AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2014 (4) TMI 285
X X X X Extracts X X X X
X X X X Extracts X X X X
....r for the 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 countries with 379 customer installations. The assessee, for the impugned assessment year filed its return of income on 30-10-2007 declaring 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 year under dispute, the assessee declared international transactions with 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 international transaction with non AEs also. The total revenue earned towards provision 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 out to 14.76% of the revenue ea....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... multiple year data and not confining to the financial data of the current financial year. The TPO further observed that the assessee while selecting/rejecting comparables has not considered the verticals/horizontals of software industry and companies engaged in software development were treated as comparables on a broad spectrum. The Assessing Officer did not accept the CUP method followed by the assessee because of the fact the assessee 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 though a show cause notice was issued to the assessee. It is further mentioned in the TP order that since the assessee did not furnish any evidence like the cost audit etc., and only furnished a letter wherein it was stated that an independent CA was appointed for verifying the hourly 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 hourly rate and recorded a statement from him. As noted by the TPO, the conce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terest on loans provided to AEs. While arriving at aforesaid TP adjustment, the TPO considered 'BBB' rated bonds in India as comparable transactions and determined the bench mark rate of 14%. The TPO further noted that during the year under consideration the loan provided by the assessee to its subsidiary 4S Netherlands of Rs.18,89,30,971/- was converted into share premium on existing equity. The TPO concluded that the equity is nothing but loan and accordingly made TP adjustment by charging interest at the rate of 14% which amounted to Rs.2,57,50,336/-. The TPO also noted that during the year the assessee has provided corporate guarantee for the loan taken by 4S BV for acquisition of DCS group. The TPO proceeded to determine the ALP on the corporate guarantee at the rate of 3.75% and made an adjustment of Rs.2,61,79,350/-. Thus, the total TP adjustment recommended by the TPO was to the tune of Rs.9,15,09,841/-. 6. In consequence of the order passed by the TPO, the Assessing Officer passed a draf t assessment order incorporating the adjustments suggested by the TPO. That apart, the Assessing Off icer made further additions by re-working the deduction u/s 10A of the Act and makin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es the comparability criteria for an international transaction with an uncontrolled transaction. In terms with the aforesaid 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 that the TPO has erred in computing the operating margin for the transactions with AEs and non AEs and also erred in allocating the bad debts such as R & D to the AE segment which apparently are in respect of third party transactions only. It was submitted that even as per the computation of TPO the margin with the AEs and non AEs is the same. Hence, the transaction has to be held to be wi thin arm's length. The Ld. AR submitted that process adopted by the TPO for determining ALP is erroneous as he has included in the operating cost net payable to AE's which includes expenses already debited in the P&L A/c in the operating cost for determining ALP of the intra group software services transactions. Further, the TPO included reimbursements by AEs for payments made on their behalf, in operating cost for determining ALP of the transactions relating to provision of softw....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... with the issue appropriately. In this context, it is to be noted that when identical issue was agitated by the assessee before the Tribunal for 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 perused the material on record. First, we will take up the issue relating to the adjustments made by the assessing officer in respect of the international transactions with Four Soft Limited, Hyderabad vs Assessee on 9 September, 2011its associated enterprises in the software development services. It is the contention of the assessee that bad debts incurred by the assessee company are in respect of transactions, which are not related to associated enterprises. This contention of the assessee has not been controverted by the Revenue by bringing any material on record before us. It is the contention of the learned counsel for the assessee that such bad debts cannot be taken into account for computing the margin of the assessee from the transactions with the associated enterprises in respect of software development services. The learned counsel for the assessee has also file....
X X X X Extracts X X X X
X X X X Extracts X X X X
....directed to determine the ALP only considering the receivables and payables in respect of transactions with AEs only. 11. The next issue is wi th regard to selection of certain companies as comparables. Though, in view of our direction in para 10 above the other issues relating to determination of ALP of software development services may have become redundant, but considering the fact that parties were heard at length on the issue of selection of certain comparables by the TPO, We prefer to record our finding in respect of each of them as under:- Avani Cimcon Technologies Limited:- 11.1 The learned AR submitted that the aforesaid company cannot be treated as comparable to the assessee as it is not a purely software service provider and has revenue from products also. 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 also makes it incomparable to the assessee. In support of such contention, the learned AR relied on a number of decisions of different benches of the Tribunal including Hyderabad Benches, copies of which are....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s including products, consultancy and solutions. Both these companies own intangibles and assume considerable risk which results in earning higher profits. 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 contentions of the assessee submitted that so far as Infosys Technologies is concerned, the assessee itself has selected the said company in the TP documentation. Therefore, the assessee cannot again object to the TPO selecting the said company as comparable. He further submitted that only because both these companies have brand value and are big in size they cannot be treated as incomparable to the assessee. 11.6 In rejoinder, the ld. AR submitted that the assessee selected Infosys on the basis of three years data whereas TPO has considered only current year data. The learned AR further submitted that if the assessee has mistakenly selected a comparable, it cannot be estopped from objecting to the selection of that comparable in proceedings before higher forum. In this context, the learned AR relied upon the Income-tax Appellate Tribunal Special Bench decisio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....learned AR relied upon the decision of co-ordinate bench of this Tribunal in case of Virtusa (India) Pvt. Ltd. V/s. DCIT (supra) and various other decisions. 11.9 The learned DR, on the other hand, relied on the reasoning of the TPO. 11.10 We have heard the parties and perused the materials on record. So far as this company is concerned, the assessee has sought exclusion of the aforesaid company on the ground that this company fails employee cost filter. In this context, the learned AR has relied upon the decision of co-ordinate Bench of this Tribunal 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 coordinate 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 decision 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 materials on record. The main objection of the assessee with regard to the afores....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ur direction in the preceding paragraphs. If on such determination of ALP the price charged by the assessee for the international 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 adjustment of software development services segment as they were specifically not argued by the learned AR. 12. Ground No.16 relates to determination of arm's length interest rate at 14% for loans provided to Foursoft BV, Netherlands. 13. During the Transfer Pricing proceedings, the TPO noticed that the assessee has advanced loan of 10,90,000 Singapore Dollars to its AE. The assessee has charged interest at 8.30% as was the case in the preceding assessment year. In the TP documentation the assessee had justified the interest charged by stating that as per the prime lending rates issued by Monetary Authority of Singapore during the year 2007, the average lending rates adopted by Singapore banks while granting loans to domestic Singapore borrowers is 5.3%. Hence, interest charged by the assessee at 8.3% is within arm's length. 14. The TPO however, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the file of the assessing officer, to verify the correctness of the claim made by the assessee company. In view of this mat ter, we remit this matter to the file of the assessing officer to verify the actual average LIBOR prevailed in the financial year relevant to the assessment year under consideration and adopt the interest rate 4.42% if the claim of the assessee is found correct. The ground raised by the assessee on this issue is partly allowed for statistical purpose". 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, we direct the A.O./TPO to determine the arms length interest on loan advanced by assessee to its AE by applying LIBOR + percentage points. In this context, A.O./TPO may consider assessee's offer of LIBOR + 2% to find out whether the interest charged by the assessee to its AE is within arm's length. With the aforesaid direction, we remit the issue to the file of the A.O./TPO for deciding afresh, after extending opportunity of being heard to the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....case the loan was not converted into equity. The Ld. A.R. relied upon a decision of ITAT, Mumbai Bench in case of Besix Kier Dabhol, SA vs. DCIT (ITA.No.4249/Mum/2007) wherein 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 materials 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 seen that the Bench after examining the agreement between the parties did not f ind anything to suggest that loan was to be treated as a quasi capital. Further, the Bench observed that nothing was brought to its notice to show that there was any technical problem for which loan could not have been contributed as capital originally, if it was actually meant to be capital contribution. However, in the case before us, it is specifically contended by the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee. The learned AR further contended that the issue is covered in favour of the assessee by virtue of the order passed by the Tribunal in assessee's own case for AY 2006-07 (supra). 25.1 The learned DR, on the other hand, submitted that by virtue of the amendment made to section 92B of the Act with retrospective effect from 01/04/2002, the corporate guarantee provided by the assessee is to be considered as an international transaction, and, therefore, the Assessing Officer was justified in determining arm's length price of such transaction. 25.2 Having considered the submissions of the parties, we are unable to accept the contention of the learned AR that corporate guarantee of the nature provided by the assessee will not come within 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 amended by the Finance Act, 2012 with the insertion of Explanation I (c) with retrospective effect from 01/04/2002. Explanation (i)(c) to section 92B, reads as under: " capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable sec....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../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 ratio laid down in case of Glenmark Pharmaceuticals Vs. ACIT (supra) and remitted the issue back to the TPO to decide the quantum of corporate guarantee rate by following the method adopted in case of Glenmark Pharmaceuticals (supra). 26. Since the issue in the present case is identical to the issue decided by the ITAT, Hyderabad Bench in case of Infotech Enterprises (supra), following the same, we also remit this issue to the file of the TPO to decide the quantum of corporate guarantee rates accordingly. If the assessee is able to bring on record any comparables with regard to corporate guarantee, the TPO may also consider the same while determining ALP of corporate guarantee. The TPO must provide a reasonable opportunity of being heard to the assessee before deciding the issue. This ground is allowed for statistical purposes. 27. Ground No.19 relates to disallowance of Rs.14,49,523/- under section 14A of the Act. 28. Facts in brief are, during the assessment proceedings the A.O. noticed that asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are routed through profit and loss account. It was therefore submitted that the expenditure is allowable. In support of such contention, 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 materials on record. As can be seen from the contention of the learned AR, the expenditure on purchase of computer software is claimed as revenue expenditure mainly relying upon the decision of Income-tax Appellate Tribunal, Delhi Special Bench in the case of Amway India Enterprises Vs. DCIT ((supra)). On a careful reading of the aforesaid decision, we find that the Special Bench has laid down certain parameters for determining the nature of expenditure incurred in acquiring software. The relevant portion from the decision is extracted hereunder for sake of convenience: "58. The following factors would be relevant to determine whether the advantage operates in the capital field or revenue field. (i) Nature of business of the assessee : It is necessary to obtain an understanding of the business function or effect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ral tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus. If there are associated 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 capital. These changes are likely to be most radical when operations previously carried on manually are computerised. (iv) It has to be borne in mind that computer software 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 mak....