Asst.C.I.T., Bangalore V. M/s ABB Global Industries & Services Ltd., Bangalore

ITA 38/BANG/2016

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 9645 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2021
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 04-01-2021
• Assessment Year: 2011-2012
• Appeal Filed On: 18-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JANMAYEE RAJKUMAR
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Set aside
• Section: 143(3); 133(6); 144C; 13

Judgement Text

IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A NO.38/BANG/2016 ASSESSMENT YEAR: 2011-12 ACIT CIRCLE-1(1)(1) BANGALORE VS. M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD. 21 ST FLOOR, WORLD TRADE CENTRE, BRIGADE GATEWAY DR. RAJKUMAR ROAD MALLESHWARAM WEST BANGALORE-560 055 PAN NO.AADCA3271B APPELLANT RESPONDENT IT(TP)A NO.58/BANG/2016 ASSESSMENT YEAR: 2011-12 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD. BANGALORE-560 055 VS. ACIT CIRCLE-1(1)(1) BANGALORE APPELLANT RESPONDENT APPELLANT BY : SMT. JANMAYEE RAJKUMAR, A.R. RESPONDENT BY : SHRI PRADEEP KUMAR, D.R. DATE OF HEARING : 04.01.2021 DATE OF PRONOUNCEMENT : 04.01.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ASSES SMENT ORDER DATED 20-11-2015 PASSED BY THE ASSESSING OFFICER FO R ASSESSMENT IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 2 OF 17 YEAR 2011-12 U/S 143(3) R.W.S 144C OF THE ACT IN PU RSUANCE OF DIRECTIONS GIVEN BY LD DISPUTE RESOLUTION PANEL (DR P). 2. THE ASSESSEE HAS FILED REVISED GROUNDS OF APP EAL. AT THE TIME OF HEARING, THE LD A.R SUBMITTED THAT SHE IS PRESSING ONLY GROUND NO.3(B) ABD 3(J). ACCORDINGLY, ALL OTHER GROUNDS A RE DISMISSED AS NOT PRESSED. THE ABOVE SAID TWO GROUNDS PRESSED BY THE ASSESSEE RELATE TO THE ADDITION MADE TOWARDS TRANSFER PRICING ADJUS TMENT 3. THE REVENUE IS IN APPEAL IN RESPECT OF FOLLO WING ISSUES:- (A) RELIEF GRANTED BY LD DRP IN RESPECT OF ADDIT ION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT (B) WHETHER THE LD DRP WAS JUSTIFIED IN DIRECTIN G THE AO TO FOLLOW THE DECISION OF KARNATAKA HIGH COURT RENDERE D IN THE CASE OF TATA ELXSI LTD, I.E., EXCLUSION OF EXPENSES INCURRED IN FOREIGN CURRENCY FROM BOTH EXPORT TURNOVER AND TOTA L TURNOVER. 4. THE FACTS RELATING TO THE CASE ARE DISCUSSED IN BRIEF. THE ASSESSEE COMPANY WAS EARLIER KNOWN AS ABB GLOBAL INDUSTRIES & SERVICES LTD.. IT BELONGS TO M/S ABB GROUP. IT IS PROVIDIN G SOFTWARE DEVELOPMENT SERVICES TO ITS AE WHICH INCLUDES DEVEL OPING SOFTWARE, CONFIGURATION, TESTING ACTIVITY. IT ALSO DEPUTES I TS ENGINEERS ON NEED BASIS FOR PROVIDING IT SUPPORT. THOUGH THE ASSESSE E HAS ENTERED INTO VARIOUS TYPES OF INTERNATIONAL TRANSACTIONS WITH IT S AES, WE ARE CONCERNED WITH SOFTWARE DEVELOPMENT ACTIVITY ONLY, SINCE THE TPO HAS MADE TRANSFER PRICING ADJUSTMENT IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES ONLY. 5. BOTH THE PARTIES ARE IN APPEAL IN RESPECT OF ADDITION RELATING TO TRANSFER PRICING ADJUSTMENT. THE FACTS RELATING TO THE SAME ARE DISCUSSED IN BRIEF. THE ASSESSEE HAS PROVIDED SOFTW ARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES (AES). THE TURNOVER OF THE IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 3 OF 17 ASSESSEE IN THE SEGMENT OF PROVISION OF SOFTWARE DE VELOPMENT SERVICES WAS RS.333.12 CRORES. THE ASSESSEE ADOPTED TRANSAC TIONAL NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD. I T ADOPTED OPERATING PROFIT/OPERATING COST (OP/OC) AS THE PROF IT LEVEL INDICATOR (PLI). THE ASSESSEE DECLARED A MARGIN OF 11.30% IN THE SOFTWARE DEVELOPMENT SEGMENT. 