Electronic Arts Games (India) Pvt. ... vs Assessee

ITA No.265/Hyd/2015 : Assessment year 2010-11

M/s. Electronic Arts Games V/s. Asstt. Commissioner of Income-tax (India) Pvt. Ltd., Hyderabad Circle 17(1), Hyderabad

(PAN - AABCJ 4279 Q )

(Appellant) (Respondent)

Appellant by : Shri Ajit Kumar Jain & Ms. Radhika Thakkar

Revenue by : Smt. G.Aparna Rao DR Date of Hearing 23.4.2015 Date of Pronouncement 29.4.2015

ORDER

Per P.M.Jagtap, Accountant Member :

This appeal filed by the assessee is directed against the order of the Asst Commissioner 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 this appeal, ground No.1 is general, while ground No.3 is not pressed by the learned counsel for the assessee at the time of hearing before us. Same are accordingly dismissed.

3. The only ground that survives for our consideration thus is ground 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.

2 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

4. The assessee in the present case is a company, which is into developing, publishing, marketing and distributing interactive entertainment software games, that are playable by consumer on a variety of hardware platforms and over the internet. It is mainly engaged in providing a contract software development services, back office support services and marketing support services to its Associated Enterprises. It is a wholly owned subsidiary of Electronics Arts (India Holding) Inc, USA. The return of income for the year under consideration was filed by it on 15.10.2010 declaring total income of Rs.35,89,206 under the normal provisions of the Act and book profit of Rs.76,96,515 under S.115JB of the Act. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee company has entered into the following international transactions with its Associated Enterprises during the year under consideration-

A.E. Nature of transaction Amount (Rs.)

Electronic Arts Inc. Provision of software 33,44,53,634 development services Electronic Arts Inc. Provision of back office 8,94,18,867 support services Electronic Arts Asia Provision of marketing 2,03,38,621 Pacific Pte. Ltd. Inc. support services Electronic Arts Inc. Provision of corporate IT 25,45,217 support services Electronic Arts Swiss Provision of Corporate IT 12,72,609 SARL support services Electronic Arts Inc. Purchase of fixed assets 12,42,724 44,92,71,672

In order to determine the Arm's 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 3 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

assessee, TP analysis was done in respect of each type of transaction separately on the basis of segmental details claimed to be maintained by the assessee. The said analysis was done by applying Transactional Net Margin Method (TNMM) as the most appropriate method by taking Operating Profit to Operating Cost (OP/OC) as Price Level Indicator (PLI). The summary of such analysis made in the TP study Report submitted by the assessee as summarized by the Transfer Pricing Officer in his order was as under-

Nature of Amount MAM PLI Margin of Margin of Transaction Tax payer Compara- bles

Provision of 33,44,53,634 TNMM OP/OC 11.2 12.1 Software deve- lopment services

Provision of back 8,94,18,867 TNMM OP/OC 9.09 13.6 office support services Provision of 2,03,38,621 TNMM OP/OC 9.09 13.6 marketing support services Provision of 38,17,826 TNMM OP/OCV 5.6 9.9 corporate IT support services

Purchase of fixed 12,42,724 TNMM OP/OC 11.2 12.1 assets

In the above analysis, different comparables were selected by the assessee for different type of transactions by applying certain filters and since the Arithmetic Mean of OP/OC of the comparables was within the range of +/-5% to the OP/OC of the assessee in relation to its international transactions with AE, it was claimed that no TP adjustment was required to be made in respect of the said transactions.

4 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

5. After going through the relevant documents maintained by the assessee and after anlaysing the relevant international transactions, the TPO was of the opinion that the method adopted by the assessee for selecting the comparables suffered from defects and the same, therefore, had resulted in selection of inappropriate comparables and rejection of appropriate comparables. He also was of the opinion that it was more appropriate to consolidate all the international transactions of the assessee company with its AE for the purpose of Transfer Pricing Analysis and such analysis should be done by taking into consideration the margin earned by the assessee at entity level. He accordingly, confronted the assessee with his observations in this regard, seeking the latter's explanation/objections and after taking into consideration the objections raised by the assessee, he proceeded to do the exercise of transfer pricing analysis. While doing so, he calculated the OP/OC of the assessee company at entity level at 10.26% and after taking into consideration the new search for selecting the appropriate comparables as well as on the basis of anaysis of data base, the relevant annual reports and other information collected by him, the TPO filanally selected the following 18 entities as comparables with Arithmetic Mean of their OP/OC at 22.69%.

Sl. Company Name OP/OC No.

1. Avani Cimcon 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 5 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

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. 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 Arm's Length Margin and applying the same to the corresponding Operating Cost of Rs.40,63,31,225, the Arm's 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.3,83,08,894 accordingly was worked out by the TPO as TP adjustment that was 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 Officer 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 6 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

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 entities, namely, Infosys Technology Ltd. and L & T Infotech Ltd. from the final list of comparables.

