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.
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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
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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
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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,
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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
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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
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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
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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
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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.
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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.
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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
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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,
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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
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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
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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
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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,
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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
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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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