BAHWAN CYBERTEK PRIVATE LIMITED,CHENNAI vs. ACIT, CHENNAI

आदेश /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 dated 27/12/2006, made in pursuance to the directions by the Disputes Resolution 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) matters (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 Arm’s Length Price (ALP); b). Selection of Comparables; c). Corporate Guarantee (CG); d). Working Capital Adjustment; and e). Five percent range.

The assessee’s TP study reveals the following: ‘5. Examination of the TP study of the assessee 5.1 Functions performed by M/s. Bahwan Cybertek Pvt. Limited and its AE’s • Strategic Management functions: Bahwan India is responsible for all management functions of corporate strategy, treasury, legal and regulatory affairs designing the policy with respect to its group operations. Bahwan Oman together with Bahwan India plays a significant role in determining the business strategy of the group. • Corporate services: With respect to human resources, financial management routine administration etc., Bahwan India is responsible for arranging the necessary resources. It is responsible for managing its own cash flows, accounts payable, accounts receivables, employee management, management information 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 undertakes lead generation, marketing and sales activity for the products/ services provided to the customers. It is responsible for maintaining and developing relationship with its customers and is therefore responsible for expanding the business. Bahwan India does not undertake any marketing/ business development activity with respect to the software product/solution that is deliverable to the customers outside India, However, Bahwan India is responsible for undertaking

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 conceptualization and design of the product. • Functional specification and requirement analysis: Bahwan India determines the requirement analysis and functional specification of the software module to be developed. AEs initiate performance analysis to validate the appropriateness of the functional specifications of the modules to be designed and developed by Bahwan India to a certain extent. • Coding and documentation: Bahwan India undertakes software coding and also generates and maintains documentation for the code generated. • Project management: Bahwan India and its AEs jointly undertake project management. AEs provides information (as required) in order to provide clarity in respect of the work to be performed. Bahwan India interacts regularly with its AEs and project tracking happens through e-mails and conference calls. This ensures close co-ordination, quality control and minimal rework in the development process. AEs are responsible for monitoring and co-ordinating the development of the entire software 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-defined quality control procedures. However, both Bahwan India and its AEs are jointly responsible for the final acceptance testing 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 designated Customer Relationship Managers. However, based on the agreement between the customer and AE and/or Bahwan India, the support services are rendered either from by Bahwan India and/or AEs. Also, the costs in respect of these services are shared by Bahwan India and its AEs, akin to the revenue sharing model. Hence the assessee company performed all the functions 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, Computers and other assets including intangibles are used in development of software by assessee company. Market & Business Risk, Exchange fluctuation risks, Credit & Collection Risk (Limited Level), Utilization Risk, Quality Risk, Product Liability Risk and Manpower risk are carried by the assessee company. The assessee company has borne all the risks of an entrepreneurial 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: Nature of Amount MAM PLI Margin Adj. International (in Rs.) of Margin of Transactions taxpayer comparable s Provision of software 295,305,086 TNMM OP/OC 10.23% 1.85 % development services Reimbursement 7,576,541 NA - - - received / receivable Reimbursement paid 1,409,208 NA - - - / payable Adopting TNMM as the most appropriate method to substantiate the arm's lengthiness of its transaction with the AEs, the assessee has short-listed 25 comparable companies after applying certain filters in Prowess and Capital Line database. The 3 years weighted average margin calculation of the comparable 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 economic adjustments towards product development expenses, unabsorbed expenses including depreciation and domestic transaction. Based 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 Associate Enterprises (AEs) is 70:30 for software development and 60:40 for product development. These ratios are based on contract value, and exclude third-party costs and cost attributable to on-site services; and b). out of the assessee’s total turnover of �. 32 cr., the domestic turnover is about �. 2 cr.

