ASAHI GLASS LTD.,NEW DELHI vs. DCIT, NEW DELHI

ORDER

PER R.S. SYAL, AM:

Out of ten reported international transactions, five related to the Automotive division and the remaining five to the Float division. The TPO did not question the correctness of the arm’s length price (ALP) of the international transactions under Automotive SBU division. He took up for consideration only the international transactions under Float glass SBU division. The assessee had maintained accounts on entity level covering both the divisions. However, for the purposes of benchmarking, the assessee split up such accounts into the above referred two segments. The TPO accepted the international transaction of royalty payment for use of technical know-how under the Float glass division at ALP, which was benchmarked by the assessee under comparable uncontrolled price (CUP) method. The TPO disputed the 3 remaining four international transactions of Float glass division, namely, Payment of Fees for technical & consultancy services at Rs.16.50 crore; Purchase of capital goods at Rs.124.82 crore; Import of tin bath blocks and machinery spares for Rs.1.08 crore; and Import of clear float glass and reflective glass at Rs.6.38 crore. These four international transactions were benchmarked by the assessee under Transactional Net Margin Method (TNMM) on a combined basis. The TPO observed that there was no clarity about the Profit level indicator (PLI) inasmuch as the assessee was showing different PLIs, such as, Profit before tax/sales, Profit before tax and depreciation and Net profit/sales. On being called upon to clarify about the correct PLI, the assessee came out with OP/TC of the Float glass division, calculated at 3.88%. The TPO observed that in this calculation, the assessee did not consider depreciation as operating cost. The assessee revised the figure of OP/TC, after considering depreciation, at 3.39%, which has been reproduced in para 4.5 of the TPO’s order. On a perusal of this calculation, it was observed that the assessee debited a sum of Rs.1244.41 lac as ‘Extraordinary items’ on the expenditure side of its Profit & Loss Account with the note 4 given in Schedule 14 that there was unrelenting rainfall in Maharashtra in July, 2005 which led to shutting down of its Float SBU plant from 26.7.2005 to 28.10.2005 due to extensive damage to assets/inventories and hence the expenditure was incurred on repair, power and fuel and utilities for resumption of operations, which was shown as extraordinary item in the Profit & Loss Account. This expenditure was ignored by the assessee for calculating the ALP. The TPO refused to accept the assessee’s contention for the exclusion of extraordinary cost at Rs.12.44 crore from Operating costs. He held that since the assessee was bearing `environmental risks’ as well, such expenditure of Rs.12.44 crore could not be reduced from the operating costs. By considering extraordinary item of loss due to rainfall at Rs.12.44 crore as an item of operating cost, the TPO recomputed OP/TC of the Float glass division at 3.24%.

Thereafter, certain comparables were taken into consideration, whose mean margin was determined at 24.49%. Applying such rate as arm’s length margin on the transacted value of the above referred four international transactions under dispute, the TPO recommended transfer pricing adjustment at Rs.31.61 crore. The assessee raised certain 5 objections before the Dispute Resolution Panel (DRP) against the draft order incorporating addition on account of transfer pricing adjustment.

The DRP allowed certain relief. That is how, the AO vide his final order has made the addition of Rs.23.76 crore which is disputed in the instant appeal.

I. Treatment of extraordinary cost by the TPO as operating cost 5.1. We espouse the first issue of not reducing a sum of Rs.12.44 crore from the operating costs of the Float glass division. The ld. AR contended that the revenue costs incurred in reactivating its plant which was shut down for more than 90 days due to inundated rains, ought to have been reduced from the assessee’s operating costs in the calculation of its profit margin. We find detail of such expenses available on page 265 of the paper book, which consists of Loss of raw material amounting to Rs.82.52 lac; Loss on writing off of metal bath/HT panel amounting to Rs.2.97 crore; Plant revival expenses for repair of plant damaged due to flood at Rs.3.89 crore; and Power, fuel and utility consumption during unproductive period at Rs.4.76 crore. The ld. AR fairly admitted that these expenses totaling Rs.12.44 crore are otherwise revenue and not of capital nature. It was emphasized that since these are extraordinary operating costs incurred by the assessee, the same should have been removed from its operating costs in the calculation of profit margin.

