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

ITA 364/HYD/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6361 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 27-04-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 07-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S V S S PRASAD
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Depreciation; Transfer pricing; International transaction; Initiation of penalty proceedings; Revised return
• Section: 43B; 143(3); 115JB; 37(1); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA.NO.364/HYD/2015 ASSESSMENT YEAR 2010-2011 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. PAN AAACU3358G VS. THE DCIT, CIRCLE-1(2) HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. P. MURALIMOHAN RAO FOR REVENUE : MR. S.V.S.S. PRASAD DATE OF HEARING : 03.05.2016 DATE OF PRONOUNCEMENT : 01.08.2016 ORDER PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y. 2010- 2011. THIS APPEAL IS FILED BY THE ASSESSEE AGAINST TH E ASSESSMENT ORDER PASSED UNDER SECTION 143(3) READ WITH SECTION 144C OF THE I.T. ACT, 1961. 2. THE ASSESSEE HAS RAISED 30 GROUNDS OF APPEAL AND 31 TO 39 ADDITIONAL GROUNDS OF APPEAL. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ASSESSEE DOES NOT WISH TO PRESS GROUNDS OF APPEAL NOS. 7,8,9 AND 12 TO 24 AND 29 AND 30. THESE GROUNDS ARE ACCORDINGLY REJECTED AS NOT PRESSED. GROUNDS NO. 1 AND 2 ARE AGAINST THE QUANTUM OF THE T.P. ADJUSTMENT 2 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. MADE BY THE A.O. WHILE GROUND NO.6 IS AGAINST THE ORD ER OF THE DRP IN NOT ADJUDICATING THE MODIFIED/ADDITIONAL GROUNDS FILED BY THE ASSESSEE BEFORE THE DRP ON 27.10.2014. THE SAID ADDITIONAL GROUNDS ARE RAISED AS GROUNDS NO. 10 AND 11 BEFORE THE TRIBUNAL. IN THESE GROUNDS, THE GRIEVANCE OF THE ASSESSEE IS THAT THE RATIO OF DEPRECIATION TO THE OPERATING COST OF THE ASSESSEE IS 30.53% AS COMPARED TO THE RATIO OF DEPRECIATION TO OPERATING COST OF THE COMPARABLES AT 5.93% AND THEREF ORE, THE PROFIT BEFORE DEPRECIATION BOTH IN THE CASE OF THE ASSESSEE AS WELL AS THE COMPARABLE COMPANIES SHOULD BE CONSIDERED FOR THE PURPOSE OF CALCULATION OF PLI. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY, WHICH IS ENGAGED IN THE BUSINESS OF PROVID ING SOFTWARE DEVELOPMENT SERVICES FOR SECURITY SYSTEMS, H AD FILED ITS RETURN OF INCOME FOR THE A.Y. 2010-2011 ON 24.09.2010 ADMITTING TOTAL INCOME OF RS.5,88,43,060 UNDER NORMAL PROVISIONS AND BOOK PROFIT OF RS.72,18, 076 UNDER THE PROVISIONS OF SECTION 115JB OF THE I.T. ACT, 1961. SUBSEQUENTLY, THE ASSESSEE COMPANY FILED ITS REVISED RETURN DECLARING LOSS OF (-) RS.89,59,810. D URING THE ASSESSMENT PROCEEDINGS UNDER SECTION 143(3) OF THE I.T. ACT, THE A.O. NOTICED FROM FORM 3CEB THAT THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH ITS A.E. THEREFORE, A REFERENCE WAS MADE TO THE TPO AS PER THE PROVISIONS OF SECTION 92CA OF THE ACT FOR DETERMINATION OF THE ALP. THE TPO DETERMINED THE T.P. ADJUSTMENT AT RS.9,40,13,553 AND THE A.O. ACCORDINGLY PASSED THE DR AFT 3 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. ASSESSMENT ORDER. THE ASSESSEE FILED ITS OBJECTIONS BE FORE THE DRP WHO DIRECTED THE TPO TO RE-COMPUTE THE ALP BY EXCLUDING CERTAIN COMPANIES. IN ACCORDANCE WITH THE SA ID DIRECTIONS, THE TPO VIDE ORDERS DATED 28.01.2015 RE- DETERMINED THE T.P. ADJUSTMENT AT RS.7,38,54,455 AND IN ACCORDANCE WITH THE SAME, THE FINAL ASSESSMENT ORDER WA S PASSED. AGGRIEVED BY THE FINAL ASSESSMENT ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD. COUNSEL FOR THE ASSESSEE HAS FILED BEFORE US, A DETAILED NOTE AND A CHART TO DEMONSTRATE THAT THE RATIO OF DEPRECIATION TO OPERATING COST OF THE ASSESS EE IS VERY HIGH AT 30.44% AS COMPARED TO THE AVERAGE RATIO OF DEPRECIATION TO OPERATING COST OF THE COMPARABLES AT 5.71%. HE HAS ALSO DEMONSTRATED THAT AFTER EXCLUDING TH E DEPRECIATION FROM OPERATING COST, THE OPERATING MARGIN O F THE ASSESSEE COMPANY IS 44.31% AS AGAINST THE AVERAGE OF THE OPERATING MARGIN OF THE COMPARABLES ALSO AFTER EXCLUDING THE DEPRECIATION FROM OPERATING COST IS 28.8 4%. HENCE, ACCORDING TO HIM, THE TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES IS MORE THAN THE ARMS LENGTH PRICE AND NO ADJUSTMENT IS REQUIRED IN THIS REGA RD. IN SUPPORT OF THIS CONTENTION, HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS : (I) AMD RESEARCH & DEVELOPMENT CENTRE INDIA P. LTD., VS. DCIT ITA.NO.275/HYD/2015. (II) QUAL CORE LOGIC LIMITED VS. DCIT ITA.NO.893/HYD/2011 4 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. (III) M/S. HSBC ELECTRONIC DATA PROCESSING INDIA LTD., VS. ACIT, ITA.NO.1624/HYD/2010. 5. THE LD. D.R. HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT IT HAS BEEN HELD IN T HE ABOVE DECISIONS RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE THAT ALL THE POSSIBLE DISCREPANCIES HAVE TO BE REMOVED AND THE ASSESSEES COMPARABLES HAVE TO BE BROUGHT ON PAR WITH EACH OTHER BEFORE COMPARING THE ASSESSEES FINANCIAL RESULTS WITH THOSE OF THE COMPARA BLE COMPANIES. AS DEMONSTRATED BY THE ASSESSEE, THE RATIO OF DEPRECIATION TO OPERATING COST IN THE CASE OF THE ASSES SEE IS VERY HIGH AS COMPARED TO THE COMPARABLE COMPANIES, THE AVERAGE OF WHICH IS 5.71% ONLY. THEREFORE, WE AR E CONVINCED WITH THE ARGUMENTS OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE PLI HAS TO BE CALCULATED BEFORE DEPRECIATION TO BRING COMPARABLE COMPANIES AND THE ASSESSEE ON PAR WITH EACH OTHER. THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF QUAL CORE LOGIC LTD., (C ITED SUPRA) AT PARA 57 OF ITS ORDER HAS HELD AS UNDER : 57. WE HAVE HEARD BOTH THE PARTIES ON THIS AND PE RUSED THE MATERIAL ON RECORD. IN THE PRESENT APPEAL, ALP OF TRANSACTIONS CARRIED WAS TO BE DETERMINED BY COMPAR ING NET PROFIT OF THE TAXPAYER (TESTED PARTY) WITH MEA N NET PROFIT OF COMPARABLES. ONLY RECEIPTS AND EXPENDITUR E, HAVING CONNECTION WITH INTERNATIONAL TRANSACTIONS, WERE REQUIRED TO BE TAKEN INTO ACCOUNT. ANY RECEIPT OR EXPENDITURE HAVING NO BEARING ON PRICE OR MARGIN OF PROFIT COULD NOT BE TAKEN INTO CONSIDERATION. IT IS EVIDEN T FROM 5 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. STATUTORY PROVISIONS THAT IT IS NOWHERE PROVIDED TH AT DEDUCTION OF DEPRECIATION IS A MUST. DEPRECIATION C AN BE TAKEN INTO ACCOUNT OR DISREGARDED IN COMPUTING PROF IT DEPENDING UPON THE CONTEXT AND PURPOSE FOR WHICH PR OFIT IS TO BE COMPUTED. THERE IS NO FORMULA WHICH WOULD BE APPLICABLE UNIVERSALLY AND IN ALL CIRCUMSTANCES. 'N ET PROFIT' USED IN RULE 10B CAN BE TAKEN TO MEAN COMME RCIAL PROFIT. BUT DEPRECIATION IN SUCH PROFIT ON COMMERCI AL PRINCIPLES HAS TO BE THE 'ACTUAL' AMOUNT BY WHICH THE ASSETS OF BUSINESS GOT DEPLETED BETWEEN THE TWO DAT ES SEPARATED BY A YEAR. IT CANNOT BE DEPRECIATION UNDE R TAX OR COMPANIES RULES OR AS PER POLICY OF THE COMPANY. IN THE CASE IN HAND, REVENUE AUTHORITIES WENT WRONG IN DISREGARDING THE CONTEXT AND PURPOSE FOR WHICH THE 'NET PROFIT' WAS TO BE COMPUTED. DEPRECIATION, WHICH CAN HAVE VARIED BASIS AND IS ALLOWED AT DIFFERENT RATES, IS NOT SUCH AN EXPENDITURE WHICH MUST BE DEDUCTED IN ALL SITUAT IONS. IT HAS NO DIRECT CONNECTION OR BEARING ON PRICE, CO ST OR PROFIT MARGIN OF THE INTERNATIONAL TRANSACTIONS. OB JECT AND PURPOSE OF THE TRANSFER PRICING TO COMPARE LIKE WIT H THE LIKE, AND TO ELIMINATE DIFFERENCES, IF ANY, BY SUIT ABLE ADJUSTMENT IS TO BE SEEN. THEREFORE, THERE WAS JUSTIFICATION ON THE PART OF THE ASSESSEE IN PLEADI NG THAT PROFITS BE TAKEN WITHOUT DEDUCTION OF DEPRECIATION AS DEPRECIATION WAS LEADING TO LARGE DIFFERENCES IN MA RGINS FOR VARIOUS REASONS. CONTENTION THAT DEPRECIATION W OULD DEPEND UPON TYPE OF TECHNOLOGY EMPLOYED, AGE AND NATURE OF MACHINERY USED, IS QUITE WELL-FOUNDED. AB OVE, ALONG WITH SIZE OF ENTERPRISE AND INVESTMENT IN PLANT/MACHINERY WERE IMPORTANT FACTORS TO BE TAKEN INTO ACCOUNT FOR COMPARISON AND FOR COMPUTING PROFIT. TH ERE IS CONSIDERABLE SUPPORT FOR THE CONTENTION RAISED ON B EHALF OF THE ASSESSEE IN THE OECD GUIDELINES ON TRANSFER PRI CING. 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. OBVIOUSLY THERE ARE DIFFERENCES BETWEE N THE MACHINERY EMPLOYED BY THE TAXPAYER AND OTHER COMPARABLE CONCERNS WHICH IS REFLECTED IN AMOUNT AN D PERCENTAGE OF DEPRECIATION CLAIMED. HOW THIS VARIAT ION AND DIFFERENCE COULD BE IGNORED UNDER TP REGULATION S IS NEITHER SHOWN NOR EXPLAINED. THE ASSESSEE HAS DEBIT ED HIGH AMOUNT/RATIO OF DEPRECIATION. OTHER ENTERPRISE S HAVE CLAIMED DEPRECIATION AT MUCH LOWER AMOUNTS. SIZE OF THE ASSETS BESIDES THE AGE OF THE ASSETS OF COMPARABLES WAS LEADING TO DIFFERENCE IN THE PROFIT MARGINS AND IN MEAN 6 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. MARGIN. ON THE CONTRARY, CLAIM OF DEPRECIATION IS E ATING 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 ADJUSTM ENT WERE IGNORED AND A FLAWED ANALYSIS WAS CARRIED EVEN IN APPELLATE PROCEEDINGS. WITHOUT CONSIDERING OBVIOUS MATERIAL DIFFERENCES, THE CONTENTION OF THE ASSESSE E TO TAKE PROFIT WITHOUT DEPRECIATION WAS REJECTED. THIS REJECTION IS NOT SOUND IN LAW. THIS GROUND IS ALLOW ED. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RE- COMPUTE THE ALP. 6.1. RESPECTFULLY FOLLOWING THE ABOVE DECISION WHICH HAS ALSO BEEN FOLLOWED IN THE CASE OF BA CONTINNUM INDIA IN ITA.NO.1154/HYD/2011 DATED 24.10.2013, WE DIRECT THE A.O. TO RE-COMPUTE THE ALP BY TAKING THE OPERATING COST BEFORE DEPRECIATION INTO CONSIDERATION. THUS, GROUNDS OF APPEAL NOS. 10 AND 1 1 ARE TREATED AS ALLOWED. 7. GROUND NOS. 29 AND 30 WHICH ARE AGAINST THE INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271BA AND 271AA OF THE I.T. ACT, 1961 ARE REJECTED AS PREMATURE GROUNDS. GROUND NO.30 BEING GENERAL IN NATURE, NEEDS NO ADJUDICATION. ASSESSEE VIDE LETTER DATED 29 TH DECEMBER, 2015 HAS ALSO RAISED ADDITIONAL GROUNDS OF APPEAL WH ICH ARE ALSO AGAINST THE T.P. ADJUSTMENT. THESE GROUNDS WHICH ARE NUMBERED AS GROUND NOS. 31 TO 39 ARE ALSO NOT ADJUDICATED AT THIS STAGE AS IT WOULD RESULT IN AN ACADEM IC EXERCISE. 8. AS REGARDS GROUND NO.4, BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAD DEBITED A SUM OF RS.2,81,235 7 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. ON ACCOUNT OF LEAVE ENCASHMENT WHICH IS PAYABLE. THE ASSESSEE COMPANY WAS ASKED TO PRODUCE PAYMENT DETAILS OF LEAVE ENCASHMENT. THE ASSESSEE AGREED WITH THE ADDITION OF LEAVE ENCASHMENT OF RS.2,81,235 AS THE SA ID AMOUNT IS NOT PAID. THE A.O. OBSERVED THAT AS PER THE PROVISIONS OF SECTION 43B OF THE ACT, ANY SUM PAYABLE BY THE ASSESSEE AS AN EMPLOYER BY WAY OF CONTRIBUTION TO ANY P.F. OR SUPERANNUATION FUND OR GRATUITY FUND OR ANY OTHER FUND FOR THE WELFARE OF THE EMPLOYEES, SHALL BE ALLOW ED IN THE PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID BY HIM. HE, THEREFORE, DISALLOWED THE SAID SUM OF RS.2,81,235 UNDER SECTION 43B OF THE ACT. THE DRP ALSO CONFIRMED THE SAID DISALLOWANCE. 9. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALTHOUGH THE LEAVE ENCASHMENT IS A LIABILITY WHICH HAS TO BE DISCHARGED AT A FUTURE DATE, BUT FOR ALLOWING THE DEDUCTION, WHAT SHOULD BE DEFINITE IS INCURRING OF LIA BILITY AND THE LEAVE ENCASHMENT IS AN ACCRUED LIABILITY THOU GH THE ASSESSEE HAS NOT MADE THE PAYMENT DURING THE RELEVANT PREVIOUS YEAR. IN SUCH CASES, HE SUBMITTED THA T THE SAID SUM CANNOT BE TREATED AS A CONTINGENT LIABILITY AND DISALLOWED UNDER SECTION 43B OF THE ACT. IN SUPPOR T OF THIS CONTENTION, HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS : (I) BHARAT EARTH MOVERS VS. CIT 112 TAXMAN 61 (SC). 8 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. (II) EXIDE INDUSTRIES LTD., VS. UNION OF INDIA 164 TAXMANN 9 (CAL.) (HC) 10. THE LD. D.R. ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 11. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS VS. CI T (CITED SUPRA), WHEREIN IT HAS BEEN HELD AS UNDER : THE LAW IS SETTLED : IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUC TION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE T O BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY . IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATI ON MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. TH E LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHAR GED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF T HE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN. 12. HOWEVER, SUBSEQUENTLY VIDE THE FINANCE ACT OF 2001, CLAUSE (F) WAS INSERTED IN SECTION 43B OF THE ACT W.E.F. 01.04.2002. THE SAME WAS CHALLENGED IN THE CA SE OF EXIDE INDUSTRIES AND THE DIVISION BENCH OF THE HONBLE CALCUTTA HIGH COURT HELD THE SAME TO BE ULTRAVIRES THE ACT IN THE ABSENCE OF DISCLOSURE OF THE OBJECTS AND BEING INCONSISTENT WITH THE BASIC INTENT OF SECTION 43B. THEREAFTER, THE DEPARTMENT HAS FILED AN SLP AGAINST THE DECISION OF THE HONBLE CALCUTTA HIGH COURT AND WHILE 9 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. ADMITTING THE SLP, THE HONBLE SUPREME COURT, STAYED THE JUDGMENT OF THE HONBLE CALCUTTA HIGH COURT UNTIL FURTHER ORDERS AND FURTHER OBSERVED THAT THE ASSESSEES, DURING THE PENDENCY OF THE CIVIL APPEAL, WOULD PAY TAX AS IF SECTION 43B(F) IS ON THE STATUTE BOOK, BUT AT THE SAME TIME, IT WOULD BE ENTITLED TO MAKE CLAIM IN ITS RETURN OF INCOME. KEEPING ALL THESE DEVELOPMENTS IN VIEW, THE COORDINATE BENCH OF THIS TRIBUNAL AT KOLKATA IN THE CAS E OF BLA INDUSTRIES IN ITA.NO.1434/KOL/2012 VIDE ORDER S DATED 16.01.2015 HAS RESTORED SIMILAR ISSUE TO THE FILE OF THE A.O. WITH A DIRECTION TO AWAIT THE FINAL DECISION OF THE HONBLE SUPREME COURT ON THE ISSUE AND THEN TO DECIDE THE ISSUE ACCORDINGLY. THEREFORE, RESPECTFULLY FOLLO WING THE SAME, THIS ISSUE IN THE CASE OF THE ASSESSEE HEREIN IS ALSO REMANDED TO THE FILE OF THE A.O. WITH SIMILAR DIRECTION S. GROUND NO.4 OF THE ASSESSEE IS ACCORDINGLY TREATED A S ALLOWED FOR STATISTICAL PURPOSES. 13. AS REGARDS GROUND NO.5 AGAINST THE DISALLOWANCE UNDER SECTION 40A(7) OF THE I.T. ACT, THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAD CREATED A PROVISION FOR GRATUITY OF RS.4 LAKHS DURING THE RELE VANT FINANCIAL YEAR. THE A.O. DISALLOWED THE SAME AS THE ASSESSEE COMPANY DID NOT OBJECT TO THE SAID ADDITIONS. HOWEVER, BEFORE THE DRP, THE ASSESSEE HAS RAISED OBJECTION AND THE DRP CONFIRMED THE DRAFT ASSESSMENT ORDER, AGAINST WHICH, THE ASSESSEE IS IN APPEAL BEFOR E US. 10 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. 14. THE LD. COUNSEL FOR THE ASSESSEE, HAS ADVANCED THE SAME ARGUMENTS AS IN THE CASE OF PROVISI ON MADE FOR LEAVE ENCASHMENT AND SUBMITTED THAT THE PROVISION FOR GRATUITY HAD ACCRUED DURING THE RELEVA NT PREVIOUS YEAR BUT WAS NOT PAID TO THE EMPLOYEES. THUS, ACCORDING TO HIM, THIS BEING AN ASCERTAINED LIABILITY, SHOULD BE ALLOWED AS A DEDUCTION. IN SUPPORT OF THIS CONTENTION, THE LD. COUNSEL FOR THE ASSESSEE HAS PLACE D RELIANCE UPON THE FOLLOWING JUDGMENT : (I) CIT VS. KANPUR TEXTILES LTD., 143 TAXMAN 274 (ALLAHABAD) (HC). 15. THE LD. D.R. ON THE OTHER HAND, RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 16. HAVING REGARD TO THE CONTENTIONS, WE ARE OF THE VIEW THAT THIS GROUND REQUIRES RE-EXAMINATION BY THE A .O. EVEN THOUGH LD. COUNSEL RELIED ON THE DECISION OF HIG H COURT OF ALLAHABAD IN THE CASE OF CIT VS. KANPUR TEX TILES LTD., (143 TAXMAN 274), WE ARE OF THE VIEW THAT THE PRINCIPLES LAID DOWN BY THE ABOVE JUDGMENT DOES NOT APPLY IN VIEW OF THE SPECIFIC PROVISIONS OF SECTION 4 0A(7). AS PER THIS PROVISION, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF ANY PROVISION, WHETHER CALLED AS SUCH OR B Y ANY OTHER NAME, MADE BY THE ASSESSEE FOR THE PAYMENT OF GRATUITY TO THE EMPLOYEES ON THEIR RETIREMENT OR ON TERMINATION OF THEIR EMPLOYMENT FOR ANY REASON, SUBJEC T TO THE PROVISIONS OF CLAUSE (B). CLAUSE (B) GIVES EXEMP TION TO ANY PROVISION MADE FOR THE PURPOSE OF ANY CONTRIBUTION 11 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. TOWARDS AN APPROVED GRATUITY FUND OR FOR THE PURPOSE O F PAYMENT OF ANY GRATUITY THAT HAS BECOME PAYABLE DURING THE YEAR. EVEN THIS IS SUBJECT TO THE PROVISIONS OF SEC TION 43B. AS SEEN FROM THE DRAFT ASSESSMENT ORDER, ASSESSEE HAS AGREED FOR DISALLOWANCE BEFORE THE A.O. BEFORE TH E DRP, ASSESSEE EVEN THOUGH RAISED OBJECTION, DID NOT FURNISH ANY DETAILS NOR GIVE ANY DETAILED SUBMISSION S SO AS TO BE EXAMINED BY THE DRP. THE DRP, IN TURN, HAS RECORDED THAT ASSESSEE HAS NOT OBJECTED TO THE ABOVE DISALLOWANCE AND VIDE PARA 19, RECORDED THAT ASSESSEE HAS EXPRESSED ITS NO OBJECTION FOR THE ADDITION. IN VIEW OF THAT, WE ARE OF THE OPINION THAT ASSESSEE HAS NOT JUSTIFIED, WHY THE