5.1 THE ASSESSEE HAD SELECTED 14 COMPARABLE CO MPANIES IN ITS TRANSFER PRICING STUDY. THE TPO REJECTED THE TRANS FER PRICING STUDY OF THE ASSESSEE AND HE FINALLY SELECTED FOLLOWING 1 3 COMPARABLE COMPANIES, WHOSE AVERAGE MARGIN WORKED OUT TO 24.82 %:- SL. NO. NAME SALES COST PLI 1 ACROPETAL TECHNOLOGIES LTD. (SEG) 81,40,16,893 61,67,54,876 31.98% 2 E - ZEST SOLUTIONS (FROM CAPITALINE) 11,28,66,098 9,32,55,341 21.03% 3 E - INFOCHIPS LTD. 26,03,84,251 167,64,47,527 56.44% 4 EVOKE (FROM CAPITALINE) 14,48,69,912 13,39,96,568 8.11% 5 ICRA TECHNO ANALYTICS LTD. (IN 000) 15,84,01,000 12,68,94,000 24.83% 6 INFOSYS LTD 253850000000 177,030,000,000 43.39% 7 LARSEN & TOUBRO INFOTECH LTD. 23318122096 19,764, 861,289 19.83% 8 MINDTREE LTD. (SEG) 8,783,000,000 7,937,143,242 10.66% 9 PERSISTENT SYSTEMS & SOLUTIONS LTD. 189,490,457 155,172,089 22.12% 10 PERSISTENT SYSTEMS LTD. 6,101,270,000 4,971,860,000 22.84% 11 R S SOFTWARE (INDIA) LTD. 1,882,638,471 1,617,804,170 16.37% 12 SASKEN COMMUNICATION TECHNOLOGIES LTD. 3,941,962,000 3,175,616,000 24.13% 13 TATA ELXSI LTD. (SEG) 3,581,985,000 2,962,533,352 20.91% AVERAGE MARGIN 24.82% AFTER DEDUCTING WORKING CAPITAL ADJUSTMENT OF 1.63% , THE TPO ARRIVED AT ADJUSTED MARGIN OF 23.19%. ACCORDINGLY, HE MADE TRANSFER PRICING ADJUSTMENT OF RS.35.74 CRORES. 5.2 THE LD DRP DIRECTED THE AO/TPO TO EXCLUDE FO LLOWING TEN COMPANIES:- IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 4 OF 17 (A) ACROPETAL TECHNOLOGIES LIMITED (B) E-ZEST SOLUTIONS LIMITED (C) E-INFOCHIPS LIMITED (D) ICRA TECHNO ANALYTICS LIMITED (E) INFOSYS LIMITED (F) LARSEN & TOUBRO INFOTECH (G) MINDTREE LIMITED (H) TATA ELXSI LTD (I) EVOKE TECHNOLOGIES LIMITED (J) R S SOFTWARE (INDIA) LTD THE LD DRP UPHELD THE SELECTION OF FOLLOWING THREE COMPANIES:- (A) PERSISTENT SYSTEMS & SOLUTIONS LIMITED (B) PERSISTENT SYSTEMS LIMITED (C) SASKEN COMMUNICATIONS TECHNOLOGIES LTD 5.3 THE GROUNDS PRESSED BY THE ASSESSEE SEEK EXC LUSION OF (A) PERSISTENT SYSTEMS & SOLUTIONS LIMITED (B) PERSISTENT SYSTEMS LIMITED (C) SASKEN COMMUNICATIONS TECHNOLOGIES LTD AND INCLUSION OF (A) AKSHAY SOFTWARE TECHNOLOGIES LTD AND (B) LGS GLOBAL LTD (C) R.S SOFTWARE LTD (C) MINDTREE LTD. (D) EVOKE TECHNOLOGIES P LTD. 5.4 THE REVENUE IS CHALLENGING THE DECISION OF L D DRP IN EXCLUDING ALL TEN COMPARABLE COMPANIES LISTED EARLIER. IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 5 OF 17 5.5 THE LD A.R SUBMITTED THAT ALL HER SUBMISSIONS ARE SUPPORTED BY THE DECISION RENDERED BY CO-ORDINATE BENCH OF TR IBUNAL IN THE CASE OF (I) M/S APPLIED MATERIALS INDIA PVT LTD VS. ACIT (I T(TP)A NO.17 & 39/BANG/2016) (II) ELECTRONICS IMAGING INDIA P LTD VS. DCIT (2017 )(85 TAXMANN.COM 124)(BANG.) 5.6 THE LD A.R FURTHER SUBMITTED THAT THE ASSES SEE IS NOW ACCEPTING FOR INCLUSION OF M/S R.S. SOFTWARE (INDIA ) LTD, M/S EVOKE TECHNOLOGIES LTD AND M/S MIND TREE LTD AS COMPARABL E COMPANIES. HE FURTHER SUBMITTED THAT THE REMAINING COMPANIES H AVE BEEN HELD TO BE NOT GOOD COMPARABLE COMPANIES BY HOSTS OF CAS E LAWS. SINCE THE COMPARABILITY OF COMPANIES DEPENDS UPON PARITY OF FACTS AND SINCE THE SAID ASPECT HAS BEEN EXAMINED BY THE TRIB UNAL, THE DECISIONS RENDERED BY THE TRIBUNAL MAY BE FOLLOWED. 