ITA 380 and CO 31 of 2015 Electronic Arts Games India P Ltd Hyderabad IN INCOME TAX APPELLATE TRIBUNAL Hyderabad Bench, Hyderabad Before Smt. P. Madhavi Devi, Judicial Member AND Shri S. Rifaur Rahman, Accountant Member ITA No.380/Hyd/2015 (Assessment Year: 2010-11) Asstt. Commissioner of Vs M/s. Electronic Arts Games Income Tax, Circle 17(1) India Pvt Ltd Hyderabad Hyderabad PAN: AABCJ 4279 Q C.O. No.31/Hyd/2015 (Arising out of ITA No.380/Hyd/2015) (Assessment Year: 2010-11) M/s. Electronic Arts Vs Asstt. Commissioner of Games India Pvt Ltd Income Tax, Circle 17(1) Hyderabad Hyderabad PAN: AABCJ 4279 Q For Revenue: Shri A. Srinivas, DR For Assessee: Shri Ajit Kumar Jain Date of Hearing: 01.08.2016 Date of Pronouncement: 30.09.2016 ORDER Per Smt. P. Madhavi Devi, J.M. This is Revenue s appeal for A.Y 2010-11 and Cross Objection is of assessee. 2. Brief facts of case are that assessee company, engaged in business of export and sale of developed software, filed its return of income for A.Y 2010-11 on 15.10.2010 admitting total income of Rs.35,89,206 under normal Page 1 of 7 ITA 380 and CO 31 of 2015 Electronic Arts Games India P Ltd Hyderabad provisions and amount of Rs.76,96,515 u/s 115JB of Act. During course of assessment proceedings u/s 143(3) of Act, AO observed that assessee has entered into international transaction with its AE. He therefore, referred determination of ALP of transaction to TPO u/s 92CA of Act. TPO, vide order dated 24.09.2013, computed ALP adjustment and accordingly proposed adjustment of Rs.3,83,08,894. In accordance with said order, draft assessment order was passed against which assessee preferred its objections before DRP. DRP, u/s 144C of Act, has granted partial relief to assessee. Against relief granted by DRP, Revenue is in appeal before us, while assessee is in cross objection supporting order of DRP, though on different grounds. grounds raised by Revenue are as under: 1. order of Honourable DRP is erroneous both in law and on facts of case. 2. Whether on facts and in circumstances of case, DRP is justified in rejecting comparable companies M/s Infosys Technologies Ltd and M/s L& T InfoTech Ltd on ground of exceptionally large scale of operations and thereby ignoring fact that high or low turnover do not influence margins of comparables? 3. Whether in facts and circumstances of case, DRP is correct in law in holding that telecommunication charges and other expenditure should be excluded from 'total turnover' for purpose of computation of allowable deduction under section 10 of Income Tax Act, 1961 when there is no such specific provision to reduce 'total turnover'? 4. Whether in facts and circumstances of case, DRP is correct in law in holding that Page 2 of 7 ITA 380 and CO 31 of 2015 Electronic Arts Games India P Ltd Hyderabad expenditure towards stock-based compensation (ESOPs) is revenue expenditure when jurisdictional ITAT in case of Medha Servo Drives Private Limited versus ACIT upheld addition on account of ESOPs as being capital in nature . 3. cross objection of assessee are as under: That on facts and circumstances of case and in law, Respondent cross-objects grounds of appeal filed by Appellant before Appellate Tribunal for following reasons: i. Hon'ble DRP/learned AO ought to have rejected companies, namely Infosys Technology Ltd and L&T Infotech Ltd, as they were functionally not comparable. ii. iii. Hon'ble DRP/learned AO ought to have considered fact that internet and telephone charges do not form part of export turnover and thereby should not be reduced from export turnover . 4. As regards Ground No.2 of Revenue s appeal is concerned, it is case of Revenue that DRP ought not to have directed exclusion of these two companies on basis of turnover. assessee has also raised cross objection No.1 that DRP ought to have rejected these two companies on ground of functional dissimilarities. 5. Having heard and having gone through material on record, we find that comparability of Infosys Technologies Ltd had arisen in case of Agnity India Technologies (P) Ltd before Hon'ble Delhi High Court for A.Y 2006-07 and Hon'ble High Court, taking note of functional dissimilarities as well as Page 3 of 7 ITA 380 and CO 31 of 2015 Electronic Arts Games India P Ltd Hyderabad exceptionally high turnover, has directed that this company be excluded from list of comparables. We find that even for relevant A.Y, there is no change in activities of Infosys Technologies Ltd and that, it is carrying on diversified activities of both software development services and product development and has huge turnover as compared to assessee. Further, this Tribunal, in case of Virtusa India Private Limited vs. DCIT in ITA No.409/Hyd/2015, for very same A.Y 2010-11, has also considered comparability of this company with assessee therein which has similar activity as assessee before us and after taking into consideration functional dissimilarities as well as turnover, has directed AO to exclude same from list of comparables. 