AMOUNT SHOULD NOT BE DISALLOWED UNDER THE PROVISIO NS OF SECTION 40A(7). HOWEVER, AS SEEN FROM THE DETAILS PLACED IN THE PAPER BOOK AT PAGE NO.94, ASSESSEE MADE A PROVISION OF RS.4,00,000 DURING THE YEAR AND HAS PAI D AN AMOUNT OF RS.4,75,960 DURING THE YEAR. IT ALSO REVERS ED A PROVISION OF RS.2,64,444 MADE IN THE EARLIER YEAR. HOW THESE AMOUNTS WERE CHARGED TO THE P & L A/C OR ADJUSTED IN THE COMPUTATION OF INCOME COULD NOT BE VERIFIED BY US. THEREFORE, A.O. IS DIRECTED TO EXAMINE WHETHER THE PROVISIONS MADE IS FOR THE AMOUNT PAYABLE IN THE LATER YEAR OR AMOUNTS WERE ALREADY PAID DURING THE YEAR, AS THE PAYMENT MADE IS MORE THAN THE PROVISION MADE. A.O. IS ALSO DIRECTED TO EXAMINE TO REVERSAL OF THE PROVISION MADE IN EARLIER YEAR TO AN EXTENT OF RS.2,64,444. IT MAY HA VE AN EFFECT ON EARLIER YEARS COMPUTATION OR CLAIMS IN THIS YEAR. THESE ASPECTS SEEMS TO HAVE NOT BEEN EXAMINED IN DETAIL 12 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. AS PER THE PROVISIONS OF THE ACT. IN VIEW OF THIS, WE A RE OF THE OPINION THAT THIS GROUND REQUIRES RE-EXAMINATION BY THE A.O. GROUND IS ACCORDINGLY CONSIDERED ALLOWED FO R STATISTICAL PURPOSES. 17. GROUND NOS. 25 TO 28 ARE AGAINST CHARGING OF 10% MARK-UP ON THE FINANCIAL TRANSACTIONS RELATING TO REIMBURSEMENT OF EXPENSES. BRIEF FACTS RELATING TO THIS ISSUE ARE THAT THE ASSESSEE HAS CLAIMED TO HAVE REIMBURSED EXPENDITURE TO ITS A.E. AT COST-TO-COST BA SIS AND HAS NOT DEBITED THE SAME TO THE P & L ACCOUNT AND HENCE, NO ADJUSTMENT CAN BE MADE IN THIS REGARD AS THE SAME WAS NOT AN INTERNATIONAL TRANSACTION. THE DRP UPHELD THE ORDER OF THE TPO HOLDING THAT THE ASSESSEE HAS RENDERED THE SERVICES ON BEHALF OF THE A.E. AND INCUR RED COST AND THE SAME WAS REIMBURSED BY A.E. SUBSEQUENTLY AND AS THE ASSESSEE HAS PERFORMED THE ACTIVITY AND THE BENEFITS HAVE FLOWN TO A.E., IT IS AN INTERNATIONAL TRANSACTION, BUT THAT THE MARK-UP ADOPTED BY THE TPO AT 22.69% IS VERY HIGH. THE DRP THEREFORE, RESTRICTED IT TO 10%. AGGRIEVED, BY THE SAID ORDER OF THE DRP, THE ASSESSEE IS IN APPEAL BEFORE US. 18. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THAT THE REIMBURSEMENT OF EXPENDITURE IS MERELY A BALANCE SHEET ENTRY AND IS NOT DEBITED TO THE P & L ACCOUNT AND SINCE THERE IS NO CLAIM OF EXPENDITURE B Y THE ASSESSEE, NO ADJUSTMENT CAN BE MADE IN THIS REGARD. 13 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. IN SUPPORT OF THIS CONTENTION, HE PLACED RELIANCE UPON THE DECISION OF THE ITAT IN ASSESSEES OWN CASE IN ITA.NO.89/2014 FOR THE A.Y. 2009-2010. 19. THE LD. D.R. SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 20. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL IN THE ASSESSEES OWN CASE 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 10.01.2014 TO HOLD THAT THE REIMBURSEMENT EXPENSES NOT DEBITED TO THE P & L ACCOUNT IS ONLY A BALANCE SHEET EN TRY AND HENCE, THERE CANNOT BE ANY MARK-UP ON SUCH EXPENDITURE AND INCOME COMPUTED THEREON. THE RELEVANT PORTION OF THE DECISION IS REPRODUCED HEREUNDER FOR R EADY REFERENCE : 5. WITH RESPECT TO REIMBURSEMENT OF EXPENDITURE I N THE CASE OF MYLAN LABORATORIES LTD., IN ITA.NO.66/H YD/2013 DATED 10.01.2014 THE BENCH OBSERVED AS FOLLOWS : 31. .. IN CASE OF REIMBURSEMENT AT COST OF THE EX PENDITURE INCURRED ON BEHALF OF THE AES AND HAS NOT FORMED PA RT OF THE EXPENDITURE CLAIMED AS OPERATING COST OF THE ASSESS EE THEN, THE REIMBURSEMENT SHOULD NOT BE CONSIDERED AS PART OF A SSESSEES SALES. THE AMOUNTS SHOULD BE EXCLUDED IN COMPUTING THE OPERATING PROFITS. SINCE THE ASSESSING OFFICER HAS NOT EXAMINED AND IT IS ALSO NOT ON RECORD WHETHER THE SAID EXPEN DITURE WAS NOT PART OF CLAIM UNDER SECTION 37(1) OF THE I.T. A CT IN THE REGULAR COMPUTATION OR NOT, IN THE INTEREST OF JUST ICE, WE REMIT THE MATTER BACK TO THE FILE OF THE TPO TO EXAMINE T HE FACTS AND TO EXCLUDE ONLY IN THE CASE THE SAID AMOUNT IS REIM BURSEMENT OF EXPENDITURE AND THERE WAS NO CLAIM BY THE ASSESSEE IN ITS COMPUTATION OF INCOME. GROUND NO.9 OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 14 ITA.NO.364/HYD/2015 CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. 5.1. HOWEVER, IN THIS CASE WE FIND THAT THE A.O. HIMSELF HAS AGREED THAT THE REIMBURSEMENT OF EXPEND ITURE DOES NOT FIGURE IN THE P & L ACCOUNT AND PERUSING THE PA PER 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. H ENCE, WE ALLOW THE GROUND WITH RESPECT TO REIMBURSEMENT OF E XPENDITURE RAISED BY THE ASSESSEE BEFORE US. 21. RESPECTFULLY FOLLOWING THE SAME, WE HOLD THAT THE REIMBURSEMENT OF EXPENDITURE CANNOT BE MARKED-UP BY THE A.O. FOR COMPUTING THE ALP ADJUSTMENT. 22. IN THE RESULT, ASSESSEES APPEAL IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 01.08.2016. SD/- SD/- (B. RAMAKOTAIAH) (SMT. P. MADHAVI DEVI) ACOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 01 ST AUGUST, 2016 VBP/- COPY TO : 1. CAMBRIDGE TECHNOLOGY ENTERPRISES LTD., HYDERABAD. C/O. MR. P. MURALI & CO., CHARTERED ACCOUNTANTS, 6- 3- 655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD 082. 2. THE DCIT, CIRCLE - 1(2), HYDERABAD. 3. THE DISPUTES RESOLUTION PANEL, 2 ND FLOOR, I.T. TOWERS, A.C. GUARDS, HYDERABAD 4. 4. THE COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXAT ION), I.T. TOWERS, 10-2-3, A.C. GUARDS, HYDERABAD. 5. THE COMMISSIONER OF IN COME TAX - 1, AAYAKAR BHAVAN, HYDERABAD. 6. THE DY. COMMISSIONER OF INCOME TAX (TRANSFER PRICIN G) - II, 3 RD FLOOR, D-BLOCK, I.T. TOWERS, A.C. GUARDS, HYDERABA D 500 004. 7. D.R. ITAT A BENCH, HYDERABAD. 8. GUARD FILE