ACIT Vs Bahwan Cybertek Private Limited (ITAT Chennai)
The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) dealt with cross appeals filed by the Revenue and the assessee, along with a cross-objection by the assessee, arising out of the assessment for Assessment Year (AY) 2017–18. The appeals challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)] relating to transfer pricing adjustments, treatment of certain expenditures, and the grant of foreign tax credit.
At the outset, the Tribunal condoned a delay of 29 days in filing the Revenue’s appeal, accepting the explanation of administrative workload and time-bound responsibilities as reasonable cause.
Transfer Pricing – Comparable Selection (Nihilent Limited):
The primary transfer pricing dispute concerned the inclusion of Nihilent Limited as a comparable for benchmarking software development services rendered by the assessee to its associated enterprises. The Transfer Pricing Officer (TPO) had included Nihilent Limited, relying on its classification as a software and IT services provider. However, the CIT(A) excluded it on the ground of functional dissimilarity.
The Tribunal upheld the CIT(A)’s finding, noting that Nihilent Limited was engaged in diversified activities such as IT consultancy, enterprise transformation, digital transformation, business consulting, analytics, blockchain, and enterprise IT services. Its core activity was classified under “other professional, technical and business services,” and segmental financial information was unavailable. Relying on consistent decisions of coordinate benches for the same assessment year, the Tribunal held that Nihilent Limited was not functionally comparable to a routine software development service provider operating on a cost-plus model. Accordingly, the Revenue’s grounds seeking inclusion of Nihilent Limited were dismissed.
Corporate Guarantee Fee:
Another transfer pricing issue related to the arm’s length pricing of corporate guarantees extended by the assessee to its overseas subsidiaries. The TPO treated the corporate guarantee as an international transaction and applied a 1% guarantee commission based on bank guarantee rates. The CIT(A), while agreeing that corporate guarantee constituted an international transaction, directed the fee to be recomputed at 0.5%.
The Tribunal confirmed this approach. It held that after the amendment to Section 92B of the Act, corporate guarantees fall within the scope of international transactions and require benchmarking. However, bank guarantee rates charged by commercial banks could not be directly applied to corporate guarantees, which are driven by group considerations and commercial expediency. Following binding judicial precedents, including decisions holding 0.5% to be an appropriate rate, the Tribunal upheld the CIT(A)’s direction. The Revenue’s ground on this issue was dismissed.
Hardware and Software Expenditure:
The Revenue also challenged the CIT(A)’s decision to treat hardware and software expenditure as revenue expenditure rather than capital expenditure. The Assessing Officer had held that the expenditure resulted in creation of intangible assets with enduring benefit.
The Tribunal observed that the expenditure was incurred to procure hardware and software consumables for supply to customers under specific contracts and formed part of the overall execution of customer projects. Since the items were supplied to customers and did not result in creation of any enduring asset for the assessee, the Tribunal held that the expenditure could not be treated as capital in nature. The CIT(A)’s decision treating the expenditure as revenue was upheld.
Cross Objection by the Assessee:
The assessee’s cross-objection largely supported the CIT(A)’s findings against the Revenue. Since the Revenue’s appeal was dismissed on all material issues, the Tribunal held that the cross-objection had become academic and infructuous and dismissed it accordingly.
Assessee’s Appeal – Corporate Guarantee and Foreign Tax Credit:
In its own appeal, the assessee challenged the treatment of corporate guarantee as an international transaction and the imputation of a 0.5% guarantee fee. The Tribunal rejected these grounds, following its findings in the Revenue’s appeal.
The final and significant issue in the assessee’s appeal related to foreign tax credit (FTC) on dividend income earned from its subsidiary in Oman. The dividend income was exempt from tax in Oman under Omani tax law but was offered to tax in India. The assessee claimed FTC under Article 25(4) of the India–Oman Double Taxation Avoidance Agreement (DTAA) for taxes deemed to have been paid in Oman. The CIT(A) denied the claim on the ground that the assessee had not produced a specific clarification letter from Omani tax authorities.
The Tribunal reversed this finding. Relying on the Supreme Court’s decision affirming the Delhi High Court ruling, it held that tax sparing credit under Article 25(4) of the India–Oman DTAA is available even where no tax is actually paid in Oman due to tax incentives. The Tribunal observed that the clarification issued by Omani authorities was general in nature and applied to all taxpayers, and there was no requirement under the DTAA for each taxpayer to obtain a separate certificate. Accordingly, the Tribunal directed the Assessing Officer to grant foreign tax credit to the assessee.
Conclusion:
The Revenue’s appeal was dismissed on all issues. The assessee’s appeal was partly allowed to the extent of granting foreign tax credit on dividend income from Oman. The cross-objection filed by the assessee was dismissed as infructuous.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