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 assessee’s report, held as under computing the ALP accordingly: ‘7.6 Attribution of income between the AE and the Assessee: During the course of the assessement proceedings the 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 between 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 respective allocation, details of expected revenue flows, cost-benefit analyses which would support the assessee's claim have not been provided. In the absence of the above, the assessee has not established 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 determination 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 unprejudiced 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 suspicion in that there is no attempt to lower the tax burden in the country, 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-shifting. • Usually, an independent service provider would estimate the expenses to be incurred in operating a contract and providing a service, and employ project studies and analytics and generate a final figure of revenue share. In this instance, these have not supplied. Also no agreements as mentioned earlier have been furnished. Consequently under the assessee's approach, there is no way of determining whether the Revenues have been attributed to the assessee on an arm's length basis. • The FAR analysis of the assessee and the AE as outline vide para 5.1 to 5.2 above shows that the assessee is concerned with all functions associated with software development viz requirement analysis, conceptualization and design, coding, testing, project management and after sale support. Hence the assessee company performed all the functions and assumed all the risks of an entrepreneurial enterprise. The AE is confined to liasoning 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 revenue split meet the conditions of profitability usual for an entrepreneurial 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 entrepreneurial service provider of similar nature. • Hence the assessee's arithmetic and approach are not 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 in its reply to show-cause are unqualifiedly sacrosanct and the same was explicitly put in place to protect the tax interests of the source country. Consequently, the assessee's position on the sanctity of revenue sharing ratio with its AEs is rejected. • Having rejected the assesse's position, based on the FAR analysis demonstrated above and also based on study of comparables under TNMM, if the assessee's margin is to be at ALP, the more appropriate revenue share with its AE would be 90:10 ratio. References are also drawn from Sec 44C of the Income Tax Act, wherein the section delineates the margin of 5% that can be retained for functions performed by the headoffice. It is to be noted that the section 44C is not invoked here but only an inference is drawn to determine an appropriate revenue apportionment ratio between the Assessee and the AE. Considering the functions of the AE with regard to the transactions with the assessee, 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 respect of expenditure incurred towards it and further allowing a 100% markup on the same, the revenue share between the Assessee and the AE for both software development and product development 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 transactions associated with the AEs and assessee to facilitate 90: 10 split of revenue. Hence the 70% split as given by the assessee is extrapolated to determine the 90: 10 split as follows: Name of the AE INR USD 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 295305086 income Hence the total revenue inclusive of the proportion to 421864409 the AE would be (A) Apportionment of 900/0 of the revenue to AE as 379677968 discussed above (90% of A)

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 413953259 para 7.6) Expenses: Personnel 257562718 Operating (124870428 - 24375035(Transalation 100495393 FX)) depreciation(60197925 - 22068752 (on let out 38129173 portion)

Operating Cost 396187284

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 assessee’s list of comparables (17 in number) and, applying filters, accepted only five of them (refer para 7.3.1/pgs. 17-20 of the TPO’s order) and, further, selected four fresh comparables (refer para 7.4/pgs. 21-22 of the TPO’s order), proceeded on that basis, subjecting the assessee’s operating margin (i.e., operating profit (OP)/operating cost (OC)) to the Transactional Net Margin Method (TNMM) test with reference to the comparables. The ancillary question would be the selection of those comparables. This is as he, after selecting the comparables, proceeded on a different footing, deciding the appropriate revenue sharing ratio, which he does at 90:10 in the assessee’s favour. Considering 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 another 5% (i.e., 100 per cent of cost) as margin, resulting in a revenue sharing of 90:10 in assessee’s favour. True, this does appear odd inasmuch as he had taken pains to examine the assessee’s comparables; in fact, also searching some on his own. However, his decision cannot be ousted merely because he undertook that exercise, which in fact, to be relevant, is to be preceded by his agreement with the assessee’s method (TNMM) as the most appropriate method (MAM). The stage of crystallizing the comparables would be a matter subsequent, i.e., would stand to be considered only after having decided the MAM. The crux of his finding, in rejecting the TNMM as MAM, is that the AEs are confined 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 agreement. 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 an 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 necessarily disclose the basis of the revenue split. The agreement would though clearly spell out the functional areas, the roles and responsibilities of the two partners – the assessee and the AE/s. Also relevant in the matter would be the agreement entered with third parties, the assessee’s customers and recipient of its services inasmuch as it would, we presume, specify both, the range of services and, two, which services are to be provided by whom. No improvement in its case in this respect stands made by the assessee even before us, i.e., by way of substantiating its case; the agreement furnished on being called upon to, is dated 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 ratio, arbitrarily determined by the TPO, would be insufficient to absorb the AEs regular costs, much less yield a reasonable margin consistent with the functions performed and the risks undertaken by them. That may well be true, and an ALP at a revenue split of 90:10 work to an operating loss for the AEs, but then it is for the assessee to show so, without which it is no more than a bald statement. As regards the charge of it being arbitrary, so is that by the assessee 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 TPO’s finding, affirmed by the ld. DRP, of the AEs undertaking, in effect, only liasoning function, strongly 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, compensated 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 reimbursement of costs). It is this arrangement which defines the international transactions 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 (refer para 4 of the TPO’s order), is an incorrect representation. In fact, the TPO does not abandon the comparables selected, but subjects the assessee’s revenue, on the basis of the sharing ratio of 90:10, to TNMM. Continuing further, what though cannot be denied is that the AE's functions being simpler by far, the same are much easier to analyze. It is well settled that the least complex (economic) entity must be taken as the tested party, which need not necessarily (and always) be the assessee. Why, for the foreign tax jurisdiction, it is, on that premise, the AE that would be the tested party. It is, therefore, the business and the economic functions, and accuracy with which, consequently, the comparables can be crystallized, rather than the geographical location or tax jurisdiction, that should be determinative of who is to be regarded as the tested party. In our considered view, in the given facts of the case, it is the assessee’s AEs, who should be the tested party. This is, in fact, what both the TPO and the ld. DRP have, without explicitly saying so, found, and which is manifest in their decision of the revenue split of 90:10, treating the AEs as front-end offices, providing leads and facilitating effective communication, a channel, between the assessee and its foreign customers, also assuring them of backup support services, the responsibility for which, though, is of the assessee, performing the core functions and, commensurately, incurring nearly the whole of the cost. Yes, the assessee’s foreign 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 undertaken/services rendered. In fact, it is perhaps to avail the low cost of capital obtaining in developed

11 ITA No.290/Mds/2017 (AY 2012-13) Bahwan CyberTek Pvt. Ltd. v. Asst. CIT economies vis-à-vis India, that the assessee, instead of extending credit to its AEs, required them to finance the receivables, availing 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 financial cost, though, would be borne only by the AEs, even as it is not clear if this business model and, thus, extension of guarantee by the assessee, is to all the 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 guarantee forms part of the business model, on the basis of which FAR analysis is carried out, the same, though an international transaction, is not to be separately benchmarked, and shall be along with the other transactions. That is, the financial cost, though incurred by the AE/s, would yet not entitle it to any return thereon as the corresponding financial risk is borne by the assessee. Why, the TPO (and the ld. DRP) have not, and, as it appears, for the same reason, not separately 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 the 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 opportunity to raise objections in this regard, as well and, equally importantly, to adduce comparables, which shall require being examined/vetted by the TPO. This shall also meet the assessee’s 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, including the TP study, if any, and assessment, including the documents furnished to the 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 regarded as inappropriate in the absence of the assessee showing as to how the revenue split adopted is consistent with the functions undertaken and risks assumed, or even the costs incurred. The Revenue’s approach also cannot be approved 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 empirical evidence in support of the ratio adopted, which is also the fundamental flaw in the assessee’s case.

3.2 Coming, next, to the aspect of the vetting of the assessee’s comparables by the TPO. The assessee has advanced no valid reason for challenging the findings by the TPO in this regard. Merely objecting for the sake of it would not be of any consequence. A ‘comparable’ under TNMM would, it may be appreciated, where the assessee is the tested party, have to be similarly serviced by an associate enterprise (AE), with there being in the instant case a disagreement between the assessee and the Revenue as to the functional classification of the assessee’s 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 round), while pointing out its inherent limitations as well as the factors that need to be taken into account if the same is, for any reason, taken recourse to again. 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 to the 5% range, allowable under section 92C, the law and in matter is well settled, being borne by the clear language of the said provision, amended retrospectively, 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 accordingly set aside to the file of the AO/TPO, who shall decide on merits after allowing the assessee a reasonable opportunity of hearing. Needless to add, the burden of proof to substantiate its claims, being, in effect, the adopted ratio of revenue sharing with its AEs being at arm’s length, is on the assessee, even as a TPO shall show cause the assessee qua his findings before finalizing the same. The validity of the other adjustments, as indicated above, would be with reference to the method adopted toward this principal transaction. This, then, completes our disposal of Part B of the assessee’s 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 disallowance 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 launched its product range ‘Cuecent’ in 2005. Software development costs of this product/product range were being capitalized based on the recognition criteria prescribed in Accounting Standard (AS) 26 on ‘Intangible Assets’ upto accounting year 2008- 09. Thereafter, the same is, it was explained, charged to the profit and loss account (operating statement) as it was unable to ascertain 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 benefits in excess of its originally assessed standard of performance. This is 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 assessee’s case, which though did not find favour with the Revenue. In its’ view, an intangible asset is, irrespective, only a capital expenditure 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.

Clearly, therefore, expenditure in the nature of capital expenditure is not admissible. True, the Accounting Standard provides guidelines on the capitalization or otherwise of an expense on an intangible 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 account 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. This, 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 for it to estimate, with reasonable accuracy, the future benefits to be derived, which thus becomes a challenging task. The Accounting Standard may suggest 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 capital 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 dictate it being written off, and not incorrectly so. Both the revenue and capital expenditure, it may be appreciated, are incurred only for the purpose of business, 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, incurred for the purpose of generating revenue. An expenditure being unfructuous 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 expenditure as well. All that the company in the present case is facing is a difficulty in being able to determine, with reasonable accuracy, if the future economic benefits would exceed that which would arise without incurring the impugned expenditure. That is, a difficulty in reliably estimating the increase in the 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 may have materialized. This is as only that would enable an assessment of the increase (in the benefits) on account of the additional expenditure. Even as we have 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 as it could also be on new products; the assessee, as a matter of accounting policy, 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 allowed. The assessee’s grounds are partly allowed.

Grounds 17 & 18: 7. The assessee was found to have incurred and claimed foreign exchange loss at �. 243.75 lacs, the breakup of which is as under: Description Amount Remarks (24,456,383 ) HDFC FCNR Loan Loss HDFC Packing Credit (4,532,060) Loss Subsidiary Company 1,306,575 Gain Debit Notes Bank account 2,152,343 Gain Debtors 1,106,825 Gain Creditors 23,479 Gain 24,186 Currency Gain (24,375,035) Total

The same was explained to be comprising both, i.e., that realized as well as on restatement of the assets and liabilities, undertaken 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 on

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 capital 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 trading 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.

18 ITA No.290/Mds/2017 (AY 2012-13) Bahwan CyberTek Pvt. Ltd. v. Asst. CIT Continuing further, the HDFC (FCNR) loan was extended and taken as a term loan for the purpose of repayment of an existing debt of the company. Clearly, if the debt is in respect of a liability assumed toward, or in respect of a borrowing for financing, the cost – in whole or part, of a capital 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 asset/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 financing a trade liability, the corresponding loss shall be on revenue 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 acquired 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 suffered 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 decide accordingly. Grounds 17 & 18 are partly allowed.

Part D: (9) Gd. 19 challenges the levy of interest u/s. 234A in-as-much as the return, filed electronically on 21.11.2012, is in time, so that no interest there- under, which is only for the late filing of the return, could be levied. No arguments in his behalf were made during hearing, even as, without doubt, where the return is furnished within the time specified u/s. 139(1), no interest u/s. 234A could be levied. Further, the challenge to 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.

Sd/- Sd/- (धु�वु� आर.एल रे�डी) (संजय अरोड़ा) (Duvvuru RL Reddy) (Sanjay Arora) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member

चे�नई/Chennai, �दनांक/Dated, August 31, 2017 EDN आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF