Infotech Enterprises Limited, Hyderabad V. DY.CIT, Cir-2(1), Hyderabad

ITA 1780/HYD/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91572 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 08-04-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 10-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G APARNA RAO
• Assessee Lawyers: M V R PRASAD
• Keywords: Capital asset; Depreciation; Transfer pricing; Double taxation relief; International transaction; Bonafide belief; Deemed to accrue or arise in india; Retrospective amendment; Permanent establishment; Cost of acquisition; Revenue expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NOS. 1780 /HYD/2012 AND 395/HYD/2014 ASSESSMENT YEARS: 2008-09 AND 2009-10 CYIENT LTD. (FORMERLY KNOWN AS INFOTECH ENTERPRISES LTD.), HYDERABAD. PAN AAAC14487J VS. DY. COMMISSIONER OF INCOME- TAX OFFICER, CIRCLE 2(1), HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI M.V.R. PRASAD REVENUE BY : SMT. G. APARNA RAO DATE OF HEARING 08-04-2015 DATE OF PRONOUNCEMENT 30-04-2015 O R D E R PER SAKTIJIT DEY, J.M.: THESE TWO APPEALS BY ASSESSEE ARE DIRECTED AGAINS T ASSESSMENT ORDERS PASSED U/S 143(3) READ WITH SECTI ON 92CA(3) AND 144C(13) OF THE ACT FOR THE AYS 2008-09 AND 2009-10 . ITA NO. 1780/HYD/2012 FOR AY 2008-09 2. IN THIS APPEAL ASSESSEE HAS RAISED SEVEN GROUNDS . GROUND NOS. 1 & 7 BEING GENERAL IN NATURE, DO NOT REQUIRE ANY S PECIFIC ADJUDICATION. GROUND NO. 2 HAS THREE SUB-GROUNDS. SUB-GROUND NO. (I) IS IN RELATION TO DISALLOWANCE OF RS. 14,98,07, 749 BEING PAYMENT TOWARDS CONSULTANCY CHARGES BY DETERMINING ARMS LE NGTH PRICE (ALP) AT NIL. SUB-GROUND NO. (II) IS IN RELATION TO SELECTION OF TWO COMPARABLES, I.E., M/S INFOSYS TECHNOLOGIES LTD. AN D WIPRO LTD. IN SUB-GROUND NO. (III) THOUGH, ASSESSEE RAISED THE IS SUE OF 2 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. DISALLOWANCE MADE U/S 40(A)(I) FOR AN AMOUNT OF RS. 14,98,07,749, BUT, SUBSEQUENTLY, IN COURSE OF HEARING, LD. AR ADM ITTED THAT THE SAID GROUND HAS BEEN MISTAKENLY RAISED AS THERE IS NO DI SALLOWANCE MADE U/AS 40(A)(I) OF THE ACT. IN ADDITION TO THE ISSUE S IN GROUND NO.2, ASSESSEE ALSO RAISED TWO ADDITIONAL GROUNDS AS UNDE R: 1) THE TPO AND THE HONBLE DRP AND THE AO ERRED IN DETERMINING THE ARMS LENGTH PRICE OF THE SO CALLED CONSULTANCY CHARGES PAID BY THE APPELLANT COMPANY TO ITS NON RE SIDENT SUBSIDIARIES AT NIL AS AGAINST THE CLAIM BY THE APP ELLANT OF RS. 14,98,07,749. 1.1) THE SAID AUTHORITIES OUGHT TO HAVE REALIZED TH AT THE SO CALLED CONSULTANCY CHARGES WERE ACTUALLY PAYMENTS M ADE BY THE APPELLANT TO ITS FOREIGN SUBSIDIARIES FOR THE SOFTW ARE SERVICES RENDERED BY THEM. ADDITIONAL GROUND WHICH CORRESPONDS TO SUB-GROUND N O. (I) WILL BE DEALT WITH AT A LATER STAGE WHILE CONSIDERING THE I SSUE OF DETERMINATION OF ALP FOR CONSULTANCY CHARGES PAID OF RS. 14,98,07 ,749 AT NIL. 3. BRIEFLY THE FACTS RELATING TO THE ISSUE RAISED I N SUB-GROUND NOS. (I) & (II) ARE, ASSESSEE AN INDIAN COMPANY INCORPOR ATED AS PRIVATE LIMITED COMPANY IN AUGUST, 1991 WAS SUBSEQUENTLY CO NVERTED TO A PUBLIC LTD. COMPANY IN THE YEAR 1997. ASSESSEE HAS VARIOUS SUBSIDIARIES LOCATED IN USA AND EUROPE TO PROVIDE S OFTWARE DEVELOPMENT SERVICES TO ITS CLIENTS. ASSESSEE BASI CALLY IS A GLOBAL TECHNOLOGY SERVICES AND SOLUTIONS COMPANY SPECIALIZ ED IN GEOSPATIAL, ENGINEERING DESIGN AND IT SOLUTIONS. ASSESSEE OPERA TES UNDER TWO VERTICAL BUSINESS SEGMENTS I.E. UTG (UTILITIES, TRA NSPORTATION, GOVERNMENT) AND EMI (ENGINEERING, MANUFACTURING AND INDUSTRIAL PRODUCTS). ASSESSEES RANGE OF SERVICES INCLUDE DIG ITIZATION OF DRAWINGS AND MAPS, PHOTOGRAMMETRY, COMPUTER AIDED DESIGN/ENGINEERING REVERSE ENGINEERING (CAD/CAE), D ESIGN AND MODELING, REPAIR DEVELOPMENT ENGINEERING, SOFTWARE PRODUCTS DEVELOPMENT CONSULTING AND IMPLEMENTATION. FOR THE AY UNDER CONSIDERATION, ASSESSEE FILED ITS RETURN OF INCOME ON 24/09/2008 3 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. DECLARING TOTAL INCOME OF RS. 24,44,28,898 AFTER CL AIMING DEDUCTION U/S 10A OF THE ACT. IN COURSE OF ASSESSMENT PROCEED ING, AO WHILE EXAMINING THE FINANCIALS OF THE COMPANY NOTICED THA T ASSESSEE HAS EARNED REVENUE FROM INTERNATIONAL TRANSACTIONS ENTE RED WITH ITS AES AS UNDER: REVENUE RS. 438,22,27,819 COST RS. 379,58,49,475 PBIT RS. 58,63,78,344 PBIT AS % OF COST 15.45% 3.1 AO, THEREFORE, REFERRED THE MATTER TO THE TRAN SFER PRICING OFFICER (TPO FOR DETERMINING ALP OF THE INTERNATION AL TRANSACTIONS. DURING THE PROCEEDING BEFORE HIM, TPO CALLED FOR VA RIOUS INFORMATIONS AND SUBMISSIONS FROM ASSESSEE. ON EXAMINING THE TP STUDY DONE BY ASSESSEE THROUGH EXTERNAL CONSULTANT, HE NOTICED TH AT ASSESSEE HAS SELECTED ITSELF AS THE TESTED PARTY AND ADOPTED TRA NSACTION NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD WIT H OPERATING PROFIT TO OPERATING COST AS THE PROFIT LEVEL INDICA TOR (PLI). ASSESSEE SELECTED 16 COMPARABLE COMPANIES FROM THE DATABASE S WITH WEIGHTED AVERAGE MARGIN OF 12%. AS MARGIN OF ASSESSEE WAS SH OWN AT 15.45%, THE PRICE CHARGED BY ASSESSEE WAS FOUND TO BE WITHIN THE ARMS LENGTH AS PER TP REPORT. TPO, THOUGH, ACCEPTE D TNMM AS THE MOST APPROPRIATE METHOD, FOR BENCH MARKING THE TRAN SACTIONS PERTAINING TO SALES OF SERVICES AND PAYMENT TOWARDS CONSULTANCY SERVICES, BUT, HE NEVERTHELESS FOUND THE APPROACH A DOPTED BY ASSESSEE IN SELECTING COMPARABLES UNACCEPTABLE. TPO TERMED THE TP STUDY REPORT OF ASSESSEE AS UNRELIABLE AND REJECTED THE SAME. AFTER REJECTING THE TP STUDY REPORT OF ASSESSEE, TPO EMBA RKED UPON A SELECTION PROCESS HIMSELF BY APPLYING CERTAIN ADDIT IONAL FILTERS AND THE SEARCH PROCESS YIELDED 19 COMPARABLE COMPANIES ( I NCLUDING THREE SELECTED BY ASSESSEE) WITH ARITHMETIC MEAN OF 26.20 %. AFTER ALLOWING WORKING CAPITAL ADJUSTMENT OF 0.11%, THE ADJUSTED A RITHMETIC PLI WAS WORKED OUT AT 26.09%. BY APPLYING THE ADJUSTED ARIT HMETIC MEAN PLI 4 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. TO THE OPERATING COST, ALP WAS DETERMINED AT RS. 48 3,32,88,400 AFTER EXCLUDING THE SALES TO NON-AES OF RS. 221,49,20,530 , ALP OF SALES TO AES WAS DETERMINED AT RS. 261,83,67,870 AS AGAINST THE PRICE SHOWN BY ASSESSEE OF RS. 216,73,07,289. THUS, THE SHORTFA LL OF RS. 45,10,60,581 WAS TREATED AS ADJUSTMENT TO BE MADE U /S 92CA OF THE ACT. 3.2 AS FAR AS THE PAYMENT OF RS. 14,98,07,749 TOWAR DS CONSULTANCY SERVICES (INTRA GROUP SERVICES) IS CONCERNED, TPO O BSERVED THAT ASSESSEE IS THE PARENT COMPANY AND THE COMPANIES FR OM WHOM SERVICES WERE CLAIMED TO HAVE BEEN RECEIVED ARE AS SUBSIDIARY. HE OBSERVED THAT ON THE ONE HAND ASSESSEE CLAIMED TO H AVE RENDERED SOFTWARE DEVELOPMENT SERVICES TO THE SAME SUBSIDIAR IES AND ON THE OTHER HAND IT CLAIMS OF RECEIVING CONSULTANCY SERVI CES FROM THEM. TPO OBSERVED THAT ASSESSEE COULD NOT SUBSTANTIATE WHET HER THERE WAS ANY NEED FOR CONSULTANCY SERVICES AND IF REQUIRED W HETHER SUCH SERVICES WERE ACTUALLY RENDERED AND IF RENDERED WHE THER THERE ARE ANY BENEFITS TO ASSESSEE IN TERMS OF HIGHER PROFITS . FURTHER, HE OBSERVED THAT IF AT ALL THERE WAS ANY BENEFIT FROM AVAILING SUCH SERVICES, WHETHER THE PAYMENT MADE IS COMMENSURATE WITH BENEFITS DERIVED. EXPRESSING HIS VIEW AS ABOVE, TPO PROCEEDE D TO DETERMINE ALP OF THE PAYMENT MADE TOWARDS CONSULTANCY SERVICE S AT RS. NIL. HOWEVER, SINCE ADJUSTMENT ON ACCOUNT OF THE SAID T RANSACTION HAS ALREADY GOT MERGED IN THE ADJUSTMENT PROPOSED BY HI M U/S 92CA, NO SEPARATE ADJUSTMENT WAS MADE BY HIM. IN TERMS WITH THE ORDER PASSED BY TPO, AO PASSED DRAFT ASSESSMENT ORDER INCORPORAT ING THE ADDITION PROPOSED BY TPO TOWARDS TP ADJUSTMENT. THAT BESIDES , AO ALSO MADE VARIOUS OTHER ADDITIONS, ADJUSTMENTS ON NON TP ISSUES. BEING AGGRIEVED OF THE DRAFT ASSESSMENT ORDER, ASSESSEE F ILED OBJECTIONS BEFORE LD. DISPUTE RESOLUTION PANEL (DRP). 4. AS FAR AS THE DETERMINATION OF ALP OF CONSULTANC Y CHARGES OF RS. 14,98,07,749 AT NIL, LD. DRP DEALT WITH THE ISS UE AS UNDER: 5 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. 43.3 THE TPO DEALT WITH THE PAYMENT OF RS. 14,98,09 ,749 TOWARDS CONSULTANCY CHARGES FROM PARA 30 TO 37.7 OF HIS ORDER. THE ASSESSEE DID NOT RAISE ANY GROUND IN RESPECT OF THIS ISSUE AND ALSO DID NOT MAKE ANY SUBMISSIONS ABOUT THE FIN DINGS OF THE TPO. THE TPO GAVE A FINDING THAT THE TAXPAYER D ID NOT SUBSTANTIATE THE CONSULTANCY SERVICES RENDERED BY T HE AE. AND ALSO OBSERVED THAT THE PAYMENT MADE TOWARDS CONSULT ANCY SERVICES MERGED WITH THE ADJUSTMENT MADE IN RESPECT OF TRANSACTIONS PERTAINING TO SALE OF DEVELOPMENT SERV ICES FOR A SUM OF RS. 45,10,60,581. THUS, A SEPARATE ADJUSTMEN T WAS NOT MADE BY TPO AND THE BENEFIT OF TELESCOPE WAS GIVEN TO THE TAXPAYER. THEREFORE, THE AO IS DIRECTED WHILE REWOR KING THE ADJUSTMENT U/S 92CA, THE TOTAL ADJUSTMENT ON APPLIC ATION OF ARITHMETIC MEAN PLI SHOULD NOT GO DOWN BELOW A SUM OF RS. 14,98,07,749. HOWEVER, THE ADJUSTMENT U/S 92CA CAN BE HIGHER THAN THIS SUM. 5. AS FAR AS THE OBJECTIONS OF ASSESSEE WITH REGAR D TO SELECTION OF CERTAIN COMPARABLES IS CONCERNED, LD. DRP AFTER CON SIDERING THE SAME, ACCEPTED ASSESSEES OBJECTIONS WITH REGARD TO ONE OF THE COMPARABLE COMPANIES M/S CELESTIAL BIO LABS LTD. AN D DIRECTED TPO TO EXCLUDE THE SAME. IN RESPECT OF TWO OTHER COMPA NIES, NAMELY, KALS INFORMATION SYSTEMS LTD. AND SOFTSOL INDIA LTD ., THOUGH LD. DRP UPHELD THE SELECTION OF THESE COMPANIES AS COMPARAB LES, BUT, DIRECTED TPO TO TAKE THE MARGIN OF THESE TWO COMPAN IES AT 30.92% AND 25.78% RESPECTIVELY. 6. ADDRESSING ON THE ISSUE OF DETERMINATION OF ALP OF CONSULTANCY CHARGES AT NIL, LD. AR SUBMITTED BEFORE US, THE FIN DING OF TPO AND LD. DRP ON THE ISSUE HAS NO BASIS OF LAW. IT WAS SUBMIT TED, THOUGH THE AMOUNT OF RS. 14,98,07,749 IS DESCRIBED IN THE ACCO UNT AS CONSULTANCY CHARGES PAID BY ASSESSEE TO NON-RESIDEN T SUBSIDIARIES, BUT, ACTUALLY THE PAYMENT WAS MADE FOR THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THEM. LD. AR REFERRING TO THE MASTER SERVICES AGREEMENT ENTERED WITH M/S PRATT AND WHITNEY, USA AND THE AGREEMENT ENTERED INTO BETWEEN ASSESSEE AND ITS SUB SIDIARY IN USA, SUBMITTED BEFORE US, ASSESSEE HAS OBTAINED SOME ORD ERS FROM M/S PRATT AND WHITNEY, USA FOR DEVELOPMENT OF CERTAIN S OFTWARE. A PORTION 6 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. OF THE SOFTWARE DEVELOPMENT WORK OBTAINED FROM M/S PRATT & WHITNEY WAS PARCELED OUT TO ITS SUBSIDIARY IN USA AND THE P AYMENTS MADE WERE TOWARDS SERVICES RENDERED BY SUBSIDIARY TOWARD S SOFTWARE DEVELOPMENT SERVICES. THUS, IN REALITY, THERE WAS N O CONSULTANCY CHARGED PAID BY ASSESSEE TO THE SUBSIDIARIES. THUS , IT WAS SUBMITTED, DETERMINATION OF ALP OF THE PAYMENT MADE TOWARDS SOFTWARE DEVELOPMENT SERVICES AT NIL BY TREATING TH E SAME AS CONSULTANCY CHARGES IS NOT ONLY ILLEGAL BUT UNREASO NABLE. LD. AR SUBMITTED, IN THE PRECEDING AYS 2006-07 AND 2007-08 ALSO PAYMENTS WERE MADE BY ASSESSEE TO FOREIGN SUBSIDIARIES TOWAR DS SIMILAR SOFTWARE DEVELOPMENT SERVICES RENDERED BY THEM. HOW EVER, TPO THOUGH VERIFIED THE INTERNATIONAL TRANSACTION DID N OT MAKE ANY ADJUSTMENT AS FAR AS SUCH PAYMENTS ARE CONCERNED, W HEREAS, AO IN THE DRAFT ASSESSMENT ORDER DISALLOWED THE PAYMENTS MADE BY APPLYING PROVISIONS OF SEC. 40(A)(I) OF THE ACT. W HEN THE DISALLOWANCE MADE ULTIMATELY CAME UP FOR CONSIDERATION BEFORE TH E ITAT IN THOSE AYS, ITAT VIDE ITS ORDER PASSED IN ITA NOS. 115 & 2 184/HYD/2011 DATED 16/01/2014, AFTER EXAMINING THE NATURE OF PAY MENT, AS WELL AS ANALYZING THE MASTER SERVICE AGREEMENT AND INTRA GROUP COMPANY AGREEMENT AND ALSO KEEPING IN VIEW THE PROVISIONS O F SECTION 195 READ WITH SECTION 9 OF THE IT ACT AND INDO-USA DTA A HELD THAT THE PAYMENTS MADE BEING TOWARDS SOFTWARE DEVELOPMENT SE RVICES RENDERED BY COMPANIES OUTSIDE INDIA ARE NOT TAXABLE IN INDIA. THUS, IT WAS SUBMITTED BY LD. AR, SINCE THE PAYMENTS MADE WA S TOWARDS SOFTWARE DEVELOPMENT SERVICES RENDERED BY FOREIGN S UBSIDIARIES AND NOT TOWARDS ANY CONSULTANCY CHARGES, ALP CANNOT BE DETERMINED AT NIL. LD. AR SUBMITTED, SAME VIEW WAS AGAIN EXPRESSE D BY ITAT WHILE DECIDING THE ISSUE IN ASSESSEES OWN CASE FOR AYS 2 002-03, 2004-05 AND 2005-06 IN ITA NOS. 1450, 1452 & 1453/H/13 DATE D 25/03/15. 7. LD. DR CONTESTING THE SUBMISSIONS MADE BY ASSESS EES COUNSEL SUBMITTED BEFORE US, ASSESSEE CANNOT RAISE THE GROU ND AT THIS STAGE 7 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. AS ASSESSEE NEVER OBJECTED TO THE DETERMINATION OF ALP OF THE CONSULTANCY CHARGES AT NIL BY RAISING ANY GROUND BE FORE LD. DRP. IN THIS CONTEXT, SHE SPECIFICALLY REFERRED TO THE OBSE RVATIONS OF LD. DRP IN PARA 43.3. THUS, IT WAS SUBMITTED BY LD. DR, SINCE ASSESSEE DID NOT RAISE ANY SPECIFIC GROUND BEFORE LD. DRP ON THE ISS UE, HE CANNOT RAISE THE SAME FOR THE FIRST TIME BEFORE ITAT. 8. IN THE REJOINDER AS WELL AS IN THE PETITION FILE D SEEKING TO RAISE ADDITIONAL GROUND, THOUGH, LD. AR ACCEPTED THE FACT THAT NO DIRECT GROUND ASSAILING THE DETERMINATION OF ALP OF CONSUL TANCY CHARGES AT NIL WAS RAISED BEFORE LD. DRP, INADVERTENTLY, HOWEV ER, HE SUBMITTED AS THE ISSUE RELATING TO DISALLOWANCE OF CONSULTANC Y CHARGES OF RS. 14,98,07,749 WAS MERGED INTO THE ADDITION OF RS. 45 ,10,65,081 ON ACCOUNT OF TP ADJUSTMENT, THE ISSUE RELATING TO DET ERMINATION OF ALP AT NIL CANNOT BE LOOKED INTO IN AN ISOLATED MANNER. THUS, HE REQUESTED FOR CONSIDERATION OF THE ADDITIONAL GROUND RAISED O N THE ISSUE. 9. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF REVENUE AUTHORITIES AS WELL AS OTHER MATERIAL ON RECORD. AT THE OUTSET, THE ISSUE RELATING TO ADMISSION OF A DDITIONAL GROUND NEEDS TO BE RESOLVED. IT IS A FACT ON RECORD THAT A SSESSEE HAS SPECIFICALLY NOT RAISED ANY OBJECTION BEFORE LD. DR P WITH REFERENCE TO DETERMINATION OF ALP OF SO CALLED CONSULTANCY CHARG ES OF RS. 14,98,0- 7,749 AT NIL. THOUGH, IN COURSE OF HEARING, LD. AR SUBMITTED BEFORE US, IN THE WRITTEN SUBMISSIONS FILED BEFORE LD. DRP ASSESSEE HAS RAISED THE ISSUE, BUT, ON CAREFUL PERUSAL OF THE SA ID WRITTEN SUBMISSION WE DO NOT FIND ANY REFERENCE TO THE ISSU E. THUS, IT CAN BE HELD THAT ASSESSEE HAS NOT SPECIFICALLY RAISED THE ISSUE OF DISALLOWANCE OF CONSULTANCY CHARGES AT NIL BEFORE L D. DRP. HAVING HELD SO, IT IS TO BE DECIDED WHETHER ASSESSEE CAN R AISE SUCH ISSUE BY WAY OF ADDITIONAL GROUND. AS CAN BE SEEN, TPO HAS D ETERMINED THE 8 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. ALP OF CONSULTANCY CHARGES AT NIL BY APPLYING THE B ENEFIT TEST. HOWEVER, IT IS THE SPECIFIC CLAIM OF ASSESSEE BEFOR E US THAT THE AMOUNT OF RS. 14,98,07,749 PAID TO FOREIGN SUBSIDIA RIES WERE NOT CONSULTANCY CHARGES, BUT, TOWARDS RENDERING SOFTWAR E DEVELOPMENT SERVICES FOR A PORTION OF WORK SUB-CONTRACTED TO TH EM. ON PERUSAL OF THE MASTER SERVICE AGREEMENT BETWEEN ASSESSEE AND M/S PRATT & WHITNEY, A COPY OF WHICH IS AT PAGE 354 OF PAPER BO OK AND THE AGREEMENT BETWEEN ASSESSEE AND ITS FOREIGN SUBSIDIA RIES IN USA, A COPY OF WHICH IS AT PAGE 372, THE CONTENTION OF ASS ESSEE TO CERTAIN EXTENT APPEARS TO BE CORRECT. FURTHER, SAMPLE INVOI CES ENCLOSED IN THE PAPER BOOK ALSO BEAR TESTIMONY TO THIS FACT. IT IS FURTHER EVIDENT FROM RECORD THAT IN THE PRECEDING AYS I.E. AY 2006-07 AN D 2007-08 THOUGH THE INTERNATIONAL TRANSACTIONS OF ASSESSEE WERE EXA MINED BY TPO, BUT, SIMILAR PAYMENTS MADE TO FOREIGN SUBSIDIARIES WERE ACCEPTED BY HIM WITHOUT MAKING ANY ADJUSTMENT. OF COURSE, AO IN THE DRAFT ASSESSMENT ORDER DISALLOWED THE PAYMENTS MADE BY AP PLYING THE PROVISIONS OF SECTION 40(A)(I) BY TREATING THEM AS ROYALTY. WHEN THE MATTER CAME UP FOR CONSIDERATION BEFORE THE COORDIN ATE BENCH IN APPEALS PREFERRED BY ASSESSEE, THE COORDINATE BENCH AFTER CONSIDERING THE NATURE OF PAYMENT AS FOUND FROM THE RELEVANT AGREEMENTS AND CONSIDERED IN THE CONTEXT OF STATUTO RY PROVISIONS AS WELL AS INDO-USA DTAA, HELD AS UNDER: 35. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT T HE A.O. DISALLOWED THE AMOUNT OF RS.19,48,02,907/- ON THE GROUND THAT THER E IS A BUSINESS CONNECTION IN TERMS OF EXPLANATION 2 TO SECTION 9(1 )(I) OF THE I.T. ACT, BETWEEN THE ASSESSEE AND ITS CONCERNED FOREIGN SUBS IDIARIES TO WHOM THE SAID AMOUNT HAS BEEN PAID. HE HELD THAT THE ASSESSE E HAS BEEN HABITUALLY/ SECURING ORDERS IN INDIA FOR THE BENEFIT OF NON-RES IDENT IN TERMS OF CLAUSE (C) OF THE SAID EXPLANATION. 36. WITH RESPECT TO IEAI USA, WE FIND THAT FACTUALL Y THE ASSESSEE HAS SECURED THE ORDERS FROM PRATT (PWC) FOR ITS OWN BEN EFIT AND IT ONLY PARCELLED OUT A PORTION OF THE WORK ENTRUSTED TO IT BY PRATT & WHITNEY TO IEAI USA. THE SAID EXPLANATION TO SECTION 9(1)(I) C AN BE INVOKED ONLY WHEN THE INDIAN COMPANY SECURES ORDERS FOR THE BENEFIT O F NON-RESIDENT. IN THE PRESENT CASE, THE ASSESSEE HAS NOT CANVASSED / SECU RED ANY ORDERS FOR ITS NON RESIDENT SUBSIDIARIES. HENCE, SECTION 9(1)(I) C ANNOT BE INVOKED. 9 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. 37. WE HAVE GONE THROUGH THE COPY OF THE MASTER TE RMS AGREEMENT (IN SHORT MTA) ENTERED INTO BY THE ASSESSEE WITH UNI TED TECHNOLOGY CORPORATION (PWC) WHICH IS FILED AT PAGES 179 TO 19 6 OF THE PAPER BOOK. SIMILARLY, WE HAVE PERUSED INTERCOMPANY AGREEMENT E NTERED INTO BY THE ASSESSEE WITH ITS SUBSIDIARIES PLACED IN THE PAPER BOOK AT PAGE 197 TO 222. THIS PROVES THAT THE ASSESSEE OBTAINED ORDERS ON IT S OWN BEHALF AND IT HAS ONLY PARCELLED OUT A PORTION OF ITS WORK TO ITS FOR EIGN SUBSIDIARIES. AS PER THE TERMS OF THE AGREEMENT, THE ASSESSEE SHALL RELEASE THE WORK ORDER BEFORE THE COMMENCEMENT OF THE WORK BY IEAI USA AND EACH W ORK ORDER SHALL BE SUPPORTED BY END CUSTOMERS ORDER COPY. CLAUSE 3 OF THE AGREEMENT READS AS UNDER : COMMENCING ON THE DATE(S) SPECIFIED IN EACH WORK O RDER, IEAI WILL ALLOCATE QUALIFIED PERSONNEL THROUGH SOFTWARE SERVI CES REQUIREMENTS STATEMENTS AND REGULAR PROJECT MEETINGS, WHICH MAY BE MODIFIED FROM TIME TO TIME BY IEL. IEAI SHALL INFORM IEL AT THE TIME OF THE REQUEST, OR AS SOON THEREAFTER AS THAT THE INFORMAT ION BECOMES AVAILABLE, SHOULD IT BE UNABLE TO DELIVER THE QUALI FIED PERSONNEL SPECIFIED IN THE WORK ORDER. PARTIES SHALL WITHIN 3 0 DAYS NEGOTIATE IN GOOD FAITH A REVISED WORK ORDER MUTUALLY AGREEABLE TO BOTH PARTIES, HOWEVER IF NO SUCH AGREEMENT CAN BE REACHED EITHER PARTY MAY TERMINATE THAT WORK ORDER ACCORDING TO PROVISIONS O F SECTION 1. OBLIGATIONS OF IEL AND IEAI UNDER THIS AGREEMENT AR E DETAILED IN THE ANNEXURE. 38. FURTHER, WE FIND THAT THE TPO HAS FOUND THAT TH E OPERATION TRANSACTION WERE EFFECTED AT ARMS LENGTH PRICE. WE ALSO OBSERVE THAT THE FOREIGN SUBSIDIARIES DO NOT WORK EXCLUSIVELY FOR THE ASSESS EE AND THEY OBTAIN ORDERS ON THEIR OWN FROM OTHER FOREIGN PARTIES AND ALSO SU B CONTRACT THE WORK TO THE ASSESSEE DEPENDING ON EXIGENCIES. 39. WE ALSO FIND THAT NO OPERATIONS HAVE BEEN UNDER TAKEN BY FOREIGN SUBSIDIARIES IN INDIA AND NO ENGINEERS HAVE BEEN DE PUTED BY THEM TO INDIA AND EVEN THEY DO NOT HAVE PERMANENT ESTABLISHMENT I N INDIA. IN TERMS OF THE RESPECTIVE DTAA, NO INCOME OF THE FOREIGN SUBSIDIAR Y IS TAXABLE IN INDIA IN TERMS OF EITHER SECTION 9(1)(I) OF THE I.T. ACT OR THE CONCERNED ARTICLES RELATING TO BUSINESS PROFITS (ARTICLE 7 R.W. ARTICL E 5) IN THE RESPECTIVE DTAAS. AS SUBMITTED BY THE ASSESSEE, THE BOARD CIRCULAR NO . 29 DATED 27.3.1969 IS INAPPLICABLE TO THE PRESENT CASE AS THE EXAMPLE GIV EN BY THE BOARD, THE NON-RESIDENT IS THE PARENT COMPANY WHEREAS, IN THE PRESENT CASE, THE INDIAN COMPANY IS THE PARENT COMPANY AND THE ASSESSEE HAS NOT SOLD THE PRODUCTS OF ITS US SUBSIDIARIES OR ANY OTHER FOREIG N SUBSIDIARIES. THE CONTENTION OF THE ASSESSEE THAT THE RATE OF TAX IN INDIA IS LESSER THAN THE RATES IN USA IS ALSO WELL TAKEN. HENCE THERE IS NO INCOME TAXABLE IN INDIA U/S 9(1)(I) AND HENCE NO REQUIREMENT FOR TDS AND TH ERE CAN BE NO APPLICATION OF S.40(A)(I). 40. THE AO SEEMS TO HAVE INVOKED S.9(1)(VII) ONLY O N THE COMMUNICATION EXPENSES INCURRED AND IN SUCH A CASE THE ASSESSEE IS RIGHT IN AS MUCH AS SAID AMOUNT OF COMMUNICATION EXPENSES SHOULD BE EXC LUDED WHILE ASSESSING THE PURVIEW OF TAXABILITY OF INCOME U/S.9 (1)(I). HOWEVER, WE POINT OUT THAT THE DRP IN ITS ORDER SEEM TO HAVE HELD THA T THE ENTIRE AMOUNT PAID 10 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. BY ASSESSEE TO ITS FOREIGN COMPANIES MAY BE REGARDE D AS FEES FOR TECHNICAL SERVICES U/S.9(1)(VII). SO WHILE WE HAVE HELD ALREADY THAT S.9(1)(I) IS INAPPLICABLE IN THE INSTANT CASE, WE NOW HAVE TO DEAL WITH THE ALTERNATE OF THE ENTIRE AMOUNT BEING DISALLOWED U/S.9(1)(VII) (O R ARTICLE 12) AS FEES FOR TECHNICAL SERVICES. 41. FIRSTLY, UNDER THE ACT, THE PAYMENTS MADE TO TH E SUBSIDIARIES MAY INDEED BE CONSTRUED AS FEES FOR TECHNICAL SERVICES. HOWEVER THIS IS ONLY DUE TO THE FACT OF THE RETROSPECTIVE AMENDMENT BY F INANCE ACT 2010. PRIOR TO THAT, THE HONBLE SUPREME COURT IN ISHIKAWAJIMA- HARIMA HEAVY INDUSTRIES LTD., VS DIT (2007)[288 ITR 408] HAD HEL D THAT SECTION 9(1)(VII) AS IT STOOD THEN ENVISAGED TWO CONDITIONS WHICH NEE D TO BE MET SIMULTANEOUSLY NAMELY THAT SERVICES HAVE TO BE REND ERED IN INDIA AND SAID SERVICES HAVE TO BE UTILIZED IN INDIA. THE APEX COU RT HELD THAT MERELY THE SOURCE OF INCOME BEING LOCATED IN INDIA WOULD NOT RENDER SUFFICIENT NEXUS TO TAX THE INCOME FROM THAT SOURCE. THE APEX COURT HELD THAT THERE MUST BE A DIRECT LIVE LINK BETWEEN THE SERVICES RENDERED AN D INDIA. THE GOVERNMENT SUBSEQUENTLY INTRODUCED A RETROSPECTIVE AMENDMENT I N FINANCE ACT 2007 WHICH READ- FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED T HAT FOR THE PURPOSES OF THIS SECTION, WHERE INCOME IS DEEMED TO ACCRUE O R ARISE IN INDIA UNDER CLAUSE (V), (VI) AND (VII) OF SUB-SECTION (1) , SUCH INCOME SHALL BE INCLUDED IN THE TOTAL INCOME OF THE NON-RESIDENT , WHETHER OR NOT THE NON RESIDENT HAS A RESIDENCE OR PLACE OF BUSINE SS OR BUSINESS CONNECTION IN INDIA -TO OVERCOME THE EFFECT OF THE ISHIKAWAJIMA-HARIMA DECISION (SUPRA) BUT IN THE DECISIONS OF CLIFFORD CHANCE VS. DCIT (176 TAXM ANN 458) AS WELL AS JINDAL THERMAL POWER COMPANY VS. DCIT (182 TAXMANN 252 KARNATAKA HC) IT WAS HELD THAT THE FINANCE ACT 2007 AMENDMENT DID NOT CHANGE ISHIKAWAJIMAS (SUPRA) APPLICATION. IN RESPONSE, TH E GOVERNMENT SUBSEQUENTLY INTRODUCED A MODIFIED EXPLANATION TO S .9(1) VIA FINANCE ACT 2010 AND IT STANDS TILL DATE READING AS UNDER: EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, INCOME OF A NON-R ESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSE (V) OR CLAUSE (VI) OR CLAUSE (VII) OF SUB-SECTION (1) AND SHALL BE INCLUD ED IN THE TOTAL INCOME OF THE NON-RESIDENT, WHETHER OR NOT, (I) THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BU SINESS OR BUSINESS CONNECTION IN INDIA; OR (II) THE NON-RESIDENT HAS RENDERED SERVICES IN INDI A. 42. THUS, IT IS SEEN CLEARLY THAT AT THE TIME OF TH E PAYMENT IN THE INSTANT CASE ISHIKAWAJIMA-HARIMA (SUPRA) WAS THE LAW OF THE LAND AND THE TWIN CONDITION LAID DOWN OF RENDERING AND UTILIZING THE TECHNICAL SERVICE IN INDIA WAS CLEARLY NOT SATISFIED IN THE ASSESSEES CASE AS THE FOREIGN SUBSIDIARIES RENDERED THE SERVICE WHICH WAS UTILIZED BY THE CLIENTS (SUCH AS PWC). THUS THE ASSESSEE COULD HAVE BEEN OF THE BONAFIDE BELIEF THAT TDS WAS NOT NECESSARY ON PAYMENTS TO THE FOREIGN SUBSIDIARIES. FURTHERMORE, THE ASSESSEE COULD NOT 11 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. HAVE BEEN EXPECTED TO KNOW THAT TDS SHOULD HAVE BEE N DEDUCTED IN ACCORDANCE WITH A LAW THAT WAS TO BE BROUGHT IN SUB SEQUENTLY. HENCE ANY DISALLOWANCE U/S 40(A)(I) BASED ON THE APPLICATION OF A RETROSPECTIVE AMENDMENT WHICH THE ASSESSEE COULD NOT HAVE FORESEE N IS WHOLLY ERRONEOUS. THIS RATIONALE IS UPHELD BY VARIOUS DECI SIONS OF THE TRIBUNALS WHICH WE RELY ON SUCH AS CHANNEL GUIDE (139 ITD 49) & STERLING ABRASIVES (IT NO.2243, 2244/AHD/ 2008 DATED 23-12-2010) AND M ETRO & METRO VS. ACIT (ITA NO.393/AGRA/2012 DATED 1-11-2013). HENCE UNDER THE ACT THE DISALLOWANCE U/S 40(A)(I) FOR FTS PAYMENTS CANNOT BE UPHELD. 43. WE ALSO POINT THAT EVEN UNDER THE INDIA-USA AND INDIA-UK TREATIES (NOT THE INDIA-GERMANY TREATY THOUGH) DUE TO THE PRESENC E OF THE MAKE AVAILABLE CLAUSE IN THESE TWO TREATIES THE PAYMENT S MADE BY THE ASSESSEE WILL NOT FALL UNDER FTS. THIS IS BECAUSE NO TECHNIC AL KNOWLEDGE HAS BEEN MADE AVAILABLE BY THE NON-RESIDENT TO THE ASSESSEE. FURTHER, NO TECHNICAL PLAN OR TECHNICAL DESIGN PLACEMENT HAS BEEN TRANSFE RRED BY US SUBSIDIARY TO THE ASSESSEE. WHAT IEAI DID WAS ONLY IN FULFILME NT OF CONTRACTUAL REQUIREMENT WITH PRATT & WHITNEY AND NOT FOR THE BE NEFIT OF THE ASSESSEE. THE NON RESIDENT HAS SIMPLY EXECUTED THE PORTION OF WORK PARCELLED OUT TO IT BY THE ASSESSEE. THE KARNATAKA HIGH COURT IN CIT VS. DE BEERS INDIA MINERALS PVT. LTD. (ITA NO.549 OF 2007 DATED 15 TH MAY 2012) LUCIDLY EXPLAINED THE CONCEPT OF MAKE AVAILABLE A S FOLLOWS: WHAT IS THE MEANING OF MAKE AVAILABLE. THE TECHN ICAL OR CONSULTANCY SERVICE RENDERED SHOULD BE OF SUCH A NA TURE THAT IT 'MAKES AVAILABLE' TO THE RECIPIENT TECHNICAL KNOWLE DGE, KNOW-HOW AND THE LIKE. THE SERVICE SHOULD BE AIMED AT AND RE SULT IN TRANSMITTING TECHNICAL KNOWLEDGE, ETC., SO THAT THE PAYER OF THE SERVICE COULD DERIVE AN ENDURING BENEFIT AND UTILIZ E THE KNOWLEDGE OR KNOW-HOW ON HIS OWN IN FUTURE WITHOUT THE AID OF TH E SERVICE PROVIDER. IN OTHER WORDS, TO FIT INTO THE TERMINOLOGY 'MAKING AVAILABLE', THE TECHNICAL KNOWLEDGE, SKILLS, ETC., MUST REMAIN WITH THE PERSON RECEIVING THE SERVICES EVEN AFTER THE PARTICULAR CO NTRACT COMES TO AN END. IT IS NOT ENOUGH THAT THE SERVICES OFFERED ARE THE PRODUCT OF INTENSE TECHNOLOGICAL EFFORT AND A LOT OF TECHNICAL KNOWLEDGE AND EXPERIENCE OF THE SERVICE PROVIDER HAVE GONE INTO I T. THE TECHNICAL KNOWLEDGE OR SKILLS OF THE PROVIDER SHOULD BE IMPAR TED TO AND ABSORBED BY THE RECEIVER SO THAT THE RECEIVER CAN D EPLOY SIMILAR TECHNOLOGY OR TECHNIQUES IN THE FUTURE WITHOUT DEPE NDING UPON THE PROVIDER. TECHNOLOGY WILL BE CONSIDERED 'MADE AVAIL ABLE' WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY TH E TECHNOLOGY. THE FACT THAT THE PROVISION OF THE SERVICE THAT MAY REQ UIRE TECHNICAL KNOWLEDGE, SKILLS, ETC., DOES NOT MEAN THAT TECHNOL OGY IS MADE AVAILABLE TO THE PERSON PURCHASING THE SERVICE, WIT HIN THE MEANING OF PARAGRAPH (4)(B). SIMILARLY, THE USE OF A PRODUCT W HICH EMBODIES TECHNOLOGY SHALL NOT PER SE BE CONSIDERED TO MAKE T HE TECHNOLOGY AVAILABLE. IN OTHER WORDS, PAYMENT OF CONSIDERATION WOULD BE REGARDED AS 'FEE FOR TECHNICAL INCLUDED SERVICES' O NLY IF THE TWIN TEST OF RENDERING SERVICES AND MAKING TECHNICAL KNOWLEDG E AVAILABLE AT THE SAME TIME IS SATISFIED.' 12 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. 44. IN THE INSTANT CASE, THE UK AND USA SUBSIDIARIE S DID ONLY CONTRACTUAL WORK PARCELLED OUT TO IT WHOSE RESULTS WERE GIVEN T O CLIENTS DIRECTLY AND NO TECHNICAL KNOWLEDGE WAS MADE AVAILABLE TO ASSESSEE. HENCE, EVEN UNDER THE RESPECTIVE DTAA, THE PAYMENTS MADE TO UK AND US SUBSIDIARIES/COMPANIES WOULD NOT FALL UNDER THE AMB IT OF FTS. FROM THE FINDING OF THE COORDINATE BENCH AS AFORESA ID, IT IS CLEARLY EVIDENT THAT THE PAYMENTS MADE BY ASSESSEE TO ITS F OREIGN SUBSIDIARIES WERE TOWARDS SOFTWARE DEVELOPMENT SERV ICES RENDERED BY THEM ON THE PORTION OF WORK SUB-CONTRACTED BY ASSES SEE TO THEM. THUS, IF THE SO CALLED CONSULTANCY CHARGES OF RS. 1 4,98,07,749 PAID IN THE IMPUGNED AY ARE OF IDENTICAL NATURE, THEN, IT C ANNOT BE TREATED AS CONSULTANCY CHARGES SIMPLICITER FURTHER, IT IS RELE VANT TO NOTE THAT THOUGH SIMILAR PAYMENTS WERE MADE EVEN IN THE SUBSE QUENT AY 2009- 10, TPO HAS NOT DETERMINED THE ALP OF SUCH PAYMENTS AT NIL. IN VIEW OF THE AFORESAID FACTUAL POSITION, SINCE THE ISSUE RAISED BY ASSESSEE GOES TO THE ROOT OF THE MATTER AS IT IS INEXTRICABL Y LINKED WITH THE ULTIMATE DETERMINATION OF TP ADJUSTMENT MADE BY TPO AND SINCE THE PRIMARY/BASIC FACTS RELATING TO SUCH ISSUE ARE ALRE ADY AVAILABLE ON RECORD, IN OUR VIEW, THE ADDITIONAL GROUNDS RAISED BY ASSESSEE REQUIRED TO BE ADMITTED IN CONSONANCE WITH THE PRIN CIPLE DECIDED BY THE HONBLE SUPREME COURT IN CASE OF NTPC LTD. CIT 229 ITR 383 (SC). HOWEVER, SINCE THIS ISSUE WAS NOT RAISED BY ASSESSEE BEFORE LD. DRP AND WAS RAISED FOR THE FIRST TIME BEFORE US , IN THE INTEREST OF FAIR PLAY AND JUSTICE, WE REMIT THE ISSUE BACK TO T HE FILE OF TPO TO DECIDE AFRESH AFTER EXAMINING THE AGREEMENTS BETWE EN ASSESSEE AND M/S PRATT & WHITNEY AS WELL AS ASSESSEE AND ITS SUB SIDIARIES AND OTHER EVIDENCES BROUGHT ON RECORD BY ASSESSEE. FURT HER WHILE DECIDING THE ISSUE, TPO MUST KEEP IN VIEW THE FINDI NGS OF THE COORDINATE BENCH IN ASSESSEES OWN CASE FOR AYS 200 6-07, 2007-08 IN ITA NOS. 115 & 2184/HYD/2011 AND FOR AYS 2002-03 , 2004-05 AND 2005-06 IN ITA NOS 1450, 1452, 1451 & 1453/HYD/2013 . THE ASSESSEE MUST BE GIVEN AN OPPORTUNITY OF BEING HEAR D. THUS, THE 13 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. ADDITIONAL GROUNDS RAISED ALONG WITH SUB-GROUND NO. (I) OF GROUND NO. 2 ARE CONSIDERED TO BE ALLOWED FOR STATISTICAL PUR POSES. 10. AS FAR AS SUB-GROUND NO. (II) OF GROUND NO. 2 IS CONCERNED, ASSESSEE HAS OBJECTED TO SELECTION OF INFOSYS TECHN OLOGIES LTD AND WIPRO LTD. LD. AR SUBMITTED BEFORE US, THESE TWO CO MPANIES CANNOT BE TREATED AS COMPARABLES TO ASSESSEE AS THE TURNOV ER OF THESE COMPANIES ARE HUGE AND THESE COMPANIES ARE IN A DIF FERENT LEAGUE. LD. AR SUBMITTED, WHILE THE TURNOVER OF INFOSYS TEC HNOLOGIES LTD. DURING THE YEAR WAS RS. 15,677 CRORES THAT OF WIPRO LTD. WAS RS. 11,258, WHEREAS, ASSESSEES TURNOVER IS ONLY RS. 43 5 CRORES. THUS, THE TURNOVER OF THESE TWO COMPANIES BEING IN EXCESS OF 10 TIMES OF ASSESSEES TURNOVER, THESE TWO COMPANIES CANNOT BE TREATED AS COMPARABLE TO ASSESSEE. FOR SUCH PROPOSITION, LD. A R RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD, 262 CTR 291 AND A NUMBER OF DECISIONS OF ITAT AS REFERRED TO IN THE REVISED WRITTEN SUBMISSI ONS. 11. LD. DR, ON THE OTHER HAND, SUBMITTED BEFORE US, TWO COMPANIES OBJECTED TO BY ASSESSEE CANNOT BE TREATED AS UNCOMP ARABLE ONLY ON THE BASIS OF TURNOVER. REFERRING TO THE REASONING O F THE TPO/DRP, LD. DR SUBMITTED, TURNOVER HAS NO SIGNIFICANT EFFECT AS FAR AS MARGINS ARE CONCERNED. 12. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF RE VENUE AUTHORITIES. WE AGREE WITH THE SUBMISSION OF LD. DR THAT ONLY ON THE BASIS OF TURNOVER A COMPANY CANNOT BE TREATED AS UNCOMPARABL E. MORE SO, WHEN ASSESSEES TURNOVER IS ALSO EQUALLY HIGH. EVEN OTHERWISE ALSO, AS CAN BE SEEN, TPO HAS SELECTED SOME COMPARABLES W ITH VERY LESS TURNOVER COMPARED TO ASSESSEE. A REFERENCE OF FEW SUCH COMPANIES ARE AS UNDER: 1. AVANI TECHNOLOGIES RS. 2.93 CRORE 2. E-ZEST SOLUTIONS RS. 7.66 CRORES 14 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. 3. KALS INFORMATION SYSTEMS RS. 2.05 CRORES 4. BODHTREE SOLUTIONS LTD. RS. 10.43 CRORES 5. SOFT SOLUTIONS LTD. RS. 23.47 CRORES AS CAN BE SEEN, THE DIFFERENCE IN TURNOVER BETWEEN ASSESSEE IN COMPARISON TO INFOSYS TECHNOLOGIES LTD AND WIPRO LT D. IS MORE OR LESS IN THE SAME RANGE AS THE DIFFERENCE BETWEEN TH E TURNOVER OF ASSESSEE AND COMPANIES REFERRED TO HEREINABOVE. THU S, ON THE BASIS OF TURNOVER ALONE, THESE TWO COMPANIES CANNOT BE TR EATED AS UNCOMPARABLE CONSIDERING THE FACT THAT ASSESSEE HAS NO PROBLEM WITH SELECTION OF COMPANIES WITH VERY LOW TURNOVER. HOWE VER, IT IS WORTH MENTIONING, INFOSYS TECHNOLOGIES LTD AND WIPRO LTD ARE UNCOMPARABLE TO ASSESSEE FOR VARIOUS OTHER FACTORS SUCH AS BRAND NAME, ECONOMY OF SCALES, GOODWILL, DIVERSIFIED ACTI VITIES, OWNING OF INTANGIBLES. IT IS ACCEPTED FACT THAT THESE TWO COM PANIES ARE LEADING SOFTWARE COMPANIES AND HAVE CARVED OUT A SEPARATE P LACE FOR THEMSELVES. THEY ARE IN THEIR OWN LEAGUE AND CANNOT BE COMPARED TO ANY OTHER SOFTWARE DEVELOPMENT COMPANY. THE HONBLE DELHI HIGH COURT IN CASE OF CIT VS. AGNITY INDIA LTD. (SUPRA) HAS ALSO OBSERVED THAT BIG COMPANIES LIKE INFOSYS CANNOT BE CONSIDERE D AS COMPARABLE TO OTHER SOFTWARE DEVELOPMENT COMPANIES. DIFFERENT BENCHES OF ITAT HAVE ALSO EXPRESSED SIMILAR VIEW WHILE EXAMINING TH E COMPARABILITY OF INFOSYS TECHNOLOGIES LTD AND WIPRO LTD. IN VIEW OF THE AFORESAID, WE DIRECT TPO TO EXCLUDE THESE TWO COMPANIES FROM THE LIST OF COMPARABLES. IN VIEW OF THE ABOVE TPO IS DIRECTED T O COMPUTE, ALP AFRESH INTERMS WITH THE OBSERVATIONS MADE BY US HER EINABOVE. 13. IN GROUND NO. 3, ASSESSEE HAS CHALLENGED THE DI SALLOWANCE OF AN AMOUNT OF RS. 2,29,78,128 U/S 40(A)(I) OF THE AC T. 14. BRIEFLY THE FACTS ARE, DURING THE ASSESSMENT PR OCEEDING, AO NOTICED THAT ASSESSEE HAS DEBITED AN AMOUNT OF RS. 5,02,70,792 TOWARDS PURCHASE OF COMPUTER SOFTWARE. ON VERIFICAT ION OF THE DETAILS SUBMITTED BY ASSESSEE IN RESPONSE TO QUERY RAISED B Y AO, IT WAS 15 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. FOUND THAT OUT OF SUCH SUM DEBITED TO P&L A/C, AN A MOUNT OF RS. 2,29,78,128 REPRESENTS PAYMENTS MADE TO NON-RESIDEN T COMPANIES TOWARDS SOFTWARE LICENSES. AO BEING OF THE VIEW THA T AFORESAID PAYMENT MADE BY ASSESSEE BEING IN THE NATURE OF ROY ALTY AS EXPLAINED IN SECTION 9(1)(VI), ASSESSEE WAS REQUIRE D TO DEDUCT TAX U/S 195 OF THE ACT. AS ASSESSEE HAS NOT WITHHELD TAX ON SUCH PAYMENTS, AO PROPOSED TO DISALLOW THE AMOUNT CLAIMED AS EXPEN DITURE BY APPLYING SECTION 40(A)(I) OF THE ACT. THOUGH, ASSES SEE OBJECTING TO THE PROPOSED DISALLOWANCE ADVANCED ELABORATE ARGUME NTS EXPLAINING THAT THE PAYMENTS CANNOT BE TREATED AS ROYALTY, AO REJECTING ALL CONTENTIONS OF ASSESSEE DISALLOWED THE AMOUNT OF RS . 2,29,78,128 U/S 40(A)(I) BY HOLDING THAT SINCE PAYMENT MADE IS IN T HE NATURE OF ROYALTY, ASSESSEE WAS REQUIRED TO DEDUCT TAX U/S 19 5 OF THE ACT. BEING AGGRIEVED OF SUCH DISALLOWANCE ASSESSEE RAISED OBJE CTIONS BEFORE LD. DRP. HOWEVER, LD. DRP FOLLOWING ITS DECISION IN AY 2006-07 AND 2007-08 SUSTAINED THE DISALLOWANCE. 15. LD. AR MORE OR LESS REITERATING THE SUBMISSIONS MADE BEFORE DEPARTMENTAL AUTHORITIES SUBMITTED, ASSESSEE HAD PU RCHASED A SOFTWARE CALLED SMALL WORLD SOFTWARE FROM M/S G.E . NETWORK SOLUTIONS, NETHERLAND AND BUNDLED IT WITH ITS OWN S OFTWARE AND THUS CUSTOMIZED IT AND SOLD IT TO ITS OWN CUSTOMERS BOTH IN INDIA AND ABROAD. IT WAS SUBMITTED, M/S G.E. NETWORK SOLUTION S, NETHERLAND NEITHER HAS ANY PERMANENT ESTABLISHMENT IN INDIA NO R HAS ANY BUSINESS ACTIVITY GIVING RISE TO TAXABLE INCOME IN INDIA. THUS, IT WAS SUBMITTED, THE PROVISIONS OF SECTION 195 ARE NOT AP PLICABLE TO THE PAYMENTS MADE TO M/S G.E. NETWORK SOLUTIONS, NETHER LAND. LD. AR FURTHER SUBMITTED, THE ISSUE IS SQUARELY COVERED I N FAVOUR OF ASSESSEE BY THE ORDER OF ITAT, HYDERABAD BENCHES IN ASSESSEES OWN CASE FOR AY 2006-07 AND 2007-08 WHEREIN THE TRI BUNAL AFTER ANALYISNG THE FACTS AND ALSO THE NATURE OF PAYMENTS AS WELL AS KEEPING IN VIEW THE DOUBLE TAXATION AVOIDANCE AGREE MENT (DTTA) BETWEEN INDIA AND NETHERLANDS HELD THAT NO TAX IS R EQUIRED TO BE 16 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. DEDUCTED AT SOURCE U/S 195 OF THE ACT, HENCE DELETE D THE ADDITION. HE SUBMITTED, THE VIEW EXPRESSED BY THE TRIBUNAL ALSO WAS UPHELD BY THE JURISDICTIONAL HIGH COURT WHILE DISMISSING DEPARTME NTS APPEAL IN ORDER DATED 25/07/14 PASSED IN ITTA NO. 485 OF 201 4. LD. AR FURTHER SUBMITTED, THE SAME VIEW WAS REITERATED BY ITAT WHI LE DECIDING ASSESSEES APPEAL ON IDENTICAL ISSUE IN AYS 2004-05 AND 2005-06 IN ITA NOS. 1451 TO 1453/HYD/2013. 16. LD. DR, ON THE OTHER HAND, WHILE ACCEPTING THE FACT THAT THE ISSUE IS COVERED BY THE DECISIONS OF ITAT NEVERTHEL ESS RELIED UPON THE REASONING OF THE AO AS WELL AS LD. DRP. 17. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIAL ON RECORD. THERE IS NO DISPUTE TO THE FACTUAL ASPECT THAT AN AMOUNT OF RS. 2,29,78,128 WAS PAID TO M/S G.E. N ETWORK SOLUTIONS, NETHERLANDS TOWARDS PURCHASE OF A SOFTW ARE CALLED SMALL WORLD SOFTWARE. THE DEPARTMENT HAS ALSO NOT CONTRO VERTED THE FACT THAT M/S G.E. NETWORK SOLUTIONS, NETHERLANDS NEITH ER HAS PERMANENT ESTABLISHMENT IN INDIA NOR HAS ANY BUSINESS ACTIVIT Y IN INDIA GIVING RISE TO INCOME TAXABLE UNDER THE INDIAN INCOME-TAX ACT. IT IS FURTHER EVIDENT FROM THE RECORD THAT LD. DRP WHILE CONFIRMI NG THE DISALLOWANCE HAS RELIED UPON ITS FINDING IN AY 2006 -07 AND 2007-08. IT WILL BE PERTINENT TO MENTION HERE, WHEN SIMILAR ISS UE RELATING TO DISALLOWANCE OF AMOUNTS PAID TO M/S G.E. NETWORK SO LUTIONS, NETHERLANDS TOWARDS PURCHASE OF SMALL WORLD SOFTWA RE CAME UP FOR CONSIDERATION BEFORE THE ITAT IN ASSESSEES OWN CAS E FOR AYS 2006- 07 AND 2007-08, THE TRIBUNAL AFTER CONSIDERING THE NATURE OF PAYMENT AND GOING THROUGH THE INDO-NETHERLANDS DTAA IN THE CONTEXT OF PROVISIONS CONTAINED U/S 195 READ WITH SECTION 9(1) (VI) OF THE ACT, HELD THAT THE PAYMENTS MADE BY ASSESSEE TO M/S G.E. NETWORK SOLUTIONS, NETHERLANDS IS NOT IN THE NATURE OF ROYA LTY. FURTHER, THE TRIBUNAL HELD THAT WHEN THE PAYMENT MADE TO NON RES IDENTS IS NOT ASSESSABLE TO TAX UNDER THE INDIAN INCOME-TAX ACT, THERE CANNOT BE ANY WITHHOLDING OF TAX U/S 195 AND CONSEQUENTIALLY NO DISALLOWANCE 17 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. CAN BE MADE U/S 40(A)(I). THE FINDINGS OF THE COORD INATE BENCH ARE EXTRACTED HEREUNDER FOR THE SAKE OF CONVENIENCE: 24. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. WE FIND THAT THE DECISION IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT. LTD. VS. CIT 327 ITR 456 HAS CLEARLY STATED TH AT THE OBLIGATION TO DEDUCT TAX AT SOURCE IS HOWEVER LIMITED TO APPROPRIATE PRO PORTION OF INCOME CHARGEABLE UNDER THE ACT FORMING PART OF THE GROSS SUM OF MONEY PAYABLE TO THE NON-RESIDENT. IN OTHER WORDS, IF THE TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED. HENCE, TH E SHORT POINT IS THAT ONE HAS TO SEE WHETHER THE AMOUNT OF RS.52,55,881/- REP RESENTS AMOUNT CHARGEABLE TO TAX IN THE HANDS OF THE NON-RESIDENT BOTH IN TERMS OF SEC.9(1)(I) AND 9(1)(VI) OF THE I.T. ACT AND ALSO D TAA BETWEEN INDIA AND NETHERLANDS. 25. WE FIND THAT THE AMOUNT IN QUESTION IS NOT TAXA BLE U/S 9(1)(I) BECAUSE EVEN ASSUMING FOR A MOMENT THERE IS A BUSINESS CONN ECTION BETWEEN THE ASSESSEE AND THE FOREIGN SOFTWARE SUPPLIER THERE AR E NO OPERATIONS IN INDIA OF THE FOREIGN COMPANY TO WHICH INCOME MAY BE REASO NABLY ATTRIBUTED TO AS REQUIRED UNDER EXPLANATION 1(A) TO SECTION 9(1)(I) . HENCE WE FIND THERE IS NO APPLICABILITY OF S.9(1)(I) IN THE INSTANT CASE. 26. NOW WE ADDRESS THE ISSUE OF CHARACTERIZATION OF THESE PAYMENTS AS ROYALTY SO AS TO FALL UNDER SECTION 9(1)(VI) OR ART ICLE 12 OF INDIA-NETHERLANDS DTAA. WE FIND THAT THE ASSESSEE HAS PURCHASED THE S MALL WORLD SOFTWARE FROM NETHERLANDS AND BUNDLED IT WITH ITS OWN SOFTWA RE AND THUS CUSTOMISED IT AND SOLD IT TO ITS OWN CUSTOMERS BOTH IN INDIA A ND ABROAD. THE ASSESSEE CANNOT MEDDLE WITH THE COPIES OF THE SOFTWARE IN TH E PROCESS OF ITS CUSTOMIZATION. WE ALSO OBSERVE THAT THE ASSESSEE HA S TO PURCHASE THE SAID SOFTWARE EACH TIME IT WANTED TO SELL THE BUNDLED SO FTWARE TO ITS CUSTOMERS AND IF IT HAD GOT ANY RIGHT TO THE COPYRIGHT TO THE SAID SOFTWARE IT WOULD NOT HAVE BOUGHT IT EVERY TIME WHEN IT WANTED TO SELL. F URTHER, PERUSING THE BOOKS OF THE ASSESSEE AT PAGES 170 TO 175 OF THE PA PER BOOK, WE FIND THAT THERE ARE MULTIPLE PURCHASES OF SOFTWARE DURING THE YEAR AND EACH PURCHASE OF SINGLE ITEM ON SOFTWARE IS MERELY ONE THOUSAND R UPEES AND NOT HUGE AMOUNT. HENCE, WE ARE OF THE OPINION THAT THEY ARE SIMPLY PURCHASE COST OF TRADING GOODS ESPECIALLY WHEN THE LICENCE IN RESPEC T OF SOFTWARE IS NOT OBTAINED BY THE ASSESSEE AND THE PERPETUAL LICENCE IS GIVEN DIRECTLY TO THE END CUSTOMER BY THE VENDOR COMPANY. COPIES OF THE I NVOICE RAISED BY NET WORK SOLUTIONS ON THE ASSESSEE AND AT PAPER BOOK 17 6 TO 178 SUPPORT THE VIEW OF THE ASSESSEE WHERE THE INVOICE MENTIONING N AME OF THE END CUSTOMER SUPPORTS OUR VIEW. HENCE, IN OUR OPINION, WHEN THERE IS NO TRANSFER OF EVEN THE LICENSE TO THE ASSESSEE EVEN T HOUGH IT IS THE PURCHASER, IT CANNOT BE SAID THAT THERE IS ANY ROYALTY PAYMENT BY THE ASSESSEE TO THE VENDOR COMPANY. THE AMOUNT OF RS.52,55,81/- IS SIMP LY THE COST OF IMPORTED TRADING GOODS AND NOT ROYALTY PAYMENT. 27. IT IS THEREFORE CLEAR THAT THE PAYMENTS MADE BY ASSESSEE TO THE NETHERLANDS COMPANY WILL NOT FALL UNDER THE AMBIT O F ROYALTY AS PER ARTICLE 12 OF THE INDIA-NETHERLANDS DTAA. HENCE THERE IS NO QUESTION OF TAX 18 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. WITHHOLDING REQUIRED BY THE ASSESSEE AND HENCE S.40 (A)(I) DISALLOWANCE IS ERRONEOUS. ACCORDINGLY, GROUND NO.5 IS ALLOWED. IT IS WORTH MENTIONING, DEPARTMENT CHALLENGED THE A FORESAID DECISION OF THE COORDINATE BENCH BY FILING AN APPEAL BEFORE THE JURISDICTIONAL HIGH COURT. THE HONBLE HIGH COURT, HOWEVER, DISMIS SED THE APPEAL OF THE DEPARTMENT ON THIS ISSUE BY UPHOLDING THE VIEW EXPRESSED BY THE COORDINATE BENCH. FURTHER, THE COORDINATE BENCH DEL ETED SIMILAR DISALLOWANCES MADE IN AYS 2004-05 AND 2005-06 IN I TA NOS. 1450 TO 1453/HYD/2013 DATED 25/03/2015 EXPRESSING SIMILAR V IEW. AS THE LD. DR HAS NOT BROUGHT TO OUR NOTICE ANY MATERIAL DIFFE RENCE IN THE FACTS IN THE IMPUGNED AY, RESPECTFULLY FOLLOWING THE DECI SIONS OF THE COORDINATE BENCH AND THE JURISDICTIONAL HIGH COURT, WE DELETE THE ADDITION MADE OF RS. 2,29,78,128. THUS, THIS GROUND RAISED BY ASSESSEE IS ALLOWED. 18. IN GROUND NO. 4, ASSESSEE HAS CHALLENGED THE DE CISION OF TPO/LD.DRP IN EXCLUDING THE COMMUNICATION EXPENSES FROM THE EXPORT TURNOVER WHILE GRANTING DEDUCTION U/S 10A. 19. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN CASE O F CIT VS. GEMPLUS JEWELLERY, 330 ITR 175 AND ITO VS SAKSOFT LTD (313 ITR AT 353 (CHENNAI) (SB). FOLLOWING THE RATIO LAID DOWN IN T HE AFORESAID JUDGMENTS, WE DIRECT THE AO TO EXCLUDE THE COMMUNIC ATION EXPENSES FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHIL E COMPUTING DEDUCTION U/S 10A OF THE ACT. 20. GROUND NO. 5 IS IN RESPECT OF DISALLOWANCE OF G UEST HOUSE MAINTENANCE EXPENDITURE OF RS. 18,28,883. 21. AS CAN BE SEEN, IN COURSE OF THE ASSESSMENT PRO CEEDING, AO NOTICED THAT ASSESSEE HAS DEBITED AN AMOUNT OF RS. 18,23,883 TO THE P&L A/C TOWARDS GUEST HOUSE MAINTENANCE . AS OBSERV ED BY AO, 19 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. THOUGH, ASSESSEE WAS ASKED TO PROVE THE DETAILS OF EXPENDITURE WITH DOCUMENTARY EVIDENCE, ASSESSEE FAILED TO PRODUCE TH E SAME. IN ABSENCE OF ANY EVIDENCE TO SUBSTANTIATE THE CLAIM O F EXPENDITURE, AO DISALLOWED THE SAME AND ADDED BACK TO THE TOTAL INC OME OF ASSESSEE. LD. DRP ALSO SUSTAINED THE ADDITION. 22. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. UNDISPUTEDLY, THOUGH, ASSE SSEE HAS CLAIMED THE EXPENDITURE TOWARDS MAINTENANCE OF GUEST HOUSE, BUT, HE HAS FAILED TO FURNISH ANY DOCUMENTARY EVIDENCE TOWARDS CLAIM OF SUCH EXPENDITURE. THEREFORE, ASSESSEES CLAIM OF EXPENDI TURE CANNOT BE ALLOWED IN FULL. HOWEVER, CONSIDERING THE FACT THAT ASSESSEE MAINTAINS GUEST HOUSE AND SOME EXPENDITURE MUST HA VE BEEN INCURRED TOWARDS MAINTENANCE OF THE SAME. IT WILL B E REASONABLE TO ALLOW 50% OF THE EXPENDITURE CLAIMED. ACCORDINGLY, WE DIRECT AO TO SUSTAIN THE ADDITION TO THE EXTENT OF 50% OF THE EX PENDITURE CLAIMED BY ASSESSEE. THIS GROUND IS PARTLY ALLOWED. 23. IN GROUND NO. 6, ASSESSEE HAS CHALLENGED THE DI SALLOWANCE OF PICNIC EXPENDITURE OF RS. 11,27,340. THIS ISSUE IS SIMILAR TO GROUND NO. 5. FOLLOWING THE DECISION THEREIN, WE DIRECT AO TO SUSTAIN THE ADDITION TO THE EXTENT OF 50% OF THE EXPENDITURE CL AIMED BY ASSESSEE. ITA NO. 395/HYD/2014 FOR AY 2009-10 24. GROUND NO. 1 & 7 BEING GENERAL, DO NOT REQUIRE ANY SPECIFIC ADJUDICATION, HENCE, THEY ARE DISMISSED. 25. IN GROUND NO. 2, ASSESSEE HAS CHALLENGED THE DI SALLOWANCE OF AN AMOUNT OF RS. 49,81,113 U/S 40(A)(I) OF THE ACT. 26. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IALS ON RECORD. THIS ISSUE IS IDENTICAL TO THE ISSUE RAISED BY ASSE SSEE IN GROUND NO. 3 OF ITA NO. 1780/HYD/14, FOLLOWING OUR DECISION TH EREIN AS EXPRESSED IN PARA NO. 17 OF THE ORDER WE DELETE THE ADDITION MADE BY AO. 20 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. 27. IN GROUND NO. 3, ASSESSEE HAS CHALLENGED THE DI SALLOWANCE OF CONSULTANCY FEES OF RS. 17,11,39,243 PAID TO ITS FO REIGN SUBSIDIARIES BY INVOKING THE PROVISIONS OF SECTION 40(A)(I). 28. BRIEFLY THE FACTS ARE, DURING THE ASSESSMENT PR OCEEDING, WHILE EXAMINING THE FINANCIAL STATEMENT OF ASSESSEE, AO N OTICED THAT ASSESSEE HAS CLAIMED PROFESSIONAL SERVICE CHARGES P AID TO THE TUNE OF RS. 38,40,02,762, OUT OF WHICH AN AMOUNT OF RS. 17,11,39,243 REPRESENTED TECHNICAL CONSULTANCY CHARGES PAID IN F OREIGN EXCHANGE TO OUTSIDE INDIA. ON FURTHER VERIFICATION OF THE IN FORMATION SUBMITTED BY ASSESSEE, IT WAS NOTICED BY AO THAT ASSESSEE HAS PAID SUCH CONSULTANCY FEES TO ITS FOREIGN SUBSIDIARIES WITHOU T DEDUCTING TAX AT SOURCE AS PER SECTION 195. HE, THEREFORE, PROPOSED TO DISALLOW THE SAME BY INVOKING SECTION 40(A)(I) OF THE ACT. THOUG H, ASSESSEE STRONGLY OBJECTED TO THE PROPOSED DISALLOWANCE, BUT , AO REJECTING THE CONTENTIONS OF ASSESSEE, DISALLOWED THE AMOUNT OF R S. 17,11,39,243 U/S 40(A)(I) BY ALLEGING VIOLATION OF SECTION 195 O F THE ACT. THOUGH, ASSESSEE OBJECTED TO SUCH DISALLOWANCE BEFORE LD. D RP, BUT, LD. DRP WITHOUT ANY DETAILED REASONING UPHELD THE DISALLOWA NCE MADE BY AO. 29. LD. AR SUBMITTED BEFORE US, THOUGH THE AMOUNT DISALLOWED IS DESCRIBED AS CONSULTANCY CHARGES, BUT, THEY ARE ACT UALLY SOFTWARE DEVELOPMENT CHARGES PAID BY ASSESSEE TO ITS NON-RES IDENT SUBSIDIARIES FOR THE WORK DONE BY THEM. REFERRING T O THE DETAILS OF WORK DONE AND PAYMENTS MADE, LD. AR SUBMITTED, ASSE SSEE HAD A CONTRACTUAL AGREEMENT WITH UNITED TECHNOLOGIES ( PR ATT AND WHITNEY), USA TO RENDER SOME SOFTWARE DEVELOPMENT SERVICES. I T WAS SUBMITTED, IN THE PROCESS OF FULFILLING THE CONTRACTUAL OBLIGA TIONS, ASSESSEE PARCELED OUT A PORTION OF WORK TO ITS NON-RESIDENT SUBSIDIARIES FOR RENDERING ONSITE SERVICES AND THE PAYMENTS MADE WER E TOWARDS SERVICES RENDERED BY SUBSIDIARIES FOR SOFTWARE DEVE LOPMENT WORK SUB- CONTRACTED TO THEM. IN THIS CONTEXT, LD. AR DREW OU R ATTENTION TO THE MASTER SERVICE AGREEMENT BETWEEN ASSESSEE AND UNI TED TECHNOLOGIES (PRATT AND WHITNEY), SALES AGREEMENT E NTERED BY 21 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. ASSESSEE WITH ITS SUBSIDIARIES. LD. AR SUBMITTED, A SSESSEE HAS NOT OBTAINED ORDERS FOR THE NON-RESIDENT SUBSIDIARIES. IN FACT THE ORDERS WERE OBTAINED BY ASSESSEE ITSELF AND ONLY A PORTION OF THE WORK WAS SUB-CONTRACTED TO NON-RESIDENT SUBSIDIARIES FOR CON VENIENCE AND TO MEET DELIVERY SCHEDULES. LD. AR SUBMITTED, THE ISSU E IS MORE OR LESS COVERED BY THE DECISION OF THE ITAT, HYDERABAD BENC HES IN ASSESSEES OWN CASE FOR AY 2006-07 AND 2007-08 IN I TA NOS. 115 & 2184/HYD/2011 DATED 16/01/14 AS THE TRIBUNAL WHILE CONSIDERING SIMILAR DISALLOWANCE MADE IN THESE ASSESSMENT YEARS DELETED THE ADDITIONS WHILE HOLDING THAT PAYMENTS MADE WERE TOW ARDS SOFTWARE DEVELOPMENT CHARGES AND NOT CONSULTANCY CHARGES. LD . AR SUBMITTED, THE ORDER PASSED BY THE TRIBUNAL ON THIS ISSUE WAS ACCEPTED BY THE DEPARTMENT AS NO APPEAL WAS PREFERRED BEFORE THE HO NBLE HIGH COURT ON THIS ISSUE. HE FURTHER SUBMITTED, SAME VIEW WAS EXPRESSED BY THE TRIBUNAL WHILE DISPOSING ASSESSEES APPEALS FOR AYS 2002-03, 2004- 05 AND 2005-06 IN ORDER DATED 25/03/2015 IN ITA NO S. 1450, 1452 AND 1453/HYD/2013. THUS, HE SUBMITTED, ADDITION MAD E HAS TO BE DELETED. 30. LD. DR, THOUGH, AGREED THAT THE ISSUE IS COVERE D BY THE DECISIONS OF ITAT IN ASSESSEES OWN CASE, BUT, SHE SUPPORTED THE REASONING OF AO AND LD. DRP. 31. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE RELEVANT MATERIAL ON RECORD. ON PERUSING THE MA STER SERVICE AGREEMENT BETWEEN ASSESSEE AND PRATT & WHITNEY AS W ELL AS INTER COMPANY AGREEMENT, WE FIND MERIT IN ASSESSEES CONT ENTION THAT THE AMOUNTS PAID WERE ACTUALLY TOWARDS SOFTWARE DEVELOP MENT CHARGES TOWARDS A PORTION OF WORK SUB-CONTRACTED TO THE NON -RESIDENT SUBSIDIARIES, THOUGH IN THE ACCOUNTS, IT HAS BEEN T ERMED AS CONSULTANCY CHARGES. IN FACT SIMILAR PAYMENTS MADE TO FOREIGN SUBSIDIARIES ARISING OUT OF THE SAME AGREEMENT WERE SUBJECT MATTER OF ADDITION IN AY 2006-07 AND 2007-08. HOWEVER, WHEN THE MATTER CAME UP FOR CONSIDERING BEFORE THE ITAT, THE COORDI NATE BENCH OF THIS 22 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. TRIBUNAL AFTER EXAMINING IN DETAIL THE AGREEMENTS B ETWEEN THE PARTIES, THE NATURE OF PAYMENT VIS--VIS DTAA AND ALSO KEEPI NG IN VIEW THE RELEVANT STATUTORY PROVISIONS CAME TO A CATEGORICAL FINDING THAT THE PAYMENTS MADE DO NOT ATTRACT THE PROVISIONS OF SECT ION 195 OF THE ACT AND DELETED THE ADDITION MADE U/S 40(A)(I). THE REL EVANT EXTRACT FROM THE ORDER OF THE TRIBUNAL HAS ALREADY BEEN REPRODUC ED IN THE EARLIER PART OF THIS ORDER. (VIDE PARAGRAPH NO. 9). IT IS A LSO A FACT ON RECORD THAT THE DEPARTMENT HAS ACCEPTED THE AFORESAID FIND ING OF THE COORDINATE BENCH SINCE NO APPEAL WAS PREFERRED ON T HIS ISSUE BEFORE THE HONBLE HIGH COURT. AS THE FACTS INVOLVED IN T HE IMPUGNED AY IS MATERIALLY SAME, AND NO CONTRARY FACT HAS BEEN BROU GHT TO OUR NOTICE BY LD. DR, RESPECTFULLY FOLLOWING THE DECISION OF T HE COORDINATE BENCH IN AYS 2006-07 AD 2007-08 (SUPRA), WE HOLD THAT THE PAYMENTS MADE TO THE FOREIGN SUBSIDIARIES ARE OUTSIDE THE PURVIEW OF SECTION 195 OF THE ACT, HENCE, DISALLOWANCE MADE U/S 40(A)(I) CANN OT BE SUSTAINED. ACCORDINGLY, WE DELETE THE SAME. 32. IN GROUND NO. 4, ASSESSEE HAS CHALLENGED THE DI SALLOWANCE OF AN AMOUNT OF RS. 1,23,19,993 CLAIMED AS DEDUCTION T OWARDS STORES AND SPARES WRITTEN OFF. 33. BRIEFLY THE FACTS ARE, WHILE EXAMINING THE FINA L ACCOUNTS OF ASSESSEE, AO NOTICED THAT ASSESSEE HAS CLAIMED AN A MOUNT OF RS. 1,23,19,993 AS STORES AND SPARES BEING WRITTEN OFF. ON VERIFYING THE DETAILS SUBMITTED BY ASSESSEE, HE NOTICED THAT THE SPARES WRITTEN OFF WERE HARD DISK, R&D MATERIAL, SOFT MOUSE AND DAT DR IVES, MODEMS, DELL HARDWARE, MB RAM ETC. AO OBSERVED THAT ALL THE SE ITEMS ARE FIXED ASSETS RELATING TO COMPUTERS, HENCE, ARE IN T HE NATURE OF CAPITAL ASSET. HE OPINED THAT REPLACEMENT OF THE SPARES OF A CAPITAL ASSET IS AN EXPENDITURE, WHICH IS CAPITAL IN NATURE, HENCE, CANNOT BE ALLOWED AS A REVENUE EXPENDITURE. HOWEVER, HE HELD THAT ASS ESSEE IS ENTITLED FOR DEPRECIATION ON SUCH AMOUNT OF EXPENDITURE. ACC ORDINGLY, AFTER ALLOWING DEPRECIATION FOR AN AMOUNT OF RS. 30,79,99 8, AO DISALLOWED THE BALANCE AMOUNT OF RS. 92,39,994. BEING AGGRIEVE D OF SUCH 23 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. DISALLOWANCE MADE BY AO, ASSESSEE OBJECTED BEFORE L D. DRP. LD. DRP, HOWEVER, REJECTING OBJECTIONS OF ASSESSEE UPHE LD THE DISALLOWANCE. 34. LD. AR SUBMITTED BEFORE US, THE EXPENDITURE CLA IMED IS ALLOWABLE EITHER U/S 31 OF THE ACT AS CURRENT REPAI RS OR U/S 37 AS REVENUE EXPENDITURE. HE SUBMITTED, SIMILAR EXPENDIT URE CLAIMED BY ASSESSEE IN AY 2008-09 WAS ALLOWED BY LD. DRP FOLLO WING THE DECISION OF THE JURISDICTIONAL HIGH COURT, HENCE, T HERE IS NO REASON WHY IT WAS DISALLOWED IN THE IMPUGNED AY. 35. LD. DR, HOWEVER, RELIED UPON THE ASSESSMENT ORD ER. 36. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIAL ON RECORD. THERE IS NO DISPUTE WITH RE GARD TO THE FACT THAT THE EXPENDITURE CLAIMED BY ASSESSEE RELATES TO REPL ACEMENT OF CERTAIN SPARES TO THE COMPUTER WHICH WAS CLAIMED AS REVENUE EXPENDITURE. AS EVIDENT FROM RECORD, SIMILAR EXPENDITURE CLAIMED BY ASSESSEE IN AY 2008-09 WAS ALLOWED BY LD. DRP FOLLOWING ITS OWN ORDER PASSED IN AY 2006-07 AND 2007-08. HOWEVER, IN THE IMPUGNED AY , AO HAS AGAIN TREATED THE EXPENDITURE AS CAPITAL IN NATURE. CONSIDERING THE AFORESAID FACTUAL ASPECT, WE REMIT THE MATTER BACK TO THE FILE OF AO TO VERIFY THE NATURE OF EXPENDITURE VIS--VIS- THE EX PENDITURE CLAIMED IN AY 2006-07, 2007-08 AND 2008-09. IF, ON VERIFICATI ON, THE NATURE OF EXPENDITURE IS FOUND TO BE SAME, THEN, THE EXPENDIT URE CLAIMED HAS TO BE ALLOWED AS LD. DRP IN AYS 2006-07, 2007-08 AND 2 008-09 HAS ALLOWED SUCH EXPENDITURE AS REVENUE EXPENDITURE. TH IS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 37. IN GROUND NO. 5, ASSESSEE HAS CHALLENGED THE DE CISION OF TPO/LD.DRP IN EXCLUDING THE COMMUNICATION EXPENSES FROM THE EXPORT TURNOVER WHILE GRANTING DEDUCTION U/S 10A. 24 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD.. 38. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN CASE O F CIT VS. GEMPLUS JEWELLERY, 330 ITR 175 AND ITO VS SAKSOFT LTD (313 ITR (AT) 353 (CHENNAI) (SB). FOLLOWING THE RATIO LAID DOWN IN T HE AFORESAID JUDGMENTS, WE DIRECT THE AO TO EXCLUDE TH E COMMUNICATION EXPENSES FROM EXPORT TURNOVER AS WELL AS TOTAL TURN OVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. 39. GROUND NO. 6 IS WITH REGARD TO GUEST HOUSE EXPE NDITURE, PICNIC EXPENDITURE AND MISCELLANEOUS EXPENDITURE. 40. THIS ISSUE IS SIMILAR TO GROUND NO. 5 & 6 RAISE D IN ITA NO. 1780/HYD/2012. FOLLOWING THE DECISION THEREIN, WE D IRECT AO TO SUSTAIN THE ADDITION TO THE EXTENT OF 50% OF THE EX PENDITURE CLAIMED BY ASSESSEE. 41. IN THE RESULT, BOTH THE APPEALS OF ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 30 TH APRIL, 2015 SD/- SD/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEM BER HYDERABAD, DATED: 30 TH APRIL, 2015 KV COPY TO:- 1) CYIENT LTD., 4 TH FLOOR, A WING, PLOT NO. 11, SOFTWARE UNITS LAYOUT, INFOCITY, MADHAPUR, HYDERABAD 500 08 2 2) DCIT, CIRCLE 2(1), ROOM NO. 825, B BLOCK, 8 TH FLOOR, IT TOWERS, HYDERABAD. 3 DRP, HYDERABAD 4) DIT, INTERNATIONAL TAXATION, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 25 ITA NOS. 1780/H/2012 & 395/HYD/2014 CYIENT LTD..