Galactus Funware Technology Private Limited Vs DCIT (ITAT Bangalore)
Summary: The Bangalore Bench of the Income Tax Appellate Tribunal, comprising Shri Prashant Maharishi, Vice President, and Shri Soundararajan K., Judicial Member, partly allowed the appeal of Galactus Funware Technology Private Limited against its assessment for AY 2022-23. The assessee operates an online gaming portal, including the Mobile Premier League platform, offering skill- and learning-based games developed by third parties. It also renders software development and support services to associated enterprises. The appeal involved the selection of comparable companies for software development services and IT-enabled services (ITeS), imputed interest on overdue receivables, working capital adjustment, and disallowance of expenditure claimed for services from two Indian suppliers under section 37(1) of the Income-tax Act, 1961.
The assessee filed its return on 9 November 2022 declaring a loss of ₹395,26,88,944. It reported nine international transactions, principally involving software development revenue of ₹166,74,06,684 and ITeS revenue of ₹11,94,00,000, and an operating margin of 18% in both segments. Applying the transactional net margin method (TNMM) with operating profit to operating cost as the profit-level indicator, the assessee benchmarked the segments against ten and eight comparable companies respectively and considered its transactions to be at arm’s length. The Transfer Pricing Officer (TPO), however, rejected the benchmarking study under section 92C(3), conducted new searches using the Prowess database, and selected 21 software development and 13 ITeS companies. The TPO originally proposed adjustments of ₹8,29,48,647 for software development services, ₹79,52,169 for ITeS and ₹3,33,47,374 for delayed receivables.
The Dispute Resolution Panel (DRP) issued directions on 29 November 2025. In the consequential proceedings, the software development adjustment was reduced to approximately ₹5.85 crore while the other two adjustments were retained. The order records an aggregate transfer pricing adjustment of ₹9,98,02,281 and a separate corporate expenditure disallowance of ₹10,46,07,000, resulting in a determined loss of ₹3,748,279,663. The assessee also raised a jurisdictional objection concerning the assessment under sections 143(3), 144C and 144B and the notice under section 143(2). However, its authorised representative expressly did not press jurisdictional Ground No. 1 before the Tribunal, and that ground was dismissed without adjudication on its merits.
For the software development segment, the assessee contended that companies with turnover and operating scale many times its own could not be treated as comparable, particularly where they also possessed substantial brands, intangible assets, different functional profiles and scalability advantages. It specifically challenged Tata Elxsi Ltd., Tata Consultancy Services Ltd., Cybage Software Pvt. Ltd., Robosoft Technologies Pvt. Ltd., Happiest Minds Technologies Ltd., LTIMindtree Ltd. and Mindtree Ltd., in addition to advancing several other comparability objections in its grounds. The departmental representative argued that Rule 10B(2) of the Income-tax Rules, 1962 did not prescribe turnover as a standalone criterion and that exclusion merely because of higher turnover was unjustified.
The Tribunal agreed that Rule 10B(2) did not expressly prescribe a mechanical turnover filter but held that the statutory comparability analysis requires examination of the characteristics of services, functions performed, assets employed, risks assumed, contractual conditions and prevailing market circumstances. A higher-turnover entity is not necessarily incomparable if those other criteria are satisfied; equally, differences in scale, brand support and intangible assets may render an enterprise materially different. Tata Elxsi Ltd. was found to benefit from Tata Group brand recognition and a different asset profile; Tata Consultancy Services Ltd. had massive turnover, valuable intangibles and Tata brand support. Mindtree Ltd. had diversified consulting and implementation activities, lacked sufficient segmental information and possessed intellectual property and other intangible assets, while LTIMindtree Ltd. benefited from Larsen & Toubro brand support and a materially different asset base. The Tribunal therefore directed the TPO to exclude these four companies, but refused to exclude the remaining comparables solely on turnover grounds.
In the ITeS segment, the assessee had earned revenue of approximately ₹11.94 crore and disputed comparisons with substantially larger companies. The Tribunal found Tech Mahindra Business Services Ltd., having turnover around ₹889 crore and the benefit of the Mahindra brand, unsuitable because its asset profile was materially different even if its functions appeared similar. It also held that Sutherland Global Services Pvt. Ltd., with turnover of approximately ₹2,000 crore, could not be regarded as adequately comparable because its annual report did not give sufficient details of the precise nature of the ITeS activities performed. Both companies were directed to be excluded from the ITeS comparable set. The ruling therefore required a fresh arm’s-length computation reflecting the specifically directed exclusions; it did not order wholesale deletion of every transfer pricing adjustment.
The assessee also challenged the interest adjustment of ₹3,33,47,374 on overdue receivables from associated enterprises, originally computed by the TPO at the State Bank of India prime lending rate of 12.26% with a 30-day credit period. It contended that receivables arose from and were closely connected with its underlying software development and ITeS services; a proper working capital adjustment under TNMM would reflect the financing impact without separate duplication. The grounds additionally referred to its debt-free status, outstanding payables to associated enterprises, the absence of a demonstrated abnormal collection pattern and the DRP’s direction concerning LIBOR. The Tribunal examined Rule 10B(1)(e)(iii), recognised that differences in working capital may materially affect net profit margins, and directed the Assessing Officer to compute the working capital differential and adjust the comparable companies’ margins, positively or negatively as appropriate. It did not separately pronounce that the entire notional interest adjustment stood deleted; the other transfer pricing sub-grounds not argued or pressed were dismissed.
The corporate tax issue concerned services allegedly acquired from Monsoleill Traders Private Limited and Innovation Software Exports Limited. The former issued invoices for ₹3,60,00,000 of services plus GST of ₹64,80,000, and the latter for ₹5,26,50,000 of services plus GST of ₹94,77,000. Thus, the disputed invoice total was ₹10,46,07,000, comprising service value of ₹8,86,50,000 and GST of ₹1,59,57,000. The assessee asserted that the services had actually been rendered in the ordinary course of business, supported by agreements, invoices, ledgers, account-payee payments, PAN particulars, tax deducted under section 194C, vendor returns and an annual report identifying Innovation Software Exports Limited as a listed entity. It also relied on a police complaint against the vendors and the letter dated 5 May 2022 closing the GST investigation; according to the assessee, voluntary reversal of input tax credit under section 73 of the CGST Act did not amount to admitting that it received no services.
The Revenue relied on information from the GST authorities alleging that the vendors had issued invoices without corresponding supplies and that input tax credit had been wrongfully availed. The Assessing Officer identified incomplete invoice particulars, discrepancies between invoice and ledger payment figures and instances of identical-value invoices issued on the same date. Notices to both vendors under section 133(6) went unanswered, and the assessee did not supply independent evidence proving actual rendition of the specified services. The departmental representative contended that invoices, agreements, bank records and accounting entries alone could not discharge the statutory burden of establishing that the amounts were incurred wholly and exclusively for business. The Tribunal noted that the GST investigation was closed after the assessee’s payment of tax of ₹2,07,14,760, interest of ₹15,86,115 and penalty of ₹31,07,214, and treated the reversal and payment as relevant to the overall evidentiary position. It also found that the subsequent police complaint did not substantiate actual performance of services.
The assessee relied on the Bombay High Court decisions in Principal Commissioner of Income-tax v. Shapoorji Pallonji & Company Limited, 423 ITR 220, and the decision identified in the supplied order as Ashok Kumar Gupta v. ITO, 301 Taxman 580; 474 ITR 160 (the reported citations identify that latter judgment as Ashok Kumar Rungta v. ITO). The Tribunal distinguished both decisions: they concerned additions substantially based on sales-tax information without sufficient independent verification, whereas the Assessing Officer in the present case examined the invoices, required evidence establishing receipt of services and issued statutory notices to the vendors that remained unanswered. Holding that mere formal documentation did not establish actual services or qualifying business expenditure, the Tribunal upheld the disallowance of ₹10,46,07,000 under section 37(1) and dismissed Ground No. 3. With the directed exclusion of six comparables and working capital computation, and dismissal of the remaining unpressed or unsuccessful grounds, the appeal was partly allowed.
Cases Discussed
- Ashok Kumar Rungta Vs Income Tax Officer (Bombay High Court); 301 Taxman 580; 474 ITR 160; ITA Nos. 1753, 1759 and 2780 of 2018; 15/10/2024. Cited by the assessee (although named “Ashok Kumar Gupta” in paragraphs 42 and 49 of the supplied Tribunal order). The High Court had rejected a 10% addition for alleged bogus purchases unsupported by cogent independent evidence. The Tribunal distinguished that ruling because the Assessing Officer here independently examined invoices, sought evidence of receipt of services and issued unanswered notices under section 133(6).
- Principal Commissioner of Income-tax Vs Shapoorji Pallonji & Company Limited (Bombay High Court); [2020] 117 taxmann.com 625; 423 ITR 220; 04/03/2020. Cited by the assessee for the proposition that a bogus-purchase addition cannot rest solely on third-party tax intelligence without independent inquiry and a fair opportunity of rebuttal. The Tribunal distinguished the decision on the evidence relating to the present vendors, GST inquiry and failure to prove receipt of services.
