ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(1), CHENNAI, CHENNAI vs. BAHWAN CYBERTEK PVT LTD, CHENNAI

26.11.2021 passed by the Assessing Officer, National Faceless Assessment Centre – Delhi, (AO) u/s.143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter “the Act”).

The brief facts emanating from the records are that the assessee is a company engaged in the business of Software Development Services. The assessee filed its return of income for the A.Y.2017-18 on 30.11.2017 declaring a total income of INR 10,44,46,200. The case was selected for scrutiny through CASS and accordingly statutory notices were issued to the assessee. During the assessment proceedings, reference was made to the Transfer Pricing Officer ('TPO') u/s.92CA(1) of the Act for determination of Arms Length Price ("ALP") in respect of international transactions

Accordingly, the following are the grounds / issues are taken up for adjudication:

Ground No. i is general in nature and hence not adjudicated.

The first issue that came up for our consideration in Ground No.ii & iii of revenue’s appeal is inclusion of M/s.Nihilent Limited as a comparable company for the purpose of determining the arms’ length price of software development services rendered by the assessee to its Associate Enterprise (“AE”).

The brief facts in relation to this particular ground raised by the revenue are that M/s. Nihilent Limited was included as part of the list of comparable companies during the course of assessment proceedings based on independent search conducted by TPO. The Assessee objected to the inclusion of Nihilent as a comparable company on the basis that it is functionally dissimilar, engaged in diversified activities and absence of segmental information. However, the TPO rejected the contentions of the Assessee stating that it is into Software and Software related services based on the business classification provided by the company as part of its Annual Report filed before the Ministry of Corporate Affairs. Accordingly, the TPO retained the same as part of the list of comparable companies.

On appeal before the Ld.CIT(A) after going through the Annual Report of the :-5-: ITA No.: 1836/Chny/2024, C.O.No.62/Chny/2024 & IT(TP) A No.: 22/CHNY/2024. company observed that the company is engaged in diversified business activities apart from software development services such as consulting, advanced analytics, business consulting, block chain, data signs and cloud services etc. Further, the Ld.CIT(A) observed that the business classification provided by the company in its Annual Report filed before the MCA is inconclusive since the company itself had classified its business activities into ‘other professional services and business services & other consulting services NEC’ as part of the Annual Report. Further, relying on the decision of co- ordinate bench in the case of Carl Zeiss India (P) Limited vs. DCIT (ITA No. 192/Bang/2022) and Subex Limited vs. DCIT [2023] (147 taxmann.com 559) for the AY 2017-18, wherein Nihilent was held to be engaged in diverse business functions and not comparable to company engaged in software development directed exclusion of M/s.Nihilent Limited from the list of comparable companies. Before us, the Ld.DR referring to the order of the TPO submitted that the Ld.CIT(A) has erred excluding M/s.Nihilent Limited as a comparable company on the basis that it is functionally dissimilar vis-à-vis assessee. The Ld.DR further referred to the Annual Report of M/s.Nihilent Limited and submitted that the M/s.Nihilent Limited is functionally comparable to the respondent company since as per Annual Report the business classification is reported as “IT Consultancy, Software Development and related services”. Further, referring to the Profit and Loss Account, the Assessee is engaged in the business of services which is software related services. Hence, the Ld.DR prayed for inclusion of the same stating the TPO has rightly included the said company as comparable to the respondent.

Per contra, the Ld.AR for the Assessee submitted that the Assessee being engaged in providing software development services cannot be comparable to that of M/s.Nihilent Limited which engaged in providing IT Consultancy Services. The Ld.AR further referred to the Annual Report of the company and submitted that the core activity of Nihilent Limited as per NIC Code No.99831319 allotted, “other professional, technical and business services” and the entire turnover of the company is from the core activity of “other IT consultancy services”. Further, referring to the business background disclosed in Annual Report the Ld.AR submitted that Nihilent Limited is engaged in rendering software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. Therefore, the Ld.AR referring to the services offerings disclosed in the Annual Report of the company submitted that Nihilent is into diversified activities such as enterprise transformation, digital transformation and enterprise IT services which is not functionally comparable to the assessee engaged in providing software development services. The Ld.AR relied on the following decisions of the coordinate benches of the Hon’ble Tribunal for the same A.Y.2017-18 wherein it was held that M/s.Nihilent Limited is functionally dissimilar to a company engaged in software development services and the same was directed to excluded from the list of comparable companies: • Red Hat India Private Limited Vs Income Tax Officer (ITA No. 801/Mum/2022) (Mum Trib) • Subex Ltd vs DCIT [2023] (147 taxmann.com 559) (Bang Trib) • Etisalat Software Solutions Private Limited Vs Deputy Commissioner of Income Tax [2022] 144 taxmann.com 162 (Bang Trib) • AMD India Private Limited Vs The Assistant Commissioner of Income Tax [2023] (154 taxmann.com 341) (Bang Trib) • Carl Zeiss India (P) Limited vs. DCIT (153 taxmann.com 519) (Bang Trib) 10. We have carefully heard the rival submissions, perused the order of the lower

Further, Nihilent limited itself has disclosed its business offering in the Annual Report as enterprise transformation, digital transformation and enterprise IT services.

Further, we find that the identical issues came up for consideration before the Co-ordinate bench of the Tribunal in the case of Red Hat India Private Limited Vs.Income Tax Officer (ITA No. 801/Mum/2022) (Mum Trib) for the same A.Y. wherein it was held that M/s.Nihilent Limited is functionally dissimilar to a company engaged in software development services and the same was directed to excluded from the list of comparable companies. The relevant extracts of the tribunal order is as under:

Further, we also find the following decisions of the coordinate bench of the tribunal have held that Nihilent functionally dissimilar to a company engaged in software development and consequently directed exclusion of the same from the list of comparable companies for the AY 2017-18: • Subex Ltd vs DCIT [2023] (147 taxmann.com 559) (Bang Trib) • Etisalat Software Solutions Private Limited Vs Deputy Commissioner of Income Tax [2022] 144 taxmann.com 162 (Bang Trib) • AMD India Private Limited Vs The Assistant Commissioner of Income Tax [2023] (154 taxmann.com 341) (Bang Trib) • Carl Zeiss India (P) Limited vs. DCIT (153 taxmann.com 519) (Bang Trib) 14. In view of the above discussion, respectfully following the judicial precedents cited above, we concur with Ld.CIT(A) in excluding M/s.Nihilent Limited. Therefore, we do not find any reason to interfere in the order of the ld.CIT(A) and uphold the same. As a result, the Ground Nos.ii & iii raised by the Revenue stands dismissed.

The next issue that came up for our consideration in Ground No.iv of revenue’s appeal is whether the Ld.CIT(A) was correct in directing to re-compute the guarantee fee at the rate of 0.5 percent ignoring the fact that the TPO has proposed 1 percent as guarantee commissions based on external analysis of bank guarantee rates.

The TPO treated corporate guarantee extended to AE subsidiary company as an international transaction u/s.92B of the Act and computed Corporate Guarantee fee at the rate of 1 percent.

Aggrieved by the said addition, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) relying on its own decision in assessee’s case for the AY 2013-14, A.Y.2014-15 and this Tribunal decision in the case of Mega Soft vs DCIT

Before us, the Ld.DR strongly supported the order of the TPO and submitted that, the issuance of corporate guarantee falls squarely within the ambit of international transaction as per Section 92B of the Act. Further, Ld.DR argued that a guarantee fee of 1 percent would be appropriate as computed by the TPO based on the external analysis of data relating to guarantee commission charged by the banks in India.

Per Contra, the Ld.AR reiterated the submissions made before the TPO and the ld.CIT(A) and relied on the order of the Delhi Bench of the Tribunal in the case of Bharti Airtel Ltd., vs. ACIT, [2014] 43 taxmann.com 150. The Ld.AR submitted that corporate guarantee issued by the assessee to its AE is in the nature of shareholding activity and hence does not constitute an international transaction. The Ld.AR further submitted that the Assessee being a shareholder had extended corporate guarantee with an intention to protect its own investment in the subsidiary which does not require any remuneration.

We have carefully heard the rival submissions, perused the order of the lower authorities, material available on record and the judicial precedent cited before us. In view of the amendment brought out by Finance Act and by inserting Explanation 1(e) to section 92B(2) of the Act, it is clear that the corporate guarantee is to be treated as deemed international transaction. Further, in view of the amendment brought out in the Act, by the Finance Act, 2012, we reject the contentions raised by the assessee. We also find that the Hon’ble High Court of Bombay in the case of CIT v. Everest Canto Cylinders Ltd. [2015] 58 taxmann.com 254 held that that bank guarantee issued by the commercial banks cannot be a yardstick to apply to corporate guarantees issued by an entity, since the latter arise out of commercial expediency and group considerations rather than as profit-making instruments.

Further, we also find that the identical issue has been considered by the coordinate bench of this Tribunal in the case of Mega Soft vs DCIT [2022] (145 taxmann.com 111) wherein a guarantee fee of 0.5 percent was held to be appropriate for the purpose of computing the arm’s length price of corporate guarantee. The relevant findings are as under:

In this view of the matter, by applying the ratio laid down in Everest Kanto Cylinders Ltd. (supra) and by following the decision of coordinate bench in the case of Mega Soft Ltd. Vs DCIT (supra), we concur with the decision of the Ld.CIT(A) in holding Corporate guarantee as a separate international transaction and adopting 0.5% as appropriate for the purpose of computing the arm’s length price of corporate guarantee.

The next issue that came up for our consideration in Ground No.v and vi of revenue’s appeal is in respect of assessee’s claim of hardware and software expenses incurred as revenue expenditure.

Before us, the Ld.DR strongly relied on the findings of the AO that the said expenses were incurred for creating an intangible assets which has enduring benefits to the assessee. The Ld. DR drew our attention to Page 458 to 467 of the paper book filed before us wherein the contract entered into by the Assessee with the customer was placed detailing various hardware and software involved in relation to the contract.

Per contra, the Ld.AR for the Assessee supported the order of the ld.CIT(A), wherein it was held that aforesaid expenditure was merely incurred towards purchase of software and hardware consumables which were consumed/utilized for the customer contracts and accordingly, does not result in creation of any intangible asset having enduring benefit.

We have carefully heard the rival submissions, perused the material available on records and gone through the orders of the lower authorities. On perusal of the customer contract referred to by the Ld.DR is between the assessee and the Commissionerate of Municipal Administration to supply, install, achieve operational acceptance of the Information system which inter alia includes supply of hardware and software consumables. As demonstrated by the ld.AR the procurement of hardware and software were made by the assessee to supply to the ultimate customers as part of this contract and explained that though these equipments are in the nature of capital expenditure, it is supply of goods in the contract as a whole. Therefore, we are of the opinion that this equipment purchased are not a capital expenditure in the hands of the assessee. Accordingly, we are of the considered view that the aforesaid expenditure which was incurred by the assessee towards purchase of hardware and software

The Assessee has raised the following grounds of cross objection to the revenue appeal and also filed following additional grounds in relation to the same:

During the course of hearing, the Ld.AR submitted that the above grounds raised by the assessee vide the cross objections and additional grounds of cross objection before us, were primarily directed against the appeal filed by the Revenue. Accordingly, having dismissed the appeal filed by the Revenue, we are of the considered view that the cross objections raised by the assessee become academic and infructuous and hence the CO of the assessee is dismissed.

Coming to the assessee’s appeal, the following grounds were raised:

Accordingly, the following are the grounds / issues which are taken up for adjudication:

The first issue that came up for our consideration in ground No.2 of the appeal is the transfer pricing adjustment on account of provision of corporate guarantee to AEs which was treated as an international transaction by the TPO. Since this issue has uphold the order of the Ld.CIT(A) in holding corporate guarantee as international transaction and hence no interference called for. As a result, Ground No. 2 raised by the Assessee stands dismissed.

The final issue that came up for our consideration in ground No.3 of the assessee’s appeal pertains to the claim of foreign tax credit in respect of dividend income earned by the assessee from its subsidiary in Oman.

The brief facts of the case are that the assessee had earned Dividend income from its subsidiary in Oman and offered the same to tax u/s.115 BBD of the Act. There were no claims made towards foreign tax credit in the return of income since no tax was actually paid in Oman towards such dividend income on account of the same being exempt from tax in Oman. Subsequently, during the course of assessment proceedings, the assessee claimed Foreign Tax Credit (“FTC”) as per Article 25(4) of the double tax avoidance agreement between India and Oman (“India - Oman DTAA”). The claim of the Assessee was towards the foreign tax credit in respect of taxes that would have been otherwise payable on such dividend income earned in Oman under Article 11 of the India - Oman DTAA. The Assessee’s claim was based upon the decision of the Hon’ble Delhi High Court in the case of Principal Commissioner of Income-tax v. Krishak Bharati Cooperative Ltd. [2017] 80 taxmann.com 326 (Delhi), wherein the Hon’ble High

Aggrieved, the assessee filed an appeal before the Ld.CIT(A), raising grounds of appeal seeking foreign tax credit contesting the actions of the AO in not considering its submissions. The Ld.CIT(A) rejected the claim of the assessee for the reason that it had not produced a letter / clarification from Oman tax authorities similar to the letter produced by the tax payer in the judgment of Hon’ble High Court of Delhi in the case of Krishak Bharati Cooperative Ltd., supra.

Further, Ld.AR drew our attention to the decision of the Hon’ble Supreme Court (Supra) wherein the Hon’ble Apex court held that the letter obtained by the Assessee

The Ld. AR further contended that neither the Act nor India - Oman DTAA casts any burden on the Assessee to furnish a proof as to the reason behind exemption of dividend income in Oman. The Ld.AR also pointed out as to the absence of any procedures prescribed either under the India - Oman DTAA or under the Omani Tax law to approach the Omani tax authorities and obtain a clarification/letter to this effect.

The Ld. AR further relying on the decision of Bengaluru Tribunal in the case of Kemwell (P.) Ltd. V. ACIT [2019] 106 taxmann.com 196 contended that the rationale for exempting the dividend income by itself is a proof that it was for no other purpose other than to promote economic development. Therefore, the Ld.AR submitted that there exists no obligation on the assessee to furnish any proof to establish the intention.

Per contra, the Ld. DR supported the findings of the Ld.CIT(A) and submitted that DTAA is not intended to promote non taxation in India and Oman.

We have carefully heard the rival submissions, perused the order of the lower authorities, relevant articles of India-Oman DTAA and have gone through the judicial precedents cited before us. The ld.CIT(A) in the impugned order had clearly mentioned at para 10.9 (page 30), that dividend income earned by the assessee company was exempt under Omani Tax law. The ld.CIT(A) had rejected the assessee’s contention only for the reason that assessee had not produced a letter / clarification from Omani tax authorities similar to the letter produced by the taxpayer in the case considered by the Hon’ble Delhi High Court in the case of M/s.Krishak Bharathi Co-operative Society Ltd.(supra). On perusal of Article 25 of the India – Oman DTAA, foreign tax credit shall be allowed with respect to taxes paid in Oman as well as taxes deemed to be paid but not actually paid in Oman on account of the tax incentives granted under the Omani tax law.

We find that the Hon’ble Supreme Court confirmed the judgment of the Hon’ble Delhi High Court in the case reported in 458 ITR 190 (SC) and held that Indian company is eligible for tax credit under Article 25(4) of India-Oman DTAA though no tax was actually paid in Oman. The Hon’ble Supreme Court at para 19 of the judgment had clearly observed that said letter issued by the Oman authority is only a clarification communication interpreting the provisions contained in Article 8 and Article 8 (bis) of :-22-: ITA No.: 1836/Chny/2024, C.O.No.62/Chny/2024 & IT(TP) A No.: 22/CHNY/2024. the Omani Tax Laws. It was further observed by the Hon’ble Apex Court that the letter itself has not introduced any new provision in Omani tax laws. We are of the considered view that once clarification is issued by Omani tax authorities, it applies to all the taxpayers in respect of dividend income earned in Oman and each taxpayer is not expected to obtain a clarification / letter as to the intention behind taxability / non- taxability of dividend income.

We also find that the decision of coordinate bench of the Bengaluru Tribunal in the case of Kemwell (P.) Ltd. V. ACIT [2019] 106 taxmann.com 196 wherein it was held that treaty does not cast any burden on the taxpayer to produce a certificate from the source country to prove tax exemption has been introduced in the domestic tax law to promote economic development. In the said case, the Tribunal was considering India- Cyprus DTAA. In the India Cyprus DTAA, Article 25(4) which is identical to the India- Oman DTAA was being interpreted by the Co-ordinate Bench of the Tribunal. The Tribunal had extracted the FAA observation confirmed his finding that there was no necessity for each of the assessee to obtain a certificate from the source country that exemption under the domestic law was to promote economic development.

In light of the aforesaid reasoning, we hold that income-tax authorities cannot direct the assessee to comply with any special requirement where there was none for the purpose of affording the credit which is explicitly provided under the Treaty or import ‘general’ or ‘special’ conditions when such a requirement has not been specifically laid down in the DTAA. Therefore, we direct the AO to grant foreign tax credit on taxes payable in Oman but not paid due to specific exemption in Omani tax law. As a result,

In the result, both the appeals filed by the revenue and the assessee are partly allowed and the cross objection filed by the assessee is dismissed.