Sounding a contra note, the learned Departmental Representative argued that the TP provisions do not permit allowing of any adjustment from the calculation of profit margin of the tested party. He argued that adjustment, if any, can be made only in computation of profit margin of the comparables. Thus, the foremost question for our consideration is whether any adjustment on account of dissimilarity between the assessee and comparables, is warranted in the assessee’s calculation of profit level indicator or that of comparables.

5.2. Chapter-X of the Act contains special provisions relating to avoidance of tax. Section 92, which is the first section of this Chapter, provides for computation of income from an international transaction having regard to arm’s length price. Sub-section (1) of the section provides that : “Any income arising from an international transaction shall be computed having regard to the arm’s length price”. Section 92C of the Act enshrines provisions relating to computation of arm’s length price. Sub-section (1) of the section states that the arm’s length price in relation to an international transaction shall be determined by any of the methods listed herein which include, inter alia, the transactional net margin method. Sub-section (2) of section 92C provides that the most appropriate method referred in sub-section (1) shall be applied for the determination of ALP `in the manner as may be prescribed’.

Calculation of ALP under the TNMM has been prescribed under Rule 10B(1)(e) of the Income-tax Rules, 1962, which states that for the purposes of section 92C(2), the ALP in relation to the international transaction shall be determined 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.’ 5.3. A bare perusal of sub-clause (i) of Rule 10B(1)(e) brings out that the net profit margin realized by the enterprise from an international transaction is to be computed in relation to a particular base. Sub-clause (ii) provides that the net profit margin realized by the enterprise from the comparable uncontrolled transaction is computed having regard to the same base. Sub-clause (iii) provides that the net profit margin realized 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 unrelated transactions or of the comparable companies, as determined under sub- clause (iii), which is used as benchmark for the purposes of making comparison with the profit margin realized by the assessee from its international transaction as per sub-clause (i). Sub-clause (iv) states that the net profit margin realized by the enterprise, as referred in sub clause (i), is established to be the same as the net profit margin referred in sub- clause (iii) of the comparables. Sub-clause (v) states that the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to international transaction. On going through the above sub-clauses of Rule 10B(1)(e), it becomes patent that as per the first step, the net profit margin ‘realized’ by the enterprise from an international transaction is to be computed. Use of the word ‘realized’ in the provision richly indicates that it is the calculation of actual operating profit margin of the assessee earned from international transaction, which is not any adjusted figure. Similar position can be traced from the language of sub-clause (iv), where again reference has been made to profit margin `realized’ by the assessee from the international transaction. When we consider sub-clauses (ii) and (iii), it turns out that, firstly, the net operating margin actually realized from the comparable uncontrolled transaction is computed, which is determined in the same way as that of the assessee as per clause (i), that is, actual figures without making any adjustment. Then sub-clause (iii) talks of 11 adjusting the actually realized margin of comparables to bring the same at par with the international transaction undertaken by the assessee, so as to iron out the effects of differences between the international transaction and comparable uncontrolled transactions. On going through all the sub-clauses of Rule 10B(1)(e), the natural corollary which follows is that the net profit margin realized by the assessee from its international transaction is taken as such and the adjustments, if any, due to differences between the international transaction and comparable uncontrolled transactions, are given effect to in the profit margin of comparables. Ergo, the viewpoint canvassed by the learned Authorized Representative for reducing extra ordinary operating costs amounting to Rs.12.44 crore from its total operating costs, is devoid of merit and contrary to the legal provisions, which is hereby repelled.

5.4. The learned Authorized Representative tried to convince us on his point of view of not reducing such extra ordinary costs from the overall operating costs in the profit margin of the assessee, by pressing into service sub-rule (3) of Rule 10B, which reads as under :

