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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Smt. P. Madhavi Devi & Shri B. Ramakotaiah
Per Smt. P. Madhavi Devi, J.M.
This is assessee’s appeal for the A.Y 2011-12. In this appeal, the assessee is aggrieved by the assessment order passed u/s 143(3) r.w.s. 92CA(4) r.w.s. 144C(13) of the I.T. Act, dated 10.02.2016. The assessee has raised the following grounds of appeal: “1. The DRP has erred in law and facts of the case in not affording an opportunity of hearing and directing the TPO to rework the adjustment u/s 92C(A) of the Act.
The DRP as well as the TPO has not given an opportunity of hearing for the enhancement of the adjustment as per law, therefore the adjustment is bad in law.
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ITA No 598 of 2016 Gameloft Software P Ltd Hyderabad.
Your appellant submits that the TPO had rejected the transfer pricing study of the appellant on the ground that the appellant's search process is not in conformity with the TP regulations.
Your appellant submits that the TPO and DRP erred in law on facts of the case in not accepting the filters adopted by your appellant.
Your appellant has in fact applied an upper cap of Rs. 200 crores on the turnover filter which the TPO has not applied at all. Hence the TPO has erred in not adopting an upper cap on turnover filter in the comparability analysis and the DRP ought to have restricted the upper limit on turnover filter to have comparables within the limited magnitude. Thereby the filters adopted are wrong in law.
Your appellant submits that the tax payer strongly refutes the DRP's contention that it do not find any infirmity in taking Super profit making comparable. The TPO ought to have applied super profit filter when he has excluded some comparables on the basis of application of persistent losses filter/diminishing returns filter.
Your Appellant refutes to the inclusion of operating cost pertaining to NIODA centre in the TPQ's order, though the Appellant is responsible for local game download and in no way connected to export earnings.
The DRP ought to have appreciated the fact that the Appellant included provision of services to AE and excluded the payment of royalty to its AE on the premise that it is paid for earning domestic revenue.
Your Appellant objects to the TPQ's claim that the intangible transaction relating la payment of royalty is aggregated with the transaction of software development. The eligible assessee had calculated the PLI by excluding the revenue from game
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ITA No 598 of 2016 Gameloft Software P Ltd Hyderabad.
downloads as well as the payment of royalty and Foreign Exchange Loss.
Your Appellant objects to the inclusion of the comparables who own the intellectual property rights, whereas the Appellant does not own any JP rights in its name. The DRP ought to have excluded the comparable owing JP rights and allowed a downward adjustment in this regard.
Your appellant is into a highly technical oriented development of software used in mobiles only unlike the other general software developers. The appellant has spent more on rent during the current financial year in anticipation of more business in the ensuing year. Both the TPQ and DRP had not given appropriate consideration to underutilization of infrastructure by the appellant. Therefore, the TPQ and DRP ought to have accepted the TP Study submitted by your appellant.
Your appellant submits that in absence of any other similar comparable in the database, the TPQ and the DRP ought to have considered international comparables as submitted by your appellant during the proceedings. Your appellant submits that in the international scenario especiaI1y in gaming software industry, the margins have very low margins. In view of this, the margins arrived by the TPO and DRP are on higher side.
Your appellant submits that on increasing the margins of your appellant would result in taxing the same twice once in the hands of your appellant and again in the hands of the associated enterprise in the other jurisdiction thus defeating the objective of DTAA and other international conventions entered into by various countries only to avoid double taxation. Hence the adjustments upheld by DRP are against the spirit of international law.
Your Appellant objects to the disallowance of Intercompany expenses Rs 24.47,030/- as the
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ITA No 598 of 2016 Gameloft Software P Ltd Hyderabad.
same has been incurred for business purposes of game down loads and hence cannot be disallowed.
For these and such other grounds that may be urged at the time of hearing your appellant prays that the income be computed as per law”.
