Dy.CIT., Circle-1(3),, Hyderabad v. M/s Four Soft Ltd.,, Hyderabad

ITA 186/HYD/2014 | 2009-2010
Pronouncement Date: 30-11-2017 | Result: Dismissed

Appeal Details

RSA Number 18622514 RSA 2014
Assessee PAN AAACF4464A
Bench Hyderabad
Appeal Number ITA 186/HYD/2014
Duration Of Justice 3 year(s) 9 month(s) 23 day(s)
Appellant Dy.CIT., Circle-1(3),, Hyderabad
Respondent M/s Four Soft Ltd.,, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 30-11-2017
Appeal Filed By Department
Tags No record found
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 30-11-2017
Last Hearing Date 14-11-2017
First Hearing Date 14-11-2017
Assessment Year 2009-2010
Appeal Filed On 06-02-2014
Judgment Text
ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 1 OF 15 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH HYDERABAD BEFORE SMT. P. MADHAVI DEVI JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN ACCOUNTANT MEMBER ITA NO.186/HYD/2014 (ASSESSMENT YEAR: 2009-10) DCIT CIRCLE ( 3 ) HYDERABAD VS M/S. PARLED TECHNOLOGIES LTD (FORMERLY FOUR SOFT LTD) HYDERABAD PAN: AAACF 4464 A (APPELLANT) (RESPONDENT) ITA NOS.207/HYD/2014 & 268/HYD/2015 (ASSESSMENT YEARS: 2009-10 & 2010-11) M/S. PARLED TECHNOLOGIES LTD (FORMERLY FOUR SOFT LTD) HYDERABAD PAN: AAACF 4464 A VS DCIT CIRCLE ( 3 ) HYDERABAD (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI J. SIRI KUMAR DR FOR ASSESSEE : SHRI MITHILESH SAI O R D E R PER SMT. P. MADHAVI DEVI J.M. APPEALS IN ITA NOS. 186/HYD/2014 AND 207/HYD/2014 ARE CROSS APPEALS FOR THE A.Y 2009-10 AND ITA NO.268/HYD/2015 IS ASSESSEES APPEAL FOR THE A.Y 20 10-11. FOR THE A.Y 2009-10 APPEALS ARE FILED BY BOTH THE ASSE SSEE AS WELL AS DATE OF HEARING: 14.11 . 2017 DATE OF PRONOUNCEMENT: 30.11.2017 ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 2 OF 15 REVENUE AGAINST THE ASSESSMENT ORDER U/S 143(3) R.W .S 144C OF THE ACT DATED 16.12.2013. ITA NO.186/HYD/2014- REVENUES APPEAL 2. IN THIS APPEAL THE REVENUE HAS RAISED ONLY ONE GROUND AGAINST THE DIRECTION OF THE DRP TO DELETE T HE ADDITION MADE BY THE AO REDUCING THE IMPLEMENTATION EXPENDIT URE AND INTERNET CONNECTIVITY CHARGES FROM THE EXPORT TURNO VER ONLY FOR THE PURPOSE OF DEDUCTION U/S 10A OF THE ACT. AT THE TIM E OF HEARING BOTH THE PARTIES AGREED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON'BLE KARNATAKA H IGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX AND ANOTHER VS. TATA ELXSI LTD REPORTED IN (2012) 349 ITR 98 ( KAR.) AND ALSO THE JURISDICTIONAL HIGH COURT IN THE CASE OF BA CON TINUUM (ITTA NO.214 OF 2017) WHEREIN IT HAS BEEN HELD THAT IF AN Y EXPENDITURE IS EXCLUDED FROM THE EXPORT TURNOVER THEN THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT AND THE DRP HAS FOLLOW ED SIMILAR DECISIONS TO DIRECT THE AO TO REDUCE THE SAME FROM THE TOTAL TURNOVER AS WELL. RESPECTFULLY FOLLOWING THE SAME WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE DRP A ND THE REVENUES APPEAL IS ACCORDINGLY DISMISSED. ITA NOS.207/HYD/2014 A.Y 2009-10 3. AS REGARDS THE ASSESSEES APPEAL BRIEF FACTS AR E THAT THE ASSESSEE FORMERLY KNOWN AS M/S FOUR SOFT LTD WAS ENGAGED IN SOFTWARE DEVELOPMENT AND I.T. CONSULTING SERVICE S. IT FILED ITS RETURN OF INCOME FOR THE RELEVANT A.Y ON 30.09.2009 ADMITTING TOTAL INCOME OF RS.50 37 530. THEREAFTER THE ASSES SEE FILED A ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 3 OF 15 REVISED RETURN OF INCOME ON 14.10.2010 ADMITTING TO TAL INCOME OF RS.25 26 675. THE ASSESSMENT WAS TAKEN UP FOR SCRUT INY BY ISSUANCE OF NOTICES U/S 143(2) AND 142(1) OF THE AC T. ON PERUSAL OF THE FORM 3CEB FILED ALONG WITH THE RETURN OF INC OME THE AO OBSERVED THAT THE ASSESSEE HAS ENTERED INTO INTERNA TIONAL TRANSACTIONS WITH ITS AES AND THEREFORE A REFERENC E WAS MADE TO THE TPO U/S 92CA OF THE ACT FOR DETERMINATION OF TH E ALP OF THE INTERNATIONAL TRANSACTIONS. THE TPO VIDE ORDER DAT ED 22.1.2013 PROPOSED THE ADJUSTMENT OF RS.5 70 75 888 BEING THE TOTAL OF SHORTFALL IN RESPECT OF (I) SOFTWARE DEVELOPMENT SE RVICES (II) REIMBURSEMENT RECEIVED AND (III) COMMISSION ON GUAR ANTEES. THE AO ACCORDINGLY PROPOSED THE DRAFT ASSESSMENT ORDER AGAINST WHICH THE ASSESSEE PREFERRED ITS OBJECTIONS BEFORE THE DRP. THE DRP VIDE ORDERS DATED 22.11.2013 CONFIRMED THE AD DITION PROPOSED BY THE AO AND THE FINAL ASSESSMENT ORDER W AS ACCORDINGLY PASSED BY THE AO. AGGRIEVED THE ASSESS EE IS IN APPEAL BEFORE US. 4. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THOUGH THE ASSESSEE HAS RAI SED AS MANY AS 17 GROUNDS OF APPEAL THE ASSESSEE IS PURSUING O NLY GROUNDS OF APPEAL NOS. 1 7 9 12 13 AND15 TO 17. 5. AS REGARDS GROUNDS OF APPEAL 1 TO 7 AND 9 ARE CONCERNED THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT THE ASSESSEE IS THE PARENT COMPANY WHICH HAD ENTERE D INTO INTERNATIONAL TRANSACTIONS WITH ITS AES IN US AND T HAT THE ASSESSEE HAD BOTH AE AS WELL AS NON-AE TRANSACTIONS FOR SOFTWARE ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 4 OF 15 DEVELOPMENT SERVICES. HE SUBMITTED THAT THE ASSESSE E HAD ADOPTED THE INTERNAL TNMM IN ITS T.P. STUDY TO ARRI VE AT THE ALP AND ALSO TO HOLD THAT THE ASSESSEES TRANSACTION WI TH ITS AE WAS AT ALP. HE SUBMITTED THAT THE TPO HAS REJECTED THE INT ERNAL TNMM OF THE ASSESSEE AND HAS ADOPTED VARIOUS OTHER INCOM PARABLE COMPANIES AS COMPARABLES AND HAS ARRIVED AT AN ADJU STMENT TOWARDS THE SHORTFALL IN THE ALP OF SOFTWARE DEVELO PMENT SERVICES. HE SUBMITTED THAT THIS ISSUE HAD ARISEN IN THE EARL IER A.YS ALSO IN THE ASSESSEES OWN CASE AND FOR THE A.YS 2006-07 2 007-08 AND 2008-09 AND THE TRIBUNAL HAS HELD THAT THE INTERNAL TNMM CANNOT BE IGNORED. HE HAS FILED THE COPIES OF THE ORDERS BEFORE US. HE FURTHER SUBMITTED THAT THE AO HAS ALSO PASSED CO NSEQUENTIAL ORDERS BY ADOPTING THE INTERNAL TNMM BY WHICH THE A LP OF COMPARABLES WAS WITHIN THE MARGIN OF + OR -5% OF AS SESSEES MARGIN AND THEREFORE THERE WAS NIL ADJUSTMENT MADE TO THE SOFTWARE DEVELOPMENT SERVICES. COPIES OF THE CONSEQ UENTIAL ORDERS WERE ALSO FILED BEFORE US. 6. THE LEARNED DR HOWEVER SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 7. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD WE FIND THAT THE TRIBUNAL IN ITA NO.1495 /HYD/2010 FOR THE A.Y 2006-07 IN THE ASSESSEES OWN CASE AT PARA 10 TO 15 HAS HELD AS UNDER: 10. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMI TTED THAT THERE ARE ERRORS IN COMPUTING THE NET MARGIN OF THE ASSES SEE. HE SUBMITTED THAT THE TPO COMPUTED THE ADJUSTMENTS CON SIDERING THE TOTAL COST OF THE ASSESSEE (INCLUDING THE COST OF T RANSACTIONS WITH NON-AES). AN ANALYSIS UNDER TNMM CONSIDERS ONLY THE PROFIT THAT IS ATTRIBUTABLE TO PARTICULAR CONTROLLED TRANSACTIONS. THE TPO SHOULD ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 5 OF 15 HAVE DETERMINED THE ALP FOR THE INTERNATIONAL TRANS ACTION WITH AE CONSIDERING ONLY THE OPERATING COST ALLOCABLE TO TH E AE SEGMENT. FOR THIS PROPOSITION HE RELIED ON SEVERAL DECISIONS CI TED IN ITS WRITTEN SUBMISSIONS WHICH INCLUDES THE CASE OF IL JIN ELECT RONICS (I)(P) LTD. VS. ACIT REPORTED IN 30 SOT 227. 11. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO REJECTED THE SEGMENTAL FINANCIALS PREPARED BY THE A SSESSEE COMPANY FOR TRANSACTIONS WITH THE AES. THE ASSESSEE COMPANY COMPUTED THE OPERATING MARGIN FOR THE TRANSACTION W ITH THE AES AND NON AES BY APPORTIONING THE EXPENSES IN PROPORT ION TO SALES. HOWEVER THE TPO NOT APPROVED THE AFORESAID APPORTI ONMENT AND SEGMENTAL FINANCIALS. THAT RESULTED IN ALLOCATING T HE BAD DEBTS AND OTHER CERTAIN COSTS VIZ R & D TO THE AE SEGMENT W HICH IS CLEARLY IN RESPECT OF THE THIRD PARTY TRANSACTION ONLY AND NOT WITH THE AES TRANSACTION. THE LEARNED COUNSEL FOR THE ASSESSEE A LSO SUBMITTED THAT THE DRP ALSO NOT MADE ANY OBSERVATION UPON THE APPROACH OF THE TPO. THE TPO COMPUTED THE ADJUSTMENT CONSIDERIN G THE TOTAL COST OF THE ASSESSEE INCLUDING THE COST OF TRANSACT ION WITH THE NON AES. THE TPO SHOULD HAVE DETERMINED THE ALP ONLY FO R THE INTERNATIONAL TRANSACTION WITH THE AE AFTER CONSIDE RING THE ALLOCABLE OPERATING COST TO THE AE SEGMENT. ALTERNATIVELY IT IS SUBMITTED THAT EVEN IF THE TP ADJUSTMENT IS TO BE MADE IT IS TO B E MADE ONLY ON THE TRANSACTIONS WITH THE AES AND NOT ON THE TOTAL TRAN SACTION. HE RELIED ON THE SEVERAL DECISIONS PLACED IN THE PAPER BOOK I NCLUDING THAT OF IL JIN ELECTRONICS (SUPRA). 12. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMI TTED THAT SINCE THE ASSESSEE COMPANY ENJOYS TAX HOLIDAY BENEFIT IN INDIA UNDER SECTION 10A OF THE ACT AND THE TAX RATES IN THE AE S JURISDICTION IS HIGHER THAN THE INDIAN TAX RATE THERE IS NO MOTIVE TO SHIFT THE PROFIT FROM THE PARENT COMPANY TO THE SUBSIDIARY COMPANY. IT IS ALSO SUBMITTED THAT THE NATURE OF REIMBURSEMENT TRANSACT ION HAS NOT BEEN ANALYSED AND INCLUDED IN THE OPERATING COST FO R TRANSACTION WITH THE AE. SUCH REIMBURSEMENTS ARE IN RESPECT OF PAYMENT TO CONSULTANT FOR THE WORK UNDERTAKEN FOR AES. HENCE THE SAME SHOULD NOT BE INCLUDED IN THE OPERATING COST. IT IS ALSO S UBMITTED THAT EVEN IF ANY OF THE GROUNDS ON THE COMPARABLES AND THE FI LTERS IS ALLOWED BY THIS TRIBUNAL THE ASSESSEES MARGIN WOULD FALL WITHIN THE RANGE OF ALP. IT IS ALSO SUBMITTED THAT THE TPO HAS ALSO NOT JUSTIFIED IN SELECTING THE SOFTWARE PRODUCT COMPANIES HIGHER TU RNOVER COMPANIES AND HIGHER MARGIN COMPANIES AS COMPARABLE S. IN THE REJOINDER THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT THE ASSESSEE COMPANY VIDE ITS SUBMISSIONS BEFORE THE TP O DATED 16-9- 2009 HAS WORKED OUT MARGINS SEPARATELY IN RESPECT O F AE AND NON- AE TRANSACTIONS AND THE TPO SIMPLY REJECTED THE CLA IM OF THE ASSESSEE COMPANY FOR THE REASON THAT THOSE SEGMENTA L DETAILS ARE NOT AUDITED AND NO BOOKS OF ACCOUNTS ARE MAINTAINED SEPARATELY. IT IS ALSO SUBMITTED THAT TPO HIMSELF FOLLOWED THE SEG MENTAL ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 6 OF 15 FINANCIALS IN RESPECT OF COMPARABLES LIKE INFOSIS. THEREFORE IT IS SUBMITTED THAT THE PLEA OF SEGMENTAL FINANCIALS TO BE ADOPTED WAS TAKEN BOTH BEFORE THE TPO AS WELL AS DRP. 13. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REP RESENTATIVE WHILE RELYING ON THE ORDER OF THE AO AND DIRECTIONS OF THE DRP SUBMITTED THAT THE ASSESSEE COMPANY HAS NOT TAKEN T HE SPECIFIC GROUND IN THE GROUNDS OF APPEAL STATING THAT SEGMEN TAL FINANCIALS PREPARED BY THE ASSESSEE COMPANY IS TO BE ADOPTED F OR THE PURPOSE OF ARRIVING ALP. IT IS ALSO SUBMITTED THAT THE TPO RIGHTLY REJECTED THE MULTIPLE YEAR DATA ADOPTED BY THE TAX PAYER IN ITS TP STUDY. AS PER RULE 10B[4] THE DATA RELATING TO THE FINANCIAL YEA R IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRAN SACTION WITH AN INTERNATIONAL TRANSACTION. WITH REGARD TO THE ISSUE OF TURNOVER CRITERIA AND HIGH MARGINS COMPARABLES HE RELIED ON THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF SYMANTEC SOFTWAR E SOLUTIONS RENDERED IN ITA NO.7894/MUM AND SUBMITTED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE DEPARTMENT AND HE NCE THE TURNOVER CRITERIA SHOULD NOT BE APPLICABLE FOR THE COMPANY WHICH OPERATES ON COST PLUS MODEL. A COMPARABLE COMPANY C ANNOT BE REJECTED SIMPLY BECAUSE IT HAS HIGH MARGINS. 14. IT IS SUBMITTED THAT THE ASSESSING OFFICER HAS TO FOLLOW ONLY THE PROVISIONS OF THE ACT AND THE ASSESSING OFFICER NEE D NOT GO INTO THE INTENTION/MOTIVE OF THE ASSESSEE. THE TP PROVISIONS HAVE BEEN INTRODUCED TO PROTECT THE TAX BASE OF THE COMPANY I N INDIA. HE RELIED ON THE DECISION OF THE BANGALORE ITAT IN THE CASE OF SAP LABS INDIA IN ITA NO.398/BANG/2008 TO SUPPORT HIS CONTEN TION. HE ALSO FILED WRITTEN SUBMISSIONS ON THE ISSUE OF PLUS OR M INUS 5% VARIATION AS PER SECTION 92C(2) OF THE ACT AND SUBMITTED THAT THE AMENDMENT TO THE AFORESAID SECTION IS PROSPECTIVE IN NATURE F OR WHICH HE RELIED ON THE JUDGMENT OF THE APEX COURT IN THE CASE OF GO LD COIN LIMITED 999(304 ITR 308). 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED 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 ITS ASSOCIATED ENTE RPRISES 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 E NTERPRISES. THIS CONTENTION OF THE ASSESSEE HAS NOT BEEN CONTROVERTE D BY THE REVENUE BY BRINGING ANY MATERIAL ON RECORD BEFORE U S. IT IS THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT SUCH BAD DEBTS CANNOT BE TAKEN INTO ACCOUNT FOR COMPUTING TH E MARGIN OF THE ASSESSEE FROM THE TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. THE LEARN ED COUNSEL FOR THE ASSESSEE HAS ALSO FILED BEFORE US A COMPARATIVE CHART EXPLAINING ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 7 OF 15 THE COMPUTATION OF NET MARGIN EXCLUDING THE BAD DE BTS AND CLEARLY DEMONSTRATED BEFORE US THAT IF THE BAD DEBTS/REIMBU RSEMENTS ARE EXCLUDED FOR THE PURPOSE OF COMPUTING THE MARGINS O N THE TRANSACTIONS RELATING TO THE ASSOCIATED ENTERPRISES THE NET MARGIN COMES TO 19.07% WHICH IS WELL COMPARABLE WITH THE ARMS LENGTH MARGIN OF 19% DETERMINED BY THE TRANSFER PRICING OF FICER. IN OUR CONSIDERED VIEW FOR COMPUTING THE NET MARGIN OF TH E ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING ONLY THE COST REL ATED TO THE TRANSACTION WITH THE ASSOCIATED ENTERPRISES HAS TO BE CONSIDERED AND ACCORDINGLY WE APPROVE THAT SEGMENTAL FINANCIA LS IS TO BE CONSIDERED FOR THE PURPOSE OF ARRIVING AT THE NET M ARGIN ON THE INTERNATIONAL TRANSACTION WITH THE ASSESSEES ENTER PRISE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. IN THAT PROCESS BAD DEBTS/REIMBURSEMENTS HAS TO BE EXCLUDED AND SEGMENT AL PROFITABILITY HAS TO BE ADOPTED. WE FIND SUPPORT IN THIS BEHALF FROM VARIOUS DECISIONS OF THE TRIBUNAL RELIED UPON BY TH E 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 DETERMINED THE ARMS LENGTH PRICE FOR THE INTERNATIO NAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES CONSIDERING ONLY THE OP ERATING COST ALLOCABLE TO THE ASSOCIATED ENTERPRISES SEGMENT. SI NCE THE ASSESSING OFFICER HAD NO OCCASION TO VERIFY THE VERACITY OF T HE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPANY FOR LI MITED PURPOSE WE DIRECT THE ASSESSING OFFICER TO VERIFY THE SEGME NTAL FINANCIALS PREPARED BY THE ASSESSEE COMPANY AND ADOPT THE SAME FOR ARRIVING AT THE NET MARGIN ON THE INTERNATIONAL TRANSACTION WITH AES IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. WE DIRECT ACCORDINGLY. 8. FURTHER FOR THE A.Y 2007-08 IN ITA NO.1903/HYD/2011 THE TRIBUNAL AT PARA 10 HAS HELD AS UNDER: 10. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ON PERUSAL OF THE TP ORDER IT IS TO BE SEEN THAT IN PA RA 2.4.1 THE TPO HAS ADMITTED THAT THE ASSESSEE HAS SUBMITTED SEGMENTAL FINANCIALS SEPARATELY IN RESPECT OF AE AND NON-AE TRANSACTIONS. AS PER TH E AFORESAID SEGMENTAL FINANCIALS (REPRODUCED AT PAGE 4 OF TP ORDER) THE MARGIN IN RESPECT OF TRANSACTIONS WITH AES IS 39.26% AS AGAINST MARGIN O F 6.30% IN RESPECT OF NON AE TRANSACTIONS. THEREFORE WHEN SEGMENTAL DETA ILS HAVE BEEN FURNISHED BY THE ASSESSEE THE TPO SHOULD HAVE CONSI DERED THEM PROPERLY INSTEAD OF REJECTING THEM WITH BROAD AND SWEEPING A LLEGATIONS. IT SEEMS THE TPO HAS NOT PROPERLY ALLOCATED THE SEGMENTAL EX PENDITURES. IF THE BAD DEBTS ETC. ARE NOT RELATED TO AE TRANSACTIONS THEY CANNOT BE CONSIDERED AS PART OF OPERATING COST FOR DETERMINING ALP OF THE T RANSACTIONS WITH AE. SIMILARLY REIMBURSEMENT ON COST TO COST BASIS ALSO CANNOT BE INCLUDED IN THE OPERATING COST. UNFORTUNATELY THE DRP WITHOUT DEALING WITH THIS ISSUE AT DEPTH HAS FINISHED ITS JOB BY SIMPLY COMMENTING THAT TPO HAS DEALT WITH THE ISSUE APPROPRIATELY. IN THIS CONTEXT IT I S TO BE NOTED THAT WHEN ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 8 OF 15 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 PE RUSED THE MATERIAL ON RECORD. FIRST WE WILL TAKE UP THE ISSUE RELATIN G TO THE ADJUSTMENTS MADE BY THE ASSESSING OFFICER IN RESPECT OF THE INT ERNATIONAL 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 N OT RELATED TO ASSOCIATED ENTERPRISES. THIS CONTENTION OF THE ASSE SSEE HAS NOT BEEN CONTROVERTED BY THE REVENUE BY BRINGING ANY MATERIA L 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 COMPUTIN G THE MARGIN OF THE ASSESSEE FROM THE TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. THE LEARNED COUNS EL FOR THE ASSESSEE HAS ALSO FILED BEFORE US A COMPARATIVE CHART EXPLAI NING THE COMPUTATION OF NET MARGIN EXCLUDING THE BAD DEBTS AND CLEARLY DEMONSTRATED BEFORE US THAT IF THE BAD DEBTS/REIMBURSEMENTS ARE EXCLUDE D FOR THE PURPOSE OF COMPUTING THE MARGINS ON THE TRANSACTIONS RELATING TO THE ASSOCIATED ENTERPRISES THE NET MARGIN COMES TO 19.07% WHICH IS WELL COMPARABLE WITH THE ARMS LENGTH MARGIN OF 19% DETERMINED BY TH E TRANSFER PRICING OFFICER. IN OUR CONSIDERED VIEW FOR COMPUTING THE NET MARGIN OF THE ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING ONLY THE COST RELATED TO THE TRANSACTION WITH THE ASSOCIATED ENTERPRISES HAS TO BE CONSIDERED AND ACCORDINGLY WE APPROVE THAT SEGMENTAL FINANCIALS I S TO BE CONSIDERED FOR THE PURPOSE OF ARRIVING AT THE NET MARGIN ON THE IN TERNATIONAL TRANSACTION WITH THE ASSESSEE'S ENTERPRISE IN RESPECT OF SOFTWA RE DEVELOPMENT SERVICES. IN THAT PROCESS BAD DEBTS/REIMBURSEMENTS HAS TO BE EXCLUDED AND SEGMENTAL PROFITABILITY HAS TO BE ADOPTED. WE F IND SUPPORT IN THIS BEHALF FROM VARIOUS DECISIONS OF THE TRIBUNAL RELIE D UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE DULY FILING COPIES THEREOF IN THE PAPER-BOOK WHICH HAVE BEEN NOTED HEREINABOVE. THAT BEING SO T HE TPO SHOULD HAVE DETERMINED THE ARMS LENGTH PRICE FOR THE INTERNATIO NAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES CONSIDERING ONLY THE OPERATI NG COST ALLOCABLE TO THE ASSOCIATED ENTERPRISES SEGMENT. SINCE THE ASSES SING OFFICER HAD NO OCCASION TO VERIFY THE VERACITY OF THE SEGMENTAL FI NANCIALS PREPARED BY THE ASSESSEE COMPANY FOR LIMITED PURPOSE WE DIREC T THE ASSESSING OFFICER TO VERIFY THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPANY AND ADOPT THE SAME FOR ARRIVING AT THE NET MARGIN ON THE INTERNATIONAL TRANSACTION WITH AES IN RESPECT OF SO FTWARE DEVELOPMENT SERVICES. WE DIRECT ACCORDINGLY.' RESPECTFULLY FOLLOWING THE AFORESAID OBSERVATION OF THE COORDINATE BENCH IN ASSESSEE'S OWN CASE WE REMIT THIS ISSUE BACK TO THE FILE OF THE ASSESSING ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 9 OF 15 OFFICER/TPO TO DETERMINE THE ALP IN TERMS WITH THE DIRECTION OF THE COORDINATE BENCH EXTRACTED HEREINABOVE. ANOTHER CON TENTION OF THE LD. AR IS WHILE MAKING TP ADJUSTMENT AND COMPUTING WORKING CAPITAL ADJUSTMENT UNDER TNMM THE TPO HAS CONSIDERED MARGINS AT THE E NTITY LEVEL. IT WAS THEREFORE CONTENDED THAT THE TP ADJUSTMENT HAS TO B E RESTRICTED ONLY TO TRANSACTIONS WITH AE. WE FIND FORCE IN THE CONTENTI ONS OF THE LD. AR. THE ASSESSING OFFICER/TPO IS DIRECTED TO DETERMINE THE ALP ONLY CONSIDERING THE RECEIVABLES AND PAYABLES IN RESPECT OF TRANSACT IONS WITH AES ONLY. 9. IN ITA NO.1686/HYD/2012 FOR THE A.Y 2008-09 VIDE M.A. NO.19/HYD/2017 THE TRIBUNAL DIRECTED THE AO T O CONSIDER THE INTERNAL TNMM ALSO FOR BENCHMARKING OF THE ASSE SSEES INTERNATIONAL TRANSACTIONS. IN VIEW OF THE ABOVE DE CISIONS IN THE ASSESSEES OWN CASE WE DIRECT THE AO TO CONSIDER O NLY THE SEGMENTAL RESULTS OF THE AES TRANSACTIONS AND ALSO CONSIDER THE INTERNAL TNMM FOR THE PURPOSE OF BENCH MARKING ASSE SSEES TRANSACTIONS OF SOFTWARE DEVELOPMENT SERVICES BEFOR E ARRIVING AT THE ALP. GROUND OF APPEAL NO.1 IS ACCORDINGLY TREAT ED AS ALLOWED AND GROUND NOS. 7 AND 9 ARE ALSO REMANDED TO THE FI LE OF THE AO WITH A DIRECTION TO RECONSIDER THE SAME IN ACCORDAN CE WITH THE DIRECTIONS AS ABOVE. GROUNDS OF APPEAL NOS. 1 7 AN D 9 ARE THUS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 10. AS REGARDS GROUND NO.12 WE FIND THAT THIS ISSU E ALSO IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISIO N OF THE COORDINATE BENCH IN THE ASSESSEES OWN CASE FOR THE A.YS 2006-07 AND 2007-08 WHEREIN IT HAS BEEN HELD THAT THE REIMB URSEMENT OF EXPENSES ON COST TO COST BASIS DOES NOT REQUIRE ANY MARK UP. IT IS CLARIFIED BY THE LEARNED COUNSEL FOR THE ASSESSEE T HAT IN THE EARLIER A.Y THE TPO HAD INCLUDED THE REIMBURSEMENT OF COST TO THE OPERATING COST OF THE INTERNATIONAL TRANSACTION FOR ARRIVING AT THE ALP BUT IN THE RELEVANT A.Y THE AO TREATED IT AS A SEPARATE ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 10 OF 15 INTERNATIONAL TRANSACTION AND HAS ADDED A MARKUP OF 10% TO MAKE THE ADJUSTMENT. WE FIND THAT BEFORE THE TPO THE ASSESSEE HAS MADE DETAILED SUBMISSIONS THAT THE REIMBURSEMEN T OF THE EXPENDITURE IS DONE BOTH BY THE ASSESSEE AS WELL AS ITS AES WITHOUT ANY IN MARKUP AND THEREFORE THERE SHOULD N OT BE ANY ADJUSTMENT ON SUCH ACCOUNT. HE SUBMITTED THAT THIS REIMBURSEMENT OF EXPENDITURE IS MOSTLY ON THE TRAVE L COST OF THE DEPUTED EMPLOYEES BOTH OF THE ASSESSEE AS WELL AS I TS AES. 11. IN VIEW OF THE DECISION OF THE COORDINATE BENCH IN THE ASSESSEES OWN CASE IN THE EARLIER A.YS ON SIMILAR SET OF FACTS WE HOLD THAT THE REIMBURSEMENT OF EXPENDITURE CANNOT B E TREATED AS A SEPARATE INTERNATIONAL TRANSACTION WITH A MARKUP ON THE SAME. THEREFORE THE ADJUSTMENT ON ACCOUNT OF SUCH TRANSA CTION IS DELETED. 12. AS REGARDS GROUND NO.13 THE LEARNED COUNSEL FO R THE ASSESSEE SUBMITTED THAT THE CORPORATE GUARANTEES CA NNOT BE CONSIDERED AS AN INTERNATIONAL TRANSACTION AS IT IS NOT COVERED UNDER THE DEFINITION OF INTERNATIONAL TRANSACTION U /S 92B OF THE ACT FOR THE RELEVANT PERIOD. HE PLACED RELIANCE UP ON VARIOUS DECISIONS OF THIS TRIBUNAL WHEREIN IT HAS BEEN HELD THAT PRIOR TO THE AMENDMENT OF SECTION 92B BY THE FINANCE ACT OF 2012 CORPORATE GUARANTEE CANNOT BE TREATED AS AN INTERNA TIONAL TRANSACTION. 13. THE LEARNED DR HOWEVER RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 11 OF 15 14. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD WE FIND THAT THIS ISSUE IS COVERED IN FAVOU R OF THE ASSESSEE BY THE DECISION OF THE VARIOUS BENCHES OF THE TRIBUNAL AND PARTICULARLY IN THE CASE OF RAIN CEMENTS IN ITA NO. 222/HYD/2014 & OTHERS DATED 26 TH APRIL 2015 WHEREIN IT HAS BEEN HELD THAT THE AME NDED PROVISION IS APPLICABLE ONLY W.E.F. A.Y 2013-14 AND NOT FOR THE PERIOD PRIOR THERETO. BOTH OF US I.E. A.M AND JM ARE SIGNATORY TO THE SAI D DECISION. THEREFORE WE ALLOW THIS GROUND OF APPEAL AND DELETE THE ADDIT ION/ADJUSTMENT MADE ON ACCOUNT OF CORPORATE GUARANTEE FEE. 15. AS REGARDS GROUND NO.15 FOR ALLOWANCE OF TDS CR EDIT AS CLAIMED IN ITS RETURN OF INCOME WE REMIT THIS G ROUND TO THE FILE OF THE AO WITH A DIRECTION TO ALLOW THE SAME IN ACC ORDANCE WITH LAW AFTER VERIFICATION OF THE ASSESSEES CLAIM. 16. AS REGARDS GROUND NO.16 BRIEF FACTS ARE THAT T HE NET INCOME FROM SALE OF 3 RD PARTY LICENSES WAS CREDITED TO THE P&L A/C. THE AO OBSERVED THAT THE PROFIT DERIVED FROM T RADING OF 3 RD PARTY LICENSE IS NOT THE PROFIT DERIVED FROM THE SO FTWARE DEVELOPMENT AND EXPORT THE SAME IS ELIGIBLE FOR DE DUCTION U/S 10A AND IS THEREFORE TO BE EXCLUDED FROM THE PROFI T ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. CONSEQUENTLY HE EXCL UDED THE SAME FROM THE EXPORT TURNOVER AS WELL AS FROM THE T OTAL TURNOVER FOR THE PURPOSE OF COMPUTING THE INCOME. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. EXCEPT FOR RELYING ON THE C ONTENTIONS MADE BEFORE THE AO THE LEARNED COUNSEL FOR THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE AS TO HOW IT WILL BE ELIGIBLE F OR DEDUCTION U/S 10A OF THE ACT OR AS TO HOW IT IS DERIVED FROM SOFT WARE ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 12 OF 15 DEVELOPMENT AND EXPORT. SINCE THE SAME HAS BEEN EXC LUDED BOTH FROM THE EXPORT AS WELL AS FROM THE TOTAL TURNOVER THE NET RESULT IS NIL AND THERE IS NO PREJUDICE CAUSED TO THE ASSES SEE. IN VIEW OF THE SAME WE DO NOT SEE ANY REASON TO INTERFERE WIT H THE ORDER OF THE AO ON THIS ISSUE AND THE ASSESSEES GROUND OF A PPEAL NO.16 IS REJECTED. 17. GROUND NO.17 IS AGAINST THE INITIATION OF PENAL TY PROCEEDINGS U/S 271(1)(C) OF THE ACT. WE REJECT THE SAME AS IT IS PREMATURE IN NATURE. 18. IN THE RESULT ASSESSEES APPEAL FOR A.Y 2009-1 0 IS PARTLY ALLOWED. ITA NO.268/HYD/2015 A.Y 2010-11 19. IN THIS APPEAL AGAINST THE ASSESSMENT ORDER U/S 143(3) R.W.S. 144C OF THE ACT ALL THE GROUNDS RAISED BY T HE ASSESSEE ARE SIMILAR TO THE GROUNDS RAISED FOR THE A.Y 2009-10 A ND FOR THE DETAILED REASONS GIVEN IN OUR ORDER EVEN DATED FOR THE A.Y 2009- 10 THE GROUNDS OF APPEAL OF THE ASSESSEE FOR THE A .Y 2009-10 I.E. GROUND 1 AGAINST REJECTION OF INTERNAL TNMM AND GRO UNDS 5 & 6 AGAINST INCOMPARABLE COMPANIES TAKEN AS COMPARABLES ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 20. AS REGARDS GROUND NO.7 AGAINST ERROR IN COMPUTA TION OF MARGIN OF THE COMPARABLES BY CONSIDERING THE PRO VISION FOR BAD AND DOUBTFUL DEBTS AS NON-OPERATING IN NATURE WE F IND THAT THIS ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 13 OF 15 ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN THE EARLIER A.YS AS REPRODUCED IN P ARA 8 ABOVE AND FOR THE REASONS MENTIONED THEREIN THIS GROUND IS ALSO REMITTED TO THE FILE OF THE AO AND IS TREATED AS AL LOWED FOR STATISTICAL PURPOSES. GROUND NO.8 IS ALSO REMITTED TO THE FILE OF THE AO. 21. WITH REGARD TO GROUND NO.9 AGAINST MARK UP ON REIMBURSEMENT OF EXPENSES RECEIVED BY THE ASSESSEE WE HOLD THAT THIS GROUND IS SIMILAR TO THE ASSESSEES GROUNDS OF APPEAL NO.12 FOR THE A.Y 2009-10 AND FOR THE DETAILED REASONS GI VEN THEREIN THIS GROUND OF APPEAL IS ALLOWED. 22. WITH REGARD TO GROUND NO.10 AGAINST COMPUTATION OF ALP ON CORPORATE GUARANTEE WE HAVE ALREADY HELD FO R A.Y 2009- 10 THAT PRIOR TO THE AMENDMENT OF SECTION 92B BY TH E FINANCE ACT OF 2012 CORPORATE GUARANTEE IS NOT AN INTERNATIONA L TRANSACTION. THEREFORE THIS GROUND OF APPEAL IS ALLOWED. 23. AS REGARDS GROUNDS 11 AGAINST LEVY OF INTEREST U/S 234B BEING CONSEQUENTIAL IN NATURE THE AO IS DIREC TED TO GIVE THE CONSEQUENTIAL RELIEF IF ANY TO THE ASSESSEE IN AC CORDANCE WITH LAW. 24. AS REGARDS GROUND NO.12 AGAINST INITIATION OF P ENALTY PROCEEDINGS U/S 271(1)(C) 271AA AND 271BA OF THE A CT IT IS DISMISSED AS A PREMATURE GROUND. ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 14 OF 15 25. AS REGARDS GROUND NO.13 AGAINST THE DISALLOWANC E OF BAD DEBTS WRITTEN OFF WE FIND THAT THERE IS SOME D ISCREPANCY IN THE FIGURE OF BAD DEBTS WRITTEN OFF BY THE ASSESSEE FOR THE A.YS 2009-10 AND 2010-11 AND THE FIGURE TAKEN BY THE AO AND IT APPEARS THAT THE AO HAS TAKEN THE FIGURE OF A.Y 200 9-10 FOR MAKING THE DISALLOWANCE IN THE A.Y 2010-11. IN VIEW OF THE SAME WE DEEM IT FIT AND PROPER TO REMAND THE ISSUE TO TH E FILE OF THE AO FOR VERIFICATION AND ADJUDICATION IN ACCORDANCE WIT H LAW AFTER GIVING THE ASSESSEE A FAIR OPPORTUNITY OF HEARING. THIS GROUND IS THEREFORE TREATED AS ALLOWED FOR STATISTICAL PURPO SES. 26. WITH REGARD TO GROUND NO.14 WE DIRECT THE AO T O VERIFY THE CLAIM OF THE ASSESSEE OF TDS CREDIT AND ALLOW THE SAME IN ACCORDANCE WITH LAW. 27. IN THE RESULT ASSESSEES APPEAL FOR THE A.Y 20 10-11 IS TREATED AS PARTLY ALLOWED. 28. TO SUM UP REVENUES APPEAL FOR A.Y 2009-10 IS DISMISSED AND ASSESSEES APPEALS FOR A.YS 2009-10 & 2010-11 ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH NOVEMBER 2017. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD DATED 30 TH NOVEMBER 2017. VINODAN/SPS ITA NOS 186 AND 207 OF 2014 AND 268 OF 2015 M/S. FOUR SOFT LTD HYDERABAD. PAGE 15 OF 15 COPY TO: 1 DCIT CIRCLE 1(3) 4 TH FLOOR AAYAKAR BHAVAN HYDERABAD 500004 2 M/S. PARLED TECHNOLOGIES LTD (FORMERLY FOUR SOFT LTD) 5Q1 A3 5 TH FLOOR CYBER TOWERS HI - TECH CITY MADHAPUR HYDERABAD 3 DRP HYDERABAD 500004 4 5 TRANSFER PRICING OFFICER (ADDL.CIT)(T.P) HYDERABAD 500004 DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) IT TOWERS 10-2-3 AC GUARDS HYDERABAD 50004 6 THE DR ITAT HYDERABAD 7 GUARD FILE BY ORDER