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

2015 (5) TMI 754 - ITAT HYDERABAD

Transfer pricing adjustment - 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 - Held that:- The profit margin of such entity in the immediately preceding year(s) may also be taken into consideration and the FAR .....

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td. 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 ma .....

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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 .....

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upport 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 ₹ 35,89,206 under the normal provisions of the Act and book profit of ₹ 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 int .....

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rate IT support services 12,72,609 Electronic Arts Inc. Purchase of fixed assets 12,42,724 44,92,71,672 In order to determine the 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 assessee, TP analysis was done in respect of each type of transaction separately on the basis .....

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on of Software development services 33,44,53,634 TNMM OP/OC 11.2 12.1 Provision of back office support services 8,94,18,867 TNMM OP/OC 9.09 13.6 Provision of marketing support services 2,03,38,621 TNMM OP/OC 9.09 13.6 Provision of corporate IT support services 38,17,826 TNMM OP/OCV 5.6 9.9 Purchase of fixed assets 12,42,724 TNMM OP/OC 11.2 12.1 In the above analysis, different comparables were selected by the assessee for different type of transactions by applying certain filters and since the A .....

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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 .....

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anally selected the following 18 entities as comparables with Arithmetic Mean of their OP/OC at 22.69%. Sl. No. Company Name OP/OC 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 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. Persisten .....

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Operating Cost of ₹ 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 ₹ 48,63,37,843 as against the price of ₹ 44,80,28,949 charged by the assessee. The difference of ₹ 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 o .....

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e 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 ₹ 4 .....

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essee, 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. .....

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d 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 nonavailability 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.EInfochips Bangalore Ltd. in the list of final comparables. 10. The learned counsel for the assessee .....

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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 developme .....

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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 ser .....

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are 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 fro .....

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e 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 ex .....

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d. 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 .....

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es 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 .....

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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 rendere .....

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ble 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 alth .....

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