`(3) An uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market ; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.’ 5.5. A cursory look at this sub-rule indicates that an uncontrolled transaction shall be comparable to an international transaction, if either there are no differences between the international transaction and the comparable uncontrolled transaction or if such differences exist, then a reasonably accurate adjustment can be made to eliminate the material effects of such differences. A plain reading of sub-rule (3) of Rule 10B brings to the fore that this sub-rule is meant only for ascertaining whether or not a probable comparable uncontrolled transaction is fit for being treated as actual comparable. This is only an entry level judgmental provision for ascertaining the comparability of an otherwise broadly comparable uncontrolled transaction. In other words, if the broader comparable uncontrolled transaction is similar to the international transaction or if there are differences between the two, which are capable of adjustment, then such broadly comparable uncontrolled transactions gains entry in to the final list of comparables to be considered for the purposes of sub-clause (ii) of rule 10B(1)(e). If, on the other hand, there are differences between the two, which are not capable of adjustment, then such otherwise broadly comparable uncontrolled transaction goes out of reckoning and does not gain entry in the final tally of comparables for the purposes of computing ALP of the international transaction as per the mandate of rule 10B(1)(e). In other words, role of sub-rule (3) to Rule 10B is only to filter out comparable uncontrolled transactions qualifying for inclusion in the determination of the ALP under Rule 10B(1). Mechanism for determining ALP under the TNMM has been enshrined in Rule 10B(1)(e) alone which clearly provides for making adjustments on account of differences between uncontrolled transaction and international transaction in the profit margin of comparables. Sub-rule (3) is neither a machinery provision in itself nor a part of the machinery for calculating arm’s length price of an international transaction, which falls exclusively and in the sole domain 14 of sub-rule (1). If we accept the contention of the learned Authorized Representative that rule 10B(3)(ii) is to be construed as a provision for allowing adjustment on account of differences between uncontrolled transaction and international transactions from the profit margin of the assessee, then we will have to read sub-rule (3) as a part of machinery for calculating ALP under Rule 10B(1)(e), which has no statutory sanction. Thus, it follows from a conjoint reading of rule 10B(1)(e) with rule 10B(3), that whereas later rule is only meant for deciding the inclusion or otherwise of a probable comparable in the final list of comparables, the former rule determines the ALP of the international transaction under the prescribed method on the basis of such a list of comparables deduced inter alia, by applying sub-rule (3). We, therefore, jettison the assessee’s contention that the extra ordinary costs incurred by the assessee due to rains be reduced from its operating costs. Our view is fortified by several orders passed by the Delhi benches of the tribunal on this issue including Saxo India Pvt. Ltd. VS. ACIT (ITA No.6148/Del/2015) dated February, 2016 and DCIT vs. Claas India Pvt. Ltd. (ITA No.1783/Del/2011) dt. 12.08.2015. Ex consequenti, it is held 15 that such adjustment can be legally made only in the profit margin of the comparables, if otherwise factually warranted.

5.6. The foregoing discussion brings us to the next issue of granting adjustment in the calculation of profit margin of comparables on account of extra ordinary costs/loss incurred by the assessee due to rains, if permissible. First and the foremost condition for granting any adjustment is that an assessee must prove existence of some material differences between the international transaction undertaken by it and comparables. In this regard, we find that the ld. AR has not demonstrated in any manner that the comparables finally chosen did not suffer such extra-ordinary operating loss. It is trite that under the transfer pricing provisions, onus is always on the assessee to furnish necessary particulars for claiming any adjustment. If necessary particulars are not filed, then there can be no question of the TPO suo motu allowing any adjustment. In the absence of the ld. AR showing non-incurring of any extra-ordinary costs by the comparables, we are not inclined to grant any adjustment in the profit margin of comparables on this score.

5.7. Be that as it may, we have noted the details of such costs/loss, from which it is manifest that these expenses are otherwise of revenue nature, which fact has been conceded by the ld. AR as well. These include loss of raw materials due to flood and loss on write off of metal bath and HT panel etc. apart from plant revival expenses incurred for repair of plant. The assessee is a listed company and has availed loans from financial institutions. Insurance is an important aspect and a pre- condition for availing of credit facilities from financial institutions. If there is a loss incurred to the extent of Rs.12.44 crore due to flood etc., naturally, the assessee must have been compensated by insurance company for such loss. It is not the case of the assessee that Insurance claim is a non-operating revenue item. So, if there is loss by means of such costs, there will be corresponding income by means of insurance claim as well. As both the items are of operating nature, they will find their place in the computation of operating profit.

5.8. There is another important aspect of the matter, which is quite significant. It can be noticed that the assessee bears all risks including environmental risk, which position is borne out from the assessee’s Transfer pricing study report and has not been disputed by the ld. AR.