6. As regards comparability of L&T InfoTech Ltd, this Tribunal in above case of Virtusa India Pvt. Ltd has observed that L&T InfoTech Ltd has no segmental data and therefore, was rejected by TPO in earlier years on this ground. Therefore, Tribunal has directed exclusion of L&T InfoTech Ltd also from final list of comparables in case of Virtusa India (P) Ltd. For sake of ready reference, Para 7 to 9 of said are reproduced hereunder: 7. Coming to Revenue's appeal against directions of DRP to exclude Infosys Technology Ltd., L & T InfoTech Ltd., and Tata Elxsi Ltd., from final list of comparables, we find that DRP has directed that these companies to be excluded on ground of functional dissimilarity. assessee has relied upon decision of this Tribunal in assessee's own case for A.Y. 2007-08 wherein Tribunal has directed that Infosys Technology Ltd., be excluded from list of comparables on account of functional dissimilarity and owning of significant intangibles and brand value. As regards L & T InfoTech Ltd. is concerned, Page 4 of 7 ITA 380 and CO 31 of 2015 Electronic Arts Games India P Ltd Hyderabad this Tribunal has directed that L & T InfoTech Ltd., be excluded as segmental data is not available and was rejected by TPO in earlier years on this ground alone. As regards Tata Elxsi Ltd., Tribunal has directed that this company be excluded on functional dissimilarity. 8. Ld. D.R., though, has relied upon order of TPO and A.O., has not been able to bring any evidence on record to show that facts in this year are in any way different from facts in A.Y. 2007-08. 9. Having regard to rival contentions we do not see any reason to interfere with order of DRP and Revenue's appeal is accordingly dismissed 7. As facts and circumstances are similar in case before us, we are satisfied that there is functional dissimilarity between assessee and Infosys Technologies Ltd including high turnover and therefore, said company has to be excluded. Similarly, in case of L&T Infotech, this Tribunal has already considered that for very same A.Y, there is no segmental data available and hence is not comparable. Therefore, respectfully following same, we do not see any reason to interfere with order of DRP. Thus, ground of appeal No.2 of Revenue is dismissed and cross objection No.1 of assessee is allowed. 8. As regards Ground No.3, we find that DRP has directed for exclusion of telecommunication charges and other expenditure both from export turnover as well as from total turnover in accordance with decision of Special Bench of Tribunal at Chennai in case of Income Tax Officer vs.SAK Soft Ltd, reported in 313 ITR 353 (AT). We find that this issue is also covered by decision of Hon'ble Karnataka Page 5 of 7 ITA 380 and CO 31 of 2015 Electronic Arts Games India P Ltd Hyderabad High Court in case of Tata Elxsi Ltd. 349 ITR 98 (Karn.) and therefore, we see no reason to interfere with same. Revenue s Ground of appeal No.2 is therefore, rejected. 9. Cross objection No.2 of assessee is that above telecommunication and internet charges should not be excluded from export turnover itself. However, since we have directed that internet and telephone charges are to be excluded from both export turnover as well as total turnover, there is no prejudice caused to assessee. Therefore, cross objection is also rejected. 10. As regards Ground No.4 with regard to claim of assessee that expenditure incurred towards employees stock (ESOPs) is revenue expenditure, we find that this issue is also covered by decision of Special Bench of Tribunal at Bangalore in case of Biocon Ltd (35 Taxmann.com 335 (Bangalore) which has been taken note of by DRP in directing AO to allow same as revenue expenditure. Therefore, we see no reason to interfere with same and ground of appeal No.4 is rejected. 11. In result, revenue s appeal is dismissed and assessee s cross objection is partly allowed. Order pronounced in Open Court on 30th September, 2016. Sd/- Sd/- (S.Rifaur Rahman) (P. Madhavi Devi) Accountant Member Judicial Member Hyderabad, dated September, 2016. Page 6 of 7 ITA 380 and CO 31 of 2015 Electronic Arts Games India P Ltd Hyderabad Vinodan/sps Copy to: 1 Asstt. Commissioner of Income tax, Circle 17(1), 6th Floor, B Block, IT Towers, AC Guards, Hyderabad 2 M/s. Electronic Arts Games (India) Pvt. Ltd, Vega Building, Software Unit Layout, Hitechcity, Madhapur, Hyderabad 500081 3 DRP, 2nd Floor, IT Towers, 10-2-3 AC Guards, Hyderabad 500004 4 Director of Income Tax, International Taxation, IT Towers, 10-2-3 AC Guards, Hyderabad 500004 5 DR, ITAT Hyderabad 6 Guard File By Order Page 7 of 7 Asstt. Commissioner of Income-tax, Circle-17(1), Hyderabad v. M/s. Electronic Arts Games India Pvt Ltd