Bahwan Cybertek Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 290/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6211 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 15-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 31-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PATHALAVATH PEERYA
• Assessee Lawyers: VIKRAM VIJAYARAGHAWAN
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Initiation of penalty proceedings; Onus to prove; Revenue expenditure; Capital expenditure
• Section: 143(3); 234B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH D, CHENNAI , ! ' . # , $ %& ' BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ITA NO.290/MDS/2017 $ ( )( / ASSESSMENT YEAR : 2012-13 BAHWAN CYBER TEK PVT. LTD., BAHWAN CYBERTEK IT PARK, 148, RAJIV GANDHI SALAI (OMR), OKKIYAM, THORAIPAKKAM, CHENNAI 600 097. [PAN: AABCB 2020P] VS. ASST. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-1(2), CHENNAI 600 034. ( /APPELLANT ) ( / RESPONDENT ) *+ - . / APPELLANT BY : SHRI VIKRAM VIJAYARAGHAWAN, ADVOCATE /0*+ - . / RESPONDENT BY : SHRI PATHALAVATH PEERYA, CIT - 1 / DATE OF HEARING : 11.07.2017 2) - 1 / DATE OF PRONOUNCEMENT : 31.08.2017 /ORDER PER SANJAY ARORA, AM : THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST ITS ASSESSMENT U/S. 143(3) R/W S.144C(1) R/W S. 92CA OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMENT YEAR (AY) 2012-13 D ATED 27/12/2006, MADE IN PURSUANCE TO THE DIRECTIONS BY THE DISPUTES RESOLUT ION PANEL-2, BENGALURU (DRP FOR SHORT) DATED 04.11.2016. 2 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT 2. THE ASSESSEE RAISES GROUNDS BOTH QUA THE TRANSFER PRICING (TP) ADJUSTMENTS (PART B) AND CORPORATE TAXATION (CT) MA TTERS (PART C), I.E., IN THE MAIN, WHICH WE SHALL TAKE UP IN SERIATIM ; PART A RAISING A GENERAL GROUND NOT WARRANTING ANY ADJUDICATION. TRANSFER PRICING (TP) ADJUSTMENTS (PART A) 3 . THE PRINCIPAL ISSUES RAISED UNDER THIS HEAD ARE: A). RE-DETERMINATION OF ARMS LENGTH PRICE (ALP); B). SELECTION OF COMPARABLES; C). CORPORATE GUARANTEE (CG); D). WORKING CAPITAL ADJUSTMENT; AND E). FIVE PERCENT RANGE. THE ASSESSEES TP STUDY REVEALS THE FOLLOWING: 5. EXAMINATION OF THE TP STUDY OF THE ASSESSEE 5.1 FUNCTIONS PERFORMED BY M/S. BAHWAN CYBERTEK PV T. LIMITED AND ITS AES STRATEGIC MANAGEMENT FUNCTIONS: BAHWAN INDIA IS RESPONSIBLE FOR ALL MANAGEMENT FUNCTIONS OF CORPORATE STRATEGY, TREASURY, LEGAL AND REGULATORY AFFAIRS DESIGNING THE POLICY WITH RE SPECT TO ITS GROUP OPERATIONS. BAHWAN OMAN TOGETHER WITH BAHWAN INDIA PLAYS A SIGNIFICANT ROLE IN DETERMINING THE BUSINESS STRATE GY OF THE GROUP. CORPORATE SERVICES: WITH RESPECT TO HUMAN RESOURCES, FINANCIAL MANAGEMENT ROUTINE ADMINISTRATION ETC., BAHWAN INDI A IS RESPONSIBLE FOR ARRANGING THE NECESSARY RESOURCES. IT IS RESPONSIBLE FOR MANAGING ITS OWN CASH FLOWS, ACCOUNTS PAYABLE, ACCOUNTS RECEIVABLES, EMPLOYEE MANAGEMENT, MANAGEMENT INFORM ATION SYSTEM AND TRAINING, HIRING EMPLOYEES. BAHWAN INDIA PROVIDES SUPPORT TO ITS AES IN TERMS OF IMPLEMENTAL OF THOSE POLICIES. MARKETING/BUSINESS DEVELOPMENT: AES FORMULATE THE MAKING STRATEGY AND ARE RESPONSIBLE FOR MARKETING THE PRODUCTS/ SERVICES OFFERED BY BAHWAN GROUP. AS EACH AE IS THE FRONT-END CONTACT FOR THE CUSTOMERS IN ITS REGION, IT UNDERTA KES LEAD GENERATION, MARKETING AND SALES ACTIVITY FOR THE PRODUCTS/ SERV ICES PROVIDED TO THE CUSTOMERS. IT IS RESPONSIBLE FOR MAINTAINING AN D DEVELOPING RELATIONSHIP WITH ITS CUSTOMERS AND IS THEREFORE RE SPONSIBLE FOR EXPANDING THE BUSINESS. BAHWAN INDIA DOES NOT UNDER TAKE ANY MARKETING/ BUSINESS DEVELOPMENT ACTIVITY WITH RESPE CT TO THE SOFTWARE PRODUCT/SOLUTION THAT IS DELIVERABLE TO TH E CUSTOMERS OUTSIDE INDIA, HOWEVER, BAHWAN INDIA IS RESPONSIBLE FOR UND ERTAKING 3 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT MARKETING AND BUSINESS DEVELOPMENT FUNCTIONS WITHIN INDIA. CONCEPTUALISATION AND DESIGN OF THE PRODUCT: BAHWAN INDIA IN CONSULTATION WITH THE AES IS RESPONSIBLE FOR CON CEPTUALIZATION AND DESIGN OF THE PRODUCT. FUNCTIONAL SPECIFICATION AND REQUIREMENT ANALYSI S: BAHWAN INDIA DETERMINES THE REQUIREMENT ANALYSIS AND FUNCT IONAL SPECIFICATION OF THE SOFTWARE MODULE TO BE DEVELOPE D. AES INITIATE PERFORMANCE ANALYSIS TO VALIDATE THE APPROPRIATENES S OF THE FUNCTIONAL SPECIFICATIONS OF THE MODULES TO BE DESI GNED AND DEVELOPED BY BAHWAN INDIA TO A CERTAIN EXTENT. CODING AND DOCUMENTATION: BAHWAN INDIA UNDERTAKES SOFTWARE CODING AND ALSO GENERATES AND MAINTAINS DOCUMENTATI ON FOR THE CODE GENERATED. PROJECT MANAGEMENT: BAHWAN INDIA AND ITS AES JOINTLY UNDERTAKE PROJECT MANAGEMENT. AES PROVIDES INFORMAT ION (AS REQUIRED) IN ORDER TO PROVIDE CLARITY IN RESPECT OF THE WORK TO BE PERFORMED. BAHWAN INDIA INTERACTS REGULARLY WITH IT S AES AND PROJECT TRACKING HAPPENS THROUGH E-MAILS AND CONFER ENCE CALLS. THIS ENSURES CLOSE CO-ORDINATION, QUALITY CONTROL AND MI NIMAL REWORK IN THE DEVELOPMENT PROCESS. AES ARE RESPONSIBLE FOR MO NITORING AND CO-ORDINATING THE DEVELOPMENT OF THE ENTIRE SOFTWAR E PRODUCT/SOLUTION TO BE PROVIDED TO THE CUSTOMER. QUALITY CONTROL AND TESTING: BAHWAN INDIA IS RESPONSIBLE FOR THE QUALITY OF WORK UNDERTAKEN BY IT BASED ON PIE-DEFIN ED QUALITY CONTROL PROCEDURES. HOWEVER, BOTH BAHWAN INDIA AND ITS AES ARE JOINTLY RESPONSIBLE FOR THE FINAL ACCEPTANCE TESTIN G OF THE SOFTWARE PRODUCT. AFTER SALES SUPPORT: BAHWAN INDIA PROVIDES AFTER SALES SUPPORT TO THE CUSTOMERS THROUGH CALL CENTERS AND ALSO, IN THE FORM OF ANNUAL MAINTENANCE CONTRACTS. SIMILARLY, AES RENDER AFTER SALES SUPPORT SERVICES TO THE CUSTOMERS THROUGH DESIGNATE D CUSTOMER RELATIONSHIP MANAGERS. HOWEVER, BASED ON THE AGREEM ENT BETWEEN THE CUSTOMER AND AE AND/OR BAHWAN INDIA, THE SUPPOR T SERVICES ARE RENDERED EITHER FROM BY BAHWAN INDIA AND/OR AES. AL SO, THE COSTS IN RESPECT OF THESE SERVICES ARE SHARED BY BAHWAN INDI A AND ITS AES, AKIN TO THE REVENUE SHARING MODEL. HENCE THE ASSESSEE COMPANY PERFORMED ALL THE FUNCTI ONS OF AN ENTREPRENEURIAL ENTERPRISE. 5.2 THE ASSETS AND THE RISKS USED / CARRIED BY THE ASSESSEE 4 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT LAND, BUILDING, DATA PROCESSING EQUIPMENT, COMPUTER S AND OTHER ASSETS INCLUDING INTANGIBLES ARE USED IN DEVE LOPMENT OF SOFTWARE BY ASSESSEE COMPANY. MARKET & BUSINESS RISK, EXCHANGE FLUCTUATION RISKS, CREDIT & COLLECTION RISK (LIMITED LEVEL), UTILIZATION RISK, QUALITY RISK, PRODUCT LIABILITY R ISK AND MANPOWER RISK ARE CARRIED BY THE ASSESSEE COMPANY. THE ASSESSEE COMPANY HAS BORNE ALL THE RISKS OF AN ENTREPRENEURI AL ENTERPRISE. 5.3 ECONOMIC ANALYSIS THE TAXPAYER HAS ADOPTED ITSELF AS THE TESTED PARTY AND HAS CARRIED OUT AN ECONOMIC ANALYSIS WHICH IT HAS SUMMARIZED AS UNDER: ADOPTING TNMM AS THE MOST APPROPRIATE METHOD TO SUBSTANTIATE THE ARM'S LENGTHINESS OF ITS TRANSACTI ON WITH THE AES, THE ASSESSEE HAS SHORT-LISTED 25 COMPARABLE COMPANIES A FTER APPLYING CERTAIN FILTERS IN PROWESS AND CAPITAL LINE DATABAS E. THE 3 YEARS WEIGHTED AVERAGE MARGIN CALCULATION OF THE COMPARAB LE COMPANIES AFTER PROVIDING WORKING CAPITAL ADJUSTMENT IS 1.85% . AS AGAINST THIS THE ASSESSEE HAS DECLARED MARGIN OF 10.23% AS OPERATING PROFIT/OPERATING COST AFTER MAKING ECONOM IC ADJUSTMENTS TOWARDS PRODUCT DEVELOPMENT EXPENSES, UNABSORBED EX PENSES INCLUDING DEPRECIATION AND DOMESTIC TRANSACTION. BA SED ON THE ABOVE, THE TAXPAYER HOLDS THE TRANSACTION TO BE WITHIN ARM 'S LENGTH. HERE, IT MAY BE RELEVANT TO MENTION TWO THINGS: A). THE REMUNERATION MODEL CONSISTENTLY ADOPTED BY THE ASSESSEE FOR SHARING THE REVENUE BETWEEN ITSELF AND ITS ASSOCIAT E ENTERPRISES (AES) IS 70:30 FOR SOFTWARE DEVELOPMENT AND 60:40 FOR PRODUC T DEVELOPMENT. THESE RATIOS ARE BASED ON CONTRACT VALUE, AND EXCLU DE THIRD-PARTY COSTS AND COST ATTRIBUTABLE TO ON-SITE SERVICES; AND B). OUT OF THE ASSESSEES TOTAL TURNOVER OF . 32 CR., THE DOMESTIC TURNOVER IS ABOUT . 2 CR. NATURE OF INTERNATIONAL TRANSACTIONS AMOUNT (IN RS.) MAM PLI MARGIN OF TAXPAYER ADJ. MARGIN OF COMPARABLE S PROVISION OF SOFTWARE DEVELOPMENT SERVICES 295,305,086 TNMM OP/OC 10.23% 1.85 % REIMBURSEMENT RECEIVED / RECEIVABLE 7,576,541 NA - - - REIMBURSEMENT PAID / PAYABLE 1,409,208 NA - - - 5 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT THE TRANSFER PRICING OFFICER (TPO), UPON FUNCTIONAL & RISK (FAR) ANALYSIS, REJECTING THE ASSESSEES REPORT, HELD AS UNDER COMPUTING THE ALP ACCORDINGLY: 7.6 ATTRIBUTION OF INCOME BETWEEN THE AE AND THE A SSESSEE: DURING THE COURSE OF THE ASSESSEMENT PROCEEDINGS TH E ASSESSEE WAS REQUIRED TO FURNISH THE TP PRICING POLICY THE ASSESSEE HAS (NOT) FURNISHED ANY MASTER SERVICE AGREEMENTS THAT WOULD DELINEATE THE REVENUE SPLIT RATIO BETWEE N THE AES AND THE ASSESSEE. THE ASSESSEE HAS MERELY STATED THAT REVENUE SPLIT RATIO HAS BEEN FORMULATED AND FINE-TUNED BY THE ASSESSEE AND ITS AES OVER YEARS OF EXPERIENCE. NO BASIS HAS BEEN GIVEN FOR THE FIGURES. DOCUMENTATIONS AND COMPUTATIONS SUPPORTING THE RESP ECTIVE ALLOCATION, DETAILS OF EXPECTED REVENUE FLOWS, COST -BENEFIT ANALYSES WHICH WOULD SUPPORT THE ASSESSEE'S CLAIM HAVE NOT B EEN PROVIDED. IN THE ABSENCE OF THE ABOVE, THE ASSESSEE HAS NOT E STABLISHED THAT THE ENTITIES INVOLVED HAVE EMPLOYED ANY REASON AND COMPETITIVE MARKET ANALYSIS TO ACCEPT THAT THE NUMBERS AS WELL AS THE DIVISION. THIS MAKES THE ENTIRE CONTRACT BETWEEN THE ASSESSEE AND THE AE OPAQUE WHEREIN THE EVOLUTION, DERIVATION AND DETERM INATION OF THE REVENUE SPLIT RATIO IS UNAVAILABLE. IN THE ABSENCE OF THE ABOVE, THE ROBUSTNESS, VALIDITY AND RELIABILITY OF THE REVENUE SPLIT FIGURES REMAIN UNTESTIFIED AND UNJUSTIFIED. THERE ARE NO CHECKS AND CONTROLS OR THE UNPREJUDICE D DYNAMICS OF MARKETS AND NEGOTIATIONS TO HOLD THE ALLOCATIONS TO ARM'S LENGTH EQUILIBRIUMS. THIS MAKES IT ALL THE MORE IMPORTANT THAT THE ALLOCATIONS-ATTRIBUTIONS OF REVENUES BE ABOVE SUSPI CION IN THAT THERE IS NO ATTEMPT TO LOWER THE TAX BURDEN IN THE COUNTR Y, NAMELY INDIA, WHERE THE MAJORITY OF THE OPERATIONS ARE PERFORMED. HOWEVER IN THE CASE OF THE ASSESSEE, GIVEN THAT THE ALLOCATION IS DONE INTERNALLY, IT SUFFERS FROM THE LACK OF ADEQUATE SANCTITY AND THE DANGER OF RELATIVISTIC UNDER-VALUATION AND THEREBY PROFIT-SHI FTING. USUALLY, AN INDEPENDENT SERVICE PROVIDER WOULD ESTI MATE THE EXPENSES TO BE INCURRED IN OPERATING A CONTRACT AND PROVIDING A SERVICE, AND EMPLOY PROJECT STUDIES AND ANALYTICS A ND GENERATE A FINAL FIGURE OF REVENUE SHARE. IN THIS INSTANCE, TH ESE HAVE NOT SUPPLIED. ALSO NO AGREEMENTS AS MENTIONED EARLIER HAVE BEEN FURNISHED. CONSEQUENTLY UNDER THE ASSESSEE'S APPROACH, THERE I S NO WAY OF DETERMINING WHETHER THE REVENUES HAVE BEEN A TTRIBUTED TO THE ASSESSEE ON AN ARM'S LENGTH BASIS. THE FAR ANALYSIS OF THE ASSESSEE AND THE AE AS OUTL INE VIDE PARA 5.1 TO 5.2 ABOVE SHOWS THAT THE ASSESSEE IS CONCERN ED WITH ALL FUNCTIONS ASSOCIATED WITH SOFTWARE DEVELOPMENT VIZ REQUIREMENT ANALYSIS, CONCEPTUALIZATION AND DESIGN, CODING, TES TING, PROJECT MANAGEMENT AND AFTER SALE SUPPORT. HENCE THE ASSESS EE COMPANY PERFORMED ALL THE FUNCTIONS AND ASSUMED ALL THE RIS KS OF AN ENTREPRENEURIAL ENTERPRISE. THE AE IS CONFINED TO L IASONING WORK. 6 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT THE FUNCTIONS ARE REPRESENTED AS BELOW: IN THIS SITUATION, IT IS NOT KNOWN WHETHER THE REVE NUE SPLIT MEET THE CONDITIONS OF PROFITABILITY USUAL FOR AN E NTREPRENEURIAL SERVICE PROVIDER OF SIMILAR NATURE. IT IS ALSO NOT KNOWN IF THE RISK- ADJUSTED RETURNS OF THE ASSESSEE (BOTH EXPECTED AND REAL) MEET THE CONDITIONS OF PROFITABILITY THAT ARE USUAL FOR AN E NTREPRENEURIAL SERVICE PROVIDER OF SIMILAR NATURE. HENCE THE ASSESSEE'S ARITHMETIC AND APPROACH ARE NO T AUTHENTIC BECAUSE THEY REPRESENT AN INTERNAL DIVISION THROUGH ACCOUNTING APPORTIONMENT BETWEEN A PARENT AND ITS SUBSIDIARIES AND THERE IS NO EVIDENCE THAT THE REVENUE APPORTIONMENT MENTIONED I N ITS REPLY TO SHOW-CAUSE ARE UNQUALIFIEDLY SACROSANCT AND THE SAM E WAS EXPLICITLY PUT IN PLACE TO PROTECT THE TAX INTEREST S OF THE SOURCE COUNTRY. CONSEQUENTLY, THE ASSESSEE'S POSITION ON THE SANCTI TY OF REVENUE SHARING RATIO WITH ITS AES IS REJECTED. HAVING REJECTED THE ASSESSE'S POSITION, BASED ON TH E FAR ANALYSIS DEMONSTRATED ABOVE AND ALSO BASED ON STUDY OF COMPA RABLES UNDER TNMM, IF THE ASSESSEE'S MARGIN IS TO BE AT ALP, THE MORE APPROPRIATE REVENUE SHARE WITH ITS AE WOULD BE 90:1 0 RATIO. REFERENCES ARE ALSO DRAWN FROM SEC 44C OF THE INCOM E TAX ACT, WHEREIN THE SECTION DELINEATES THE MARGIN OF 5% THA T CAN BE RETAINED FOR FUNCTIONS PERFORMED BY THE HEADOFFICE. IT IS TO BE NOTED THAT THE SECTION 44C IS NOT INVOKED HERE BUT ONLY A N INFERENCE IS DRAWN TO DETERMINE AN APPROPRIATE REVENUE APPORTION MENT RATIO BETWEEN THE ASSESSEE AND THE AE. CONSIDERING THE FU NCTIONS OF THE AE WITH REGARD TO THE TRANSACTIONS WITH THE ASSESSE E, 5% OF THE TOTAL 7 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT INCOME FROM SUCH TRANSACTION MAY BE ALLOCATED IN RE SPECT OF EXPENDITURE INCURRED TOWARDS IT AND FURTHER ALLOWIN G A 100% MARKUP ON THE SAME, THE REVENUE SHARE BETWEEN THE A SSESSEE AND THE AE FOR BOTH SOFTWARE DEVELOPMENT AND PRODUCT DE VELOPMENT IS DETERMINED ON 90:10 PROPORTION. THE ASSESSEE IN ITS SUBMISSION DATED 12.01.2015 HAS PRESENTED A SUMMARY OF THE FINANCIAL RESULTS OF THE AES BUT HAS HOWEVER NOT PRESENTED THE TOTAL INCOME ARISING FROM THE TRANSAC TIONS ASSOCIATED WITH THE AES AND ASSESSEE TO FACILITATE 90: 10 SPLI T OF REVENUE. HENCE THE 70% SPLIT AS GIVEN BY THE ASSESSEE IS EXT RAPOLATED TO DETERMINE THE 90: 10 SPLIT AS FOLLOWS: HENCE AN AMOUNT OF RS.8,43,72,882/- IS PROPOSED AS AN UPWARD ADJUSTMENT TO THE REVENUE OF THE ASSESSEE. 7.7 PLI CALCULATION OF THE ASSESSEE: CONSIDERING THE ARGUMENTS GIVE IN PARA 7.5 & 7.6 ABOVE, THE PLI CALCULATION OF THE ASSESSEE IS AS UNDER: TOTAL INCOME (AS REVISED VIDE PARA 7.6) 413953259 EXPENSES: PERSONNEL 257562718 OPERATING (124870428 - 24375035(TRANSALATION FX)) 100495393 DEPRECIATION(60197925 - 22068752 (ON LET OUT PORTION) 38129173 OPERATING COST 396187284 NAME OF THE AE USD INR BAHWAN CYBER TECH FZ - LLC 48668 22784234 BAHWAN CYBER TECH LLC 5241554 235455263 BAHWAN CYBER TECH INC 803271 37065589 TOTAL INCOME FROM AES BEING 70% PROPORTION OF THE TOTAL INCOME 295305086 HENCE THE TOTAL REVENUE I NCLUSIVE OF THE PROPORTION TO THE AE WOULD BE (A) 421864409 APPORTIONMENT OF 90 0 /0 OF THE REVENUE TO AE AS DISCUSSED ABOVE (90% OF A) 379677968 8 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT OPERATING PROFIT 17765975 OP/OC 4.48% SINCE THE MARGIN OF THE ASSESSEE IS HIGHER THAN THE ADJUSTED MARGIN OF THE COMPARABLES NO ADJUSTMENT IS CONSIDERED NECESSARY. 3.1 THE FIRST ISSUE, THEREFORE, THAT ARISES FOR OUR CONSIDERATION IS IF THE TPO OUGHT TO HAVE, CONSIDERING THAT HE EXAMINED THE ASS ESSEES LIST OF COMPARABLES (17 IN NUMBER) AND, APPLYING FILTERS, ACCEPTED ONLY FIVE OF THEM (REFER PARA 7.3.1/PGS. 17-20 OF THE TPOS ORDER) AND, FURTHER, SELECTED FOUR FRESH COMPARABLES (REFER PARA 7.4/PGS. 21-22 OF THE TPOS ORDER), PROCEEDED ON THAT BASIS, SUBJECTING THE ASSESSEES OPERATING MARGIN ( I.E., OPERATING PROFIT (OP)/OPERATING COST (OC)) TO THE TRANSACTIONAL NET MARGIN METHOD (TNMM) TEST WITH REFERENCE TO THE COMPARABLES. THE ANCILLA RY QUESTION WOULD BE THE SELECTION OF THOSE COMPARABLES. THIS IS AS HE, AFTE R SELECTING THE COMPARABLES, PROCEEDED ON A DIFFERENT FOOTING, DECIDING THE APPR OPRIATE REVENUE SHARING RATIO, WHICH HE DOES AT 90:10 IN THE ASSESSEES FAVOUR. CO NSIDERING THE FUNCTIONS OF THE AES, IN HIS VIEW, A 5% (OF THE TOTAL REVENUE) WOULD BE SUFFICIENT TO ABSORB THE COSTS SUFFERED BY THE AES, TO WHICH HE ADDED ANOTHE R 5% (I.E., 100 PER CENT OF COST) AS MARGIN, RESULTING IN A REVENUE SHARING OF 90:10 IN ASSESSEES FAVOUR. TRUE, THIS DOES APPEAR ODD INASMUCH AS HE HAD TAKEN PAINS TO EXAMINE THE ASSESSEES COMPARABLES; IN FACT, ALSO SEARCHING SOM E ON HIS OWN. HOWEVER, HIS DECISION CANNOT BE OUSTED MERELY BECAUSE HE UNDERTO OK THAT EXERCISE, WHICH IN FACT, TO BE RELEVANT, IS TO BE PRECEDED BY HIS AGRE EMENT WITH THE ASSESSEES METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM). THE STAGE OF CRYSTALLIZING THE COMPARABLES WOULD BE A MATTER SUB SEQUENT, I.E., WOULD STAND TO BE CONSIDERED ONLY AFTER HAVING DECIDED THE MAM. TH E CRUX OF HIS FINDING, IN REJECTING THE TNMM AS MAM, IS THAT THE AES ARE CONF INED TO LIAISONING WORK. AND TWO, THAT THE ASSESSEE HAD NOT GIVEN ANY BASIS FOR THE REVENUE SHARING RATIO AS ADOPTED, WHICH IS ALSO NOT SUPPORTED BY ANY AGRE EMENT. IN FACT, CONSIDERING 9 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT THAT THE AGREEMENT IS NOT WITH A THIRD-PARTY, BUT A N ASSOCIATE ENTITY, REPRESENTING AN INTERNAL ARRANGEMENT, WHICH IS THE BASIS FOR THE INVOCATION OF THE TP PROVISIONS, EVEN THAT THE AGREEMENT BETWEEN THEM, COULD NOT BE REGARDED AS SACROSANCT AND THE ASSESSEE SHALL HAVE TO NECESSARI LY DISCLOSE THE BASIS OF THE REVENUE SPLIT. THE AGREEMENT WOULD THOUGH CLEARLY S PELL OUT THE FUNCTIONAL AREAS, THE ROLES AND RESPONSIBILITIES OF THE TWO PA RTNERS THE ASSESSEE AND THE AE/S. ALSO RELEVANT IN THE MATTER WOULD BE THE AGRE EMENT ENTERED WITH THIRD PARTIES, THE ASSESSEES CUSTOMERS AND RECIPIENT OF ITS SERVICES INASMUCH AS IT WOULD, WE PRESUME, SPECIFY BOTH, THE RANGE OF SERVI CES AND, TWO, WHICH SERVICES ARE TO BE PROVIDED BY WHOM. NO IMPROVEMENT IN ITS C ASE IN THIS RESPECT STANDS MADE BY THE ASSESSEE EVEN BEFORE US, I.E., BY WAY O F SUBSTANTIATING ITS CASE; THE AGREEMENT FURNISHED ON BEING CALLED UPON TO, IS DAT ED 30.03.2012, SO THAT IT WOULD NOT GOVERN THE TRANSACTIONS FOR THE RELEVANT YEAR. THE LD. AUTHORIZED REPRESENTATIVE (AR) WOULD ARGUE THAT ADOPTING THE R ATIO, ARBITRARILY DETERMINED BY THE TPO, WOULD BE INSUFFICIENT TO ABSORB THE AES REGULAR COSTS, MUCH LESS YIELD A REASONABLE MARGIN CONSISTENT WITH THE FUNCT IONS PERFORMED AND THE RISKS UNDERTAKEN BY THEM. THAT MAY WELL BE TRUE, AND AN A LP AT A REVENUE SPLIT OF 90:10 WORK TO AN OPERATING LOSS FOR THE AES, BUT TH EN IT IS FOR THE ASSESSEE TO SHOW SO, WITHOUT WHICH IT IS NO MORE THAN A BALD ST ATEMENT. AS REGARDS THE CHARGE OF IT BEING ARBITRARY, SO IS THAT BY THE ASS ESSEE IN THE ABSENCE OF ANY BASIS FOR ITS RATIO OF REVENUE SPLIT BEING DISCLOSED. IN FACT, AN ANALYSIS OF THE OPERATING STATEMENT OF THE AES, BEARING THEIR OPERATING COSTS , WOULD ALSO EXHIBIT WHAT FUNCTIONS THEY ARE PERFORMING, THEREBY EFFECTIVELY CHALLENGING, I.E., IN CONTRADISTINCTION TO THE TPOS FINDING, AFFIRMED BY THE LD. DRP, OF THE AES UNDERTAKING, IN EFFECT, ONLY LIASONING FUNCTION, ST RONGLY OBJECTED TO BY THE ASSESSEE BEFORE US. THE SCHEMATIC REPRESENTATION OF THE BUSINESS MODEL, REPRODUCED ABOVE, IT MAY BE NOTED, IS NOT DISPUTED, SO THAT THE DISPUTE, IN ESSENCE, IS THE APPROPRIATE SHARE OF THE AES, COMPE NSATED UNIFORMLY BY THE 10 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT ASSESSEE, IN THE TOTAL REVENUE (EXCLUDING REIMBURSE MENT OF COSTS). IT IS THIS ARRANGEMENT WHICH DEFINES THE INTERNATIONAL TRANSAC TIONS IN THE INSTANT CASE. AND IT IS THIS, THEREFORE, THAT IS TO BE TESTED . DESCRIBING IT AS PROVISION OF SOFTWARE SERVICES, AS THE ASSESSEE DOES IN ITS TP STUDY (RE FER PARA 4 OF THE TPOS ORDER), IS AN INCORRECT REPRESENTATION. IN FACT, THE TPO DO ES NOT ABANDON THE COMPARABLES SELECTED, BUT SUBJECTS THE ASSESSEES R EVENUE, ON THE BASIS OF THE SHARING RATIO OF 90:10, TO TNMM. CONTINUING FURTHER, WHAT THOUGH CANNOT BE DENIED I S THAT THE AE'S FUNCTIONS BEING SIMPLER BY FAR, THE SAME ARE MUCH E ASIER TO ANALYZE. IT IS WELL SETTLED THAT THE LEAST COMPLEX (ECONOMIC) ENTITY MU ST BE TAKEN AS THE TESTED PARTY, WHICH NEED NOT NECESSARILY (AND ALWAYS) BE T HE ASSESSEE. WHY, FOR THE FOREIGN TAX JURISDICTION, IT IS, ON THAT PREMISE, T HE AE THAT WOULD BE THE TESTED PARTY. IT IS, THEREFORE, THE BUSINESS AND THE ECONO MIC FUNCTIONS, AND ACCURACY WITH WHICH, CONSEQUENTLY, THE COMPARABLES CAN BE CR YSTALLIZED, RATHER THAN THE GEOGRAPHICAL LOCATION OR TAX JURISDICTION, THAT SHO ULD BE DETERMINATIVE OF WHO IS TO BE REGARDED AS THE TESTED PARTY. IN OUR CONSIDER ED VIEW, IN THE GIVEN FACTS OF THE CASE, IT IS THE ASSESSEES AES, WHO SHOULD BE T HE TESTED PARTY. THIS IS, IN FACT, WHAT BOTH THE TPO AND THE LD. DRP HAVE, WITHOUT EXP LICITLY SAYING SO, FOUND, AND WHICH IS MANIFEST IN THEIR DECISION OF THE REVE NUE SPLIT OF 90:10, TREATING THE AES AS FRONT-END OFFICES, PROVIDING LEADS AND FACIL ITATING EFFECTIVE COMMUNICATION, A CHANNEL, BETWEEN THE ASSESSEE AND ITS FOREIGN CUSTOMERS, ALSO ASSURING THEM OF BACKUP SUPPORT SERVICES, THE RESPO NSIBILITY FOR WHICH, THOUGH, IS OF THE ASSESSEE, PERFORMING THE CORE FUNCTIONS A ND, COMMENSURATELY, INCURRING NEARLY THE WHOLE OF THE COST. YES, THE ASSESSEES F OREIGN SUBSIDIARIES HAVE ALSO CAPITAL LOCKED UP IN WORKING CAPITAL ASSETS ABROAD. BUT, AGAIN, IT IS THE ASSESSEE WHO BEARS THE FINANCIAL RISK OF THE DEFAULT, I.E., APART FROM THE BUSINESS RISK OF NON-PAYMENT ON ACCOUNT OF ANY FLAW IN THE WORK UNDE RTAKEN/SERVICES RENDERED. IN FACT, IT IS PERHAPS TO AVAIL THE LOW COST OF CAP ITAL OBTAINING IN DEVELOPED 11 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT ECONOMIES VIS--VIS INDIA, THAT THE ASSESSEE, INSTE AD OF EXTENDING CREDIT TO ITS AES, REQUIRED THEM TO FINANCE THE RECEIVABLES, AVAI LING BANK CREDIT IN THOSE COUNTRIES, WHILE AT THE SAME TIME GUARANTEEING THE SAID CREDIT, SO THAT, IN EFFECT, IT IS IT WHO HAS AVAILED THE BANK CREDIT. THE FINAN CIAL COST, THOUGH, WOULD BE BORNE ONLY BY THE AES, EVEN AS IT IS NOT CLEAR IF T HIS BUSINESS MODEL AND, THUS, EXTENSION OF GUARANTEE BY THE ASSESSEE, IS TO ALL T HE AES AVAILING BANK CREDIT. THIS ASPECT, THEREFORE, SHALL HAVE TO BE EXAMINED. ONE THING, THOUGH, CLEAR IS THAT IF, AS IT APPEARS, EXTENSION OF CORPORATE GUAR ANTEE FORMS PART OF THE BUSINESS MODEL, ON THE BASIS OF WHICH FAR ANALYSIS IS CARRIE D OUT, THE SAME, THOUGH AN INTERNATIONAL TRANSACTION, IS NOT TO BE SEPARATELY BENCHMARKED, AND SHALL BE ALONG WITH THE OTHER TRANSACTIONS. THAT IS, THE FIN ANCIAL COST, THOUGH INCURRED BY THE AE/S, WOULD YET NOT ENTITLE IT TO ANY RETURN TH EREON AS THE CORRESPONDING FINANCIAL RISK IS BORNE BY THE ASSESSEE. WHY, THE T PO (AND THE LD. DRP) HAVE NOT, AND, AS IT APPEARS, FOR THE SAME REASON, NOT S EPARATELY BENCHMARKED THE INTERNATIONAL TRANSACTIONS BY WAY OF REIMBURSEMENT OF EXPENSES RECEIVED/RECEIVABLE BY THE ASSESSEE AS WELL AS THE EXPENSES/PAYABLES REIMBURSED (REFER PARA 4/PG. 2 AND PARA 7.6/PG. 29 OF THE TPO S ORDER). SIMILARLY, UNDER RISK ANALYSIS, THE ENTIRE BUSINESS AND FINANCIAL RISK OF THE BUSINESS/ENTERPRISE IS TO BE REGARDED AS THAT OF THE ASSESSEE. IN VIEW OF THE FOREGOING, IN OUR CLEAR VIEW, GIVEN THE DISTRIBUTION OF ECONOMIC FUNCTIONS, THE AES SHOULD BE REGARDED AS T HE TESTED PARTY AND THEIR PROFITS BENCHMARKED ON THE BASIS OF MAM, BE IT THE COST PLUS METHOD OR THE REVENUE SPLIT METHOD OR ANY OTHER FOR THAT MATTER. THE TPO SHALL PROPERLY SHOW CAUSE THE ASSESSEE IN THE MATTER, PROVIDING IT AN O PPORTUNITY TO RAISE OBJECTIONS IN THIS REGARD, AS WELL AND, EQUALLY IMPORTANTLY, T O ADDUCE COMPARABLES, WHICH SHALL REQUIRE BEING EXAMINED/VETTED BY THE TPO. THI S SHALL ALSO MEET THE ASSESSEES OBJECTION QUA THE RATIO ADOPTED BEING ARBITRARY AND SANS ANY BASIS. NEEDLESS TO ADD, THE ASSESSEE SHALL BE REQUIRED TO PRODUCE THE RELEVANT DATA, DULY 12 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT AUTHENTICATED, OF ITS FOREIGN SUBSIDIARIES, INCLUDI NG THE TP STUDY, IF ANY, AND ASSESSMENT, INCLUDING THE DOCUMENTS FURNISHED TO TH E TAX AUTHORITIES, UNDERTAKEN OR, AS THE CASE MAY BE, COMPLETED IN THAT COUNTRY. THE WHOLE PURPORT IS TO MAKE THE EXERCISE AS OBJECTIVE AND AUTHENTIC AS POSSIBLE . AS REGARDS THE TNMM, WHICH IS EVEN OTHERWISE TO BE CONSIDERED ONLY WHERE OTHER MORE DIRECT METHODS OF ESTIMATION FAIL, THE SAME HAS ALREADY BEEN REGAR DED AS INAPPROPRIATE IN THE ABSENCE OF THE ASSESSEE SHOWING AS TO HOW THE REVEN UE SPLIT ADOPTED IS CONSISTENT WITH THE FUNCTIONS UNDERTAKEN AND RISKS ASSUMED, OR EVEN THE COSTS INCURRED. THE REVENUES APPROACH ALSO CANNOT BE APP ROVED FOR THE SAME REASON; IT APPLYING TNMM BY SUBSTITUTING ITS RATIO FOR THAT ADOPTED BY THE ASSESSEE. THIS IS IMPERMISSIBLE, UNLESS OF COURSE THERE IS EMPIRIC AL EVIDENCE IN SUPPORT OF THE RATIO ADOPTED, WHICH IS ALSO THE FUNDAMENTAL FLAW I N THE ASSESSEES CASE. 3.2 COMING, NEXT, TO THE ASPECT OF THE VETTING OF T HE ASSESSEES COMPARABLES BY THE TPO. THE ASSESSEE HAS ADVANCED NO VALID REAS ON FOR CHALLENGING THE FINDINGS BY THE TPO IN THIS REGARD. MERELY OBJECTIN G FOR THE SAKE OF IT WOULD NOT BE OF ANY CONSEQUENCE. A COMPARABLE UNDER TNMM WO ULD, IT MAY BE APPRECIATED, WHERE THE ASSESSEE IS THE TESTED PARTY , HAVE TO BE SIMILARLY SERVICED BY AN ASSOCIATE ENTERPRISE (AE), WITH THERE BEING I N THE INSTANT CASE A DISAGREEMENT BETWEEN THE ASSESSEE AND THE REVENUE A S TO THE FUNCTIONAL CLASSIFICATION OF THE ASSESSEES AES. ALTERNATIVELY , SUITABLE ADJUSTMENT FOR THE COSTS INCURRED AND, CONSEQUENTLY, ECONOMIC VALUE OF THE SERVICES AVAILED, WOULD HAVE TO BE SUITABLY FACTORED, AND WHICH WAS NOT. WE HAVE, WHILE UPHOLDING THE REJECTION OF TNMM BY THE TPO/DRP, AS APPLIED BY THE ASSESSEE, YET NOT EXCLUDED TNMM AS AN OPTION (I.E., IN THE SECOND ROU ND), WHILE POINTING OUT ITS INHERENT LIMITATIONS AS WELL AS THE FACTORS THAT NE ED TO BE TAKEN INTO ACCOUNT IF THE SAME IS, FOR ANY REASON, TAKEN RECOURSE TO AGAI N. THE ASSESSEE AS THE TESTED PARTY, WE CLARIFY, SHALL HAVE TO BE PRECEDED BY AN INABILITY TO TEST THE AES WITH REFERENCE TO THE COMPARABLES. THE ISSUE QUA THE WORKING CAPITAL ADJUSTMENT ALSO 13 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT DOES SURVIVE UNDER THE CIRCUMSTANCES. WITH REGARD T O THE 5% RANGE, ALLOWABLE UNDER SECTION 92C, THE LAW AND IN MATTER IS WELL SE TTLED, BEING BORNE BY THE CLEAR LANGUAGE OF THE SAID PROVISION, AMENDED RETROSPECTI VELY, AS WELL AS THE CASE LAW, AND TOWARD WHICH REFERENCE BE MADE TO THE DECISION BY THE SPECIAL BENCH OF THE TRIBUNAL IN IHG IT SERVICES (I) PVT. LTD. V. ITO [2013] 23 ITR 608 (DEL)(SB). 3.3 THE ISSUE OF TP ADJUSTMENT IN THE PRESENT CASE IN RESPECT OF THE REVENUE SHARING RATIO BETWEEN THE ASSESSEE AND ITS AES IS A CCORDINGLY SET ASIDE TO THE FILE OF THE AO/TPO, WHO SHALL DECIDE ON MERITS AFTER ALL OWING THE ASSESSEE A REASONABLE OPPORTUNITY OF HEARING. NEEDLESS TO ADD, THE BURDEN OF PROOF TO SUBSTANTIATE ITS CLAIMS, BEING, IN EFFECT, THE ADOP TED RATIO OF REVENUE SHARING WITH ITS AES BEING AT ARMS LENGTH, IS ON THE ASSESSEE, EVEN AS A TPO SHALL SHOW CAUSE THE ASSESSEE QUA HIS FINDINGS BEFORE FINALIZING THE SAME. THE VALIDI TY OF THE OTHER ADJUSTMENTS, AS INDICATED ABOVE, WOULD BE WITH REFERENCE TO THE METHOD ADOPTED TOWARD THIS PRINCIPAL TRANSACTION. T HIS, THEN, COMPLETES OUR DISPOSAL OF PART B OF THE ASSESSEES APPEAL, WHICH IS PARTLY ALLOWED. CORPORATE TAX MATTERS (PART C) 4. THIS PART RAISES TWO ISSUES, I.E., DISALLOWANCE OF PRODUCT DEVELOPMENT EXPENDITURE AS CAPITAL IN NATURE (GDS. 15-16) AND D ISALLOWANCE OF FOREIGN EXCHANGE (FOREX) LOSS, AGAIN, FOR BEING CAPITAL IN NATURE (GDS. 17-18). GROUNDS 15-16 : 5. THE ASSESSEE COMPANY IS INTO THE DEVELOPMENT OF SOFTWARE IN THE BUSINESS PROCESS MANAGEMENT (BPM) SPACE AND HAD LAU NCHED ITS PRODUCT RANGE CUECENT IN 2005. SOFTWARE DEVELOPMENT COSTS OF THIS PRODUCT /PRODUCT RANGE WERE BEING CAPITALIZED BASED ON THE RECOGNITION CRI TERIA PRESCRIBED IN ACCOUNTING STANDARD (AS) 26 ON INTANGIBLE ASSETS UPTO ACCOUNTING YEAR 2008- 09. THEREAFTER, THE SAME IS, IT WAS EXPLAINED, CHAR GED TO THE PROFIT AND LOSS ACCOUNT (OPERATING STATEMENT) AS IT WAS UNABLE TO A SCERTAIN IF THE EXPENDITURE 14 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT WILL ENABLE THE ASSET TO GENERATE FUTURE ECONOMIC B ENEFITS IN EXCESS OF ITS ORIGINALLY ASSESSED STANDARD OF PERFORMANCE. THIS I S ONE OF THE CONDITIONS NECESSARY FOR THE CAPITALIZATION OF THE ADDITIONAL EXPENDITURE INCURRED IN RELATION TO AN INTANGIBLE IN TERMS OF AS 26 ISSUED BY ICAI. THIS SUMS UP THE ASSESSEES CASE, WHICH THOUGH DID NOT FIND FAVOUR WITH THE REV ENUE. IN ITS VIEW, AN INTANGIBLE ASSET IS, IRRESPECTIVE, ONLY A CAPITAL E XPENDITURE HAVING ENDURING BENEFIT, ENTITLED THOUGH TO DEPRECIATION, AND WHICH WAS ACCORDINGLY ALLOWED @ 25%, DISALLOWING THE EXPENDITURE PER SE AS NOT REVENUE. AGGRIEVED, THE ASSESSEE IS IN APPEAL. 6. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. WITHOUT DOUBT, WHAT THE ASSESSEE IS DEVELOPING IS AN INTANG IBLE, FOR THE USE IN ITS BUSINESS. THE SAME WAS BEING CAPITALIZED UPTO THE A CCOUNTING (FINANCIAL) YEAR 2008-09. THE EXPENDITURE ON SOFTWARE DEVELOPMENT WO ULD BE, WHERE SO, ADMISSIBLE U/S. 37(1), WHICH READS AS UNDER: GENERAL. 37. (1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE N ATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CA PITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXP ENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PRO FESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. CLEARLY, THEREFORE, EXPENDITURE IN THE NATURE OF CA PITAL EXPENDITURE IS NOT ADMISSIBLE. TRUE, THE ACCOUNTING STANDARD PROVIDES GUIDELINES ON THE CAPITALIZATION OR OTHERWISE OF AN EXPENSE ON AN INT ANGIBLE ASSET. WHERE, THEREFORE, THE PROBABLE FUTURE ECONOMIC BENEFITS DO NOT INCREASE THE ORIGINAL ASSESSED STANDARD OF PERFORMANCE, IT CANNOT BE SAID THAT A NEW ASSET OR ADVANTAGE HAS COME INTO BEING OR EXISTENCE ON ACCOU NT OF INCURRING THE SAID EXPENDITURE (PARA 59 OF THE STANDARD). WHAT, THEN, ONE MAY ASK, IS THE NATURE OF THE EXPENDITURE ? IT, SURELY, IS NOT MAINTENANCE EXPENDITURE. THAT IS, IF NOT ON IMPROVEMENT, OR DEVELOPING NEW PRODUCTS, WHAT IT IS ON ? WHAT IS THE EXTENT OF 15 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT IMPROVEMENT, I.E., OVER THE STANDARD OF PERFORMANCE AS ORIGINALLY ASSESSED, IS A TECHNICAL MATTER. THE FUTURE ECONOMIC BENEFITS THAT MAY ARISE THERE-FROM IS, AGAIN, SOMETHING THAT LIES IN THE WOMB OF FUTURE. T HIS, IN FACT, IS WHAT THE ASSESSEE COMPANY ALSO IMPLIES WHEN IT SAYS THAT ON ACCOUNT OF IT OPERATING IN MULTIPLE MARKETS WITH A DIVERSIFIED RANGE OF CUECENT PRODUCTS AND INCREASED COMPETITION IN THE BPM SPACE, IT WAS NOT POSSIBLE F OR IT TO ESTIMATE, WITH REASONABLE ACCURACY, THE FUTURE BENEFITS TO BE DERI VED, WHICH THUS BECOMES A CHALLENGING TASK. THE ACCOUNTING STANDARD MAY SUGGE ST OR ADVOCATE IT BEING CHARGED TO REVENUE UNDER THE CIRCUMSTANCES. THE SAME SHALL HOWEVER NOT MAKE IT A REVENUE EXPENDITURE . WHY, AN ABORTIVE CAPITAL EXPENDITURE IS ALSO CAPI TAL IN NATURE AND, THUS, A CAPITAL EXPENDITURE (REFER, INTER ALIA, SWADESHI COTTON MILLS CO. LTD. V. CIT [1967] 63 ITR 65 (SC); HASIMARA INDUSTRIES LTD. V. CIT [1998] 231 ITR 842 (SC)), EVEN AS ACCOUNTING POLICY MAY DI CTATE IT BEING WRITTEN OFF, AND NOT INCORRECTLY SO. BOTH THE REVENUE AND CAPITA L EXPENDITURE, IT MAY BE APPRECIATED, ARE INCURRED ONLY FOR THE PURPOSE OF B USINESS, WITH A VIEW TO GENERATE REVENUE. HOW SUCCESSFUL IT WOULD ACTUALLY BE IS A MATTER SUBSEQUENT, AND WHICH IN FACT IS NOT RELEVANT. AS EXPLAINED BY THE APEX COURT TIME AND AGAIN, AS IN CIT V. R.P.MOODY [1978] 115 ITR 519 (SC), THE FUTURE BENEFIT/S THAT AN EXPENDITURE MAY YIELD IS UNCERTAIN, BUT THAT BY ITSELF IS NO GROUND FOR THE SAME TO BE NOT REGARDED AS REVENUE IN NATURE, INCUR RED FOR THE PURPOSE OF GENERATING REVENUE. AN EXPENDITURE BEING UNFRUCTUOU S WOULD NOT CHANGE ITS CHARACTER, AND WOULD THUS EQUALLY QUA QUALIFY FOR BEING ALLOWED OR, AS THE CASE MAY BE, NOT SO. THE PRINCIPLE HOLDS FOR A CAPITAL E XPENDITURE AS WELL. ALL THAT THE COMPANY IN THE PRESENT CASE IS FACING IS A DIFFICUL TY IN BEING ABLE TO DETERMINE, WITH REASONABLE ACCURACY, IF THE FUTURE ECONOMIC BE NEFITS WOULD EXCEED THAT WHICH WOULD ARISE WITHOUT INCURRING THE IMPUGNED EX PENDITURE. THAT IS, A DIFFICULTY IN RELIABLY ESTIMATING THE INCREASE IN T HE FUTURE ECONOMIC BENEFITS. AND WHICH WOULD THEREFORE IMPLY AN ESTIMATE OF THE BENEFITS AS ORIGINALLY 16 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT ASSESSED AS WELL AS THE EXTENT TO WHICH THE SAME MA Y HAVE MATERIALIZED. THIS IS AS ONLY THAT WOULD ENABLE AN ASSESSMENT OF THE INCR EASE (IN THE BENEFITS) ON ACCOUNT OF THE ADDITIONAL EXPENDITURE. EVEN AS WE H AVE EXPLAINED IT TO BE NOT A RELEVANT CONSIDERATION, THERE IS NOTHING ON RECORD TO EXHIBIT THE SAID ESTIMATES/REALIZATION. WHY, WE DO NOT EVEN KNOW THE EXTENT TO WHICH THE IMPUGNED EXPENDITURE IS ON IMPROVEMENT IN-AS-MUCH A S IT COULD ALSO BE ON NEW PRODUCTS; THE ASSESSEE, AS A MATTER OF ACCOUNTING P OLICY, CHARGING THE EXPENDITURE ON PRODUCT DEVELOPMENT TO REVENUE. THE EXPENDITURE, IN OUR CLEAR VIEW, IS ONLY ON CREATING MORE PRODUCTS IN THE CUECENT RANGE OF SOFTWARE DEVELOPED BY IT, OR EFFECTING IMPROVEMENT THEREIN. THE EXPENDITURE IS, THEREFORE, ONLY A CAPITAL EXPENDITURE, RESULTING IN A CAPITAL ASSET, ON WHICH THEREFORE DEPRECIATION IS EXIGIBLE, WHICH STANDS RIGHTLY ALLO WED. THE ASSESSEES GROUNDS ARE PARTLY ALLOWED. GROUNDS 17 & 18 : 7. THE ASSESSEE WAS FOUND TO HAVE INCURRED AND CLAI MED FOREIGN EXCHANGE LOSS AT . 243.75 LACS, THE BREAKUP OF WHICH IS AS UNDER: DESCRIPTION AMOUNT REMARKS HDFC FCNR LOAN (24,456,383 ) LOSS HDFC PACKING CREDIT (4,532,060) LOSS SUBSIDIARY COMPANY DEBIT NOTES 1,306,575 GAIN BANK ACCOUNT 2,152,343 GAIN DEBTORS 1,106,825 GAIN CREDITORS 23,479 GAIN CURRENCY 24,186 GAIN TOTAL (24,375,035) THE SAME WAS EXPLAINED TO BE COMPRISING BOTH, I.E., THAT REALIZED AS WELL AS ON RESTATEMENT OF THE ASSETS AND LIABILITIES, UNDER TAKEN IN PURSUANCE TO THE MANDATORY AS-11 (BY ICAI), ALSO PLACING RELIANCE ON CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254 (SC). THE REVENUE DISALLOWS IT O N 17 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT THE BASIS THAT A FOREX LOSS IN RELATION TO A CAPITA L ASSET WOULD ONLY BE CAPITAL IN NATURE, A MATTER FURTHER SQUARELY COVERED BY S. 43A (AS SUBSTITUTED BY FINANCE ACT, 2002 W.E.F. 01.04.2003). IT IS ONLY WHERE THE SAME IS IN RESPECT OF A TRADING ASSET, THAT THE SAME WOULD BE IN THE NATURE OF A TR ADING LOSS, ALLOWABLE U/S. 28, ALSO RELYING ON THE DECISIONS IN SUTLEJ COTTON MILLS LTD. V. CIT [1979] 116 ITR 1 (SC) AND CIT V. DEMPO & CO. PVT. LTD. [1994] 206 ITR 291 (BOM). AGGRIEVED, THE ASSESSEE IS IN APPEAL. 8. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THERE IS, TO BEGIN WITH, NO DICHOTOMY BETWEEN THE DECISIONS RELI ED UPON BY THE ASSESSEE AND THE REVENUE. A TRADING LOSS SHALL ARISE, EVEN IF ON RESTATEMENT, TO THE EXTENT IT IS QUA A TRADING ASSET OR LIABILITY. THIS IS ALSO THE CLE AR MANDATE OF AS-11. TO THE EXTENT IT IS QUA A LIABILITY INCURRED ON THE ACQUISITION OF A CAPITA L ASSET, THE SAME SHALL BE A CAPITAL EXPENDITURE (OR RECEIPT), LEADIN G TO AN INCREASE (OR DECREASE) IN THE COST OF THE CAPITAL ASSET. SECTION 43A EXTENDS THIS PROPOSITION TO ALSO A BORROWING (IN FOREIGN CURRENCY) MADE SPECIFICALLY F OR THE PURPOSE OF ACQUIRING A CAPITAL ASSET, SO THAT THE FOREX LOSS INCURRED ON R EPAYING THE BORROWING, TO THE EXTENT ACTUALLY SUFFERED, I.E., WHILE DISCHARGING T HE LIABILITY, WOULD ALSO, SIMILARLY, GO TO INCREASE THE COST OF THE RELEVANT ASSET/S. CLEARLY, THEREFORE, THE LOSS TO THE EXTENT IT IS QUA THE CAPITAL BORROWED FOR ACQUIRING OR FINANCING TH E ACQUISITION OF A CAPITAL ASSET, INCURRED UPON REPAY MENT, SHALL GO TO INCREASE THE COST OF THE RELEVANT ASSET, ON WHICH INCREASED COST DEPRECIATION SHALL, CONSEQUENTLY, BE ALLOWABLE. SO, HOWEVER, IT IS ONLY THE INCREASE (OR DECREASE) IN LIABILITY (OR BORROWING), AS REALIZED, THAT SHALL B E SO CONSIDERED. TO THE EXTENT NOT REALIZED, EVEN IF ACCOUNTED FOR, AS IN VIEW OF AS-11, SHALL HAVE TO BE IGNORED FOR DETERMINING THE ASSESSEES TAXABLE INCOME AND, ACCORDINGLY, TAX LIABILITY. SECTION 43A IS A NON OBSTANTE PROVISION, SO THAT, WHERE APPLICABLE, IT SHALL PREVAIL OVER OTHER PROVISIONS, AS (SAY) S. 37(1); S . 145, ETC. IN FACT, IT EXPLICITLY PROVIDES FOR OVERRIDING THE METHOD OF ACCOUNTING AD OPTED BY THE ASSESSEE. 18 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT CONTINUING FURTHER, THE HDFC (FCNR) LOAN WAS EXTEND ED AND TAKEN AS A TERM LOAN FOR THE PURPOSE OF REPAYMENT OF AN EXISTING DE BT OF THE COMPANY. CLEARLY, IF THE DEBT IS IN RESPECT OF A LIABILITY ASSUMED TOWAR D, OR IN RESPECT OF A BORROWING FOR FINANCING, THE COST IN WHOLE OR PART, OF A CA PITAL ASSET, SEC. 43A SHALL GET ATTRACTED. ACCORDINGLY, TO THE EXTENT REALIZED, THE LOSS IN RESPECT OF THIS TERM LOAN SHALL INCREASE THE COST OF THE RELEVANT CAPITAL ASS ET/S. THE ASSESSEE SHALL BE ALLOWED DEPRECIATION ON SUCH INCREASED COST. WHERE, AND TO THE EXTENT, THE EXISTING DEBT IS QUA A TRADE LIABILITY OR A LIABILITY ASSUMED FOR FINAN CING A TRADE LIABILITY, THE CORRESPONDING LOSS SHALL BE ON REVEN UE ACCOUNT. THIS, HOWEVER, IS SUBJECT TO ONE CAVEAT, I.E., THAT THE CAPITAL ASSET FINANCED IS ACQUIRED FROM OUTSIDE INDIA. THERE IS NO FINDING QUA THIS ASPECT IN THE ORDERS BY THE REVENUE AUTHORITIES. WHERE THE CAPITAL ASSET IS NOT ACQUIRE D FROM OUTSIDE INDIA, SEC. 43A SHALL BE NO APPLICATION. THE GAIN OR LOSS IN SUCH A CASE SHALL BE INCLUDIBLE OR DEDUCTIBLE AS FOR OTHER ASSETS, OR EVEN LIABILITIES , I.E., IN TERMS OF AS 11. THE ASSESSEE SHALL THEREFORE BE ENTITLED TO THE LOSS SU FFERED DURING THE RELEVANT YEAR, I.E., WITH REFERENCE TO THE CHANGE FROM THE END OF THE IMMEDIATELY PRECEDING YEAR TO THE CURRENT YEAR-END. SUPPORT FOR THIS MAY ALSO BE DRAWN FROM THE DECISION IN CIT V. TATA IRON & STEEL CO. LTD. [1998] 231 ITR 285 (SC). THE AO SHALL DECIDE AFTER DETERMINING THIS ASPECT. WE DECI DE ACCORDINGLY. GROUNDS 17 & 18 ARE PARTLY ALLOWED. PART D : (9) GD. 19 CHALLENGES THE LEVY OF INTEREST U/S. 2 34A IN-AS-MUCH AS THE RETURN, FILED ELECTRONICALLY ON 21.11.2012, IS IN T IME, SO THAT NO INTEREST THERE- UNDER, WHICH IS ONLY FOR THE LATE FILING OF THE RET URN, COULD BE LEVIED. NO ARGUMENTS IN HIS BEHALF WERE MADE DURING HEARING, E VEN AS, WITHOUT DOUBT, WHERE THE RETURN IS FURNISHED WITHIN THE TIME SPECI FIED U/S. 139(1), NO INTEREST U/S. 234A COULD BE LEVIED. FURTHER, THE CHALLENGE T O THE LEVY OF INTEREST U/SS. 234B AND 234C, BEING CONSEQUENTIAL, FAILS (REFER: CIT V. ANJUM M. H. GHASWALA [2001] 252 ITR 1 (SC)). WE DECIDE ACCORDINGLY. 19 ITA NO.290/MDS/2017 (AY 2012-13) BAHWAN CYBERTEK PVT. LTD . V. ASST. CIT PART E : (10) THIS RAISES GROUNDS ON INITIATION OF PENALTY PROCEEDINGS, WHICH IS CLEARLY NOT MAINTAINABLE; PENALTY PROCEEDINGS BEING SEPARATE AND DISTINCT PROCEEDINGS. WE DECIDE ACCORDINGLY. 11. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED ON AUGUST 31, 2017 AT CHENNAI . SD/- SD/- ( ! ' . # ) (DUVVURU RL REDDY) $ /JUDICIAL MEMBER ( ) (SANJAY ARORA) /ACCOUNTANT MEMBER /CHENNAI, 3 /DATED, AUGUST 31, 2017 EDN 4 - /$156 76)1 /COPY TO: 1. *+ /APPELLANT 2. /0*+ /RESPONDENT 3. 81 ( )/CIT(A) 4. 81 /CIT 5. 69: /$1$ /DR 6. : ( ; /GF