Gameloft Software Private Limited, Hyd, Secunderabad v. ITO, Ward-2(2), Hyd, Hyderabad

ITA 439/HYD/2015 | 2010-2011
Pronouncement Date: 28-10-2016 | Result: Partly Allowed

Appeal Details

RSA Number 43922514 RSA 2015
Assessee PAN AACCG4168L
Bench Hyderabad
Appeal Number ITA 439/HYD/2015
Duration Of Justice 1 year(s) 6 month(s) 7 day(s)
Appellant Gameloft Software Private Limited, Hyd, Secunderabad
Respondent ITO, Ward-2(2), Hyd, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 28-10-2016
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 28-10-2016
Date Of Final Hearing 22-08-2016
Next Hearing Date 22-08-2016
Assessment Year 2010-2011
Appeal Filed On 20-04-2015
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A HYDERABAD BEFORE SHRI D. MANMOHAN VICE PRESIDENT AND SHRI S. RIFAUR RAHMAN ACCOUNTANT MEMBER ITA NO. 1848/HYD/2012 ASSESSMENT YEAR: 2008-09 GAMELOFT SOFTWARE PVT. LTD. HYDERABAD. PAN AACCG4168L VS. DY. COMMISSIONER OF INCOME- TAX CIRCLE 2(3) HYDERABAD. (APPELLANT) (RESPONDENT) ITA NO. 439/HYD/2015 ASSESSMENT YEAR: 2010-11 GAMELOFT SOFTWARE PVT. LTD. HYDERABAD. PAN AACCG4168L VS. INCOME-TAX OFFICER CIRCLE 2(2) HYDERABAD. (APPELLANT) (RESPONDENT) ITA NO. 226/HYD/2015 ASSESSMENT YEAR: 2010-11 ASST. COMMISSIONER OF INCOME- TAX CIRCLE 2(2) HYDERABAD. VS. GAMELOFT SOFTWARE PVT. LTD. HYDERABAD. PAN AACCG4168L (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI M.V. ANIL KUMAR REVENUE BY : SHRI SIBENDU MAHARANA DATE OF HEARING 22-08-2016 DATE OF PRONOUNCEMENT 28 -10-2016 O R D E R PER S. RIFAUR RAHMAN A.M.: THESE APPEALS ARE PREFERRED BY THE ASSESSEE AS WEL L AS THE REVENUE AGAINST THE ORDERS PASSED U/S 143(3) R.W.S. 92CA 2 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. R.W.S.144C(13) OF THE INCOME TAX ACT 1961 (IN SHOR T ACT) DATED RELATING TO AYS 2008-09 AND 2010-11. ITA NO. 1848/HYD/2012 BY THE ASSESSEE FOR AY 2008-0 9 2. BRIEF FACTS OF THE CASE ARE THE ASSESSEE GAME LOFT SOFTWARE PVT. LTD. IS A FULLY OWNED SUBSIDIARY OF GAMELOFT SA FRANCE. THE COMPANY PROVIDES SOFTWARE DEVELOPMENT SERVICE TO IT S AE. GAMELOFT IS A LEADING INTERNATIONAL PUBLISHER AND DEVELOPER OF VIDEO GAMES FOR MOBILE PHONES AND CONSOLES. THE PARENT COMPANY WAS ESTABLISHED IN 1999 AND IS ONE OF THE TOP INNOVATORS IN ITS FIELD. THE AE CREATES GAMES FOR MOBILE HANDSETS AND IS ANTICIPATED TO CRE ATE TOTAL GAMES IN EXCESS OF RS. 4 BILLIONS BY THE YEAR 2012. GAMELOFT GAMES ARE ALSO AVAILABLE TO PLAYERS ON WII WIWARE AND DS MICROSOF TS EX-BOX LIVE ARCADE APPLES I-POD I-TOUCH I-PHONES AND PCS. 2.1 FOR THE AY 2008-09 THE ASSESSEE FILED ITS RETU RN OF INCOME ON 29/09/2008 DECLARING TOTAL LOSS OF RS. 1 89 27 920/ -. THE AO VIDE HIS DRAFT ORDER DETERMINED THE TOTAL INCOME OF THE ASSE SSEE AT RS. 6 50 28 190/- IN ACCORDANCE WITH THE TRANSFER PRICI NG OFFICER (TPO)S ORDER PASSED U/S 92CA(3) OF THE ACT. 2.2 DURING THE RELEVANT AY AS PER THE 3CEB REPORT/ TP DOCUMENT THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTION S FOR SOFTWARE DEVELOPMENT SERVICES FOR A SUM OF RS. 15 98 76 731/ -. 2.3 THE TPO DETERMINED THE ARMS LENGTH PRICE WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS OF SOFTWARE DEVELOPMENT SERVICES AND MADE AN ADJUSTMENT OF RS. 8 36 90 249/-. THE TAX PAYER F URNISHED THE TP STUDY COMPILED BY M/S ANANDAM & CO. CAS AND THE TP O REJECTED THE TP DOCUMENTATION SUBMITTED BY THE TAX PAYER AND COM PUTED THE ARMS LENGTH PRICE OF SOFTWARE DEVELOPMENT SERVICES BY SELECTING 19 COMPARABLES. 3 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. 2.4 AS PER THE ANNUAL REPORT THE FINANCIALS OF THE ASSESSEE FOR THIS FY 2007-08 WERE AS UNDER: DESCRIPTION AMOUNT (RS.) OPERATING REVENUE 15 98 76 731 OPERATING COST 19 92 20 498 OPERATING PROFIT (PBIT) (-)3 93 43 761 OP TO COST RATIO (-) 19.74% OPERATING REVENUE EXCLUDING OTHER INCOMES RS. 7 63 175/- AND DOMESTIC REVENUE RS. 1 73 22 022/-. OPERATING COST EXCLUDING PRELIMINARY EXPENSES RS. 4 65 928/-. 2.5 FOR DETERMINATION OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS WITH ITS AE THE ASSESSEE ADOPTED TRAN SACTION NET MARGIN METHOD (TNMM) AS THE MAM FOR SOFTWARE DEVE LOPMENT SERVICES. THE TPO DID NOT DISPUTE THE METHOD AND CO NSIDERED IT TO BE THE MOST APPROPRIATE METHOD. THE PROFIT LEVEL INDIC ATOR OPERATING PROFIT TO COST RATIO OF THE ASSESSEE WAS (-) 19.74 %. THE TP STUDY BASED ON 8 COMPARABLES YIELDED AN AVERAGE PROFIT MA RGIN OF (-) 5.93% ON COST. THE TAXPAYER HAD TAKEN EBIT/SALES AS THE P LI AND CALCULATED THE SAME AT (-) 5.72%. HENCE THE MARGIN EARNED WAS CONSIDERED AT ARMS LENGTH BY THE ASSESSEE. BUT THE TPO CARRIED OUT A FRESH SEARCH OF COMPARABLES 19 COMPARABLES WERE CHOSEN AND ARI THMETIC MEAN PLI OF THE COMPARABLES WAS DETERMINED AT 26.2%. WOR KING CAPITAL ADJUSTMENT OF 3.94% WAS ALLOWED BY THE TPO WHICH RE DUCED THE PLI TO 22.66%. ALL THESE ACTIONS LED TO AN ADJUSTMENT O F RS. 8 36 90 249/- . 2.6 THE FINAL COMPARABLES SELECTED BY TRANSFER PRIC ING OFFICER (TPO) WITH OP TO OC ARE AS UNDER: SL.NO. NAME OF THE COMPANY OP TO TOTAL COST 1. AVANI CINCOM TECHNOLOGIES 21.65% 2. BODHTREE CONSULTING LTD. 19.14% 3. CELESTIAL BIOLABS 87.94% 4. E-ZEST SOLUTIONS LTD. 28.95% 4 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. 5. FLEXTRONICS (NOW KNOWN AS ARICENT TECHNOLOGIES (HOLDINGS) LTD.) 8.07% 6. IGATE GLOBAL SOLUTIONS LTD. 13.90% 7. INFOSYS 40.41% 8. KALS INFORMATION SYSTEMS LTD. (SEG.) 41.94% 9. LGS GLOBAL LTD. 26.64% 10. MINDTREE CONSULTING LTD. (SEG.) 17.51% 11. PERSISTENT SYSTEMS LTD. 27.23% 12. QUINTEGRA SOLUTIONS LTD. 21.74% 13. R. SYSTEMS INTERNATIONAL (SEG.) 15.30% 14. R.S. SOFTWARE (INDIA) LTD. 6.46% 15. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 13.44% 16. SOFSOL INDIA LTD. 42.15% 17. TATA ELXSI (SEG.) 18.97% 18. THIRDWARE SOLUTION LTD. 18.01% 19. WIPRO LTD. (SEG.) 28.38% 26.20% 2.9 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 ARITHMETIC MEAN OF PLI AS ARRIVED AT BY THE TPO 26.20% LESS: WCA 3.94% ARMS LENGTH MARGIN AS ARRIVED AT BY THE TPO 22.26% OPERATION COST (OC) 19 92 20 498/- ADJUSTED ARMS LENGTH MARGIN (%) (AALM) 22.26% OF THE OPERATING COST ARMS LENGTH PRICE (AL) @ 122.26.09% OF OPERATING COST 24 35 66 980 5 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. THE ABOVE SHORTFALL OF RS. 8 36 90 249/- WAS TREATE D AS TRANSFER PRICING ADJUSTMENT U/S 92CA OF THE IT ACT BY TPO. 2.10 THE TP ADJUSTMENT WAS ARRIVED AS UNDER: ARMS LENGTH PRICE OF AE SALES (ALP) @ 122.26% OF OPERATING COST RS. 24 35 66 980/- PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS. 15 98 76 731/- SHORTFALL BEING ADJUSTMENT U/S 92CA RS. 8 36 90 249/- 2.11 ACCORDINGLY THE TPO PASSED AN ORDER U/S 92CA (3) OF THE ACT ON 28/10/2011 RECOMMENDED ADJUSTMENT OF RS. 8 36 9 0 249/-. THE SAME WAS INCORPORATED BY THE AO IN THE DRAFT ASSESS MENT ORDER. 3. AGGRIEVED THE ASSESSEE PREFERRED APPEAL BEFORE T HE DRP. 4. DRP HAS GIVEN PARTIAL RELIEF TO THE ASSESSEE AS UNDER: 4.1 THE DRP HAS ELIMINATED THE COMPANY CELESTIAL BI O LABS AS COMPARABLE AFTER CONSIDERING THE SUBMISSIONS OF TH E ASSESSEE AND DIRECTED THE AO TO ADOPT 25.78% AS NET MARGIN OF SO FSOL INDIA LTD. INSTEAD OF 42.15% AS TAKEN BY THE TPO. 4.2 CONSIDERING THE ABOVE FINDINGS OF DRP THE AO H AS REDUCED THE ADJUSTMENT U/S 92CA TO RS. 5 38 96 113/-. 