ITO, Bangalore V. M/s Galaz E Solutions India Pvt. Ltd., Bangalore

ITA 494/BANG/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4687 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2020
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-10-2020
• Assessment Year: 2011-2012
• Appeal Filed On: 18-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BRITO B
• Assessee Lawyers: MUZAFFAR HUSSAIN
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 143(3); 144C; 13

Judgement Text

IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A NO.184/BANG/2016 ASSESSMENT YEAR: 2011-12 M/S. GALAX E SOLUTIONS INDIA PVT. LTD. UNIT NO.4, 8 TH FLOOR, INNOVATOR BLOCK ITPL WHITEFIELD ROAD BANGALORE-560 066 AND SRIDHAR & BRITO CHARTERED ACCOUNTANTS NO.82, THIRD FLOOR ST BED KORAMANGALA 4 TH BLOCK BANGALORE-560 034 PAN NO : AABCG9007F VS. ITO WARD-3(1)(2) BANGALORE APPELLANT RESPONDENT IT(TP)A NO.494/BANG/2016 ASSESSMENT YEAR: 2011-12 ITO WARD-3(1)(2) BANGALORE VS. M/S. GALAX E SOLUTIONS INDIA PVT. LTD. UNIT NO.4, 8 TH FLOOR, INNOVATOR BLOCK ITPL WHITEFIELD ROAD BANGALORE-560 066 AND SRIDHAR & BRITO CHARTERED ACCOUNTANTS NO.82, THIRD FLOOR ST BED KORAMANGALA 4 TH BLOCK BANGALORE-560 034 APPELLANT RESPONDENT IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 2 OF 12 APPELLANT BY : SHRI BRITO B., A.R. RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, D.R. DATE OF HEARING : 15.10.2020 DATE OF PRONOUNCEMENT : 21.10.2020 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ASSESS MENT ORDER DATED 18-01-2016 PASSED BY THE ASSESSING OFFICER FO R ASSESSMENT YEAR 2011-12 U/S 143(3) R.W.S 144C OF THE INCOME-TA X ACT,1961 ['THE ACT' FOR SHORT] IN PURSUANCE OF DIRECTIONS GIVEN BY LD DISPUTE RESOLUTION PANEL (DRP). 2. THE GROUNDS URGED BY THE ASSESSEE RELATE T O THE ADDITION MADE TOWARDS TRANSFER PRICING ADJUSTMENT 3. THE REVENUE IS IN APPEAL IN RESPECT OF FOLLO WING ISSUES:- (A) WHETHER FOREIGN EXCHANGE GAINS/LOSS ARE OPERAT ING IN NATURE OR NOT? (B) WHETHER THE LD DRP WAS JUSTIFIED IN DIRECTING 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. (C) RELIEF GRANTED BY LD DRP IN RESPECT OF ADDITI ON MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 4. THE FACTS RELATING TO THE CASE ARE DISCUSSE D IN BRIEF. THE ASSESSEE COMPANY IS WHOLLY OWNED SUBSIDIARY OF M/S GALAX E SOLUTIONS INC. IT IS PROVIDING SOFTWARE DEVELOPMEN T SERVICES TO ITS AE RELATING TO INTERNET CLIENT-SERVER, MORE PARTICULAR LY IT OFFERS:- IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 3 OF 12 1. INDEPENDENT VERIFICATION AND VALIDATION. 2. ENTERPRISE APPLICATION INTEGRATION 3. ENTERPRISE SHARED SERVICES IMPLEMENTATION 4. ENTERPRISES IT SOLUTIONS 5. SERVICES LEVEL MANAGEMENT 6. ENTERPRISE RELIABILITY FRAMEWORK 7. TECHNICAL SUPPORT. THE TPO HAS MADE TRANSFER PRICING ADJUSTMENT IN RES PECT OF PROVISION 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 ASSESSEE IN THE SEGMENT OF PROVISION OF SOFTWARE DE VELOPMENT SERVICES WAS RS.32.16 CRORES. THE ASSESSEE ADOPTED TRANSACT IONAL 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 11.48% IN THE SOFTWARE DEVELOPMENT SEGMENT. 