This indicates that revenues of the assessee include compensation for environmental loss as well, which has not been treated as an item of non-operating revenue. Once there is such additional compensation also, which has been taken as an item of operating revenue, then the costs incurred in bearing such risks have to be naturally considered as operating costs of the assessee. In view of the above discussion, we are satisfied that the TPO was fully justified in not allowing reduction on account of extra-ordinary costs to the tune of Rs.12.44 crore while calculating the assessee’s operating profit margin. We, therefore, refuse to countenance the assessee’s contention on this issue.

II. TP adjustment in respect of capital expenses 6.1. Second issue under challenge is about considering capital work-in- progress for the purposes of making addition on account of transfer pricing adjustment. The ld AR pointed out that the TPO while computing transfer pricing adjustment at Rs.31.61 crore, considered base amount of Rs.148.78 crore for applying arm’s length profit margin of comparables at 24.49%. Referring to such base amount of Rs.148.78 crore, the ld. AR submitted that this comprises of transacted value of four international transactions as discussed above, that also include ‘Purchase of capital goods’ for a sum of Rs.124.82 crore and payment of `Fees for technical & consultancy services’ at Rs.15.50 crore which was in respect of capital work-in-progress capitalized in the balance sheet.

The ld. AR submitted that since these two items belong to balance sheet of the assessee and were not routed through the Profit & Loss Account, there was no occasion for applying profit margin of the comparables on these two transactions as well. This was opposed by the ld. DR. 6.2. Having heard the rival submissions and perused the relevant material on record, we find that there are four international transactions which have been considered by the TPO for the purposes of benchmarking. Transaction of `Import of tin bath blocks and machinery spares’ and `Import of clear float glass and reflective glass’ are obviously items of revenue nature, which would find their place in the Profit & Loss Account. There is an international transaction of `Purchase of capital goods’ amounting to Rs.124.82 crore, which resides in Schedule of fixed assets. Fourth international transaction is `Fees for technical and consultancy services’ amounting to Rs.16.50 crore, which is in two parts, namely, Rs.15.50 crore for capital work-in-progress and Rs.1 crore for unit in operation. In so far as fees for technical services for capital work-in-progress is concerned, the same has again been capitalized by the assessee in its Schedule of fixed assets. These two items, namely, `Purchase of capital goods’ at Rs.124.82 crore and `Fees for technical & consultancy services’ at Rs.15.50 crore have been capitalized by the assessee and hence cannot be considered for making transfer pricing adjustment under the TNMM. Since operating profit is computed by considering the items of operating costs alone, the value of these two items which are capital in nature and have been capitalized in the balance sheet, cannot be included in the base amount for applying the operating profit margin rate of the comparables for computing the 20 amount of transfer pricing adjustment. We, therefore, direct to exclude them from the base amount of Rs.148.78 crore for applying the mean profit margin rate of the comparables to determine the amount of transfer pricing adjustment under the TNMM.

6.3. This, however, does not mean that these two international transactions should be ignored for all practical purposes. In fact, these transactions should have been separately processed under this Chapter and their ALP determined under the CUP method de hors the determination of ALP of the other international transactions under the TNMM. The ALP of these two transactions under the CUP method will give the price at which such assets should have been purchased. Such ALP is then required to be considered for the purpose of allowing depreciation in the year under consideration and subsequent years. If higher purchase price is shown vis-à-vis the ALP and resultantly excess depreciation has been claimed, then such excess depreciation calls for disallowance. Adverting to the facts of the instant case, we find that the TPO has considered these two items under the overall TNMM, as was wrongly done by the assessee also and then he went on to consider the value of these two transactions of capital nature for making transfer pricing adjustment. This approach of benchmarking these items of balance sheet under the TNMM, as done by the assessee and then followed by the TPO, is not appropriate, thus, calling for correction. No doubt, the stand of the assessee seeking exclusion of these two transactions of capital nature from the base amount for calculating transfer pricing adjustment under the TNMM is justified, but, at the same time these transactions of capital nature are required to be benchmarked by considering CUP as the most appropriate method. The ld. AR during the course of hearing admitted this position. Since the TPO has not done benchmarking in a proper manner as discussed above, we set aside the impugned order and direct the TPO/AO to benchmark these transactions of capital nature under the CUP method independent of other transactions under the TNMM.

III. Selection of comparables 7.1. The next issue raised in this appeal is against selection of certain comparables. The assessee initially selected five companies as comparable. During the course of proceedings before the TPO, it was found that all the companies so selected by the assessee were not fulfilling the comparability criteria. Para 5.5 of the TPO’s order shows that a search was carried out by him and the companies were selected from the economic activity with product name ‘Float glass.’ Such search process threw up five companies as comparable. The assessee was given opportunity to raise objections, if any, against the comparability of these five companies. After entertaining the objections raised on behalf of the assessee, the TPO shortlisted three companies as comparable, namely, Gujarat Guardian Ltd. (Profit margin of 46.57%); Hindustan National Glass (14.78%) and Saint Gobain Glass India (12.13%). The assessee is aggrieved against the exclusion of remaining two companies, namely, Bharat Glass Tube Ltd., and Triveni Glass Ltd. Apart from that, the assessee is also against the inclusion of Gujarat Guardian Ltd., which, in its opinion, ought to have been excluded. We will consider these companies one by one.

(i) Bharat Glass Tube Ltd. 8.1. The TPO has discussed the assessee’s objections as regards this company in para 5.7 of his order in which it has been recorded that the turnover of this company was only Rs.40 crore, whereas the turnover of the assessee company stood at Rs.683 crore. The TPO further recorded that no objections were raised on the functional comparability of this company. Considering the fact that there was a vast difference in the turnover of the assessee company and Bharat Glass Tube Ltd., the TPO considered it expedient to exclude this company from the list of comparables.

8.2. We have heard the rival submissions and perused the relevant material on record. It is noticed that it was the TPO who initially selected this company as comparable and asked the assessee to raise objections, if any, against its comparability. The TPO accepted and recorded the functional comparability of this company. Exclusion was made only on the reason of high turnover of the assessee company at Rs.683 crore as against a low turnover of Rs.40 crore of this company.

Apart from this turnover difference, the comparability is undisputed. In so far as the figure of Rs.683 crore is concerned, we find that this amount represents turnover of both the Float and Automotive glass divisions. Turnover of Float glass division under consideration is Rs.258.94 crore, leaving the remaining amount for Automotive division.

In so far as the difference in turnover as the relevant criteria for inclusion or exclusion of a company is concerned, we find that this issue is no more res integra in view of the judgment of the Hon’ble jurisdictional High Court in the case of Cryscapital Investment Advisors (India) (P) Ltd. vs. DCIT (2015) 376 ITR 183 (Del) in which it has been held that high/low profit and high/low turnover cannot be a ground to exclude an otherwise comparable company. Similar view has been reiterated by the Hon’ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. vs. CIT (2015) 279 CTR 441 (Del). The reliance of the ld. DR on a recent judgment of the Hon’ble Delhi High Court in ST Microelectronics Pvt. Ltd. vs. CIT 2016-TII-15-HC-DEL-TP is misconceived. It can be 25 noticed from para 11 of the judgment that the assessee argued that the Tribunal did not consider the principal contention about the functional profile of the comparables chosen, which was different from that of the assessee. Setting aside the Tribunal order and restoring the matter for a fresh consideration, the Hon’ble High Court held that the ITAT ought to have considered the assessee’s contention about dissimilarities as to the risk profile of the assessee and the comparables used. The Hon’ble High Court also found that the transfer pricing study report submitted by the assessee was deficient as the assessee did not make a functional comparison which was sought to be made before the Hon’ble High Court. Thus, it is manifest from this judgment of the Hon’ble Delhi High Court in ST Microelectronics (supra) that functional comparability has to be necessarily considered before including or excluding a company from the list of comparables. Nowhere has it been laid down in this case that a company with higher or lower turnover can be excluded merely for this reason. We, therefore, do not find any relevance of this judgment in so far as the issue before us is concerned.

Resultantly, following the ratio laid down in Cryscapital Investment 26 Advisors (supra) and Rampgreen Solutions Pvt. Ltd (supra,) Bharat Glass Tube Ltd. is directed to be included in the final set of comparables.

(ii) Triveni Glass Ltd. 9.1. It has been noticed in para 5.10 of the TPO’s order that Triveni Glass Ltd. suffered loss from operations. The TPO has further recorded that this company was persistent loss making company and, hence, was not a good comparable. The assessee is aggrieved against the exclusion of this company.

9.2. After going through the relevant material, we find that the TPO excluded this company from the list of comparables simply on the ground that there was loss from operations during the year and it was consistently in red in earlier years as well. We have gone through the Annual report of this company and the assessee’s submissions before the TPO qua this company, a copy of which is available on page 259 of the paper book. The assessee stated that there was profit of Rs.14.89 crore earned by this company, after considering write back of interest and transfer of debenture redemption reserves to its Profit & Loss Account and if the exclusion of these extraordinary items was made, there would be loss from operations to the tune of Rs.1.69 crore. There is no reference to any consistent losses incurred by this company, as has been recorded by the TPO in his order. In so far as the profit for this year is concerned, we find that Triveni Glass Ltd. earned profit of Rs.14.89 crore which was after write back of interest and transfer of debenture redemption reserves to the Profit & Loss Account. While discussing the comparability of Bharat Glass Tube Ltd. above, we have observed that the Hon’ble jurisdictional High Court has held that a lower or a higher profit rate/turnover cannot be a criteria for exclusion of a company.

Unless it is shown that there were losses due to extraordinary circumstances which were only case specific, a probable comparable company cannot be excluded from the list of comparables. As there are no extraordinary reasons for incurring of loss of Triveni Glass Ltd. for the year and this company is not a consistent loss making company, we hold that the same cannot be excluded. We order accordingly.

(iii) Gujarat Guardian Ltd. 10.1. The TPO included this company in the list of comparables by noticing that it was one of the manufacturers of float glass. The assessee’s objections that it was earning dividend income and was also having cheaper power supply, were found to be unconvincing. The TPO observed that while computing the margin of this company, income from dividend, being a non-operational income, was liable to be ignored. As regards the assessee’s contention about adjustment on account of power consumption, the TPO found that the assessee did not advance any reason showing difference in power charges. The other objection of the assessee that it was paying huge royalty and Gujarat Guardian Ltd. was not paying, was also found untenable because Gujarat Guardian Ltd. was paying technical know-how fees to its associated enterprise. That is how, the TPO treated this company as comparable.

10.2. After considering the rival submissions and perusing the relevant material on record, we find the assessee’s objections unsustainable. The TPO has thoroughly dealt with all the objections raised by the assessee, such as, earning of dividend income by Gujarat Guardian, difference in power consumption and payment of royalty/fees for technical services, etc. The ld. AR has not brought any material on record to fortify his contention about difference in power consumption rates of the assessee vis-à-vis this company. Accordingly, we are of the considered opinion that the TPO was right in including this company in the list of comparables.

12.1. The only other ground raised in this appeal is against addition of Rs.4,10,000/- made u/s 14A of the Act.

12.2. Briefly stated, the facts of the case are that the assessee earned dividend income of Rs.4,12,299/- which was claimed as exempt u/s 10(34) of the Act. The AO invoked Rule 8D and computed disallowance at Rs.4,10,000/- u/s 14A. This addition is under challenge before us.

12.3. We have heard the rival submissions and perused the relevant material on record. The assessment year under consideration is 2006-07.

The Hon’ble jurisdictional High Court in Maxopp Investments Ltd. Vs. CIT (2012) 347 ITR 272 (Del), has held that the provisions of Rule 8D are applicable only from the assessment year 2008-09. It has further been held that in the period anterior to that, the disallowance is required to be made on some reasonable basis. In view of the judgment of the Hon’ble jurisdictional High Court on the point, we cannot approve the view taken by the AO in computing the disallowance u/s 14A as per the mandate of Rule 8D of the Income-tax Rules. Accordingly, the impugned order is set aside on this issue and the matter is restored to the file of the AO for making disallowance u/s 14A on some reasonable basis as has been held by the Hon’ble jurisdictional High Court in the afore noted case.

The order pronounced in the open court on 06.04.2016.