Four Soft Limited, Hyderabad V. The DCIT, Circle 1(3), Hyderabad

ITA 1686/HYD/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6067 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 17-10-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 15-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G APARNA RAO
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Wholly owned subsidiary; Bad and doubtful debts
• Section: 143(3); 92B; 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1686/HYD/2012 ASSESSMENT YEAR: 2008-09 PALRED TECHNOLOGIES LTD., (FORMERLY KNOWN AS FOUR SOFT LTD.), HYDERABAD. PAN- AAACF4464A VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 1(3), 4 TH FLOOR, AAYAKAR BHAVAN, HYDERABAD 500 029. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI DEEPAK CHOPRA REVENUE BY : SMT. G. APARNA RAO DATE OF HEARING 17-10-2016 DATE OF PRONOUNCEMENT 28 -10-2016 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST T HE ORDER PASSED U/S 143(3) R.W.S. 144C(5) OF THE INCOME TAX ACT, 1961 (IN SHORT ACT) DATED 15/10/02/2012 RELATING TO AY 200 8-09. 2. ASSESSEE, FORMERLY KNOWN AS FOUR SOFT LTD., HAS BECOME PALRED TECHNOLOGIES LTD., VIDE CERTIFICATE OF INCOR PORATION ISSUED BY THE REGISTRAR OF COMPANIES, AP, DATED 09/12/2013. 3. BRIEF FACTS OF THE CASE ARE, ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE PRODUCT DEVELOPMENT HAS E-FILE D ITS RETURN OF INCOME ON 29/09/08 ADMITTING TOTAL INCOME AT NIL. A SSESSEE HAS ALSO FURNISHED A REPORT IN FORM NO. 3CEB IN ACCORDANCE W ITH PROVISIONS OF SECTION 92E. AS PER THE SAID REPORT, ASSESSEE HAD I NTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES WHICH N ECESSITATED 2 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) AS PER THE PROVISIONS OF SECTION 92CA. ACCORDINGLY, THE CASE WAS REFERRED TO THE TPO ON 17/05/2010 FOR DETERMINATION OF ARMS LENGTH PRICE WITH THE PRIOR APPROVAL OF THE CIT-I, HYDERABAD. 3.1 TAXPAYERS PROFILE: M/S FOUR SOFT LTD. (FSL INDIA) WAS INCORPORATED IN INDIA IN 1999. FOR THE YEAR ENDED 31 ST MARCH, 2008, FSL INDIA HAS WHOLLY OWNED SUBSIDIARIES IN THE FOLLOWING COUNTRIES: 1. FOUR SOFT DENMARK A/S 2. SINGAPORE FOUR SOFT SINGAPORE PTE LTD. 3. NETHERLANDS FOUR SOFT B.V. 4. MALAYSIA FOUR SOFT MALAYSIA SDS BHD. FURTHER FSL INDIA CONTROLS FOUR SUBSIDIARIES IN THE FOLLOWING COUNTRIES THROUGH ITS WHOLLY OWNED SUBSIDIARY IN NETHERLANDS, NAMELY, FOUR SOFT B.V. 1. US FOURSOFT INC., USA 2. NETHERLANDS FOUR SOFT BV NETHERLANDS 3. GERMANY FOUR SOFT GERMANY GMBH 4. UK FOUR SOFT UK LTD. FSL INDIA HAS BRANCHES IN THE FOLLOWING COUNTRIES: SINGAPORE FOUR SOFT PTE LTD. FURTHER FSL INDIA INDIRECTLY CONTROLS BRANCH IN AUS TRALIA THROUGH FOUR SOFT DEMARK A/S B.V. AND IN BELGIUM THROUGH FOUR SO FT UK LTD. 3.2 BUSINESS PROFILE OF THE COMPANY: FOUR SOFT LTD. (FSL), THE TAXPAYER, IS AN ENTERPRI SE SOLUTIONS COMPANY THAT DEVELOPS INNOVATIVE SOFTWARE PRODUCTS AND PROVIDES IT CONSULTANCY SERVICES FOR THE LOGISTICS AND SUPPLY C HAIN MANAGEMENT MARKETPLACE. THE GROUP OPERATES ACROSS THE GLOBE WI TH DEVELOPMENT CENTERS IN INDIA, AUSTRALIA, DENMARK, ENGLAND, SING APORE, 3 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. NETHERLANDS, JAPAN AND UNITED STATES. THE GROUP ALS O HAS SALES AND SUPPORT OFFICES LOCATED ACROSS ASIA, AUSTRALIA, EUR OPE AND NORTH AMERICA. THE TAXPAYER COMPANY IS REGISTERED UNDER THE SOFTWA RE TECHNOLOGY PARKS OF INDIA SCHEME AND IS CLAIMING TAX HOLIDAY B ENEFIT IN RESPECT OF THE PROFITS EARNED BY IT FROM THE SOFTWARE DEVEL OPMENT SERVICES. FOLLOWING ARE THE REVENUE STREAMS OF FSL INDIA: A. LICENSE REVENUE FROM SOFTWARE PRODUCT DEVELOPME NT AND SALES: B. SOFTWARE SERVICES REVENUE FROM CONSULTANCY AND MAINTENANCE SERVICES: FSL INDIA WITH THE SUBSIDIARIES FSL INDIA PROVIDES OFF SHORE SERVICES TO FOUR SOFT SUBSIDIARIES ON THE SUBSIDIARY PRODUCTS WHICH INCLUDE SOFTWARE C ONSULTING AND TECH SUPPORT AND MAINTENANCE. AE GROUP (GROUP) FOUR SOFT INDIA LTD. AND ITS SUBSIDIARIES TOGETHER IS CALLED 4S GROUP WHICH IS ORGANIZED IN TERMS OF CUSTOMER FACIN G GEOGRAPHICS (IN THE FORM OF SUBSIDIARIES OR BRANCH OFFICES IN VARIO US COUNTRIES). THE GEOGRAPHICS FORM PART OF THE CUSTOMER FACING ORGANI ZATION OF THE GROUP AND ARE INVOLVED IN BUSINESS DEVELOPMENT, SAL ES AND CLIENT RELATIONSHIPS. 3.3 FINANCIAL RESULTS OF FOUR SOFT INDIA FOR THE FY 2008-09 DESCRIPTION AMOUNT (RS.) OPERATING REVENUE 37,72,31,973 OPERATING COST 35,86,63,628 OPERATING PROFIT (PBIT) 1,85,68,345 OP/OR (%) 5.18% 4 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. 3.4 SEGMENTAL MARGINS BETWEEN AE AND NON-AE THE TAXPAYER ALONG WITH THE TP DOCUMENTATION DATED 05/08/2010 HAS SUBMITTED THE SEGMENTAL FINANCIALS S EPARATELY IN RESPECT OF AE AND NON-AE TRANSACTIONS. THE TAXPAYER IN ITS TP STUDY HAS WORKED OUT THE PROFIT MARGIN OF FSL INDIA AS FO LLOWS: PARTICULARS AMOUNT (RS.) REVENUE FROM SOFTWARE SERVICES 37,72,31,973 EXPENDITURE 33,51,55,249 MARGIN 4,20,76,724 PERCENTAGE 12.55% 3.5 DURING THE RELEVANT PY, AS PER THE 92CE REPORT/ TP DOCUMENT, THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE REFL ECTED AS UNDER: NATURE OF TRANSACTION AMOUNT (RS.) PROVISION OF SOFTWARE DEVELOPMENT SERVICES 25,02,10,202 PAYMENT OF IMPLEMENTATION EXPENSES 5,70,58,238 LOAN TO AE 3,76,25,021 INTEREST ACCRUED ON LOAN 29,30,176 INVESTMENT INTO EQUITY 40,61,26,882 REPAYMENT OF INTEREST ON LOAN 40,50,447 REPAYMENT OF LOAN 2,03,81,362 PURCHASE OF FIXED ASSETS FROM AE 1,24,514 REIMBURSEMENT OF EXPENSES BY AE (RECEIPTS) 7,00,16,499 REIMBURSEMENT OF EXPENSES TO AE (PAYMENTS) 2,09,76,202 3.6 THE TAXPAYER HAS CARRIED OUT THE ECONOMIC ANALY SIS IN SEARCH FOR COMPARABLES. THE TAXPAYER HAS USED PROWESS AND CAPITALINE PLUS DATA BASE IN SEARCH FOR COMPARABLE COMPANIES. FOR THE SOFTWARE DEVELOPMENT SERVICES, AFTER APPLYING CERTAIN FILTER S, THE TAXPAYER USING TNMM AS MAM HAS SHORT-LISTED 23 COMPARABLES W ITH ARITHMETIC MEAN PLI (OP/OC) WAS COMPUTED AT 12.55%. FOR THE TR ANSACTIONS 5 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. RELATING TO REIMBURSEMENT OF EXPENSES PAID, NO TP S TUDY HAS BEEN CARRIED OUT. ACCORDINGLY, THE TAXPAYER HOLDS THAT T HE TRANSACTIONS ARE WITHIN THE ARMS LENGTH. 3.7 ON GOING THROUGH THE TP DOCUMENT, THE TPO NOT ED THAT THE METHOD OF THE SEARCH PROCESS SUFFERS FROM DEFECTS W HICH RESULTED IN SELECTION OF INAPPROPRIATE COMPARABLES AND REJECTIO N OF COMPANIES THAT ARE APPROPRIATE COMPARABLES. HE, THEREFORE, RE JECTED THE TP DOCUMENT AND AN INDEPENDENT ANALYSIS HAS BEEN MADE BY AGGREGATING ALL THE TRANSACTIONS UNDER TNMM. 3.8 THE FINAL COMPARABLES SELECTED BY TRANSFER PRIC ING OFFICER (TPO) WITH OP TO OC ARE AS UNDER: SL.NO. NAME OF THE COMPANY OPERATING MARGIN IN PERCENTAGE 1. AVANI CIMCON TECHNOLOGIES LTD. 21.65 2. BODHTREE CONSULTING LTD. 19.14 3. CELESTIAL BIOLABS LTD. 87.94 4. E-ZEST SOLUTIONS LTD. 28.95 5. FLEXITRONICS SOFTWARE SYSTEMS LTD. (ARICENT) (SEG.) 8.07 6. IGATE GLOBAL SOLUTIONS LTD. 13.90 7. INFOSYS TECHNOLOGIES LTD. 40.41 8. KALS INFORMATION SYSTEMS LTD. (SEG.) 41.94 9. LGS GLOBAL LTD. 26.64 10. MINDTREE LTD. (SEG.) 17.51 11. PERSISTENT SYSTEMS LTD. 27.23 12. QUINTEGRA SOLUTIONS LTD. 21.74 13. R SYSTEMS INTERNATIONAL LTD. (SEG.) 15.30 14. RS SOFTWARE (INDIA) LTD. 6.46 15. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 13.44 16. SOFTSOL INDIA LTD. 42.15 17. TATA ELXSI LTD. (SEG.) 18.97 18. THIRDWARE SOLUTIONS LTD. 18.01 19. WIPRO LTD. (SEG.) 28.38 ARITHMETIC MEAN 26.20 6 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. 3.9 AFTER COMPARING THE AVERAGE MARGINS OF THE COMP ARABLES TO THE FINANCIALS OF THE ASSESSEE, THE TPO COMPUTED THE AD JUSTED ARMS LENGTH MARGIN AS UNDER: DESCRIPTION ARMS LENGTH MARGIN 26.20% LESS: WCA (-)4.66% ADJUSTED ARMS LENGTH MARGIN 30.86% ARMS LENGTH PRICE OPERATION COST (INCLUDING REIMBURSEMENT OF EXPENSES RECEIVED) (RS.35,86,63,628 + RS. 7,40,60,178) 43,27,806 ARMS LENGTH MARGIN (%) 30.86% ON OPERATING COST ARMS LENGTH PRICE @ 130.86% OF OPERATING COST 56,62,62,373 LESS: SALES WITH NON-AE (RS. 37,72,31,973 25,02,10,202) 12,70,21,771 SALES WITH AE 43,92,48,602 PRICE RECEIVED FROM AE (INCLUDING REIMBURSEMENT OF EXPENSES RECEIVED RS. 25,02,10,202 + 7,40,60,178) 32,42,70,380 SHORTFALL BEING ADJUSTMENT U/S 92CA 11,49,78,222 THE SUMMARY OF ADJUSTMENTS MADE BY THE TPO ARE AS U NDER: 1. SHORTFALL BEING ADJUSTMENT IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES RS. 11,49,78 ,222 2. SHORTFALL BEING ADJUSTMENT IN RESPECT OF INTEREST CHARGED ON LOAN RS. 26,48,885 3. SHORTFALL BEING ADJUSTMENT IN RESPECT OF COMMISSION ON GUARANTEES RS.2,61,79,350 TOTAL SHORTFALL BEING THE ADJUSTMENT U/S 92CA RS. 14,38,86,457 3.10 ACCORDINGLY, THE TPO WHO PASSED AN ORDER U/S 9 2CA(3) OF THE ACT ON 28/10/2011, RECOMMENDED ADJUSTMENT OF RS. 14 ,38,86,457/-. THE SAME WAS INCORPORATED BY THE AO IN THE DRAFT AS SESSMENT ORDER. ASSESSEE PREFERRED A PETITION BEFORE THE DISPUTE RE SOLUTION PANEL (DR) RAISING VARIOUS OBJECTIONS. 4. DRP HAS GIVEN PARTIAL RELIEF TO THE ASSESSEE AS UNDER: 7 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. 4.1 THE DRP HAS DELETED THE COMPANY M/S CELESTIAL B IOLABS LTD. FROM THE LIST OF COMPARABLES AS COMPARABLE. HE DIRE CTED THAT PLI OF M/S SOFTSOL INDIA LTD. AND M/S KALS INFOMRATION SYS TEMS LTD. BE TAKEN AT 25.78% AND 30.92% RESPECTIVELY. 4.2 CONSIDERING THE ABOVE FINDINGS OF DRP, THE AO H AS REDUCED THE ADJUSTMENT U/S 92CA TO RS. 9,48,05,292/-. 5. AS REGARDS THE ALP OF INTEREST CHARGED ON LOAN T RANSACTIONS WITH AES, THE DRP OBSERVED THAT THE ASSESSEE COMPAN Y ADOPTED THE METHODOLOGY OF LIBOR BEING AN INTERNATIONALLY ACCEP TED NORM. IT IS DIRECTED THAT THERE IS NO REQUIREMENT OF ANY CHANGE IN THE INTEREST CHARGED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPR ISES. THEREFORE, THE TRANSFER PRICING ADJUSTMENT ON INTEREST CHARGED ON LOAN TRANSACTIONS WITH AES GETS REDUCED TO NIL. 6. AS REGARDS THE ALP OF CORPORATE GUARANTEES GIVEN TO AES, THE DRP UPHELD THE ACTION OF TPO WITH REGARD TO DETERMI NATION OF ALP OF COMMISSION ON CORPORATE GUARANTEE. THEREFORE, THERE IS NO CHANGE IN THE TP ADJUSTMENT MADE BY THE TPO. 7. IN VIEW OF THE ABOVE, THE TOTAL SHORTFALL BEING ADJUSTMENT U/S 92CA AS PER THE DIRECTIONS OF THE DRP IS AS UNDER: 1. SHORTFALL BEING ADJUSTMENT IN RESPECT OF SOFTWA RE DEVELOPMENT SERVICES 9,48,05,292 2. SHORTFALL BEING ADJUSTMENT IN RESPECT OF COMMISSION OF CORPORATE GUARANTEE 2, 51,79,350 12,09,84,042 =========== 8. THE AO COMPUTED THE TOTAL INCOME OF THE ASSESSEE AS UNDER: INCOME FROM BUSINESS (-) 56,13,871 ADD: ADDITION AS PER TP ADJUSTMENT 12,09,84, 642 INCOME FROM BUSINESS 11,53,70,771 ADD: INCOME FROM OTHER SOURCES 29,88,7 43 TOTAL INCOME RS., 11,83,59,514 ============== 8 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. 9. AGGRIEVED WITH THE ABOVE ORDER, ASSESSEE IS IN A PPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: TRANSFER PRICING MATTERS - RELATING TO DETERMINATIO N OF ARM'S LENGTH PRICE (' ALP ') IN RESPECT OF PROVISIO N OF SOFTWARE SERVICES TO ASSOCIATED ENTERPRISES (' AES') BASED ON THE FACTS 'AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED ASSESSING OFFICER (' AO') I LEARNED TRA NSFER PRICING OFFICER ('TPO') AND THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP') ERRED IN THE FOLLOWING: REJECTION OF TRANSFER PRICING DOCUMENTATION MAINTAI NED AND UNDERTAKING FRESH SEARCH OF COMPARABLES: 1. REJECTION OF THE TRANSFER PRICING DOCUMENTATION MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF T HE ACT READ WITH THE INCOME TAX RULES, 1962 ('RULES') AND UNDER TAKING A FRESH ECONOMIC ANALYSIS DURING THE COURSE OF ASSESS MENT PROCEEDINGS AND ACCORDINGLY MAKING AN ADJUSTMENT OF RS 9,48,05,292 TO THE INTERNATIONAL TRANSACTIONS RELAT ING TO PROVISION OF SOFTWARE SERVICES TO ITS AE. REJECTION OF USE OF MULTIPLE YEAR DATA 2. REJECTING THE USE OF MULTIPLE YEAR DATA AND USIN G DATA FOR THE FY 2007-08 ONLY; ELIGIBILITY UNDER SECTION 10A 3. NOT APPRECIATING THAT THE COMPANY IS ELIGIBLE FO R TAX HOLIDAY BENEFIT U/S 10A OF THE ACT, AND THERE IS NO INCENTI VE FOR SHIFTING OF PROFITS; REJECTION OF INTERNAL COMPARABLE TRANSACTIONS 4. NOT CONSIDERING THE INTERNAL UNCONTROLLED TRANSA CTIONS OF THE APPELLANT FOR DETERMINING THE ALP. INFORMATION OBTAINED UNDER SECTION 133(6) 5. A) USING INFORMATION/ DOCUMENTS OBTAINED BY EXER CISING POWERS U/ S 133(6) OF THE ACT WHICH ARE NOT AVAILAB LE IN PUBLIC DOMAIN; AND B) FURTHER NOT PROVIDING ANY OPPORTUNITY TO APPELLA NT TO CROSS- EXAMINE THE SAME. USE OF ADDITIONAL FILTERS 6. INTER-ALIA USE OF THE FOLLOWING ADDITIONAL FILTE RS IN UNDERTAKING THE COMPARATIVE ANALYSIS TO REJECT COMPARABLE COMPA NIES HAVING: 9 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. A) DIMINISHING REVENUE/LOSS MAKING COMPANIES; B) DIFFERENT FINANCIAL YEAR-END. C) ONSITE REVENUE IN EXCESS OF 75%; SELECTION OF COMPANIES EARNING ABNORMAL HIGH MARGIN S 7. SELECTION OF COMPANIES EARNING ABNORMAL HIGH MAR GINS AS COMPARABLE TO THE APPELLANT; SELECTION OF UNCOMPARABLES 8. NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYSI S AND INTER ALIA SELECTING THE FOLLOWING COMPANIES AS COMPARABL E TO THE SOFTWARE SERVICES OF THE APPELLANT: A) AVANI CINCOM TECHNOLOGIES; B) BODHTREE CONSULTING LTD (SEG); - C) E-ZEST SOLUTIONS LTD; D) LGS GLOBAL LTD; E) PERSISTENT SYSTEMS LTD; F) QUINTEGRA SOLUTIONS LTD G) SOFTSOL INDIA LTD; H) THIRDWARE SOLUTIONS LTD; I) INFOSYS TECHNOLOGIES LIMITED; J) KALS INFORMATION SYSTEMS LTD; K) TATA ELXSI LIMI TED (SEG); AND I) WIPRO LIMITED (SEG). REJECTION OF COMPARABLES 9. NOT UNDERTAKING AN OBJECTIVE COMPARATIVE ANALYSI S AND INTERALIA REJECTING THE FOLLOWING COMPARABLE COMPAN IES: A) ADITYA BIRLA MINACS IT SERVICES LTD; B) ADITYA BIRLA MINACS TECHNOLOGIES LTD; C) CG-VAK SOFTWARE EXPORTS LTD (SEG); D) GOLDSTONE TECHNOLOGIES LTD; E) INDIUM SOFTWARE INDIA LTD; F) THINKSOFT GLOBAL SERVICES LTD; G) LARSEN & TOUBRO INFOTECH LTD; H) V M F SOFTECH LTD. TP ADJUSTMENT ON TRANSACTIONS WITH NON-AES 10. DETERMINING THE TP ADJUSTMENT ON THE TRANSACTIO NS WITH NON- AES. INCORRECT WORKING CAPITAL ADJUSTMENT 10 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. 11. COMPUTATION OF WORKING CAPITAL ADJUSTMENT BY AL LOCATING THE TOTAL RECEIVABLES AND PAYABLES OF THE APPELLANT TO THE INTERNATIONAL TRANSACTIONS WITH AE AND MAKING A NEG ATIVE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES SELECTED. INCLUSION OF CERTAIN AMOUNTS IN OPERATING COST 12. INCLUDING THE FOLLOWING REIMBURSEMENTS BY AES ( RS 7,40,60,178) FOR PAYMENTS TRANSACTIONS RELATING TO PROVISION OF SOFTWARE SERVICES: PAYROLL AND RELATED COST OF DEPUTED EMPLOYEES AND OTHER MISCELLANEOUS RS 6,79,17,541; AND TRAVEL- RS 58,34,419; OTHER MISCELLANEOUS - RS 3,08,218. ADJUSTMENT FOR RISK DIFFERENCES 13. NOT ADJUSTING THE NET MARGINS OF THE COMPARABLE COMPANIES SELECTED TAKING INTO ACCOUNT THE FUNCTIONAL AND RIS K DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION OF THE APPELL ANT AND THE COMPARABLE COMPANIES IN ACCORDANCE WITH THE PROVISI ONS OF RULE 10B(1)(E); APPLICABILITY OF PROVISO TO SECTION 92C(2) 14. NOT ALLOWING THE OPTION UNDER THE PROVISO TO SE CTION 92C(2) OF THE ACT IN LIMITING THE ADJUSTMENT AT A VARIATION O F 5 PERCENT TO THE ARM'S LENGTH PRICE; CORPORATE GUARANTEE PROVIDED TO THE AES 15. A) APPLYING THE TRANSFER PRICING PROVISIONS TO THE CORPORATE GUARANTEE PROVIDED TO ICICI BANK IN RELATION TO THE LOAN TAKEN BY ITS WHOLLY OWNED SUBSIDIARY FOR ACQUISITION OF COMP ANIES IN EUROPE; B) DETERMINING THE ALP ON THE CORPORATE GUARANTEE @ 3.75% P.A. ON THE GUARANTEE AMOUNT WITHOUT UNDERTAKING ANY ECO NOMIC ANALYSIS FOR THE SAME; AND C) NO APPRECIATING THAT THE ACQUISITION WAS IN THE SAME BUSINESS AS THAT THE APPELLANT AND ACCORDINGLY BENEFICIAL TO THE APPELLANT; NON-DISCRIMINATION UNDER INDIA - NETHERLANDS TAX TR EATY 16. DISCRIMINATING ITS NETHERLANDS SUBSIDIARY IN DE TERMINING THE ALP FOR CORPORATE GUARANTEED PROVIDED VIS-A-VIS SIM ILAR CORPORATE GUARANTEE PROVIDED BY COMPANIES ON BEHALF OF THEIR INDIAN 11 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. SUBSIDIARIES RESULTING IN VIOLATION OF ARTICLE LEVY OF INTEREST UNDER SECTION 234B 17. IMPOSING INTEREST UNDER SECTION 234B OF THE ACT ON THE TRANSFER PRICING ADJUSTMENTS; 18. INITIATING THE PENALTY PROCEEDINGS U/ S 271(1(C ) OF THE ACT. THE APPELLANT CRAVES, TO CONSIDER EACH OF THE ABOVE GROUNDS OF APPEAL WITHOUT PREJUDICE TO EACH OTHER AND CRAVES L EAVE TO ADD, ALTER, DELETE OR MODIFY ALL OR ANY OF THE ABOVE GRO UNDS OF APPEAL. 10. THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE T PO HAS ADOPTED VARIOUS FILTERS TO SELECT COMPARABLES OUT OF WHICH ONE OF THE FILTERS ARE COMPARABLE COMPANIES SHOULD HAVE AT LEAST 75% OF IT S REVENUE FROM THE SOFTWARE DEVELOPMENT SERVICES CONSIDERING THE F ACT THAT THE ASSESSEE COMPANY IS PREDOMINANTLY SERVICE COMPANY A S THE MAJORITY OF THE REVENUES ARE DERIVED BY THE ASSESSEE FROM TH E SOFTWARE DEVELOPMENT SERVICES. CONSIDERING THIS FILTER, TPO SHOULD HAVE SELECTED ONLY THOSE COMPANIES WHICH HAVE 75% OF IT S REVENUES FROM THE SERVICES AND EXCLUDED THOSE COMPANIES IN WHICH SEGMENTAL INFORMATIONS ARE NOT AVAILABLE. IT IS PERTINENT TO NOTE THAT THE TPO HAS SELECTED EIGHT COMPARABLES IN WHICH THERE IS NO SEG MENTAL INFORMATION AVAILABLE, WHICH ARE AS UNDER: 1. AVANI CINCOM TECHNOLOGIES LTD. 2. BODHTREE CONSULTING LTD. (SEG.) 3. E-ZEST SOLUTIONS LTD. 4. LGS GLOBAL LTD. 5. PERSISTENT SYSTEMS LTD. 6. SOFTSOL INDIA LTD. 7. THIRDWARE SOLUTIONS LTD. 8. KALS INFORMATION SYSTEMS LTD. WHEN THERE IS NO SEGMENTAL INFORMATION AVAILABLE O N THE FINANCIAL REPORTS, IT IS DIFFICULT TO DETERMINE THE REVENUE F ROM SERVICES AND OTHER REVENUES PROPERLY. IT IS HEREBY SUBMITTED THA T THESE COMPARABLE SHOULD BE ELIMINATED. FURTHER, AR OF THE ASSESSEE S UBMITTED THAT APART FROM SEGMENTAL INFORMATION IS NOT AVAILABLE, THERE ARE OTHER ASPECTS WHICH ALSO FUNCTIONALLY DIFFERENT AND THE S AME ALSO SHOULD BE EXCLUDED FROM COMPARABLES. HOWEVER, HE SUBMITTED TH AT ASSESSEE 12 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. HAS NO ISSUE IF THE TPO ADOPTS THE ABOVE FILTER OF 75% OF REVENUE FROM SOFTWARE SERVICES TO ALL THE COMPARABLES BY CO LLECTING THE RELEVANT INFORMATION FROM THE RESPECTIVE COMPARABLE S U/S 133(6) OF THE ACT. 11. LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES. 12. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL FACTS ON RECORD. AS SUBMITTED BY THE LD. AR THAT MO ST OF THE COMPARABLES ADOPTED BY TPO DOES NOT HAVE SEGMENTAL INFORMATION. WITHOUT THE SEGMENTAL INFORMATION ON RECORD, IT IS DIFFICULT TO ADOPT THE FILTER OF 75% OF REVENUE FROM SERVICES. WE ARE NOT SURE, HOW THE TPO HAS ADOPTED THIS FILTER WITHOUT THIS BASIC INFORMAT ION. ACCORDINGLY, WE DIRECT THE TPO TO COLLECT INFORMATION FROM THE RESP ECTIVE COMPARABLES AND ADOPT THIS FILTER WITH THE SEGMENTAL INFORMATIO N. TPO CAN DETERMINE THE COMPARABLES BY ADOPTING THE ABOVE FIL TER. HENCE, WE FIND IT APPROPRIATE TO REMIT THIS MATTER BACK TO TH E FILE OF AO/TPO TO DETERMINE THE COMPARABLES AFRESH BY ADOPTING THE AB OVE FILTER. THE ASSESSEE MAY BE GIVEN PROPER OPPORTUNITY OF BEING H EARD. ACCORDINGLY, GROUNDS RAISED BY THE ASSESSEE IN THIS REGARD ARE ALLOWED FOR STATISTICAL PURPOSES. 13. GROUND NOS. 2, 3, 7 & 14 ARE NOT PRESSED AT THE TIME OF HEARING BEFORE US AND THE SAME ARE DISMISSED AS NOT PRESSED. 14. AS REGARDS THE ISSUE OF REIMBURSEMENT OF INCOME AND EXPENDITURE, WE FIND THAT THIS ISSUE IS SQUARELY CO VERED BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL I N ASSESSEES OWN CASE FOR AY 2007-08 IN ITA NO. 1903/HYD/2011, WHERE IN THE COORDINATE BENCH HAS HELD AS UNDER: 10. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. ON PERUSAL OF THE TP ORDER IT IS TO BE SEE N THAT IN PARA 2.4.1 THE TPO HAS ADMITTED THAT THE ASSESSEE HAS SU BMITTED SEGMENTAL FINANCIALS SEPARATELY IN RESPECT OF AE AN D NON-AE TRANSACTIONS. AS PER THE AFORESAID SEGMENTAL FINANC IALS 13 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. (REPRODUCED AT PAGE 4 OF TP ORDER), THE MARGIN IN R ESPECT OF TRANSACTIONS WITH AES IS 39.26% AS AGAINST MARGIN O F 6.30% IN RESPECT OF NON AE TRANSACTIONS. THEREFORE, WHEN SEG MENTAL DETAILS HAVE BEEN FURNISHED BY THE ASSESSEE THE TPO SHOULD HAVE CONSIDERED THEM PROPERLY INSTEAD OF REJECTING THEM WITH BROAD AND SWEEPING ALLEGATIONS. IT SEEMS, THE TPO H AS NOT PROPERLY ALLOCATED THE SEGMENTAL EXPENDITURES. IF T HE BAD DEBTS ETC. ARE NOT RELATED TO AE TRANSACTIONS THEY CANNOT BE CONSIDERED AS PART OF OPERATING COST FOR DETERMINING ALP OF TH E TRANSACTIONS WITH AE. SIMILARLY, REIMBURSEMENT ON COST TO COST B ASIS ALSO CANNOT BE INCLUDED IN THE OPERATING COST. UNFORTUNA TELY, THE DRP WITHOUT DEALING WITH THIS ISSUE AT DEPTH HAS FINISH ED ITS JOB BY SIMPLY COMMENTING THAT TPO HAS DEALT WITH THE ISSUE APPROPRIATELY. SINCE THE ISSUE IN THE CURRENT AY IS IDENTICAL TO T HAT OF AY 2007-08, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH IN THAT YEAR, WE REMIT THE ISSUE TO THE FILE OF THE TPO/AO TO DECIDE THE ISSUE FOLLOWING THE DIRECTIONS GIVEN BY THE TRIBUNA L IN AY 2007-08. 15. AS REGARDS THE ISSUE OF CORPORATE GUARANTEE, WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE CO ORDINATE BENCH IN ASSESSEES OWN CASE FOR AY 2007-08 (SUPRA) WHEREIN THE COORDINATE BENCH HAS HELD AS UNDER: 25.2 HAVING CONSIDERED THE SUBMISSIONS OF THE PARTI ES, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE LEARNED AR T HAT CORPORATE GUARANTEE OF THE NATURE PROVIDED BY THE ASSESSEE WI LL NOT COME WITHIN THE MEANING OF INTERNATIONAL TRANSACTION IN TERMS WITH SECTION 92B OF THE ACT. IT IS NOT DISPUTED THAT SEC TION 92B OF THE ACT HAS BEEN AMENDED BY THE FINANCE ACT, 2012 WITH THE INSERTION OF EXPLANATION I (C) WITH RETROSPECTIVE E FFECT FROM 01/04/2002. EXPLANATION (I)(C) TO SECTION 92B, READ S AS UNDER: CAPITAL FINANCING, INCLUDING ANY TYPE OF LONG-TER M OR SHORT-TERM BORROWING, LENDING OR GUARANTEE, PURCHASE OR SALE O F MARKETABLE SECURITIES OR ANY TYPE OF ADVANCE, PAYMENTS OR DEFE RRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINESS. 25.3 A READING OF THE AFORESAID CLAUSE FROM THE EXP LANATION WOULD MAKE IT CLEAR THAT THE CORPORATE GUARANTEE PR OVIDED BY THE ASSESSEE COMES WITHIN THE SCOPE AND AMBIT OF INTE RNATIONAL TRANSACTION AS PER THE AFORESAID CLAUSE. THEREFORE , THE CONTENTION OF THE LEARNED AR THAT THE ISSUE IS COVE RED IN FAVOUR OF THE ASSESSEE BY VIRTUE OF THE ORDER PASSED IN AS SESSEES OWN CASE FOR AY 2006-07 NO LONGER HOLDS GOOD SINCE THE ORDER 14 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. PASSED BY THE COORDINATE BENCH IS PRIOR TO THE AMEN DMENT MADE TO PROVISION OF SECTION 92B OF THE ACT. IT WILL BE PERTINENT TO MENTION HERE THAT THIS ISSUE WAS ALSO CONSIDERED BY THE ITAT MUMBAI BENCH IN CASE OF MAHINDRA & MAHINDRA VS. D CIT IN ITA NO. 8597/MUM/2010, 54 SOT (UR) 146. THE COORDINATE BENCH OF THIS TRIBUNAL WHILE CONSIDERING SIMILAR ARGUMENT AD VANCED ON BEHALF OF THE ASSESSEE BY PLACING RELIANCE ON THE DECISION OF THE FOUR SOFT LTD.(SUPRA), HELD AS UNDER: 15.2 AFTER HEARING THE RIVAL SUBMISSIONS WE FEEL T HAT ASSESSING OFFICER WILL HAVE TO FOLLOW THE DECISION OF THE ITA T HYDERABAD OR THE AMENDED PROVISION OF THE ACT IN THIS REGARD. IF THE FINANCE BILL OF 2012 IS PASSED BY THE PARLIAMENT AMENDING T HE PROVISIONS OF SECTION 92B, WITH EFFECT FROM 1 ST APRIL, 2002, HE WILL HAVE TO IGNORE THE DECISION OF THE ITAT HYDERABAD. IN CASE SECTION 92B IS NOT AMENDED WITH RETROSPECTIVE EFFECT, HE SHOULD GRANT RELIEF TO THE APPELLANT. 25.4 IN THE AFORESAID VIEW OF THE MATTER, WE AGREE WITH THE TPO THAT ALP OF THE CORPORATE GUARANTEE HAS TO BE D ETERMINED AS IT FALLS WITHIN THE SCOPE AND AMBIT OF AN INTERN ATIONAL TRANSACTION AFTER THE RETROSPECTIVE AMENDMENT TO SE CTION 92B. HOWEVER, IT APPEARS THAT THE TPO HAS APPLIED THE RA TE OF 3.75%, WHICH IS APPLICABLE TO BANK GUARANTEE ISSUED BY THE BANK. AS THE CORPORATE GUARANTEE IS NOT IN THE NATURE OF BANK GU ARANTEE, THE RATE APPLICABLE TO BANK GUARANTEE PROVIDED BY THE B ANK CANNOT BE APPLIED TO CORPORATE GUARANTEE WHICH IS PROVIDED BY A GROUP COMPANY. IN CASE OF GLENMARK PHARMACEUTICALS VS. AC IT IN ITA NO. 5031/MUM/2012, DATED 13/11/2013, THE MUMBAI BEN CH OF THE TRIBUNAL AFTER ANALYSING THE FACTS IN THAT CASE HAD HELD THAT 0.53% CORPORATE GUARANTEE RATE IN THAT CASE WAS APP ROPRIATE. THE ITAT HYDERABAD BENCH IN CASE OF INFOTECH ENTER PRISES LTD. IN ITA NO. 115/HYD/2011 AND IN ITA NO. 2184/HYD/201 1, DATED 16/01/2014 WHILE CONSIDERING IDENTICAL ISSUE OF DET ERMINING ALP OF CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE TO ITS AE FOLLOWED THE RATIO LAID DOWN IN CASE OF GLENMARK PH ARMACEUTICALS VS. ACIT (SUPRA) AND REMITTED THE ISSUE BACK TO THE TPO TO DECIDE THE QUANTUM OF CORPORATE GUARANTEE RATE BY F OLLOWING THE METHOD ADOPTED IN CASE OF GLENMARK PHARMACEUTICALS (SUPRA). 26. SINCE THE ISSUE IN THE PRESENT CASE IS IDENTICA L TO THE ISSUE DECIDED BY THE ITAT, HYDERABAD BENCH IN CASE OF INFOTECH ENTERPRISES (SUPRA), FOLLOWING THE SAME, WE ALSO RE MIT THIS ISSUE TO THE FILE OF THE TPO TO DECIDE THE QUANTUM OF COR PORATE GUARANTEE RATES ACCORDINGLY. IF THE ASSESSEE IS ABL E TO BRING ON RECORD ANY COMPARABLES WITH REGARD TO CORPORATE GUA RANTEE, THE TPO MAY ALSO CONSIDER THE SAME WHILE DETERMINING AL P OF CORPORATE GUARANTEE. THE TPO MUST PROVIDE A REASONA BLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE D ECIDING THE ISSUE. THIS GROUND IS ALLOWED FOR STATISTICAL PURPO SES. 15 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. SINCE THE ISSUE IN THE CURRENT AY IS IDENTICAL TO T HAT OF AY 2007-08, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH IN THAT YEAR, WE REMIT THE ISSUE TO THE FILE OF THE TPO/AO TO DECIDE THE ISSUE FOLLOWING THE DIRECTIONS GIVEN BY THE TRIBUNA L IN AY 2007-08. 16. IN THE RESULT, APPEAL OF THE ASSESSEE IS TREATE D AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 28 TH OCTOBER, 2016. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 28 TH OCTOBER, 2016 KV COPY TO:- 1) PALRED TECHNOLOGIES LTD., PLOT NO. 2,8-2-703/2/ B, ROAD NO. 12, BANJARA HILLS, HYDERABAD 500 034 2) DCIT, CIRCLE 1(3), 4 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYD. 500 029 3) DRP, HYDERABAD 4). CIT, INTERNATIONAL TAXATION, INCOME TAX TOWERS, 10-2-3, AC GUARDS, HYDERABAD 500 004. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE 16 ITA NO. 1686 /HYD/2012 PALRED TECHNOLOGIES LTD. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER