M/S DELL INTERNATIONAL SERVICES INDIA PRIVATE LIMITED,BANGALORE vs. JCIT, BANGALORE

Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the

assessment order dated 29/10/2012 passed under section 143(3) read

2 IT(TP)A No.3/Bang/2013 with section 144C of the Act in pursuant to the directions of DRP dated

03/09/2012 for the assessment year 2008-09.

“ General ground: 1. That on the facts and circumstances of the case and in law, the Assessing Officer (“AO”), has erred in completing the assessment of the appellant at an income of INR 392,174,075 under the normal provisions of Income tax Act, 1961 (“the Act”) and book profit of INR 678,734,585 under the provisions of section 115JB of the Act as against the total income of INR 185,145,994 accepted by the appellant under the normal provisions and book profits of INR 571,589,387 under the provisions of 115JB of the Act (considering suo-moto disallowances).

Disallowance under section 14A: 2. That on the facts and circumstances of the case and in law, the AO / Dispute Resolution Panel (“DRP”) has erred in making an addition of INR 5,002,740 under the provisions of section 14A of the Act by attributing expenses equivalent to 0.5 percent of the average value of the investments held by the appellant during the year, failing to appreciate the contention of the appellant that no expenditure has been incurred for earning dividend income and therefore, the provisions of section 14A of the Act were not applicable. 3. Without prejudice, that the AO / DRP has erred in not considering the expenses disallowed under section 14A for allocation over various units, including those entitled to deduction under section 10A of the Act for the purpose of computing deduction under section 10A of the Act. 4. That on the facts and circumstances of the case and in law, the AO / DRP has erred in making an addition of INR 5,002,740 in respect of expenses disallowed under section 14A for computing book profit under the provisions of section 115JB of the Act.

Exchange gain on forward foreign exchange contracts: 5. That on the facts and circumstances of the case and in law, the AO / DRP has erred in adding unrealized Mark to Market (“MTM”) gains amounting to INR 17,388,000,on forward foreign exchange contracts to the income of the appellant, although the same reflects a decrease in the business income due to a change in the accounting policy. 6. Without prejudice, that on the facts and circumstances of the case and in law, the AO / DRP has erred in not allocating the unrealized MTM gains arising on account of forward

3 IT(TP)A No.3/Bang/2013 foreign exchange contracts to the units eligible for deduction under section 10A of the Act, alleging that – - the appellant has failed to furnish any details thereof; and - the gains had not been ‘derived from’ such eligible units and hence could not be allocated to eligible units for deduction under section 10A of the Act.

Disallowance on provision for leave encashment:

Addition of excess depreciation for computation of book profits:

4 IT(TP)A No.3/Bang/2013 Transfer Pricing: 12. The order passed by the DRP and the AO / Transfer Pricing Officer (“TPO”) is not in accordance with the law and is contrary to the facts and circumstances of the present case and in any case in violation of the principle of equity and natural justice. 13. The DRP and the AO/TPO have erred in law and on facts in rejecting the detailed benchmarking analysis conducted by the appellant and embarking on a fresh search for comparables and upholding the Arm’s Length Price (“ALP”) of 24.49 percent as proposed by the TPO, for the software development services rendered by the appellant and further erred in making an adjustment of INR 184,637,341. 14. Among the other comparables considered, the DRP and the TPO has erred in selecting the following companies as comparable companies: - Infosys Technologies Limited; - KALS Infosystems Limited; and - LGS Global Limited. 15. The DRP and the AO/TPO has erred in determining the ALP based on companies, which are not comparable to the appellant due to various factors such as applying incorrect/ additional filters, not applying filters consistently, ad-hoc selection of comparables, selecting comparables with abnormally high margins or substantially huge turnover, selecting comparables which are functionally different, selecting comparables engaged in sale of software products and that hold high brand value,etc. 16. That on the facts and circumstances of the case and in law, the AO / DRP / TPO has erred in not granting the working capital/risk adjustment, as claimed by the appellant.

That on the facts and circumstances of the case and in law, the AO/TPO has erred by not following the directions issued by the DRP and making a Transfer Pricing addition to the entire value of transactions entered into by the appellant and in not restricting adjustments only to the value of international transactions entered into by the appellant (i.e. proportionate adjustments) and ignoring established jurisprudence in this regard.”

adjudication.

14A of the income tax Act. The AO noted that the assessee has shown

5 IT(TP)A No.3/Bang/2013 opening and closing balance of investment of Rs.90,50,15,000/-and

Rs.109,60,81,000/-respectively. During the year under consideration, the

assessee has received the dividend income of Rs. 2, 46, 99, 745/-which

has been claimed exempt. The AO proposed to disallow the expenditure

under section 14A read with rule 8D of the income tax rules. In response

the assessee submitted that it has not incurred any expenses for earning

the dividend income. The AO did not accept the contention of the

assessee and made the disallowance of Rs.50,02,740/-being .5% of

average value of investment as per Rule 8D(2)(iii). The disallowance

computed as per rule 8D was also added to the income of the assessee

while computing the book profit under MAT provisions. Aggrieved by the

Action of the AO the assessee has raised the objections before the DRP

but could not succeed.

assessee has not incurred any expenditure for earning the dividend

income and consequently the assessee has not debited any expenditure

related to the exempt income in the profit and loss account, then the

same cannot be brought within the purview of clause (f) of explanation 1

6 IT(TP)A No.3/Bang/2013 to section 115 JB (2) of the Act. He has further contended that the

disallowance made under section 14A cannot be automatically imported

for the purpose of adjustment to the book profit as per the explanation

to section 115 JB of the Act. On the other hand, the Ld. DR has submitted

that the authorities below have followed the decision of the Mumbai

benches of the Tribunal in case of Dabar India Ltd versus ACIT 145 ITD

175 wherein the Tribunal has held that the expression “in the relation to”

used for making the disallowance under section 14A has been employed

in the explanation 1 to section 115JB(2) as expenditure “relatable to” in a

more or less same form. Thus, the Ld. the DR contended that the

Tribunal has taken a view that the disallowance made under section 14A

can be considered as an expenditure relatable to the exempt income for

the purpose of computing the book profit under section 115JB.

material on record. It is manifest from the details of the investment that

there are moments in the investment portfolio of the assessee and

therefore, the assessee has taken decisions of sale and purchase of the

investments during the year under consideration. Once the management

7 IT(TP)A No.3/Bang/2013 of the assessee is involved in taking the decision of selling as well as

purchasing of the investments, then the provisions of section 14A are

attracted so far as the indirect expenditure is concerned. Section 14A of

the income tax Act envisages the concept of apportionment of the

indirect expenditure which has been incurred for the composite activity

resulting taxable as well as exempt income. Accordingly, we are of the

view that when there is no denial of the fact that during the year under

consideration, the assessee has taken the decisions for purchase and sale

of the investments and there is significant amount of moment in the

investment portfolio then irrespective of the assesse not debiting any

specific expenditure in the profit and loss account in respect of earning

the tax-free dividend income, the provisions of section 14A are attracted

to the extent of the indirect expenditure. Hence, we do

concurrent/confirm the disallowance made by the AO being 0.5% of the

average investment on account of indirect expenditure under section

14A read with rule 8D of the rules.

14A while computing the book profit under section 115JB our intention

8 IT(TP)A No.3/Bang/2013 was invited to the judgment of Hon'ble Bombay High Court in case of CIT

versus JSW Energy Limited 379 ITR 36, wherein the Honourable High

Court while dealing with an identical issue has observed in paras 9 and

10 as under :

“ 9. However, the tribunal also noted that by way of additional ground the assessee challenged disallowance under section 14A in calculation of book profit under section 115JB. The tribunal therefore heard both sides on additional ground and in paragraph 18 held that once the accounts are prepared in accordance with Indian Companies Act, 1956, they have been approved by the Registrar of Companies, then, the assessing officer must take those accounts into consideration. If the assessee has not debited any actual expenditure relating to the earning of the exempt income, therefore, the provisions of section 14A cannot be imported into the computation of book profit under section 115JB of the Income Tax Act, 1961. Therefore, even clause (f) of Explanation to section 115JB which refers to those amounts which are debited to the Profit and Loss account, alone can be added to the book profit, cannot apply. Then, the tribunal referred to the order passed in the case of Essar Teleholdings Ltd. (supra). Mr.Kaka, learned Senior Counsel is right that in case of Essar Teleholdings when similar issue was raised this Court did not entertain the appeal and in that regard, he relied upon the Division Bench order passed on 7th August, 2014. One of us (Shri S.C. Dharmadhikari, J.) was a party to this order. The said order reads as under : “IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.438 OF 2012 The Commissioner of Income Tax5, ...Appellant v/s M/s Essar Teleholdings Ltd. ...Respondent

Mr Abhay Ahuja with Ms Padma Divakar for Appellant. None for Respondent.

CORAM : S.C. DHARMADHIKARI AND B.P. COLABAWALLA JJ. DATE : 7TH AUGUST 2014. P.C. : 1. We have heard Mr Ahuja, learned counsel appearing on behalf of the Appellant on the questions which have been termed as substantial

9 IT(TP)A No.3/Bang/2013 questions of law. They are formulated in this Memo of Appeal by the Revenue at page 3. They read as under : “(A) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT is right in setting aside and restoring back the issue to the file of AO for de novo adjudication in light of the provisions of Rule 8D ? (B) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT is right in deleting the addition of Rs.4.06 crores made by the AO u/s 14A of the Act for the purpose of computing book profit u/s 115JB(f) of the Income Tax Act 1961 ?” 3. In relation to the second question, Mr Ahuja stated that it is a substantial question of law simply because the Tribunal while remanding and restoring the case to the file of the Assessing Officer has given a finding with regard to the course to be adopted after restoration by the Assessing Officer. The Tribunal should not have done this. In such circumstances, the Appeal raises substantial questions of law. We are of the view that the Tribunal had only reiterated in paragraph 8 of the order under challenge delivered on 29th July 2011 the finding on the expenditure as per rule 8D r/w section 14A of the Income Tax Act 1961. In relation to that, the Tribunal held that Rule 8D is not applicable to the A.Y. Under consideration. Hence, applying the provisions of Rule 8D is not justified. The further finding of the Tribunal is only to bring to the notice of the Assessing Officer that he has to abide by clause (f) of Explanation 115JB of the Income Tax Act. In such circumstances, what the Tribunal has done is to invite attention of the Assessing Officer to the orders passed by the Tribunal, Delhi Bench. Beyond this, we do not think that the Tribunal has adjudicated the claim or has accepted the contentions raised before it by either side. In these circumstances and when the Assessing Officer is expected to determine the claim afresh and in accordance with law, we do not see any basis for the apprehension and which is voiced by Mr Ahuja. With this additional clarification, the Appeal does not raise any substantial question of law. Appeal is dismissed. No costs. ( B.P. COLABAWALLA J.) (S.C. DHARMADHIKARI J.)” 10. Having held that the matter is sent back to the assessing officer for reconsideration and while working out the deduction in terms of section 14A read with Rule-8D, the asssessing officer must take note of clause (f) of Explanation to section 115JB of the I.T. Act, then we do not think that questions 1 and 3 could be entertained. The same clarification as is given in the case of M/s. Essar Teleholdings Ltd. would govern the present case. The facts and circumstances being identical, we do not think that the appeal should be entertained on question nos.1 and 3.” In the absence of any contrary view or precedent of Honourable High

Court, we set aside this issue to the record of the assessing officer for

10 IT(TP)A No.3/Bang/2013 reconsidering the issue of working out the adjustment as per clause (f) of

the explanation to Sec. 115JB of the amount calculated under section

14A of the Act in the light of the observation of the Honourable High

Court.

gain on forward contracts. During the course of assessment proceedings

the AO noted that accounting policy in respect of accounting of

profit/loss on forward contract was changed during the year, resulting in

reduction of income in respect of foreign exchange gain on forward

contract by a sum of Rs.1,73,88,000/-. The assessee submitted before the

AO that losses due to forex fluctuation on forward contract were debited

to the profit and loss account, whereas the gain was not be recognised in

the profit and loss account as per the accounting policy. It was not

disputed that up to the last assessment year, the assessee was

recognising gain or loss arising due to change in the value of the forward

contract. In the year under consideration, the assessee has changed its

accounting policy and has disclosed the impact of such change in the

notes to the accounts as per the accounting standards. The assessee

11 IT(TP)A No.3/Bang/2013 pointed out that the relevant discloser have been made in the note 10 of

schedule 13 of the note to accounts. Alternatively the assessee

contended that even if Mark to market(MTM) gain is to be added to the

income of the assesse the same should be allowed for deduction under

section 10A of the Act. The AO did not accept the contention of the

assessee and held that the gain in respect of foreign exchange

fluctuation which was not accounted for by the assessee due to change

of accounting policy during the year is clearly a revenue receipt to be

included in the income of the assessee. As regards the claim of deduction

under section 10A the AO denied the same for want of necessary details

for calculation of the claim. The assessee raised the objections before the

DRP against the denial of the change in accounting policy and as well as

the deduction under section 10A. The DRP has rejected the objections

and confirmed the action of the AO.

changed the accounting policy of recognising the gain/loss arising from

foreign exchange fluctuation on forward contract which is in accordance

with the accounting standards. The assessee has duly disclosed the said

12 IT(TP)A No.3/Bang/2013 change of the accounting policy in the note 10 of schedule 13 to the

accounts. Therefore, once the assessee has disclosed the impact of such

change in the notes to accounts as required under the accounting

standards then in the absence of any finding that the change has been

made only with a view to distort the financial results the assessing officer

is not justified in rejecting the accounting treatment given by the

assessee. Alternatively, the Ld. AR of the assessee has submitted that

such a gain would be regarded as business income of the assessee and

therefore the same is eligible for deduction under section 10A. The Ld.

AR has pointed out that all the undertakings of the assessee are eligible

for deduction under section 10A and accordingly the income arising from

fluctuation gain on forward contract which are marked to market, then

such income would be regarded as the income of the undertaking and

consequently eligible for deduction under section 10A. In support of his

contention he has relied upon the decision of Honourable jurisdictional

High Court in case of CIT versus Motorola India Electronics private

Limited 225 taxmen 11 (Karnataka).

13 IT(TP)A No.3/Bang/2013 9.1 On the other hand, the Ld. DR has submitted that the assessee has

not brought on record the impending circumstances under which the

assessee has changed its accounting policy during the year under

consideration. It is undisputed fact that due to the change in the

accounting policy the assessee has not offered the due income on

account of foreign exchange gain on forward contract. He has relied

upon the orders of the authorities below. As regards the eligibility for

deduction under section 10A the Ld. DR has submitted that when this

income is not derived from the industrial undertaking and particularly

from export of goods then it has no first degree nexus with the

undertaking to claim the deduction under section 10A. He has relied

upon the decision of Honourable Supreme Court in case of Liberty India

v. CIT 317 ITR 218 as well as the orders of the authorities below and

submitted that the foreign exchange gain on forward contract does not

satisfy the condition for including in the export turnover.

material on the record. There is no impediment for the change of

accounting policy if the purpose of change is to comply with the

14 IT(TP)A No.3/Bang/2013 accounting standard and not to achieve any under hand objective. In

other words the change in the accounting policy should not lead to the

distortion of the financial results and once it has been changed it should

be for a long-lasting period to maintain the consistency of recognising

the revenue and treatment of the particular income or loss. Though

there is an impact on the taxable income of the assessee due to the

change in the accounting policy for not recognising the foreign exchange

gain as income in respect of forward contracts however, if the change as

well as the impact in the financial results due to such change has been

duly disclosed by the assessee as required under the accounting

standards and such change has been made to follow the accounting

standards and not intended to suppress the income or to misrepresents

the results then such change cannot be rejected. The assessing officer

has rejected the revenue recognition on account of foreign exchange

gain on forward contracts without examining the relevant facts whether

the assessee is continuing following the same accounting policy and

whether the change of accounting policy is in compliance of the

accounting standard. Therefore, we are of the view that if this change in

15 IT(TP)A No.3/Bang/2013 the accounting policy is consistently followed by the assessee in the

following years and the assessee has already disclosed the change in the

accounting policy as well as impact of change in the books of accounts

and particularly in the notes to accounts under schedule 13 then it

cannot be rejected without pointing out the defect in policy or any

ulterior motive of such change. The assessing officer has not disputed the

discloser of the change in the accounting policy and impact of the same

in the notes to accounts. Accordingly, we set aside this issue to the

record of the AO to the examine the same in the light of the above

observations and by considering the fact whether the assessee has been

consistently following the same accounting policy for a substantial period

in future.