At the time of hearing, the learned Counsel for the assessee submitted that the assessee is not pressing ground of appeal No.13. It is accordingly rejected.
As regards the other grounds, the learned Counsel for the assessee submitted that the assessee is mainly agitating on the grounds 3, 4, 5 & 7 and if these grounds are adjudicated in favour of the assessee, the assessment would have to be remanded to the file of the AO/TPO. He submitted that very same issue had come up in the assessee’s own case for the A.Ys 2008- 09, 2010-11 & 2012-13 and the Coordinate Benches of this Tribunal have remanded the issue to the file of the AO for re- examining the issue of TP adjustment afresh after giving due opportunity to the assessee. Copies of the said orders are filed before us.
We find that the Coordinate Bench of this Tribunal in the assessee’s own case has considered the issue at length for the A.Ys 2008-09, 2010-11 and 2012-13 to remand the issue to the file of the AO. We both are signatories to one of such orders. For the sake of clarity and ready reference, Para-8 of the order of the Tribunal for the A.Y 2012-13 is reproduced hereunder:
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ITA No 598 of 2016 Gameloft Software P Ltd Hyderabad.
“8. Coming to other grounds on the merits of the TP addition made, it was fairly submitted that assessee is in the specified business and the comparable companies are not at all comparable. This issue was discussed by the Co-ordinate Bench in assessee's own case for the AYs. 2008-09 and 2010-11. The decision of the Co-ordinate Bench of ITAT, Hyderabad in para 17 onwards is as under: "17. Ground no. 9 is with regard to comparables selected 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 companies and also services providers. There are no gaming companies during that period. Hence, the TP study of assessee has to be accepted. In this connection, ld. AR relied on the decision of Hewlett Packard India Software Operation Pvt. Ltd Vs ACIT 67 taxmann.com 309 (Bang Trib). 18. Ld. DR relied on the orders of revenue authorities. 19. Considered the rival submissions and perused the material facts on record as well as the orders of revenue authorities. We agree with the assessee that the assessee is a software developer in gaming sector and cannot be compared with the general software development or service providers. It is unique in terms 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 software companies as comparables and identify only those companies which are exclusively involved in the development of games software. TPO can take the help of assessee to identify these comparables and determine the ALP. Accordingly, this ground of assessee is allowed for statistical purposes. ". 8.1. Since the very basis of the selection of comparables is questioned, the consequent issues of filters, working capital adjustment and risk adjustments become academic. In line with the decision of the Co-ordinate Bench in other assessment years as stated supra, we are of the opinion that exercise of selection of comparables has to be done specifically keeping in mind the special nature of assessee's business in
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ITA No 598 of 2016 Gameloft Software P Ltd Hyderabad.
developing gaming software. The AO is directed to keep the detailed orders of the Co- ordinate Bench in AYs. 2008-09 & 2010-11 (supra) and can re- examine the issue of TP adjustment afresh after giving due opportunity to assessee. For these reasons, the issues on merits are considered allowed and the order of the TPO/AO with reference to TP adjustment is set aside with a direction to re-do it afresh as directed above”.
As the facts and circumstances in the A.Y before us are the same, we deem it fit and proper to remand the issue of the T.P. adjustments to the AO/TPO for re-examination of the issue afresh after giving a reasonable opportunity of hearing to the assessee.
In the result, assessee’s appeal is partly allowed for statistical purposes. Order pronounced in the Open Court on 10th January, 2018.
Sd/- Sd/- (B. Ramakotaiah) (P. Madhavi Devi) Accountant Member Judicial Member
Hyderabad, dated 10th January 2018. Vinodan/sps
Copy to:
1 M. Anandam & Co. CAs, 7A Surya Towers, Sardar Patel Road, Secunderabad 500003 2 ACIT, Circle 2(2) Hyderabad 3 DRP, Hyderabad 4 Director of Income Tax (IT & TP) Hyderabad 5 Add. CIT (TP) Hyderabad 7 Guard File
By Order
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