5.1 THE ASSESSEE HAD SELECTED 5 COMPARABLE COM PANIES 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) 814,016,893 616,754,876 31.98% 2 E ZEST SOLUTIONS (FROM CAPITALINE) 112866098 93255341 21.03% 3 E-INFOCHIPS LTD 260384251 166447527 56.44% 4 EVOKE (FROM CAPITALINE) 144869912 133996568 8.11% IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 4 OF 12 SL. NO. NAME SALES COST PLI 5 ICRA TECHNO ANALYTICS LTD. (IN 000) 158401000 126894000 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 1 0.66% 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 1,617,8 04,170 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 2,962,533,35 2 20.91% AVERAGE MARGIN 24.82% AFTER DEDUCTING WORKING CAPITAL ADJUSTMENT OF 1.26% , THE TPO ARRIVED AT ADJUSTED MARGIN OF 23.56%. ACCORDINGLY, HE MADE TRANSFER PRICING ADJUSTMENT OF RS.4.38 CRORES. 5.2 THE LD DRP DIRECTED THE AO/TPO TO EXCLUDE FO LLOWING TEN COMPANIES:- (A) ACROPETAL TECHNOLOGIES LIMITED (B) E-ZEST SOLUTIONS LIMITED (C) E-INFOCHIPS LIMITED (D) ICRA TECHNO ANALYTICS LIMITED (E) INFOSYS TECHNOLOGIES LIMITED (F) LARSEN & TOUBRO INFOTECH (G) MINDTREE LIMITED (H) TATA ELXSI LTD (I) EVOKE TECHNOLOGIES LIMITED (J) R S SOFTWARE (INDIA) LTD IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 5 OF 12 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 AT THE TIME OF HEARING, THE LD A.R PRESSED G ROUND NOS.1, 2, 5 AND 7. REMAINING GROUNDS ARE DISMISSED AS NOT PRES SED. THE ASSESSEE HAS ALSO RAISED AN ADDITIONAL GROUND, WHIC H READS AS UNDER:- 12. THE DRP ERRED BY REJECTING MINDTREE LTD AS A COMPARABLE WHICH WAS SELECTED BY THE TPO, STATING THAT MINDTRE E LTD UNDERTAKES ON SITE ACTIVITIES THROUGH ITS BRANCHE S AND THEREFORE NOT COMPARABLE TO THE ASSESSEE COMPANY. THIS FILTER (ON SITE) WAS NEITHER USED BY THE ASSESSEE NOT BY T HE TPO IN SELECTING THE COMPARABLES. THE GROUNDS AND ADDITIONAL GROUND URGED BY THE ASSE SSEE SEEK EXCLUSION OF (A) PERSISTENT SYSTEMS & SOLUTIONS LIMITED (B) PERSISTENT SYSTEMS LIMITED (C) SASKEN COMMUNICATIONS TECHNOLOGIES LTD AND INCLUSION OF (A) R.S SOFTWARE LTD (B) EVOKE TECHNOLOGIES LTD (C) MINDTREE LTD. 5.4 THE LD A.R SUBMITTED THAT ALL HIS SUBMISSIONS ARE SUPPORTED BY THE DECISION RENDERED BY CO-ORDINATE BENCH OF TRIBU NAL IN THE CASE OF (I) M/S AMD INDIA PRIVATE LIMITED VS. ACIT (IT(TP)A NO.1487/BANG/2015 (II) M/S APPLIED MATERIALS INDIA PVT LTD VS. ACIT ( IT(TP)A NO.17/BANG/2016) IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 6 OF 12 (III) M/S L G SOFT INDIA P LTD VS. DCIT (IT(TP)A NO.52/BANG/2016 DATED 05 TH AUGUST, 2020) 5.5 THE REVENUE IS CHALLENGING THE DECISION OF L D DRP IN EXCLUDING ALL TEN COMPARABLE COMPANIES LISTED EARLIER. 