M/S. Cambridge Technology Enterprises ... vs Assessee
- CitationITA.No.89/Hyd/2014
Ratio decidendi
The rule this decision rests on
The Tribunal, in applying the transfer pricing comparability analysis, held that companies whose functional profile is dissimilar to the assessee's (here, product-based or possessing high brand value, or showing abnormal super profits during the year) are to be excluded from the list of comparables, following the reasoning of the coordinate bench in the earlier decision of the same Tribunal in the Allianz matter. Expenses reimbursed at cost to or on behalf of associated enterprises, which do not form part of the assessee's profit and loss account and are merely balance sheet entries, are not to be included in the computation of operating profit or sales for the purpose of determining the arm's length price; such amounts are excluded from the computation of operating margins.
Written by Miss Lucy from the judgment below, not taken from a headnote.
Judgment
As delivered
M/s. Cambridge vs. Technology Enterprises The ACIT, Circle 1(2) Ltd., Hyderabad. Hyderabad. PAN AAACU3358G (Appellant) (Respondent)
For Assessee : Mr. P. Muralimohan Rao For Revenue : Mr. D. Sudhakar Rao
Date of Hearing : 27.05.2015 Date of Pronouncement : 29.05.2015
ORDER
PER SMT. ASHA VIJAYARAGHAVAN, J.M.
This appeal filed by the assessee is directed against the Order passed under section 144C(5) of the Disputes Resolution Panel, Hyderabad dated 22.11.2013 for the A.Y. 2009-2010.
2. Briefly stated, the assessee company is engaged in the business of software development and export. It filed its return of income electronically on 25.09.2009 declaring loss of Rs.15,74,210 under normal provisions of I.T. Act and the same was processed under section 143(1). The case was selected for scrutiny and notices were issued under section 143(2) and 142(1). As the assessee's international transactions were more than Rs.15 crores, reference was made to the TPO for valuation of the ALP of the transactions and as the adjustment proposed 2 ITA.No.89/Hyd/2014 M/s. Cambridge Technology Enterprises Ltd., Hyderabad.
by the TPO was detrimental to the interests of the assessee, draft order was forwarded to the assessee as per the provisions of section 144C and the assessee filed objections before the DRP. The DRP after considering the submissions, issued directions under section 144C(5) of the I.T. Act. The ACIT, Circle 1(2), Hyderabad received the directions and finalized the order wherein the ACIT determined the ALP of transactions under section 92CA at Rs.16,93,00,083 under software development service and Rs.5,55,25,491 for reimbursement and short fall of Rs.2,18,00,589 was treated as adjustment to the ALP. The ACIT stated that DRP after considering the assessee's objections rejected the assessee's claim and hence the amount is added to the income as T.P. adjustment. Aggrieved, assessee has filed the appeal before the Tribunal.
3. The Ld. Counsel for the assessee Mr. P. Muralimohan Rao stated that before the DRP it was submitted that the TPO had selected 23 comparables and while finalizing the final list, the TPO had eliminated all the companies which are functionally different from the assessee company. The list of comparable companies selected by TPO finally are as under :
S.No. Company Name OP Margin on Total Cost (%) 1. Akshay Software Technologies Ltd., 12.41% 2. Bodhtree Consulting Ltd., 68.43% 3. Comp-U-Learn Tech India Ltd., 28.00% 4. Igate Global Solutions Ltd., 21.97% 5. Infosys Ltd., 41.34% 6. Kals Information Systems Ltd., (seg.) 23.11% 7. LGS Global Ltd., 20.51% 8. Mindtree Ltd., (Seg.) 5.56% 9. Neilsoft Ltd., 9.05% 10. Persistent Systems Ltd., 18.49% 11. R S Software (India) Ltd., 9.99% 12. R Systems International Ltd., (Seg.) 17.53% 3
ITA.No.89/Hyd/2014 M/s. Cambridge Technology Enterprises Ltd., Hyderabad.
13. Sasken Communication Technologies 17.30% Ltd.,
14. Tata Elxsi Ltd., (Seg.) 22.82%
15. Thinksoft Global Services Ltd., 20.80%
16. Thirdware Solutions 22.28%
17. Zylog Systems Ltd., 15.00%
3.1. The Ld. Counsel for the assessee pointed out that out of that 17 comparable companies, Bodhtree Consulting Ltd., cannot be compared as it is product based and functionally different. Further, it has abnormal super profits during the year. Ld. Counsel for the assessee relied on the decision of Hyderabad ITAT in the case of Allianz Global Services I.T. India P. Ltd., vs. DCIT ITA.No.58/Hyd/2014. The next company which is dissimilar according to the Ld. Counsel for the assessee is Infosys Ltd., which has high brand value and the Ld. Counsel for the assessee again relied on the decision of Allianz Global Services I.T. India P. Ltd., The third company which is functionally different company from that of the assessee and product based is Kals Information Systems Ltd., (Segment). The Ld. Counsel for the assessee relied on the decision of Allianz Global Services I.T. India P. Ltd., (supra). In short the Ld. Counsel for the assessee stated that if these companies are taken out of the comparable list due to their dissimilarity with the assessee company, the ALP margin comes to 17.27% which is within range of + or - 5 of the ALP declared by the assessee.
3.2. With respect to the issue of reimbursement of expenses, the Ld. Counsel for the assessee filed the paper book consisting of 12 pages containing the following :
Sl.No. Particulars Page No. 1. Ledger account copy of CTE Inc Exp 1 reimbursable account 4
ITA.No.89/Hyd/2014 M/s. Cambridge Technology Enterprises Ltd., Hyderabad.
2. Statement showing accounting treatment 2 of CTE Inc Exp reimbursable account.
3. Copy of Financials of assessee for the A.Y. 3-12 2009-10
3.3. The Ld. Counsel for the assessee submitted that the reimbursement of expenditure of Rs.1,06,49,141 does not figure in the P & L account and is merely balance sheet entry and not debited to the P & L account. It was also submitted that the A.O. has also agreed that the reimbursement of expenditure is not part of the P & L account.
4. We have heard both the parties and also perused the material available on record. The Coordinate Bench of Bangalore Tribunal in the case of Cisco Systems India P. Ltd., vs. DCIT IT(T.P.)No.130/Bang./2014 dated 14.08.2014 has excluded Infosys Ltd., Bodhtree Consulting Ltd., and Kals Information Systems. The Coordinate Bench of Hyderabad Tribunal also in the case of Allianz Global Services I.T. India P. Ltd., (supra) has followed the order in the case of Cisco Systems India P. Ltd., and held that Bodhtree Consulting Ltd., Infosys Ltd., and Kals Information Systems are not comparable for various reasons. Similar reasons as in Allianz Global Services I.T. India P. Ltd., (supra) are to be found in the present case and hence the conclusion drawn in Allianz Global Services I.T. India P. Ltd., (supra) is to be adopted in the present case. Hence, we are of the opinion that Bodhtree Consulting Ltd., Infosys Ltd., and Kals Information Systems are to be deleted from the list of comparables, in which case, the ALP margin would be at 17.27% is accepted by us. The appeal of the assessee on this issue is allowed.
5 ITA.No.89/Hyd/2014 M/s. Cambridge Technology Enterprises Ltd., Hyderabad.
5. With respect to reimbursement of expenditure in the case of Mylan Laboratories Ltd., in ITA.No.66/Hyd/2013 dated 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 expenditure claimed as operating cost of the assessee then, the reimbursement should not be considered as part of assessee's 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 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 exclude only in the case the said amount is reimbursement 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.
5.1. However, in this case we find that the A.O. himself 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 reimbursement of expenditure raised by the assessee before us.
6. In the result, appeal of the assessee is allowed.
Order pronounced in the open Court on 29.05.2015.
Sd/- Sd/- (INTURI RAMA RAO) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated 29th May, 2015
VBP/- 6
ITA.No.89/Hyd/2014 M/s. Cambridge Technology Enterprises Ltd., Hyderabad.
Copy to
1. M/s. Cambridge Technology Enterprises Ltd., Hyderabad C/o. Mr. P. Murali & Co., Chartered Accountants, 6-3- 655/2/3, 1st Floor, Somajiguda, Hyderabad - 500 082.
2. The ACIT, Circle 1(2), Hyderabad.
3. Disputes Resolution Panel, 2nd Floor, I.T. Towers, 10-2-3, A.C. Guards, Hyderabad - 500 004.
4. DCIT (Transfer Pricing)-II, Hyderabad.
5. D.R. I.T.A.T. "B" Bench, Hyderabad.
6. Guard File
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