORE WE SEE NO REASON TO INTERFERE WITH THE SAME AND THE GR OUND OF APPEAL NO.4 IS REJECTED. 11. IN THE RESULT REVENUES APPEAL IS DISMISSED AN D THE ASSESSEES CROSS OBJECTION IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH SEPTEMBER 2016. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD DATED SEPTEMBER 2016. ITA 380 AND CO 31 OF 2015 ELECTRONIC ARTS GAMES IND IA P LTD HYDERABAD PAGE 7 OF 7 VINODAN/SPS COPY TO: 1 ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 17(1) 6 TH FLOOR B BLOCK IT TOWERS AC GUARDS HYDERABAD 2 M/S. ELECTRONIC ARTS GAMES (INDIA) PVT. LTD VEGA BUILDING SOFTWARE UNIT LAYOUT HITECHCITY MADHAPUR HYDERAB AD 500081 3 DRP 2 ND FLOOR IT TOWERS 10-2-3 AC GUARDS HYDERABAD 50000 4 4 DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION I T TOWERS 10-2-3 AC GUARDS HYDERABAD 500004 5 THE DR ITAT HYDERABAD 6 GUARD FILE BY ORDER