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EXL Service. Com (India) Pvt. Ltd. 103-A, Ashoka Estate Barakhamba Road, New Delhi-110001 Vs. Asstt. CIT Circle-11(1) New Delhi.
December, 25th 2014
          IN THE INCOME TAX APPELLATE TRIBUNAL
                DELHI BENCH: `I' NEW DELHI

 BEFORE SHRI R. S. SYAL, AM AND SH. GEORGE GEORGE K., JM

                     I.T.A .No. 1939/Del/2008
                    Assessment Year : 2003-04

EXL Service. Com (India) Pvt. Ltd. Vs.. Asstt. CIT
103-A, Ashoka Estate                     Circle-11(1)
Barakhamba Road,                         New Delhi.
New Delhi-110001
     AAACE5174C
PAN: AAACE5174C
                        I.T.A .No.1981 /Del/2008
                     Assessment Year : 2003-04

DCIT,                          Vs.   EXL Services.Com (I) P. Ltd.,
Circle 11 (1),                       103-A, Ashoka Estate,
New Delhi.                           Barakhamba Road,
                                     New Delhi ­ 110 001.
                                     PAN: AAACE5174C

(Appellants)                          (Respondents)


     Assessee by : Shri Ajay Vohra, Sr. Adv., Shri Neeraj Jain,
                   Advocate and Shri Abhishek Agarwal, CA
     Revenue by : Shri Peeyush Jain, CIT. DR

                            ORDER
PER R. S. SYAL, AM :
     These cross-appeals, one by the assessee and the other

by the Revenue, arise out of the order passed by the

Commissioner of Income Tax (Appeals) on 20.03.2008 in

relation to the Assessment year 2003-04.
                                 2


2.   Briefly stated the facts of the case are that the assessee is

an I.T. Enabled Company providing Transaction processing

services and Voice based customer care services to the

customers of its Associated Enterprises (AEs). The assessee,

inter alia, reported an international transaction of "Transaction

processing and internet and voice based customer care

services" worth Rs.9,78,563,935/-. To demonstrate that this

international transaction was at Arm's Length Price (ALP), the

assessee selected Transactional Net Margin Method (TNMM) as

the most appropriate method with the Profit Level Indicator

(PLI) of Operating Profit to Total cost (OP/TC). As against its PLI

at 5.62%, the assessee showed weighted PLI of seven

comparable companies at 9.18%. The Transfer Pricing Officer

(TPO) did not treat two companies as comparable, namely,

Mapro Industries Ltd. and Nucleus Netsoft and GIS India Ltd.,

for the reasons given in his order. He worked out OP/TC of the

remaining five companies at 18.46%,          which resulted into

eventual addition on account of Transfer pricing adjustment

amounting to Rs.13,40,26,353/-.


3.    The assessee challenged the said addition of Rs.13.40

crore before the ld. CIT(A). After considering various objections
                                3


raised by the assessee, the ld. CIT(A) held that the only current

year's data was to be used; the two companies excluded by

the TPO were liable to be included in the list of comparables;

one company, namely, Giltedge Infotech Services Ltd., was not

comparable; arithmetic mean of the operating profit margin,

after adjustment of working capital differences, was to be

computed and considered; and the assessee was entitled to +

5% adjustment in terms of the proviso to section 92C of the

Act. Both the sides are in appeal opposing the impugned order

to the extent indicated in their respective appeals.


4.        We have heard the rival submissions in the light of

material placed before us and decisions relied upon. The

assessee has challenged some of facets of the addition made

towards transfer pricing adjustment, which we will deal with

one by one.


I. ADJUSTMENT FOR DIFFERENCE IN DEPRECIATION RATES


5.1.   The first issue taken up by the ld. AR, raised through

ground 6(ii) of the assessee's appeal, is against not granting

any adjustment on account of depreciation claimed by the

assessee in its Profit & Loss account at the rates higher than
                                4


those stipulated in Schedule XIV to the Indian Companies Act,

1956 (hereinafter also called `the Companies Act').           He

submitted that the assessee charged depreciation in its P&L

account on Straight Line Method (SLM) at the rates higher than

those prescribed under Schedule XIV of the Companies Act,

whereas      the comparable companies charged depreciation at

the rates specified in the Schedule, warranting adjustment in

the operating profit margins.


5.2.   Before deciding the possibility of allowing any adjustment

on this count, we consider it sine qua non to ascertain the

factual position as stated by the ld. AR.       It was candidly

accepted that though this issue was not taken up either before

the TPO or the ld. CIT(A), but similar contention     was made

before the Dispute Resolution Panel (DRP) for the assessment

years 2006-07 and 2009-10. He submitted that the DRP

concurred with the assessee's contention on this score for both

the years.    It was also pointed out that though the Revenue

could not have filed appeal as per law against the order of the

AO, giving effect to the direction of the DRP, for the A.Y. 2006-

07, but the same was possible for the A.Y. 2009-10. He put

forth that the Revenue did prefer appeal against the AO's
                                 5


order, giving effect to the DRP's direction for the A.Y. 2009-10,

but such direction of allowing adjustment on account of higher

depreciation rates, has not been assailed. Accentuating on the

principle of consistency, it was pleaded that similar view be

taken for the instant year as well.


5.3.   As this issue has been taken up before us for the first

time, we consider it expedient to verify the veracity of the

assessee's contention about it charging depreciation at higher

rates in comparison with its comparables. The question of

adjudicating such issue would arise only if there, in fact, exists

some difference in the rates at which the assessee charged

depreciation   vis-a-vis its comparables. In this regard,    it is

noticed that the assessee charged depreciation in its Profit &

Loss account to the tune of Rs.19,49,90297/-. Schedule of Fixed

assets is available on page 115 of the paper book, indicating

Opening    balance    of   the   assets,   Additions,   Disposals/

adjustments and Closing balance. Similarly, the amount of

Opening depreciation, Disposal/adjustments and Depreciation

for the year under consideration have also been given. It can

be seen from Note 2(a) of "Notes to the Financial statements",

a copy of which is available on page 112 of the paper book,
                                   6


that: "Depreciation on fixed assets is provided pro-rata to the

period of use, based on the straight-line method at the rates

specified in Schedule XIV of the Companies Act, 1956, or based

on the management's assessment of the economic useful life of

the asset, whichever is higher', as follows : -


     Leasehold improvements                               33.33%
     Plant and machinery (including computers)            33.33%
     Office Equipment                             20.00% - 33.33%
     Furniture and fixtures                               20.00%
     Software                                             33.33%
     Motor Vehicles                                       33.33%


5.4. Here, it is pertinent to note that Schedule XIV to the

Companies Act contains rates of depreciation on various assets

under different blocks, both on written down value and straight

line basis. Some of the relevant rates of depreciation given in

the Schedule are as under : -


Nature of Assets         W.d.v. rate (%)     Straight line rate (%)


I. (a) BUILDINGS

  (other than factory buildings)       5                  1.63

  (b) Factory Building                 10                 3.34
                                    7




II. Plant and Machinery

   (i). General rate applicable to

   (a)Plant & Machinery)                13.91              4.75

    A. 5. Motor-cars, motor-cycles,

    scooters and other mopeds           25.89               9.5

    C.4. Data processing machines

    including computers                  40                16.21

III. Furniture & Fitting

       1.      General rate             18.1                6.33



5.5.        On a comparative analysis of some of the rates at which

the assessee charged depreciation under SLM in its Profit and

Loss account and those as per Schedule XIV to the Companies

Act, it can be seen that whereas the SLM rate of depreciation

on Plant & machinery as per the Schedule is 4.75%, the

assessee charged depreciation at 33.33%. Similar is the

position regarding other assets as well. The SLM rate of

depreciation prescribed under the Schedule XIV on Computers

is 16.21%, whereas the assessee charged depreciation at an

enhanced SLM rate of 33.33%. In like manner, Motor vehicles

have been depreciated by the assessee at 33.33% on SLM, as

against the SLM rate of depreciation on Motor vehicles under
                                8


the Schedule at 9.50%. This shows that the assessee charged

depreciation in its Profit & Loss account at the SLM rates higher

than those provided in the Schedule XIV to the Companies Act.



5.6. Now let examine the rates at which the comparable

companies provided depreciation in their respective P&L

accounts. The ld. AR submitted that the rates of depreciation

charged by Mapro Industries Ltd. and Karvy Consultants Ltd. in

comparison with the rates prescribed under Schedule XIV of the

Companies Act may be taken as correct, without any further

need for adjustment. Taking us through the Annual report of

Apex Logical Data Conversion Pvt. Ltd., it was shown that this

company provided depreciation on their fixed assets at the SLM

rates given at page 813 of the paper book. On a perusal of the

rates on which depreciation has been charged by this company

under SLM, it can be seen that albeit some of the depreciation

rates accord with those prescribed in Schedule XIV, but, there

is difference in some cases e.g. Air Conditioner has been

depreciated at 6.33% whereas the general rate of depreciation

on plant & machinery under Schedule XIV is 4.75%. Similar is

the position regarding EPABX and Fax on which the company

charged depreciation under SLM at 6.33%, whereas the rate
                                9


prescribed under Schedule XIV is 4.75%. There are some other

items also on which the rates of depreciation charged by this

company are at variance with the rates given under Schedule

XIV of the Companies Act.


5.7.    The next company is Ace Software Exports Ltd. Annual

accounts of this company indicate through Notes to accounts

that it provided depreciation on SLM in accordance with the

rates specified in Schedule XIV of the Companies Act. The next

company is Nucleus Netsoft and GIS India Ltd. Notes to account

of this company show that it also provided depreciation on SLM

at the rates prescribed under Schedule XIV of the Companies

Act, except for Computers on which depreciation was provided

on written down value basis. Last Company is Fortune Infotech

Ltd. Annual accounts of this company mention that it claimed

depreciation under SLM at the rates prescribed under Schedule

XIV of the Companies Act.


5.8.    The above discussion is a pointer towards the fact that

the assessee charged depreciation at higher rates on its assets

under   SLM   in   comparison   with   these   four   comparable

companies, which largely claimed depreciation under SLM as
                                10


per Schedule XIV rates, subject to the exceptions as mentioned

above.


5.9.     The ld. AR put forth that to neutralize the effect of the

fat amount of depreciation charged at such higher rates by the

assessee, a suitable adjustment was required to be given in the

computation of its operating profit. In oppugnation, the ld. DR

strongly objected to the allowing of such adjustment by

contending that such adjustment, if allowed,          would have

serious repercussions on the profits of the assessee company

over the years inasmuch as the profit of the assessee for this

year due to higher rates of depreciation would have impact

over the profit of the company for succeeding years, when the

amount of depreciation would stand reduced or totally wiped

out in comparison with comparables. Considering one year in

isolation would defeat the comparability for the succeeding

years. It was stated that the higher amount of depreciation due

to higher rates for the initial years gets neutralized with the

resultant lower amount of depreciation for the later years,

thereby ultimately having no impact on the overall profitability

in long run. He relied on certain decisions, which we will shortly

advert to, for bolstering his submission in this regard.
                                    11


5.10.     The primary question which falls for our consideration is

whether any adjustment to the operating profits can be made

on account of the difference in the rates of depreciation on

various assets. In order to find an answer to this question, it is

relevant to note the mandate of Rule 10B(1)(e), which

embodies the modus operandi for determining the ALP of an

international transaction under TNMM, as under : -


        (e) transactional net margin method, by which,--
             (i) the net profit margin realised by the enterprise
        from an international transaction entered into with an
        associated enterprise is computed in relation to costs
        incurred or sales effected or assets employed or to be
        employed by the enterprise or having regard to any other
        relevant base;
             (ii) the net profit margin realised by the enterprise or
        by an unrelated enterprise from a comparable
        uncontrolled transaction or a number of such transactions
        is computed having regard to the same base;
              (iii) the net profit margin referred to in sub-clause (ii)
        arising in comparable uncontrolled transactions is
        adjusted to take into account the differences, if any,
        between the international transaction and the comparable
        uncontrolled transactions, or between the enterprises
        entering into such transactions, which could materially
        affect the amount of net profit margin in the open market;
               (iv) the net profit margin realised by the enterprise
        and referred to in sub-clause (i) is established to be the
        same as the net profit margin referred to in sub-clause
        (iii);
              (v) the net profit margin thus established is then
        taken into account to arrive at an arm's length price in
        relation to the international transaction.
                                12


5.11.    A perusal of the above rule divulges that sub-clause (i)

of Rule 10B(1)(e) provides for determining the net operating

profit margin realised by the assessee from its international

transaction. Sub-clause (ii) talks of computing net profit margin

realised by a comparable uncontrolled company. Sub-clause

(iii) provides that the net profit margin realised by a

comparable company, determined as per sub-clause (ii) above,

`is adjusted to take into account the differences, if any,

between the international transaction and the comparable

uncontrolled transactions, ..... which could materially affect the

amount of net profit margin in the open market.'        It is this

adjusted net profit margin of the comparable companies, as

determined under sub-clause (iii), which is used for the

purposes of making comparison with the net profit margin

realised by the assessee from its international transaction as

per sub-clause (i). Sub-rule (2) of Rule 10B provides that the

comparability   of   an   international   transaction   with   an

uncontrolled transaction shall be judged with reference to

certain factors which have been enumerated therein. Rule

10B(3)   states that   an uncontrolled transaction shall       be

comparable to an international transaction, if either there are
                                     13





no differences between the two or a `reasonably accurate

adjustment can be made to eliminate the material effects of

such differences.' When we read sub-clauses (ii) & (iii) of Rule

10B(1)(e) in juxtaposition to sub-rules (2) & (3) of rule 10B, the

position which emerges is that the net operating profit margin

of the comparable companies is required to be adjusted in such

a manner so as to bring both the international transaction and

comparable cases at the same pedestal. In other words,                  if

there are no differences in these two, then the net operating

profit   margin   of     the   comparable     companies       should   be

considered as a benchmark,                but in case there is some

difference, then such difference should be ironed out by making

suitable adjustment to the operating profit margin of the

comparables.      That    is   the    way    for   bringing    both    the

transactions, namely, the international transaction and the

comparable uncontrolled transaction, on the same platform for

making a meaningful and effective comparison.


5.12.    Now the moot question is as to whether variation in the

rates of depreciation can be considered as a relevant factor

necessitating adjustment in the operating profit margin of the

comparables. The ld. DR relied on DCIT VS. Sumi Motherson
                                14


Innovative Engineering Ltd. (2014) 150 ITD 195 (Delhi) and

some other decisions to bring home his point of view of not

carrying out any adjustment on account of difference in

depreciation.


5.13.   There can be no dispute on the principle that calculation

of `Operating profit' as envisaged under Rule 10B(1)(e)

embraces cumulative effect of all the items of income and

expenses which are of operating nature. Ordinarily, there can

be no question of considering each item of such operating

expenses or income in isolation de hors the other expenses to

claim adjustment on the ground of such expenditure or income

of the assessee on the higher side seen individually or as a

percentage of other operating expense/incomes in comparison

with its comparables. The reason is obvious that when we

consider the operating profit margin, the effect of all the

individual higher or lower items of expenses or incomes gets

submerged in the overall operating profit margin, ruling out the

need for any adjustment on one-to-one comparison. One

company may have taken a building on rent for carrying on its

business, in which case, it will pay rent which will find its place

in the operating costs. For the purposes of making comparison,
                               15


one cannot contend that the payment of rent by one enterprise

in comparison with a non-payment of rent by another, should

be neutralized by giving proper adjustment from the operating

profit of the comparable. The manifest reason is that the other

enterprise may have its own office premises and the amount of

depreciation on such premises will also form part of its

operating cost. When we consider the operating profit of the

first enterprise which is paying rent and then compare it with

the second enterprise which is not paying any rent but is

claiming depreciation on its own premises, the overall effect of

rent in one case gets counterbalanced with depreciation on

premises of the other.   Similar is the position of a company

having purchased new assets charging higher amount of

depreciation allowance in its books of accounts vis-a-vis

another comparable company using old assets with lower

amount   of   depreciation.   No    adjustment   on   account   of

difference in the amounts of depreciation of two companies is

called for when the operating profits are determined because in

the case of a company having purchased new asset, there will

be lower repair cost and vice versa.       The effect of all the

individual items of operating expenses and incomes culminates
                                16


into the operating profit margin. That is why, the legislature has

provided for comparing the ratio of `operating profit margin' to

a similar base of the assessee with that of its comparables,

thereby dispensing with the need for making any adjustment

on account of higher or lower amount of individual items of

expenses and incomes.         Merely because the amount of

depreciation of one enterprise is more or less than the other,

can never be a reason to seek adjustment. Such higher amount

of depreciation may be due to large scale of the company and

host of other factors. By considering percentage of operating

profit margin under the TNMM of the assessee as well as

comparables, the higher or lower volume of two companies

becomes immaterial and so is the quantum of depreciation. The

nitty-gritty of the matter is that no adjustment can be allowed

simply for the reason that one company has charged higher

amount of depreciation vis-a-vis its comparable companies.

Not only no adjustment on this score is permissible,          the

assessee cannot also seek an exclusion or inclusion of a

company on the ground that the ratio of its depreciation to

total expenses is more or less in comparison with comparables.

It is so for the reason that such higher percentage of
                               17


depreciation to total expenses is marginalized by the lower

percentage of repairs and other incidental costs of the assets

and vice versa.


5.14.     However, the position may be a little different when

there is a difference in the rates of depreciation charged by two

companies on similar category of assets. One company may

adopt the policy of charging depreciation on its assets in

conformity with the rates prescribed in Schedule XIV of the

Companies Act and other company may adopt a policy of

charging depreciation at the higher rates or lower than those

prescribed under Schedule XIV. This can be demonstrated with

the help of an example. Other things being equal, if the

operating profit of company A, after claiming depreciation of

Rs.10 on the value of asset worth Rs.50 with rate of

depreciation 20%, is Rs.100, the operating profit of company

B with everything same including the value of assets at Rs.50,

but with rate of depreciation 30%, will be Rs.95. It shows that

the     comparability is jeopardized due    to   higher rate of

depreciation charged by company B at 30% in comparison with

lower rate of depreciation charged by company A at 20%. In

such a situation, although both the companies use similar type
                                     18


of assets and everything else is also equal, but their respective

operating profit percentages undergo change due to higher or

lower   rate     of    depreciation,      thereby      distorting   their

comparability.    It   is   this    difference   in   the    amounts   of

depreciation due to different rates of depreciation and not due

to different quantums of depreciation simiplicitor, which calls

for bringing both the companies at par.


5.15.        At this juncture, we will consider the ratio of the

decisions relied by the ld. DR to bolster his submission for not

granting any adjustment on account of difference in the rates

of depreciation on similar assets. In Sumi Motherson (supra),

the assessee requested for suitable reduction towards higher

depreciation charged by it, thereby boosting its percentage of

depreciation to sales at a much higher level than that of

comparables. Rejecting this contention, the tribunal held that it

is not allowed to compare each and every item of the operating

cost incurred by the assessee with similar cost in the case of

comparables to ask for any adjustment. It is the overall effect

of all such individual items descending into operating profit,

which   is    considered      for    benchmarking      the    assessee's

international transaction and if the amount of depreciation is
                                   19


distinctly compared with comparables, leaving aside other

related and consequential items, such as repair costs etc., then

the results are likely to be distorted. It was further observed

that to ask for adjustment, it is essential that there should be

some independent and substantial reason. It was held that : `In

the context of depreciation, one can rightly appreciate the need

to make adjustment, if rate of depreciation charged by the

assessee      vis-a-vis its comparables is different. But the

simplicitor    difference   in   the    amount   of   depreciation   is

inconsequential.'


5.16.    Almost similar proposition has been laid down by the

Delhi Bench of the tribunal in Nokia India (P) Ltd. VS. DCIT

2014-TII-224-ITAT-DEL-TP by disapproving the exclusion of

some companies on the strength of the filter of lower or higher

depreciation as a percentage of total costs. In so holding, it

observed that the higher amount of depreciation is usually

coupled with the lower repair cost etc., and vice versa. That is

how, it held that : `there can be no justification in applying the

filter of rejecting the companies with depreciation higher or

lower than a particular percentage of total costs.'. It is, thus,
                               20


overt that these two cases relied by the ld. DR, in fact, support

the case of the assessee rather than the Revenue.


5.17.     Another case relied by the ld. DR in 24/7 Customer

Com Pvt. Ltd. VS. DCIT 2012-TII-143-ITAT-BANG-TP, again does

not take us any further. In that case, the assessee raised an

additional ground for suitable adjustment towards higher rate

of depreciation charged by the assesee vis-a-vis its comparbles.

It is patent from the penultimate para of this order that the

tribunal eventually remitted the issue of depreciation, as raised

through the additional ground, to the file of the AO/TPO for a

fresh consideration and decision. So, this order also does not

support the case of the Revenue. The last case relied by the ld.

DR is Lason India Pvt. Ltd. VS. ACIT 2012-TII-47-ITAT-MAD-TP.

The assessee in that case provided depreciation on assets

under SLM at the rates higher than those provided in Schedule

XIV, whereas the comparables provided for depreciation as per

Income-tax Rules on written down value method. The assessee

claimed before the tribunal that if depreciation of the assessee

is also brought to the w.d.v. method, then its operating profit

would be more. The tribunal rejected this claim of the assessee.

In our considered opinion, the adjustment has been rightly
                                21


denied because the method of charging depreciation was

different and further the assessee sought adjustment from its

profits, which is not permissible as will be seen infra. The ld.

AR also candidly admitted that his point was limited to the

adjustment due to difference in the rates of depreciation from

SLM of the assessee to SLM of the comparables and not

otherwise as is the position in Lason India Pvt. Ltd. (supra).


5.18.     The sum and substance of the above cases is that

neither any adjustment       can be     made    for a   simplicitor

higher/lower amount of depreciation in itself or as a percentage

of the total operating expenses nor an otherwise comparable

company ceases to be comparable because of the above

factors. However, an adjustment is called for when there is a

difference in the rates of depreciation on similar types of assets

under similar method of charging depreciation. At the cost of

repetition, we want to accentuate the line of distinction

between two cases, viz., first in which the amount of

depreciation is more due to higher value of the assets

employed by one company and second, in which the amount of

depreciation is more not due to higher value of the assets

employed by one company but due to higher rates of
                                22


depreciation. Whereas, the first situation would not call for any

adjustment, the second one would warrant adjustment in the

operating profit of the comparable company. That is where Rule

10B(1)(e) (ii) & (iii) read with Rules 10B(2) & (3) come into play

for neutralising the difference in the operating profits of the two

otherwise comparable companies by making a "reasonably

accurate adjustment ... to eliminate      the material effects of

such differences".


5.19.    Now the next question is as to in whose hands the

above adjustment should be allowed. The ld. AR argued that

the excessive rate of depreciation charged by the assessee

should be lowered to the rates as prescribed under Schedule

XIV to the Companies Act so as to bring a parity between the

rates of depreciation charged by the assessee vis-a-vis its

comparables. This contention in our considered opinion, is not

tenable. It has been noticed above that Rule 10B(1)(e)(iii)

contemplates the making of adjustment to the net profit margin

of the comparables determined under sub-clause (ii) to Rule

10B(1)(e). Even Rule 10B(3) also requires the making of

adjustment in the hands of comparables to eliminate the

material effects of differences. Thus, the adjustment can be
                                23


made only in the hands of the comparables' operating profit

margin and not to that of the assessee.


5.20.     The ld. DR pleaded for not allowing any adjustment

on this score by arguing that the difference in the rates of

depreciation by the assessee and comparables does not affect

the computation of the net operating profit margin on a long

term basis. He stated that the higher rates of depreciation

would no doubt lower the profit in the earlier years, but such

reduction of profits would be set off with the higher amount of

profit due to lower amount of depreciation in the later years,

thereby, nullifying the effect of such higher rate of depreciation

over the life time of an asset. Asserting on this argument, the

ld. DR stated that no adjustment could be accordingly allowed.


5.21.    This contention, in our considered opinion does not

move forwards the case of Revenue for the reason that Chapter

X of the Act requires computation of income from international

transactions having regard to ALP on year to year basis. There

is no provision for determining the ALP of an international

transaction for more than one year in a consolidated manner.

Unlike the hitherto determination of undisclosed income for the

block period as provided under Chapter XIV-B of the Act, as
                               24


opposed to year-to­year basis, there is no such provision for

determining the ALP of an international transaction for more

than one year by considering a few years as one unit during

which an asset is put to use. Not only is this exercise

impermissible under the law, but is also impractical of

application. Various assets will have varying useful life spans

due to different rates of depreciation and their useful life will

not terminate at one common point of time, so as to facilitate

the making of adjustment at such point of time. Be that as it

may, since the legislature requires determination of ALP of an

international transaction on yearly basis, what we need to do is

to find out the effect of depreciation on year to year basis and

not on a consolidated basis extending to the life time of such

assets.


5.22.1.   The ld. DR made still another contention opposing the

assessee's   stand. It   was   argued that   re-calculating the

operating profits of the comparable companies by providing

depreciation on SLM in the hands of comparables at the higher

rates, at par with the assessee's, would distort the comparison.

He explained his point of view by stating that no doubt with the

increase in the rates of depreciation of the comparables for the
                                     25


current   year   at   par    with        the   assessee,    would   achieve

comparability, but this would adversely affect the calculation of

operating profit of the comparables because of the inclusion of

proportionate depreciation also on the assets which still appear

in their books but actually depreciated fully due to parity with

the assessee's higher rates of depreciation. It was explained

with the help of an example in which the assessee is charging

depreciation under SLM at the rate of 33.33% on a particular

asset considering the useful life of three years, as against the

comparables providing depreciation on similar asset under SLM

at the rate of 16.21% by impliedly considering its useful life a

little over six years. He explained that the comparable

company providing depreciation at 16.66% on SLM would

continue to hold assets in 4th, 5th and 6th year as well and the

amount of depreciation in these three years will also be at

16.21%    despite     the   fact    that       this   particular asset has

exhausted its useful life after three years as has been done by

the assessee. This proposition, in the opinion of the ld. DR,

warranted   reduction       in     the    amount       of   depreciation   of

comparables companies to the extent of 16.21% of the value of

such asset from 4th to 6th years.              It was thus pleaded that if
                                  26


some adjustment is to be allowed in favour of the assessee in

line with the above arguments of the ld. AR, then a

simultaneous negative adjustment on account of the above

factor should also be directed.


