M/s Microship Technology India Private Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-4(1)(2), Bangalore

ITA 323/BANG/2019

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 2549 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-06-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-03-2021
• Assessment Year: 2010-2011
• Appeal Filed On: 22-02-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: TANMAY RAJKUMAR
• Keywords: Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Fair market value; Tax effect; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 92D; 37(1); 144C; 13; 22; 92CA; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO.323/BANG/2019 ASSESSMENT YEAR : 2010-11 MICROCHIP TECHNOLOGY INDIA PVT. LTD., PLOT NO.149-B EPIP PHASE INDUSTRIAL AREA, WHITEFIELD, BENGALURU-560 066. PAN AABCM 9868 J VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-4(1)(2), BENGALURU. APPELLANT RESPONDENT ASSESSEE BY : SMT. TANMAY RAJKUMAR, ADVOCATE REVENUE BY : MS. NEERA MALHOTRA, CIT(DR) DATE OF HEARING : 10-03-2021 DATE OF PRONOUNCEMENT : 14-06-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AG AINST ORDER DATED 21/12/2018 PASSED BY THE LD.DCIT CIRCLE 4(1)( 2) UNDER SECTION 143(3) READ WITH SECTION 254 OF THE ACT, ON FOLLOWING GROUNDS OF APPEAL: THE GROUNDS MENTIONED HEREIN BY THE APPELLANT ARE WITHOUT PREJUDICE TO ONE ANOTHER. 1. THAT THE ORDER OF THE LEARNED DEPUTY COMMISSIONE R OF INCOME-TAX, CIRCLE - 4(1)(2), BANGALORE ('LEARNED AU'), DATED DECEMBER 2 1, 2018, TO THE EXTENT PREJUDICIAL TO THE APPELLANT, IS BAD IN LAW, CONTRA RY TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND IS LIABLE TO BE QUASH ED. PAGE 2 OF 21 ITA NO.323/BANG/2019 2. THAT THE DISPUTE RESOLUTION PANEL ('LEARNED DRP' ) ERRED IN NOT APPRECIATING THAT THE ORDER OF THE LEARNED ASSISTANT COMMISSIONE R OF INCOME-TAX (TRANSFER PRICING) - 2(1)(1), BANGALORE ('LEARNED T PO') PASSED UNDER SECTION 92CA OF THE INCOME-TAX ACT, 1961 ('THE ACT') IS CON TRARY TO LAW AND THUS LIABLE TO BE QUASHED. 3. THAT ON FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, IN THE FIRST ROUND OF ASSESSMENT, THE LEARNED DRP/ AO/ TPO ERRED IN MAKIN G AN UPWARD ADJUSTMENT TO THE TRANSFER PRICE OF THE APPELLANT'S INTERNATIONAL TRANSACTIONS OF INR 29,885,102 IN RESPECT OF SOFTWA RE DEVELOPMENT SERVICES AND INR 6,354,054 ON ACOUNT OFMARKETING SU PPORT SERVICES. VIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL ('IT AT'), DATED OCTOBER 27, 2017, THE ENTIRE TP MATTER WAS REMANDED BACK TO THE FILE OF LEARNED DRP AND LEARNED TPO WITH SPECIFIC ADJUDICATION. IN LIEU OF THIS ORDER, THE LEARNED DRP/ AU! TPO ERRED IN RETAINING AN UPWARD A DJUSTMENT OF INR 26,366,448 IN RESPECT OF APPELLANT'S SOFTWARE DEVEL OPMENT SERVICES AND CONFIRMING THE ADJUSTMENT OF INR 6,354,054 ON ACCOU NT OF MARKETING SUPPORT SERVICES. GROUNDS FOR SOFTWARE DEVELOPMENT SERVICES 4. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WITH RESPECT TO ADJUSTMENT TO THE TRANSFER PRICE OF THE SOFTWARE DEVELOPMENT SERVICES, THE LEARNED DRP/ AO/ TPO ERRED IN: 4.1. REJECTING THE TRANSFER PRICING ('TP') DOCUMENT ATION MAINTAINED BY THE APPELLANT UNDER SECTION 92D OF THE ACT, IN GOOD FAI TH AND WITH DUE DILIGENCE. 4.2. REJECTING THE COMPARABILITY ANALYSIS CARRIED O UT BY THE ASSESSEE IN THE TP DOCUMENTATION AND IN CONDUCTING A FRESH COMPARAB ILITY ANALYSIS FOR THE SOFTWARE DEVELOPMENT SERVICES BASED ON THE APPL ICATION OF ADDITIONAL FILTERS IN DETERMINING THE ARM'S LENGTH PRICE. 4.3. USING DATA, WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF PREPA RING THE TP DOCUMENTATION. 4.4. NOT CONSIDERING THE MULTIPLE YEAR/PRIOR YEAR D ATA OF COMPARABLE COMPANIES WHILE DETERMINING THE ARM'S LENGTH PRICE IN RELATION TO THE ASSESSEE'S INTERNATIONAL TRANSACTIONS WITH ITS AES. 4.5. RE-ADJUDICATING AND DISREGARDING ITS OWN DIREC TIONS DATED NOVEMBER 28, 2014, WHEREIN THE FOLLOWING COMPARABLE COMPANIE S WERE REJECTED BY THE LEARNED DRP BASED ON FUNCTIONAL DIFFERENCES: A) INFOSYS LIMITED B) MINDTREE LIMITED C) PERSISTENT SYSTEMS LIMITED D) SASKEN COMMUNICATION TECHNOLOGIES LIMITED E) TATA ELXSI 4.6. DISREGARDING CERTAIN FILTERS APPLIED BY THE AP PELLANT IN SELECTION OF THE COMPARABLE COMPANIES AT THE TIME OF TP DOCUMENTATIO N. PAGE 3 OF 21 ITA NO.323/BANG/2019 4.7. INCLUDING THE FOLLOWING COMPANIES EVEN THOUGH THEY ARE FUNCTIONALLY DIFFERENT FROM OPERATIONAL PROFILE OF THE APPELLANT (NOT CONSIDERING SUBMISSIONS MADE BY APPELLANT: A) INFOSYS LIMITED; B) KALS INFORMATION SYSTEMS LIMITED C) SASKEN COMMUNICATION TECHNOLOGIES LIMITED D) TATA ELXSI 4.8. EXCLUDING THE FOLLOWING COMPANIES EVEN THOUGH THEY ARE