Four Soft Limited, Hyderabad v. DCIT, Hyderabad

ITA 1495/HYD/2010 | 2006-2007
Pronouncement Date: 09-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 149522514 RSA 2010
Assessee PAN AAACT4464A
Bench Hyderabad
Appeal Number ITA 1495/HYD/2010
Duration Of Justice 9 month(s) 9 day(s)
Appellant Four Soft Limited, Hyderabad
Respondent DCIT, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 09-09-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 09-09-2011
Assessment Year 2006-2007
Appeal Filed On 30-11-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH HYDERABAD BEFORE SHRI. G.C. GUPTA VICE PRESIDENT AND SHRI. AKBER BASHA ACCOUNTANT MEMBER ITA NO. 1495/HYD/2010 (ASSESSMENT YEAR 2006-07) M/S. FOUR SOFT LTD. HYDERABAD PAN: AAACT4464A VS THE DY. COMMISSIONER OF INCOME-TAX CIRCLE 1(3) HYDERABAD. APPELLANT RESPONDENT APPELLANT BY: SHRI. RAJAN VORA REVENUE BY: SHRI. V. SRINIVAS ORDER PER AKBER BASHA ACCOUNTANT MEMBER: THIS APPEAL BY THE ASSESSEE IS AGAINST THE DI RECTIONS OF THE DISPUTE RESOLUTION PANEL HYDERABAD UNDER SECTION 144C [5] OF THE INCOME TAX ACT DATED 30.9.2010 FOR THE ASSESSMENT YEAR 2006-07. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE WHI CH ARE AS FOLLOWS. BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED ASSESSING OFFICER LEARNED TRANSFE R PRICING OFFICER AND THE HONBLE DISPUTE RESOLUTION PANEL (1) ERRED IN REJECTING THE TRANSFER PRICING DOCUMEN TATION MAINTAINED BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME-TAX RULE S 1962 AND MAKING ADJUSTMENT OF RS.4 19 41 501 IN RELATION TO THE FOLLOWING INTERNATIONAL TRANSACTION S WITH ITS ASSOCIATED ENTERPRISES (AES): ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 2 PROVISION OF SOFTWARE SERVICES RS.13 526 760. INTEREST ON LOANS PROVIDED TO ITS AES RS.2 235 391; AND CORPORATE GUARANTEE PROVIDED TO BANKS ON LOANS TAKEN BY ITS SUBSIDIARY RS.26 179 350. (2) ERRED IN COMPUTING THE CORRECT NET MARGIN OF TH E APPELLANT UNDER TRANSACTIONAL NET MARGIN METHOD (TNMM) AND CORRECTLY DETERMINING THE TRANSFER PRICI NG AND ADJUSTMENT; (3) WITHOUT PREJUDICE TO GROUND NO. 2 ERRED IN NOT APPLYING TNMM TO THE INTERNAL UNCONTROLLED TRANSACTIONS FOR DETERMINING THE ARMS LENGTH PRICE (ALP); (4) ERRED IN EXCLUDING FOREIGN EXCHANGE FLUCTUATION IN COMPUTATION OF THE OPERATING MARGIN UNDER TNMM; (5) ERRED IN REJECTING THE CONTEMPORANEOUS DATA (I. E. DATA EXISTING BEFORE THE DUE DATE OF FILING OF RETU RN OF INCOME) AND IN UNDERTAKING A FRESH COMPARABLE SEARC H DURING THE COURSE OF ASSESSMENT PROCEEDINGS USING INFORMATION/ DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF SATISFYING THE MANDATORY DOCUMENTATION REQUIREMENTS. (6) ERRED IN REJECTING THE USE OF MULTIPLE YEAR DAT A AND USING DATA FOR THE FY 2005-06 ONLY IN DETERMINATION OF ALP UNDER TNMM. (7) ERRED IN USING SELECTIVE INFORMATION/ DOCUMENTS OBTAINED BY THE LEARNED TPO USING POWERS AND UNDER SECTION 133(6) OF THE ACT 3WHICH ARE NOT AVAILABLE IN PUBLIC DOMAIN FOR DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT. (8) FAILED TO APPRECIATE THAT THE APPELLANT IS ELIG IBLE FOR TAX HOLIDAY BENEFIT UNDER SECTION 10A OF THE ACT A ND THERE IS NO INCENTIVE FOR SHIFTING OF PROFITS. (9) ERRED IN INTER-ALIA USE OF THE FOLLOWING ADDITI ONAL FILTERS IN UNDERTAKING THE COMPARATIVE ANALYSIS: REJECTION OF COMPANIES HAVING ONSITE REVENUE IN EXCESS OF 75%; ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 3 REJECTION OF COMPANIES HAVING DIFFERENT FINANCIAL YEAR-END. REJECTION OF COMPANIES HAVING DIMINISHING REVENUE/LOSS MAKING FILTER FOR THE LAST 3 YEARS. REJECTION OF CONSOLIDATED FINANCIAL STATEMENTS OF THE INDIAN PARENT COMPANIES; ONE SIDE TURNOVER FILTER (I.E. REJECTING COMPANIES HAVING TURNOVER LESS THAN RS.1 CRORE AND SELECTING COMPANIES HAVING HIGH TURNOVER); (10) WITHOUT PREJUDICE TO THE GROUND 8 ERRED IN RE JECTING INTER-ALIA THE FOLLOWING COMPARABLE COMPANIES FOR DETERMINATION OF ALP UNDER TNMM: VMF SOFTECH LIMITED. TVS INFOTECH LTD. PSI DATA SYSTEMS LTD. LARSEN & TOUBRO INFOTECH LTD. BIRLA TECHNOLOGIES LTD. GOLDSTONE TECHNOLOGIES LTD. AND QUINTEGRA SOLUTIONS LTD. (11) WITHOUT PREJUDICE TO THE GROUND 6 ERRED IN CO NFIRMING THE SELECTION OF THE FOLLOWING COMPANIES AS COMPARABLE TO THE APPELLANT FOR DETERMINATION OF AL P UNDER TNMM: ACCEL TRANSMATIC LTD.; AND MEGASOFT LTD. (12) ERRED IN ADDING THE REIMBURSEMENTS RECEIVED BY THE APPELLANT TO THE OPERATING COST FOR THE PURPOSE OF DETERMINING THE ALP; (13) ERRED IN DETERMINING THE ARMS LENGTH INTEREST RATE FOR LOANS PROVIDED TO FOURSOFT BV NETHERLANDS CONSIDERI NG USD LIBOR RATE AT 5.78%; (14) ERRED IN DETERMINING THE ALP ON THE CORPORATE GUARANTEE PROVIDED BY THE COMPANY @ 3.75% ON THE GUARANTEE AMOUNT; ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 4 (15) ERRED IN DISCRIMINATING ITS NETHERLANDS SUBSID IARY IN DETERMINING THE ALP FOR CORPORATE GUARANTEE PROVIDE D VIS-A-VIS SIMILAR CORPORATE GUARANTEE PROVIDED BY COMPANIES ON BEHALF OF THEIR INDIAN SUBSIDIARIES RESULTING IN VIOLATION OF ARTICLE 24 OF INDIA-NETHE RLANDS DOUBLE TAXATION AVOIDANCE AGREEMENT. (16) ERRED IN NOT TAKING INTO ACCOUNT THE FUNCTIONA L AND RISK DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT AND THE COMPARABLE TRANSACTIONS AND N OT ADJUSTING THE NET MARGINS OF THE COMPARABLE COMPANIES FOR THE SAME IN ACCORDANCE WITH THE PROVISIONS OF RULE 10B(1)(E) READ WITH RULE 10B(2)( B); (17) ERRED IN NOT CONSIDERING THAT THE ADJUSTMENT T O THE TRANSFER PRICE IF ANY SHOULD BE LIMITED TO THE LO WER END OF THE 5 PER CENT RANGE OF THE ALP AS THE APPEL LANT HAD THE RIGHT TO EXERCISE THIS OPTION UNDER THE PRO VISO TO SECTION 92C(2) OF THE ACT FOR THE SUBJECT ASSESSMENT YEAR; (18) ERRED IN DEDUCTING THE FOLLOWING EXPENSES FROM THE EXPORT TURNOVER AND FURTHER NOT REDUCING THE SAME FROM THE TOTAL TURNOVER IN THE COMPUTATION OF DEDUCTION U/S. 10A OF THE ACT; COMMUNICATION CHANGE OF RS.4 167 242 CONSIDERED AS ATTRIBUTABLE TO THE DELIVERY OF SOFTWARE OUTSIDE INDIA. SALARIES AND IMPLEMENTATION EXPENSES OF RS.16 024 557 CONSIDERED AS EXPENSES IN FOREIGN CURRENCY FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. (19) ERRED IN DETERMINING THE AMOUNT OF EXPENDITURE RELATING TO EXEMPT INCOME AND DISALLOWING THE SAME UNDER SECTION 14A. ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 5 (20) ERRED IN DISALLOWING EXPENSES INCURRED TOWARDS PROFESSIONAL AND LEGAL FEES IN RELATION TO ITS GLOB AL BUSINESS AND INVESTMENTS; (21) ERRED IN THE IMPOSITION OF INTEREST UNDER SECT ION 234B OF THE ACT ON ADDITIONAL INCOME ARISING DUE TO THE TRANSFER PRICING ADJUSTMENT. (22) ERRED IN INITIATING PENALTY PROCEEDINGS U/S. 2 71(1)(C) OF THE ACT. 3. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSES SEE COMPANY HAD INTERNATIONAL TRANSACTIONS WITH AN ASSOCIATED E NTERPRISE (AE) DURING THE ASSESSMENT YEAR 2006-07 TO AN EXTENT OF RS.21 5 6 22 574 RELATING TO SOFTWARE DEVELOPMENT SERVICES. BESIDES THE ABOV E IT HAD OTHER INTERNAL TRANSACTIONS AS UNDER: I. PAYMENT OF MANAGEMENT ALLOCATION EXPENSES RS.2 77 76 497 II. REIMBURSEMENT OF EXPENSES (RECEIVED) RS.13 11 19 575 III. REIMBURSEMENT OF EXPENSES (PAID) RS.2 29 60 060 IV. INTEREST PAID ON LOAN RS.82 16 457 4. THE ASSESSEE COMPANY FILED ITS RETURN ON 23-11- 2006 DECLARING A INCOME OF RS.1 44 43 091/- AFTER CLAIMI NG DEDUCTION UNDER SECTION 10A OF THE ACT. THE ASSESSING OFFICER SELEC TED THE CASE FOR SCRUTINY ASSESSMENT AND ISSUED A NOTICE UNDER SECTI ON 143(2) OF THE ACT. THE MATTER WAS REFERRED TO TRANSFER PRICING OF FICER UNDER SECTION 92CA [1] OF THE ACT FOR DETERMINING THE ARMS LENGT H PRICE [ALP] IN RESPECT OF THE INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES. THE TPO VIDE ORDER DATED 30.10.2009 PASSED UNDER SE CTION 92CA OF ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 6 THE ACT DETERMINED THE VALUE OF FOREIGN TRANSACTION S RELATING TO SOFTWARE SERVICES AT RS.100 40 64 698 AGAINST THE PRICE SHOW N BY THE ASSESSEE AT RS.77 98 59 542 AND RS.46 90 03 746 RELATING TO IT ENABLED SERVICES (ITES) AGAINST THE PRICE SHOWN BY THE ASSESSEE AT R S.41 99 24 368. THUS THERE IS ENHANCEMENT IN THE VALUE OF INTERNAT IONAL TRANSACTIONS AT RS.27 32 84 534 AS GIVEN BELOW: S. NO. NATURE OF REVENUE AS PER ACCOUNTS (RS.) AS DETERMINED BY THE TPO (RS.) ADJUSTMENT (RS.) 1. SOFTWARE DEVELOPM ENT SERVICES 77 98 59 542 100 40 64 698 22 42 05 156 2. ITES 41 99 24 368 46 90 03 746 4 90 79 378 TOTAL 119 97 83 901 147 30 68 444 27 32 84 534 5. THE ASSESSING OFFICER AFTER CONSIDERING THE ORD ER OF TPO AND AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING H EARD ISSUED A PROPOSED ASSESSMENT ORDER UNDER SECTION 144C OF THE ACT ON 21.12.2009. THE ASSESSING OFFICER COMPUTED THE TOT AL INCOME OF THE ASSESSEE AT RS.9 56 79 799/- BY PROPOSING THE FOLLO WING ADDITIONS BESIDES THE ISSUE RELATING TO ALP CERTAIN OTHER AD DITIONS AND ISSUES RELATING TO NON TRANSFER PRICING MATTERS WERE ALSO CONSIDERED FOR ASSESSMENT IN THE DRAFT ASSESSMENT ORDER. I. PROVISION OF SOFTWARE SERVICES RS.2 35 70 348 II. INTEREST ON LOANS PROVIDED TO ITS AES RS.2 23 92 553 III . C ORPORATE GUARANTEE PROVIDED TO BANKS ON BEHALF OF THE SUBSIDIARY RS.2 61 79 350 TOTAL RS.7 21 42 251 ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 7 6. THE ASSESSING OFFICER REDUCED THE FOLLOWING EXP ENSES FROM THE EXPORT TURNOVER IN THE COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT: I. COMMUNICATION CHARGES CONSIDERED AS ATTRIBUTABLE TO THE DELIVERY OF SOFTWARE OUTSIDE INDIA RS. 41 67 242 II. SALARIES AND IMPLEMENTATION EXPENSES CONSIDERED AS EXPENSES IN FOREIGN CURRENCY FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA; AND RS. 1 60 24 557 III . EXPORT TURNOVER NOT REALISED DURING THE YEAR RS. 1 41 51 830 TOTAL RS. 3 43 43 629 7. AGGRIEVED WITH THE ADJUSTMENTS ADDITIONS PROPO SED IN THE DRAFT ASSESSMENT ORDER THE ASSESSEE FILED OBJECTIO NS BEFORE THE DISPUTE RESOLUTION PANEL [DRP] ON 29-1-2010. THE DRP VIDE ITS DIRECTION UNDER SECTION 144C (5) OF THE ACT ON 30-9-2010 HAD DIRECT ED TO EFFECT CERTAIN CHANGES TO THE ADJUSTMENTS/ADDITIONS PROPOSED IN TH E DRAFT ASSESSMENT ORDER. 8. THE ASSESSING OFFICER IN CONFORMITY OF THE DIRE CTIONS OF THE DRP COMPLETED THE ASSESSMENT UNDER SECTION 144C (1 3) OF THE ACT AND DETERMINED THE TOTAL INCOME OF THE ASSESSEE AT RS.6 39 68 149/-. AGGRIEVED BY THE DIRECTIONS OF THE DRP THE ASSESSE E IS IN APPEAL BEFORE US. ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 8 9. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS COMPUTED THE ALP IN ACCORDANCE WITH TH E PROVISIONS OF THE ACT READ WITH THE RULES. THE COMPANIES HAD UNDERTA KEN A DETAILED ANALYSIS TO DETERMINE THE FUNCTIONS PERFORMED RISK S ASSUMED AND ASSETS UTILISED BY THE COMPANY AND ITS AE. THE TP STUDY WAS CARRIED OUT BY AN INDEPENDENT EXTERNAL CONSULTANT. BASED O N THE TP STUDY THE INDEPENDENT EXTERNAL CONSULTANT CONCLUDED THAT THE PRICE RECEIVED BY THE COMPANY IN RESPECT OF ITS TRANSACTIONS WITH AE IS WITHIN THE ARMS LENGTH RANGE UNDER THE INDIAN TP REGULATIONS. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER/T PO CAN DETERMINE THE PRICE ONLY UNDER THE CIRCUMSTANCES ENUMERATED I N CLAUSES (A) TO (D) OF SECTION 92C (3) OF THE ACT. IN ALL OTHER CASES THE VALUE OF THE INTERNATIONAL TRANSACTION ADOPTED BY THE COMPANY SH OULD BE ACCEPTED. IN THIS REGARD THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ALP OF THE ASSESSEES INTERNATIONAL TRANSACTIONS HA S BEEN DETERMINED BY APPLYING THE MOST APPROPRIATE PRESCRIBED METHOD IN ACCORDANCE WITH SUB-SECTION (1) AND (2) OF SECTION 92C OF THE ACT. ALL THE RELEVANT INFORMATION AND DOCUMENTS RELATING TO THE INTERNATI ONAL TRANSACTIONS HAVE BEEN MAINTAINED AND SUBMITTED TO THE TPO. THE DATA USED IN COMPUTATION OF ALP IS TAKEN FROM TWO WIDELY RECOGNI SED COMMERCIAL INFORMATION DATABASES VIZ. PROWESS AND CAPITALINE. THE TPO ALSO USED THE VERY SAME DATABASES. THE DATA USED FOR COMPUTA TION OF THE ALP IS RELIABLE AND CORRECT AND ALL THE INFORMATION/ DOCUM ENTS REQUIRED BY THE TPO DURING THE ASSESSMENT PROCEEDINGS WERE PROVIDED IN TIME. THE COMPANYS ANALYSIS WAS IN ACCORDANCE WITH THE PROVI SIONS OF THE ACT READ WITH THE RULES AND BASED ON GLOBALLY ACCEPTED SOUND TP PRINCIPLES. IT IS NOT JUSTIFIED TO REJECT THE TP ANALYSIS OF TH E INTERNATIONAL ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 9 TRANSACTIONS UNDERTAKEN BY THE COMPANY IN THE ABSEN CE OF ANY INFORMATION TO THE CONTRARY. FOR THE PURPOSE THE A SSESSEE RELIED ON DECISION OF DELHI HIGH COURT IN THE CASE OF SONY I NDIA (P) LTD. V. CBDT REPORTED IN 288 ITR 52 (DEL) WHEREIN IT WAS HELD TH AT ACCEPTANCE OF THE ALP DECLARED BY THE ASSESSEE IS THE RULE AND ITS RE JECTION IS THE EXCEPTION. IT IS SUBMITTED THAT SINCE THE TRANSFER PRICING IN INDIA BEING IN A NASCENT STAGE THAT THERE ARE VARIED INTERPRET ATIONS AS TO WHAT IS THE ALP. THIS IS IMPLICITLY RECOGNISED THE CIRCULA R 12 OF 2001 DATED 23.8.2001 ISSUED BY THE CBDT. FOR THIS PURPOSE THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF DELHI ITAT IN THE CASE OF MENTOR GRAPHICS (NOIDA) (P) LTD. VS. DCIT REPORTED IN 109 ITD 101. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT IN THE LIGHT OF THE ABOVE GUIDANCE IT WOULD BE AGAINST THE PROVISIONS OF THE LAW TO REJECT THE TP ANALYSIS DONE BY THE ASSESSEE. 10. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBM ITTED THAT THERE ARE ERRORS IN COMPUTING THE NET MARGIN OF THE ASSESSEE. HE SUBMITTED THAT THE TPO COMPUTED THE ADJUSTMENTS CON SIDERING THE TOTAL COST OF THE ASSESSEE (INCLUDING THE COST OF TRANSAC TIONS WITH NON-AES). AN ANALYSIS UNDER TNMM CONSIDERS ONLY THE PROFIT TH AT IS ATTRIBUTABLE TO PARTICULAR CONTROLLED TRANSACTIONS. THE TPO SHOULD HAVE DETERMINED THE ALP FOR THE INTERNATIONAL TRANSACTION WITH AE CONSI DERING ONLY THE OPERATING COST ALLOCABLE TO THE AE SEGMENT. FOR TH IS PROPOSITION HE RELIED ON SEVERAL DECISIONS CITED IN ITS WRITTEN SU BMISSIONS WHICH INCLUDES THE CASE OF IL JIN ELECTRONICS (I)(P) LTD. VS. ACIT REPORTED IN 30 SOT 227. ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 10 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 COM PUTED THE OPERATING MARGIN FOR THE TRANSACTION WITH THE AES A ND NON AES BY APPORTIONING THE EXPENSES IN PROPORTION TO SALES. HOWEVER THE TPO NOT APPROVED THE AFORESAID APPORTIONMENT AND SEGMENTAL FINANCIALS. THAT RESULTED IN ALLOCATING THE BAD DEBTS AND OTHER CERT AIN COSTS VIZ R & D TO THE AE SEGMENT WHICH IS CLEARLY IN RESPECT OF THE THIRD PARTY TRANSACTION ONLY AND NOT WITH THE AES TRANSACTION. THE LEARNE D COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THE DRP ALSO NOT MADE ANY OBSERVATION UPON THE APPROACH OF THE TPO. THE TPO COMPUTED THE ADJUSTMENT CONSIDERING THE TOTAL COST OF THE ASSESSEE INCLUDIN G THE COST OF TRANSACTION WITH THE NON AES. THE TPO SHOULD HAVE DETERMINED THE ALP ONLY FOR THE INTERNATIONAL TRANSACTION WITH THE AE AFTER CONSIDERING THE ALLOCABLE OPERATING COST TO THE AE SEGMENT. ALTERN ATIVELY IT IS SUBMITTED THAT EVEN IF THE TP ADJUSTMENT IS TO BE M ADE IT IS TO BE MADE ONLY ON THE TRANSACTIONS WITH THE AES AND NOT ON TH E TOTAL TRANSACTION. HE RELIED ON THE SEVERAL DECISIONS PLACED IN THE PA PER BOOK INCLUDING THAT OF IL JIN ELECTRONICS (SUPRA). 12. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBM ITTED THAT SINCE THE ASSESSEE COMPANY ENJOYS TAX HOLIDAY BENEF IT 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 SHI FT THE PROFIT FROM THE PARENT COMPANY TO THE SUBSIDIARY COMPANY. IT IS AL SO SUBMITTED THAT THE NATURE OF REIMBURSEMENT TRANSACTION HAS NOT BEE N ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 11 ANALYSED AND INCLUDED IN THE OPERATING COST FOR TRA NSACTION WITH THE AE. SUCH REIMBURSEMENTS ARE IN RESPECT OF PAYMENT TO CO NSULTANT FOR THE WORK UNDERTAKEN FOR AES. HENCE THE SAME SHOULD NO T BE INCLUDED IN THE OPERATING COST. IT IS ALSO SUBMITTED THAT EVEN IF ANY OF THE GROUNDS ON THE COMPARABLES AND THE FILTERS IS ALLOWED BY TH IS TRIBUNAL THE ASSESSEES MARGIN WOULD FALL WITHIN THE RANGE OF AL P. IT IS ALSO SUBMITTED THAT THE TPO HAS ALSO NOT JUSTIFIED IN SE LECTING THE SOFTWARE PRODUCT COMPANIES HIGHER TURNOVER COMPANIES AND HI GHER MARGIN COMPANIES AS COMPARABLES. IN THE REJOINDER THE LE ARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY VIDE I TS SUBMISSIONS BEFORE THE TPO DATED 16-9-2009 HAS WORKED OUT MARGI NS SEPARATELY IN RESPECT OF AE AND NON-AE TRANSACTIONS AND THE TPO S IMPLY REJECTED THE CLAIM OF THE ASSESSEE COMPANY FOR THE REASON THAT T HOSE SEGMENTAL DETAILS ARE NOT AUDITED AND NO BOOKS OF ACCOUNTS AR E MAINTAINED SEPARATELY. IT IS ALSO SUBMITTED THAT TPO HIMSELF F OLLOWED THE SEGMENTAL 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 RE PRESENTATIVE WHILE RELYING ON THE ORDER OF THE AO AND DIRECTIONS OF THE DRP SUBMITTED THAT THE ASSESSEE COMPANY HAS NOT TAKEN THE SPECIFIC GROUND IN THE GROUNDS OF APPEAL STATING THAT SEGMENTAL FIN ANCIALS PREPARED BY THE ASSESSEE COMPANY IS TO BE ADOPTED FOR THE PURPO SE 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 RU LE 10B[4] THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNA TIONAL TRANSACTION HAS BEEN ENTERED INTO TO BE USED IN ANALYSING THE COMPA RABILITY OF AN ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 12 UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION. 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 SOFTWARE SOLUTIONS RENDERED IN ITA NO.7894/MUM AND SUBMITTED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE DEPA RTMENT AND HENCE THE TURNOVER CRITERIA SHOULD NOT BE APPLICABLE FOR THE COMPANY WHICH OPERATES ON COST PLUS MODEL. A COMPARABLE COMPANY CANNOT 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 NEED NOT GO INTO THE INTENTION/MOTIVE OF THE ASSESSEE. THE TP PROVISION S 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 S AP LABS INDIA IN ITA NO.398/BANG/2008 TO SUPPORT HIS CONTENTION. HE ALS O FILED WRITTEN SUBMISSIONS ON THE ISSUE OF PLUS OR MINUS 5% VARIA TION AS PER SECTION 92C(2) OF THE ACT AND SUBMITTED THAT THE AMENDMENT TO THE AFORESAID SECTION IS PROSPECTIVE IN NATURE FOR WHICH HE RELIE D ON THE JUDGMENT OF THE APEX COURT IN THE CASE OF GOLD COIN LIMITED 99 9(304 ITR 308). 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED 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 ENTERPRISES IN THE SOFTWARE DEVELOPMENT SERVICES. IT IS THE CONTENTION OF THE ASSESSEE THA T 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 AN Y MATERIAL ON RECORD BEFORE US. IT IS THE CONTENTION OF THE LEAR NED COUNSEL FOR THE ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 13 ASSESSEE THAT SUCH BAD DEBTS CANNOT BE TAKEN INTO A CCOUNT FOR COMPUTING THE MARGIN OF THE ASSESSEE FROM THE TRANS ACTIONS WITH THE ASSOCIATED ENTERPRISES IN RESPECT OF SOFTWARE DEVEL OPMENT SERVICES. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO FILED BEFORE US A COMPARATIVE CHART EXPLAINING THE COMPUTATION OF NET MARGIN EXCLUDING THE BAD DEBTS AND CLEARLY DEMONSTRATED BEFORE US TH AT IF THE BAD DEBTS/REIMBURSEMENTS ARE EXCLUDED FOR THE PURPOSE O F COMPUTING THE MARGINS ON THE TRANSACTIONS RELATING TO THE ASSOCIA TED ENTERPRISES THE NET MARGIN COMES TO 19.07% WHICH IS WELL COMPARABL E WITH THE ARMS LENGTH MARGIN OF 19% DETERMINED BY THE TRANSFER PRI CING OFFICER. IN OUR CONSIDERED VIEW FOR COMPUTING THE NET MARGIN O F THE ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING ONLY THE COST REL ATED TO THE TRANSACTION WITH THE ASSOCIATED ENTERPRISES HAS TO BE CONSIDERE D AND ACCORDINGLY WE APPROVE THAT SEGMENTAL FINANCIALS IS TO BE CONSI DERED FOR THE PURPOSE OF ARRIVING AT THE NET MARGIN ON THE INTERNATIONAL TRANSACTION WITH THE ASSESSEES ENTERPRISE IN RESPECT OF SOFTWARE DEVELO PMENT SERVICES. IN THAT PROCESS BAD DEBTS/REIMBURSEMENTS HAS TO BE EX CLUDED AND SEGMENTAL PROFITABILITY HAS TO BE ADOPTED. WE FIN D SUPPORT IN THIS BEHALF FROM VARIOUS DECISIONS OF THE TRIBUNAL RELI ED UPON BY THE 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 INTER NATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES CONSIDERIN G ONLY THE OPERATING COST ALLOCABLE TO THE ASSOCIATED ENTERPRISES SEGMEN T. SINCE THE ASSESSING OFFICER HAD NO OCCASION TO VERIFY THE VER ACITY OF THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE COMPANY FOR LI MITED PURPOSE WE DIRECT THE ASSESSING OFFICER TO VERIFY THE SEGMENTA L FINANCIALS PREPARED BY THE ASSESSEE COMPANY AND ADOPT THE SAME FOR ARRI VING AT THE NET MARGIN ON THE INTERNATIONAL TRANSACTION WITH AES IN RESPECT OF SOFTWARE ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 14 DEVELOPMENT SERVICES. WE DIRECT ACCORDINGLY. 16. WITH REGARD TO THE EXCLUSION OF GAIN ON ACCOUN T OF FOREIGN EXCHANGE FLUCTUATION WHILE COMPUTING THE NET MARGIN AS CLAIMED BY THE ASSESSEE WE FIND THAT THE EXCHANGE FLUCTUATION GAI NS ARISE OUT OF SEVERAL FACTORS FOR INSTANCE REALISATION OF EXPOR T PROCEEDS AT HIGHER RATE IMPORT DUES PAYABLE AT LOWER RATE. SINCE THE GAIN OR LOSS ON ACCOUNT OF EXCHANGE RATE FLUCTUATION ARISES IN THE NORMAL COURSE OF BUSINESS TRANSACTION THE SAME SHOULD BE CONSIDERED WHILE COMPUTING THE NET MARGIN FOR THE INTERNATIONAL TRANSACTIONS W ITH THE ASSOCIATED ENTERPRISES OF THE ASSESSEE. OUR VIEW IN THIS BEH ALF IS FORTIFIED BY THE DECISIONS OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SAP LABS INDIA LTD. (SUPRA) AND BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF DEUTSCHE BANK A.G. V/S. DY. CIT REPORTED IN 86 ITD 431. IF THE GAIN ON ACCOUNT OF FOREIGN EXCHANGE RATE FLUCTUATIONS IS TO BE TAKEN AS OPERATING GAIN IN NATURE THE NET MARGIN DECLARED B Y THE ASSESSEE FOR THE INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES GOES UP STILL FURTHER. HENCE CONSIDERING BOTH THE ABOVE T WO FACTORS THERE IS NO JUSTIFICATION FOR ANY ADJUSTMENT TO THE PRICE DECLA RED BY THE ASSESSEE SINCE THE ASSESSEES MARGIN WOULD FALL WITHIN THE A RMS LENGTH RANGE. WE THEREFORE HOLD THAT NO ADJUSTMENT IS REQUIRED T O BE MADE ON THE MARGIN DECLARED BY THE ASSESSEE FOR THE INTERNATION AL TRANSACTION OF THE ASSOCIATED ENTERPRISES IN RELATION TO SOFTWARE DEVE LOPMENT SERVICES. WE DIRECT ACCORDINGLY. 17. SINCE THE ASSESSEE COMPANY SUCCEEDS IN THE AF ORESAID TWO ISSUES IT APPEARS THAT NO ADJUSTMENT IS REQUIRED TO BE MADE ON THE MARGIN DECLARED BY THE ASSESSEE COMPANY IN RELATION TO SOFTWARE DEVELOPMENT SERVICES THE OTHER GROUNDS RAISED IN T HE PRESENT APPEAL ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 15 RELATED TO SOFTWARE DEVELOPMENT SERVICES I.E. GRO UND NOS.2 3 4 5 6 7 8 9 10 11 12 16 AND 17 HAVE BECOME REDUNDANT BEING ONLY OF ACADEMIC NATURE AND HENCE WE ARE NOT INCL INED TO GO INTO THE MERITS OF THE SAME. THEY ARE ACCORDINGLY DISPOSED OFF. 18. NOW WE WILL TAKE UP THE NEXT ISSUE [GROUND NO .13] RELATING TO LOAN TO ITS SUBSIDIARY COMPANY 4S BV NETHERLAN DS. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DRP HAS TAKEN THE LIBOR AT 5.78% FOR THE TP ADJUSTMENT IN RESPECT OF LOAN TRAN SACTIONS WHEREAS THE ACTUAL AVERAGE LIBOR RATE FOR THE YEAR IS ONLY 4.42%. FOR THESE PROPOSITIONS HE RELIED ON THE DECISION OF THE MADR AS BENCH IN THE CASE OF SIVA INDUSTRIES AND HOLDINGS LIMITED IN ITA NO.2 148/MAD/2010 FOR THE SAME YEAR UNDER CONSIDERATION AND SUBMITTED THA T THE TRIBUNAL APPROVED THE LIBOR RATE AT 4.42% AS BENCH MARK FOR DETERMINATION OF THE ARMS LENGTH INTEREST RATE. IT IS ALSO SUBMITTED THAT IN NETHERLANDS THE BANK LENDING RATES ARE BASED ON THE EUROPEAN IN TER-BANK OFFER RATES THAT IS EURIBOR AND HENCE THE EURIBOR OF 2006 AT 3.44% IS TO BE CONSIDERED AS THE BENCHMARK FOR DETERMINATION OF TH E ARMS LENGTH INTEREST RATE FOR THE SAID TRANSACTION. WHEREAS TH E LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE DRP HAS ERRED IN DETERMINING THE CORRECT ALP FOR THE LOAN TRANSACTIO N. IT IS SUBMITTED THAT THE TPO WAS CORRECT IN DETERMINING THE ALP INTEREST RATE BY COMPARING THE INTEREST RATE ON CORPORATE BONDS AT 14% PER ANN UM WHICH IS THE OPPORTUNITY COST OF SUCH FUNDS SINCE THE ASSESSEE C AN EARN A HIGHER RATE OF INTEREST IN INDIA. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIALS AVAILABLE ON RECORD. WE DO NOT FIND ANY M ERIT IN THE ARGUMENTS OF THE LEARNED DEPARTMENTAL REPRESENTATIV E AS WE FIND THAT ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 16 THE ALP IS TO BE DETERMINED FOR THE INTERNATIONAL T RANSACTION THAT IS ON INTERNATIONAL LOAN AND NOT FOR THE DOMESTIC LOAN. H ENCE THE COMPARABLE IN RESPECT OF FOREIGN CURRENCY LOAN IN THE INTERNAT IONAL MARKET IS TO BE LIBOR BASED WHICH IS INTERNATIONALLY RECOGNISED AND ADOPTED. IN OUR CONSIDERED VIEW THE DRP RIGHTLY DIRECTED THE ASSES SING OFFICER TO ADOPT THE LIBOR PLUS FOR THE PURPOSE OF TP ADJUSTMENT. OU R VIEW IS FORTIFIED BY THE DECISION OF THE MADRAS BENCH IN THE CASE OF SIV A INDUSTRIES [SUPRA]. WE DO NOT FIND ANY MERIT IN THE ARGUMENTS OF THE LE ARNED COUNSEL FOR THE ASSESSEE THAT THE DRP SHOULD HAVE ADOPTED THE EURIB OR FOR THE PURPOSE OF THE TP ADJUSTMENTS AS WE FIND THAT THE MOSTLY USED AND RECOGNISED BENCHMARK RATE FOR INTERNATIONAL LOAN IS LIBOR BASED. HENCE THE DRP RIGHTLY DIRECTED THE ASSESSING OFFIC ER TO ADOPT THE LIBOR RATES. WE CONFIRM THE DIRECTIONS OF THE DRP. HOWEV ER BY CONSIDERING THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSE SSEE THAT THE ACTUAL LIBOR WAS 4.42% AS AGAINST THE 5.78% APPROVED BY TH E DRP WE FIND IT PROPER TO RESTORE THIS ISSUE TO THE FILE OF THE ASS ESSING OFFICER TO VERIFY THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE C OMPANY. IN VIEW OF THIS MATTER WE REMIT THIS MATTER TO THE FILE OF TH E ASSESSING OFFICER TO VERIFY THE ACTUAL AVERAGE LIBOR PREVAILED IN THE FI NANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION AND ADOP T 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. 20. THE NEXT ISSUE [GROUND NO.14 AND 15] IS WITH R EGARD TO THE TP ADJUSTMENTS IN RESPECT OF THE CORPORATE GUARANTE E PROVIDED BY THE ASSESSEE COMPANY ON BEHALF OF ITS SUBSIDIARY. THE A SSESSEE COMPANY PROVIDED CORPORATE GUARANTEE TO ICICI BANK UK AND A LSO DCS GROUP. THE TPO HELD THAT GUARANTEE IS AN OBLIGATION AND IF THE PRINCIPAL DEBTOR FAILS TO HONOUR THE OBLIGATION THE GUARANTOR IS LI ABLE FOR THE SAME AND ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 17 HENCE THE TPO DETERMINED A COMMISSION AT THE RATE OF 3.75% AS THE ALP UNDER CUP METHOD ON THE BASIS OF THE COMMISSION CHARGED BY THE ICICI BANK AS BENCH MARK. THE DRP CONFIRMED THE AC TION OF THE TPO. HENCE THE ASSESSEE IS IN APPEAL BEFORE US. THE LE ARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT TP LEGISLATION PROVIDES FOR COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTION AS PER SECTIO N 92B OF THE ACT. THE CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE CO MPANY DOES NOT FALL WITHIN THE DEFINITION OF INTERNATIONAL TRANSAC TION. THE TP LEGISLATION DOES NOT STIPULATE ANY GUIDELINES IN RESPECT TO GUA RANTEE TRANSACTIONS. IN THE ABSENCE OF ANY CHARGING PROVISIONS THE LOWE R AUTHORITIES ARE NOT CORRECT IN BRINGING AFORESAID TRANSACTION IN THE TP STUDY. THE LEARNED COUNSEL FOR THE ASSESSEE MADE ELABORATE DISCUSSIONS ON SEVERAL POINTS THAT INCLUDE NORMAL PRACTICE FOLLOWED BY THE COMPAN IES IN PROVIDING THE CORPORATE GUARANTEE TO ITS SUBSIDIARY COMPANIES ET C. IT IS ALSO SUBMITTED THAT THE SUBSIDIARY COMPANY HAS NOT RECEI VED ANY BENEFIT IN THE FORM OF LOWER INTEREST RATE BY VIRTUE OF THE CO RPORATE GUARANTEE GIVEN BY THE ASSESSEE COMPANY AND AT THE SAME TIME THE ASSESSEE COMPANY SIGNIFICANTLY BENEFITED FROM SUCH TRANSACTI ON. HE RELIED ON THE FOLLOWING DECISIONS. A] JUDGEMENT OF THE APEX COURT IN THE CASE OF S A B UILDERS REPORTED IN 288 ITR 1 B] CIT VS. AMALGAMATION PVT. LTD. REPORTED IN 226 ITR 188 C] ACIT VS. W S INDUSTRIES LTD. REPORTED IN 2009 T IOL 783-MAD WHEREAS THE LEARNED DEPARTMENTAL REPRESENTATIVE REL IED ON THE DIRECTIONS OF THE DRP AND THE ORDER OF THE ASSESSIN G OFFICER AND SUBMITTED THAT THE GUARANTEE IS AN OBLIGATION AND I F THE PRINCIPAL DEBTOR FAILS TO HONOUR THE OBLIGATION THE GUARANTOR IS LI ABLE FOR SUCH FAILURE. THE ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 18 TPO RIGHTLY DETERMINED A COMMISSION AT THE RATE OF 3.75% AS THE ALP UNDER CUP METHOD ON THE CONSIDERING THE COMMISSION CHARGED BY THE ICICI BANK AS BENCH MARK. 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE TP LEGISLATION PROVIDES FOR COMPUTATION OF INCOME FROM INTERNATIONAL TRANSA CTION AS PER SECTION 92B OF THE ACT. THE CORPORATE GUARANTEE PROVIDED B Y THE ASSESSEE COMPANY DOES NOT FALL WITHIN THE DEFINITION OF INTE RNATIONAL TRANSACTION. THE TP LEGISLATION DOES NOT STIPULATE ANY GUIDELINE S IN RESPECT TO GUARANTEE TRANSACTIONS. IN THE ABSENCE OF ANY CHARG ING PROVISION THE LOWER AUTHORITIES ARE NOT CORRECT IN BRINGING AFORE SAID TRANSACTION IN THE TP STUDY. IN OUR CONSIDERED VIEW THE CORPORATE GUA RANTEE IS VERY MUCH INCIDENTAL TO THE BUSINESS OF THE ASSESSEE AND HENC E THE SAME CANNOT BE COMPARED TO A BANK GUARANTEE TRANSACTION OF THE BANK OR FINANCIAL INSTITUTION. IN VIEW OF THIS MATTER WE HOLD THAT NO TP ADJUSTMENT IS REQUIRED IN RESPECT OF CORPORATE GUARANTEE TRANSACT ION DONE BY THE ASSESSEE COMPANY. HENCE WE ANSWER THIS QUESTION IN FAVOUR OF THE ASSESSEE AND ALLOW THE GROUNDS RAISED BY THE ASSESS EE ON THIS ISSUE. 22. THE GROUND NO.18 IS WITH REGARD TO THE EXCLUSI ON OF COMMUNICATION CHARGES AND IMPLEMENTATION EXPENSES F ROM THE EXPORT TURNOVER AND FURTHER NOT REDUCING THE SAME FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF BENEFIT UNDER SECTION 10A OF THE ACT. WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF CHENNAI SPECIAL BENCH IN THE CASE OF SA K SOFT LIMITED REPORTED IN 313 ITR (AT) 353 AND ACCORDINGLY WE HEL D THAT THE TELECOMMUNICATION CHARGES AND IMPLEMENTATION EXPENS ES INCURRED BY THE ASSESSEE COMPANY WHICH HAS BEEN EXCLUDED BY TH E ASSESSING OFFICER ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 19 FROM EXPORT TURNOVER HAS TO BE EXCLUDED FROM THE T OTAL TURNOVER ALSO WHILE COMPUTING THE ADMISSIBLE DEDUCTION 10A OF THE ACT. WE DIRECT ACCORDINGLY. HENCE THE GROUND RAISED BY ASSESSEE IS ALLOWED. 23. THE GROUND NO.19 RELATES TO DISALLOWANCE OF EX PENDITURE UNDER SECTION 14A OF THE ACT. THIS ISSUE IS COVERE D BY THE JUDGEMENT OF THE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE VS. DCIT REPORTED IN 328 ITR 81 WHEREIN IT WAS HELD THAT RULE 8D READ WITH SECTION 14A[2] OF THE ACT IS NOT ARBITRARY OR UNREASONABLE BUT CAN BE APPLIED ONLY IF ASSESSEES METHOD IS NOT SATISFACTORY. RULE 8D IS N OT RETROSPECTIVE IN NATURE AND THE SAME HAS TO BE APPLIED FROM THE ASSE SSMENT YEAR 2008- 09. FOR THE EARLIER ASSESSMENT YEARS DISALLOWANCE HAS TO BE WORKED OUT ON REASONABLE BASIS UNDER SECTION 14A [2] OF THE ACT. ACCORDINGLY WE RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFF ICER TO REWORK THE DISALLOWANCE ON REASONABLE BASIS IN ACCORDANCE WITH THE RATIO LAID DOWN BY THE AFORESAID JUDGEMENT. THE GROUND RAISED BY T HE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 24. THE GROUND NO.20 RELATES TO DISALLOWANCE OF EX PENSES INCURRED TOWARDS PROFESSIONAL AND LEGAL FEES IN REL ATION TO ITS GLOBAL BUSINESS AND INVESTMENTS. THE LEARNED COUNSEL FOR T HE ASSESSEE NOT PRESSED THIS ISSUE. HENCE THIS GROUND RAISED BY TH E ASSESSEE IS DISMISSED AS NOT PRESSED. 25. THE GROUND NO.21 RELATES TO LEVY OF INTEREST U NDER SECTION 234B OF THE ACT.WE FIND THAT CHARGING OF INTEREST U NDER SECTIONS 234B IS MANDATORY AND MERELY CONSEQUENTIAL IN NATURE TO THE ASSESSED INCOME. HENCE THE GROUNDS RAISED BY THE ASSESSEE ON THESE ISSUES ARE REJECTED AS SUCH. ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 20 26. THE LAST GROUND NO.22 RAISED BY THE ASSESSEE I S WITH REGARD TO THE INITIATION OF PENALTY PROCEEDINGS UNDER SECT ION 271(1) (C) OF THE ACT. WE FIND THAT THERE IS NO PROVISION IN THE ACT FOR ALLOWING APPEAL AGAINST INITIATION OF PENALTY PROCEEDINGS UNDER SEC TION 271 (1) (C) OF THE ACT. HENCE THE GROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS NOT ENTERTAINABLE AND THE SAME IS ACCORDINGLY REJECTED. 27. IN THE RESULT THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 9TH SEPTEMB ER 2011. SD/- SD/- SD - D/ - (G.C. GUPTA) VICE PRESIDENT SD/ - (AKBER BASHA) ACCOUNTANT MEMBER HYDERABAD DATED THE 9 TH SEPTEMBER 2011 JMR* COPY FORWARDED TO: 1. M/S. FOUR SOFT LIMITED 5Q1 A3 CYBER TOWERS HI TECH CITY MADHAPUR HYDERABAD. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE 1( 3) AAYAKAR BHAVAN BASHEERBAGH HYDERABAD. 3. THE DISPUTE RESOLUTION PANEL 4A I.T. TOWERS A .C. GUARDS HYDERABAD-500 004. 4. THE ADDL. CIT (TRANSFER PRICING) HYDERABAD. 5. THE DR A-BENCH ITAT HYDERABAD. ITA NO.1495/HYD/10 FOUR SOFT LIMITED HYD. ============================ 21