5.22.2.   This contention advanced on behalf of the Revenue

can be properly appreciated if one understands the striking

dissimilarities between the scheme of charging depreciation

under the Income-tax Act, 1961 and the Companies Act, 1956.

The concept of block of assets exists under the Act by which all

the assets of a particular species having the same rate of

depreciation are considered together as one unit.           This can be

seen from sec.    2(11) of the Act, which defines               "block of

assets" to mean    `a group of assets falling within a class of

assets    comprising-- (a)      tangible     assets, being buildings,

machinery, plant or furniture;         (b)   intangible assets, being

........, in respect of which          the same          percentage of

depreciation is prescribed'.      Under the scheme of block            of

assets, depreciation is charged on the total written down value

of such block as appearing at the end of the               year at the

prescribed     rates.   There     is   no    provision    for   charging

depreciation on individual assets. Similarly, there is                no
                                27


mandate for computing capital gain at the time of transfer of

such individual assets, unless the block of assets ceases to

exist as such. Capital gains are computed u/s 50 of the Act

under two prescribed situations by considering the block of

assets in entirety de hors the event of sale of individual asset.

First   is the situation under which the full value of the

consideration   received or accruing as a result of the transfer

of the asset together with the full value of such consideration

received or accruing as a result of the transfer of any other

capital asset falling within the block of the assets during the

previous year, exceeds the           aggregate of (i) expenditure

incurred wholly and exclusively in connection with such transfer

or transfers; (ii) the written down value of the block of assets at

the beginning of the previous year; and (iii) the actual cost of

any asset falling within the block of assets acquired during the

previous year. It is this excess which is deemed to be the

capital gains arising from the transfer of short-term capital

assets. Second is the situation in which any block of assets

ceases to exist as such, for the reason that all the assets in

that block are transferred during the previous year. In such a

situation, the cost of acquisition of the block of assets is taken
                                28


as the written down value of the block of assets at the

beginning of the     previous year, as increased by the actual

cost of any asset falling   within that block of assets, acquired

by the assessee during the previous year. The income received

or accruing as a result of such transfer or transfers is deemed

to be the capital gains arising from the transfer of short-term

capital assets. A careful perusal of the above provisions

deciphers that the individual assets on their purchase merge

with other assets of that block, thereby losing their separate

identity. Depreciation is provided on the basis of the written

down value of such block and not the w.d.v. of such individual

assets. Even the event of their transfer also does not lead to

automatic charging of capital gains, unless the case falls under

either of two clauses of section 50. Assessee gets depreciation

on the w.d.v. of such assets, which stand merged with the

w.d.v. of the block, even after their transfer, of course subject

to the provisions of section 50 and other relevant sections.


5.22.3.     Now let us examine the position under the Indian

Companies Act, 1956. Section 349 deals with the determination

of net profits. Sub-section (1) provides that in computing the

net profits of a company in any financial year, : `(a) credit shall
                                29


be given for the sums specified in sub-section (2) and credit

shall not be given for those specified in sub-section (3); and (b)

the sums specified in sub-section (4) shall be deducted, and

those specified in sub-section (5) shall not be deducted.'.

Clause (k) of sub-section (4) states that deduction shall be

allowed for `depreciation to the extent specified in section 350'.

The later section, in turn provides that: `The amount of

depreciation to be deducted in pursuance of clause (k) of sub-

section (4) of section 349 shall be the amount of depreciation

on assets as shown by the books of the company at the end of

the financial year expiring at the commencement of this Act or

immediately thereafter and at the end of each subsequent

financial year, at the rate specified in Schedule XIV.' Clause

(d) of sub-section (3) states that in making the computation

aforesaid, no credit shall be given for `profits from the sale of

any immovable property or fixed assets of a capital nature

comprised in the undertaking or any of the undertakings of the

company, unless the business of the company consists,

whether wholly or partly, of buying and selling any such

property or assets:' At this stage, it is relevant to note the

prescription of the proviso to this clause which stipulates that :
                                 30


`where the amount for which any fixed asset is sold exceeds

the written-down value thereof referred to in section 350, credit

shall be given for so much of the excess as is not higher than

the difference between the original cost of that fixed asset and

its written down value.'    Clause (d) of sub-section (5) further

provides   that   in   making   the   computation   aforesaid,   no

deduction shall be allowed for loss of a capital nature including

loss on sale of the undertaking or any of the undertakings of

the company or of any part thereof not including any excess

referred to in the proviso to section 350 of the written-down

value of any asset which is sold, discarded, demolished or

destroyed over its sale proceeds or its scrap value. Proviso to

section 350 provides that: `if any asset is sold, discarded,

demolished or destroyed for any reason before depreciation of

such asset has been provided for in full, the excess, if any, of

the written-down value of such asset over its sale proceeds or,

as the case may be, its scrap value, shall be written off in the

financial year in which the asset is sold, discarded, demolished

or destroyed.'


5.22.4.     On a reading of sections 349 in conjunction with

section 350 of the Companies Act, it emerges that depreciation
                                31


on each asset is separately provided at the rates specified in

Schedule XIV for the purposes of the determination of profit. If

an asset is sold or discarded before providing full depreciation

on it, then the excess of the w.d.v. of such asset over its sale

price/scrap value, to the extent provided, shall be written off in

the financial year in which the asset is sold or discarded. In the

converse situation, where the amount for which any fixed asset

is sold exceeds the written-down value thereof referred to in

section 350, then credit shall be given for so much of the

excess, to the extent provided, as is not higher than the

difference between the original cost of that fixed asset and its

w.d.v. in the year of its sale.      These two situations can be

demonstrated with the help of a simple example. If asset A with

original cost of Rs. 100 having w.d.v. of Rs.40 is sold for Rs.50,

then the profit of Rs.10 is to be credited to the Profit and Loss

account for the year of sale of such asset.      If asset A with

original cost of Rs. 100 having w.d.v. of Rs.40 is sold for Rs.30,

then the loss of Rs.10 is to be debited to the Profit and Loss

account for the year of sale/scrapping of such asset.


5.22.5.   On a comparative study of the scheme for charging

depreciation and treatment of profit/loss on the sale of specific
                                 32


assets under both the statutes, we observe that whereas, the

Act does not recognize individual assets for the purposes of

allowing depreciation and grants depreciation on the block of

assets, the Companies Act recognizes the existence of separate

assets and stipulates depreciation on each asset distinctly in

the Profit and loss account. When an asset is sold, there is no

scope for calculating profit or loss on sale of each asset in

excess of its w.d.v. under the Act. It is done only for the block

of assets in the manner given and to the extent enshrined in

section 50. On the other hand, the Companies Act mandates

claiming deduction for loss or crediting gain on the sale of each

asset separately to its Profit and Loss account, which is not in

excess of difference between the original cost and the w.d.v. of

such asset.


5.22.6.   With the above legal position at hand, let us evaluate

the contention of the ld. DR that the comparables companies'

depreciation   for   the   current    year   would   also   include

depreciation in respect of the assets which have seen the end

of their useful life but still continue to form part of the schedule

of fixed assets because of providing depreciation at lower rates

on such assets in comparison with the assessee.                This
                                 33


contention of the ld. DR, though appears attractive at the first

blush, but loses its shine on an in-depth analysis. It is severely

simple that if an asset has reached the milestone of the end of

its useful life, then it would be either sold or discarded.

Ordinarily, no company would continue to hold obsolete assets.

Once an asset is sold after its useful life, the company will write

off the unamortized depreciation in the year of its sale or

discarding,    by considering its sale price and w.d.v. and hence

it would cease to appear in the books of account. Once it does

not appear in the books of account, there can be no question of

any depreciation on it in the later years as has been put forth

on behalf of the Revenue. Continuing with the example given

by the ld. DR, we find that the particular asset on the

completion of its useful life of three years would become

obsolete in fourth year and sold/discarded by the company and

the short-fall in the amount and depreciation charged over its

cost would be accordingly written off in its accounts. In such a

situation,    that particular asset with useful life of three years

would cease to appear in the Schedule of fixed assets of the

comparable company at the end of fourth, fifth and sixth years
                                34


respectively, As such, no value of such assets will be available

for depreciation in the next year(s).

5.23.   Turning to the facts of the instant case, we find that the

method of charging depreciation, both by the assessee and its

comparables, is by and large the same that is SLM. The

assessee is seeking adjustment only due to higher rates of

depreciation charged by it under SLM with the lower rates of

depreciation charged by four comparable companies, other

than Mapro Industries Ltd. and Karvy Consultants Ltd. In view

of above discussion, we hold that the operating profit margins

of these four comparable companies should be recomputed by

the TPO/AO in line with the rates of depreciation charged by the

assessee under SLM. To put it simply, the amount of

depreciation of the four comparable companies on their assets

shall also be recomputed under the SLM alone as per the rates

at which the assessee has provided depreciation. In doing so, if

the comparable companies have charged depreciation at a

lower rate in comparison with the assessee, then suitable

increase should be made to their amount of depreciation and if

the comparables have charged depreciation at a higher rate in

comparison with the assessee on some of the assets, then
                                35


suitable reduction should be made in the amount of their

depreciation. Here it is significant to note that one of these four

companies, namely, Nucleus Netsoft and GIS India Ltd has

charged depreciation on all its assets under SLM except for

Computers, on which it provided depreciation on written down

value basis. The TPO should see if he can correctly deduce the

amount of depreciation, on the basis of data available, for the

year on `Computers' also under SLM. If due to one reason or the

other, such precise calculation is not possible, then no

adjustment should be carried out in the calculation of the

operating profits of this company, even on other items of

assets. Ordinarily, we would have ordered for the exclusion of

this company from the list of comparables in the event of no

possibility of computing depreciation on computers under the

SLM by converting it from w.d.v. method, because of this being

a material factor and not quantifiable. But since neither the

assessee nor the Revenue seek the exclusion of this company

from the list of comparables, we cannot suo motu order so. We,

therefore, sum up our conclusion on this aspect of the matter

by holding that if the assessee as well as the comparable

companies are using the SLM and there is a difference in the
                                   36


rates of depreciation charged by them, then there is a need to

make suitable adjustment to the profits of the comparables.


II. RISK ADJUSTMENT


6.1.    The ld. Counsel contended that the assessee undertook

no risks or minimal risks while rendering services to its AEs

under this segment, in contrast to the risks undertaken by the

comparables finally selected. Taking us through the Transfer

pricing study report conducted by the assessee,              the ld. AR

submitted that the assessee is a captive BPO service provider

immune to any risks.         It was put forth that its foreign AE

undertakes all the risks relating to marketing in identifying the

prospective customers in the US; entering into contracts with

the    clients   for   the   provision   of   the   agreed    services;

undertaking responsibility for the quality of the services

provided by the assessee;           and for the accuracy of the

information conveyed to customers. In contrast to minimal or

no risks undertaken by the assessee in providing such services,

the ld. AR submitted that the comparable companies are full

risk bearing entities and accordingly risk adjustment was
                                37


required to be allowed. On the other hand, the ld. DR opposed

this contention.


6.2.   After considering the rival submissions and perusing the

relevant material on record, we note from page 14 of the

assessee's TP study report that the foreign AE is to identify and

pursue customers in the US; enter into contract with the clients;

and undertake responsibility for the quality of services. At the

same time, it is apparent from the same TP study report that

though the assessee is not liable to end-customers, but it is

required to adhere to the group standards. A very important

factor is the `Utilisation risk'. The assessee is responsible for

effective utilization of its resources and its foreign AE did not

assure the assessee of a minimum level of utilization. Thus, it

is clear that the assessee bears excess capacity or utilization

risk in respect of the provision of services. It means that the

assessee is responsible for effective utilization of its resources

and there is no assurance of the volume of business generating

from its AE.   If there is no/less business, the assessee will

continue to incur costs for which there will be no compensation

from the AE. Apart from that, the assessee also bears foreign

exchange fluctuation risk because it incurs expenses in Indian
                                 38


rupees, whereas its revenues are earned in US dollars. Other

than that, the assessee assumes a greater `Business risk' which

has been stated on page 15 of the TP study report.              The

assessee is under constant pressure to ensure competitiveness

of the rates it charges. The foreign AE shall continue to sub-

contract provision of services to the assessee as long as it is

feasible, given the quality and cost of services. Thus, it is clear

that the assessee bears substantial business risks with regard

to its operations. In the light of the above, it is evident that the

argument tendered by the ld. AR about the assessee bearing

no risk or minimal risk, is sans merit. We do not find the

assessee to be only a captive unit, not assuming any risk at all

or minimal risk. Taking a holistic view of the matter, we find

that the assessee is hybrid of a captive unit combined with the

attributes of risk taking entrepreneurial unit.


6.3.    Coming to the argument of the ld. AR for allowing

adjustment for the greater risks assumed by the comparable

companies, we find this contention to be devoid of any

strength. Except for referring to certain submissions advanced

before the ld. CIT(A) to contend that the functions performed by

Fortune Infotech Ltd., were more than those of the assessee,
                                   39


which contention came to be rejected by the ld. CIT(A), the ld.

AR has placed no material on record worth the name to indicate

the level of risks undertaken by the comparable companies.

There is hardly any need to accentuate that it is for the

assessee to place on record material indicating differences in

its international transaction and comparables, if it seeks any

adjustment on such account. Only when such differences are

pointed out, that the authorities can proceed to calculate the

effect of such differences on the operating profit margins of the

comparables. Reverting to the facts of the instant case, we find

that the submission made by the ld. AR that the assessee is a

captive unit not undertaking any risks vis-a-vis its comparables,

is partly incorrect and partly unsubstantiated.             As we have

noticed   above    that    the    assessee    has   also    undertaken

business/capacity/foreign        exchange     fluctuation    risks,    the

contention that the assessee did not bear any/minimal risks,

does not merit acceptance.         The other part of the argument

about the comparables undertaking much more risks, is not

substantiated     with    any    worthwhile    evidence.       In     such

circumstances, we are unable to allow any risk adjustment in

the operating profit margins of the comparables on this score.
                               40







III. WHETHER NO T.P. ADJUSTMENT BECAUSE OF THE GROUP

SUFFERING LOSS


7.1.   The ld. AR took up still another legal issue contending

that the transfer pricing adjustment should be restricted to the

overall profit at the group level. He put forth that since the

overall EXL Group suffered losses, no TP adjustment should be

sustained. To buttress this contention, he highlighted the

background leading to the introduction of Chapter-X in the Act

by which shifting of profits from Indian jurisdiction to outside

jurisdictions was proposed to be checked.      Relying on some

Tribunal orders, the ld. AR argued that the transfer pricing

adjustment cannot be made when the overall group is in loss.

It was frankly accepted that this issue was not taken up before

the authorities below and it is for the first time that the

assessee raised it before the Tribunal.     Referring to certain

additional evidence in the shape of copy of consolidated

financial statements of EXL Services.com, Inc., and EXL Service

Holdings, Inc., the ld. AR contended that the group suffered loss

as was manifest from the Consolidated financial statements of

EXL Services Holdings (Inc.), being the ultimate holding
                                     41


company of all the entities. In view of there being loss in the

group as a whole, the ld. AR contended that the TP adjustment

should be restricted to the loss at the group level and there

being no profit available, no adjustment was called for. The ld.

DR strongly opposed this contention with the help of some

tribunal orders, not approving such an approach.


7.2.    We have heard the rival submissions in the light of the

material placed before us and precedents relied upon. In order

to appreciate this contention advanced on behalf of the

assessee, it is important to note the scheme of Chapter X of the

Act, with the caption `Special provisions relating to avoidance

of tax'. Section 92(1) provides that : `any income arising from

an international transaction shall be computed having regard to

the arm's length price.'       The manner of computation of the

arm's length price has been set out in section 92C. This section

talks   of   computing   ALP    in        relation   to   an   international

transaction.    When we go to Rule 10B, which provides the

modus operandi for the determination of the ALP under section

92C, it can be seen that some methods have been prescribed

for this purpose. All the methods provide mechanism for the

determination of ALP of an international transaction. There is
                                   42


no     reference    whatsoever    in    the   entire   transfer   pricing

legislation   for   restricting   the   arm's    length   price   of   an

international transaction or the amount of transfer pricing

adjustment by viewing the overall profitability of all the entities

of the group taken together. Such a contention put forth on

behalf of the assessee does not stand to any logic because

Chapter-X of the Act provides for computation of income from

an international transaction having regard to its ALP. Neither

any section of Chapter-X nor any Rule prescribes an upper limit

for restricting the TP adjustment as determined in the manner

laid down in Rule 10B, to the level of the overall profitability or

loss of the group as a whole.           In the absence of any such

provision set out in Chapter-X for limiting the TP adjustment to

the loss at the group level, we are constrained to accept this

argument.


7.3.      Further, we find logic in the legislature not providing

such a provision capping the ALP/TP adjustment.              It is quite

possible that some of the associated enterprises of the overall

group may suffer loss due to their own inefficiencies and wrong

business decisions and the consequences of such wrong

decisions taken by them cannot be allowed to affect the ALP of
                                43


the international transaction undertaken by the assessee in

India. This can be illustrated with the help of an example in

which there are three AEs, viz., AE-A in India (with profit of `

100), AE-B in Pakistan (with loss of ` 150) and AE-C in UK

(with profit of ` 25). If AE-B supplies goods worth ` 50/- to AE-A

at ` 60, then, the otherwise TP adjustment of ` 10 (`60-`50) in

the hands of AE-A cannot be aborted simply for the reason that

the group as a whole incurred loss of ` 25/- (`100-`150+`25).

The Chapter-X requires the computation of income of AE-A in

India at `110/- with transfer pricing adjustment of ` 10/-. The

simple fact that AE-B incurred loss can be no reason to stop the

Indian authorities from making TP adjustment of ` 10/- in the

hands of AE-A, which is otherwise well deserved and rightly

called for in conformity with the relevant provisions. Thus, it is

crystal clear that the overall loss incurred by group companies

as a whole can never be a criteria to desist from making any TP

adjustment, which is otherwise called for as per the statutory

provisions under the Act. This argument, being devoid of any

worth, deserves to be and is hereby repelled.


8.1.      The next issue raised by the ld. AR is about the

exclusion of Fortune Infotech Ltd from the list of comparables.
                                  44


The ld. AR argued that this company, though included by the

assessee voluntarily as comparable in its TP Study report, is

functionally incomparable and hence be excluded. To support

his contention for its exclusion, the ld. AR relied on an order

passed by the Bangalore Bench of the Tribunal in 24/7

Customer Com Pvt. Ltd. (supra) in which this company has

been directed to be excluded for the succeeding year. It was

stressed that the profit margin of this company was higher due

to abnormal circumstances.        This contention was opposed by

the ld. DR. by referring to certain material from the paper book

indicating that the higher profit for the year was not due to

abnormal circumstances. He relied on the order of Nokia India

(supra) to contend that a company cannot be considered as

incomparable because of higher turnover/profit margin.


8.2.   After considering the rival submissions and perusing the

relevant material on record, we hold in principle, that there can

be no fetters on the assessee in claiming before the authorities

that a particular company was inadvertently included in the list

of comparables. Eventually, it is for the TPO to consider the

argument and then decide whether it is comparable or not. The

mere   making    of   a   claim    of   incomparability   does   not
                                 45


automatically lead to exclusion. If a company, which is actually

not comparable, but was inadvertently included by the

assessee in the list of comparables, the same is liable to be

excluded.


8.3.        Turning to the facts of this company, we find that the

ld. AR has harped on higher OP/OC margin of this company for

the year under consideration at 108%, in contrast to 67% for

the preceding year and 39% for the succeeding year to contend

for its exclusion due to abnormal profits. In our considered

opinion, the year in question cannot be considered as abnormal

when viewed in the light of the fact that its profit rate has

progressed from the preceding year. The decline in the profit

rate for the succeeding year is due to the reasons given by the

company in its Annual report for next year, a copy which is

available on pages 178 onwards of the paper book. In his

message to the shareholder, the Managing Director of the

company stated that the year ending 31st March 2004 (i.e.

succeeding year) was a year of consolidation in which it

"sacrificed   immediate    profits    for   much   larger   gains   by

preparing ourselves for future growth". The Annual report of

this company for the next year indicates that it developed its
                                  46


own intangibles in such next year. These factors indicate that

financial year 2003-04 relevant to assessment year 2004-05

was abnormal for Fortune Infotech Ltd. But for that, its profit

progressed from assessment year 2002-03 to assessment year

2003-04 in question.


8.4.    Reference to the Tribunal order in the case of 24/7

Customer (supra), for seeking exclusion of Fortune Infotech

Ltd., is again misplaced. The palpable reason for our this

conclusion is that the Tribunal order in that case is for the

assessment year 2004-05 and we have noticed from the Annual

report of this company that it was an abnormal year of its

operations in which it sacrificed immediate profits for larger

gains in future by developing its own intangible. It is further

relevant to note that the functional profile of this company is

similar to that of the assessee company as it is also a BPO, as is

the assessee. It was not due to some inadvertence that the

assessee   initially   included   this   company   in   the   list   of

comparables. It can be seen from page 43 of the impugned

order that this company figured in the TP reports of the

assessee across the earlier years and the assessee chose it on

the basis of functional similarity and this continued even for the
                                   47


succeeding year. Further there are no specific intangibles used

by Fortune Infotech Ltd in its operations for the year under

consideration. We cannot permit the exclusion of this otherwise

comparable company from the list of comparables on the

simple ground of higher profit earned by it during the extant

year. First proviso to section 92C(2) provides that where more

than one price is determined by the most appropriate method,

the ALP shall be taken to be the arithmetical mean of such

prices. It therefore, transpires that the Indian legislation talks of

considering all the comparables and then finding out the

arithmetic mean of the price/profit of such comparables. Unlike

some countries adopting interquartile range, which is also

called   middle   fifty,   the   Indian   legislation   stipulates   for

calculating arithmetic mean of price/profit of all the otherwise

comparable companies. Simply because the profit rate of a

company is higher or it has a higher turnover, can be no reason

to seek exclusion. This has been held by the Delhi bench of the

tribunal in the case of Nokia India (supra).


8.5. In view of above discussion, we are of the considered

opinion that Fortune Infotech Ltd. is a comparable company
                                   48


warranting its inclusion in the list of comparables. The contrary

contention of the ld. AR in this regard is rejected.


9.   Having dealt with all the issues raised by the ld. AR on the

addition towards transfer pricing adjustment, we set aside the

impugned order on this issue and send the matter back to the

TPO/AO for making a fresh determination of the ALP under this

segment in conformity with our above observations and

conclusions, after allowing a reasonable opportunity of hearing

to the assessee.


10.1.     Ground Nos. 16 and 17 of the assessee's appeal are

against    the   sustenance   of    disallowance   of   provision   of

expenses amounting to ` 32,08,612/-.


10.2.     Briefly stated, the facts of these grounds are that the

assessee created provision for expenses to the tune of `

5,18,03,004/- and claimed deduction for the same.             As the

assessee failed to furnish specific bills for which the above

provision was made, the AO made addition of equal sum. The

ld. CIT(A) observed that the assessee was not provided

adequate opportunity of adducing necessary evidence in

support of its claim of provision for expenses. After considering
                                 49


the relevant material furnished by the assessee, the ld. CIT (A)

deleted addition of ` 4.85 crore for which the invoices were

available. As regards the remaining amount of ` 32.08 lac for

which the invoices were not available, the ld. CIT (A) sustained

the addition. The assessee is aggrieved against the sustenance

of addition to this extent.


10.3.   After considering the rival submissions and perusing the

relevant material on record, it is observed that the assessee is

constantly making provision for expenses on year-to-year basis

on the estimate of reasonable expenses incurred but the bills

not received up to the year-ending. When in the subsequent

year, the bills are received, such provision is reversed. If the

actual amount of expenses for which the provision was made

falls short of such provision, then deduction is claimed for the

excess expenditure and in the converse situation, the earlier

excess provision created is reversed in the succeeding year.

This method of accounting has been accepted by the Revenue

in the past without any question.       Now simply because the

invoices were not available when the matter was considered by

the ld. CIT(A), it cannot be said that the liability ceased to exist.

From the details of the sustenance of disallowance, it can be
                                   50


seen that the expenses are basically in the nature of

professional fee, telephone expenses, communication expenses

and consultation, etc.       The point for determination of the

question of deduction is the crystalization of liability for

incurring such expenses and not the actual receipt of the

invoices.    This contention raised on behalf of the assessee

about the incurring of actual liability in respect of these

expenses has not been controverted on behalf of the Revenue.

Going by the mandate of the mercantile system of accounting

and following the rule of consistency, we order for the deletion

of the addition sustained in the first appeal.       This ground of

appeal is allowed.


11.         The   last   ground   about   charging   of   interest   is

consequential.


12.1.   The only issue raised by the Revenue in its appeal is

against the deletion of addition of ` 40,50,472/-,        being rent

equalization reserve included in the provision for expenses

amounting to ` 5.18 crore. The claim of the Revenue is that

this amount is not in the nature of expense.
                                 51


12.2.     After considering the rival submissions and perusing the

relevant material on record, we find that this issue is no more

res integra in view of the judgment of the Hon'ble jurisdictional

High Court in CIT vs. Virtual Soft Systems Ltd. (2012) 205

Taxman 257 (Del), in which it has been held that the lease

equalization charges debited to the Profit & Loss Account

cannot be disallowed. Similar view has been taken by the

Hon'ble Karnataka High Court in Prakash Leasing Ltd. Vs. DCIT

(2012) 208 Taxman 464 (Kar). In view of the above judicial

precedents, we uphold the view taken by the ld. CIT(A) in

deleting this addition. This ground fails.


13.     In the result, the appeal of the assessee is partly allowed

and that of the Revenue is dismissed.


        Order pronounced in the open Court on 22/12/2014.


            Sd/-
            Sd/-                                     Sd/-
                                                     Sd/-


 (GEORGE GEORGE K.)                              (R. S. SYAL)
   JUDICIAL MEMBER                           ACCOUNTANT MEMBER


Dated: 22/12/2014

dk
                     52


Copy forwarded to:

1.   Appellant
2.   Respondent
3.   CIT
4.   CIT(Appeals)
5.   DR: ITAT
                                    REGISTRAR
                          ASSISTANT REGISTRAR

 
 
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