10.1 As regards eligibility of deduction under section 10A it is

pertinent to note that if the forward contracts entered into by the

assessee are fully backed by the export then the gain or loss on such

forward contracts would be regarded as business income. Therefore,

when the forward contracts are valued at mark to market, and fully

backed by the export transactions then the gain or loss arising from such

16 IT(TP)A No.3/Bang/2013 contracts would be in the nature of business income of the assessee.

Consequently when all the undertaking are eligible for deduction under

section 10A then the income from foreign exchange gain on forward

contract is eligible for deduction under section 10A. Accordingly, so far as

the income on account of gain on foreign exchange fluctuation on

forward contracts which are fully backed by the export transactions the

same is to be treated as income derived from industrial undertaking for

the purpose of section 10A. The Honourable jurisdictional High Court in

case of CIT Vs. Motorola India Electronics Private Limited (supra) after

considering the judgment of Honourable Supreme Court in case of

Liberty India v. CIT (supra) has held in para 7 and 8 as under:

“ 7. The submission of the appellant(s) [assessee(s)] in nutshell was that the amount of duty drawback/DEPB was intended to neutralize the incidence of duty on inputs consumed/utilized in the manufacture of exported goods resulting into increased profits derived from the business of the industrial undertaking which profits qualified for deduction under s. 80-IB. According to the appellant(s) since no excise duty/customs duty was payable on raw materials consumed/utilized in manufacturing goods exported out of India, the duty paid stood refunded under s. 37(2)(xvia) of the Central Excise Act, 1944 and under s. 75 of the Customs Act, 1962 read with Customs, Central Excise Duties and Service-tax Drawback Rules, 1995. 8. On the nature of DEPB it was submitted that the amount of DEPB was granted under Exim Policy issued in terms of powers conferred under s. 5 of the Foreign Trade (Development and Regulation) Act, 1992. According to the appellant(s), the DEPB Scheme is a Duty Remission Scheme which allows drawback of import charges paid on inputs used in the export product. The object being to neutralize the incidence of customs duty on the import content of the export product by way of grant of duty credit. The DEPB benefit is freely transferable. Thus, according to

17 IT(TP)A No.3/Bang/2013 the appellant(s), duty drawback/DEPB benefit received had to be credited against the cost of manufacture of goods/purchases debited to the P&L a/c. That, such credit was not an independent source of profit. In this connection reliance has been placed on AS-2 issued by ICAI on "Valuation of Inventories" which indicates that while determining cost of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition should be considered and that trade discounts, rebates, duty drawback and such other similar items have to be deducted in determining the cost of purchase. Placing reliance on AS-2, it was submitted that where excise duty paid was subsequently recoverable by way of drawback, the same would not form part of the manufacturing cost. It was submitted on behalf of the appellant(s) that payment of excise duty/customs duty on inputs consumed in manufacture of goods by an industrial undertaking eligible for deduction under s. 80-IB, was inextricably linked to the manufacturing operations of the eligible undertaking without which manufacturing operations cannot be undertaken, hence the duty, which was paid in the first instance and which had direct nexus to the manufacturing activity when received back, had first degree nexus with the industrial activity of the eligible undertaking and consequently the reimbursement of the said amount cannot be treated as income of the assessee(s) de hors the expense originally incurred by way of payment of duty. Consequently, according to the appellant(s), receipt of duty drawback/DEPB stood linked directly to the manufacture/production of goods and therefore had to be regarded as profits derived from eligible undertaking qualifying for deduction under s. 80-IB of the 1961 Act. On behalf of the appellant(s) it was further submitted that this Court’s decision in Sterling Food (supra) dealt with availability of deduction under s. 80HH with respect to profit on sale of import entitlements. The said decision, according to the appellant, had no applicability to the issue under consideration for the reason that import entitlement/REP licence was granted by the Government on the basis of exports made; the same were granted gratuitously without antecedent cost having being incurred by the industrial undertaking, unlike duty drawback and DEPB, which had direct link to the costs incurred by such industrial undertaking by way of payment of customs/excise duty in respect of duty paid inputs used in the manufacture of goods meant for export and in such circumstances, profit from sale of import entitlements/REP licence was in the nature of windfall and it was in those circumstances, that the apex Court held that source of profit on sale of import entitlements was not the industrial undertaking but the source was the Export Promotion Scheme. According to the appellant(s), in the case of sale of import entitlements/REP licence, the source was the scheme framed by Government of India whereas in the case of DEPB/duty drawback, the source was the fact of payment of duty in respect of inputs consumed/utilized in the manufacture of goods meant for export. That, but for such payments of duty on inputs used in the manufacture of goods meant for exports, industrial undertaking(s) would not be entitled to the benefit of duty drawback/DEPB, notwithstanding, the Export Promotion Scheme of the Government and, therefore, there was a direct and immediate nexus between payment of duty on such inputs and receipt of duty drawback/DEPB. In this connection reliance was placed on the judgment of the Gujarat High Court in the case of CIT vs. India Gelatine & Chemicals Ltd. (2005) 194 CTR (Guj) 492 : (2005) 275 ITR 284 (Guj). Lastly, it was submitted on behalf of the appellant(s) that there was no difference between Advance Licence Scheme and duty drawback/DEPB. In this connection it was urged that duty drawback regime required the industrial undertaking to pay in the

18 IT(TP)A No.3/Bang/2013 first instance the duty on inputs and thereafter seek reimbursement on profit of goods manufactured using such duty paid inputs, having been exported. The industrial undertaking alternatively could avail of Advance Licence Scheme where under the industrial undertaking could import inputs to be used for manufacture of goods meant for export without payment of duty. In the case where the industrial undertaking enjoyed the benefit of Advance Licence Scheme, the profit as shown in P&L a/c was regarded as income derived from industrial undertaking entitled to deduction under s. 80-IB of the 1961 Act without any adjustment whereas when the same industrial undertaking when it opts for duty drawback is denied the benefit of deduction under s. 80-IB on the duty remitted.” In view of the facts and circumstances of the case when the AO has

denied the deduction under section 10A in respect of the foreign

exchange fluctuation gain on forward contracts for want of necessary

details we set aside this issue to the record of the assessing officer for

fresh adjudication in the light of the judgment of Honourable

jurisdictional High Court in case of CIT versus Motorola India election

private Limited and after verifying the amount of income arising on mark

to market gain.

encashment while computing book profit. The assessing officer added

back provision for gratuity of Rs.45,00,26,696/-as well as provision for

leave encashment of Rs.8,23,56, 024/-while computing book profit under

section 115JB of the Act. While deciding the objections of the assesse the

DRP has allowed the claim and deleted the addition on account of

19 IT(TP)A No.3/Bang/2013 provision for gratuity however, the issue of adjustment make to the book

profit on account of provision for leave encashment has not been

adjudicated by the DRP.

principally the DRP has decided the issue in favour of the assesse

however, the leave encashment issue has not been adjudicated while

directing the AO not to make the adjustment. He has referred the finding

of the DRP in para 4.3 of the directions and pleaded that the AO may be

directed not to make adjustment on account of leave encashment. The

Ld. AR has pointed out that it is an ascertain liability and based on

actuarial valuations at the balance sheet date. The Ld. AR has further

pointed out that since it was a provision and the actual payment was not

made during the year therefore, the assessee itself has disallowed this

amount under section 43B of the Act in the normal computation but it is

an ascertain liability and based on the actuarial valuation carried out by

an independent actuary then no adjustment can be made while

computing the book profit. On the other hand, the Ld. DR has relied upon

the order of the assessment officer.

20 IT(TP)A No.3/Bang/2013 13. We have considered the rival submissions as well as relevant

material on record. The DRP while dealing with the issue has given the

directions to the AO in para 4.3 of the order as under:

“ 4.3 The assessee has objected that the Assessing Officer has erred in proposing to add back provision for gratuity to INR 45,026,696, while computing book profit under Section 115JB of the Act.

It is seen that the assessee has made adjustment to the book profit by treating provision for gratuity as an unascertained liability. This issue is however, now settled in favour of the tax payers by the judgement of the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. 245 ITR 428 (SC), wherein the SC has held that liability on account of gratuity and leave encashment is allowable as a deduction while computing book profits. The objection of the assessee on this account is therefore sustained and the Assessing Officer is directed not to make adjustment of Rs.4,50,26,696 to the book profit on account of provision for gratuity.”

As it is clear from the finding of the DRP that on principle the DRP has

accepted that the issue is now covered by the judgment of Honourable

Supreme Court in case of Bharat Earth Movers Ltd 245 ITR 428, wherein

it was held that liability on account of gratuity as well as leave

encashment is allowable as deduction while computing book profits.

Only one part of the claim regarding provision for gratuity was

adjudicated by the DRP and the other aspect of the issue regarding

provision for leave encashment was not adjudicated. Therefore, we are

21 IT(TP)A No.3/Bang/2013 of the view that the matter is required to be examined by the AO in the

light of the decisions of the Honourable Supreme Court in case of BEML

(supra) and by considering the fact whether the liability is an ascertain

liability based on actuarial valuation at the date of balance sheet carried

out by an independent Actuary. Accordingly, this issue is set aside to the

record of the AO to decide the same afresh in terms of the above

observations.

for computation of book profit. The Assessing Officer noted that the

assessee is following policy of capitalizing amount and then depreciating

the same @ 100% in respect of the asset costing up to Rs.45,000.

Though the assessee claimed depreciation as per the provisions of the

Act for normal computation of income however while computing the

book profit the A.O noted that the depreciation of 100% in respect of the

assets upto Rs.45,000 is not as per the Schedule XIV of the Companies

Act which permits 100% depreciation in respect of the assets costing

Rs.5,000 or less. Accordingly, the Assessing Officer after allowing the

depreciation specified as per the Schedule VI of the Companies Act made

22 IT(TP)A No.3/Bang/2013 the addition of the excess depreciation claimed by the assessee to the

tune of Rs.4,79,078. The DRP confirmed the action of the Assessing

Officer.

has submitted that the assessee is following a particular policy on

depreciation and depreciating the asset costing upto Rs.45,000 @ 100%

in the books of accounts. He has submitted that there is no bar for

adopting a higher rate than provided under the Schedule XIV of the

Companies Act. The assessee has duly disclosed in the accounts the

higher rate of depreciation applied in respect of the assets costing upto

Rs.45,000. In support of his contention, he has referred to the guidance

note issued by the Institute of Chartered Accountants India on Schedule

XIV of the Companies Act and submitted that the company can write off

fully low value item on the consideration of materiality whether such

accounting policy is followed by a company, the same should be

disclosed in the accounts. Thus the learned Authorised Representative

has submitted that the rate of depreciation provided under Schedule XIV

is minimum for the cost of the assets and if a company followed an

23 IT(TP)A No.3/Bang/2013 accounting policy of charging depreciation @ 100% on low value items of

more than Rs.5,000 the same is permissible. In support of his

contention, he has relied upon the decision of Hon'ble Supreme Court in

the case of Malayala Manorama Co. Ltd. Vs. CIT (2008) 300 ITR 251

(SC) as well as decision in the case of Apollo Tyres Ltd. Vs. CIT (2002)

255 ITR 273 (SC).

contended that applying the depreciation @ 100% on the asset costing

upto Rs.45,000 is not provided under the Schedule XIV of the Companies

Act. There is no basis of charging 100% depreciation on the assets

costing Rs.45,000 and fixing the threshold limit of low cost item. The

learned Departmental Representative has further contended that the

decisions of Hon'ble Supreme Court are not applicable in the case of the

assessee when the books of accounts are not prepared as per Part II & III

of Schedule VI of the Companies Act. He has relied upon the decision of

the Hon'ble Supreme Court in the case of Dynamic Orthopedics (P) Ltd.

Vs. CIT (2010) 321 ITR 300 and submitted that the Hon'ble Supreme

Court has taken a different view in the subsequent decision.

24 IT(TP)A No.3/Bang/2013 17. We have considered the rival submissions as well as the relevant

material on record. There is no dispute that as per Schedule XIV of the

Companies Act 100% depreciation is provided in respect of the assts

costing upto Rs.5,000. The assessee has placed reliance on the guiding

note of the ICAI on Schedule XIV of the Companies Act which reads as

under :

“ 10. According to the above note, all individual items of fixed assets whose actual cost does not exceed Rs.5,000 shall be charged depreciation at the rate of 100%. However, in respect of the fixed assets acquired prior to December 16, 1993, alternative bases of computing the depreciation charge are permitted. The amount of write off in respect of low value assets would also therefore depend upon the alternative chosen.

Thus there is no dispute that even in the guiding note low cost items not

exceeding Rs.5,000 shall be charged depreciation @ 100%. The only

exception provided is that a low value item on consideration of

25 IT(TP)A No.3/Bang/2013 materiality can be written off fully if such an accounting policy is

followed by a company. Therefore it gives the scope of exceeding the

threshold limit of Rs.5,000 in the cases where the useable life of low

value item is not lasting more than one financial year. However this

cannot be applied as a general rule for deciding the threshold limit of low

value item arbitrarily. It can be understandable in a particular case if a

low value item costing slightly more than Rs.5,000 has a useable life

ofonly one year then the company may write off fully such low value

item by following an accounting policy which should be disclosed

properly in the accounts. In the case of the assessee fixing of the low

cost item of Rs.45,000 has no basis and even the assessee has not

brought on record to show that this limit of low cost of Rs.45,000 is fixed

because of the useable life of the assets not exceeding one year. The

Hon'ble Supreme Court in the case of Dynamic Orthopedics (P) Ltd. Vs.

CIT (2010) 321 ITR 300 (SC) which is the subsequent and latest decision

on the point has held in paras 7 and 8 as under :

“ 7. In our view, with respect, the judgment of this Court in Malayala Manorama Co. Ltd. vs. CIT (supra) needs reconsideration for the following reasons : Chapter XII-B of the Act containing "Special provisions relating to certain companies" was introduced in the IT Act, 1961, by the Finance Act, 1987, w.e.f. 1st April, 1988. In fact, s. 115J replaced s. 80VVA of the Act. Sec. 115J (as it stood at the relevant time), inter alia, provided that where the total income of a company, as computed

26 IT(TP)A No.3/Bang/2013 under the Act in respect of any accounting year, was less than thirty per cent of its book profit, as defined in the Explanation, the total income of the company, chargeable to tax, shall be deemed to be an amount equal to thirty per cent of such book profit. The whole purpose of s. 115J of the Act, therefore, was to take care of the phenomenon of prosperous ‘zero tax’ companies not paying taxes though they continued to earn profits and declare dividends. Therefore, a MAT was sought to be imposed on ‘zero tax’ companies. Sec. 115J of the Act imposes tax on a deemed income. Sec. 115J of the Act is a special provision relating only to certain companies. The said section does not make any distinction between public and private limited companies. In our view, s. 115J of the Act legislatively only incorporates provisions of Parts II and III of Sch. VI to 1956 Act. Such incorporation is by a deeming fiction. Hence, we need to read s. 115J(1A) of the Act in the strict sense. If we so read, it is clear that, by legislative incorporation, only Parts II and III of Sch. VI to 1956 Act have been incorporated legislatively into s. 115J of the Act. Therefore, the question of applicability of Parts II and III of Sch. VI to 1956 Act does not arise. If a company is a MAT company, then be it a private limited company or a public limited company, for the purposes of s. 115J of the Act, the assessee-company has to prepare its P&L a/c in accordance with Parts II and III of Sch. VI to 1956 Act alone. If, with respect, the judgment of this Court in Malayala Manorama Co. Ltd. (supra) is to be accepted, then the very purpose of enacting s. 115J of the Act would stand defeated, particularly when the said section does not make any distinction between public and private limited companies. It needs to be reiterated that, once a company falls within the ambit of it being a MAT company, s. 115J of the Act applies and, under that section, such an assessee-company was required to prepare its P&L a/c only in terms of Parts II and III of Sch. VI to 1956 Act. The reason being that rates of depreciation in r. 5 of the IT Rules, 1962, are different from the rates specified in Sch. XIV of 1956 Act. In fact, by the Companies (Amendment) Act, 1988, the linkage between the two has been expressly delinked. Hence, what is incorporated in s. 115J is only Sch. VI and not s. 205 or s. 350 or s. 355. This was the view of the Kerala High Court in the case of CIT vs. Malayala Manorama Co. Ltd. (supra), which has been wrongly reversed by this Court in the case of Malayala Manorama Co. Ltd. vs. CIT (supra). 8. For the aforestated reasons, the Registry is directed to place this civil appeal before the learned Chief Justice for appropriate directions as we are of the view that the matter needs reconsideration by a Larger Bench of this Court.”

Thus it is clear that the earlier decision of the Hon'ble Supreme Court in

the case of Malayala Manorama Ltd. (supra) has been distinguished by

the Division Bench and referred the matter for consideration by the

larger bench. Even otherwise when the assessee has not brought on

record the basis for fixing the low cost of the asset at Rs.45,000 for the

27 IT(TP)A No.3/Bang/2013 purpose of applying 100% depreciation then the said accounting

treatment of the assessee is contrary to the provisions of Schedule XIV of

the Companies Act and therefore the Assessing Officer is empowered to

make the necessary adjustments. There is no dispute that the Assessing

Officer has allowed the depreciation @ provided under the Schedule XIV

of the Companies Act in respect of the assets in question. Accordingly,

we do not find any error or illegality in the impugned order qua this

issue.

Ground Nos. 12 to 14 are regarding Transfer Pricing Adjustment.

services to its Associated Enterprises (AEs) besides other international

transactions. The dispute is only with regard to the international

transactions of providing software development services to the AEs. The

international transactions reported by the assessee are as under :

Nature of International Method Value of International transactions Selected transactions (INR) Provision of Software Services TNMM 2,291,287,095 / IT Infrastructure Services. Provision of Corporate TNMM 146,729,086 expenses charged back TNMM Provision of receiving of 61,566,042 services

28 IT(TP)A No.3/Bang/2013 Reimbursement of expenses -- 183,124,076 Buy back of shares -- 12,528,492 Bad debts written off / ESOP TNMM 30,268,030 Recharges

selection of 21 comparable companies and adopting TNMM as MAM

with average margin of 5.21% as against the assessee's margin of

17.22%. The TPO rejected the TP Analysis of the assessee and carried

out a fresh search. The TPO finally considered 10 comparable companies

with average PLI of 24.49% as under :

Sl.No. Name of comparable OP/TC % 1. Infosys Technologies Ltd. 39.62 2. Mindtree Consulting Ltd. 15.34 3. R Systems InternationalLtd 15.30 4. Sasken Communication Technologies 12.83 Ltd. (Seg.) 5. Kals Information Systems Ltd.(Seg.) 41.94 6. Lanco Global Systems Ltd. 26.46 7. Quintegra Solutions Ltd. 9.75 8. Accel Transmatic Ltd. (Seg.) 15.72 9. Helios & Matheson Information 33.4 Technology Ltd. (Seg.) 10. i-Flex Solutions Ltd. 34.62 Average 24.49

29 IT(TP)A No.3/Bang/2013 Accordingly, the TPO proposed an adjustment under Section 92CA of

Rs.20,26,85,019. In the present appeal, the assessee is seeking exclusion

of three comparable companies as under : i) Infosys Technologies Ltd.

ii) KALS Info Systems Ltd. iii) LGS Global Ltd.

submitted that the comparability of these three companies has been

examined by this Tribunal in a series of decisions and in a latest decision

in the case of GXS India Vs. ITO in IT(TP)A No.1444/Bang/2012

Dt.31.7.2015 for the Assessment Year 2008-09 again decided the

comparability of these three companies.

issue of comparability of these three companies is covered by the said

decision of the Tribunal. He has further pointed out that the Infosys

Technologies Ltd. was part of the TP Study however, the assessee raised

the objection against the inclusion of this company in the set of

comparables before the DRP. He has referred to the objections raised

30 IT(TP)A No.3/Bang/2013 before the DRP as well as before the TPO at page 250 of the Paper Book

I. However, the DRP has not adjudicated on this issue.

has submitted that the TPO has considered the segmental data of the

KALS Infosystems Ltd. and therefore the objections of the assessee

cannot be accepted. As regards the Infosys Technologies Ltd., the

predominant business activity of the said company is software

development services and other activities are insignificant therefore

more than 90% revenue is earned from the software development

services then the comparability of the said company cannot be

questioned on the ground of insignificant activity or function. Similar

contention has been advanced by the learned Departmental

Representative in respect of LGS Global Ltd. that the predominant

activity of the said company is software development services and more

than 75% of revenue has been earned from the software development

services.

material on record. At the outside we note that the functional

31 IT(TP)A No.3/Bang/2013 comparability of the Infosys Technologies Ltd. and KALS Infosystems Ltd.

have been considered by the co-ordinate bench of this Tribunal vide

order dt.31.7.2015 in the case of GXS India Technology Centre Pvt. Ltd.

Vs. ITO (IT(TP)A No.1444/Bang/2012) in paras 11 & 12 held as under :

“ 11. Infosys Technologies Ltd. The learned AR of the assessee has submitted that this company cannot be considered as good comparables of the assessee because this company own intangibles apart from the industry leader in the field. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of M/s Cisco Systems (Ind.) Pvt.Ltd.

11.1 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that this company is engaged in the same business that of the assessee and therefore, it is a good comparable of a software development company.

11.2 We have considered the rival submissions and the material on record. We note that the co-ordinate bench of this Tribunal in case of Cisco Systems (Ind.)Pvt. Ltd (Supra) has considered and examined the functional comparability of this company in para-26.2 as under;

“26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:-

“11.0 Infosys Technologies Ltd.

11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment.

11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial

32 IT(TP)A No.3/Bang/2013 brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in ‘AUTOLAY’, a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies.

11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies.

11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold

33 IT(TP)A No.3/Bang/2013 that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.

The decision rendered as aforesaid pertains to A.Y. 2008- 09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08- 09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies”. Following the findings of the co-ordinate bench of this Tribunal we direct the AO/TPO to exclude this company from the list of comparables.

12.1 The learned AR thus, submitted that this company is functionally not comparable with the business of the assessee. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra) as well as in the case of Cisco Systems India Pvt. Ltd., (Supra).

12.2 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that the TPO has considered the segmental data of this company. Therefore, this company is a good comparable of the assessee.

12.3. We have considered the rival submissions as well as the relevant material on record. We find that the functional comparability of this company has been examined by this co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd.(Supra) and also in case of M/s Cisco Systems India Pvt. Ltd.,(Supra) the relevant finding of the Tribunal in case of Cisco Systems (Supra) in para-26.3 as under;

“26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:-

“(d) KALS Information Systems Ltd.

34 IT(TP)A No.3/Bang/2013 cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal’s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows:

“16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.”

Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.

Following the decision of the co-ordinate bench we direct the AO/TPO to exclude this company from the list of comparables.”

Following the earlier orders of this Tribunal wherein all the relevant facts

were examined by the Tribunal and it was found that these two

35 IT(TP)A No.3/Bang/2013 companies cannot be considered as good comparable with company

providing software development services as captive service provider.

Accordingly, we direct the A.O./TPO to exclude these two companies

from the list of comparables. It is pertinent to note that in the case of

KALS Infosystems Ltd., no segmental data has been reported however

the TPO himself has computed the margin of software development

services which cannot be accepted without giving supporting details of

expenditure to be allocated to various activities.

LGS Global Limited.

company is having the activity of BPO services and therefore in the

absence of segmental data, composite data from software development

services and BPO cannot be compared with the assessee.

submitted that more than 75% of the revenue is earned by this company

from software development services and therefore it is a good

comparable.

36 IT(TP)A No.3/Bang/2013 26. We have considered the rival submissions as well as the relevant

material on record. At page 26 of the Annual Report of this company,

the details of the services and sales provided by this company includes:

(i) Consultancy Services

(ii) Enterprise System Solutions

(iii) BPO (iv) Custom Development, etc.

Thus it is apparent from the various services undertaken by this

company that it engaged in diversified activity including Business Process

Outsourcing (BPO) in the field of human resources, life sciences, legal

services, supply chain management, sales and customer care etc. We

further note that the company has not reported segmental data and

therefore the composite data from the diversified activity of this

company cannot be compared with the assessee's software

development activity. Accordingly, we direct the A.O. / TPO to exclude

this company from the set of comparables.

adjustment. The TPO denied the working capital adjustment while

passing the impugned order.

37 IT(TP)A No.3/Bang/2013 28. The learned Authorised Representative of the assessee has

submitted that the assessee has submitted the details of the outstanding

receivables with the related parties as well as the difference level of

accounts receivable and payable in respect of the comparable

companies. Thus it is contended that the risk assumed by the companies

is greater than the no risk assumed by the assessee with the related

parties and therefore working capital adjustment is required on this

account as comparable companies are expected to return higher due to

the difference in risk involved. Accordingly the learned Authorised

Representative has pleaded that the A.O./TPO may be directed to grant

the appropriate risk adjustment. In support of his contention, he has

relied upon the decision of this Tribunal in the case of Mercer Consulting

(India) P. Ltd. Vs. DCIT reported in 150 ITD 1.

submitted that the TPO as well as DRP have considered the claim of the

assessee and found that it is not a fit case to grant any risk adjustment.

He has relied upon the orders of the authorities below.

38 IT(TP)A No.3/Bang/2013 30. We have considered the rival submissions as well as the relevant

material on record. The TPO as well as DRP has denied the risk

adjustment on the ground that the assessee has not furnished the

relevant details to demonstrate that there is a difference in the level of

working capital employed by it vis-à-vis the comparable. Since the

assessee is a captive service provider therefore the level of inventory,

trade receivable and trade payable is certainly be different from the

comparable companies who are dealing with third parties. The co-

ordinate bench of Delhi Tribunal in the case of Mercer Consulting

(India) P. Ltd. (supra) has considered an identical issue in paras 16.1 and

16.2 as under :

“ 16.1. The next issue raised by the ld. AR is against non-granting of working capital adjustment claimed by the assessee for the first time before the TPO. The assessee requested the TPO to grant working capital adjustment. The assessee’s claim was jettisoned on the ground that the assessee failed to demonstrate that there was a difference in the levels of working capital employed by it vis-a-vis the comparables. The TPO further observed that: “The claim of working capital adjustment is not a matter of right.” He further went on to add that the issue of working capital can be relevant when there is a situation of inventory remaining tied up or receivables being held up and such situation will not be relevant to the service industry. That is how the assessee’s contention on this issue was repelled. The DRP also followed the suit by noticing that the working capital adjustment is difficult to apply due to the lack of accurate and reliable data. It also held that the issue of working capital would be relevant only when there is a situation of inventory remaining tied up or receivables being held up. The assessee contests the non-granting of the working capital adjustment. 16.2. Having heard the rival submissions and perused the relevant material on record, we find that the viewpoint canvassed by the authorities below is sans

39 IT(TP)A No.3/Bang/2013 merit. Working capital adjustment is ordinarily confined to inventory, trade receivables and trade payables. If a company carries on high trade receivables, it would mean that it is allowing its customers a relatively longer period to pay their amount which will result into higher interest cost and the resultant less profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it to pay back its suppliers which lowers the interest cost and accelerates profits. To have a level playing field, it is sine qua non that the working capital adjustment should be carried out to bring two otherwise comparable cases at par with each other. We are unable to comprehend any reason or rhyme to restrict the grant of working capital adjustment only in the case of manufacturers or traders. What is true for these categories of businesses is fully true for a service provider as well. It is a different matter that in the case of service provider, no working capital adjustment would be required towards higher or lower inventory, but the same may be warranted in respect of higher or lower trade receivables/payables. Since the authorities below have rejected the assessee’s contention for grant of working capital adjustment at the threshold, which in our considered opinion is not correct, we set aside the impugned order and remit the matter to the file of the TPO/AO for examining the assessee’s claim for grant of working capital adjustment on merits and thereafter, allow the same, if it is available. Needless to say, the assessee will be allowed an adequate opportunity of hearing.”

In view of the above facts and circumstances of the case and following

the order of the co-ordinate bench (supra), we set aside this issue to the

record of the A.O/TPO to examine the claim of working capital

adjustment properly and then decide the same as per law.

comparables, therefore the A.O./TPO to recomputed the ALP after

considering the working capital adjustment if any. Needless to say the

benefit of the proviso to Section 92C of the Act be also considered in

40 IT(TP)A No.3/Bang/2013 case comparable price falls within the tolerance range of + or – 5% of the

assessee.

Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member

*Reddy gp

Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File.

By Order

Asst. Registrar, ITAT, Bangalore