Appellant's Appeal Allowed: Tribunal Directs Recomputation & Verification for Trade Receivables

Zynga Game Network India Pvt. Ltd. Versus The Dy. Commissioner of Income Tax, Circle-7 (1) (2) Bengaluru

Zynga Game Network India Pvt. Ltd. Versus The Dy. Commissioner of Income Tax, Circle-7 (1) (2) Bengaluru - TMI Issues Involved:
1. Adjustment in the Software Development Segment.
2. Adjustment of Notional Interest on Outstanding Debtors.
3. Interest under Section 234B of the Act.

Detailed Analysis:

1. Adjustment in the Software Development Segment:

1.1. Transfer Pricing Adjustment:
The lower authorities determined a TP adjustment of Rs. 7,76,58,654/- for the software development segment. The authorities invoked Section 92C(3) and rejected the comparability analysis by the appellant.

1.2. Selection of Comparable Companies:
The authorities selected comparable companies only if data for FY 2014-15 was available and excluded companies with different financial year endings without considering quarterly financials.

1.3. Operating Nature of Foreign Exchange Gain/Loss:
The authorities considered foreign exchange gain/loss as operating in nature, which was contested by the appellant.

1.4. Provision for Bad and Doubtful Debts:
The authorities did not consider provisions for bad and doubtful debts as operating in nature while computing operating margins. The Tribunal directed the AO to rework the margins considering these provisions as operating expenditures, referencing decisions in Brocade Communications Systems Pvt. Ltd. and Rolls-Royce India Pvt. Ltd.

1.5. Filters Applied for Comparability Analysis:
The authorities applied filters excluding companies with service income less than 75% of total sales, export earnings less than 75%, and employee costs less than 25%. The Tribunal noted that the authorities applied a lower turnover limit but did not apply an upper limit, which was inconsistent with established precedents. The Tribunal directed the exclusion of companies with high turnover and functional dissimilarities, such as Tata Elxsi Ltd., Mindtree Ltd., and others.

1.6. Inclusion/Exclusion of Specific Comparables:
The authorities included companies like Tata Elxsi Ltd., Mindtree Ltd., and others despite functional dissimilarities and high turnover. The Tribunal directed the exclusion of these companies and the inclusion of others like Evoke Technologies Ltd. and FCS Software Solutions Ltd. for reconsideration.

1.7. Risk Adjustment:
The Tribunal noted that the appellant is a no-risk company and directed the AO to provide risk adjustments to comparables if necessary.

2. Adjustment of Notional Interest on Outstanding Debtors:

2.1. Imputation of Notional Interest:
The authorities imputed notional interest on trade receivables from AE, considering a credit period of 30 days and adopting LIBOR plus 400 basis points. The appellant argued that all trade receipts were within the mutually agreed credit period of 90 days.

2.2. Verification of Trade Receivables:
The Tribunal directed the AO to verify invoice-wise details to ensure that trade receivables were within the agreed credit period. If any receivables fell beyond the agreed period, the AO was to verify if they were subsumed in the working capital adjustments. If not subsumed, the adjustment would be restricted to LIBOR plus 300 basis points.

3. Interest under Section 234B of the Act:

3.1. Consequential Nature:
The interest levied under Section 234B amounting to Rs. 1,21,70,785/- was noted to be consequential in nature and did not require separate adjudication.

Conclusion:
The appeal was allowed in favor of the appellant with directions to the AO to recompute margins, verify trade receivables, and apply appropriate filters and adjustments as per the Tribunal's observations. The Tribunal emphasized adherence to established precedents and proper verification of facts before making adjustments.