4.3 THE ASSESSEE HAS ALSO RAISED THE FOLLOWING OBJE CTIONS BEFORE THE DRP: 1. TPO HAS CHANGED THE BASE FOR COMPUTATION OF MAR GINS FROM SALES TO OPERATING COST AND CONTENDED THAT IT ADVE RSELY AFFECTS THE TAX PAYER. 2. ADJUSTMENT SHOULD BE GIVEN FOR THE FOREIGN EXCH ANGE LOSS AND ALSO FOR RENT AND ELECTRICITY. 3. THERE SHOULD BE AN ADJUSTMENT FOR THE NUMBER OF YEARS THE TAXPAYER IS IN EXISTENCE. 4.4 THE DRP REJECTED THE ABOVE OBJECTIONS OF THE AS SESSEE AND CONFIRMED THE ACTION OF TPO IN THIS REGARD. 6 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. 5. AGGRIEVED WITH THE ABOVE ORDER ASSESSEE IS IN A PPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. YOUR APPELLANT SUBMITS THAT THE TPO AND DRP ERRE D IN LAW ON FACTS OF THE CASE IN NOT ACCEPTING THE FILTERS ADOP TED BY YOUR APPELLANT. 2. YOUR APPELLANT SUBMITS THAT THE TPO HAD REJECTED THE TRANSFER PRICING STUDY OF THE APPELLANT ON THE GROUND THAT T HE APPELLANT HAS NOT APPLIED APPROPRIATE FILTERS. 3. YOUR APPELLANT HAS IN FACT APPLIED AN UPPER CAP OF RS 25 CRORES ON THE TURNOVER FILTER WHICH THE TPO HAS NOT APPLIED AT ALL. HENCE THE TPO HAS ERRED IN NOT ADOPTING AN UPPER CA P ON TURNOVER FILTER IN THE COMPARABILITY ANALYSIS AND T HE DRP OUGHT TO HAVE RESTRICTED THE UPPER LIMIT ON TURNOVER FILTER TO HAVE COMPARABLES WITHIN THE LIMITED MAGNITUDE THEREBY NO T COMPARING YOUR APPELLANT WITH GIANTS LIKE INFOSYS AND WIPRO A ND OTHERS. THEREBY THE FILTERS ADOPTED ARE WRONG IN LAW. 4. YOUR APPELLANT SUBMITS THAT THE TAX PAYER STRONG LY REFUTES THE TPO'S CONTENTION THAT THERE IS NO LINKAGE OR CORREL ATION BETWEEN THE TURNOVER (SCALE) AND THE OPERATING MARGIN IN A SOFTWARE INDUSTRY. THE TPO HAS REJECTED THE UPPER LIMIT OF R S 25 CRORES ON THE GROUND THAT THERE IS NO LINKAGE OR CORRELATION BETWEEN THE TURNOVER AND THE OPERATING MARGIN IN A SOFTWARE IND USTRY. THE TAX PAYER SUBMITS THAT THIS IS NOT CORRECT BECAUSE THE SIZE OF THE COMPARABLE IS AN IMPORTANT FACTOR FOR COMPARISON. 5. YOUR APPELLANT SUBMITS THAT THE TPO'S VIEW POINT THAT THERE IS NO CORRELATION BETWEEN THE YEARS IN EXISTENCE OF TH E COMPANY AND ITS PROFIT MARGIN IS NOT RELEVANT IS NOT CORREC T. GAMING INDUSTRY IS A VERY VOLATILE INDUSTRY AND IT TAKES S OME TIME FOR ANY COMPANY TO ENTER INTO THE MARKET WITH ITS PRODUCTS AND SERVICES AND BREAKEVEN. THEREFORE ONLY GAMING COMPANY HAS TO BE COMPARED ONLY WITH ANOTHER GAMING COMPANY. THE AO H AS ERRED IN MAKING AN ADDITION OF RS 3 52 34 052/- TOWARDS T HE ADDITION IN RESPECT OF SEC 92 CA. 6. YOUR APPELLANT SUBMITS THAT THE TPO HAD SELECTED COMPARABLES WHICH HAVE A LONG STANDING AND HAVING L OW RENTAL AND OTHER OPERATIONAL EXPENDITURE WHEN COMPARED TO YOUR APPELLANT WHICH ARE ON HIGHER SIDE BEING THE INITIA L YEAR OF OPERATIONS. IT IS ALSO SUBMITTED THAT YOUR APPELLANT IS INTO A HIGHLY TECHNICAL ORIENTED DEVELOPMENT OF SOFTWARE USED IN MOBILES ON LY UNLIKE THE OTHER GENERAL SOFTWARE DEVELOPERS. THE APPELLANT HA S SPENT MORE ON RENT DURING THE CURRENT FINANCIAL YEAR IN ANTICI PATION OF MORE 7 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. BUSINESS IN THE ENSUING YEAR. BOTH THE TPO AND DRP HAD NOT GIVEN APPROPRIATE CONSIDERATION TO UNDER UTILIZATIO N OF INFRASTRUCTURE BY THE APPELLANT. THEREFORE THE TPO AND DRP OUGHT TO HAVE ACCEPTED THE TP STUDY SUBMITTED BY YO UR APPELLANT. 7. YOUR APPELLANT SUBMITS THAT IN ABSENCE OF ANY OT HER SIMILAR COMPARABLE IN THE DATABASE THE TPO AND THE DRP OUG HT TO HAVE CONSIDERED INTERNATIONAL COMPARABLES AS SUBMITTED B Y YOUR APPELLANT DURING THE PROCEEDINGS. YOUR APPELLANT SU BMITS THAT IN THE INTERNATIONAL SCENARIO ESPECIALLY IN GAMING SOF TWARE INDUSTRY THE MARGINS RANGE BETWEEN 5 TO 7%. IN VIEW OF THIS THE MARGINS ARRIVED BY THE TPO AND DRP ARE ON HIGHER SIDE. 8. YOUR APPELLANT SUBMITS THAT ON INCREASING THE MA RGINS OF YOUR APPELLANT WOULD RESULT IN TAXING THE SAME TWICE ONC E IN THE HANDS OF YOUR APPELLANT AND AGAIN IN THE HANDS OF THE ASS OCIATED ENTERPRISE IN THE OTHER JURISDICTION THUS DEFEATING THE OBJECTIVE OF DTAA AND OTHER INTERNATIONAL CONVENTIONS ENTERED IN TO BY VARIOUS COUNTRIES ONLY TO AVOID DOUBLE TAXATION. HENCE THE ADJUSTMENTS UPHELD BY DRP ARE AGAINST THE SPIRIT OF INTERNATION AL LAW. 9. YOUR APPELLANT OBJECTS TO SELECTION OF COMPARABL ES BASED ON THE INFORMATION GATHERED UNDER SECTION 133(6) AS IT DEFEATS THE VERY PURPOSE OF YOUR APPELLANT CONDUCTING THE TP ST UDY AS YOUR APPELLANT DOES NOT HAVE ACCESS TO ANY DATABASE OTHE R THAN IN THE PUBLIC DOMAIN. HENCE THE TP STUDY CONDUCTED BY YOUR APPELLANT CANNOT BE DEMOLISHED ON THIS FRONT. 10. YOUR APPELLANT ALTERNATIVELY SUBMITS THAT DURIN G THE PROCEEDINGS BEFORE THE TPO THEY HAD SUBMITTED WITH OUT PREJUDICE TO THE OBJECTIONS RAISED BEFORE TPO ACCE PTABLE COMPARABLES TO THE APPELLANT BASED ON THE INFORMAT ION FURNISHED BY THE TPO APPLYING FILTERS TO MAXIMUM TURNOVER AN D OTHER FILTERS WHICH THE TPO OUGHT TO HAVE ACCEPTED. 6. GROUND NOS. 1 & 2 ARE GENERAL IN NATURE. 7. AS REGARDS GROUND NOS. 3 & 4 REGARDING HIGH TURN OVER FILTERS THE LD. AR SUBMITTED THAT THE COMPARABLES HAVING A TURNOVER OF RS. 100 CRORES OR MORE MAY BE EXCLUDED. HE SUBMITTED TH AT THE FOLLOWING COMPARABLES SELECTED BY THE TPO MAY BE EXCLUDED: NAME OF THE COMPANY PLI (OP/OC IN %) TURNOVER (RS. IN CR.) FLEXTRONICS SOFTWARE SYSTEMS LTD. 8.07 956.20 IGATE GLOBAL SOLUTIONS LTD. 13.9 786.90 INFOSYS TECHNOLOGIES LTD. 40.41 15 677.00 8 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. LGS GLOBAL LTD. 26.64 136.52 MINDTREE LTD. 17.51 579.01 PERSISTENT SYSTEMS LTD. 27.23 405.49 R SYSTEMS INTERNATIONAL LTD. 15.3 144.56 R. SOFTWARE (INDIA) LTD. 6.46 100.71 SASKEN COMMUNICATION TECHNOLOGIES LTD. 13.44 354.12 TATA ELXSI LTD. 18.97 342.85 WIPRO LTD. 28.38 11 258.00 7.1 LD. AR SUBMITTED THAT THE PLI OF THE REMAINING COMPARABLES AFTER EXCLUSION OF THE ABOVE 11 COMPARABLES ON THE BASIS OF APPLICATION OF AN UPPER LIMIT ON TURNOVER WORKS OUT TO 19.81% AS UNDER: S.NO. NAME OF THE FINAL COMPARABLES PLI (AFTER WORKING CAPITAL ADJ.) EXCLUSION OF COMPARABLES WITH OPERATING REVENUE MORE THAN RS. 100 CRORES 1 AVANI CIMCON TECHNOLOGIES LTD. 21.36 21.36 2 BODHTREE CONSULTING LTD. 17.04 17.04 3 E-ZEST SOLUTIONS LTD. 25.91 25.91 4 FLEXTRONICS SOFTWARE SYSTEMS LTD. (ARICENT) (SEG.) 4.37 - 5 IGATE GLOBAL SOLUTIONS LTD. 9.97 - 6 INFOSYS TECHNOLOGIES LTD. 35.21 - 7 KALS INFORMATION SYSTEMS LTD. (SEG.) 24.89 24.89 8 LGS GLOBAL LTD. 22.70 - 9 MINDTREE CONSULTING LTD. (SEG.) 14.00 - 10 PERSISTENT SYSTEMS LTD. 24.40 - 11 QUINTEGRA SOLUTIONS LTD. 16.26 16.26 12 R SYSTEMS INTERNATIONAL LTD. (SEG.) 11.16 - 13 R S SOFTWARE (INDIA) LTD. 5.42 - 14 SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 10.45 - 15 SOFTSOL INDIA LTD. 19.89 19.89 16 TATA ELXSI LTD. (SEG.) 16.05 - 17 THIRDWARE SOLUTION LTD. 13.32 13.32 18 WIPRO LTD. (SEG.) 26.34 - 9 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. ARITHMETIC MEAN OF PLI 17.71 19.81 7.2 LD. AR SUBMITTED THAT ALTERNATIVELY BASED ON THE DECISION OF THE HYDERABAD ITAT IN THE CASE OF HYUNDAI MOTORS IN DIA ENGINEERING PVT LTD 44 TAXMANN.COM 34 (HYDTRIB) WHERE IN THE TP O AS WELL AS THE DRP HAVE ACCEPTED THAT THE RANGE OF THE TURNOVER FI LTER SHALL BE 1 CRORE TO 150 CRORE WHERE THE TESTED PARTY TURNOVER IS AROUND 15 TO 16 CRORES. THE FILTER SELECTED BY THE TPO AND APPROVED BY THE DRP WAS CONFIRMED BY THE JURISDICTIONAL TRIBUNAL. HENCE THE SAME MAY BE APPLIED TO YOUR APPELLANT CASE. THE COORDINATE BENC H IN THE SAID CASE HELD AS UNDER: 4. THERE IS NO DISPUTE WITH MANY FILTERS EXCEPT WI TH REFERENCE TO THE FILTERS LIKE THE TURNOVER FILTER AND RPT FILTER AND EXPORT SALES FILTER. THE TPO EXCLUDED THE COMPANIES WHOSE RECEIP TS ARE LESS THAN RS. 1 CRORE AND ABOVE RS.150 CRORES WHEREAS ASSESSEE WANTS THE COMPANIES WITH LESS THAN RS. 1 CRORE ALSO TO BE INCLUDED. EVEN THOUGH THIS OBJECTION WAS RAISED BEF ORE THE DRP THERE IS NO DECISION ON IT. CONSIDERING THAT EXTREM E TURNOVER COMPANIES ARE EXCLUDED GENERALLY FROM COMPARABILITY WE ALSO AFFIRM THE RANGE OF COMPANIES ADOPTED BY THE TPO IN ITS FILTER AS THE ASSESSEE'S TURNOVER WAS ABOUT RS.15.79 CRORES. SO THE RANGE SELECTED BY THE TPO IS ACCEPTED. 7.3 LD. AR SUBMITTED THAT PLI OF THE REMAINING COMP ANIES AFTER EXCLUSION OF THE COMPARABLES BASED ON THE APPLICATI ON OF UPPER LIMIT ON TURNOVER OF 150 CRORES OR MORE WORKS OUT TO 17.8 0% AS UNDER: S.NO. NAME OF THE FINAL COMPARABLES PLI OP/OC EXCLUSION OF COMPARABLES WITH OPERATING REVENUE MORE THAN RS. 150 CRORES 1 AVANI CIMCON TECHNOLOGIES LTD. 21.36 21.36 2 BODHTREE CONSULTING LTD. 17.04 17.04 3 E-ZEST SOLUTIONS LTD. 25.91 25.91 4 FLEXTRONICS SOFTWARE SYSTEMS LTD. (ARICENT) (SEG.) 4.37 - 5 IGATE GLOBAL SOLUTIONS LTD. 9.97 - 6 INFOSYS TECHNOLOGIES LTD. 35.21 - 10 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. 7 KALS INFORMATION SYSTEMS LTD. (SEG.) 24.89 24.89 8 LGS GLOBAL LTD. 22.70 - 9 MINDTREE CONSULTING LTD. (SEG.) 14.00 - 10 PERSISTENT SYSTEMS LTD. 24.40 - 11 QUINTEGRA SOLUTIONS LTD. 16.26 16.26 12 R SYSTEMS INTERNATIONAL LTD. (SEG.) 5.43 5.43 13 R S SOFTWARE (INDIA) LTD. 11.16 11.16 14 SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 10.45 - 15 SOFTSOL INDIA LTD. 19.89 19.89 16 TATA ELXSI LTD. (SEG.) 16.05 - 17 THIRDWARE SOLUTION LTD. 13.32 13.32 18 WIPRO LTD. (SEG.) 26.34 - ARITHMETIC MEAN OF PLI 17.71 17.80 7.4 THE LD. AR RELIED UPON THE DECISION OF THE ITAT HYDERABAD IN THE CASE OF DCIT VS. HELLOSOFT INDIA (P) LTD. [201 3] 32 TAXMANN.COM 101 8. THE LD. DR ON THE OTHER HAND SUBMITTED THAT THE RE IS NO CORRELATION OF TURNOVER AND PLI. HE RELIED ON THE F OLLOWING CASE LAWS: 1. 27 ITR 0074 2. R.B. JESSARAM FETECHAND (SUGAR DEPT.) VS. CIT [1969] 37 CCH 229 (MUM HC) 9. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF REVENUE AUTHORIT IES. THE TPO HAS SELECTED THE COMPARABLES IRRESPECTIVE OF THE SIZE O F THE ORGANIZATION. VARIOUS COORDINATE BENCHES HAVE HELD THAT THE SIZE OF THE ENTERPRISES DOES MATTER AS IT HELD THAT IT IS UNIVERSAL FACT TH AT THERE ARE LOT OF DIFFERENCES BETWEEN THE LARGE BUSINESSES AND SMALL BUSINESSES OPERATING IN THE SAME FIELD. IN THE CASE OF SMALL B USINESS ECONOMIES OF SCALE ARE NOT AVAILABLE AND THEREFORE GENERALL Y ARE LESS PROFITABLE. IN THE CASE BEFORE US M/S HYUNDAI MOTORS (SUPRA) THE COORDINATE BENCH HAS ADJUDICATED THAT IT IS PROPER TO ELIMINAT E THE EXTREME COMPARABLES AND MAY ADOPT TURNOVER FILTERS FROM RS . 1 TO 150 CRORES. 11 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. ACCORDINGLY FOLLOWING THE RATIO LAID DOWN BY THE COORDINATE BENCH ASSESSEES GROUND IS ALLOWED. 10. AS REGARDS GROUND NO. 5 PERTAINING TO COMPARABL ES WITH LONG STANDING (IN TERMS OF AGE) NOT TO BE SELECTED AS CO MPARABLES LD. AR SUBMITTED THAT COMPARABLES HAVING LONG BUSINESS STA NDING SHOULD NOT BE COMPARED WITH COMPANIES IN THEIR INITIAL YEARS O F ESTABLISHMENT. IN THE CASE OF RADHASHIR JEWELLERY COMPANY PRIVATE LIM ITED VS ACIT CIRCLE 8(3)(2016) 71 TAXMANN.COM 337 (MUMBAI TRIB) THE COORDINATE BENCH HAS HELD THAT 'YEAR OF ESTABLISHMENT DOES HA VE AN IMPACT ON THE PROFITABILITY OF THE COMPANY AND HENCE LONG STA NDING COMPANIES SHOULD NOT BE COMPARED WITH COMPANIES HAVING TWO TO THREE YEARS OF STANDING' . (THE COPY OF THE DECISION IS ENCLOSED I N THE ADDITIONAL PAPER BOOK AT PAGES 14-22). IT WAS FURTHER HELD TH AT AN ASSESSEE WHO STARTS BUSINESS IN A PARTICULAR YEAR CANNOT BE COMPARED WITH THE ASSESSEE'S WHO ARE DOING BUSINESS FOR MANY YEARS EV EN IF COMPARISON OF SUCH AN ASSESSEE HAS TO BE MADE THEN IT HAS TO BE SEEN THAT BOTH ARE AT SAME LEVEL. 11. LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES AND FURTHER SUBMITTED THAT THE AGE OF THE COMPANY IS NOT RELEV ANT ONLY FAR ANALYSIS ARE RELEVANT. 12. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF REVENUE AUTHORIT IES. IT IS OPEN FACT THAT THE NEWLY ESTABLISHED COMPANY NEEDS TIME TO ES TABLISH ITSELF. THE GESTATION PERIOD TO ESTABLISH IS DIFFERENT ACCO RDING TO THE INDUSTRY TO INDUSTRY. IN THE INITIAL YEAR OF ESTABLISHMENT THE COMPANY WILL BE IN A SITUATION WHEREIN IT MAY NOT BE ABLE TO RECOVER ITS OVERHEAD FOR THE SAME YEAR LEAVE ALONE THE ESTABLISHMENT EXPENSES. I T MAY NOT BE APPROPRIATE TO COMPARE THEM WITH THE WELL ESTABLISH ED ENTERPRISES. WE ACKNOWLEDGE THE DIFFICULTY OF TPO THAT THERE MAY NOT BE ANY ENTERPRISES WHICH ARE SIMILAR TO ASSESSEE WHICH I S IN THE INITIAL YEAR OF OPERATION. WE RESPECTFULLY FOLLOW THE DECISION O F THE MUMBAI BENCH IN THE CASE OF RADHASHIR JEWELLERY COMPANY PVT. LTD .(SUPRA) WHEREIN 12 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. IT WAS HELD THAT AN ASSESSEE WHO STARTS BUSINESS IN A PARTICULAR YEAR CANNOT BE COMPARED WITH THE ASSESSEE WHO ARE DOING BUSINESS FOR MANY YEARS. THE COMPARABILITY HAS TO BE ON LEVEL PL AYING FIELD WITH THE SAME CATEGORY OF ASSESSEES. HOWEVER WE FIND TH AT IN THE ABOVE DECISION THE ASSESSEE WAS IN ITS FIRST YEAR OF OPE RATION WHEREAS IN THE GIVEN CASE ASSESSEE IS IN ITS SECOND YEAR OF O PERATION. IN OUR VIEW WE CANNOT ENFORCE THIS DECISION IN THE PRESEN T CASE BECAUSE IT IS IN THE SECOND YEAR OF OPERATION. IT IS THE DUTY OF ASSESSEE AND TPO TO COMPARE THE EXISTING UNITS WITH THE SIMILAR COMP ARABLES. TPO SHOULD COMPARE THE REVENUE WITH THE RELATED COST AN D IF THERE IS ANY UNDERUTILIZATION OF COST IT SHOULD BE ELIMINATED A ND COMPARED THE RESULTANT RESULT WITH OTHER COMPARABLES. THE OPERAT ION HAS TO BE ANALYZED WITH FAR ANALYSIS AND CANNOT ELIMINATE JUST BECAUSE IT IS IN SECOND YEAR OF OPERATION. ACCORDINGLY GROUND RA ISED BY THE ASSESSEE IS DISMISSED. 13. GROUND NO 6 IS WITH REGARD TO UNDER UTILIZATIO N OF CAPACITY IN INFRASTRUCTURE FACILITY. LD. AR SUBMITTED THAT THE ASSESSEE WAS INCORPORATED IN 2005 AND IT WAS IN THE SECOND YEAR OF OPERATION AND HAS INCURRED A VERY HIGH COST OF RENT AND ELECTRICI TY OF RS 4.23 CRORES. HE SUBMITTED THAT THE ASSESSEE COMPANY HAD TAKEN ON LEASE AN AREA OF 39604 SQUARE FEET AND EMPLOYED 269 EMPLOYEES DUR ING THIS YEAR WHERE IN THE UNDERUTILIZATION OF FLOOR SPACE WORKS OUT TO APPROXIMATELY 77.36% OF THE FLOOR AREA. LD. AR THE REFORE REQUESTED THAT SUITABLE ADJUSTMENT IN THE OPERATING COST OF A SSESSEE HAS TO BE MADE. THE WORKING IS AS UNDER: INFRASTRUCTURE UNDERUTILIZATION: TOTAL RENT AND ELECTRICITY PAID HYDERABAD AND PUNE 4 23 33 278 AREA OCCUPIED 39604 SFT LESS: COMMON AREAS @ 25% 9901 SFT ACTUAL WORK SPACE 29703 SFT NUMBER OF EMPLOYEES 269 STANDARD OCCUPANCY @ 25 SFT PER EMPLOYEE 6725 SFT 13 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. EXCESS UNUTILIZED WORK SPACE 22978 SFT PERCENTAGE OF UNDERUTILIZATION 77.36% CALCULATION OF SHORTFALL U/S 92CA BASED ON INFRASTR UCTURE UNDERUTILIZATION: PARTICULARS AMOUNT (RS.) OPERATING COST OF HYDERABAD AND PUNE 18 01 84 446 LESS: ADJUSTMENT @ 77.36% TOWARDS UNDERUTILIZATION OF RENT 3 27 49 024 ADJUSTED OPERATING COST 14 74 35 422 ALP @ 113.856% 16 78 64 074 LESS: PRICE RECEIVED 15 98 76 731 SHORTFALL U/S 92CA 79 87 343 13.1 ALTERNATIVELY THE LD. AR SUBMITTED THAT RENT AND DEPRECIATION RELATING TO BUILDINGS HAVE TO BE EXCLUDED FROM THE OPERATING COST OF ASSESSEE AS WELL AS FROM THE OPERATING COST OF THE COMPARABLES SELECTED BY THE TPO TO ARRIVE AT THE PLI. SUCH PLI' S SHOULD BE COMPARED TO DETERMINE THE ALP. IN THIS CONNECTION LD. AR RELIED ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF HSBC ELECTRONIC DATA PROCESSING (I) (P.) LTD. VS ACIT [2014] 148 IT O 644 (HYDTRIB) WHERE IN AT PARA 21 TO 24 IT WAS OBSERVED AS FOLLOW S: 24. AFTER CONSIDERING THE SUBMISSIONS OF THE PARTI ES AND PERUSING THE ORDERS OF THE LOWER AUTHORITIES ON THI S ISSUE WE FIND THAT WHILE THE TPO HAS TOTALLY REJECTED THE ASSESSE E'S CLAIM ON THIS ACCOUNT THE CIT (A) HAS ALLOWED A DEDUCTION O F 1% BY ACCEPTING THE FACT THAT THE ASSESSEE MIGHT BE FACIN G CERTAIN UTILISATION PROBLEMS IN ITS NEW UNIT AND UNUTILISED CAPACITY MIGHT HAVE ADVERSELY AFFECTED THE OVERALL PROFIT FOR THE YEAR. HOWEVER THE CIT (A) HAS GIVEN NO REASON AS TO WHY HE CONSID ERS 1% MARGIN TO BE APPROPRIATE AND ON WHAT BASIS HE HAS A DOPTED SUCH MARGIN. WHEN IT IS ACCEPTED THAT ASSESSEE'S OVERALL PROFIT IS ADVERSELY AFFECTED DUE TO IDLE CAPACITIES AND IDLE FACILITIES THEN THE ENTIRE ISSUE REQUIRES TO BE CONSIDERED PROPERLY AND IN AN OBJECTIVE MANNER TAKING INTO ACCOUNT ALL THE DATAS AVAILABLE IN THIS REGARD. THEREFORE CONSIDERING THE FACTS AND T HE CIRCUMSTANCES OF THIS CASE WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WHO SHALL CONSIDER THE ASSESSEE'S CLAIM WITH REGARD TO IDLE CAPACITIES AFTER DUE CONSIDERATION O F ALL MATERIALS 14 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. AVAILABLE ON RECORD AND AFFORDING A REASONABLE OPPO RTUNITY OF BEING HEARD TO THE ASSESSEE. 13.2 LD. AR ALSO RELIED ON THE DECISION IN THE CASE OF DC IT VS PANASONIC AVC NETWORKS INDIA CO. LTD. 63 SOT 121 ( DELHI - TRIB.) WHEREIN THE COORDINATE BENCH HAS HELD AS FOLLOWS: 5. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL ON RECORD WE SEE NO REASONS TO INTERFERE IN VERY WELL REASONED FINDINGS AND DIRECTIONS OF THE LEARNED CIT (A). RULE 10B(L)(E)(II) OF THE INCOME TAX RULES 1962 DOES IND EED PROVIDE THAT THE NET PROFIT MARGIN REALIZED IN A COMPARABLE UNCONTROLLED TRANSACTION IS ADJUSTED INTER ALIA FOR DIFFERENCE S IN ENTERPRISE ENTERING INTO SUCH TRANSACTIONS WHICH COULD MATERI ALLY AFFECT THE NET PROFIT MARGIN IN OPEN MARKET. CAPACITY UNDERUTI LIZATION BY ENTERPRISES IS CERTAINLY AN IMPORTANT FACTOR AFFECT ING NET PROFIT MARGIN IN THE OPEN MARKET BECAUSE LOWER CAPACITY UT ILIZATION RESULTS IN HIGHER PER UNIT COSTS WHICH IN TURN R ESULTS IN LOWER PROFITS. OF COURSE THE FUNDAMENTAL ISSUE SO FAR A S ACCEPTABILITY OF SUCH ADJUSTMENTS IS CONCERTED IS REASONABLE ACC URACY EMBEDDED IN THE MECHANISM FOR SUCH ADJUSTMENTS AND AS LONG AS SUCH AN ADJUSTMENT MECHANISM CAN BE FOUND NO OB JECTION CAN BE TAKEN TO THE ADJUSTMENT. IN OUR CONSIDERED V IEW THE LEARNED CIT(AL'S APPROACH IS REASONABLE IN THIS REG ARD AND THE ADJUSTMENTS ARE ON A CONCEPTUALLY SOUND BASIS. IN A NY CASE AS POINTED OUT BY THE LEARNED COUNSEL THE ADJUSTMENTS SO DIRECTED BY THE LEARNED CIT(A) HAVE DULY BEEN MADE BY THE AS SESSING OFFICER AND THERE HAVE BEEN NO ISSUES REGARDING IM PLEMENTING THESE ADJUSTMENTS. WE APPROVE THE CONCLUSIONS ARRIV ED BY THE CIT(A) ON THIS ISSUE AND DECLINE TO INTERFERE IN TH E MATTER. 14. THE LD. DR RELIED ON THE ORDERS OF REVENUE AUTH ORITIES. 15. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF REVENUE AUTHORIT IES. THERE IS NO DISPUTE ON THE FACT THAT THE ASSESSEE HAS EXTRA CA PACITY WHICH LEADS TO UNDER ABSORPTION OF RENT AND DEPRECIATION. IT WI LL HAVE BEARING ON THE PROFIT. BY RELYING ON THE DECISION CITED ABOVE WE ALSO FIND IT APPROPRIATE TO REMIT THIS CASE BACK TO THE FILE OF THE AO/TPO TO DETERMINE THE UNDERUTILIZATION AND GIVE ADJUSTMENT ACCORDINGLY IN THE PLI. HENCE THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 16. GROUND NO 7 AND 8 ARE WITH REGARD TO INTERNATIO NAL COMPARABLES AND OBJECTIVE OF DTAA. LD. AR SUBMITTED THAT ON PER USAL OF THE 15 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. INFORMATION SUBMITTED BEFORE THE TPO AND DRP WITH R EGARD TO PROFIT MARGIN IN CASE OF INTERNATIONAL GAMING COMPANIES T HE SAID AVERAGE PROFIT LEVEL INDICATOR IS AROUND 1.45. IN VIEW OF T HIS THE ASSOCIATED ENTERPRISE OF ASSESSEE IS NOT IN A POSITION TO PAY THE PRICE AS DETERMINED BY THE TPO AND CONFIRMED BY THE DRP. HEN CE THE LD. AR SUBMITTED THAT AN ADJUSTMENT IS WARRANTED ON THIS G ROUND OF COMPARISON WITH INTERNATIONAL GAMING COMPANIES ENGA GED IN THE DEVELOPMENT OF SOFTWARE FOR GAME DOWNLOADS. HE SUBM ITTED THAT IN ALL THE TPO COMPARABLES THE ASSOCIATED ENTERPRISE OF S UCH COMPARABLES ARE IN THE DEVELOPMENT OF SOFTWARE IN GENERAL AND T HE AVERAGE PLI OF SUCH COMPARABLES IS AROUND 20% WHEREAS THE AVERAGE PLI OF GAMING COMPANIES IS AROUND 2% AS STATED ABOVE. 16.1 LD. AR SUBMITTED THAT FOR THE FACT THAT GAME S OFTWARE CANNOT BE COMPARED WITH THE GENERAL SOFTWARE. THE GAME SOFTWA RE ARE DEVELOPED SPECIFIC TO THE HAND SET AVAILABLE IN THE MARKET AND THEY CANNOT BE DOWNLOADED BY VERY HAND SET AND THE MOBIL E SERVICE PROVIDED HAS TO AGREE FOR THE SAME. HE SUBMITTED TH AT IN VIEW OF THE NATURE OF THIS BUSINESS SUCH HUGE MARGINS ARE NOT A VAILABLE TO ASSESSEE. LD. AR ALSO SUBMITTED THAT BY VIRTUE OF THIS ADJUSTMENT THERE IS A LEVY OF DOUBLE TAXES ONCE IN THE HANDS OF THE AE AND SECOND IN ASSESSEES HAND. THEREFORE IT IS PRAYED T HAT THE ADJUSTMENT MAY BE DELETED. 16.2 LD. DR RELIED ON THE ORDER OF DRP AND FURTHER SUBMITTED THAT THERE IS NO DIFFERENCE BETWEEN SOFTWARES ALL ARE D EVELOPED WITH HUMAN INTERFERENCE. HE ALSO RELIED ON THE FOLLOWING CASES: 1. CIT VS. DELOITTEE CONSULTING INDIA (P) LTD. 6 1 DTR 101 2. ITO VS. SRM SERVICES INDIA (P) LTD. 30 CCH 065 4 16.3 CONSIDERED THE RIVAL SUBMISSIONS AND MATERIAL FACTS ON RECORD. THE ASSESSEE RAISED THE ISSUES THAT THE MARGIN SHOU LD BE BENCH MARKED WITH INTERNATIONAL MARKET WHICH IS AT BELOW 2% AND ALSO IT WILL LEAD TO DOUBLE TAXATION. IN OUR CONSIDERED VIEW TH E TP STUDIES ARE 16 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. ANALYSED IN THE TESTED PARTIES. IN CASE ASSESSEE C AN SUBMIT THE RELATED DATA FOR ANALYSIS IT CAN SUBSTANTIATE BY M AKING A SEPARATE STUDY AND MAKING IT AVAILABLE TO THE TPO. OTHERWISE IT WILL NOT BE FRUITFUL EXERCISE. WITH REGARD TO DOUBLE TAXATION IN OUR VIEW THE WHOLE STUDY OF TP IS TO PREVENT THE REVENUE LEAKAGE FROM INDIA. THE ARGUMENT OF LD. AR IS NOT TENABLE SIMPLY BECAUSE TH E ASSESSEE HAS TO ESTABLISH THAT THE FEES CHARGED ON THE INTERNATIONA L TRANSACTION IS PROPER. THE ASSESSEE CANNOT RELY ON THE MARGINS ACH IEVED BY THE SIMILAR INDUSTRY. THE ULTIMATE RESULT MAY NOT BE RE LEVANT. THE COMPARISON FOR THE SERVICES EXPORTED HAS TO BE DETE RMINED PROPERLY. CONSIDERING THE ABOVE DISCUSSION THIS GROUND RAISE D BY THE ASSESSEE IS DISMISSED. 17. GROUND NO. 9 IS WITH REGARD TO COMPARABLES SELE CTED 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 CONSIDERED AS COMPARABLES. THE TPO ALSO HAS SELECTED GENERAL SOFTWARE DEVELOPMENT SERVICES COMP ANIES AND ALSO SERVICES PROVIDERS. THERE ARE NO GAMING COMPANIES D URING THAT PERIOD. HENCE THE TP STUDY OF ASSESSEE HAS TO BE A CCEPTED. IN THIS CONNECTION LD. AR RELIED ON THE DECISION OF HEWLE TT PACKARD INDIA SOFTWARE OPERATION PVT. LTD VS ACIT 67 TAXMANN.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 AUTHORIT IES. WE AGREE WITH THE ASSESSEE THAT THE ASSESSEE IS A SOFTWARE DEVELO PER IN GAMING SECTOR AND CANNOT BE COMPARED WITH THE GENERAL SOFT WARE DEVELOPMENT OR SERVICE PROVIDERS. IT IS UNIQUE IN T ERMS OF UTILIZATION OF TECHNICAL MANPOWER 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 COMPANIES WH ICH ARE 17 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. EXCLUSIVELY INVOLVED IN THE DEVELOPMENT OF GAMES SO FTWARE. TPO CAN TAKE THE HELP OF ASSESSEE TO IDENTIFY THESE COMPARA BLES AND DETERMINE THE ALP. ACCORDINGLY THIS GROUND OF ASSE SSEE IS ALLOWED FOR STATISTICAL PURPOSES. 20. GROUND NO 10 IS IN GENERAL IN NATURE HENCE N EED NO ADJUDICATION. ITA NO. 439/HYD/2015 FOR AY 2010-11 BY THE ASSESSEE 21 FOR THE AY 2010-11 THE ASSESSEE FILED ITS RETUR N OF INCOME ON 23/09/2010 DECLARING TOTAL LOSS OF RS. 1 47 402/-. THE AO VIDE HIS DRAFT ORDER DETERMINED THE TOTAL INCOME OF THE ASSE SSEE AT RS. 3 18 90 861/- IN ACCORDANCE WITH THE ORDER OF TRANS FER PRICING OFFICER (TPO) PASSED U/S 92CA(3) OF THE ACT. 21.2 DURING THE RELEVANT PY AS PER THE 3CEB REPORT /TP DOCUMENT THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTION S AS UNDER: A.E. NATURE OF TRANSACTION AMOUNT (RS.) GAMELOFT SA PROVISION OF SOFTWARE DEVELOPMENT SERVICES 14 06 04 084 GAMELOFT SA PAYMENT OF ROYALTY 1 66 50 309 15 72 54 393 21.3 THE TAXPAYER HAS CARRIED OUT THE ECONOMIC ANAL YSIS AND HAS SUMMARIZED IT AS UNDER: NATURE OF INTERNATIONAL TRANSACTION AMOUNT (RS.) MAM PLI MARGIN OF TAX PAYER MARGIN OF COMPARA- BLES PROVISION OF SOFTWARE DEVELOPMENT SERVICES 14 06 04 084 TNMM PBT/ SALES 4.63 6.05 PAYMENT OF ROYALTY 1 66 50 309 TNMM PBT/ SALES 4.63 6.05 21.4 THE ASSESSEE HAS USED PROWESS DATA BASE IN SEA RCH FOR COMPARABLES. FOR THE SOFTWARE DEVELOPMENT SERVICES AFTER APPLYING 18 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. CERTAIN FILTERS THE ASSESSEE HAS SHORTLISTED AROUN D 20 COMPARABLES ARITHMETIC MEAN PLI (OP/OC) WAS COMPUTED AT 6.05% A S AGAINST ITS OWN PLI AT 4.63%. THE PAYMENT OF ROYALTY HAS BEEN S EPARATED WITH THE SOFTWARE DEVELOPMENT SERVICES. 21.5 AS PER THE ANNUAL REPORT THE FINANCIALS OF TH E ASSESSEE FOR THIS FY 2009-10 WERE AS UNDER: DESCRIPTION AMOUNT (RS.) OPERATING REVENUE 15 97 33 143 OPERATING COST 16 16 41 441 OPERATING PROFIT -19 08 298 OP/OR (%) -1.19 OP/OC (%) -1.18 21.6 ON GOING THROUGH THE TP DOCUMENT TPO OBSERVED THAT THE METHOD OF THE SEARCH PROCESS SUFFERS FROM DEFECTS W HICH RESULTED IN SELECTION OF INAPPROPRIATE COMPARABLES AND REJECTIO N OF COMPANIES THAT ARE APPROPRIATE COMPARABLES. THEREFORE THE TP O REJECTED THE TP DOCUMENT AND AN INDEPENDENT ANALYSIS HAD BEEN CARRI ED OUT BY AGGREGATING ALL THE TRANSACTIONS UNDER TNMM. 21.7 THE FINAL COMPARABLES SELECTED BY TRANSFER PRI CING OFFICER (TPO) WITH OP TO OC ARE AS UNDER: SL.NO. NAME OF THE COMPANY OP/OC 1. AVANI CINCOM TECHNOLOGIES LTD. 3.39 2. CAT TECHNOLOGIES LTD. 13.04 3. COMP-U-LEARN 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 TECHNOLOGY LTD. 45.44 8. KALS INFORMATION SYSTEMS LTD. (SEG.) 22.05 9. KULIZA TECH 25.92 10. L&T INFOTECH LTD. 19.97 11. MINDTREE LTD. (SEG.) 20.47 12. PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) 11.37 13. RS SOFTWARE (INDIA) LTD. 9.88 19 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. 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 22.69% 21.8 AFTER COMPARING THE AVERAGE MARGINS OF THE COM PARABLES TO THE FINANCIALS OF THE ASSESSEE THE TPO COMPUTED THE AD JUSTED ARMS LENGTH MARGIN AS UNDER: DESCRIPTION AMOUNT ARITHMETIC MEAN OF PLI AS ARRIVED AT BY THE TPO 22.69% LESS: WCA 4.05% ARMS LENGTH MARGIN AS ARRIVED AT BY THE TPO 18.64% OPERATION COST (OC) 16 16 41 441/- ADJUSTED ARMS LENGTH MARGIN (%) (AALM) 18.64% ARMS LENGTH PRICE (ALP) = (100+AALM)*OC 19 17 71 406 PRICE RECEIVED (OR) 15 97 33 143 ADJUSTMENT U/S 92CA 3 20 38 263 21.9 ACCORDINGLY THE TPO WHO PASSED AN ORDER U/S 9 2CA(3) OF THE ACT ON 24/09/2013 RECOMMENDED ADJUSTMENT OF RS. 3 20 38 263/-. THE SAME WAS INCORPORATED BY THE AO IN THE DRAFT AS SESSMENT ORDER. 22. AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BEF ORE THE DRP. 23. DRP HAS GIVEN PARTIAL RELIEF TO THE ASSESSEE AS UNDER: 20 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. 23.1 THE DRP AFTER CONSIDERING THE OBJECTIONS OF TH E ASSESSEE DIRECTED TO EXCLUDE THE FIVE COMPARABLES NAMELY I NFOSYS TECHNOLOGY LTD. L&T INFOTECH LTD. MINDTREE LTD. SASKEN COMM UNICATION TECHNOLOGIES AND ZYLOG SYSTEMS LTD. FROM THE LIST O F 18 COMPARABES AND DIRECTED THE AO TO REWORK THE ARMS LENGTH PRICE . 23.2 ACCORDINGLY THE AVERAGE MARGINS OF THE FIVE C OMPARABLES WERE REMOVED AND THE MARGIN OF THE REMAINING 13 COMPARAB LES COMES TO 21.44% AND AFTER REDUCING THE WORKING CAPITAL ADJUS TMENT OF THESE COMPANIES WHICH IS RECOMPUTED AT 4.30% THE ADJUST ED ARMS LENGTH MARGIN COMES TO 17.14%. THUS THE RECOMPUTED ARMS L ENGTH PRICE WORKED OUT TO RS. 18 93 46 784/- AND THE ADJUSTMENT U/S 92CA COMES TO RS. 2 96 13 641/-. 24. AGGRIEVED WITH THE ABOVE ORDER ASSESSEE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. YOUR APPELLANT SUBMITS THAT THE TPO HAD REJECTED THE TRANSFER PRICING STUDY OF THE APPELLANT ON THE GROUND THAT T HE APPELLANT'S SEARCH PROCESS IS NOT IN CONFORMITY WITH THE TP REG ULATIONS. 2. YOUR APPELLANT SUBMITS THAT THE TPO AND DRP ERRE D IN LAW ON FACTS OF THE CASE IN NOT ACCEPTING THE FILTERS ADOP TED BY YOUR APPELLANT. 3. YOUR APPELLANT HAS IN FACT APPLIED AN UPPER CAP OF RS 50 CRORES ON THE TURNOVER FILTER WHICH THE TPO HAS NOT APPLIED AT ALL. HENCE THE TPO HAS ERRED IN NOT ADOPTING AN UPPER CA P ON TURNOVER FILTER IN THE COMPARABILITY ANALYSIS AND T HE DRP OUGHT TO HAVE RESTRICTED THE UPPER LIMIT ON TURNOVER FILTER TO HAVE COMPARABLES WITHIN THE LIMITED MAGNITUDE. THEREBY T HE FILTERS ADOPTED ARE WRONG IN LAW. 4. YOUR APPELLANT SUBMITS THAT THE TAX PAYER STRONG LY REFUTES THE DRP'S CONTENTION THAT IT DOES NOT FIND ANY INFIRMIT Y IN TAKING SUPER PROFIT MAKING COMPARABLE. THE TPO OUGHT TO HA VE APPLIED SUPER PROFIT FILTER WHEN HE HAS EXCLUDED SOME COMPA RABLES ON THE BASIS OF APPLICATION OF PERSISTENT LOSSES FILTE R / DIMINISHING RETURNS FILTER. 5. YOUR APPELLANT REFUTES TO THE INCLUSION OF OPER ATING COST PERTAINING TO NOIDA CENTER IN THE TPO'S ORDER THOU GH THE APPELLANT IS RESPONSIBLE FOR LOCAL GAME DOWNLOAD AN D IN NO WAY CONNECTED TO EXPORT EARNINGS. THE DRP OUGHT TO HAVE 21 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. APPRECIATED THE FACT THAT THE APPELLANT INCLUDED PR OVISION OF SERVICES TO AE AND EXCLUDED THE PAYMENT OF ROYALTY TO ITS AE ON THE PREMISE THAT IT IS PAID FOR EARNING DOMESTIC RE VENUE. 6. YOUR APPELLANT OBJECTS TO THE INCLUSION OF THE C OMPARABLES WHO OWN THE INTELLECTUAL PROPERTY RIGHTS WHEREAS T HE APPELLANT DOES NOT OWN ANY IP RIGHTS IN ITS NAME. THE DRP OUG HT TO HAVE EXCLUDED THE COMPARABLE OWING IP RIGHTS AND ALLOWED A DOWNWARD ADJUSTMENT IN THIS REGARD. 7. YOUR APPELLANT SUBMITS THAT THE TPO HAD SELECTED COMPARABLES WHICH HAVE A LONG STANDING AND HAVING L OW RENTAL AND OTHER OPERATIONAL EXPENDITURE WHEN COMPARED TO YOUR APPELLANT WHICH ARE ON HIGHER SIDE. IT IS ALSO SUBMITTED THAT YOUR APPELLANT IS INTO A HIGHLY TECHNICAL ORIENTED DEVELOPMENT OF SOFTWARE USED IN MOBILES ON LY UNLIKE THE OTHER GENERAL SOFTWARE DEVELOPERS. THE APPELLANT HA S SPENT MORE ON RENT DURING THE CURRENT FINANCIAL YEAR IN ANTICI PATION OF MORE BUSINESS IN THE ENSUING YEAR. BOTH THE TPO AND DRP HAD NOT GIVEN APPROPRIATE CONSIDERATION TO UNDERUTILIZATION OF INFRASTRUCTURE BY THE APPELLANT. THEREFORE THE TPO AND DRP OUGHT TO HAVE ACCEPTED THE TP STUDY SUBMITTED BY YO UR APPELLANT. 8. YOUR APPELLANT SUBMITS THAT IN ABSENCE OF ANY OT HER SIMILAR COMPARABLE IN THE DATABASE THE TPO AND THE DRP OUG HT TO HAVE CONSIDERED INTERNATIONAL COMPARABLES AS SUBMITTED B Y YOUR APPELLANT DURING THE PROCEEDINGS. YOUR APPELLANT SU BMITS THAT IN THE INTERNATIONAL SCENARIO ESPECIALLY IN GAMING SOF TWARE INDUSTRY THE MARGINS RANGE BETWEEN 5 TO 7%. IN VIEW OF THIS THE MARGINS ARRIVED BY THE TPO AND DRP ARE ON HIGHER SIDE. 9 . YOUR APPELLANT SUBMITS THAT ON INCREASING THE M ARGINS OF YOUR APPELLANT WOULD RESULT IN TAXING THE SAME TWICE ONC E IN THE HANDS OF YOUR APPELLANT AND AGAIN IN THE HANDS OF THE ASS OCIATED ENTERPRISE IN THE OTHER JURISDICTION THUS DEFEATING THE OBJECTIVE OF DTAA AND OTHER INTERNATIONAL CONVENTIONS ENTERED IN TO BY VARIOUS COUNTRIES ONLY TO AVOID DOUBLE TAXATION. HENCE THE ADJUSTMENTS UPHELD BY DRP ARE AGAINST THE SPIRIT OF INTERNATION AL LAW. 10. YOUR APPELLANT ALTERNATIVELY SUBMITS THAT DURIN G THE PROCEEDINGS BEFORE THE TPO THEY HAD SUBMITTED WITH OUT PREJUDICE TO THE OBJECTIONS RAISED BEFORE TPO ACCE PTABLE COMPARABLES TO THE APPELLANT BASED ON THE INFORMAT ION FURNISHED BY THE TPO APPLYING FILTERS TO MAXIMUM TURNOVER AN D OTHER FILTERS WHICH THE TPO OUGHT TO HAVE ACCEPTED. 25. GROUND NOS. 1 & 2 ARE GENERAL IN NATURE. 22 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. 26. GROUND NO. 3 IS WITH REGARD TO TURNOVER FILTER. THE LD. AR SUBMITTED THAT COMPARABLES HAVING A TURNOVER OF RS. 100 CRORES OR MORE MAY BE EXCLUDED WHICH ARE AS UNDER: S.N. NAME OF THE COMPARABLE OPERATING REVENUE (RS.) IN CRORES PLI (OP/OC%) 1. PERSISTENT SYSTEMS LTD. 509.12 28.18 2. RS SOFTWARE (INDIA) LTD. 161.84 8.79 3. TATA ELXSI (SEG.) 337.78 13.81 26.1 LD. AR SUBMITTED THAT THE PLI OF THE REMAINING COMPARABLES AFTER EXCLUSION OF THE COMPARABLES HAVING A TURNOVE R OF RS. 100 CRORE OR MORE WORKS OUT TO 17.20% AS DETAILED BELOW: S.N. NAME OF THE FINAL COMPARABLES NET PROFIT LEVEL INDICATOR (AFTER WORKING CAPITAL ADJUSTMENTS) OP/OC EXCLUSION OF COMPARABLES WITH OR MORE THAN RS. 100 CRORES EXCLUSION OF COMPARABLES WITH OR MORE THAN RS. 150 CRORES. 1. AVANICIMCON TECHNOLOGIES LTD. 0.8 0.80 0.80 2. CAT TECHNOLOGIES LTD. 5.18 5.18 5.18 3. COMP-U-LEARN TECH INDIA LTD. 12.24 12.24 12.24 4. E-INFOCHIPS BANGALORE LTD. 63.30 63.30 63.30 5. EVOK TECH 17.15 17.15 17.5 6. E-ZEST SOLUTIONS LTD. 19.16 19.16 19.16 7. KALS INFORMATION SYSTEMS LTD. (SEG.) 17.10 17.10 17.10 8. KULIZA TECH 22.41 22.41 22.41 9. PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) 7.39 7.39 7.39 10. R S SOFTWARE (INDIA) LTD. 8.79 - - 11. TATA ELXSI (SEG.) 13.81 - - 12. THINKSOFT GLOBAL 7.25 7.25 7.25 23 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. SERVICES LTD. 13. PERSISTENT SYSTEMS LTD. 28.18 - - ARITHMETIC MEAN OF PLI 17.14 17.20 17.20 26.2 ALTERNATIVELY THE LD. AR RELYING ON THE DECIS ION OF THE ITAT HYDERABAD BENCH IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. PVT. LTD. 44 TAXMANN.COM 34 SUBMITTED THAT IN THE SAID CASE TPO AND DRP HAVE ACCEPTED THAT THE RANGE OF THE TURNOVER FILTER SHALL BE RS. 1 TO 150 CRORE WHERE THE TESTED PARTY TURNOVER IS AROUND 15 TO 16 CRORES. HE SUBMITTED THAT SINCE THE FILTER SELECTED BY THE TPO AND APPROVED BY THE DRP WAS CONFIRMED BY THE TRIBUNAL IN THE CA SE OF ASSESSEE ALSO THE SAME MAY BE APPLIED. HE ALSO RELIED ON TH E DECISION OF THE ITAT HYDERABAD IN THE CASE OF DCIT VS. HELLOSOFT I NDIA (P.) LTD. [2013] 32 TAXMANN.COM 101. 27. LD. DR ON THE OTHER HAND RELIED ON THE ORDER OF TPO/AO. 28. CONSIDERED THE SUBMISSIONS OF BOTH THE COUNSELS AND PERUSED THE MATERIAL FACTS ON RECORD. THE FACTS ARE SIMILAR TO THE AY 2008-09. HENCE THE DIRECTION GIVEN IN PARA 9 (SUPRA) ARE AP PLICABLE TO THIS AY ALSO. ACCORDINGLY GROUND RAISED BY THE ASSESSEE IS ALLOWED. 29. AS REGARDS GROUND NO. 4 REGARDING EXCLUSION OF SUPER NORMAL PROFIT COMPARABLES THE LD. AR SUBMITTED THAT THE P ROFIT MARGIN OF GAMING COMPANIES IS VERY LOW AND THEREFORE IT IS SU BMITTED THAT WHEN OTHER GENERAL SOFTWARE DEVELOPMENT COMPANIES ARE CO NSIDERED AS COMPARABLES A PLI OF MORE THAN 20% MAY BE EXCLUDED AS SUPER NORMAL PROFIT COMPARABLES. THE FOLLOWING COMPARABLE S ARE BEING EXCLUDED ON THE BASIS OF HAVING SUPER NORMAL PROFIT S I.E. A PLI OF MORE THAN 20%: NAME OF THE COMPARABLE OPERATING REVENUE (RS.) IN CRORES OPERATING COST (RS.) IN CRORES OPERATING PROFIT (RS.) IN CRORES PLI (OP/OC%) 24 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. E-INFOCHIPS BANGALORE LTD. 43.05 24.98 18.07 63.30 KUIZA TECH 9.91 7.87 2.04 22.41 30. LD. DR RELIED ON THE ORDER OF DRP. 31. CONSIDERED THE SUBMISSIONS OF BOTH THE COUNSELS AND PERUSED THE MATERIAL FACTS ON RECORD. LD. AR SUBMITS THAT T HE TPO CANNOT ADOPT SUPER NORMAL PROFIT AS COMPARABLES SINCE THE ASSESSEE IS DEVELOPING THE GAMING SOFTWARE FOR WHICH THERE IS N O COMPARABLE AVAILABLE AS WELL AS IT DIFFERS FROM THE NORMAL SOF TWARE DEVELOPMENT. WE HAVE DISCUSSED SIMILAR ISSUE IN PARA 19 OF THIS ORDER. ACCORDINGLY WE REMIT THIS ISSUE BACK TO AO/TPO TO DETERMINE THE PROFIT. HENCE THIS GROUND OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 32. AS REGARDS GROUND NO. 5 RELATES TO EXCLUSION OF INCOME AND EXPENDITURE PERTAINING TO THE DOMESTIC TRANSACTION OF NOIDA THE LD. AR SUBMITTED THAT THE FOLLOWING DIVISIONAL PROFIT A ND LOSS A/C HAD BEEN SUBMITTED BEFORE THE TPO AS WELL AS DRP: HYDERABAD NOIDA GRAND TOTAL EXPORT TURNOVER DOMESTIC TURNOVER INCOME SOFTWARE SERVICES (EXPORT) 140604084 0 140604084 OTHER INCOME 38011 11174 49185 REVENUE FROM GAME DOWNLOANDS 0 19117886 19117886 TOTAL INCOME 140642094 19129060 159771154 DIRECT EXPENSES SALARIES BONUS & ALLOWANCES 76602985 1263873 77866858 PF & OTHER BENEFITS 4570898 53011 4623909 COMMUNICATION EXPENSES 1943511 15288.37 1958800 GAME TESTING EXPENSES 866145 0 866145 ROYALTIES 0 16650309 16650309 TOTAL 83983540 17982481 101966021 OFFICE AND ADMINISTRATIVE EXPENSES: RENT & ELECTRICITY 24882168 549477 25431645 STAFF WELFARE 1587748 0 1587748 25 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. PRINTING & STATIONERY 117359 3799 121158 POSTAGE & COURIER 6455 1866 8321 TRAVELLING & CONVEYANCE 5590235 484031 6074266 PROFESSIONAL CHARGES 2227028 55150 2282178 OFFICE & ADMIN EXPENSES 10607893 237668 10845561 TAXES 0 4107844 4107844 AUDIT FEE 375020 0 375020 EXCHANGE LOSS 4094093 0 4094093 TOTAL OFFICE EXPENSES 49487999 5439836 54927835 DEPRECIATION 4721349 26235 4747584 TOTAL EXPENSES 138182888 23448552 161641440 PROFIT/LOSS 2449206 -4319492 -1870286 32.1 LD. AR SUBMITTED THAT IN SPITE OF HAVING THE A BOVE DETAILS THE TPO HAS AGGREGATED BOTH INTERNATIONAL AND DOMESTIC TRANSACTIONS WHILE CALCULATING THE OPERATING COST AS WELL AS OPE RATING REVENUE TO ARRIVE AT PROFIT LEVEL INDICATOR (PLI).HE SUBMITTED THAT INCOME AND/OR EXPENDITURE RELATING TO THE DOMESTIC TRANSACTIONS H AVE TO BE SEGREGATED AND EXCLUDED TO ARRIVE AT CORRECT PLI OF THE ASSESSEE. LD. AR SUBMITTED THAT THE PLI OF THE COMPARABLES HAVE TO BE COMPARED WITH CORRECT PLI TO ARRIVE AT THE ALP. 32.2 IN THIS CONNECTION LD. AR SUBMITTED THAT IN T HE NOIDA PROFIT AND LOSS ACCOUNT THERE IS A LINE ITEM KNOWN AS ROY ALTY. ROYALTY IS BEING PROVIDED TO GAMELOFT SA FRANCE BASED ON A RE VENUE SHARING AGREEMENT BETWEEN THE PARTIES. A COPY OF THE AGREEM ENT WAS ALREADY SUBMITTED TO THE TPO / DRP. THIS PAYMENT MADE TO AS SOCIATED ENTERPRISE DOES NOT PERTAIN TO THE DEVELOPMENT OF S OFTWARE FOR GAMES. IN ABSENCE OF ANY COMPARABLE THE STUDY OF YOUR APP ELLANT HAS TO BE ACCEPTED. THE TPO AS WELL AS DRP HAVE JUST BRUSHED ASIDE ON THE GROUND THAT IT IS AN INTERNATIONAL TRANSACTION. THE RE IS NO DOUBT THAT IT IS AN INTERNATIONAL TRANSACTION BUT THIS TRANSACTI ON IS NOT RELATED TO THE HYDERABAD UNIT WHICH IS ENGAGED IN THE DEVELOPM ENT OF GAMES SOFTWARE. LD. AR PRAYED THAT THIS ISSUE HAS TO BE LOOKED INTO AFRESH BY THE ASSESSING OFFICER. HE SUBMITTED THAT THE FOL LOWING ARE THE COMPARABLES THAT ARE ACCEPTED AFTER ELIMINATION OF COMPARABLES 26 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. BASED ON APPLICATION OF UPPER LIMIT ON TURNOVER OF EXCLUSION OF SUPER NORMAL PROFIT COMPARABLES AS ABOVE: S. N NAME OF THE FINAL COMPARABL ES OPERATI NG REVENUE OPERATI NG COST OPERATI NG PROFIT NET PROFIT LEVEL INDICAT OR (NET PLI) (AFTER WORKIN G CAPITAL ADJ. EXCLUSION OF COMPARABL ES WITH OR MORE THAN RS. 150 CRORES EXCLUSION BASED ON COMPARABL ES HAVING SUPER NORMAL PROFITS OR OC OP OP/OC RS. IN CRORES FIGRES IN % 1 AVANI CIMCON TECHNOLOGI ES LTD. 2.83 2.74 0.09 0.8 0.80 0.80 2 CAT TECHNOLOGI ES LTD. 8.15 7.21 0.94 5.18 5.18 5.18 3 COMP-U- LEARN TECH INDIA LTD. 14.31 11.93 2.38 12.24 12.24 12.24 4 E- INFOCHIPS BANGALORE LTD. 43.05 24.98 18.07 63.30 63.30 - 5 EVOK TECH 10.86 9.16 1.70 17.15 17.15 17.15 6 E-ZEST SOLUTIONS LTD. 10.36 8.48 1.88 19.16 19.16 19.16 7 KALS INFORMATIO N SYSTEMS LTD.(SEG.) 2.19 1.79 0.40 17.10 17.10 17.10 8 KULIZA TECH 9.91 7.87 2.04 22.41 22.41 - 9 PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) 6.67 5.99 0.68 7.30 7.30 7.39 10 PERSISTENT SYSTEMS LTD. 509.13 386.97 122.15 28.18 - - 11 RS SOFTWARE (INDIA) LTD. 161.84 147.28 14.56 8.79 - - 12 TATA ELXSI (SEG.) 337.78 288.11 49.67 13.81 - - 13 THINKSOFT GLOBAL 74.56 67.04 7.52 7.25 7.25 7.25 27 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. SERVICES LTD. ARITHMETIC MEAN OF PLI 17.14 17.20 10.79 33. LD. DR RELIED ON THE ORDER OF DRP. 34. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. ON ANALYSING THE BOOKS OF ACCOUNT SUBMIT TED BY THE ASSESSEE WE ARE OF THE VIEW THAT THE ASSESSEE HAS ENTERED INTO TWO TYPES OF BUSINESS THE FIRST IS THE INTERNATIONAL T RANSACTION WITH ITS AE AND SECOND BEING THE DOMESTIC TRANSACTION RELATING TO THE SALES OF SOFTWARE TO THE DOMESTIC USERS. THIS ISSUE WAS ALRE ADY BROUGHT TO THE NOTICE OF TPO AND DRP. THE DOMESTIC TRANSACTIONS CA NNOT BE INCLUDED IN THE INTERNATIONAL TRANSACTION TO DETERM INE THE ALP. ACCORDINGLY AO/TPO IS DIRECTED TO EXCLUDE THE DOME STIC TRANSACTION AND ARRIVE THE ALP FOR INTERNATIONAL TRANSACTION. T HE PAYMENT OF ROYALTY IS SEPARATE INTERNATIONAL TRANSACTION AND S EPARATE STUDY HAS TO BE CONDUCTED TO DETERMINE THE ALP FOR ROYALTY. HENC E WE DIRECT THE TPO TO MAKE SEPARATE STUDY ON ALP FOR ROYALTY. ACCO RDINGLY BOTH THESE TRANSACTIONS ARE REMITTED BACK TO THE FILE OF AO/TPO. HENCE THIS GROUND OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 35. AS REGARDS GROUND NOS. 6 & 7 REGARDING UNDERUTI LIZATION OF CAPACITY/INFRASTRUCTURE FACILITY LD. AR SUBMITTED THAT THE ASSESSEE WAS INCORPORATED IN 2005 AND IT WAS IN THE FIFTH YE AR OF OPERATIONS AND HAS INCURRED A VERY HIGH COST OF RENT AND ELECTRICI TY OF RS 2.48 CRORES. THE APPELLANT COMPANY HAD TAKEN ON LEASE AN AREA OF 39604 SQUARE FEET AND EMPLOYED 252 EMPLOYEES DURING THIS YEAR W HERE IN THE UNDERUTILISATION OF FLOOR SPACE WORKS OUT TO APPROX IMATELY 78.79% OF THE FLOOR AREA. LD. AR THEREFORE REQUESTED THAT SUI TABLE ADJUSTMENT IN THE OPERATING COST IS TO BE MADE. THE WORKING IS AS UNDER: INFRASTRUCTURE UNDERUTILIZATION TOTAL RENT PAID HYDERABAD AND PUNE RS. 2 48 82 168 AREA OCCUPIED 39604 SFT 28 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. LESS: COMMON AREAS 9901 SFT ACTUAL WORK SPACE 29703 SFT NUMBER OF EMPLOYEES 252 STANDARD OCCUPANCY @ 25 SFT PER EMPLOYEE 6300 SFT EXCESS UNUTILIZED 2340 SFT PERCENTAGE OF UNDERUTILIZATION 78.79% CAPACITY UNDERUTILIZATION AND THE CORRESPONDING PLI WORKINGS (ADJUSTMENT FOR RENT AND ELECTRICITY) PARTICULARS AMOUNT (IN RS.) OPERATING COST OF HYDERABAD AND PUNE 13 81 92 888 LESS: ADJUSTMENT @ 78.79% TOWARDS UNDERUTILIZATION OF INFRASTRUCTURE 1 96 04 660 ADJUSTED OPERATING COST 11 85 88 228 ARMS LENGTH PRICE @ 110.79% 13 13 83 898 LESS: PRICE RECEIVED 14 06 04 084 SHORFTALL U/S 92CA NIL ALTERNATIVELY THE ASSESSEE SUBMITTED THAT RENT AND DEPRECIATION RELATING TO BUILDINGS HAVE TO BE EXCLUDED FROM THE OPERATING COST OF THE ASSESSEE AS WELL AS FROM THE OPERATING COST OF THE COMPARABLES SELECTED BY THE TPO TO ARRIVE AT THE PLI. SUCH PLI' S SHOULD BE COMPARED TO DETERMINE THE ALP. LD. AR RELIED ON THE FOLLOWING CASES: 1. HSBC ELECTRONIC DATA PROCESSING (I) (P) LTD. VS . ACIT 148 ITD 644 (HYD.) 2. DCIT VS. PANASONIC AVC NETWORKS INDIA CO. LTD. 63 SOT 121 (DEL.) 36. LD. DR RELIED ON THE ORDER OF DRP. 37. CONSIDERED THE SUBMISSIONS OF BOTH THE COUNSELS AND PERUSED THE MATERIAL FACTS ON RECORD. THIS ISSUE IS SIMILAR TO THE FINDINGS GIVEN IN PARA 15. ACCORDINGLY THIS ISSUE ALSO REMITTED B ACK TO THE FILE OF AO. HENCE THESE GROUNDS OF ASSESSEE ARE ALLOWED FOR ST ATISTICAL PURPOSES. 38. AS REGARDS GROUND NOS. 8 & 9 REGARDING INTERNAT IONAL COMPARABLES AND DTAA THE LD. AR SUBMITTED THAT ON PERUSAL OF THE 29 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. INFORMATION SUBMITTED BEFORE THE TPO AND DRP THE PR OFIT MARGIN OF INTERNATIONAL GAMING COMPANIES IS AROUND 1.45%. IN VIEW OF THIS THE ASSOCIATED ENTERPRISE IS NOT IN A POSITION TO PAY T HE PRICE AS DETERMINED BY THE TPO AND CONFIRMED BY THE DRP. HEN CE THE LD. AR SUBMITTED THAT AN ADJUSTMENT IS WARRANTED ON THIS G ROUND OF COMPARISON WITH INTERNATIONAL GAMING COMPANIES ENGA GED IN THE DEVELOPMENT OF SOFTWARE FOR MOBILE GAMES. HE SUBMIT TED THAT IN ALL THE TPO COMPARABLES THE ASSOCIATED ENTERPRISE OF A LL SUCH COMPARABLES ARE IN THE DEVELOPMENT OF SOFTWARE IN G ENERAL AND THE AVERAGE PLI OF SUCH COMPARABLES IS AROUND 20% WHERE AS THE AVERAGE PLI OF GAMING COMPANIES IS AROUND 2% AS STATED ABOV E. 38.1 LD. AR SUBMITTED THAT GAME SOFTWARE CANNOT BE COMPARED WITH THE GENERAL SOFTWARE. THE GAME SOFTWARE ARE DEVELOP ED SPECIFIC TO THE HAND SET AVAILABLE IN THE MARKET AND THEY CANNO T BE DOWNLOADED IN EVERY HAND SET AND THE MOBILE SERVICE PROVIDED H AS TO AGREE FOR THE SAME. IN VIEW OF THE PECULIAR AND COMPETITIVE NATUR E OF THIS BUSINESS SUCH HUGE MARGINS ARE NOT AVAILABLE TO THE ASSESSEE . THE ASSESSEE ALSO SUBMITS THAT BY VIRTUE OF THIS ADJUSTMENT THE RE IS A LEVY OF DOUBLE TAXES ONCE IN THE HANDS OF THE AE AND SECON D IN THE ASSESSEES HAND. THEREFORE IT IS PRAYED THAT THE AD JUSTMENT MAY BE DELETED. 39. LD. DR RELIED ON THE ORDER OF DRP. 40. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL FACTS ON RECORD. THE MAIN GRIEVANCE OF THE ASSESSEE IS THAT THE MARGIN OF THE GENERAL SOFTWARE COMPANIES ARE MORE T HAN THE GAMING SOFTWARE COMPANIES. IT HAS TO BE BENCH MARKED BY CO MPARING WITH THE INTERNATIONAL COMPARABLES. MOREOVER THE ASSESSEE I S TRYING TO CONVEY THAT THIS EXERCISE AMOUNTS TO DOUBLE TAXATION. WE F IND IT DIFFICULT TO UNDERSTAND THE COMPARABLE STUDY HAS TO BE DONE ON T ESTED PARTIES. TPO CANNOT DO THE STUDY HIMSELF WITHOUT PROPER ASSI STANCE. HE CANNOT CALL FOR THE INFORMATION FROM THE INTERNATIO NAL COMPARABLES SIMILAR TO THE DOMESTIC COMPARABLES. HE HAS POWER VESTED UNDER HIM 30 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. U/S 133(6) OF THE ACT WITH THE HELP OF AO IN OUR V IEW TPO HAS TO COMPLETE THE STUDY AS PER THE INFORMATION AVAILABLE DOMESTICALLY. WITH REGARD TO DOUBLE TAXATION WE CANNOT BUY THIS ARGUM ENT SIMPLY BECAUSE THE TP STUDY IS CARRIED OUT TO DETERMINE T HE PROPER PLI AND TO CURB THE REVENUE LEAKAGE. THE INTENTION OF THE L EGISLATURE IS TO DETERMINE THE PROPER PRICE OF THE TRANSFER OF THE S ERVICE. THE ASSISTANCE HAS TO COME FROM ASSESSEE TO DETERMINE T HE SAME. IT IS ONLY DETERMINATION OF PROPER PRICE/COST AND ULTIMAT ELY THE NEGOTIATION POINT BETWEEN THE ASSESSEE AND AE. AS LONG AS PROPE R PRICE IS DETERMINED FOR INTERNATIONAL TRANSACTION THERE CAN NOT BE ARGUMENT ON DOUBLE TAXATION. IN THE RESULT GROUND RAISED BY TH E ASSESSEE IS DISMISSED. 41. GROUND NO. 10 IS GENERAL IN NATURE HENCE NEED NO ADJUDICATION. ITA NO. 226/HYD/2015 FOR AY 2010-11 BY THE REVENUE 42. IN THIS APPEAL THE REVENUE HAS RAISED THE FOLL OWING GROUNDS OF APPEAL: 1) THE ORDER OF THE DRP IS ERRONEOUS ON FACTS. 2) THE DRP ERRED IN DELETING M/S L&T INFO TECH LTD AS COMPARABLE. AS REGARDS THE ISSUE OF UPPER TURNOVER IS CONCERNED UNDER RULE 10B(2) AND (3) OF THE RULE 'T URNOVER' PER SE IS NOT A COMPARABILITY FACTOR. BOTH UNDER UN AN D OECD TP GUIDELINES 'TURNOVER' PER SE IS NOT A COMPARABILI TY FACTOR BUT 'ECONOMIES OF SCALE' MAY AT TIMES BE A COMPARABI LITY FACTOR. TURNOVER MAY BE COMPARABILITY FACTOR IN THE CIRCUMS TANCES WHERE IT IS PROVED THAT TURNOVER SIGNIFICANTLY INFLUENCES PRICE COST OR PROFIT ARISING FROM INTERNATIONAL TRANSACTION. WHIL E ARRIVING AT ARM'S LENGTH MARGIN BELOW AVERAGE MARGIN OF THE CO MPARABLES IS TAKEN INTO CONSIDERATION WHICH COMPRISES OF MARGINS BELOW AVERAGE MARGIN AS WELL AS ABOVE AVERAGE MARGINS TH EREBY IMPLYING THAT COMPARISON IS BEING MADE NOT WITH IND IVIDUAL MARGINS BUT WITH AN AVERAGE OVER A BROAD RANGE. THE RELIANCE ON CASE LAWS AS IF THEY HAVE BEEN LAID DOWN AS BINDING LEGAL PRECEDENCE IS MISLEADING AS HAS BEEN HELD IN THE RE CENT RULING OF TRIBUNAL IN THE CASE OF INTERRA TECHNOLOGIES INDIA PVT LTD. 31 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. 3) THE DRP ERRED IN DELETING THE COMPARABLES OF M/S MINDTREE LTD SASKEN COMMUNICATION TECHNOLOGIES LTD AND ZYLO G SYSTEMS LTD AS THEY ARE EXTRAORDINARY EVENTS LIKE ACQUISITI ON AND MERGER. IN THIS REGARD THE OBJECTIONS WERE NOT RAISED BEFOR E TPO. FURTHER THE DRP WHILE ADMITTING ADDITIONAL EVIDENCE DID NOT GIVE ANY OPPORTUNITY TO THE TPO TO PRESENT HIS CASE. FURTHER THE TAXPAYER DID NOT DEMONSTRATE WHETHER THE MERGER AND ACQUISIT ION HAVE TAKEN PLACE ON THE STANDALONE OR ON CONSOLIDATED BA SIS. IT HAS ALSO DEMONSTRATED THAT THE M&A WERE OF COMPANIES EN GAGED IN DIFFERENT ACTIVITIES WHICH WILL RENDER THESE COMPA NIES UNFIT FOR COMPARISON. 43. AS REGARDS GROUND NO. 2 REGARDING EXCLUSION OF M/S L&T INFOTECH LTD THE LD. DR SUBMITTED THAT UNDER RULE 10B(2) AND (3) OF THE RULE 'TURNOVER' PER SE IS NOT A COMPARABILITY FACTOR. BOTH UNDER UN AND OECD TP GUIDELINES 'TURNOVER' PER SE IS NO T A COMPARABILITY FACTOR BUT 'ECONOMIES OF SCALE' MAY AT TIMES BE A COMPARABILITY FACTOR. TURNOVER MAY BE COMPARABILITY FACTOR IN THE CIRCUMSTANCES WHERE IT IS PROVED THAT TURNOVER SIGN IFICANTLY INFLUENCES PRICE COST OR PROFIT ARISING FROM INTERNATIONAL TR ANSACTION. WHILE ARRIVING AT ARM'S LENGTH MARGIN THE AVERAGE MARGIN OF THE COMPARABLES IS TAKEN INTO CONSIDERATION WHICH COMPR ISES OF MARGINS BELOW AVERAGE MARGIN AS WELL AS ABOVE AVERAGE MARGI N THEREBY IMPLYING THAT COMPARISON IS BEING MADE NOT WITH THE INDIVIDUAL MARGINS BUT WITH AN AVERAGE OVER A BROAD RANGE. LAS TLY THE RELIANCE ON CASE LAWS AS IF THEY HAVE BEEN LAID DOWN AS A BI NDING LEGAL PRECEDENCE IS MISLEADING AS HAS BEEN HELD IN A RECE NT RULING OF THE TRIBUNAL IN THE CASE OF INTERRA TECHNOLOGIES INDIA PVT. LTD. 44. CONSIDERED THE RIVAL SUBMISSIONS AND MATERIAL F ACTS PLACED ON RECORD. THE REVENUE IS OBJECTING TO THE EXCLUSION O F L&T INFOTECH LTD. AND SIMILAR COMPANY BASED ON THE TURNOVER FILTER HAVING HUGE TURNOVER COMPARED TO THE ASSESSEE COMPANY. IN OUR C ONSIDERED VIEW THE VARIOUS TRIBUNALS DRP AND TPO ARE APPLYING THE TURNOVER FILTER CONSISTENTLY TO COMPARE THE COMPARABLES TO EXCLUDE THE DISSIMILARITY. THE BASIC PRINCIPLE IS TO COMPARE THE COMPARABLES W HICH ARE IN SIMILAR IN ALL POSSIBLE WAY. IT IS A UNIVERSAL FACT THAT THERE ARE LOT OF DIFFERENCES IN THE SAME FIELD. IN THE CASE OF BIG C OMPANY IT WOULD BE 32 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. IN A POSITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES W HO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE T HESE ADVANTAGES AND THEREFORE THE TURNOVER ALSO WOULD COME DOWN WHI CH RESULTS IN REDUCING THE PROFIT MARGINS. HENCE THE COMPANIES H AVING HUGE TURNOVER ARE TO BE EXCLUDED FROM COMPARABLES. IN TH E RESULT THIS GROUND IS REJECTED. 45. AS REGARDS GROUND NO. 3 REGARDING EXCLUSION OF M/S MINDTREE LIMITED SASKEN COMMUNICATION TECHNOLOGIES LIMITED AND M/S ZYLOG SYSTEMS LIMITED THE LD. DR SUBMITTED THAT THE OBJE CTIONS WERE NOT RAISED BEFORE THE TPO. FURTHER THE DRP WHILE ADMITT ING ADDITIONAL EVIDENCE DID NOT GIVE ANY OPPORTUNITY TO THE TPO TO PRESENT HIS CASE. FURTHER THE TAXPAYER DID NOT DEMONSTRATE WHETHER T HE MERGER AND ACQUISITION HAVE TAKEN PLACE ON THE STANDALONE OR O N CONSOLIDATED BASIS. IT HAS ALSO TO BE DEMONSTRATED THAT THE M&A WERE OF COMPANIES ENGAGED IN DIFFERENT ACTIVITIES WHICH WILL RENDER THESE COMPANIES UNFIT FOR COMPARISON. 45. CONSIDERED THE RIVAL SUBMISSIONS AND MATERIAL F ACTS PLACED ON RECORD. THE REVENUE IS HAVING GRIEVANCE THAT PROPER OPPORTUNITY WAS NOT GIVEN TO THE AO/TPO WHILE ADJUDICATING THE MATT ER OF DELETING THE THREE COMPARABLES ON THE GROUND OF EXTRA-ORDINARY E VENTS IN THESE COMPANIES. IT IS THE QUESTION OF NATURAL JUSTICE. W E FIND IT APPROPRIATE TO REMIT THIS MATTER BACK TO DRP TO GIVE PROPER OPP ORTUNITY OF BEING HEARD TO THE AO/TPO. HENCE THIS GROUND OF REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 33 ITA NO. 1848 /HYD/2012 & 439 & 226/H/15 GAMELOFT SOFTWARE PVT. LTD. 46. IN THE RESULT APPEALS OF THE ASSESSEE ITA NOS. 1848/HYD/2015 & 439/HYD/2011 AND APPEAL OF THE REVENUE ITA NO. 22 6/HYD/2016 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 28 TH OCTOBER 2016. SD/- SD/- (D. MANMOHAN) (S. RIFAUR RAHMAN ) VICE PRESIDENT ACCOUNTANT MEMBER HYDERABAD DATED: 28 TH OCTOBER 2016 KV COPY TO:- 1) M/S GAMELOFT SOFTWARE PVT. LTD. C/O M. ANANDAM & CO. CAS. 7A SURYA TOWERS SARDAR PATEL ROAD SECUNDERAB AD 500 003. 2) DCIT CIRCLE 2(3) HYDERABAD. 3) DRP HYDERABAD 4. DIT INTERNATIONAL TAXATION INCOME TAX TOWERS 10-2-3 AC GUARDS HYDERABAD 500 004. 5) THE DEPARTMENTAL REPRESENTATIVE I.T.A.T. HYDE RABAD. 6) GUARD FILE