FUNCTIONALLY COMPARABLE TO THE APPELLANT AND PASSES ALL THE FILT ERS APPLIED BY THE LEARNED TPO IN ITS ORDER: A) AKSHAY SOFTWARE TECHNOLOGIES LIMITED B) LGS GLOBAL LIMITED 4.9. NOT MAKING APPROPRIATE ADJUSTMENTS UNDER RULE IOB: A) DIFFERENCES IN ACCOUNTING PRACTICES AND DEPRECIA TION RATES ADOPTED BY APPELLANT AND COMPANIES IDENTIFIED BY HIM AS COMPAR ABLE B) UNDERUTILISATION OF CAPACITY BY APPELLANT C) EMPLOYEES STOCK OPTION PLAN ('ESOP') CHARGED BY THE PARENT COMPANY OF INR 300.84 LAKHS EVALUATED ON THE BLACK SCHOLES MET HOD IN TERMS OF US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES D) RISK PROFIT BETWEEN THE APPELLANT AND THE COMPAR ABLE COMPANIES 4.10 ROVIDING NEGATIVE WORKING CAPITAL ADJUSTMENT T O ACCOUNT FOR DIFFERENCES IN THE WORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES. (TAX EFFECT: INR 8,961,956) GROUNDS FOR MARKETING S UPPORT SERVICES 5. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE, T HE LEARNED DRP/AO/TPO ERRED IN: 5.1. STATING IN ITS DIRECTIONS THAT APPELLANT HAS N OT MADE ANY SUBMISSIONS AGAINST THE ADJUSTMENT MADE BY THE LEARNED TPO FOR THE MARKETING SUPPORT SERVICES AND ACCORDINGLY NOT PROVIDING ANY SPECIFIC ADJUDICATION ON THE COMPARABLE COMPANIES SELECTED BY THE LEARNED TPO; 5.2. REJECTING THE TRANSFER PRICING ('TP') DOCUMENT ATION MAINTAINED BY THE APPELLANT UNDER SECTION 92D OF THE ACT, IN GOOD FAI TH AND WITH DUE DILIGENCE. 5.3. REJECTING THE COMPARABILITY ANALYSIS CARRIED O UT BY THE ASSESSEE IN THE TP DOCUMENTATION AND IN CONDUCTING A FRESH COMPARAB ILITY ANALYSIS FOR THE SOFTWARE DEVELOPMENT SERVICES BASED ON THE APPL ICATION OF ADDITIONAL FILTERS IN DETERMINING THE ARM'S LENGTH PRICE. 5.4. USING DATA, WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF PREPA RING THE TP DOCUMENTATION. 5.5. NOT CONSIDERING THE MULTIPLE YEAR/PRIOR YEAR D ATA OF COMPARABLE COMPANIES WHILE DETERMINING THE ARM'S LENGTH PRICE IN RELATION TO THE APPELLANT 'S INTERNATIONAL TRANSACTIONS WITH ITS AES. PAGE 4 OF 21 ITA NO.323/BANG/2019 5.6. NCLUDING THE FOLLOWING COMPANIES EVEN THOUGH T HEY ARE FUNCTIONALLY DIFFERENT FROM OPERATIONAL PROFILE OF THE APPELLANT : A) ASIAN BUSINESS EXHIBITION & CONFERENCES LIMITED B) HCCA BUSINESS SERVICES PRIVATE LIMITED C) HINDUSTAN HOUSING CO. LIMITED D) KILLICK AGENCIES & MARKETING LIMITED GAPPELLANTEXCLUDING THE FOLLOWING COMPANIES EVEN TH OUGH THEY ARE FUNCTIONALLY COMPARABLE TO THE AND PASSES ALL THE FILTERS APPLIED BY THE LEARNED TPO IN ITS ORDER: A) ICRA MANAGEMENT CONSULTING SERVICES LIMITED (TAX EFFECT: INR 2,159,743) GROUNDS FOR ESOP EXPENSES 6. THE LEARNED AO/ TPO'S ACTION OF ELIMINATING THE EMPLOYEE STOCK COMPENSATION COST FROM THE GROSS INCOME IS ERRONEOU S 'AND BASED ON WRONG APPRECIATION OF FACTS. THE REVENUE OF THE APP ELLANT IS THAT CHARGED COMMERCIALLY BY THE APPELLANT TO ITS ASSOCIATED CON CERN. WHILE THE REVENUE WOULD CONTINUE TO BE INR 290,053,589 OF SOF TWARE DEVELOPMENT SERVICES UNIT AND INR 54,523,003 OF MARKETING SUPPO RT SERVICES UNIT AS COMMERCIALLY CHARGED, ADJUSTMENT FOR EMPLOYEE STOCK COMPENSATION COST SHOULD BE MADE ONLY FROM THE TOTAL COSTS. THE ACTIO N OF THE AO/TPO IN SUBTRACTING EMPLOYEE STOCK COMPENSATION COST FROM T HE GROSS INCOME IS ERRONEOUS. (TAX EFFECT: INR 25,384,607) 7. WITHOUT PREJUDICE TO THE GROUND NO. 6, THE LEARN ED TPO ERRED IN CONSIDERING INCORRECT REVENUE WHILE REDUCING THE SA ME FROM THE SOFTWARE DEVELOPMENT AND MARKETING SUPPORT UNITS. (TAX EFFECT: INR 3,496,416) 8. THE LEARNED AO/ DRP ERRED IN NOT ALLOWING DEDUCT ION FOR A SUM OF INR 1,99,91,400 REPRESENTING COST OF ESOP/ RSUS DEBITED TO THE COMPANY BY ITS PARENT CONSEQUENT TO STOCK OPTIONS/ RESTRICTED STOCK UNITS ISSUED BY THEM TO ITS EMPLOYEES AND CLAIMED BY THE COMPANY IN THE REVISED RETURN OF INCOME. THE LEARNED AU! DRP ERRED IN NOT APPRECIATING THAT THE SAID AMOUNT IS AN EMPLOYEE COMPENSATION EXPENDITURE AND HAS BEEN EXPE NDED WHOLLY FOR THE PURPOSE OF BUSINESS. (TAX EFFECT: INR 67,95,077/-) 9. THAT THE LEARNED AO ERRED IN LEVYING INTEREST UN DER SECTION 234 B OF THE ACT OF INR 7,142,540. THAT THE APPELLANT CRAVES LEAVE TO ADD TO AND/OR TO ALTER, AMEND, RESCIND, MODIFY THE GROUNDS HEREIN BELOW OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. BRIEF FACTS OF THE CASE ARE AS UNDER: 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURING AND MARKETING OF SEMICONDUCTOR COMPONENTS. IT FILED ITS RETURN OF PAGE 5 OF 21 ITA NO.323/BANG/2019 INCOME ON 13/10/2010 DECLARING TOTAL INCOME OF RS.4,52,25,320/-. SUBSEQUENTLY, THE CASE WAS SELECT ED FOR SCRUTINY AS ASSESSEES INTERNATIONAL TRANSACTION EX CEEDED RS. 15 CRORES. 