8. As per the directions of the DRP, the Assessing Officer recomputed the Arm's Length Price of the international transactions of the assessee company with its AE at Rs.48,04,05,407 by applying average OP/OC of 18.23% of the final 16 comparables to the corresponding operating cost and based on that, addition of Rs.3,23,76,458 was made by the Assessing Officer to the total income of the assessee on account of TP adjustment in the assessment made by him, vide order dated 18.2.2015 passed under S.143(3) read with S.92CA(3) and S.144C(5) of the Act. Aggrieved by the same, assessee has preferred this appeal before the Tribunal.

9. The learned counsel for the assessee, at the outset, submitted that although the transfer pricing analysis done in the TP report submitted by the assessee in respect of each type of transaction separately was rejected by the Transfer Pricing Officer without assigning any reasons, the assessee is not really interested to challenge the action of the TPO on this aspect of the matter. He contended that the limited issue which the assessee wants to raise is about the inclusion of one entity, namely, M/s. E-Infochips Bangalore Ltd. in the list of final comparables. He contended that this entity is not functionally comparable to the assessee company 7 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

and the relevant data in respect of the said entity not being fully available in the public domain, the same is liable to be excluded from the list of comparables, while working out the Arm's Length Price of the relevant transactions of the assessee company with its AE. In this regard, he invited our attention to the relevant portion of the submissions made before the DRP placed at page Nos.79 to 83 of the appeal memo to point out that elaborate submissions were made by the assessee before the DRP to highlight the difference in functional profile of the said entity as well as non- availability of relevant data. He contended that the DRP, however, has completely ignored the submissions made by the assessee and upheld the action of the Assessing Officer/TPO to include M/s.E- Infochips Bangalore Ltd. in the list of final comparables.

10. The learned counsel for the assessee then proceeded to explain as to how the functional profile of M/s. E-Infochips Bangalore Ltd. is different from that of the assessee company. In this regard, he invited our attention the relevant pages of the print out taken from the website of the said entity placed at pages 286 to 288a of the paper-book and pointed out that the said entity is mainly engaged into product development, with specialization in offering end to end product life cycle management services ranging from conceptualization and feasibility analysis, product design to product launch. He also pointed out that the end to end product design services provided by the said entity include hardware design, software design including software architecture design, software stack development, software QA, middleware and firmware design and application development. He submitted that as per the information available on the website, the said entity over the last 16 years, has claimed to have become a trusted new product development partner for companies across the globe, who seek a long term partnership. He contended that the assessee 8 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

company, on the other hand, as per the Transfer Pricing Officer's report itself is engaged in providing contract software development services, back office support services and marketing support services to its AE, which are entirely different and distinct functions performed, as compared to M/s. E-Infochips Bangalore Ltd. He contended that the functional profile of the said entity thus is entirely different from the assessee company and the same is liable to be excluded from the list of final comparables in. In support of this contention, he relied on the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT V/s. Inototo Software India Private Ltd. (ITTA 233 of 2014 dated 27.3.2014), wherein the decision of the Tribunal to exclude an entity from the list of comparables taking into consideration the dissimilarity between the product company and the software services company was upheld by Their Lordships.

11. In order to support and substantiate the case of the assessee that the relevant financial data of M/s. E-Infochips Bangalore Ltd. is not available in the public domain, the learned counsel for the assessee invited our attention to the relevant portion of the annual report of the said entity placed at page 296 of the paper-book. He pointed out that the income earned by the said entity from software services as well as the expenses incurred on software development are given in the Profit & Loss Account with a mention that further details of the same are given in Schedule 7 and 8I. He submitted that the information stated to be given in Schedule 7 and 8, however, is not available in the public domain. He submitted that similarly Schedule 9 giving details of administrative and other expenses as mentioned in the Profit & Loss Account of M/s. E-Infochips Bangalore Ltd. is not made available in the public domain. He also pointed out from the relevant portion of the Annual Report placed at page 304 of his paper book that the 9 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

said entity is claimed to be primarily engaged in software development and IT enabled services, but segmental details are stated to be not maintained, as the software development and IT enabled services are considered as one reportable business segment. He also pointed out that the amount of consultancy charges given on the same page and relied upon by the TPO to work out the percentage of consultancy income of the said entity is actually in respect of related party and not in respect of all the parties. He contended that sufficient data of M/s. E-Infochips Bangalore Ltd. as relevant for the purposes of comparability analysis thus is not available in public domain and the TPO is not justified in including the said entity in the list of comparables on the basis of insufficient data. He also pointed from the Annual Report of M/s. E-Infochips Bangalore Ltd. that complete and sufficient data giving exact functional profile of the said entity is not available 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 insufficient information available in the public domain from the list of comparables.

12. The Learned Departmental Representative, on the other hand, strongly supported the order of the Transfer Pricing Officer in support of the Revenue's case that M/s. E-Infochips Bangalore Ltd. is rightly included in the list of final comparables. She invited our attention to page 8 of the TPO's order to point out that the assessee has not gone vertical or horizontal within the software industry for its comparability study. She also invited our attention to page No.10 of the TPO's report to show that the criteria adopted by the TPO for selection of the comparables covered vertical as well as horizontals within the software industry. She contended that both M/s. E-Infochips Bangalore Ltd. and the assessee company are basically rendering software development services, as highlighted 10 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

by the TPO and the said entity, therefore, is rightly taken as comparable company.

13. We have considered the rival submissions and also perused the relevant material on record. The limited contention raised by the learned counsel for the assessee is that the entity M/s. E-Infochips Bangalore Ltd. taken by the Assessing Officer/TPO as comparable should be excluded from the list of final comparables for the purposes of transfer pricing analysis on the ground of functional differences as well as on the ground of insufficient information available in respect of the said entity in public domain. In order to support and substantiate his contention of functional dissimilarity, the learned counsel for the assessee has heavily relied on the contents of the website www.einfochip.com., the print out of relevant portion of which is placed on record before us. On the basis of the said contents, he has made an attempt to point out that M/s. E-Infochips Bangalore Ltd. is functionally different form the assessee company in as much as the said company is mainly into development of new products whereas the assessee company is mainly providing software development services. After having gone through the website www.einfochip.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 functional profile given on the said website thus is that of the entire group and not just of the M/s. E-Infochips Bangalore Ltd. The content of the said website in our opinion, therefore, cannot be relied upon to ascertain the functional profile of M/s. E-Infochips Bangalore Ltd., especially when the nature of functions/services given there are materially different from the functions/services stated to be rendered by M/s. E-Infochips Bangalore Ltd. in its annual report. Even the details of services stated to be rendered by M/s. E- Infochips Bangalore Ltd. at different places in its Annual Report are 11 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

very sketchy and it is very difficult to ascertain from the same, exact nature of services rendered by the said entity.

14. It is also pertinent to note here that a detailed submission was made by the assessee before the DRP in support of its case for exclusion of M/s. E-Infochips Bangalore Ltd. from the list of final comparables on the ground of functional differences as well as insufficient data/information available in the public domain. A perusal of the order of the DRP however, shows that no finding/observation has been recorded by them on these vital aspects of the matter. It is also worthwhile to note here that out of the 16 comparables finally selected, profit margin(OP/OC) of 15 entities taken as comparables is in the range of 3% to 32% whereas 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 be excluded from the list of final comparables merely on the ground of high or abnormal profits, as held by the Special Bench of ITAT in the case of Maersk Global Service Centre (India) Private Limited in ITA No.7466/Mum/12 dated 7.3.2014, it should trigger further investigation in order to establish whether it can be taken as comparable or not. As further held by the Special Bench in the case of Maersk Global Centres (India) P. Ltd., such investigations should be to ascertain as to whether earning of super profits reflects normal business condition or whether it is the result of some abnormal condition prevailing in the relevant year. The profit margin of such entity in the immediately preceding year(s) may also be taken into consideration and the FAR analysis in such cases may be reviewed to ensure that the potential comparable earning higher profit satisfies the comparability condition. Since this exercise has not been done either by the AO/TPO or the DRP in the present case, we are of the view that the matter should go back to 12 ITA No.265/Hyd/2015 M/s.Electronic Arts Games(India) Pvt. Ltd., Hyderabad

the Assessing Officer/TPO for fresh consideration. This, in our opinion, will also take care of the grievance of the assessee relating to the lack of sufficient information in respect of M/s. E-Infochips Bangalore Ltd. available in the public domain in as much as the TPO can obtain such information in the form of relevant schedules of the Profit & Loss Account of the said entity as well as the segmental details, if any, directly from the said entity. We therefore, set aside the impugned order of the Assessing Officer as well as the direction given by the DRP on this issue and restore the matter to the file of the Assessing Officer/TPO for deciding the same afresh in the light of the observations already made by us, after giving the assessee proper and sufficient opportunity of being heard. Ground No.2 of the assessee's appeal is accordingly allowed for statistical purposes.

15. In the result, assessee's appeal is treated as partly allowed for statistical purposes.

Order pronounced in the court on 29th April, 2015

Sd/- Sd/- (Saktijit Dey) (P.M.Jagtap) Judicial Member Accountant Member

Dt/- 29th April, 2015

Copy forwarded to:

1. M/s. Electronic Arts Games (India) Pvt. Ltd., 7th Floor, Vega Block, Ascendas IT Park, Madhapur, Hyderabad 500 081.

2. Asstt. Commissioner of Income-tax Circle 17(1), Hyderabad

3. Dispute Resolution Panel, Hyderabad

4. Director General of Income-tax, International Taxation, Hyderabad 500 004.

5. Departmental Representative, ITAT, Hyderabad.

B.V.S