5.6 THE LD D.R SUBMITTED THAT THE ASSESSEE HAS A CCEPTED R.S. SOFTWARE BEFORE TPO AND HENCE THE LD DRP WAS NOT JU STIFIED IN EXCLUDING THE SAME. HE FURTHER SUBMITTED THAT IDENT ICAL OBSERVATIONS HAVE BEEN RECORDED BY LD DRP AGAINST E-ZEST SOLUTIO NS AND E INFOCHIPS LTD. HENCE THERE IS A CONFUSION IN THE R EASONING GIVEN BY LD DRP IN RESPECT OF THESE TWO COMPANIES. ACCORDIN GLY HE SUBMITTED THAT THESE TWO COMPANIES MAY BE RESTORED TO THE FIL E OF LD DRP. HE SUBMITTED THAT THE CO-ORDINATE BENCH HAS EXCLUDED L & T INFOTECH LTD IN THE CASE OF M/S L G SOFT INDIA P LTD (SUPRA) . THE REASONING GIVEN BY TRIBUNAL IS MENTIONED IN PARAGRAPH 11 AND 14 OF ITS ORDER. HOWEVER, THESE FILTERS HAVE NOT BEEN APPLIED BY TPO IN HIS ORDER. ACCORDINGLY, HE SUBMITTED THAT THIS COMPANY MAY BE RESTORED TO THE FILE OF TPO. HE FURTHER SUBMITTED THAT BOTH TPO AN D DRP HAS NOT APPLIED TURNOVER FILTER AND HENCE THE SAME SHOULD N OT BE APPLIED. 5.7 THE LD A.R, IN THE REJOINDER, SUBMITTED THA T THE ASSESSEE IS NOW ACCEPTING FOR INCLUSION OF M/S R.S. SOFTWARE (I NDIA) LTD, M/S EVOKE TECHNOLOGIES LTD AND M/S MIND TREE LTD. HE F URTHER SUBMITTED THAT THE REMAINING COMPANIES HAVE BEEN HE LD TO BE NOT GOOD COMPARABLE COMPANIES BY HOSTS OF CASE LAWS. S INCE THE COMPARABILITY OF COMPANIES DEPENDS UPON PARITY OF F ACTS AND SINCE THE SAID ASPECT HAS BEEN EXAMINED BY THE TRIBUNAL, THE DECISIONS RENDERED BY THE TRIBUNAL MAY BE FOLLOWED. 5.8 WE NOTICE THAT, OUT OF THE TEN COMPARABLE COM PANIES EXCLUDED BY LD DRP, THE ASSESSEE NOW SEEKS INCLUSION OF THRE E COMPANIES, VIZ., IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 7 OF 12 M/S EVOKE TECHNOLOGIES LTD, M/S R S SOFTWARE (INDIA ) LTD AND M/S MINDTREE LIMITED. HENCE THE GRIEVANCE OF REVENUE N OW REMAINS 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 5.9 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 M/S LG SOFT INDIA P LTD (IT(TP)A NO.52/BANG/2016 AND IT(TP )A NO.97/BANG/2016 DATED 05-08-2020. WE NOTICE THAT T HE CO-ORDINATE BENCH, IN THE CASE OF M/S LG SOFT INDIA P LTD (SUPR A) HAS FOLLOWED THE DECISION RENDERED BY ANOTHER CO-ORDINATE BENCH IN T HE CASE OF ELECTRONIC FOR IMAGING (I) PVT LTD (2017)(85 TAXMAN N.COM 124). FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE DISCU SSIONS MADE AND THE DECISION TAKEN BY THE TRIBUNAL 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 IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 8 OF 12 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 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 IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 9 OF 12 SUPPORTIVE OF GROUND NO.2 AND ARE GENERAL GROUNDS W ITH NO SPECIFIC REFERENCE TO INSTANCES OF COMPARABLES EXCLUDED AND HENCE DISMISSED. 5.10 FOLLOWING ABOVE SAID ORDER OF CO-ORDINATE B ENCH, WE CONFIRM EXCLUSION OF ABOVE SAID SEVEN COMPANIES. SINCE THE ASSESSEE HAS SOUGHT FOR INCLUSION OF THREE COMPANIES OUT OF THE TEN COMPANIES EXCLUDED BY LD DRP, VIZ., M/S EVOKE TECHNOLOGIES LT D, R.S SOFTWARE INDIA LTD, MINDTREE LIMITED, THE GROUND OF REVENUE IN RESPECT OF ABOVE SAID THREE COMPANIES ARE ALLOWED. 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) 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. IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 10 OF 12 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 ACCORDINGLY, WE DIRECT THE AO/TPO TO COMPUT E 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. 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, EXPENSES EXCLUD ED FROM EXPORT TURNOVER HAVE TO BE EXCLUDED FROM TOTAL TURNOVER ALSO. OTHE RWISE, ANY OTHER INTERPRETATION MAKES THE FORMULA UNWORKABLE AND ABS URD. HENCE, WE ARE SATISFIED THAT SUCH DEDUCTION SHALL BE ALLOWED FROM THE TOTAL TURNOVER IN SAME PROPORTION AS WELL. 21. ON THE ISSUE OF EXPENSES ON TECHNICAL SERVICES PROVIDED OUTSIDE, WE HAVE TO FOLLOW THE SAME PRINCIPLE OF INTERPRETATION AS F OLLOWED IN THE CASE OF EXPENSES OF FREIGHT, TELECOMMUNICATION ETC., OTHERW ISE THE FORMULA OF CALCULATION WOULD BE FUTILE. HENCE, IN THE SAME WA Y, EXPENSES INCURRED IN FOREIGN EXCHANGE FOR PROVIDING THE TECHNICAL SERVIC ES OUTSIDE SHALL BE ALLOWED TO EXCLUDE FROM THE TOTAL TURNOVER. IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 11 OF 12 ACCORDINGLY, FOLLOWING THE DECISION RENDERED BY HON 'BLE SUPREME COURT, WE UPHOLD THE ORDER PASSED BY LD DRP ON THIS ISSUE. 7. THE REVENUE IS ASSAILING THE DECISION OF LD DRP IN HOLDING THAT THE GAIN/LOSS ARISING ON ACCOUNT OF FLUCTUATION IN FOREIGN EXCHANGE IS OPERATING INCOME/EXPENSES. WE NOTICE THAT THE LD D RP HAS FOLLOWED THE DECISION RENDERED BY THE TRIBUNAL IN THE CASE O F SAP LABS INDIA (P) LTD (2011)(44 SOT 156) AND CISCO SYSTEMS SERVIC ES BV (IT(TP)A NO.270/BANG/2014) AND ACCORDINGLY HELD THAT THE FOR EIGN EXCHANGE FLUCTUATION GAIN/LOSS ARISING TO THE ASSESSEE ON RE ALIZATION OF TRADE DEBTORS, PAYMENT TO CREDITORS ETC WERE NOTHING BUT OPERATION INCOME. ACCORDINGLY, THE LD DRP HAS DIRECTED THE AO TO CONS IDER THE FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS OPERATING IN NATU RE BOTH IN THE HANDS OF THE ASSESSEE AND IN THE HANDS OF COMPARABL E COMPANIES. SINCE THE LD DRP HAS FOLLOWED THE DECISION RENDERED BY THE TRIBUNAL IN THIS REGARD, WE DO NOT FIND ANY INFIRMITY IN ITS DECISION RENDERED ON THIS ISSUE. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE I S TREATED AS ALLOWED AND THE APPEAL OF THE REVENUE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST OCT, 2020 SD/- (GEORGE GEORGE K. ) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 21 ST OCT, 2020. VG/SPS IT(TP)A NOS.184&494/BANG/2020 M/S. GALAX E SOLUTIONS INDIA PVT. LTD., BANGALORE PAGE 12 OF 12 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.