3. FROM THE TRANSFER PRICING ORDER PASSED BY LD.TPO UNDER 92CA OF THE ACT, WE NOTE THAT, ASSESSEE HAD FOLLOWI NG INTERNATIONAL TRANSACTIONS: PARTICULARS AMOUNT IN INR OUTCOME OF THE TP ORDER SOFTWARE DEVELOPMENT SERVICES 29,00,23,589/- ADJUSTMENT OF INR 2,98,85,102/- MARKETING SUPPORT SERVICES 5,45,23,003/- ADJUSTMENT OF INR 63,54,054/- PURCHASE OF OFFICE EQUIPMENTS 98,822/- ACCEPTED TO BE AT ARM'S LENGTH. REIMBURSEMENT OF EXPENSES 4,29,47,534/- ACCEPTED TO BE AT ARM'S LENGTH. SOFTWARE DEVELOPMENT SERVICE SEGMENT: 4. IT IS OBSERVED THAT, ASSESSEE USED TNMM AS THE M OST APPROPRIATE METHOD AND COMPUTED ITS MARGIN AT 12% B Y USING OP/TC AS PLI. IS IT IS OBSERVED THAT, ASSESSEE USED 11 COMPARABLES WITH AVERAGE MARGIN OF 13.86%. THE LD.T PO DISSATISFIED WITH THE COMPARABLES SELECTED BY ASSES SEE APPLIED CERTAIN FILTERS AND SHORTLISTED FINAL SET OF 11 COM PARABLES WITH ARITHMETIC MEAN OF 22.71%. MARKETING SUPPORT SERVICE SEGMENT: PAGE 6 OF 21 ITA NO.323/BANG/2019 5. IT IS OBSERVED THAT, ASSESSEE USED TNMM AS MOST APPROPRIATE METHOD AND COMPUTED ITS MARGIN AT 10% B Y USING OP/TC AS PLI. IT IS OBSERVED THAT, ASSESSEE USED 6 COMPARABLES WITH AVERAGE MARGIN OF 9.93%. THE LD.TPO DISSATISFI ED WITH THE FILTERS APPLIED, CONDUCTED FRESH SEARCH AND SHORTLI STED A SET OF 6 COMPARABLES WITH AN AVERAGE MARGIN OF 24.48%. 6. THE LD. TPO THUS COMPUTED THE TOTAL TRANSFER PRI CING ADJUSTMENT INCLUDING BOTH THE SEGMENTS AT RS.3,62,3 9,156/- BEING THE SHORTFALL. 7. ASSESSMENT ORDER UNDER SECTION 143(3) READ WITH 144C OF THE ACT WAS PASSED ON 29/12/2014 AFTER MAKING TRANS FER PRICING ADJUSTMENT OF RS.3,62,39,156/-. AGAINST THE ORDER A SSESSEE PREFERRED APPEAL BEFORE THIS TRIBUNAL . THIS TRIBUNAL IN IT(TP)A NO.260/B/2015 DATED 27/10/2017 SET-ASIDE THE ENTIRE TRANSFER PRICING ISSUE TO THE FILE OF DRP FOR EXAMINING IT A FRESH BASED ON FUNCTIONAL SIMILARITY AND APPLICATION OF TURNOVER F ILTER WITH A DIRECTION TO ADJUDICATE THE GROUND IS IN THE LIGHT OF OBSERVATIONS BY HONBLE DELHI HIGH COURT MADE IN CASE OF CHRIS CAPITAL INVESTMENT ADVISERS (INDIA) PVT.LTD . IN ITA NO.417/2014 BY ORDER DATED 27/4/2015. 8. IN THE REMAND PROCEEDINGS, DRP REJECTED THE CONT ENTIONS OF ASSESSEE SEEKING INCLUSION AND EXCLUSION OF VARIOUS COMPARABLES HOWEVER, ICRA TECHNO ANALYTICS LTD. AND PERSISTENT SYSTEMS LTD. WERE REMANDED TO THE LD.TPO FOR EXAMINING THE RELAT ED PARTY TRANSACTION ISSUE AS WAS DIRECTED BY THE TRIBUNAL (SUPRA) . PAGE 7 OF 21 ITA NO.323/BANG/2019 9. ON RECEIPT OF THE DRP DIRECTIONS, THE LD. AO PAS SED THE IMPUGNED ORDER BY REVISING THE TRANSFER PRICING ADJ USTMENT AT RS.3,27,20,502/-. 10. AGGRIEVED BY THE IMPUGNED ORDER SO PASSED BY TH E LD. AO, ASSESSEE IS IN APPEAL BEFORE US NOW. 11. AT THE OUTSET THE LD.AR SUBMITTED THAT, ASSESSE E WISH TO PRESS COMPARABLES ALLEGED FOR INCLUSION IN GROUND 4 .7, GROUND 4.10, COMPARABLES ALLEGED FOR EXCLUSION IN GROUND 5 .6 AND COMPARABLE ALLEGED FOR EXCLUSION IN GROUND 5.7. THE LD.COUNSEL ALSO SUBMITTED THAT ASSESSEE WISH TO PRESS GROUND N O. 8 UNDER THE CORPORATE TAX ISSUES. 12. IT HAS BEEN CATEGORICALLY SUBMITTED THAT ALL OT HER GROUNDS ARE NOT PRESSED AND THEREFORE THESE ARE NOT ADJUDIC ATED HEREIN BELOW. 13. BEFORE WE UNDERTAKE THE COMPARABILITY ANALYSIS, IT IS SINE QUA NON TO STAND THE FUNCTIONS PERFORMED, THE ASSETS OWNED AND RISKS ASSUMED BY ASSESSEE UNDER THESE SEGMENTS. FUNCTIONS SOFTWARE DEVELOPMENT SERVICE SEGMENT: 14.1 IN THE TRANSFER PRICING STUDY PLACED AT PAGE 2 85 OF PAPER BOOK, IT HAS BEEN SUBMITTED THAT ASSESSEE PROVIDES CHIP DESIGNING/SOFTWARE DEVELOPMENT SERVICES TO ITS AE. IT IS ALSO BEEN SUBMITTED THAT IN RENDERING SUCH SERVICES THE AE UN DERTAKES ANALYSIS OF FEASIBILITY STUDY, SOFTWARE DESIGN, COD E GENERATION, VERIFICATION OF SOFTWARE TESTING, ACCEPTANCE, INSTA LLATION AND DEPLOYMENT, MAINTENANCE FOR THE DEVELOPER. PAGE 8 OF 21 ITA NO.323/BANG/2019 ASSESSEE PROVIDES DESIGNING SERVICES IN ACCORDANCE WITH THE SPECIFICATIONS RECEIVED FROM THE AE AND THE DESIGNI NG AND DEVELOPMENT SERVICES RENDERED BY ASSESSEE COMPRISES OF DESIGNING DEVELOPMENT WHICH INCLUDES LOGIC/CIRCUIT/ LAYOUT DESIGN, APPLICATION SUPPORT WHICH INCLUDES APPLICAT ION NOTES AND CAD SYSTEM SUPPORT FOR DESIGNS. MARKETING SUPPORT SERVICE SEGMENT. 14.2 UNDER THIS SEGMENT ASSESSEE PROVIDES SERVICES TO THE AE IN IRELAND FOR DIFFERENT PRODUCT LINES FROM ITS OFFICE LIVE IDENTIFICATION OF POTENTIAL CUSTOMERS FOR MICROCHIP IRELAND, SUGGE STING THE SUITABILITY OF MICROCHIP IRELANDS PRODUCTS BASED O N THE OEMS REQUIREMENT, PROVISION OF APPLICATION SUPPORT TO TH E USERS DESIGN ENGINEERS BY MICROCHIP INDIA TECHNICAL TEAM, PROVID ING PRODUCT TRAINING TO PROSPECTIVE CUSTOMERS AND CONDUCTING SE MINARS, COORDINATION WITH DISTRIBUTION CHANNELS AND FACTORY TO FACILITATE DELIVERY OF LARGE ORDERS OF OEMS, OBTAINING AND MAI NTAINING LITERATURE AND OTHER POTENTIAL MATERIALS REQUIRED F OR PROMOTING THE IRELANDS PRODUCT, OR PROMOTIONAL OR MARKETING ACTIVITIES DRIVEN BY MICROCHIP IRELAND ARE EXECUTED BY ASSESSE E. 14.3 ASSETS OWNED: AT PAGE 287 AND 290 OF PAPER BOOK IT HAS BEEN SUBM ITTED THAT ASSESSEE OWNS TANGIBLE ASSETS WITHOUT WHICH IT CANNOT FUNCTION LIST OF IT HAS BEEN NOTED THAT ASSESSEE OW NS SOME AMOUNT OF COMPUTER SOFTWARE IS WHICH IS NECESSARY F OR ITS FUNCTIONING OF BUSINESS HOWEVER DOES NOT OWN ANY NO N ROUTINE VALUABLE INTANGIBLE ASSETS. PAGE 9 OF 21 ITA NO.323/BANG/2019 14.4 RISKS ASSUMED IT HAS BEEN SUBMITTED IN THE TP STUDY THAT ASSESS EE DOES NOT BEAR ANY CREDIT RISK, CAPACITY UTILISATION RISK S, CONTRACT RISK, PRICE RISK, MARKET RISK. IT ONLY BEARS A MINIMUM AM OUNT OF SERVICE LIABILITY RISK AND FOREIGN EXCHANGE FLUCTUA TION RISK. BASED ON THE ABOVE WE SHALL UNDERTAKE THE COMPARAB ILITY ANALYSIS OF THE COMPARABLES ALLEGED FOR INCLUSION/E XCLUSION UNDER BOTH THE SEGMENTS. 15. GROUND NO.4.7 THIS GROUND HAS BEEN RAISED BY ASSESSEE SEEKING EX CLUSION OF INFOSYS LTD., KALS INFORMATION SYSTEMS LTD., SAS KEN COMMUNICATIONS TECHNOLOGIES LTD. AND TATA ELXSI LTD . THE LD.AR THE OUTSET SUBMITTED THAT ALL THESE COMP ARABLES HAVE BEEN CONSIDERED FOR EXCLUSION BY COORDINATE BE NCH OF THIS TRIBUNAL IN CASE OF DCIT VS ELECTRONICS FOR IMAGING INDIA PVT.LTD., REPORTED IN (2016) 70 TAXMANN.COM 299 FOR THE VERY SAME ASSESSMENT YEAR 2010-11. ON THE CONTRARY, THE LD.CIT.DR RELIED ON THE OBSER VATIONS OF DRP ARE NOT AUTHORITIES BELOW. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF RECORDS PLACED BEFORE US. WE HAVE ALSO PERUSED THE DECISION RELIED BY THE LD .COUNSEL REFERRED TO HEREIN ABOVE. WE NOTE THAT THIS TRIBUNAL IN SIMILAR CIRCUMSTANCES CONSIDERED THESE COMPARABLES BY OBSER VING AS UNDER: PAGE 10 OF 21 ITA NO.323/BANG/2019 4. ON THE FOLLOWING COMPARABLES, THE AR SUBMITTED T HAT THE APPELLANTS TURNOVER IS JUST 13.23 CRORES, WHILE THE TURN OVER OF EACH OF THE COMPARABLE IS MULTIPLE TIMES HIGHER (SAY FROM 28 TI MES TO 1601 TIMES HIGHER) THAN ITS TURNOVER AND HENCE THE DRP CORRECT LY EXCLUDED THEM. THE SUMMARY OF AR S CONTENTIONS ON EACH OF THE COMPARA BLE IS EXTRACTED AS UNDER : INFOSYS LTD : THE DRP REJECTED THIS COMPARABLE ON THE GROUND THA T THE TURNOVER OF THE COMPANY IS VERY HIGH, INR 21,140 CR ORES WHICH IS 1601 TIMES THE TURNOVER OF THE ASSESSEE FROM ITES BUSINE SS . THE ASSESSEE SUBMITTED THAT INFOSYS IS AN INDUSTRIAL GIANT WITH AN EXTREMELY HIGH TURNOVER AND HAS SUBSTANTIAL INTANGIBLE ASSETS. THE SIZE, FUNCTIONS PERFORMED, STAGE OF BUSINESS CYCLE, AND GROWTH CYCL E OF INFOSYS IS NOT COMPARABLE WITH THE ASSESSEE WHICH IS A LOW RISK CA PTIVE SERVICE PROVIDER AND RELIED ON DCIT VS IKANOS COMMUNICATIONS: ITA NO. 137/BANG/2 015 (AY 2010-11) ACIT VS BROADCOM INDIA RESEARCH PRIVATE LIMITED: [2016] 49 ITR(T) 79 (BANGALORE) [AY 2010-11] BEARING POINT BUSINESS CONSULTING PVT. LTD. ITA NO- 1124/BANG/2011 DCIT VS ELECTRONICS FOR IMAGING PVT. LIMITED: ITA NO. 212/BANG/2015 (AY 2010-11) INSILICA SEMICONDUCTORS INDIA PVT. LTD. VS ITO: [ 2012]53 SOT 157 (BANGALORE) LOGICA PVT. LTD. VS ACIT: IT(TP)A NO. 1621&1664 (BA NG) OF 2014 ORANGE BUSINESS SERVICES INDIA SOLUTIONS (P.) LTD . VS DCII: ITA NO. 869 (DELHI) OF 2016 24/7 CUSTOMER.COM PVT. LTD : ITA NO. 227/BANG/201 0 DCIT VS PMC SIERRA INDIA PVT. LTD. : LT(TP)A NO . 882/BANG/2013 LAM RESEARCH VS DCIT: IT(TP)A NO. 1437/BANG/2014 TELECORDIA TECHNOLOGIES INDIA PVT. LTD. VS ACII: [2012] 137 ITD 1 (MUMBAI) CIT VS AGNITY INDIA TECHNOLOGIES (P.) LTD: [2013] 262 CTR 291 (DELHI) (3) KALS INFORMATION SYSTEMS LTD. 21. THE ASSESSEE RAISED OBJECTIONS AGAINST THIS COMPAN Y ON THE GROUND THAT THIS COMPANY IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS. FURTHER, THIS COMPANY CONSISTS O F STPI UNIT AND ALSO HAVING A TRAINING CENTRE ENGAGED IN TRAINING OF SOF TWARE PROFESSIONALS ON ONLINE PRODUCTS. THUS, WHEN THIS COMPANY IS HAVI NG REVENUE FROM SOFTWARE SERVICES AS WELL AS SOFTWARE PRODUCT, THE SAME CANNOT BE CONSIDERED AS COMPARABLE WITH SOFTWARE DEVELOPMENT SERVICE PROVIDING COMPANY. 22. THE DRP HAS DIRECTED THE AO TO EXCLUDE THIS COMPAN Y FROM THE LIST OF COMPARABLES BY TAKING NOTE OF THE FACT THAT THER E WERE INVENTORIES IN THE BOOKS OF ACCOUNTS OF THIS COMPANY WHICH SHOWS T HAT THIS COMPANY PAGE 11 OF 21 ITA NO.323/BANG/2019 IS IN THE SOFTWARE PRODUCT BUSINESS. FURTHER, BY FO LLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOF TWARE INDIA (P.) LTD. V. DY. CIT [2013] 140 ITD 540/29 TAXMANN.COM 3 10 (BANG. - TRIB.), THIS COMPANY WAS FOUND TO BE NOT COMPARABLE WITH TH AT OF THE ASSESSEE. 23. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CON SIDERED THE RELEVANT MATERIAL ON RECORD. THE LD. DR HAS NOT DIS PUTED THE FACT THAT COMPARABILITY OF THIS COMPANY HAS BEEN EXAMINED BY THIS TRIBUNAL IN A SERIES OF DECISIONS INCLUDING IN THE CASE OF TRILOG Y E-BUSINESS SOFTWARE INDIA (P.) LTD. (SUPRA). WE FURTHER NOTE THAT IN TH E BALANCE SHEET OF THIS COMPANY AS ON 31.3.2010, THERE ARE INVENTORIES OF R S. 60,47,977. THEREFORE, WHEN THIS COMPANY IS IN THE BUSINESS OF SOFTWARE PRODUCTS, THE SAME CANNOT BE COMPARED WITH A PURE SOFTWARE DE VELOPMENT SERVICES PROVIDER. ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED FINDINGS OF THE DRP SASKEN COMMUNICATION TECHNOLOGIES: THE DRP REJECTED THIS COMPANY ON THE GROUND THAT THE TURNOVER OF THE COMPANY IS VERY HIGH I.E INR 402 CRORES WHICH IS 30 TIMES THE TURNOVER OF THE ASSESS EE FROM ITES BUSINESS AND THEREFORE IT WAS CORRECTLY EXCLUDED FROM THE LI ST OF COMPARABLES. RELIANCE IS PLACED ON THE FOLLOWING CASES: -BEARING POINT BUSINESS CONSULTING PVT. LTD. ITA NO.1124/BANG/2011 -DCIT VS KODIAK NETWORKS INDIA PVT LTD: ITA NO. 532 /BANG/2013 -LAM RESEARCH VS DCIT: IT(TP)A NO. 1437/BANG/2014 -DCIT VS HELLOSOFT INDIA (P.) LTD: (2013] 23 ITR(T) 1 (HYDERABAD) 6. TATA ELXSI LTD (SEG): THE DRP REJECTED THIS COMPANY ON THE GROUND THAT THE TURNOVER OF THE COMPANY IS VERY HIGH I.E. INR 376.37 CRORES WHICH IS 28 TIMES THE TURNOVER OF THE ASSESSEE FROM ITES BUSINESS AND THEREFORE IT WAS CORRECTLY EXCLUDED FROM THE LIST O F COMPARABLES. RELIANCE IS PLACED ON THE FOLLOWING CASES: -BEARING POINT BUSINESS CONSULTING PVT. LTD.: ITA NO.1124/BANG/2011 -LAM RESEARCH VS DCIT : IT(TP)A NO-:1437/BANG/2014 HOWEVER, AGAINST THE APPLICATION OF THE TURNOVER FI LTER, THE DR RELIED ON THE DECISION OF THIS TRIBUNAL IN LSI TECHNOLOGIES I NDIA PRIVATE LTD & LSI RESEARCH & DEVELOPMENT P LTD IN IT (TP) A NO 1380 & 1381 /BANG/ 2010 FOR AY 2006-07 DT 13.5.2016. WE HEARD THE RIVA L SUBMISSIONS. IT IS SEEN THAT THE DRP REJECTED THE ABOVE COMPARABLES BA SED ON THE TURNOVER FILTER, SIZE ETC RELYING ON VARIOUS TRIBUNAL DECISI ONS VIZ BANGALORE, DELHI, HYDERABAD, MUMBAI AND PUNE. THIS TRIBUNAL IN THE CA SE OF OBOPAY MOBILE TECHNOLGY INDIA P LTD IN IT(TP) A NOS 388 & 469/ BANG/ 2015 DT 08.01.2016, AFTER CONSIDERING THE DELHI AND BOMBAY HIGH COURT DECISIONS IN CHRYSCAPITAL INVESTMENT ADVISORS INDIA P LTD 376 ITR 183(DEL), CIT VS PENTAIR WATER INDIA P LTD (MUMB) I N TAX APPEAL NO 18 OF 2015 AND AGNITY INDIA TECHNOLOGIES P LTD (DEL) 36 T AXMANN.COM PAGE 12 OF 21 ITA NO.323/BANG/2019 289/219 TAXMAN 26, THE PRINCIPLE OF JUDICIAL DISCIP LINE ETC , FOLLOWING THE BOMBAY HIGH COURT DECISION UPHELD THE DRP ORDER IN EXCLUDING 6 COMPANIES, FROM THE LIST OF COMPARABLES CHOSEN BY THE TPO, ON THE BASIS OF TURNOVER AND SIZE. FOLLOWI NG IT , WE UPHOLD THE DRP ORDER IN EXCLUDING THE ABOVE 6 COMPA NIES, FROM THE LIST OF COMPARABLES CHOSEN BY THE TPO, ON THE B ASIS OF TURNOVER AND SIZE. THUS, THE CORRESPONDING GROUNDS OF THE REVENUE FAIL. THERE IS NOTHING ON RECORD BROUGHT BY THE LD. CIT DR IN ORDER TO DISTINGUISH THE ABOVE OBSERVATION/FINDINGS BY THIS TRIBUNAL. ACCORDINGLY RESPECTFULLY FOLLOWING THE AFORESTATED VIEW WE DIRECT LD.AO TO EXCLUDE THESE COMPARABLES FROM THE FINALIST. 16. GROUND NO. 4.10 THIS GROUND HAS BEEN RAISED BY ASSESSEE FOR CONSID ERING NEGATIVE WORKING CAPITAL BY THE LD. AO/TPO. 16.1 THE GRIEVANCE OF THE ASSESSEE IS WITH REGARD T O NEGATIVE WORKING CAPITAL ADJUSTMENT CARRIED OUT BY THE LD.TP O WHICH WAS CONFIRMED BY THE DRP. IT IS THE PLEA OF THE ASSESSE E THAT THOUGH THE LD.TPO OBSERVED THAT THE ASSESSEE HAS A HEALTHY MARGIN, THE LD.TPO ERRED IN MAKING ADJUSTMENT TOWARDS WORKING CAPITAL AND THE DRP FURTHER ERRED IN UPHOLDING THE SAME. 16.2 IT WAS SUBMITTED THAT, WORKING CAPITAL ADJUSTM ENT IS MADE FOR THE TIME VALUE OF MONEY LOST WHEN CREDIT TIME I S GIVEN TO THE CUSTOMERS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HOWEVER DOES NOT BEAR ANY RISK AND HAS NO WORKING CAPITAL CONTIN GENCIES, AND HAS NOT INCURRED ANY EXPENSES FOR MEETING THE WORKI NG CAPITAL REQUIREMENT, AND THAT THE ASSESSEE IS RUNNING THE B USINESS PAGE 13 OF 21 ITA NO.323/BANG/2019 WITHOUT ANY WORKING CAPITAL RISK AS COMPARED TO THE COMPARABLES. THE ASSESSEE DOES NOT BEAR ANY MARKET RISK AS THE SERVICES ARE PROVIDED ONLY TO ITS GROUP ASSOCIATES. THEREFORE, IN OUR VIEW REQUIREMENT FOR ADJUSTMENT OF NEGATIVE WOR KING CAPITAL DOES NOT ARISE. 32. WE DRAW OUR SUPPORT FROM DECISION OF COORDINATE BENCH OF THIS TRIBUNAL IN CASE REPORTED IN (2020) 120 COM 122 AND LAM RESEARCH INDIA (P.) LTD. V. DY. CIT IN [IT APPEAL N OS. 1473 & 1385 (BENG.) OF 2014, DATED 30-4-2015], TIVO TECH (P.) L TD. V. DY. CIT [2020] 117 TAXMANN.COM 259, AND DY. CIT V. SOFTWARE AG BANGALORE TECHNOLOGIES (P.) LTD. [IT APPEAL NO. 162 8 OF 2014, DATED 31-3-2016] , WHERE IT IS HELD THAT, NEGATIVE WORKING CAPITAL ADJUSTMENT SHALL NOT BE MADE. 16.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE F IND THAT IN THE CASE OF LAM RESEARCH INDIA (P.) LTD . ( SUPRA ) AND SOFTWARE AG BANGALORE TECHNOLOGIES (P.) LTD . ( SUPRA ) PASSED BY THIS TRIBUNAL , IT HAS BEEN HELD THAT NEGATIVE WORKING CAPITAL ADJUSTM ENT SHALL NOT BE MADE IN CASE OF A CAPTIVE SERVICE PROVIDER AS TH ERE IS NO RISK AND IT IS COMPENSATED ON A TOTAL COST PLUS BASIS. W E THEREFORE DIRECT LD.TPO TO COMPUTE THE ALP IN ACCORDANCE WITH THE DIRECTIONS CONTAINED IN THIS ORDER AFTER AFFORDING ASSESSEE OPPORTUNITY OF BEING HEARD. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS ALLOWED. GROUND NO. 5.6 17. THIS GROUND HAS BEEN RAISED BY ASSESSEE FOR EXC LUSION OF ASIAN BUSINESS EXHIBITION AND CONFERENCES LTD., HCC A BUSINESS PAGE 14 OF 21 ITA NO.323/BANG/2019 SERVICES PVT.LTD, HINDUSTAN HOUSING COMPANY LTD., K ILLICK AGENCIES AND MARKETING LTD., ON THE GROUND THAT, TH EY ARE FUNCTIONALLY NOT SIMILAR WITH THAT OF ASSESSEE UNDE R MARKETING SUPPORT SERVICE SEGMENT. THE LD.COUNSEL HAS PLACED RELIANCE ON THE DECISION OF DCIT VS ELECTRONICS FOR IMAGING INDIA PVT LTD (SUPRA) AND ARM EMBEDDED TECHNOLOGIES PVT.LTD VS ITO IN IT(TP)A NO.1225/B/2016 BY ORDER DATED 19/07/2019 FOR ASSESS MENT YEAR 2010-11 . SHE SUBMITTED THAT THESE COMPARABLES HAVE BEEN EXCLUDED FOR VARIOUS REASONS BY THIS TRIBUNAL . 17.1 ON THE CONTRARY, THE LD.CIT.DR RELIED ON THE O BSERVATIONS OF DRP ARE NOT AUTHORITIES BELOW. 17.2 WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH S IDES IN THE LIGHT OF RECORDS PLACED BEFORE US. 17.3 WE HAVE ALSO PERUSED THE DECISION RELIED BY TH E LD.COUNSEL REFERRED TO HEREIN ABOVE. WE NOTE THAT THIS TRIBUNAL IN SIMILAR CIRCUMSTANCES CONSIDERED THESE COMPARABLES WERE SER VING AS UNDER: (1) HCCA BUSINESS SERVICES PVT. LTD. 41. THE ASSESSEE OBJECTED AGAINST INCLUSION OF THIS CO MPANY IN THE LIST OF COMPARABLES ON THE GROUND THAT THIS COMPANY IS ENGA GED IN PROVIDING PAYROLL PROCESS SERVICES AND THEREFORE IT IS FUNCTI ONALLY DIFFERENT. IN SUPPORT OF ITS CONTENTION, THE ASSESSEE REFERRED TO NOTES TO THE ACCOUNTS WHEREIN THE COMPANY'S OPERATIONS COMPRISE OF PAYROL L PROCESSING SERVICES IS MENTIONED AND HENCE IT IS NOT POSSIBLE TO GIVE T HE QUANTITATIVE DETAILS OF SALES AND CERTAIN INFORMATION SEPARATELY. 42. THE DRP AFTER CONSIDERING THE ANNUAL REPORT NOTED THAT EXCEPT THE NOTE 2.14, THERE IS NO OTHER OBSERVATION IN THE ANN UAL REPORT FROM WHICH IT CAN BE ESTABLISHED THAT THE COMPANY IS ENGAGED IN M ARKETING AND SALES SUPPORT SERVICES COMPARABLE TO THE ASSESSEE. ACCORD INGLY, THE DRP DIRECTED THE AO TO EXCLUDE THE SAID COMPANY FROM TH E COMPARABLES. 43. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CON SIDERED THE RELEVANT MATERIAL ON RECORD. THE DRP HAS CONSIDERED THE FACT THAT PAYROLL PAGE 15 OF 21 ITA NO.323/BANG/2019 PROCESSING SERVICES WAS MAIN PART OF THE OPERATIONS OF THE COMPANY AND QUANTITATIVE DETAILS OF SALES AND CERTAIN INFORMATI ON AS REQUIRED UNDER PART II OF SCHEDULE VI TO COMPANIES ACT WAS NOT POS SIBLE. THUS, IN THE ABSENCE OF ANY CONTRARY FACT ON RECORD BROUGHT BEFO RE US, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDING OF THE DRP , WHEN THE FUNCTIONS AND BUSINESS ACTIVITY OF THIS COMPANY WAS FOUND TO BE DIFFERENT FROM MARKETING AND SALES SUPPORT SERVICES OF THE ASSESSE E. ACCORDINGLY, THE OBJECTION OF THE REVENUE IS REJECTED. (2) KILLICK AGENCIES & MARKETING LTD. 44. THE ASSESSEE OBJECTED AGAINST THIS COMPANY ON THE GROUND THAT COMMISSION/SERVICE CHARGES INCOME OF THIS COMPANY I S RS. 2,19,00,000 OUT OF THE OPERATING REVENUE OF RS. 3,39,00,000. TH EREFORE, THE COMMISSION/SERVICE CHARGES INCOME CONSTITUTE ABOUT 65% OF THE OPERATING REVENUE WHICH IS LESS THAN 75% OF THE OPERATING REV ENUE FILTER APPLIED BY THE TPO. IN THE ABSENCE OF SEGMENTAL RESULTS, THIS COMPANY WAS SOUGHT TO BE EXCLUDED FROM THE SET OF COMPARABLES. 45. THE DRP FOUND THAT THIS COMPANY CONDUCTS BUSINESS AS AN AGENT OF THE FOREIGN PRINCIPAL AND DEAL IN MARITIME EQUIPMEN TS. FURTHER, THE RECEIPTS ARE MAINLY IN THE NATURE OF COMMISSION INC OME AND SERVICE CHARGES. THEREFORE, THIS COMPANY WAS FUNCTIONALLY D ISSIMILAR TO THAT OF ASSESSEE. 46. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CON SIDERED THE RELEVANT MATERIAL ON RECORD. 47. THE LD. DR HAS SUBMITTED THAT THE TPO HAS CONSIDER ED THE RELEVANT INFORMATION AS REPORTED IN THE ANNUAL REPORT OF THE COMPANY AND IT WAS FOUND THAT THIS COMPANY IS ACTING AS AN AGENT FOR V ARIOUS FOREIGN PRINCIPALS FOR SALE OF DREDGERS, DREDGING EQUIPMENT AND ALSO OFFERS AFTER SALES SERVICE. THEREFORE, THIS COMPANY WAS FOUND TO BE IN THE BUSINESS OF MARKETING SUPPORT SERVICES WHICH IS SIMILAR TO THE ASSESSEE. 48. ON THE OTHER HAND, THE LD. AR HAS SUBMITTED THAT T HIS COMPANY IS ENGAGED IN THE BUSINESS OF CONSTRUCTION EQUIPMENTS AND EARTH MOVING MACHINERY AND IS NOT INTO MARKETING SUPPORT SERVICE S. 49. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD, WE NOTE THAT IN THE PROFIT & LOSS ACCOUN T FOR THE YEAR UNDER CONSIDERATION, THIS COMPANY HAS SHOWN SALES (EXPORT OF RS. 1,18,00,000 AND COMMISSION/SERVICE CHARGES OF RS. 2,19,00,000. THEREFORE, EXPORT INCOME REVENUE OF THIS COMPANY IS LESS THAN 75% OF THE TOTAL REVENUE, A FILTER APPLIED BY THE TPO. ONCE THE TPO HAS APPLIED A FILTER OF 75% OF EXPORT SALE, THEN THIS COMPANY WHICH FAILS THE FILT ER APPLIED BY THE TPO CANNOT BE CONSIDERED AS A GOOD COMPARABLE. FURTHER, WE NOTE THAT THIS COMPANY IS ENTIRELY IN A DIFFERENT ACTIVITY WITH TH AT OF THE ASSESSEE. UNDISPUTEDLY, THIS COMPANY IS ACTING AS AGENT FOR V ARIOUS FOREIGN PRINCIPALS FOR SALE OF DREDGERS, DREDGING EQUIPMENT , STEERABLE RUDDER PROPULSIONS AND OTHER EQUIPMENTS AND MACHINERIES. A CCORDINGLY, WE DO PAGE 16 OF 21 ITA NO.323/BANG/2019 NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP AND DIRECT THE AO TO EXCLUDE THIS COMPANY FROM THE COMPARABLES. HCCA BUSINESS SERVICES PVT. LTD., THIS COMPARABLE HAS BEEN INCLUDED BY LD.TPO AND OBJ ECTED BY ASSESSEE FOR REASON THAT IT IS FUNCTIONALLY NOT SIMILAR, AS THIS COMPANY IS INTO PROVISION OF HR OPERATIONS AND ADMINISTRATION SERVI CES OFFERING PAYROLL PROCESSING AND COMPENSATION RESTRUCTURING, MANAGEME NT OF LABOUR AND LEGAL COMPLIANCES AND EMPLOYEE REIMBURSEMENT PROCES SING AND ACCOUNTING SERVICES. LD.COUNSEL SUBMITTED THAT THIS TRIBUNAL IN CASE OF DCIT VS ELECTRONICS FOR IMAGING INDIA PVT.LTD (SUPR A) AND ITO VS INTERWOVEN SOFTWARE SERVICES (INDIA) PVT.LTD (SUPRA ) HAS HELD THIS COMPANY TO BE NOT COMPARABLE WITH COMPANY ENGAGED I N MARKETING AND SALES SUPPORT SERVICES. LD.CITDR PLACED RELIANCE UPON ORDER OF LD.AO AND OP POSED EXCLUSION OF THIS COMPARABLE. 14. WE HAVE PRODUCED SUBMISSIONS ADVANCED BY BOTH S IDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. IT IS OBSERVED THAT ANNUAL REPORT OF THIS COMPARABLE IS PLACED AT PAGE 1390-14 08 OF COMPENDIUM OF ANNUAL REPORTS AT PAGE 1392 AND LOSS ACCOUNT, IT IS OBSERVED THAT INCOME HAS BEEN EARNED BY THIS COMPANY UNDER TWO HEADS BE ING, SERVICE FEES AND OTHER INCOMES, FOR WHICH NO DETAILS HAVE BEEN P ROVIDED IN SCHEDULES TO ACCOUNTS. RESPECTFULLY FOLLOWING THE VIEW TAKEN BY THIS TRIBUNAL IN CASE OF DCIT VS ELECTRONICS FOR IMAGING INDIA PVT.LTD (S UPRA) AND ITO VS INTERWOVEN SOFTWARE SERVICES (INDIA) PVT.LTD (SUPRA ) WE ARE OF CONSIDERED OPINION THAT THIS COMPANY CANNOT BE COMPARED WITH A SSESSEE FOR FUNCTIONAL DISSIMILARITIES. WE THEREFORE DIRECT LD. TPO/AO TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. 17.4 THERE IS NOTHING ON RECORD BROUGHT BY THE LD. CIT DR IN ORDER TO DISTINGUISH THE ABOVE OBSERVATION/FINDINGS BY THIS TRIBUNAL . ACCORDINGLY RESPECTFULLY FOLLOWING THE AFORESTATED VIEW WE DIRECT LD.AO TO EXCLUDE THESE COMPARABLES F ROM THE FINALIST. GROUND NO. 5.7 18. THIS GROUND HAS BEEN RAISED BY ASSESSEE SEEKING INCLUSION OF ICRA MANAGEMENT CONSULTING SERVICES LTD. PAGE 17 OF 21 ITA NO.323/BANG/2019 18.1 THE LD.COUNSEL SUBMITTED THAT, THIS COMPANY IS ENGAGED IN PROVIDING SUPPORT SERVICES AND IS FUNCTIONALLY COMP ARABLE WITH THAT OF ASSESSEE. SHE PLACED RELIANCE ON HONBLE MUMBAI TRIBUNAL IN CASE OF IIMLH ADVISORS LTD. VS DCIT IN ITA NO. 4060/M/2016 BY ORDER DATED 20/06/2018 FOR ASSESSMENT YEAR 2010- 11. IN OUR VIEW THIS COMPARABLE NEEDS TO BE REMANDED TO THE LD. AO/TPO FOR RECONSIDERATION IN ACCORDANCE WITH THE O BSERVATIONS OF HONBLE MUMBAI TRIBUNAL IN IIMLH ADVISORS LTD. VS DCIT (SUPRA). ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED FOR STATISTICAL PURPOSES. 18. GROUND NO.8 IS IN RESPECT OF THE DISALLOWANCE OF DEDUCTION OF ESOP EXPENSES. 18.1 THE LD.COUNSEL SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION ASSESSEE HAD REMITTED AN AMOUNT OF RS.19,91,400/- TO ITS AE REPRESENTING COST OF ESOP BONE BY A FOREIGN INSURANCE OF STOCK OPTION TO THE EMPLOYEES OF ASSESSEE. IT HAS BEEN SUBMITTED THAT THE CLAIM WAS RAISED BY WAY OF REVISED RETURN WHICH WAS NOT GRANTED BY THE LD.AO. 18.2 THE LD.CIT DR RELIED ON ORDERS PASSED BY AUTHO RITIES BELOW. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. 18.3 IT WAS FURTHER SUBMITTED THAT, THE OBSERVATION S OF THE CIT(A) THAT BY ISSUE OF ESOP, THE FOREIGN PARENT COMPANY A T DENMARK WAS BENEFITED WILL BE NO GROUND TO DISALLOW A LEGIT IMATE BUSINESS EXPENDITURE OF THE ASSESSEE WHICH WAS EMPLOYEE COST OF THE PAGE 18 OF 21 ITA NO.323/BANG/2019 ASSESSEE. RELIANCE IS PLACED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SASSOON J. DAVID & CO. (P.) LTD. V. CIT REPORTED IN (1979) 1 TAXMAN 485 , WHEREIN HON'BLE SUPREME COURT TOOK THE VIEW THAT, IF THE ASSESSEE INCURRED ANY EXPENDITURE IN THE COURSE OF ITS BUSINESS, VOLUNTA RILY AND WITHOUT NECESSITY, BUT IF IT IS INCURRED FOR PROMOT ING THE BUSINESS AND TO EARN PROFIT, DEDUCTION U/S. 37(1) OF THE ACT HAS TO BE ALLOWED. THE HON'BLE COURT FURTHER HELD THAT, THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDITURE, SHOULD NOT COME IN THE WAY OF EXPENDIT URE BEING ALLOWED AS DEDUCTION. 18.4 FURTHER, HON'BLE KARNATAKA HIGH COURT IN THE CASE OF MYSORE KIRLOSKAR LTD. V. CIT REPORTED IN (1987) 30 TAXMAN 467 ), FOLLOWING THE HON'BLE SUPREME COURT IN THE CASE OF SASSOON J. DAVID & CO. (P) LTD. ( SUPRA ), HELD THAT THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDITURE SHOUL D NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED AS DEDUCTIO N U/S. 37(1) OF THE ACT. 18.5 EVEN THE DIRECT TAX NOTIFICATION NO.323 DATED 11.10.2011, WAS ISSUED IN EXERCISE OF POWERS CONFERRED U/S. 17( 2) OF THE ACT. THE CENTRAL GOVERNMENT IN THE AFORESAID NOTIFICATIO N SPECIFIED GUIDELINES, WHICH NEED TO BE FOLLOWED WHEN SHARES A RE ALLOTTED UNDER ESOP SCHEME. IN CLAUSE (6) OF THE AF ORESAID GUIDELINES, THE CENTRAL GOVT., HAS LAID DOWN THAT, WHERE SHARES OF A PARENT COMPANY ARE ISSUED UNDER AN ESOP, THE COMP ANY ISSUING ESOP HAS TO GIVE THE REQUIRED PARTICULARS T O THE CHIEF PAGE 19 OF 21 ITA NO.323/BANG/2019 COMMISSIONER OF INCOME-TAX ('CCIT') WITH AN ENGLISH TRANSLATION OF THE PLAN OR SCHEME, IF THE SAME IS IN A LANGUAGE OTHER THAN ENGLISH. IT WAS POINTED OUT THAT THE ASSESSEE DULY COMPLIED WITH THE AFORESAID GUIDELINES AND FILED THE ESOP SCHEME WITH THE CCIT AS ON 05.12.2005. 18.6 THE LD.COUNSEL DREW OUR ATTENTION TO THE OBSER VATIONS OF THE LD.CIT(A) IN PARA _____ OF HIS ORDER, AND OBSER VED THAT, THE ARRANGEMENT BY WHICH THE ASSESSEE ISSUED THE SHARES AT A DISCOUNT TO ITS EMPLOYEES OF THE PARENT COMPANY UNDER AN ESOP AND PAID THE DIFFERENCE BETWE EN THE ISSUE PRICE AND THE FAIR MARKET VALUE OF THE SHARES AS REIMBURSEMENT TO THE PARENT COMPANY WAS A MECHANISM TO PASS ON THE LIABILITY TO THE INDIAN COMPANY ONLY TO ENAB LE THE INDIAN COMPANY TO AVAIL OF THE TAX DEDUCTION UNDER THE ACT . IT WAS SUBMITTED THAT, NO SUCH INFERENCE WHATSOEVER HAD BE EN DRAWN BY THE CCIT, PURSUANT TO THE ASSESSEE FILING THE REQUI RED DETAILS OF ESOP. WITH REGARD TO THE OBSERVATIONS OF THE LD. CIT(A) THAT CAPITAL EXPENDITURE OF THE PARENT COMPANY WAS BEING CLOAKED IN THE GARB OF REVENUE EXPENDITURE OF THE AFFILIATE IN INDIA, IT WAS POINTED OUT THAT THERE WAS AN ACTUAL CASH OUTFLOW F ROM THE ASSESSEE TO THE PARENT COMPANY AND THAT THERE WAS N O ARRANGEMENT TO PASS ON THE CAPITAL EXPENSES OF THE PARENT COMPANY AS REVENUE EXPENSES OF THE AFFILIATE IN IND IA. THE OBSERVATIONS OF THE LD.CIT(A) IN THIS REGARD ARE BA SED ON SURMISES AND SUSPICION. PAGE 20 OF 21 ITA NO.323/BANG/2019 18.7 FURTHER, THE LD.COUNSEL SUBMITTED THAT, THE IS SUE STANDS SQUARELY COVERED BY ASSESSEES OWN CASE IN IT(TP)A NO. 267 & 87/B/2019 FOR ASSESSMENT YEAR 2009-10 BY ORDER DATE D 28/8/2019. COPY OF THE DECISION IS PLACED AT PAGE 1 124 OF THE PAPER BOOK. THIS TRIBUNAL OBSERVED AS UNDER:- 18.8 RESPECTFULLY FOLLOWING THE ABOVE, WE HOLD IT T O BE REVENUE EXPENDITURE, ELIGIBLE TO BE ALLOWED UNDER SECTION 3 7 OF THE ACT. ACCORDINGLY, THIS GROUND RAISED BY ASSESSEE STANDS ALLOWED. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JUNE, 2021 SD/- SD/- (CHANDRA POOJARI) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE, DATED, THE 22 ND JUNE, 2021. /VMS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE PAGE 21 OF 21 ITA NO.323/BANG/2019 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR -6-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -6-2021 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. -6-2021 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS -6-2021 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -6-2021 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -6-2021 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -6-2021 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS