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

ITA 1903/HYD/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5543 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-06-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 09-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Keywords: Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Wholly owned subsidiary; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 143(3); 92B; 234B; 14A; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1903/HYD/11 ASSESSMENT YEAR: 2007-08. FOUR SOFT PVT. LIMITED, -VS- DCIT, CIR-1(3) HYDERABAD. HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY S/SHRI DEEPAK CHOPRA & RAVI BHARADWAJ DEPARTMENT BY SRI P. SOMASEKHAR REDDY (DR) DATE OF HEARING 09-01-2014 DATE OF PRONOUNCEMENT 28-03-2014 ORDER PER SAKTIJIT DEY, J.M: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ASSESSMENT ORDER PASSED U/S 143(3) READ WITH SEC. 144C OF THE ACT PERTAINING TO THE ASSESSMENT YEAR 2007-08. 2. BRIEFLY STATED, ASSESSEE IS A PRIVATE LIMITED COMPANY. THE ASSESSEE HAS FOLLOWING WHOLLY OWNED SUBSIDIARIES OV ERSEAS WHICH ARE ITS ASSOCIATED ENTERPRISES(AE):- 1. FOUR SOFT DENMARK A/S 2. FOUR SOFT SINGAPORE PTE LTD 3. FOUR SOFT BV NETHERLAND 4. FOUR SOFT MALAYSIA SDN BHD 2 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 3. BESIDES, THE ASSESSEE COMPANY ALSO EXERCISES CONTROL OVER FOUR SUBSIDIARIES IN USA, NETHERLAND, GERMANY AND U.K. T HROUGH ITS WHOLLY OWNED SUBSIDIARY IN NETHERLANDS. THE ASSESSEE COMP ANY BASICALLY IS ENGAGED IN PROVIDING SERVICES IN ENTERPRISE SOLUTI ONS BY OPERATING SOFTWARE PRODUCTS AND SERVICES IN ITES SECTOR FOR T HE LOGISTICS AND SUPPLY CHAIN MANAGEMENT MARKET PLACE. AS STATED BY THE ASSESSEE, AS A RESULT OF GLOBAL ACQUISITIONS AND EXPANSIONS THE ASSESSEE AND ITS ROUTE COMPANIES HAVE ESTABLISHED IN MORE THAN 10 COUNTRIE S WITH 379 CUSTOMER INSTALLATIONS. THE ASSESSEE, FOR THE IMPUG NED ASSESSMENT YEAR FILED ITS RETURN OF INCOME ON 30-10-2007 DECLA RING TOTAL INCOME OF RS.93,22,780/- AFTER CLAIMING DEDUCTION U/S 10A OF THE ACT. DURING THE FINANCIAL YEAR 2006-07 RELEVANT TO THE ASSESSMENT Y EAR UNDER DISPUTE, THE ASSESSEE DECLARED INTERNATIONAL TRANSACTIONS WI TH ITS AE AS UNDER:- 1. PROVISION OF SOFTWARE SERVICES TO AES RS.18, 75,30,850 2. RECEIPT OF SERVICES FROM AES RS.5,65,77,968 3. INTEREST RECEIVED ON LOANS TO SUBSIDIARY RS.25 ,80,423 4. REIMBURSEMENT TO AES RS.4,91,57,236/- 5. REIMBURSEMENTS BY AES RS.3,07,21,617 4. THAT APART, ASSESSEE HAS ENTERED INTO INTERN ATIONAL TRANSACTION WITH NON AES ALSO. THE TOTAL REVENUE EARNED TOWARDS PRO VISION OF SOFTWARE SERVICES BOTH TO AES AND NON AES IS TO THE TUNE OF RS.36,49,46,821/-. AFTER DEDUCTING OPERATING COST OF RS.31,79,98,626/- , THE MARGIN SHOWN BY THE ASSESSEE IS RS.4,69,48,195/- WHICH WORKED OU T TO 14.76% OF THE REVENUE EARNED. FOR THE PURPOSE OF ESTABLISHING AR MS LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTIONS WITH AES, ASSES SEE UNDERTOOK A TRANSFER PRICING STUDY CARRIED OUT BY AN INDEPENDEN T EXTERNAL CONSULTANT. AS PER THE FUNCTIONAL ANALYSIS, ASSESSEE HAVING BEE N CATEGORISED AS A RISK MITIGATED CONTRACT SERVICE PROVIDER WAS SELECT ED AS TESTED PARTY IN 3 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. RESPECT OF THE PROVISION OF SOFTWARE SERVICES TO AE S. COMPARABLE UNCONTROLLED PRICE (CUP) METHOD WAS SELECTED AS MOS T APPROPRIATE METHOD TO DETERMINE THE ALP. AS THE DERIVED HOURLY RATE RECEIVED FROM THE AES WAS HIGHER THAN THE HOURLY RATE RECEIVED FR OM NON AES, THE TRANSACTION WAS CONCLUDED TO BE AT ARMS LENGTH. T HE ASSESSEE ALSO UNDERTOOK SUPPLEMENTARY ANALYSIS UNDER TRANSACTION NET MARGIN METHOD (TNMM) WITH OPERATING PROFIT TO OPERATING COST AS T HE PROFIT LEVEL INDICATOR (PLI) TO DETERMINE THE ALP. ON CONSIDERI NG THE NATURE OF INTERNATIONAL TRANSACTION, ECONOMIC CONDITIONS, DIF FERENCES IN BUSINESS OR PRODUCT LIFE CYCLES AND OTHER SIMILAR FACTORS AN D ALSO THE FACT THAT THE AUDITED FINANCIAL DATA FOR THE FINANCIAL YEAR 2006- 07 WAS NOT AVAILABLE IN ALL CASES, FINANCIAL DATA OF FINANCIAL YEAR 2004-05 AND FINANCIAL YEAR 2005-06 WAS ALSO CONSIDERED ALONG WITH FINANCIAL DA TA FOR THE FINANCIAL YEAR 2006-07. ON THE AFORESAID BASIS, A SEARCH WAS CARRIED OUT IN THE PUBLIC DATA BASES WHICH YIELDED 27 COMPARABLE COMPA NIES WITH WEIGHTED AVERAGE ARITHMETIC MEAN OF 14.2%. SINCE ASSESSEES OPERATING MARGIN IS SHOWN AT 14.76% AS AGAINST 14.2% OF THE COMPARAB LE COMPANIES, THE PRICE CHARGED FOR THE INTERNATIONAL TRANSACTIONS WI TH AES WAS CONSIDERED TO BE WITHIN ARMS LENGTH RANGE. 5. DURING THE SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICING THAT THE ASSESSEE HAD ENTERED INTO INTERNA TIONAL TRANSACTIONS, MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (T PO) FOR DETERMINING THE ARMS LENGTH PRICE. IN COURSE OF THE TP PROCEED INGS, THE TPO CALLED FOR VARIOUS INFORMATION FROM THE ASSESSEE AS WELL A S FROM OUTSIDE SOURCES U/S 133(6) OF THE ACT AND ON CONSIDERING TH E MATERIAL AVAILABLE ON RECORD REJECTED THE TP STUDY DONE BY THE ASSESSE E BY OBSERVING THAT THE SAME IS NOT RELIABLE DUE TO VARIOUS DEFECTS AND DEFICIENCIES AS NOTED BY THE TPO IN HIS ORDER. THE TPO REJECTING THE CUP METHOD ADOPTED BY THE ASSESSEE SELECTED TNMM AS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP. THE PRIMARY REASON FOR REJECTING THE TP STUDY IS, USE 4 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. OF MULTIPLE YEAR DATA AND NOT CONFINING TO THE FINA NCIAL DATA OF THE CURRENT FINANCIAL YEAR. THE TPO FURTHER OBSERVED T HAT THE ASSESSEE WHILE SELECTING/REJECTING COMPARABLES HAS NOT CONSI DERED THE VERTICALS/HORIZONTALS OF SOFTWARE INDUSTRY AND COMP ANIES ENGAGED IN SOFTWARE DEVELOPMENT WERE TREATED AS COMPARABLES ON A BROAD SPECTRUM. THE ASSESSING OFFICER DID NOT ACCEPT TH E CUP METHOD FOLLOWED BY THE ASSESSEE BECAUSE OF THE FACT THE A SSESSEE HAS ARRIVED AT THE AVERAGE RATES CHARGED TO AES FOR COMPARISON UNDER INTERNAL CUP. THE TPO ALLEGED THAT THE ASSESSEE HAS NOT FURNISHED ANY EVIDENCES AS TO HOW THE AVERAGE RATES WERE ARRIVED AT EVEN THOUG H A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. IT IS FURTHER M ENTIONED IN THE TP ORDER THAT SINCE THE ASSESSEE DID NOT FURNISH ANY E VIDENCE LIKE THE COST AUDIT ETC., AND ONLY FURNISHED A LETTER WHEREIN IT WAS STATED THAT AN INDEPENDENT CA WAS APPOINTED FOR VERIFYING THE HOUR LY RATE FOR THE SOFTWARE SERVICES PROVIDED TO THE AES AND NON AES. SINCE NO OTHER EVIDENCE WAS SUBMITTED BY THE ASSESSEE LIKE COST AUDIT ETC., THE TPO ISSUED SUMMONS TO THE CA WHO HAS WORKED OUT THE HO URLY RATE AND RECORDED A STATEMENT FROM HIM. AS NOTED BY THE TP O, THE CONCERNED CA SRI VENKATRAMAN STATED THAT THE AVERAGE RATE WAS ARRIVED AT BY HIM ON THE BASIS OF INFORMATION SUBMITTED BY THE ASSESS EE AND NOT ON THE BASIS OF BOOKS OF ACCOUNTS. WHEN A SPECIFIC QUERY WAS MADE WITH REGARD TO THE BASIS OF PRICING DONE BY THE ASSESSEE IN CHARGING THEIR SERVICES TO AES, THE CONCERNED CA STATED THAT HE IS NOT AWARE OF THE SAME. THE ASSESSING OFFICER NOTED THAT THE STATEME NT RECORDED FROM THE CA CLEARLY REVEALED THE FACT THAT THE ASSESSEE HAS NOT MAINTAINED ANY SEPARATE BOOKS OF ACCOUNTS FOR THE TRANSACTIONS ENTERED INTO WITH ITS AES AND NON AES. HE THEREFORE WAS OF THE VIEW THAT THE AVERAGE BILLING RATES WORKED OUT BY THE ASSESSEE CANNOT BE RELIED U PON FOR APPLYING THE ARMS LENGTH MARGIN FOR THE INTERNATIONAL TRANSACTI ONS ENTERED WITH ITS AES. THE TPO FURTHER NOTED THAT UNDER THE SEGMENT AL MARGIN WORKED 5 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. OUT IN RESPECT OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO THE AES AND NON AES, THE ASSESSEE HAS ALLOCATED DIFFERENT E XPENSES UNDER AES AND NON AES WHICH SHOWS THE SERVICES PROVIDED TO TH E AES AND NON AES CANNOT BE COMPARED. THE TPO WAS OF THE VIEW THAT I N CASE OF CUP THE FUNCTIONAL SIMILARITY BETWEEN THE SERVICES RENDERED BY TESTED PARTY AND THE UNCONTROLLED TRANSACTION IS MORE STRINGENT. IT IS VERY DIFFICULT TO GET THE DATA REGARDING THE MAN HOUR CHARGE FOR VARIOUS LEVELS OF EMPLOYEES IN THE CASE OF INDEPENDENT ENTERPRISES. THE TPO T HEREFORE FELT THAT CUP METHOD CANNOT BE CONSIDERED TO BE MOST APPROPRI ATE METHOD DUE TO NON AVAILABILITY OF RELIABLE DATA IN THE PUBLIC DOMAIN. HAVING REJECTED THE TP STUDY SUBMITTED BY THE ASSESSEE AND SELECTED TNMM AS THE MOST APPROPRIATE METHOD, THE TPO BY APPLYING CE RTAIN FILTERS PROCEEDED TO SEARCH DATA BASES FOR SELECTING COMPAR ABLES. IN THIS REGARD, THE TPO ALSO EXERCISED HIS POWERS UNDER SEC TION 133(6) OF THE ACT FOR OBTAINING INFORMATION FROM CERTAIN COMPANIE S. IN THE PROCESS THE TPO SELECTED 26 COMPANIES AS COMPARABLES WITH A N AVERAGE MARGIN OF 26.36%. WHILE DOING SO THE TPO INCLUDED REIMBURS EMENT TRANSACTIONS ALSO IN OPERATING COST AND ARRIVED AT THE ARMS LEN GTH PRICE OF INTERNATIONAL TRANSACTIONS WITH ITS AE FROM SOFTWAR E SERVICES AT RS.27,44,96,144/- WHICH RESULTED IN A TRANSFER PRIC ING ADJUSTMENT OF RS.3,78,08,058/-. APART FROM THE AFORESAID TP ADJ USTMENT ON ACCOUNT OF PROVISION FOR SOFTWARE DEVELOPMENT SERVICES TO A ES, THE TPO ALSO MADE TP ADJUSTMENT OF RS.17,72,097/- WITH REGARD TO INTEREST ON LOANS PROVIDED TO AES. WHILE ARRIVING AT AFORESAID TP AD JUSTMENT, THE TPO CONSIDERED BBB RATED BONDS IN INDIA AS COMPARABLE TRANSACTIONS AND DETERMINED THE BENCH MARK RATE OF 14%. THE TPO FUR THER NOTED THAT DURING THE YEAR UNDER CONSIDERATION THE LOAN PROVID ED BY THE ASSESSEE TO ITS SUBSIDIARY 4S NETHERLANDS OF RS.18,89,30,971 /- WAS CONVERTED INTO SHARE PREMIUM ON EXISTING EQUITY. THE TPO CONCLUDE D THAT THE EQUITY IS NOTHING BUT LOAN AND ACCORDINGLY MADE TP ADJUSTM ENT BY CHARGING 6 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. INTEREST AT THE RATE OF 14% WHICH AMOUNTED TO RS. 2,57,50,336/-. THE TPO ALSO NOTED THAT DURING THE YEAR THE ASSESSEE HA S PROVIDED CORPORATE GUARANTEE FOR THE LOAN TAKEN BY 4S BV FOR ACQUISITION OF DCS GROUP. THE TPO PROCEEDED TO DETERMINE THE ALP ON T HE CORPORATE GUARANTEE AT THE RATE OF 3.75% AND MADE AN ADJUSTME NT OF RS.2,61,79,350/-. THUS, THE TOTAL TP ADJUSTMENT REC OMMENDED BY THE TPO WAS TO THE TUNE OF RS.9,15,09,841/-. 6. IN CONSEQUENCE OF THE ORDER PASSED BY THE T PO, THE ASSESSING OFFICER PASSED A DRAFT ASSESSMENT ORDER INCORPORATI NG THE ADJUSTMENTS SUGGESTED BY THE TPO. THAT APART, THE ASSESSING OF FICER MADE FURTHER ADDITIONS BY RE-WORKING THE DEDUCTION U/S 10A OF TH E ACT AND MAKING DISALLOWANCE U/S14A. AS A RESULT, THE TOTAL INCOME WAS DETERMINED AT RS.11,59,47,911/- IN THE DRAFT ASSESSMENT ORDER. THE ASSESSEE CHALLENGED THE ADDITIONS PROPOSED IN THE DRAFT ASSE SSMENT ORDER BY FILING OBJECTIONS WITH THE DISPUTE RESOLUTION PANEL (DRP). THE DRP REJECTED ALMOST ALL THE CONTENTIONS OF THE ASSESSEE WITH REG ARD TO THE TRANSFER PRICING ISSUES EXCEPT IN RESPECT ONE OF THE COMPARA BLES SELECTED BY THE TPO VIZ., M/S CELESTIAL LABS, WHICH THE DRP EXCLUDE D FROM THE LIST OF COMPARABLES. AS A RESULT OF WHICH THE ARMS LENGTH MARGIN WAS REDUCED TO 25.1% CONSEQUENTLY RESULTING IN REDUCTION OF TP ADJUSTMENT TO RS.3,34,44,867/-. THAT APART, THE DRP ALSO DIRECTE D THE ASSESSING OFFICER TO ALLOW DEDUCTION/S 10A ON THE AMOUNT DISA LLOWED TOWARDS SOFTWARE EXPENSES. IN PURSUANCE TO THE DIRECTIONS OF THE DRP , THE ASSESSING OFFICER PASSED THE IMPUGNED ASSESSMENT OR DER RAISING A DEMAND OF RS.5,25,41,563/- INCLUDING INTEREST CHAR GED U/S 234B AND 234C OF THE ACT. 7. BEING AGGRIEVED OF THE ASSESSMENT ORDER SO PASSE D THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL RAISING A NUMBER O F GROUNDS. 7 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 8. GROUND NOS. 1 TO 15 RELATE TO TP ADJUSTMENT ON P ROVISION OF SOFTWARE DEVELOPMENT SERVICES. SINCE THE ISSUES RA ISED IN THE AFORESAID GROUNDS ARE OVERLAPPING, WE WILL DEAL WITH THE ISSU ES SPECIFICALLY ARGUED BY THE LEARNED AR BEFORE US AT THE TIME OF HEARING. THE LEARNED AR CONFINED HIS SUBMISSIONS TO THE FOLLOWING ISSUES WI TH REGARD TO THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. I) NON APPLICATION OF CUP/TNMM TO INTERNAL UNCONTRO LLED TRANSACTIONS OF THE ASSESSEE FOR DETERMINING ALP. II) BAD DEBTS, REIMBURSEMENTS SHOULD NOT BE INCLUDE D IN THE OPERATING COST. III) SELECTION OF INCOMPARABLE AS COMPARABLES BY TP O SO FAR AS THE FIRST AND SECOND ISSUES ARE CONCERNED , THE LEARNED AR SUBMITTED THAT THE TP PROVISIONS REQUIRE TESTING T HE ARMS LENGTH NATURE OF A TRANSACTION WITH AE BY COMPARING THE PRICE/MAR GINS OF THE CONTROLLED TRANSACTIONS WITH PRICE/MARGIN OF COMPARABLE TRANSA CTIONS UNDER COMPARABLE CIRCUMSTANCES ENGAGED BY UNCONTROLLED EN TERPRISES, IN OTHER WORDS, UNCONTROLLED TRANSACTIONS. IT WAS SUBMITTED THAT COMPARABILITY EXISTS IF THE UNCONTROLLED TRANSACTIONS AND CIRCUMS TANCES SUFFICIENTLY RESEMBLES THE ASSESSEES TRANSACTION TO PROVIDE A R ELIABLE MEASURE OF AN ARMS LENGTH PRICE/MARGIN. HE FURTHER SUBMITTED THAT RULE 10B PROVIDES THE COMPARABILITY CRITERIA FOR AN INTERNA TIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION. IN TERMS WITH THE AFO RESAID RULES THE ASSESSEE HAS FURNISHED ENOUGH EVIDENCE AND DATA TO SHOW THAT PRICE CHARGED FOR INTERNAL COMPARABLE TRANSACTIONS ARE AT PAR WITH EXTERNAL COMPARABLE TRANSACTIONS. THE LEARNED AR SUBMITTED T HAT THE TPO HAS ERRED IN COMPUTING THE OPERATING MARGIN FOR THE TRA NSACTIONS WITH AES AND NON AES AND ALSO ERRED IN ALLOCATING THE BAD DE BTS SUCH AS R & D TO THE AE SEGMENT WHICH APPARENTLY ARE IN RESPECT OF THIRD PARTY 8 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. TRANSACTIONS ONLY. IT WAS SUBMITTED THAT EVEN AS P ER THE COMPUTATION OF TPO THE MARGIN WITH THE AES AND NON AES IS THE SAM E. HENCE, THE TRANSACTION HAS TO BE HELD TO BE WITHIN ARMS LENGT H. THE LD. AR SUBMITTED THAT PROCESS ADOPTED BY THE TPO FOR DETER MINING ALP IS ERRONEOUS AS HE HAS INCLUDED IN THE OPERATING COST NET PAYABLE TO AES WHICH INCLUDES EXPENSES ALREADY DEBITED IN THE P&L A/C IN THE OPERATING COST FOR DETERMINING ALP OF THE INTRA GRO UP SOFTWARE SERVICES TRANSACTIONS. FURTHER, THE TPO INCLUDED REIMBURSEME NTS BY AES FOR PAYMENTS MADE ON THEIR BEHALF, IN OPERATING COST FO R DETERMINING ALP OF THE TRANSACTIONS RELATING TO PROVISION OF SOFTWARE SERVICES. HE SUBMITTED, THE AMOUNTS PAID ON BEHALF OF THE AES WERE RECOVERE D FROM THE AES AT COST. SIMILARLY, AES ALSO ON CERTAIN INSTANCES MAD E PAYMENTS ON BEHALF OF THE ASSESSEE WHICH WERE REIMBURSED TO THE AE. IT WAS SUBMITTED THAT THESE RECEIPTS/PAYMENTS WERE MADE AT COST WITHOUT M ARK UP BECAUSE THE AES FOR ADMINISTRATIVE CONVENIENCE PAID THE AMOUNTS ON BEHALF OF THE CLIENTS. NO SIGNIFICANT ADDITIONAL FUNCTIONS PERFOR MED OR RISKS ASSUMED BY THE ASSESSEE/AES AND PAYMENTS ARE NOT RELATED TO THE OPERATIONS OF THE ASSESSEE BUT THE AE. IN SUPPORT OF SUCH CONTENT ION, THE LEARNED AR RELIED UPON A DECISION OF THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO.1495/HYD/2010 DATED 9-9-2011 RELATING TO ASSESSMENT YEAR 2006-07. HE ALSO RELIED UPON THE FOLLOWING OTHER D ECISIONS:- 1. DESTINATION OF THE WORLD (SUBCONTINENT) (P.) LTD . VS. ACIT, DELHI INCOME-TAX APPELLATE TRIBUNAL (ITA NO. 5534 D EL 2010) 2. BIRLASOFT (INDIA) LTD. VS. DCIT (IT APPEAL NO. 3 830(DELHI) OF 2010) AND 3. M/S TECHNIMOUNT ICB PVT. LTD. VS. ACIT (2011-TII -31-INCOME- TAX APPELLATE TRIBUNAL-MUM-TP) 9. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT THE TPO HAS EXHAUSTIVELY DEALT WITH THIS ASPECT WHILE REJECTING THE TP DOCUMENTATION BY GIVING DETAILED REASONS. THEREFORE, THE ASSESS EES CONTENTION CANNOT BE ACCEPTED. 9 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 10. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD. ON PERUSAL OF THE TP ORDER IT IS TO BE SEEN THAT IN PARA 2.4.1 THE TPO HAS ADMITTED THAT THE ASSESSEE HAS SUBMITTED SEGMEN TAL FINANCIALS SEPARATELY IN RESPECT OF AE AND NON-AE TRANSACTIONS . AS PER THE AFORESAID SEGMENTAL FINANCIALS (REPRODUCED AT PAGE 4 OF TP ORDER), THE MARGIN IN RESPECT OF TRANSACTIONS WITH AES IS 39.26 % AS AGAINST MARGIN OF 6.30% IN RESPECT OF NON AE TRANSACTIONS. THEREFO RE, WHEN SEGMENTAL 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 HAS NOT PRO PERLY ALLOCATED THE SEGMENTAL EXPENDITURES. IF THE BAD DEBTS ETC. ARE N OT RELATED TO AE TRANSACTIONS THEY CANNOT BE CONSIDERED AS PART OF O PERATING COST FOR DETERMINING ALP OF THE TRANSACTIONS WITH AE. SIMILA RLY, REIMBURSEMENT ON COST TO COST BASIS ALSO CANNOT BE INCLUDED IN TH E OPERATING COST. UNFORTUNATELY, THE DRP WITHOUT DEALING WITH THIS IS SUE AT DEPTH HAS FINISHED ITS JOB BY SIMPLY COMMENTING THAT TPO HAS DEALT WITH THE ISSUE APPROPRIATELY. IN THIS CONTEXT, IT IS TO BE NOTED T HAT WHEN IDENTICAL ISSUE WAS AGITATED BY THE ASSESSEE BEFORE THE TRIBUNAL FO R THE ASSESSMENT YEAR 2006-07, A COORDINATE BENCH OF THIS TRIBUNAL IN ITA NO. 1495/HYD/10 DT. 09/09/2011 HELD AS UNDER: 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. FIRST, WE WILL TAKE UP THE ISSU E RELATING TO THE ADJUSTMENTS MADE BY THE ASSESSING OFFICER IN RESPEC T OF THE INTERNATIONAL TRANSACTIONS WITH FOUR SOFT LIMITED, HYDERABAD VS ASSESSEE ON 9 SEPTEMBER, 2011ITS ASSOCIATED ENTERPR ISES IN THE SOFTWARE DEVELOPMENT SERVICES. IT IS THE CONTENTION OF THE ASSESSEE THAT BAD DEBTS INCURRED BY THE ASSESSEE CO MPANY ARE IN RESPECT OF TRANSACTIONS, WHICH ARE NOT RELATED TO A SSOCIATED ENTERPRISES. THIS CONTENTION OF THE ASSESSEE HAS NO T BEEN CONTROVERTED BY THE REVENUE BY BRINGING ANY MATERIA L ON RECORD BEFORE US. IT IS THE CONTENTION OF THE LEARNED COUN SEL FOR THE ASSESSEE THAT SUCH BAD DEBTS CANNOT BE TAKEN INTO A CCOUNT FOR COMPUTING THE MARGIN OF THE ASSESSEE FROM THE TRANS ACTIONS WITH THE ASSOCIATED ENTERPRISES IN RESPECT OF SOFTWARE D EVELOPMENT 10 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. SERVICES. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO FILED BEFORE US A COMPARATIVE CHART EXPLAINING THE COMPUT ATION OF NET MARGIN, EXCLUDING THE BAD DEBTS AND CLEARLY DEMONST RATED BEFORE US THAT IF THE BAD DEBTS/REIMBURSEMENTS ARE EXCLUDE D FOR THE PURPOSE OF COMPUTING THE MARGINS ON THE TRANSACTION S RELATING TO THE ASSOCIATED ENTERPRISES, THE NET MARGIN COMES TO 19.07%, WHICH IS WELL COMPARABLE WITH THE ARMS LENGTH MARGI N OF 19% DETERMINED BY THE TRANSFER PRICING OFFICER. IN OUR CONSIDERED VIEW, FOR COMPUTING THE NET MARGIN OF THE ASSESSEE FOR TH E PURPOSES OF TRANSFER PRICING, ONLY THE COST RELATED TO THE TRAN SACTION WITH THE ASSOCIATED ENTERPRISES HAS TO BE CONSIDERED AND ACC ORDINGLY, WE APPROVE THAT SEGMENTAL FINANCIALS IS TO BE CONSIDER ED FOR THE PURPOSE OF ARRIVING AT THE NET MARGIN ON THE INTERN ATIONAL TRANSACTION WITH THE ASSESSEE'S ENTERPRISE IN RESPE CT OF SOFTWARE DEVELOPMENT SERVICES. IN THAT PROCESS, BAD DEBTS/RE IMBURSEMENTS HAS TO BE EXCLUDED AND SEGMENTAL PROFITABILITY HAS TO BE ADOPTED. WE FIND SUPPORT IN THIS BEHALF FROM VARIOUS DECISIO NS OF THE TRIBUNAL RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE DULY FILING COPIES THEREOF IN THE PAPER-BOOK, WHICH HAVE BEEN NOTED HEREINABOVE. THAT BEING SO, THE TPO SHOULD HAVE DET ERMINED THE ARMS LENGTH PRICE FOR THE INTERNATIONAL TRANSACTION S WITH ASSOCIATED ENTERPRISES CONSIDERING ONLY THE OPERATI NG COST ALLOCABLE TO THE ASSOCIATED ENTERPRISES SEGMENT. SI NCE THE ASSESSING OFFICER HAD NO OCCASION TO VERIFY THE VER ACITY OF THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPA NY, FOR LIMITED PURPOSE, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPA NY AND ADOPT THE SAME FOR ARRIVING AT THE NET MARGIN ON TH E INTERNATIONAL TRANSACTION WITH AES IN RESPECT OF SOFTWARE DEVELOP MENT SERVICES. WE DIRECT ACCORDINGLY. RESPECTFULLY FOLLOWING THE AFORESAID OBSERVATION OF THE COORDINATE BENCH IN ASSESSEES OWN CASE, WE REMIT THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER/TPO TO DETERMINE THE ALP IN TERMS WITH THE DIRECTION OF THE COORDINATE BENCH EXTRACTED HEREINABOVE. ANOT HER CONTENTION OF THE LD. AR IS WHILE MAKING TP ADJUSTMENT AND COMPUT ING WORKING CAPITAL ADJUSTMENT UNDER TNMM, THE TPO HAS CONSIDERED MARGI NS AT THE ENTITY LEVEL. IT WAS THEREFORE CONTENDED THAT THE TP ADJUS TMENT HAS TO BE RESTRICTED ONLY TO TRANSACTIONS WITH AE. WE FIND FO RCE IN THE CONTENTIONS OF THE LD. AR. THE ASSESSING OFFICER/TPO IS DIRECTE D TO DETERMINE THE 11 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. ALP ONLY CONSIDERING THE RECEIVABLES AND PAYABLES I N RESPECT OF TRANSACTIONS WITH AES ONLY. 11. THE NEXT ISSUE IS WITH REGARD TO SELECTION OF C ERTAIN COMPANIES AS COMPARABLES. THOUGH, IN VIEW OF OUR DIRECTION IN PA RA 10 ABOVE THE OTHER ISSUES RELATING TO DETERMINATION OF ALP OF SO FTWARE DEVELOPMENT SERVICES MAY HAVE BECOME REDUNDANT, BUT CONSIDERING THE FACT THAT PARTIES WERE HEARD AT LENGTH ON THE ISSUE OF SELECT ION OF CERTAIN COMPARABLES BY THE TPO, WE PREFER TO RECORD OUR FIN DING IN RESPECT OF EACH OF THEM AS UNDER:- AVANI CIMCON TECHNOLOGIES LIMITED:- 11.1 THE LEARNED AR SUBMITTED THAT THE AFORESAID C OMPANY CANNOT BE TREATED AS COMPARABLE TO THE ASSESSEE AS IT IS NO T A PURELY SOFTWARE SERVICE PROVIDER AND HAS REVENUE FROM PRODUCTS AL SO. THE SEGMENTAL DETAILS OF THE SAID COMPANY ARE ALSO NOT AVAILABLE IN THE PUBLIC DOMAIN. IT WAS FURTHER CONTENDED BY THE LEARNED AR THAT THE EX-ORDINARILY HIGH MARGIN OF PROFIT AT 52.59% SHOWN BY THE COMPANY ALS O MAKES IT INCOMPARABLE TO THE ASSESSEE. IN SUPPORT OF SUCH CONTENTION, THE LEARNED AR RELIED ON A NUMBER OF DECISIONS OF DIFF ERENT BENCHES OF THE TRIBUNAL INCLUDING HYDERABAD BENCHES, COPIES OF WHI CH ARE PLACED IN PAPER BOOK. 11.2 THE LEARNED DR, ON THE OTHER HAND, SUBMITTED THAT THE TPO HAS SELECTED THE COMPARABLES AFTER CONSIDERING ALL ASPECTS AND AFFORDING DUE OPPORTUNITY TO THE ASSESSEE. THEREFORE, THERE B EING FUNCTIONAL SIMILARITY BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANY IT CANNOT BE TREATED AS INCOMPARABLE. 11.3 WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OT HER MATERIAL ON RECORD. THE ASSESSEE HAS BASICALLY SOUGHT EXCLUSION OF AFOR ESAID COMPANY ON 12 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. TWO GROUNDS, FIRSTLY, THIS COMPANY HAS REVENUE FROM BOTH PRODUCT AND SOFTWARE SERVICES AND SEGMENT-WISE DATA IS NOT AVAI LABLE AND SECONDLY, IT IS CONTENDED THAT THE COMPANY HAS SHOWN SUPER NORMAL PROFIT OF 52.59% AGAINST AVERAGE MARGIN OF OTHER COMPARABLES. IT IS VERY MUCH EVIDENT FROM THE TP ORDER THAT THE ASSESSEE HAS BEE N CATEGORISED AS A SOFTWARE DEVELOPMENT SERVICE PROVIDER. COORDINATE B ENCH OF THIS TRIBUNAL IN THE CASE OF VIRTUSA (INDIA) PVT. LTD. ( ITA NO. 1962/HYD/2011 DATED 30/08/2013) AFTER FOLLOWING SOME OTHER DECISI ONS OF THE TRIBUNAL HAS HELD THIS COMPANY NOT TO BE TREATED AS COMPARAB LE AS THIS COMPANY IS ALSO INTO PRODUCT DEVELOPMENT. AS SEGMENTAL DET AILS OF OPERATING INCOME OF SOFTWARE DEVELOPMENT SERVICES AND SALE OF SOFTWARE PRODUCTS ARE NOT AVAILABLE, IT COULD NOT BE ASCERTAINED WHET HER THE PROFIT RATIO OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR CO MPARING WITH THE ASSESSEE. AS THE AFORESAID DECISION OF THE COORDINA TE BENCH PERTAINED TO THE SAME ASSESSMENT YEAR I.E. AY 2007-08, FOLLOW ING THE SAME WE HOLD THAT THIS COMPANY CANNOT BE TREATED AS COMPARA BLE TO THE ASSESSEE. INFOSYS TECHNOLOGIES LTD. & WIPRO LIMITED 11.4 OBJECTING TO THE AFORESAID COMPANIES BEING TR EATED AS COMPARABLES, THE LEARNED AR SUBMITTED THAT THESE T WO COMPANIES CANNOT BE CONSIDERED TO BE COMPARABLE TO A CAPTIVE SERVICE PROVIDER LIKE THE ASSESSEE , NOT ONLY BECAUSE OF THE QUANTUM OF REVENUE EARNED BY THEM BUT ALSO ON ACCOUNT OF VARIOUS OTHER FACTOR S. IT WAS SUBMITTED THAT THESE COMPANIES COMMAND A PREMIUM IN THE PRICI NG OF THEIR PRODUCTS AND SERVICES DUE TO THE GOODWILL, REPUTATI ON AND BRAND VALUE. IT WAS SUBMITTED THAT DUE TO SCALE OF OPERATION THE Y NOT ONLY ENJOY ECONOMIES OF SCALE IN THE LOWER COST OF INFRASTRUCT URE FACILITIES AND EMPLOYEES BUT ALSO EARNING PROFIT. IT WAS SUBMITTE D THAT BOTH THE COMPANIES HAVE DIVERSIFIED ACTIVITIES INCLUDING PRO DUCTS, CONSULTANCY 13 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. AND SOLUTIONS. BOTH THESE COMPANIES OWN INTANGIBLES AND ASSUME CONSIDERABLE RISK WHICH RESULTS IN EARNING HIGHER P ROFITS. IN SUPPORT OF SUCH CONTENTION THE LD. AR RELIED UPON A NUMBER OF DECISIONS, COPIES OF WHICH ARE PLACED IN THE PAPER BOOK. 11.5 THE LEARNED DR STRONGLY CONTESTING THE CONTEN TIONS OF THE ASSESSEE SUBMITTED THAT SO FAR AS INFOSYS TECHNOLOG IES IS CONCERNED, THE ASSESSEE ITSELF HAS SELECTED THE SAID COMPANY IN THE TP DOCUMENTATION. THEREFORE, THE ASSESSEE CANNOT AGAI N OBJECT TO THE TPO SELECTING THE SAID COMPANY AS COMPARABLE. HE FURTHE R SUBMITTED THAT ONLY BECAUSE BOTH THESE COMPANIES HAVE BRAND VALUE AND ARE BIG IN SIZE THEY CANNOT BE TREATED AS INCOMPARABLE TO THE ASSES SEE. 11.6 IN REJOINDER, THE LD. AR SUBMITTED THAT THE AS SESSEE SELECTED INFOSYS ON THE BASIS OF THREE YEARS DATA WHEREAS TP O HAS CONSIDERED ONLY CURRENT YEAR DATA. THE LEARNED AR FURTHER SUBM ITTED THAT IF THE ASSESSEE HAS MISTAKENLY SELECTED A COMPARABLE, IT C ANNOT BE ESTOPPED FROM OBJECTING TO THE SELECTION OF THAT COMPARABLE IN PROCEEDINGS BEFORE HIGHER FORUM. IN THIS CONTEXT, THE LEARNED AR RELIE D UPON THE INCOME-TAX APPELLATE TRIBUNAL SPECIAL BENCH DECISION IN CASE O F QUARK SYSTEMS, 4 ITR (TRIB) 606. 11.7 WE HAVE CONSIDERED THE SUBMISSIONS OF THE PAR TIES AND PERUSED THE MATERIALS ON RECORD. ON CONSIDERING T HE SAME, WE ARE OF THE VIEW THAT BOTH THESE COMPANIES CANNOT BE CONSID ERED AS COMPARABLE TO THE ASSESSEE DUE TO VARIOUS FACTORS SUCH AS THEI R SIZE, TURNOVER, BRAND VALUE, SCALE OF OPERATION, DIVERSIFIED ACTIVI TIES AND OWNING OF INTANGIBLES. THAT BESIDES AS CAN BE SEEN FROM PAR A 10.1 OF TPOS ORDER HE HAS APPLIED THE TURNOVER FILTER BY EXCLUDI NG COMPANIES HAVING TURNOVER OF LESS THAN RS.1 CRORE FROM SOFTWARE DEVE LOPMENT SERVICES. APPLYING THE SAME LOGIC, HE SHOULD ALSO HAVE FIXED AN UPPER LIMIT AND EXCLUDED COMPANIES WITH EXTRA-ORDINARILY HIGH TURNO VER. AS CAN BE SEEN 14 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. FROM THE TP ORDER, THE TURNOVERS OF INFOSYS TECHNOL OGIES LIMITED AND WIPRO LIMITED DURING THE YEAR UNDER CONSIDERATION A RE RS.13,149 CRORES AND 9616.09 CRORES RESPECTIVELY AS AGAINST RS. 36 C RORES OF THE ASSESSEE. THOUGH IT IS A FACT THAT THE ASSESSEE IN THE TP DOCUMENTATION, HAS SELECTED INFOSYS TECHNOLOGIES LT D. AS COMPARABLE BUT THAT CANNOT PREVENT THE ASSESSEE FROM OBJECTING TO THE AFORESAID COMPANY BEING SELECTED AS COMPARABLE, IF THERE ARE VALID REASONS FOR DOING SO. IN THIS CONTEXT, THE CONTENTION OF THE L EARNED AR THAT THE ASSESSEE HAS SELECTED INFOSYS LIMITED ON THE BASIS OF THREE YEARS FINANCIAL DATA, WHEREAS THE TPO CONSIDERED ONLY THE CURRENT YEAR DATA ALSO NEEDS TO BE APPRECIATED. THEREFORE, CONSIDERI NG THE ENORMITY OF TURNOVER OF THESE TWO COMPANIES AS WELL AS OTHER RE LEVANT FACTORS, THE AFORESAID COMPANIES CANNOT BE TREATED AS COMPARABL E TO THE ASSESSEE IN ANY MANNER. THIS VIEW OF OURS IS ALSO IN TUNE W ITH THE VIEW EXPRESSED BY DIFFERENT BENCHES OF THIS TRIBUNAL AS WELL AS TH AT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECH NOLOGIES PVT. LTD.,[2013] 85 CCH 146. WE THEREFORE DIRECT THE ASS ESSING OFFICER /TPO TO EXCLUDE THEM WHILE COMPUTING ALP. ISHIR INFOTECH LTD 11.8 OBJECTING TO THIS COMPANY BEING TREATED AS CO MPARABLE, THE LEARNED AR SUBMITTED THAT THIS COMPANY CANNOT BE A COMPARABLE TO THE ASSESSEE AS THE SAID COMPANY DOES NOT SATISFY THE E MPLOYEE COST FILTER THRESHOLD LIMIT OF 25% APPLIED BY TPO. IT WAS SUBM ITTED THAT AS PER THE INFORMATION AVAILABLE FROM THE ANNUAL REPORT OF THE SAID COMPANY EMPLOYEE COST AS A PERCENTAGE OF OPERATING REVENUE IS ONLY 3.96%. IN SUPPORT OF SUCH CONTENTION, THE LEARNED AR RELIED U PON THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN CASE OF VIRTU SA (INDIA) PVT. LTD. V/S. DCIT (SUPRA) AND VARIOUS OTHER DECISIONS. 15 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 11.9 THE LEARNED DR, ON THE OTHER HAND, RELIED ON T HE REASONING OF THE TPO. 11.10 WE HAVE HEARD THE PARTIES AND PERUSED THE MA TERIALS ON RECORD. SO FAR AS THIS COMPANY IS CONCERNED, THE A SSESSEE HAS SOUGHT EXCLUSION OF THE AFORESAID COMPANY ON THE GROUND T HAT THIS COMPANY FAILS EMPLOYEE COST FILTER. IN THIS CONTEXT, THE LEARNED AR HAS RELIED UPON THE DECISION OF CO-ORDINATE BENCH OF THIS TRIB UNAL IN CASE OF M/S VIRTUSA (INDIA) PVT. LTD. (SUPRA). ON A PERUSAL OF THE ORDER PASSED IN CASE OF M/S VIRTUSA (INDIA) PVT. LTD.((SUPRA)), WE FIND THAT THE CO- ORDINATE BENCH HAS HELD THAT ISHIR INFOTECH LIMITED CANNOT BE TREATED AS COMPARABLE AS IT DOES NOT QUALIFY THE EMPLOYEE COST FILTER AS WELL AS RPT FILTER . RESPECTFULLY FOLLOWING THE AFORESAID DECIS ION OF THE CO-ORDINATE BENCH, WE ALSO DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. LUCID SOFTWARE LIMITED:- 11.11 WE HAVE HEARD THE PARTIES AND PERUSED THE MAT ERIALS ON RECORD. THE MAIN OBJECTION OF THE ASSESSEE WITH REGARD TO T HE AFORESAID COMPANY IS THAT IT EARNS REVENUE BOTH FROM PRODUC T DEVELOPMENT AS WELL AS SOFTWARE SERVICES FOR WHICH SEGMENTAL DATA IS NOT AVAILABLE. IN SUPPORT OF SUCH CONTENTION, THE LEARNED AR HAS RELI ED UPON THE DECISION OF CO-ORDINATE BENCH IN THE CASE M/S VIRTUSA (INDIA ) PVT. LTD. (SUPRA). ON PERUSAL OF THE ORDER PASSED IN CASE OF M/S VIRTU SA (INDIA) PVT. LTD. (SUPRA), IT IS TO BE SEEN THAT THE CO-ORDINATE BENC H HAS EXCLUDED THE AFORESAID COMPANY ACCEPTING ASSESSEES CONTENTION T HAT SEGMENTAL DATA IN RESPECT OF SALE OF PRODUCTS AND SOFTWARE SERVICE S ARE NOT AVAILABLE. FOLLOWING THE AFORESAID DECISION OF THE COORDINATE BENCH WE DIRECT EXCLUSION OF THE AFORESAID COMPANY FROM LIST OF COM PARABLES. 16 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. MEGASOFT LIMITED 11.12 WE HAVE HEARD THE PARTIES AND PERUSED THE MA TERIALS ON RECORD. THE MAIN OBJECTION OF THE ASSESSEE WITH RE GARD TO THE AFORESAID COMPANY IS THAT THIS IS PREDOMINANTLY A PRODUCT DEV ELOPMENT COMPANY AND MARGIN FROM SOFTWARE DEVELOPMENT SERVICES IS 23 .11%. AS CAN BE SEEN, IN CASE OF M/S VIRTUSA (INDIA) PVT. LTD. (SUP RA), THE CO-ORDINATE BENCH OF THE TRIBUNAL WHILE CONSIDERING THE ASSESSE ES OBJECTION WITH REGARD TO THE AFORESAID COMPANY HAD DIRECTED THE AS SESSING OFFICER/TPO TO TAKE ONLY SEGMENTAL MARGIN OF THIS COMPANY FOR C OMPUTING ALP. RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF CO-OR DINATE BENCH, WE ALSO DIRECT THE ASSESSING OFFICER /TPO TO CONSIDER ONLY THE SEGMENTAL MARGIN OF THIS COMPANY FOR THE RELEVANT ASSESSMENT YEAR FO R COMPUTING ALP. TATA ELXSI LIMITED 11.13 WE HAVE HEARD THE PARTIES AND PERUSED THE MA TERIALS ON RECORD. THE ASSESSEE HAS SOUGHT EXCLUSION OF THE AFORESAID COMPANY BY PLACING RELIANCE UPON THE INFORMATION FURNISHED BY SAID COMPANY U/S 133(6) WHEREIN THE SAID COMPANY HAS ADMITTED THAT I T CANNOT BE TREATED AS COMPARABLE WITH ANY OTHER SOFTWARE SERVICE PROVI DER DUE TO COMPLEX NATURE OF ITS BUSINESS. CONSIDERING THE SUBMISSIONS OF THE PARTIES WE REMIT THE ISSUE OF COMPARABILITY OF THIS COMPANY BA CK TO THE FILE OF ASSESSING OFFICER/TPO FOR CONSIDERING AFRESH. THE A SSESSING OFFICER/TPO SHALL DULY CONSIDER ASSESSEES OBJECTIO N WITH REGARD TO FUNCTIONAL DIFFERENCES BETWEEN ASSESSEE AND TATA EL IXI LTD. BEFORE DECIDING THE ISSUE OF COMPARABILITY. ACCORDINGLY, W E DIRECT THE ASSESSING OFFICER/TPO TO DETERMINE THE ALP OF THE PRICE CHARG ED BY THE ASSESSEE TO ITS AE TOWARDS PROVISION OF SOFTWARE DEVELOPMENT SERVICES IN TERMS WITH OUR DIRECTION IN THE PRECEDING PARAGRAPHS. IF ON SUCH DETERMINATION OF ALP THE PRICE CHARGED BY THE ASSESSEE FOR THE IN TERNATIONAL 17 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. TRANSACTIONS WITH ITS AE IS FOUND TO BE WITHIN ARM S LENGTH, THE SAME IS TO BE ACCEPTED. 11.14 WE MAKE IT CLEAR THAT WE HAVE REFRAINED FROM DEALING WITH THE OTHER GROUNDS RELATING TO TRANSFER PRICING ADJU STMENT OF SOFTWARE DEVELOPMENT SERVICES SEGMENT AS THEY WERE SPECIFIC ALLY NOT ARGUED BY THE LEARNED AR. 12. GROUND NO.16 RELATES TO DETERMINATION OF ARMS LENGTH INTEREST RATE AT 14% FOR LOANS PROVIDED TO FOURSOFT BV, NETHERLANDS. 13. DURING THE TRANSFER PRICING PROCEEDINGS, THE T PO NOTICED THAT THE ASSESSEE HAS ADVANCED LOAN OF 10,90,000 S INGAPORE DOLLARS TO ITS AE. THE ASSESSEE HAS CHARGED INTEREST AT 8.30% AS WAS THE CASE IN THE PRECEDING ASSESSMENT YEAR. IN THE TP DOCUMENTAT ION THE ASSESSEE HAD JUSTIFIED THE INTEREST CHARGED BY STATING THAT AS PER THE PRIME LENDING RATES ISSUED BY MONETARY AUTHORITY OF SINGAPORE DUR ING THE YEAR 2007, THE AVERAGE LENDING RATES ADOPTED BY SINGAPORE BANK S WHILE GRANTING LOANS TO DOMESTIC SINGAPORE BORROWERS IS 5.3%. HENC E, INTEREST CHARGED BY THE ASSESSEE AT 8.3% IS WITHIN ARMS LENGTH. 14. THE TPO HOWEVER, REFUSED TO ACCEPT THE CONTENT ION OF THE ASSESSEE AND DETERMINED THE ARMS LENGTH PRICE OF IN TEREST AT 14% BY APPLYING THE RATE OF DOMESTIC CORPORATE BONDS. THE DRP ALSO CONFIRMED THE VIEW OF TPO. 15. THE LD. A.R. SUBMITTED THAT INTEREST ON INTERN ATIONAL LOANS GIVEN IN FOREIGN CURRENCY HAS TO BE BENCHMARKED IN TERMS WITH INTERNATIONALLY ACCEPTED LIBOR RATE AND ARMS LENGTH PRICE OF INTEREST CANNOT BE DETERMINED BY APPLYING THE INTEREST RATES OF DOMESTIC CORPORATE BONDS. THE LD. A.R. SUBMITTED THAT INTERE ST RATE MAY BE DETERMINED AT LIBOR + 2%. IN SUPPORT OF SUCH CONTEN TION THE LD. A.R. RELIED UPON THE DECISION OF THE ITAT, IN ASSESSEES OWN CASE FOR A.Y. 18 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 2006-07 (ITA.NO.1495/HYD/2010) AS WELL AS IN CASE O F SIVA INDUSTRIES AND HOLDINGS LTD. (ITA.NO.2148/MAD/2010) AND COTTON NATURALS INDIA PVT. LTD. VS. DCIT (ITA.NO.5855/DEL/2012). 16. THE LD. D.R. ON THE OTHER HAND, RELIED UPON TH E ORDERS OF DRP AND TPO. 17. WE HAVE HEARD THE PARTIES. THIS ISSUE WAS CONS IDERED BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2 006-07 (SUPRA). THE COORDINATE BENCH WHILE DECIDING THE ISSUE HELD AS U NDER : 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIALS AVAILABLE ON RECORD. WE DO NOT FIND ANY M ERIT IN THE ARGUMENTS OF THE LEARNED DEPARTMENTAL REPRESENTATIV E AS WE FIND THAT THE ALP IS TO BE DETERMINED FOR THE INTERNATIO NAL TRANSACTION, THAT IS, ON INTERNATIONAL LOAN AND NOT FOR THE DOME STIC LOAN. HENCE, THE COMPARABLE, IN RESPECT OF FOREIGN CURRENCY LOAN IN THE INTERNATIONAL MARKET, IS TO BE LIBOR BASED WHICH IS INTERNATIONALLY RECOGNISED AND ADOPTED. IN OUR CONSIDERED VIEW, THE DRP RIGHTLY DIRECTED THE ASSESSING OFFICER TO ADOPT THE LIBOR P LUS FOR THE PURPOSE OF TP ADJUSTMENT. OUR VIEW IS FORTIFIED BY THE DECISION OF THE MADRAS BENCH IN THE CASE OF SIVA INDUSTRIES [SU PRA]. WE DO NOT FIND ANY MERIT IN THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE DRP SHOULD HAVE ADOPTED THE EURIB OR FOR THE PURPOSE OF THE TP ADJUSTMENTS, AS WE FIND THAT THE MOSTLY USED AND RECOGNISED BENCHMARK RATE FOR INTERNATIONAL LOA N IS LIBOR BASED. HENCE, THE DRP RIGHTLY DIRECTED THE ASSESSIN G OFFICER TO ADOPT THE LIBOR RATES. WE CONFIRM THE DIRECTIONS OF THE DRP. HOWEVER, BY CONSIDERING THE CONTENTIONS OF THE LEAR NED COUNSEL FOR THE ASSESSEE THAT THE ACTUAL LIBOR WAS 4.42% AS AGA INST THE 5.78% APPROVED BY THE DRP, WE FIND IT PROPER TO RES TORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER, TO VERIFY THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE COMPANY. IN VIEW OF THIS MATTER, WE REMIT THIS MATTER TO THE FILE OF THE ASSESSING OFFI CER TO VERIFY THE ACTUAL AVERAGE LIBOR PREVAILED IN THE FINANCIAL YEA R RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION AND ADOPT T HE INTEREST RATE 4.42% IF THE CLAIM OF THE ASSESSEE IS FOUND CO RRECT. THE GROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS PART LY ALLOWED FOR STATISTICAL PURPOSE. 19 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 18. THE OTHER DECISIONS RELIED UPON BY THE LD. A.R . ALSO EXPRESS THE VIEW THAT ARMS LENGTH PRICE OF LOAN TRANSACTION WITH AE SHOULD BE ON THE BASIS OF LIBOR + PERCENTAGE POINT. RESPECTFULLY FOLLOWING THE VIEW EXPRESSED BY THE COORDINATE BENCHES AS AFORESAID, W E DIRECT THE A.O./TPO TO DETERMINE THE ARMS LENGTH INTEREST ON L OAN ADVANCED BY ASSESSEE TO ITS AE BY APPLYING LIBOR + PERCENTAGE P OINTS. IN THIS CONTEXT, A.O./TPO MAY CONSIDER ASSESSEES OFFER OF LIBOR + 2% TO FIND OUT WHETHER THE INTEREST CHARGED BY THE ASSESSEE TO ITS AE IS WITHIN ARMS LENGTH. WITH THE AFORESAID DIRECTION, WE REMI T THE ISSUE TO THE FILE OF THE A.O./TPO FOR DECIDING AFRESH, AFTER EXTENDIN G OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 19. GROUND NO. 17 RELATES TO RE-CHARACTERISATION O F EQUITY INTO LOAN. 20. THE TPO NOTICED THAT THE ASSESSEE DURING THE F .Y. 2005-06 HAS ADVANCED LOAN OF RS.18,89,30,971/- TO ITS AE, F OURSOFT BV, NETHERLANDS AND RECEIVED INTEREST @ 6.23%. HOWEVER, DURING THE F.Y. 2006-07 THE OUTSTANDING LOAN AS ON 31.03.2006 WAS C ONVERTED TO EQUITY. THE TPO NOTICED THAT, IN TP DOCUMENTATION THE ASSES SEE HAS NOT ANALYSED THE SAID TRANSACTION STATING THAT THE TRAN SACTION HAS NO BEARING ON THE PROFITS OF ASSESSEE. THE TPO HOWEVER, WAS NO T CONVINCED WITH THE EXPLANATION OF THE ASSESSEE. THE TPO RELYING UP ON A DECISION OF ITAT, DELHI BENCH IN CASE OF PEROT SYSTEMS TSI (IND IA) LTD. VS. DCIT (2010-TIOL-51-ITAT-DEL.) HELD THAT SUBSEQUENT CONVE RSION OF LOAN TO EQUITY WILL NOT CHANGE THE CHARACTER OF THE TRANSAC TION, BECAUSE WHEN THE PARTIES ENTERED INTO THE TRANSACTION IT WAS ONL Y A LOAN. ACCORDINGLY, THE TPO COMPUTED INTEREST @ 14% ON THE AMOUNT OF RS .18,89,30,971/- AND TREATED IT AS ADJUSTMENT UNDER SECTION 92CA. TH E DRP ALSO UPHELD THE VIEW OF THE TPO THAT SUBSEQUENT CONVERSION OF L OAN INTO EQUITY WILL NOT CHANGE ITS CHARACTER. 20 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 21. THE LD. A.R. SUBMITTED BEFORE US THAT ASSESSEE HAS PROVIDED LOAN TO ITS 100% SUBSIDIARY IN NETHERLANDS , WHICH WAS LATER CONVERTED INTO EQUITY AS PER FEMA REGULATIONS. HE S UBMITTED THAT IN RELATION TO CONVERSION OF LOANS INTO EQUITY, NO NEW SHARES WERE ISSUED AND THE AMOUNT OF LOAN WAS CONVERTED INTO SHARE PRE MIUM IN RELATION TO THE EXISTING SHARES, 100% OF WHICH IS HELD BY FOURS OFT INDIA. IT WAS SUBMITTED, THOUGH FRESH SHARES COULD HAVE BEEN ISSU ED BUT AS ASSESSEE IS HOLDING 100% OF EQUITY, IT DOES NOT HAVE ANY IMP ACT ON THE SHAREHOLDING INTEREST OF ASSESSEE IN ITS SUBSIDIARY IN NETHERLANDS. SINCE 100% OF THE EQUITY IS HELD BY ASSESSEE, THE ENTIRE DIVIDENDS DECLARED BY THE SUBSIDIARY IN NETHERLANDS WOULD BE RECEIVED BY ASSESSEE. THE LD. A.R. REFERRING TO CHAPTER VII OF OECD GUIDELINES SU BMITTED THAT AN ACTIVITY PERFORMED BY A GROUP MEMBER SOLELY BECAUSE OF ITS OWNERSHIP INTEREST IN THE CAPACITY OF A SHAREHOLDER IS A SHA REHOLDER ACTIVITY AND WOULD NOT JUSTIFY A CHARGE TO THE RECIPIENT COMPANY . THE LD. A.R. SUBMITTED THAT THE DECISION IN PEROT SYSTEMS TSI (I NDIA) LTD. VS. DCIT (SUPRA) WILL NOT BE APPLICABLE TO THE ASSESSEE FIRS TLY BECAUSE IT IS NOT A CASE OF INTEREST FREE LOAN BUT EQUITY CAPITAL CONTR IBUTION AND SECONDLY, UNLIKE IN ASSESSEES CASE THE LOAN WAS NOT CONVERTE D INTO EQUITY. THE LD. A.R. RELIED UPON A DECISION OF ITAT, MUMBAI BEN CH IN CASE OF BESIX KIER DABHOL, SA VS. DCIT (ITA.NO.4249/MUM/2007) WHE REIN IT IS HELD THAT TPO CANNOT RE CHARACTERISE THE TRANSACTION. HE ALSO RELIED UPON THE FOLLOWING TWO DECISIONS. 1. MICRO INKS LTD. VS. ACIT (ITA.NO.1668, 1442/AHD /2006) 2. COTTON NTURALS INDIA PVT. LTD. VS. DCIT (ITA.NO .5855/DEL/2012) 22. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IALS ON RECORD. IT IS CLEAR FROM THE TP ORDER THAT THE TPO HAS ARRIVED AT HIS CONCLUSION PRIMARILY RELYING UPON THE DECISION OF THE TRIBUNAL IN CASE OF PEROT SYSTEMS TSI (INDIA) LTD. VS. DCIT (SUPRA). HOWEVER, ON GOING THROUGH THE DECISION OF PEROT SYSTEMS(SUPRA) IT IS TO BE SE EN THAT THE BENCH 21 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. AFTER EXAMINING THE AGREEMENT BETWEEN THE PARTIES D ID NOT FIND ANYTHING TO SUGGEST THAT LOAN WAS TO BE TREATED AS A QUASI C APITAL. FURTHER, THE BENCH OBSERVED THAT NOTHING WAS BROUGHT TO ITS NOTI CE TO SHOW THAT THERE WAS ANY TECHNICAL PROBLEM FOR WHICH LOAN COULD NOT HAVE BEEN CONTRIBUTED AS CAPITAL ORIGINALLY, IF IT WAS ACTUAL LY MEANT TO BE CAPITAL CONTRIBUTION. HOWEVER, IN THE CASE BEFORE US, IT IS SPECIFICALLY CONTENDED BY THE ASSESSEE THAT LOAN WAS EXTENDED IN VIEW OF F EMA REGULATIONS. IT IS ALSO A FACT ACKNOWLEDGED BY THE TPO THAT THE ASS ESSEE HAS OBTAINED APPROVAL OF THE RBI FOR CONVERTING THE LOAN INTO EQ UITY. THEREFORE, WITHOUT PROPERLY ANALYZING THE TERMS OF THE LOAN AG REEMENT IN CASE OF ASSESSEE AND IN CASE OF PEROT SYSTEMS AS WELL AS OT HER RELEVANT FACTUAL ASPECTS ONE CANNOT APPLY THE RATIO OF PEROT SYSTEMS TO ASSESSEES CASE. AS IT APPEARS, NEITHER THE TPO NOR DRP HAVE CONSIDE RED THE ISSUE AT DEPTH. WE, THEREFORE, REMIT THIS ISSUE BACK TO THE A.O. / TPO FOR CONSIDERING AFRESH AFTER PROPERLY EXAMINING THE AGR EEMENT AS A WHOLE AND OTHER RELEVANT FACTUAL ASPECTS. THE ASSESSEE SH OULD BE GIVEN A REASONABLE OPPORTUNITY OF BEING HEARD IN THE MATTER . 23. GROUND NO.18 RELATES TO DETERMINATION OF ALP A T 3.75% ON THE CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE TO ITS AE. 24. IT IS NOTED BY THE TPO, DURING THE F.Y. 2005-0 6 THE ASSESSEE HAS PROVIDED BANK GUARANTEES ON BEHALF OF ITS OVERS EAS SUBSIDIARY, FOURSOFT BV, NETHERLANDS FOR AN AMOUNT OF RS.69,81, 16,000/- WHICH IS CONTINUING FOR THE YEAR UNDER CONSIDERATION ALSO. T HE TPO FOLLOWING THE ORDER PASSED FOR A.Y. 2006-07 TREATED THE COMMISSIO N CHANGED BY ICICI BANK AT 3.75% ARMS LENGTH PRICE FOR THE CORPORATE G UARANTEE PROVIDED BY THE ASSESSEE TO ITS AE WORKED OUT THE TP ADJUSTM ENT OF RS.2,61,79,350/-. THE DRP ALSO REJECTED ASSESSEES OBJECTION ON THE ISSUE. 22 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 25. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD. THE SUM AND SUBSTANCE OF THE SUBMISSIONS MADE BY TH E LEARNED AR IS, THE CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE CA NNOT BE EQUATED TO BANK GUARANTEE AND RESULTANTLY THE COMMISSION RATE FOR BANK GUARANTEE CANNOT BE APPLIED TO THE CORPORATE GUARANTEE. IT WA S SUBMITTED THAT THE CORPORATE GUARANTEE IS NOTHING BUT AN ADDITIONAL GU ARANTEE PROVIDED BY THE PARENT COMPANY AND IT DOES NOT INVOLVE ANY COST OR RISK TO THE SHAREHOLDERS. IT WAS SUBMITTED THAT SINCE THE CORPO RATE GUARANTEE WAS GIVEN KEEPING IN VIEW PARAMOUNT BUSINESS INTEREST O F THE PARENT COMPANY IT HAS TO BE ALLOWED AS BUSINESS EXPENDITUR E. IT IS THE FURTHER SUBMISSIONS OF THE LEARNED AR THAT THE RETROSPECTIV E AMENDMENT EFFECTED TO SECTION 92B OF THE ACT, BY FINANCE ACT, 2012 BY INSERTION OF EXPLANATION (I)(C) TO SECTION 92B ALSO HAS NOT ENLA RGED THE SCOPE OF THE INTERNATIONAL TRANSACTION TO INCLUDE THE CORPORAT E GUARANTEE IN THE NATURE PROVIDED BY THE ASSESSEE. THE LEARNED AR FUR THER CONTENDED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY V IRTUE OF THE ORDER PASSED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A Y 2006-07 (SUPRA). 25.1 THE LEARNED DR, ON THE OTHER HAND, SUBMITTED T HAT BY VIRTUE OF THE AMENDMENT MADE TO SECTION 92B OF THE ACT WITH RETRO SPECTIVE EFFECT FROM 01/04/2002, THE CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE IS TO BE CONSIDERED AS AN INTERNATIONAL TRANSACTION, AND, TH EREFORE, THE ASSESSING OFFICER WAS JUSTIFIED IN DETERMINING ARMS LENGTH P RICE OF SUCH TRANSACTION. 25.2 HAVING CONSIDERED THE SUBMISSIONS OF THE PARTI ES, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE LEARNED AR THAT COR PORATE GUARANTEE OF THE NATURE PROVIDED BY THE ASSESSEE WILL NOT COME W ITHIN THE MEANING OF INTERNATIONAL TRANSACTION IN TERMS WITH SECTION 92B OF THE ACT. IT IS NOT DISPUTED THAT SECTION 92B OF THE ACT HAS BEEN AMEND ED BY THE FINANCE 23 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. ACT, 2012 WITH THE INSERTION OF EXPLANATION I (C) W ITH RETROSPECTIVE EFFECT FROM 01/04/2002. EXPLANATION (I)(C) TO SECTION 92B, READS 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 PROVIDED BY THE ASSESSEE COMES WITHIN THE SCOPE AND AMBIT OF INTERNATIONAL TRANSACTION AS PER THE AFORESAID CLAUSE. THEREFORE, THE CONTENTION OF THE LEARNED AR THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY V IRTUE OF THE ORDER PASSED IN ASSESSEES OWN CASE FOR AY 2006-07 NO LO NGER HOLDS GOOD SINCE THE ORDER PASSED BY THE COORDINATE BENCH IS P RIOR TO THE AMENDMENT MADE TO PROVISION OF SECTION 92B OF THE A CT. IT WILL BE PERTINENT TO MENTION HERE THAT THIS ISSUE WAS ALSO CONSIDERED BY THE ITAT MUMBAI BENCH IN CASE OF MAHINDRA & MAHINDRA VS. DCIT IN ITA NO. 8597/MUM/2010, 54 SOT (UR) 146. THE COORDINATE BENCH OF THIS TRIBUNAL WHILE CONSIDERING SIMILAR ARGUMENT ADVANCE D 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 TH AT 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 THE PR OVISIONS 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 DETERMINED AS IT FALLS WITHIN THE SCOPE AND AMBIT OF AN INTERNATIONAL TRANSACTION AFTER THE 24 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. RETROSPECTIVE AMENDMENT TO SECTION 92B. HOWEVER, IT APPEARS THAT THE TPO HAS APPLIED THE RATE OF 3.75%, WHICH IS APPLICA BLE TO BANK GUARANTEE ISSUED BY THE BANK. AS THE CORPORATE GUAR ANTEE IS NOT IN THE NATURE OF BANK GUARANTEE, THE RATE APPLICABLE TO B ANK GUARANTEE PROVIDED BY THE BANK CANNOT BE APPLIED TO CORPORATE GUARANTEE WHICH IS PROVIDED BY A GROUP COMPANY. IN CASE OF GLENMARK PH ARMACEUTICALS VS. ACIT IN ITA NO. 5031/MUM/2012, DATED 13/11/2013, TH E MUMBAI BENCH OF THE TRIBUNAL AFTER ANALYSING THE FACTS IN THAT C ASE HAD HELD THAT 0.53% CORPORATE GUARANTEE RATE IN THAT CASE WAS APPROPRIA TE. THE ITAT HYDERABAD BENCH IN CASE OF INFOTECH ENTERPRISES LT D. IN ITA NO. 115/HYD/2011 AND IN ITA NO. 2184/HYD/2011, DATED 16 /01/2014 WHILE CONSIDERING IDENTICAL ISSUE OF DETERMINING ALP OF CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE TO ITS AE FOLLOWED THE RAT IO LAID DOWN IN CASE OF GLENMARK PHARMACEUTICALS VS. ACIT (SUPRA) AND RE MITTED THE ISSUE BACK TO THE TPO TO DECIDE THE QUANTUM OF CORPORATE GUARANTEE RATE BY FOLLOWING THE METHOD ADOPTED IN CASE OF GLENMARK PH ARMACEUTICALS (SUPRA). 26. SINCE THE ISSUE IN THE PRESENT CASE IS IDENTICA L TO THE ISSUE DECIDED BY THE ITAT, HYDERABAD BENCH IN CASE OF INF OTECH ENTERPRISES (SUPRA), FOLLOWING THE SAME, WE ALSO REMIT THIS ISS UE TO THE FILE OF THE TPO TO DECIDE THE QUANTUM OF CORPORATE GUARANTEE RA TES ACCORDINGLY. IF THE ASSESSEE IS ABLE TO BRING ON RECORD ANY COMPARA BLES WITH REGARD TO CORPORATE GUARANTEE, THE TPO MAY ALSO CONSIDER THE SAME WHILE DETERMINING ALP OF CORPORATE GUARANTEE. THE TPO MUS T PROVIDE A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE BEFORE DECIDING THE ISSUE. THIS GROUND IS ALLOWED FOR STATISTICAL P URPOSES. 27. GROUND NO.19 RELATES TO DISALLOWANCE OF RS.14, 49,523/- UNDER SECTION 14A OF THE ACT. 25 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 28. FACTS IN BRIEF ARE, DURING THE ASSESSMENT PROC EEDINGS THE A.O. NOTICED THAT ASSESSEE HAS RECEIVED EXEMPT INCO ME IN FAVOUR OF DIVIDEND AMOUNTING TO RS.28,36,993/-. THE A.O. APPL YING RULE 8D DISALLOWED UNDER SECTION 14A AN AMOUNT OF RS.14,49, 523/-. THE ASSESSEE OBJECTED TO THE DISALLOWANCE BEFORE DRP. H OWEVER, THE DRP SUSTAINED THE DISALLOWANCE MADE BY THE A.O. 29. WE HAVE HEARD BY THE PARTIES AND PERUSED THE M ATERIALS ON RECORD. THIS ISSUE IS SQUARELY COVERED BY THE DECIS ION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2006-07 IN ITA.NO. 1495/HYD/2010. THE TRIBUNAL HAS HELD AS UNDER : 23. THE GROUND NO.19 RELATES TO DISALLOWANCE OF EX PENDITURE UNDER SECTION 14A OF THE ACT. THIS ISSUE IS COVERED BY THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF GO DREJ & BOYCE VS. DCIT REPORTED IN 328 ITR 81 WHEREIN IT WAS HELD THAT RULE 8D READ WITH SECTION 14A[2] OF THE ACT IS NOT ARBITRAR Y OR UNREASONABLE BUT CAN BE APPLIED ONLY IF ASSESSEE'S METHOD IS NOT SATISFACTORY. RULE 8D IS NOT RETROSPECTIVE IN NATURE AND THE SAME HAS TO BE APPLIED FROM THE ASSESSMENT YEAR 2008-09. FOR THE E ARLIER ASSESSMENT YEARS, DISALLOWANCE HAS TO BE WORKED OUT ON 'REASONABLE BASIS' UNDER SECTION 14A [2] OF THE ACT . ACCORDINGLY, WE RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO REWORK THE DISALLOWANCE ON REASONABLE BASIS IN ACCORDANCE WITH THE RATIO LAID DOWN BY THE AFORESAID JUDGMENT. THE GROUND RAI SED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 30. RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF THE COORDINATE BENCH, WE REMIT THE MATTER BACK TO THE FILE OF THE A.O. FOR DECIDING AFRESH IN TERMS WITH THE DIRECTION OF THE TRIBUNAL EXTRACTED HEREINABOVE. THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 31. GROUND NO.20 RELATES TO DISALLOWANCE OF EXPEND ITURE INCURRED OF RS.43,92,874/- TOWARDS PURCHASE OF SOFT WARE FOR THIRD PARTIES. 26 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 32. DURING THE ASSESSMENT PROCEEDINGS THE A.O. NOT ICING THAT THE ASSESSEE HAS CLAIMED EXPENDITURE OF RS.43,92,87 4/- TOWARDS PURCHASE OF SOFTWARE FOR THIRD PARTIES, DISALLOWED THE SAME BY TREATING IT AS CAPITAL EXPENDITURE. THE DRP THOUGH ENDORSED THE VIEW OF THE A.O. WITH REGARD TO THE NATURE OF EXPENDITURE, BUT NEVER THELESS DIRECTED THE A.O. TO EXAMINE ADMISSIBILITY OF DEPRECIATION ON SU CH CAPITAL EXPENDITURE. 33. THE LD. A.R. SUBMITTED BEFORE US THAT THE ASSE SSEE HAS PURCHASED SOFTWARE SUCH AS ORACLE, PROGRESS ETC., F ROM THIRD PARTIES SOLD TO ITS CUSTOMERS. ACCORDINGLY, COST OF PURCHAS E AND SALES ARE ROUTED THROUGH PROFIT AND LOSS ACCOUNT. IT WAS THEREFORE S UBMITTED THAT THE EXPENDITURE IS ALLOWABLE. IN SUPPORT OF SUCH CONTEN TION, HE RELIED UPON THE FOLLOWING DECISIONS : 1. AMWAY INDIA ENTERPRISES VS. DCIT (111 ITD 112) 2. IBM INDIA VS. CIT (290 ITR 183). 34. THE LD. D.R. SUPPORTED THE ORDER OF DRP AND A. O. 35. WE HAVE HEARD THE PARTIES AND PERUSED MATERIAL S ON RECORD. AS CAN BE SEEN FROM THE CONTENTION OF THE LEARNED A R, THE EXPENDITURE ON PURCHASE OF COMPUTER SOFTWARE IS CLAIMED AS REVE NUE EXPENDITURE MAINLY RELYING UPON THE DECISION OF INCOME-TAX APPE LLATE TRIBUNAL, DELHI SPECIAL BENCH IN THE CASE OF AMWAY INDIA ENTERPRISE S VS. DCIT ((SUPRA)). ON A CAREFUL READING OF THE AFORESAID DE CISION, WE FIND THAT THE SPECIAL BENCH HAS LAID DOWN CERTAIN PARAMETERS FOR DETERMINING THE NATURE OF EXPENDITURE INCURRED IN ACQUIRING SOFTWAR E. THE RELEVANT PORTION FROM THE DECISION IS EXTRACTED HEREUNDER FO R SAKE OF CONVENIENCE: 58. THE FOLLOWING FACTORS WOULD BE RELEVANT TO DETERMI NE WHETHER THE ADVANTAGE OPERATES IN THE CAPITAL FIELD OR REVE NUE FIELD. 27 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. (I) NATURE OF BUSINESS OF THE ASSESSEE : IT IS NECE SSARY TO OBTAIN AN UNDERSTANDING OF THE BUSINESS FUNCTION OR EFFECT OF A CONCERNS SOFTWARE. SOFTWARE NORMALLY FUNCTIONS AS A TOOL ENA BLING BUSINESS TO BE CARRIED ON MORE EFFICIENTLY. THE SCOPE, POWER , LONGEVITY OF SUCH A TOOL AND ITS CENTRALITY TO THE FUNCTIONS OF THE BUSINESS WILL ALL BEAR ON ITS TREATMENT. IN THE CASE OF M/S SQL STAR INTERNATIONAL LTD. ONE OF THE ASSESSEES IN THE CASES REFERRED TO THE SPECIAL BENC H, THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOFT WARE DEVELOPMENT AS WELL AS RUNNING A TRAINING CENTER TO IMPART SPECIALIZED TRAINING TO THE STUDENTS IN SOFTWARE TE CHNOLOGY. IF THE SOFTWARE WERE USED IN SUCH BUSINESS TO IMPART TRAIN ING TO THE STUDENTS, THEN THE SAME WOULD BE PART OF THE PROFIT MAKING APPARATUS OF THE ASSESSEE AND CONSEQUENTLY EXPENDIT URE ON SOFTWARE, CAPITAL. SIMILARLY, EXAMPLE OF A TRAVEL AGENT CAN BE CITED H ERE AS AN ILLUSTRATION WHEREIN THE EXPENDITURE INCURRED ON AC QUISITION OF A SOFTWARE FOR THE PURPOSE OF ENABLING THE ASSESSEE T O MAKE BOOKING OF AIR TICKETS WOULD BE A CAPITAL EXPENDITU RE BECAUSE SUCH A SOFTWARE CERTAINLY FORMS PART OF THE PROFIT MAKIN G APPARATUS OF THE TRAVEL AGENCY BUSINESS INASMUCH AS THE BUSINESS OF AIR TICKET BOOKING IS DONE WITH THE HELP OF THAT SOFTWARE. ANOTHER EXAMPLE WHICH CAN BE CONSIDERED HERE IS THA T OF ACQUISITION OF TURBO GOLD SOFTWARE FOR RS. 17.61 LA KHS BY ONE OF THE ASSESSEES IN THE PRESENT CASE I.E. M/S AMWAY IN DIA ENTERPRISES. AS SUBMITTED BEFORE US, THE SAID SOFTW ARE HELPS IN COMPRESSION OF SIZE OF E-MAILS SENT THROUGH THE LOT US NOTES MAILING SYSTEM AND IT INCLUDES LICENSES FOR 150 USE RS WHO ARE USING LOTUS NOTES MAILING SYSTEM AND SOFTWARE LICEN SE FOR RUNNING ON ITS SERVER. IF USE OF THIS SOFTWARE IN THE BUSIN ESS OF THE ASSESSEE IS LIMITED TO FACILITATE MERELY AN EFFECTI VE AND FAST COMMUNICATION IN ORDER TO INCREASE ITS ORGANIZATION AL EFFICIENCY, THE SAME CANNOT BE TREATED AS FORMING PART OF THE P ROFIT MAKING APPARATUS OF THE ASSESSEE. ON THE OTHER HAND, IF SU CH SOFTWARE IS BEING USED BY AN ASSESSEE ENGAGED IN THE BUSINESS O F PLACEMENT AGENCY WHERE THE APPLICATIONS FROM PERSONS SEEKING JOBS ARE INVITED THROUGH E-MAIL AND ARE ALSO FORWARDED TO TH E CONCERNED CLIENTS THROUGH E-MAIL, THE SAME MAY FORM PART OF P ROFIT MAKING APPARATUS OF THE ASSESSEES BUSINESS OF PLACEMENT A GENCY AND CAN BE TREATED AS A CAPITAL ASSET. 28 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. (II) AS A GENERAL RULE IT MAY BE STATED THAT THE MO RE EXPENSIVE THE COMPUTER SOFTWARE THE MORE IT IS LIKELY TO BE A CEN TRAL TOOL OF THE BUSINESS AND THE MORE ENDURING IS LIKELY TO BE ITS EFFECT ADDING TO THE PROFIT EARNING APPARATUS. IF THERE ARE ASSOCIAT ED CAPITAL EXPENDITURE LIKE PURCHASE OF NEW COMPUTER EQUIPMENT FOR RUNNING THE SOFTWARE DEVELOPED UNDER A PROJECT, THEN IT CAN BE CONSIDERED AS CAPITAL EXPENDITURE. THIS IS ESPECIALLY THE CASE WHERE THE NEW HARDWARE IS NOT MERELY DESIRABLE BUT NECESSARY FOR THIS PURPOSE. (III) DEGREE OF ASSOCIATED ORGANISATIONAL CHANGE : SIMILARLY THE DEGREE OF CHANGE INTENDED IN THE WAY OPERATIONS ARE CARRIED OUT AS A RESULT OF THE COMPUTER SOFTWARE, FOR EXAMPLE, SAVINGS IN THE NUMBER, AND CHANGES IN THE LOCATION, OF STAFF USED TO PROVIDE SERVICES TO CUSTOMERS WILL HAVE A BEARING. THE MORE RADICAL THE CHANGES, THE MORE LIKELY THE EXPENDITURE WILL BE CA PITAL. THESE CHANGES ARE LIKELY TO BE MOST RADICAL WHEN OPERATIO NS PREVIOUSLY CARRIED ON MANUALLY ARE COMPUTERISED. (IV) IT HAS TO BE BORNE IN MIND THAT COMPUTER SOFTW ARE INDUSTRY IS OF A FAST CHANGING NATURE. THEREFORE WHATEVER SOFTWARE PURCHASED BY AN ASSESSEE WOULD BECOME OUTDATED MUCH EARLIER THAN EXPECTED. THE ASSESSEE HAS THEREFORE TO UPGRADE HIS SOFTWARE. AN ELEMENT OF UPGRADING DOES NOT AUTOMATICALLY MAKE THE EXPEND ITURE CAPITAL. THE PRESENCE OF AN ELEMENT OF UPGRADING, THEREFORE, WILL NOT NECESSARILY CAUSE THE EXPENDITURE IN QUESTION TO BE CAPITAL. 59. OUR CONCLUSIONS ON THE ISSUE UNDER CONSIDERATION T HUS CAN BE SUMMARIZED, AS UNDER : (I) WHEN THE ASSESSEE ACQUIRES A COMPUTER SOFTWARE OR FOR THAT MATTER THE LICENSE TO USE SUCH SOFTWARE, HE ACQUIRE S A TANGIBLE ASSET AND BECOMES OWNER THEREOF AS HELD ABOVE RELYI NG ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TC S (SUPRA). (II) HAVING REGARD TO THE FACT THAT SOFTWARE BECOME S OBSOLETE WITH TECHNOLOGICAL INNOVATION AND ADVANCEMENT WITHIN A S HORT SPAN OF TIME. IT CAN BE SAID THAT WHERE THE LIFE OF THE COM PUTER SOFTWARE IS SHORTER (SAY LESS THAN 2 YEARS), IT MAY BE TREATED AS REVENUE EXPENDITURE. ANY SOFTWARE HAVING ITS UTILITY TO THE ASSESSEE FOR A PERIOD BEYOND TWO YEARS CAN BE CONSIDERED AS ACCRUA L OF BENEFIT OF ENDURING NATURE. HOWEVER, THAT BY ITSELF WILL NO T MAKE THE EXPENDITURE INCURRED ON SOFTWARE AS CAPITAL IN NATU RE AND THE FUNCTIONAL TEST AS DISCUSSED ABOVE ALSO NEEDS TO BE SATISFIED. 29 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. (III) ONCE THE TESTS OF OWNERSHIP AND ENDURING BENE FIT ARE SATISFIED, THE QUESTION WHETHER EXPENDITURE INCURRED ON COMPUT ER SOFTWARE IS CAPITAL OR REVENUE HAS TO BE SEEN FROM THE POINT OF VIEW OF ITS UTILITY TO A BUSINESSMAN AND HOW IMPORTANT AN ECONO MIC OR FUNCTIONAL ROLE IT PLAYS IN HIS BUSINESS. IN OTHER WORDS, THE FUNCTIONAL TEST BECOMES MORE IMPORTANT AND RELEVANT BECAUSE OF THE PECULIAR NATURE OF THE COMPUTER SOFTWARE AND IT S POSSIBLE USE IN DIFFERENT AREAS OF BUSINESS TOUCHING EITHER CAPI TAL, OR REVENUE FIELD OR ITS UTILITY TO A BUSINESSMAN WHICH MAY TOU CH EITHER CAPITAL OR REVENUE FIELD. 60. HAVING LAID DOWN THE CRITERIA FOR DETERMINING THE NATURE OF EXPENDITURE INCURRED ON ACQUISITION OF SOFTWARE, WH ETHER CAPITAL OR REVENUE, WE ARE OF THE VIEW THAT THESE CRITERIA NEE D TO BE APPLIED TO DETERMINE THE EXACT NATURE OF EXPENDITURE INCURR ED BY THE ASSESSEES IN THE PRESENT CASES FOR ACQUIRING DIFFER ENT SOFTWARES. SINCE THIS EXERCISE IS REQUIRED TO BE DONE IN RESPE CT OF EACH AND EVERY SOFTWARE INDEPENDENTLY HAVING REGARD TO THE C RITERIA LAID DOWN ABOVE, WE ARE OF THE VIEW THAT THE MATTER NEED S TO BE RESTORED BACK TO THE FILE OF THE AO FOR DOING SUCH EXERCISE. THE AO SHALL EXAMINE THE QUESTION WHETHER EXPENDITURE ON C OMPUTER SOFTWARE IS CAPITAL OR REVENUE IN THE LIGHT OF THE CRITERIA LAID DOWN ABOVE AFTER GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEES. IF ON SUCH EXAMINATION, THE AO COMES TO THE CONCLUS ION THAT THE EXPENDITURE IS CAPITAL EXPENDITURE, THEN THE QUESTI ON REGARDING ALLOWING DEPRECIATION WILL BE DECIDED IN ACCORDANCE WITH THE PRINCIPLES LAID DOWN IN THE SUBSEQUENT PARAS. 36. IN LIGHT OF OBSERVATION OF THE INCOME-TAX APPEL LATE TRIBUNAL SPECIAL BENCH ((SUPRA)), WE DIRECT THE ASSESSING OFFICER TO CONSIDER THE CLAIM OF THE ASSESSEE BY APPLYING THE CRITERIA LAID DOWN THE REIN AND DECIDE THE ISSUE ACCORDINGLY. FURTHER, WE MAKE IT CLEAR THAT I F AT ALL THE ASSESSING OFFICER CONCLUDES THAT THE EXPENDITURE IS CAPITAL I N NATURE, THEN, HE MUST ALLOW DEPRECIATION KEEPING IN VIEW THE RATIO LAID D OWN BY THE HONBLE SPEICAL BENCH ((SUPRA)). THIS GROUND IS CONSIDERED TO BE ALLOWED FOR STATISTICAL PURPOSES. 37. IN GROUND NO.21 THE ASSESSEE HAS RAISED THE IS SUE OF COMPUTATION OF EXEMPTION UNDER SECTION 10A BY REDUC ING CERTAIN EXPENDITURES ONLY FROM THE EXPORT TURNOVER. 30 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. 38. THE A.O. WHILE COMPUTING EXEMPTION UNDER SECTI ON 10A OF THE ACT REDUCED CERTAIN EXPENSES FROM THE EXPORT TU RNOVER ON THE GROUND THAT SUCH EXPENDITURES ARE ATTRIBUTABLE TO DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA. THE DRP ALSO ENDORSED THE VIEW OF A. O. 39. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIALS ON RECORD. THIS ISSUE IS NO MORE RES INTEGRA IN VIEW O F A NUMBER OF DECISIONS OF NOT ONLY DIFFERENT HIGH COURTS BUT ALS O DIFFERENT BENCHES OF THE TRIBUNAL INCLUDING SPECIAL BENCH. KEEPING IN TU NE WITH SUCH CONSISTENT VIEW, WE DIRECT THE A.O. TO REDUCE SUCH EXPENSES BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER WHILE COMPUTING EXEMPTION UNDER SECTION 10A OF THE ACT. 40. GROUND NO.22 RELATES TO LEVY OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT. LEVY OF INTEREST BEING CONSEQU ENTIAL IS NOT REQUIRED TO BE ADJUDICATED UPON AT THIS STAGE. 41. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 28/03/2014 SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER SD/- (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 28 TH MARCH, 2014. JMR/KV 31 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD. COPY TO:- 1) FOUR SOFT PVT. LTD., 5Q1, A3, 5 TH FLOOR, CYBER TOWERS, HITECH CITY, MADHAPUR, HYDERABAD. 2) DCIT, CIRCLE -1(3), HYDERABAD. 3) DRP, HYDERABAD. 4) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABA D. 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 32 ITA NO. 1903 OF 2011, FOUR SOFT PVT. LIMITED, HYD.