Cambridge Technology Enterprises Ltd., Hyd, Hyderabad V. DCIT, Circle-1(2), Hyd, Hyderabad

ITA 213/HYD/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 5911 (ITAT-HYDERABAD)
• Duration Of Justice: 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 25-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KPC RAO
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Depreciation; Transfer pricing; International transaction; Revised return
• Section: 143(3); 92E; 115JB; 37(1); 10B; 92

Judgement Text

ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.213/HYD/2016 (ASSESSMENT YEAR: 2011-12) M/S. CAMBRIDGE TECHNOLOGY ENTERPRISES LTD HYDERABAD PAN:AAACC 3358 G VS DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2) HYDERABAD FOR ASSESSEE : SHRI P. MURALI MOHAN RAO FOR REVENUE : SHRI K.P.C. RAO, CIT (DR) O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2011-12. IN T HIS APPEAL THE ASSESSEE IS AGGRIEVED BY THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C(1) OF THE ACT. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY, ENGAGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT O F SOFTWARE, E- FILED ITS RETURN OF INCOME FOR THE A.Y 2011-12 ON 23 .09.2011 ADMITTING A TOTAL INCOME OF RS.NIL. SUBSEQUENTLY, T HE ASSESSEE COMPANY FILED REVISED RETURN ON 30.11.2011 ADMITTIN G INCOME OF RS.1,71,77,250 UNDER THE NORMAL PROVISIONS AND BOOK PROFITS OF RS.1,86,55,763 UNDER SECTION 115JB OF THE ACT. THE RETURN WAS DATE OF HEARING : 28.11.2016 DATE OF PRONOUNCEMENT : 16.12.2016 ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 2 OF 11 INITIALLY PROCESSED U/S 143(1), BUT SUBSEQUENTLY WA S TAKEN UP FOR SCRUTINY. 3. THE AO OBSERVED THAT THE ASSESSEE HAS FURNISHED A REPORT IN FORM NO.3CEB IN ACCORDANCE WITH PROVISION S OF SECTION 92E AND AS PER THIS REPORT, THE ASSESSEE HAD ENTERE D INTO INTERNATIONAL TRANSACTIONS WITH ITS AE. THEREFORE, A REFERENCE WAS MADE TO THE TPO U/S 92CA OF THE ACT FOR DETERMINATI ON OF THE ARMS LENGTH PRICE. THE TPO PASSED THE ORDER U/S 92 CA OF THE ACT ON 31.10.2014 PROPOSING THE TP ADJUSTMENT OF RS.5,89,28,768. 4. FURTHER, FROM THE P&L A/C, THE AO ALSO OBSERVED T HAT UNDER THE HEAD GENERAL & ADMINISTRATIVE EXPENSES, THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.13,73,745 AS LOSS ON SA LE OF ASSET BUT THE ASSESSEE DID NOT ADD BACK THE AMOUNT IN THE COMPUTATION OF INCOME. OBSERVING THAT THE LOSS ON SALE OF ASSET IS NOT ALLOWABLE, THE AO DISALLOWED THE SAME AND ADDED IT BACK TO THE RETURNED INCOME. ACCORDINGLY, THE AO PASSED THE DRA FT ASSESSMENT ORDER AND FURNISHED A COPY TO THE ASSESS EE. AGGRIEVED, THE ASSESSEE PREFERRED ITS OBJECTIONS BE FORE THE DRP AGAINST THE TP ADJUSTMENT AND ALSO AGAINST BRINGING TO TAX THE LOSS ON SALE OF ASSET. 5. THE DRP, HOWEVER, CONFIRMED THE DRAFT ASSESSMENT ORDER AND IN CONSONANCE THEREWITH, THE AO HAS PASSE D THE FINAL ASSESSMENT ORDER AND THE ASSESSEE IS IN APPEAL BEFO RE US. THE ASSESSEE HAS RAISED THE FOLLOWING PRECISE GROUNDS O F APPEAL: ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 3 OF 11 EACH OF THE GROUNDS OF APPEAL IS MUTUALLY EXCLUSIVE OF, INDEPENDENT AND WITHOUT PREJUDICE TO OTHER. BASED ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICER (AO), LEARNED TRANSFER PRICING OFFICER (TPO) AND THE HON'BLE DISPUTE RESOLUTION PANEL (DRP) 1. ERRED IN LAW IN MAKING THE REFERENCE TO THE TPO WITHOUT MEETING THE PRECONDITIONS FOR SUCH REFERENCE UNDER SECTION 92CA OF THE 1.T. ACT, 1961. 2. ERRED IN CALCULATING THE OPERATING MARGIN OF THE COMPANY AT RS. 2,88,92,826/- AND PLI(OP/OC) OF 9. 60% WITHOUT APPRECIATING THAT OPERATING MARGIN AFTER EXCLUDING DEPRECIATION IS CALCULATED AT RS.12,56,42,745/ - AND PLI(OP/OC) OF 61.54%. 3. ERRED IN NOT FOLLOWING THE DIRECTIONS OF THE HON'BLE DRP DATED 30.12.2015 WHEREIN IT IS DIRECTED AS UNDER: ' .... CONSIDER THE MARGIN IN THE CASE OF THE ASSESSEE AS WELL AS COMPARABLES AFTER EXCLUDING DEPRECIATION.' 4. ERRED IN MAKING THE ADDITION OF RS. 4,06,86,257/- TOWARDS THE SHORTFALL OF ALP ADJUSTMENT IN RESPECT OF TRANSACTIONS OF RENDERING OF SOFTWARE DEVELOPMENT SERVICES. 5. ERRED IN CALCULATING ADJUSTED ARM'S LENGTH MARGIN (ALM) OF COMPARABLES AT 23.04% (ALM AT 20.79% - WCA AT (- )2.23%). 6. ERRED IN NOT GIVING THE RISK ADJUSTMENT TO THE ASSESSEE COMPANY WITHOUT APPRECIATING THE FACT THAT ASSESSEE COMPANY HAVING HIGH RISK IN THE MARKET. ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 4 OF 11 7. ERRED IN NOT GIVING THE BENEFIT OF +1- 5%, AS PROVIDED UNDER FIRST PROVISO TO SECTION 92C(2) OF THE ACT. 8. ERRED IN MAKING THE ADDITION OF RS. 43,81,006/- TOWARDS THE SHORTFALL OF ALP ADJUSTMENT BY CHARGING 5% MARK-UP ON REIMBURSEMENT OF EXPENSES TRANSACTIONS. 9. ERRED IN DLSALIOWIN9 AN AMOUNT OF RS.13,73,745/- TOWARDS LOSS ON SALE OF ASSET CLAIMED BY THE ASSESSEE. 10. ERRED IN INITIATING PENALTY PROCEEDINGS U/E 271(1)(C), 271BA AND 271AA OF THE INCOME TAX ACT. 11.THE ASSESSEE MAY ADD, ALTER OR MODIFY ANY OTHER POINT TO THE GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 6. AT THE TIME OF HEARING, IT IS SUBMITTED BY THE L EARNED COUNSEL FOR THE ASSESSEE THAT GROUNDS OF APPEAL NO. 1 AND 11 ARE GENERAL IN NATURE AND NEED NO ADJUDICATION. 7. AS REGARDS GROUNDS 2 TO 7, THE LEARNED COUNSEL F OR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY IS A B USINESS SOLUTION PROVIDER FOCUSING ON BUILDING AND INTEGRAT ING BUSINESS APPLICATIONS. IT HAS ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ITS AE AT USA FOR PROVISION OF SOFTWARE DEVELOPMENT SERVICES. IN ITS TP STUDY, THE ASSESSEE HAD ADOPTED THE TNMM AS THE MOST APPROPRIATE METHOD AND HAS ARRIVED AT THE MARGIN OF 9.6% AS AGAINST THE MARGIN OF THE COMPARABLES OF 6.68%. THER EFORE, THE ASSESSEE TREATED THE INTERNATIONAL TRANSACTION TO B E AT ALP, BUT THE TPO REJECTED THE ASSESSEES TP STUDY AND HAS AD OPTED THE ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 5 OF 11 TNMM AS THE MOST APPROPRIATE METHOD AND HAS TAKEN 1 8 COMPANIES AS COMPARABLES AND HAS ARRIVED AT THE MEA N MARGIN OF THE COMPARABLES AT 20.81% RESULTING IN THE ADJUSTMEN T OF RS.1,82,42,500. THE LEARNED COUNSEL FOR THE ASSESSE E SUBMITTED THAT FOR THE A.Y 2010-11, THE ASSESSEE COMPANY HAD C ALCULATED THE OPERATING MARGIN OF THE ASSESSEE COMPANY BEFORE DEPRECIATION AS THE DEPRECIATION COST OF THE ASSESSEE TO THE TOT AL COST IS 32.09%, WHICH IS VERY HIGH AND HAS AN ADVERSE IMPAC T ON THE OPERATING MARGIN BUT THE TPO HAS COMPUTED THE OPERA TING MARGIN OF BOTH THE ASSESSEE AS WELL AS THE COMPARABLES AFT ER DEPRECIATION RESULTING IN THE HUGE ADJUSTMENT. IT IS SUBMITTED T HAT THE ASSESSEE HAS OBJECTED BEFORE THE DRP THAT THE OPERA TING MARGIN OF THE ASSESSEE COMPANY IS HUGELY IMPACTED WHEN THE AM OUNT OF DEPRECIATION IS INCLUDED IN THE OPERATING COST AND HENCE THE MARGIN OF THE ASSESSEE COMPANY BEFORE DEPRECIATION AND ALSO THE MARGINS OF THE COMPARABLE COMPANIES BEFORE DEPRECIA TION SHOULD BE TAKEN FOR ARRIVING AT THE CORRECT ALP. HE SUBMIT TED THAT EVEN THE DRP HAS ACCEPTED THAT AS CLAIMED BY THE ASSESS EE, THE MARGIN IN THE CASE OF THE CASE AS WELL AS COMPARABL ES CAN BE CONSIDERED BEFORE ALLOWING DEPRECIATION TO ARRIVE A T A CORRECT COMPARABILITY IN THE CIRCUMSTANCES MENTIONED BY THE ASSESSEE AND FOR COMING TO THIS CONCLUSION, THE DRP PLACED R ELIANCE UPON THE DECISION OF THE HON'BLE ANDHRA PRADESH & TELANG ANA HIGH COURT IN THE CASE OF BA CONTINUUM INDIA PVT LTD VS. CIT-1 IN ITTA NO.440/2014 AND DIRECTED THE AO TO CONSIDER THE MAR GIN IN THE CASE OF THE ASSESSEE AS WELL AS THE COMPARABLES AFT ER EXCLUDING DEPRECIATION. HE SUBMITTED THAT THE AO HAS ERRONEOU SLY HAS NOT FOLLOWED THIS DIRECTION OF THE DRP AND HAS COMPUTED THE ALP AFTER INCLUDING THE DEPRECIATION COST TO THE OPERATING CO ST OF BOTH THE ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 6 OF 11 ASSESSEE AS WELL AS THE COMPARABLES. HE ALSO DREW O UR ATTENTION TO THE ORDER OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO.364/HYD/2015 FOR A.Y 2010-11 WHEREIN THE TRIBUNAL HAS CONSIDERED THIS ISSUE AT LENGTH AND AT PARA 6 HELD AS UNDER: 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT IT HAS BEEN HELD IN THE ABOVE DECISIONS R ELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE THAT ALL THE POSSIBLE DISC REPANCIES HAVE TO BE REMOVED AND THE ASSESSEE'S COMPARABLES HAVE TO BE B ROUGHT ON PAR WITH EACH OTHER BEFORE COMPARING THE ASSESSEE'S FINANCIA L RESULTS WITH THOSE OF THE COMPARABLE COMPANIES. AS DEMONSTRATED BY THE AS SESSEE, THE RATIO OF DEPRECIATION TO OPERATING COST IN THE CASE OF THE A SSESSEE IS VERY HIGH AS COMPARED TO THE COMPARABLE COMPANIES, THE AVERAGE O F WHICH IS 5.71% ONLY. THEREFORE, WE ARE CONVINCED WITH THE ARGUMENTS OF T HE LD. COUNSEL FOR THE ASSESSEE THAT THE PLI HAS TO BE CALCULATED BEFORE D EPRECIATION TO BRING COMPARABLE COMPANIES AND THE ASSESSEE ON PAR WITH E ACH OTHER. THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF QU AL CORE LOGIC LTD., (CITED SUPRA) AT PARA 57 OF ITS ORDER HAS HELD AS U NDER : '57. WE HAVE HEARD BOTH THE PARTIES ON THIS AND PER USED THE MATERIAL ON RECORD. IN THE PRESENT APPEAL, ALP OF TRANSACTIONS CARRIED WAS TO BE DETERMINED BY COMPARING NET PROFIT OF THE TAXPAYER (TESTED PARTY) WITH MEAN NET PROFIT OF COMPARABLES. ONLY RECEIPTS AND E XPENDITURE, HAVING CONNECTION WITH INTERNATIONAL TRANSACTIONS, WERE RE QUIRED TO BE TAKEN INTO ACCOUNT. ANY RECEIPT OR EXPENDITURE HAVING NO BEARI NG ON PRICE OR MARGIN OF PROFIT COULD NOT BE TAKEN INTO CONSIDERAT ION. IT IS EVIDENT FROM STATUTORY PROVISIONS THAT IT IS NOWHERE PROVIDED TH AT DEDUCTION OF DEPRECIATION IS A MUST. DEPRECIATION CAN BE TAKEN I NTO ACCOUNT OR DISREGARDED IN COMPUTING PROFIT DEPENDING UPON THE CONTEXT AND PURPOSE FOR WHICH PROFIT IS TO BE COMPUTED. THERE IS NO FOR MULA WHICH WOULD BE APPLICABLE UNIVERSALLY AND IN ALL CIRCUMSTANCES. 'N ET PROFIT' USED IN RULE 10B CAN BE TAKEN TO MEAN COMMERCIAL PROFIT. BUT DEP RECIATION IN SUCH PROFIT ON COMMERCIAL PRINCIPLES HAS TO BE THE 'ACTU AL' AMOUNT BY WHICH THE ASSETS OF BUSINESS GOT DEPLETED BETWEEN THE TWO DATES SEPARATED BY A YEAR. IT CANNOT BE DEPRECIATION UNDER TAX OR COMPAN IES RULES OR AS PER POLICY OF THE COMPANY. IN THE CASE IN HAND, REVENUE AUTHORITIES WENT WRONG IN DISREGARDING THE CONTEXT AND PURPOSE FOR W HICH THE 'NET PROFIT' WAS TO BE COMPUTED. DEPRECIATION, WHICH CAN HAVE VA RIED BASIS AND IS ALLOWED AT DIFFERENT RATES, IS NOT SUCH AN EXPENDIT URE WHICH MUST BE DEDUCTED IN ALL SITUATIONS. IT HAS NO DIRECT CONNEC TION OR BEARING ON PRICE, COST OR PROFIT MARGIN OF THE INTERNATIONAL TRANSACT IONS. OBJECT AND PURPOSE OF THE TRANSFER PRICING TO COMPARE LIKE WIT H THE LIKE, AND TO ELIMINATE DIFFERENCES, IF ANY, BY SUITABLE ADJUSTME NT IS TO BE SEEN. THEREFORE, THERE WAS JUSTIFICATION ON THE PART OF T HE ASSESSEE IN PLEADING THAT PROFITS BE TAKEN WITHOUT DEDUCTION OF DEPRECIA TION AS DEPRECIATION ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 7 OF 11 WAS LEADING TO LARGE DIFFERENCES IN MARGINS FOR VAR IOUS REASONS. CONTENTION THAT DEPRECIATION WOULD DEPEND UPON TYPE OF TECHNOLOGY EMPLOYED, AGE AND NATURE OF MACHINERY USED, IS QUIT E WELL-FOUNDED. ABOVE, ALONG WITH SIZE OF ENTERPRISE AND INVESTMENT IN PLANT/MACHINERY WERE IMPORTANT FACTORS TO BE TAKEN INTO ACCOUNT FOR COMPARISON AND FOR COMPUTING PROFIT. THERE IS CONSIDERABLE SUPPORT FOR THE CONTENTION RAISED ON BEHALF OF THE ASSESSEE IN THE OECD GUIDELINES ON TRANSFER PRICING. THE CLAIM OF DEPRECIATION CAN LEAD TO GREAT DIFFERE NCE IN COMPUTING PROFITS OF COMPARABLES AS DEPRECIATION IS PERMITTED DEPENDING UPON NATURE OF PLANT/MACHINERY AND YEAR OF USE. OBVIOUSL Y THERE ARE DIFFERENCES BETWEEN THE MACHINERY EMPLOYED BY THE T AXPAYER AND OTHER COMPARABLE CONCERNS WHICH IS REFLECTED IN AMOUNT AN D PERCENTAGE OF DEPRECIATION CLAIMED. HOW THIS VARIATION AND DIFFER ENCE COULD BE IGNORED UNDER TP REGULATIONS IS NEITHER SHOWN NOR E XPLAINED. THE ASSESSEE HAS DEBITED HIGH AMOUNT/RATIO OF DEPRECIAT ION. OTHER ENTERPRISES HAVE CLAIMED DEPRECIATION AT MUCH LOWER AMOUNTS. SI ZE OF THE ASSETS BESIDES THE AGE OF THE ASSETS OF COMPARABLES WAS LE ADING TO DIFFERENCE IN THE PROFIT MARGINS AND IN MEAN MARGIN. ON THE CONTR ARY, CLAIM OF DEPRECIATION IS EATING UP LARGE CHUNK OF PROFIT IN THE CASE OF THE TAXPAYER. THE CIT(A) HAS NOT SAID A WORD ON 'ASSET' EMPLOYED AND 'RISKS' SUFFERED BY THE TESTED PARTY AND THE COMPAR ABLES. THUS, MATERIAL DIFFERENCES NEEDING SUITABLE ADJUSTMENT WERE IGNORE D AND A FLAWED ANALYSIS WAS CARRIED EVEN IN APPELLATE PROCEEDINGS. WITHOUT CONSIDERING OBVIOUS MATERIAL DIFFERENCES, THE CONTENTION OF THE ASSESSEE TO TAKE PROFIT WITHOUT DEPRECIATION WAS REJECTED. THIS REJECTION I S NOT SOUND IN LAW. THIS GROUND IS ALLOWED. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE ALP.' 6.1. RESPECTFULLY FOLLOWING THE ABOVE DECISION WHIC H HAS ALSO BEEN FOLLOWED IN THE CASE OF BA CONTINNUM INDIA IN ITA.NO.1154/HYD/2011 DATED 24.10.2013, WE DIRECT TH E A.O. TO RE- COMPUTE THE ALP BY TAKING THE OPERATING COST BEFORE DEPRECIATION INTO CONSIDERATION. THUS, GROUNDS OF APPEAL NOS. 10 AND 11 ARE TREATED AS ALLOWED. THEREFORE, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE ASSESSMENT ORDER NEEDS TO BE REDONE IN ACCORDANCE W ITH THE DIRECTIONS OF THE DRP. 8. THE LEARNED DR SUPPORTED THE ORDERS OF THE AUTHO RITIES BELOW. ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 8 OF 11 9. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT IN THE ASSESSEES OWN CASE FOR THE EARLIER A.Y, THIS TRIBUNAL HAS DIRECTED THE AO TO R ECOMPUTE THE ALP BY TAKING THE OPERATING COST BEFORE DEPRECIATIO N INTO CONSIDERATION. TO GIVE THIS DIRECTION, WE HAVE FOLL OWED THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CAS E OF B.A. CONTINUUM INDIA PVT. LTD VS. CIT-1 (CITED SUPRA) WH ICH HAS ALSO BEEN FOLLOWED BY THE DRP FOR THE RELEVANT A.Y BEFORE US. IN VIEW OF THE SAME, WE DIRECT THE AO TO COMPUTE THE ALP BEFOR E DEPRECIATION BOTH IN THE CASE OF THE ASSESSEE AS WE LL AS THE COMPARABLE COMPANIES AND WORK OUT THE MARGINS ACCOR DINGLY. 10. FURTHER, THE LEARNED COUNSEL FOR THE ASSESSEE HA S SUBMITTED THAT IF THE ALP IS SO CALCULATED, THEN TH E MARGIN OF THE ASSESSEE WOULD BE WITHIN (+_) 5% OF THE AVERAGE MARG INS OF THE COMPARABLES AND THEREFORE, THE TP ADJUSTMENT WOULD NOT HAVE REQUIRED AT ALL AND OTHER GROUNDS NEED NO ADJUDICAT ION. THEREFORE, WE SEE NO REASON TO ADJUDICATE THE OTHER GROUNDS OF APPEALS. ACCORDINGLY GROUNDS 2 TO 7 ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 11. AS REGARDS GROUND OF APPEAL NO.8, THE LEARNED C OUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE HAD ARIS EN IN THE ASSESSEES OWN CASE FOR THE A.Y 2010-11 AND THE TRIB UNAL AT PARAS 20 & 21 OF ITS ORDER HAS HELD AS UNDER: 20. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL IN THE ASSESSEE'S OWN CAS E FOR THE A.Y. 2009- 2010, HAS CONSIDERED THE DECISION OF THE COORDINATE BENCH IN THE CASE OF MYLAN LABORATORIES IN ITA.NO.66/2013 DATED 10.01.20 14 TO HOLD THAT THE REIMBURSEMENT EXPENSES NOT DEBITED TO THE P & L ACC OUNT IS ONLY A ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 9 OF 11 BALANCE SHEET ENTRY AND HENCE, THERE CANNOT BE ANY MARK-UP ON SUCH EXPENDITURE AND INCOME COMPUTED THEREON. THE RELEVA NT PORTION OF THE DECISION IS REPRODUCED HEREUNDER FOR READY REFERENC E : '5. WITH RESPECT TO REIMBURSEMENT OF EXPENDITURE IN THE CASE OF MYLAN LABORATORIES LTD., IN ITA.NO.66/HYD/2013 DATE D 10.01.2014 THE BENCH OBSERVED AS FOLLOWS : '31. ..... IN CASE OF REIMBURSEMENT AT COST OF THE EXPENDITURE INCURRED ON BEHALF OF THE AES AND HAS NOT FORMED PART OF THE EX PENDITURE CLAIMED AS OPERATING COST OF THE ASSESSEE THEN, THE REIMBURSEM ENT SHOULD NOT BE CONSIDERED AS PART OF ASSESSEE'S SALES. THE AMOUNTS SHOULD BE EXCLUDED IN COMPUTING THE OPERATING PROFITS. SINCE THE ASSES SING OFFICER HAS NOT EXAMINED AND IT IS ALSO NOT ON RECORD WHETHER THE S AID EXPENDITURE WAS NOT PART OF CLAIM UNDER SECTION 37(1) OF THE I.T. ACT IN THE REGULAR COMPUTATION OR NOT, IN THE INTEREST OF JUSTICE, WE REMIT THE MATTER BACK TO THE FILE OF THE TPO TO EXAMINE THE FACTS AND TO EXC LUDE ONLY IN THE CASE THE SAID AMOUNT IS REIMBURSEMENT OF EXPENDITURE AND THERE WAS NO CLAIM BY THE ASSESSEE IN ITS COMPUTATION OF INCOME. GROUN D NO.9 OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 5.1. HOWEVER, IN THIS CASE WE FIND THAT THE A.O. HI MSELF HAS AGREED THAT THE REIMBURSEMENT OF EXPENDITURE DOES NOT FIGURE IN THE P & L ACCOUNT AND PERUSING THE PAPER BOOK AT PAGES 1, 3 AND 11 WE ARE CONVINCED THAT IT IS ONLY A BALANCE SHEET ENTRY AND NOT DEBITED TO THE P & L ACCOUNT. HENCE, WE ALLOW THE GROUND WITH RESPECT TO REIMBURS EMENT OF EXPENDITURE RAISED BY THE ASSESSEE BEFORE US.' 21. RESPECTFULLY FOLLOWING THE SAME, WE HOLD THAT T HE REIMBURSEMENT OF EXPENDITURE CANNOT BE MARKED-UP BY THE A.O. FOR COMPUTING THE ALP ADJUSTMENT. THEREFORE, ACCORDING TO HIM, SIMILAR DIRECTION IS T O BE GIVEN FOR THE A.Y BEFORE US AS WELL. 12. THE LEARNED DR, HOWEVER, SUPPORTED THE ORDERS O F THE AUTHORITIES BELOW. 13. HAVING REGARD TO THE FACT THAT THE ISSUE HAD AR ISEN IN ASSESSEES OWN CASE FOR THE EARLIER A.Y AND THE TRIB UNAL HAS HELD THAT THE REIMBURSEMENT OF THE EXPENDITURE CANNOT BE MARKED UP ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 10 OF 11 BY THE AO FOR COMPUTING THE ALP ADJUSTMENT, WE ALLO W THE ASSESSEES GROUND OF APPEAL. 14. AS REGARDS GROUND NO.9, IT IS THE CASE OF THE A SSESSEE THAT THE ASSESSEE HAS SOLD AN ASSET AND THE LOSS ON SUCH SALE HAS BEEN REDUCED FROM THE BLOCK OF ASSETS AND THE DEPRE CIATION HAS BEEN CLAIMED AFTER SUCH REDUCTION IN THE VALUE OF T HE ASSET. THEREFORE, ACCORDING TO HIM, THERE IS NO IMPACT ON THE INCOME OF THE ASSESSEE AND THEREFORE, IT CANNOT BE BROUGHT TO TAX. 15. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THIS ISSUE NEEDS VERIFICATION BY THE AO AS SCHEDULE 5 GIVING T HE DETAILS OF THE FIXED ASSETS, DOES NOT REFLECT THE REDUCTION IN THE VALUE OF THE ASSET. 16. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE ARE OF THE OPINION THAT THE ASSESSEE S CONTENTIONS NEEDS VERIFICATION BY THE AO AS THE SPECIFIC ASSET WHICH HAS BEEN SOLD AND THE LOSS THEREON IS NOT EVIDENT FROM EITHE R THE ASSESSMENT ORDER OR THE DRPS ORDER AND THEREFORE, THE ASSESSEES CONTENTION THAT THE LOSS HAS BEEN REDUCED FROM THE BLOCK OF ASSETS IS NOT ACCEPTABLE AT THIS STAGE WITHOUT THE SPECIFIC DETAILS. THEREFORE, THIS ISSUE IS SET ASIDE TO THE FILE OF T HE AO FOR VERIFICATION AFTER GIVING THE ASSESSEE A FAIR OPPOR TUNITY OF HEARING AND CONSIDERING THE ASSESSEES SUBMISSIONS ON THE I SSUE. 17. IN THE RESULT, GROUND OF APPEAL NO.9 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ITA NO 213 OF 2016 CAMBRIDGE TECHNOLOGY ENTERPRISE S LTD HYDERABAD PAGE 11 OF 11 18. GROUND NO.10 IS ONLY AGAINST INITIATION OF PENA LTY PROCEEDINGS U/S 271(1)(C), 271BA AND 271AA OF THE I .T. ACT AND THIS GROUND IS DISMISSED AS PREMATURE. 19. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH DECEMBER, 2016. SD/- SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 16 TH DECEMBER, 2016. VINODAN/SPS COPY TO: 1 P. MURALI & CO. CAS, 6-3-655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD 500082 2 DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2) HYDER ABAD 3 DISPUTE RESOLUTION PANEL (DRP) HYDERABAD 4 DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) I T TOWERS, HYDERABAD 5 THE ADDL. CIT (T.P) HYDERABAD 6 GUARD FILE 7 THE DR, ITAT HYDERABAD BY ORDER