5.7 WE HEARD LD D.R AND PERUSED THE RECORD. WE NOTICE THAT, OUT OF THE TEN COMPARABLE COMPANIES EXCLUDED BY LD DRP, THE ASSESSEE NOW SEEKS INCLUSION OF THREE COMPANIES, VIZ., M/S E VOKE TECHNOLOGIES LTD, M/S R S SOFTWARE (INDIA) LTD AND M/S MINDTREE LIMITED. HENCE THE GRIEVANCE OF REVENUE WOULD NOW REMAIN WITH REGARD TO THE FOLLOWING SEVEN COMPANIES ONLY:- A) ACROPETAL TECHNOLOGIES LIMITED (B) E-ZEST SOLUTIONS LIMITED (C) E-INFOCHIPS LIMITED (D) ICRA TECHNO ANALYTICS LIMITED (E) INFOSYS LIMITED (F) TATA ELXSI LTD (SEG) (G) LARSEN & TOUBRO INFOTECH IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 6 OF 17 5.8 WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORD. THE LD A.R SUBMITTED THAT ALL THE ABOVE SAID COMPANIES HAVE BEEN DIRECTED TO BE EXCLUDED BY THE CO-ORDINATE BENCH IN THE CASE OF APPLIED MATERIALS INDIA P LTD (SUPRA) AND ALSO IN T HE CASE OF ELECTRONIC IMAGING (I) PVT LTD (SUPRA). WE NOTICE THAT THE CO-ORDINATE BENCH OF TRIBUNAL HA S FOLLOWED THE DECISION RENDERED IN THE CASE OF ELECRONIC FOR IMAG ING (I) P LTD (SUPRA) WHILE DECIDING THE APPEAL IN THE CASE OF M/S LG SOF T INDIA P LTD (IT(TP)A NO.52/BANG/2016 AND IT(TP)A NO.97/BANG/201 6 DATED 05- 08-2020. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE DISCUSSIONS MADE AND THE DECISION TAKEN BY THE TRIB UNAL IN THE CASE OF L G SOFT INDIA P LTD (SUPRA):- 10. WITH REGARD TO THE OTHER 7 COMPARABLE COMPANIE S, WHOSE EXCLUSION IS CHALLENGED BY THE REVENUE IN GROUND NO.2 OF ITS APP EAL, WE FIND THAT EXCLUSION OF THESE COMPARABLES FROM THE LIST OF COM PANIES SELECTED BY THE TPO HAD COME UP FOR CONSIDERATION BEFORE THE BANGAL ORE ITAT IN THE CASE OF ELECTRONIC FOR IMAGING (I) PVT. LTD. V. DCIT [2017] 85 TAXMANN.COM 124 [BANG. TRIB]. ; SYMANTECH SOFTWARE & SERVICES (I) PVT. LTD. V. DCIT , ITA NO.614/MDS/2016; DCIT V. IKANOS COMMUNICATION PVT. LTD . IN ITA 137/BANG/2015; NESS TECHNOLOGIES (I) PVT. LTD. V. DCIT IN ITA NO.696/MUM/2016 WHICH ARE ALSO DECISIONS RENDERED I N RELATION TO AY 2011- 12 IN THE CASE OF A COMPANIES PROVIDING SWD SERVICE S SUCH AS THE ASSESSEE IN THE PRESENT APPEAL. IT IS ALSO RELEVANT TO POINT OUT THAT THE VERY SAME COMPARABLE COMPANIES CHOSEN BY THE TPO IN THE PRESE NT APPEAL IT(TP)A NOS.52 & 97/BANG/2016 HAD BEEN CHOSEN BY THE TPO AS COMPARABLE COMPANIES IN THE CASE OF ELECTRONIC FOR IMAGING (I) PVT. LTD. (SUPRA). THE TRIBUNAL IN ITS ORDER DATED 14.7.2017 IN THE AFORES AID CASE DEALT WITH THE COMPARABILITY OF THESE COMPANIES. 11. AS FAR AS ACROPETAL TECHNOLOGIES LTD . IS CONCERNED, VIDE PARA 8 OF THE ORDER OF TRIBUNAL IN ELECTRONICS FOR IMAGING (I) PVT. LTD. (SUPRA), EXCLUSION OF ACROPETAL WAS UPHELD ON THE G ROUND THAT THIS COMPANY WAS INTO DEVELOPMENT OF COMPUTER PRODUCTS. THE TRIBUNAL ALSO HELD THAT L&T INFOTECH LTD. HAD RPT AT 18.66% AND SINCE THE RPT WAS BEYOND THE THRESHOLD LIMIT OF 15%, THIS COM PANY WAS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THE TRIBUNAL FURTHER EXCLUDED TATA ELXSI LTD. FROM THE LIST OF COMPARABLES ON THE GROUND THAT THIS COMPANY WAS ENG AGED IN DIVERSIFIED ACTIVITIES AND WAS NOT A PURE SWD SERVI CES PROVIDER SUCH AS THE ASSESSEE. IN PARA 9 OF THE AFORESAID ORDER, THE TRIBUNAL HELD E- INFOCHIPS LTD., WAS EARNING REVENUE BOTH FROM THE SOFTWARE SERVICE S IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 7 OF 17 AND SOFTWARE PRODUCTS AND THOUGH THE BREAK-UP OF RE VENUE FROM THE TWO SEGMENTS WERE AVAILABLE, BUT THE BREAK-UP OF OP ERATING COST AND NET OPERATING REVENUE AND SEGMENTAL DETAILS WERE NO T AVAILABLE. 12. AS REGARDS E-ZEST SOLUTIONS LTD. , IN THE CASE OF SYMANTECH SOFTWARE & SERVICES (I) PVT. LTD. V. DCIT, ITA NO .614/MDS/2016, THIS COMPANY WAS HELD TO BE ENGAGED IN KNOWLEDGE PROCESS OUTSOURCING (KPO) AND CANNOT BE REGARDED AS A SWD SERVICES COMP ANY. 13. THE TRIBUNAL IN THE CASE OF DCIT V. IKANOS COMMUNICATION PVT. LTD . IN ITA 137/BANG/2015 EXCLUDED THE COMPANY, ICRA TECHNO ANALYTICS LTD. , ON THE GROUND THAT IT WAS ENGAGED IN ENGINEERING AND CONSULTING SERVICES, BESIDES LICENSING AND SUB-LICE NSING AND NO SEGMENTAL INFORMATION WAS AVAILABLE TO COMPARE THE MARGINS OF SWD SERVICES SEGMENT. 14. THE MUMBAI TRIBUNAL IN THE CASE OF NESS TECHNOLOGIES (I) PVT. LTD. V. DCIT IN ITA NO.696/MUM/2016 HELD INFOSYS LTD. TO BE NOT COMPARABLE FOR THE REASON THAT THIS COMPANY WAS ENG AGED IN MANUFACTURING OF SOFTWARE PRODUCTS AND WAS A GIANT COMPANY ASSUMING VARIOUS RISKS. AS FAR AS LARSEN & TOUBRO INFOTECH LTD ., IS CONCERNED, VIDE PARAGRAPH-8 PAGE-16 OF THE ORDER IN THE CASE OF ELECTRONICS FOR IMAGING INDIA PVT. LTD., (SUPRA) TH IS TRIBUNAL EXCLUDED THIS COMPANY ON THE GROUND OF PRESENCE OF ONSITE RE VENUE OF MORE THAN 50% AND THAT THE RELATED PARTY TRANSACTION WAS MORE THAN 15% (18.66%). 15. RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS, WE UPHOLD THE EXCLUSION OF THE AFORESAID 7 COMPANIES FROM THE LIST OF COMPA RABLE COMPANIES AND GROUND NO.2 RAISED BY THE ASSESSEE TO THIS EXTENT I S DISMISSED. WE MAY ADD THAT THE OTHER GROUNDS RAISED BY THE REVENUE IN ITS APPEAL ARE PURELY SUPPORTIVE OF GROUND NO.2 AND ARE GENERAL GROUNDS W ITH NO SPECIFIC REFERENCE TO INSTANCES OF COMPARABLES EXCLUDED AND HENCE DISMISSED. 5.9 WITH REGARD TO E ZEST SOLUTIONS LTD, WE NOTI CE THAT THE CO- ORDINATE BENCHES HAVE RENDERED DIVERSE DECISIONS AS UNDER:- (A) IN THE CASE OF APPLIED MATERIALS INDIA (P) LTD (IT(TP)A 17 & 39/BANG/2016 DATED 21.09.2016, IT WAS REMANDED TO T HE FILE OF AO/TPO. (B) IN THE CASE OF SAXO INDIA P LTD (2016)(67 TAX MANN.COM 155), THE DELHI BENCH OF TRIBUNAL HAS HELD THAT M/S E ZEST SOLUTIONS LTD IS GOOD COMPARABLE AND ACCORDINGLY RE TAINED THE SAME. IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 8 OF 17 (C) IN THE CASE OF SYMANTECH SOFTWARE & SERVICES (I) PVT. LTD. V. DCIT, ITA NO .614/MDS/2016, THIS COMPANY WAS HELD TO BE ENGAGED IN KNOWLEDGE PROCESS OUTSOURCING (KPO) AND CANNOT BE REGARDED AS A SWD SERVICES COMPANY. HOWEVER, IN THE CASE OF APPLIED MATERIALS INDIA P LTD (SUPRA), THE CO-OR DINATE BENCH HAS EXPRESSED THE VIEW THAT THE QUESTION OF BPO AND KPO IS RELEVANT ONLY IN ITES SEGMENT AND NOT FOR SOFTWARE DEVELOPMENT SERVICES SEGMENT. (D) IN THE CASE OF AMD INDIA P LTD VS. ACIT (IT(TP )A 1487 & 1496/BANG/2015 DATED 06-04-2017), THE TRIBUNAL APPA RENTLY FOLLOWED THE DECISION RENDERED IN THE CASE OF SAXO INDIA P LTD (SUPRA), BUT FINALLY IT EXCLUDED E ZEST SOLUTIONS L TD. WE NOTICED EARLIER THAT THE TRIBUNAL HAS RETAINED THIS COMPANY IN THE CASE OF SAXO INDIA P LTD. HENCE, THERE IS AN E RROR IN THE ORDER PASSED IN THE CASE OF AMD INDIA P LTD (SUPRA) . (E) IN THE CASE OF ELECTRONIC IMAGING INDIA P LTD (SUPRA), THE DECISION RENDERED IN THE CASE OF AMD INDIA P LTD (S UPRA) WAS FOLLOWED. IN VIEW OF DIVERSE OF OPINIONS EXPRESSED IN VARIOUS CASES, WE ARE OF THE VIEW THAT COMPARABILITY OF THIS COMPANY REQUIRE S FRESH EXAMINATION AS HELD IN THE CASE OF APPLIED MATERIAL S INDIA (P) LTD. ACCORDINGLY, WE RESTORE THIS COMPANY TO THE FILE OF AO/TPO FOR EXAMINING IT AFRESH. 5.10 WITH REGARD TO REMAINING SIX COMPANIES, WE C ONFIRM EXCLUSION OF ABOVE SAID SEVEN COMPANIES, FOLLOWING THE DECISI ONS OF TRIBUNAL REFERRED ABOVE. SINCE THE ASSESSEE HAS SOUGHT FOR INCLUSION OF THREE COMPANIES OUT OF THE TEN COMPANIES EXCLUDED BY LD D RP, VIZ., M/S EVOKE TECHNOLOGIES LTD, R.S SOFTWARE INDIA LTD, MIN DTREE LIMITED, THE GROUND OF REVENUE IN RESPECT OF ABOVE SAID THRE E COMPANIES ARE ALLOWED. IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 9 OF 17 5.11 IN THE APPEAL OF THE ASSESSEE, THE ASSESSE E SEEKS EXCLUSION OF ALL THE THREE COMPANIES RETAINED BY LD DRP, VIZ., M /S PERSISTENT LTD, M/S PERSISTENT SYSTEMS & SOLUTIONS LTD AND M/S SASK EN COMMUNICATIONS LTD. 5.12 THE ABOVE SAID THREE COMPANIES, VIZ., M/S P ERSISTENT LTD, M/S PERSISTENT SYSTEMS & SOLUTIONS LTD AND M/S SASKEN COMMUNICATIONS LTD HAVE BEEN DEALT BY THE CO-ORDINA TE BENCH IN THE CASE OF LG SOFT INDIA P LTD (SUPRA), IN WHICH THE D ECISION RENDERED IN THE CASE OF ELECTRONIC FOR IMAGING (I) P LTD (SUPRA ) HAS BEEN FOLLOWED. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE O BSERVATIONS MADE IN THE CASE OF LG SOFT INDIA P LTD AS UNDER:- 16. NOW WE SHALL TAKE UP THE APPEAL OF THE ASSESSE E. THE ASSESSEE IN GROUND NO.13 SEEKS EXCLUSION OF 3 COMPANIES VIZ., PERSISTE NT SYSTEMS & SOLUTIONS LTD., SASKEN COMMUNICATION TECHNOLOGIES LTD. AND PE RSISTENT SYSTEMS LTD. EXCLUSION OF THESE 3 COMPANIES WAS CONSIDERED BY TH E TRIBUNAL IN THE CASE OF ELECTRONICS FOR IMAGING (I) PVT. LTD. (SUPRA). I N PARA 8 OF THE ORDER, THIS TRIBUNAL HELD THAT PERSISTENT SYSTEMS & SOLUTIONS L TD. WAS A COMPANY ENGAGED IN SWD SERVICES AND PRODUCTS WITH NO SEGMEN TAL DETAILS AND EXCLUDED IT. SIMILARLY, PERSISTENT SYSTEMS LTD. WAS ALSO EXCLUDED ON THE GROUND THAT IT WAS ENGAGED IN DIVERSE ACTIVITIES WI TH NO SEGMENTAL BREAK-UP. AS FAR AS SASKEN COMMUNICATION TECHNOLOGIES LTD. IS CONCERNED, THIS TRIBUNAL IN THE CASE OF SYMANTECH SOFTWARE & SERVIC ES (I) PVT. LTD. (SUPRA) HAS EXCLUDED THIS COMPANY ON THE GROUND OF FUNCTION AL IT(TP)A NOS.52 & 97/BANG/2016 DISSIMILARITY VIZ., DEALING WITH MULTI MEDIA PRODUCTS AND R&D ACTIVITIES WITH NO BREAK-UP OF SEGMENTAL INFORMATIO N. 17. FOLLOWING THE AFORESAID DECISIONS, WE DIRECT EX CLUSION OF THE AFORESAID 3 COMPARABLE COMPANIES. THE TPO IS DIRECTED TO COMPUT E THE ALP OF THE INTERNATIONAL TRANSACTION IN ACCORDANCE WITH THE DI RECTIONS GIVEN ABOVE IN THIS ORDER, AFTER AFFORDING ASSESSEE OPPORTUNITY OF BEING HEARD. 5.13 CONSISTENT WITH THE VIEW TAKEN BY THE CO-OR DINATE BENCHES IN THE ABOVE SAID CASES, WE DIRECT EXCLUSION OF AFORES AID THREE COMPARABLE COMPANIES. 5.14 THE ASSESSEE SEEKS INCLUSION OF FIVE COMPAN IES, WHICH INCLUDES THREE COMPANIES SOUGHT TO BE INCLUDED BY THE REVENU E, VIZ., M/S IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 10 OF 17 EVOKE TECHNOLOGIES LTD, M/S R S SOFTWARE (INDIA) LT D AND M/S MINDTREE LIMITED. SINCE BOTH THE PARTIES AGREEING F OR INCLUSION OF ABOVE SAID THREE COMPANIES, WE DIRECT THE AO/TPO TO INCLUDE ABOVE SAID THREE COMPANIES IN THE SET OF COMPARABLE COMPA NIES. 5.15 THE REMAINING TWO COMPANIES, WHICH ASSESSEE SEEKS INCLUSION ARE AKSHAY SOFTWARE TECHNOLOGIES LTD AND LGS GLOBAL LTD. 5.16 WE HEARD THE PARTIES ON THIS ISSUE AND PERU SED THE RECORD. WITH REGARD TO M/S AKSHAY SOFTWARE TECHNOLOGIES LTD , THE LD A.R SUBMITTED THAT THE SAME HAS BEEN CONSIDERED AS GOOD COMPARABLE IN THE ASSESSEES OWN CASE IN AY 2005-06. HOWEVER, WE NOTICE THAT THE CO-ORDINATE BENCH OF TRIBUNAL HAS EXAMINED THIS COM PANY IN THE CASE OF M/S APPLIED MATERIALS INDIA P LTD (IT(TP)A NO.17 /BANG/2016 DATED 21.09.2016) RELATING TO ASSESSMENT YEAR 2011- 12, I.E., FOR THE YEAR UNDER CONSIDERATION AND HELD THE SAME TO BE NO T A GOOD COMPARABLE. 5.17 WITH REGARD TO M/S LGS GLOBAL LTD, WE NOTICE THAT THE CO- ORDINATE BENCH HAS REMANDED THE SAME TO THE FILE OF AO/TPO IN THE VERY SAME CASE OF M/S APPLIED MATERIALS INDIA P LTD (SUPRA). FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE RELEVANT OBSERVATIONS MADE BY THE TRIBUNAL IN THE CASE OF M/S APPLIED MATERIAL S INDIA P LTD (SUPRA):- 11. THE NEXT GROUND OF ASSESSEE'S APPEAL IS REGARD ING SEEKING INCLUSION OF SOME OF THE COMPARABLES IN THE SET OF COMPARABLE COMPANIES WHICH ARE AS UNDER : (I) AKSHA Y SOFTWARE TECHNOLOGY LTD. (II) POWERSOFT GLOBAL LTD. (III) R SYSTEMS INTERNATIONAL LTD. IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 11 OF 17 (I) AKSHAY SOFTWARE TECHNOLOGY LTD . 12.1 THIS COMPANY WAS SELECTED BY THE ASSESSEE IN T HE TP STUDY HOWEVER THE TPO REJECTED THIS COMPANY ON T HE GROUND THAT ITS FUNCTIONS APPEAR TO BE MORE IN THE NATURE OF SUPPORT SERVICES OR ITES. THE DRP HAS CONFIRMED THE REJECTION ON A DIFFERENT GROUND BY APPLYING A FILTE R THAT THE EXPENDITURE IN FOREIGN CURRENCY WAS HIGHER WHEN COMPARED TO ITS TOTAL REVENUE. THUS DRP WAS OF THE VIEW THAT THIS COMPANY WAS PREDOMINANTLY ENGAGED IN THE ON SITE DEVELOPMENT OF SOFTWARE. THE LD. AR HAS SUBMI TTED THAT SUCH FILTER WAS NEITHER APPLIED BY THE TPO NOR SOUGHT TO BE APPLIED BY THE ASSESSEE. THEREFORE THE DRP WA S NOT ASKED TO APPLY THIS FILTER. SECONDLY THE DRP DID NO T ARRIVE AT THE FINDING THAT THE SAID COMPANY WAS IN FACT EN GAGED IN ON SITE DEVELOPMENT OF SOFTWARE. THE FINDING O F THE DRP ARE BASED MAINLY ON THE ASSUMPTION THAT BECAUSE OF ITS EXPENDITURE IN FOREIGN CURRENCY WAS HIGH IT MUS T HAVE BEEN ENGAGED IN THE ON SITE DEVELOPMENT OF SOFTWA RE. THE LD. AR HAS FURTHER CONTENDED THAT THIS FILTER O F ON SITE DEVELOPMENT SERVICES HAVE BEEN APPLIED BY THE DRP WITHOUT GIVING AN OPPORTUNITY OF FILING ITS OBJECTI ONS TO THE ASSESSEE. THUS THE LD. AR HAS SUBMITTED THAT THE RE JECTION OF THE SAID COMPANY BY APPLYING A FILTER NOT APPLIE D BY THE TPO IS LIABLE TO BE SET ASIDE. HE HAS RELIED UP ON THE DECISION OF THIS TRIBUNAL DT.29.6.2015 IN THE CASE OF M/S. AROWANA CONSULTING LTD. VS. ITO IN IT(TP)A NO.235/BANG/2015. 12.2 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS REFERRED TO PAGE NOS.15 AND 20 O F THE ANNUAL REPORT AND SUBMITTED THAT THIS COMPANY HAS IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 12 OF 17 SHOWN PRODUCT AND STOCK IN THE ACCOUNTS THEREFORE I N THE ABSENCE OF SEGMENTAL REPORTING IT CANNOT BE CONSIDE RED AS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE. 12.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WE LL AS THE RELEVANT MATERIAL ON RECORD. AS REGARDS THE DEC ISION OF THE CO-ORDINATE BENCH IN THE CASE OF AROWANA CONSUL TING LTD. VS. ITO (SUPRA), THE TRIBUNAL HAS DEALT WITH O NLY ONE OBJECTION OF EMPLOYEE COST IN PARAS 8 & 9 AS UNDER : 08. WHAT IS LEFT FOR CONSIDERATION IS ASSESSEES GRIEVANCE REGARDING M/S. AKSHAY SOFTWARE TECHNOLOGIES LTD. DRP DIRECTED EXCLUSION OF THE SAI D COMPANY FOR A REASON THAT ITS EMPLOYEE COST WAS MORE THAN 89% OF ITS TOTAL OPERATING EXPENDITURE. W E FIND THAT ASSESSEE HAD EMPLOYEE COST IN EXCESS OF 90% OF ITS OPERATING EXPENDITURE. IN OUR OPINION, I T IS NORMAL TO HAVE A HIGH PERCENTAGE OF EMPLOYEE COST IN A SOFTWARE DEVELOPMENT COMPANY, ESPECIALLY SO, WHEN THE COMPANY IS INVOLVED IN DEVELOPMENT OF SOFTWARE FOR CLIENTS AT THE SITE OF THE CLIENTS. RE ASON GIVEN BY THE DRP, IN OUR OPINION, WAS NOT CORRECT. HIGHER EMPLOYEE COST IS A NORMAL FEATURE FOR A SOFTWARE DEVELOPMENT COMPANY FOR THE SIMPLE REASON THAT IT IS A SKILL ORIENTED BUSINESS. THE SK ILL- SET REQUIRED FOR THE EMPLOYEES IN THE CASE OF THE ASSESSEE, REQUIRED KNOWLEDGE OF ARABIC ALSO, MAKING IT ALL THE MORE SCARCE. IN ANY CASE, FOR A. Y. 2009-10, M/S. AKSHAY SOFTWARE TECHNOLOGIES LTD WAS CONSIDERED AS A PROPER COMPARABLE AND NOT EXCLUDED. IN HIS ORDER DT.07.01.2015 FOR A. Y. 2009 - 10, AFTER APPLYING THE ONSITE REVENUE FILTER OF 50% , TPO HIMSELF HAD CONSIDERED M/S. AKSHAY SOFTWARE TECHNOLOGIES LTD, AS A PROPER COMPARABLE. AS TO THE ARGUMENT OF THE LD. DR THAT RELATED PARTY TRANSACTION, VOLUME OF M/S. AKSHAY SOFTWARE TECHNOLOGIES WAS NOT PROVIDED BY THE ASSESSEE, LEADING TO ITS REJECTION, WE FIND THAT ASSESSEE HAD AT PARA 5.172 AND 5.173 OF ITS OBJECTIONS BEFORE DRP, SUBMITTED THAT RPT OF THE SAID COMPANY WAS 4.33% ONLY, COMPILING THE FIGURES FROM PREVIOUS YEARS DAT A AVAILABLE IN ANNUAL REPORT OF FINANCIAL YEAR 2010- 11 OF THE SAID COMPANY. THIS WORKING STANDS IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 13 OF 17 UNREBUTTED. WE ARE, THEREFORE OF THE OPINION THAT T HE ASSESSEE HAS TO SUCCEED IN ITS CLAIM THAT M/S. AKSHAY SOFTWARE TECHNOLOGIES LTD, IS A PROPER COMPARABLE. WE DIRECT THE TPO TO INCLUDE THE SAID COMPANY AS A COMPARABLE ALONG WITH THE TWO COMPARABLES, NAMELY, M/S. R. S. SOFTWARE (INDIA) LTD AND M/S. THINKSOFT GLOBAL SERVICES LTD, AND REWORK THE MEAN PLI. ALP ADJUSTMENT, IF ANY, REQUIRED SHALL BE BASED ON SUCH MEAN PLI, AFTER CONSIDERING THE WORKING CAPITAL ADJUSTED. ORDERED ACCORDINGLY. GROUND 12 OF THE ASSESSEE IS ALLOWED. 09. VIDE ITS GROUND 13, WE FIND THAT ASSESSEE IS AGGRIEVED THAT DRP HAD DIRECTED TREATMENT OF FOREIG N EXCHANGE LOSS/GAIN AS NON-OPERATING IN NATURE. WE FIND THAT DRP HAD AT PARA 2.9 OF ITS DIRECTIONS DAT ED 26.11.2014 DIRECTED INCLUSION OF FOREIGN EXCHANGE GAIN / LOSS AS PART OF THE OPERATING EXPENDITURE AN D NOT THE OTHER WAY. THEREFORE, THE SAID GROUND IS IL L CONCEIVED AND DISMISSED. THEREFORE OTHER THAN THE EMPLOYEE COST, THE ISSUE O F FUNCTIONAL SIMILARITY WAS NOT BEFORE THE TRIBUNAL I N THE SAID CASE. HOWEVER, WE NOTE THAT AS PER THE FINANCI AL RESULTS REPORTED IN THE ANNUAL REPORT AT PAGE 2 AND 15, THE INCOME SHOWN IN THE PROFIT AND LOSS ACCOUNT IS FROM SOFTWARE SERVICES AND PRODUCTS. FURTHER AS PER THE SCHEDULE 10 AT PAGE 20 OF THE ANNUAL REPORT THIS COMPANY HAS REPORTED INCOME FROM SALE OF PRODUCT. SIMILARLY AS PER SCHEDULE 12, THIS COMPANY HAS SHOW N GOODS PURCHASED FOR RESALE AS WELL AS OPENING STOCK . THEREFORE IN THE ABSENCE OF SEGMENTAL RESULTS AND OPERATION MARGIN, THIS COMPANY CANNOT BE CONSIDERED AS FUNCTIONALLY COMPARABLE. ACCORDINGLY, WE REJECT THI S GROUND OF ASSESSEE. IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 14 OF 17 (II) LGS GLOBAL LTD . 13.1 THE TPO REJECTED THIS COMPANY ON THE GROUND TH AT THE ANNUAL REPORT DID NOT GIVE BREAK UP OF EMPLOYEE COST AND THUS HE COULD NOT COMPUTE ITS EMPLOYEE COST FAC TOR. THE DRP UPHELD THE REJECTION ON THE BASIS THAT THE SEPARATE DETAILS OF EMPLOYEE COST WERE NOT AVAILABL E. 13.2 BEFORE US, THE LD.AR OF THE ASSESSEE HAS SUBMI TTED THAT THIS COMPANY HAS SHOWN PURCHASE AND EMPLOYEE COST UNDER A COMPOSITE HEAD WHICH IS 83.91% OF THE SALE. THEREFORE THIS COMPANY SATISFIED THE EMPLOYEE COST OF 25% OF TOTAL SALES. THE LEARNED AUTHORISED REPRESEN TATIVE HAS POINTED OUT THAT IN CASE OF SERVICE PROVIDER TH E MAJOR COMPONENT IS EMPLOYEE COST AND THERE IS HARDLY ANY PURCHASES THEREFORE EVEN IF THE EMPLOYEE COST IS NO T SEPARATELY REPORTED, THE COMPOSITE OF PURCHASE AND EMPLOYEE COST CONSTITUTE 83.91% OF SALES. THUS HE H AS SUBMITTED THAT THIS COMPANY SHOULD BE INCLUDED IN T HE LIST OF COMPARABLES. 13.3 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THERE IS NO DI SPUTE THAT THIS COMPANY HAS NOT REPORTED EMPLOYEE COST SEPARATELY AND THEREFORE IT IS NOT POSSIBLE TO ASCE RTAIN THE EMPLOYEE COST AND TO APPLY EMPLOYEE COST FILTER. FU RTHER THIS COMPANY HAS ALSO SHOWN ITS GOODWILL IN ITS BAL ANCE SHEET AND THEREFORE THE INTANGIBLE ASSETS RENDERS T HIS COMPANY NON-COMPARABLE TO THE ASSESSEE. IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 15 OF 17 13.4 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WE LL AS THE RELEVANT MATERIAL ON RECORD. THIS COMPANY HAS S HOWN THE PURCHASES AND PERSONNEL COST AT PAGE 39 OF THE ANNUAL REPORT AS A COMBINED EXPENDITURE AS UNDER : PURCHASES & PERSONNEL COST : RS.250,61,55,607. THEREFORE THE COST OF EMPLOYEE IS NOT SEPARATELY RE PORTED BY THIS COMPANY. FURTHER IT IS NOT CLEAR WHETHER TH E GOODWILL IS SELF-GENERATED OR ACQUIRED INTANGIBLE A SSET. ACCORDINGLY, THIS ISSUE IS SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER/TPO TO VERIFY THE RELEVANT FACTS TO ASCERTAIN THE EMPLOYEE COST AND THEN DECIDE THE FUNCTIONAL COMPARABILITY. NEEDLESS TO SAY THE INFOR MATION UNDER SECTION 133(6) MAY BE OBTAINED FOR THE PURPOS E OF ASCERTAINING THE ANNUAL EMPLOYEE COST OF THIS COMPA NY. 5.18 WE NOTICE THAT THE ABOVE SAID DECISION HAS BEEN RENDERED FOR AY 2011-12 AND HENCE WE PREFER TO FOLLOW THE SAME. ACCORDINGLY, FOLLOWING THE ABOVE SAID DECISION, WE HOLD THAT M/S AKSHAY SOFTWARE TECHNOLOGY LTD IS NOT A GOOD COMPARABLE. FOLLOWING THE ABOVE SAID DECISION, WE RESTORE M/S LGS GLOBAL LTD TO THE FILE OF AO/TPO WITH SIMILAR DIRECTIONS. 5.19 ACCORDINGLY, WE DIRECT THE AO/TPO TO COMPUTE THE ALP OF THE INTERNATIONAL TRANSACTION IN ACCORDANCE WITH THE DI RECTIONS GIVEN ABOVE, AFTER AFFORDING ADEQUATE OPPORTUNITY OF BEIN G HEARD TO THE ASSESSEE. 6. THE REVENUE HAS RAISED A GROUND AS TO WHETHER THE LD DRP WAS JUSTIFIED IN DIRECTING THE AO TO FOLLOW THE DECISIO N OF KARNATAKA HIGH COURT RENDERED IN THE CASE OF TATA ELXSI LTD, I.E., EXCLUSION OF EXPENSES INCURRED IN FOREIGN CURRENCY FROM BOTH EXP ORT TURNOVER AND TOTAL TURNOVER. IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 16 OF 17 6.1 THE HON'BLE SUPREME COURT HAS SETTLED THIS ISSUE IN THE CASE OF CIT VS. HCL TECHNOLOGIES LTD (TS 218 SC -201 8). THE RELEVANT OBSERVATIONS MADE BY HON'BLE SUPREME COURT ARE EXTR ACTED BELOW:- 20) EVEN IN COMMON PARLANCE, WHEN THE OBJECT OF T HE FORMULA IS TO ARRIVE AT THE PROFIT FROM EXPORT BUSINESS, EX PENSES EXCLUDED FROM EXPORT TURNOVER HAVE TO BE EXCLUDED F ROM TOTAL TURNOVER ALSO. OTHERWISE, ANY OTHER INTERPRETATION MAKES THE FORMULA UNWORKABLE AND ABSURD. HENCE, WE ARE SATIS FIED THAT SUCH DEDUCTION SHALL BE ALLOWED FROM THE TOTAL TURN OVER IN SAME PROPORTION AS WELL. 21. ON THE ISSUE OF EXPENSES ON TECHNICAL SERVICES PROVIDED OUTSIDE, WE HAVE TO FOLLOW THE SAME PRINCIPLE OF IN TERPRETATION AS FOLLOWED IN THE CASE OF EXPENSES OF FREIGHT, TELECOMMUNICATION ETC., OTHERWISE THE FORMULA OF CA LCULATION WOULD BE FUTILE. HENCE, IN THE SAME WAY, EXPENSES INCURRED IN FOREIGN EXCHANGE FOR PROVIDING THE TECHNICAL SERVIC ES OUTSIDE SHALL BE ALLOWED TO EXCLUDE FROM THE TOTAL TURNOVER . ACCORDINGLY, FOLLOWING THE DECISION RENDERED BY HON 'BLE SUPREME COURT, WE UPHOLD THE ORDER PASSED BY LD DRP ON THIS ISSUE. 7. IN THE RESULT, BOTH THE APPEALS OF THE ASSE SSEE AND REVENUE ARE TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH JAN, 2021. SD/- (N.V. VASUDEVAN ) VICE PRESIDENT SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 4 TH JAN, 2021. VG/SPS IT(TP)A NOS.38 & 58/BANG/2016 M/S. ABB GLOBAL INDUSTRIES & SERVICES LTD., BANGALO RE PAGE 17 OF 17 COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.