EXI Service Com (India) (P) Ltd, V. ACIT Circle-11 (1),

ITA 1939/DEL/2008

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7533 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 17-12-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 19-05-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Rule of consistency; Additional evidence; Working capital adjustments; Cost of acquisition; Avoidance of tax
• Section: 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI DELHI BENCH: I NEW DELHI DELHI BENCH: I NEW DELHI DELHI BENCH: I NEW DELHI BEFORE SHRI R. S. SYAL, AM AND SH. GEORGE GEORGE K. , JM I.T.A .NO. 1939/DEL/2008 ASSESSMENT YEAR : 2003-04 EXL SERVICE. COM (INDIA) PVT. LTD. VS. .. . ASSTT. CIT 103-A, ASHOKA ESTATE CIRCLE-11(1) BARAKHAMBA ROAD, NEW DELHI. NEW DELHI-110001 PAN: AAACE PAN: AAACE PAN: AAACE PAN: AAACE5174C 5174C 5174C 5174C I.T.A .NO.1981 /DEL/2008 ASSESSMENT YEAR : 2003-04 DCIT, VS. EXL SERVICES.COM (I) P. LTD., CIRCLE 11 (1), 103-A, ASHOKA ESTATE, NEW DELHI. BARAKHAMBA ROAD, NEW DELHI 110 001. PAN: AAACE5174C PAN: AAACE5174C PAN: AAACE5174C PAN: AAACE5174C (APPELLANTS) (RESPONDENTS) ASSESSEE BY : SHRI AJAY VOHRA, SR. ADV., SHRI NEER AJ JAIN, ADVOCATE AND SHRI ABHISHEK AGARWAL, CA REVENUE BY : SHRI PEEYUSH JAIN, CIT. DR ORDER ORDER ORDER ORDER PER PER PER PER R. S. SYAL, AM : R. S. SYAL, AM : R. S. SYAL, AM : R. S. SYAL, AM : THESE CROSS-APPEALS, ONE BY THE ASSESSEE AND THE OT HER BY THE REVENUE, ARISE OUT OF THE ORDER PASSED BY TH E COMMISSIONER OF INCOME TAX (APPEALS) ON 20.03.2008 IN RELATION TO THE ASSESSMENT YEAR 2003-04. 2 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE IS AN I.T. ENABLED COMPANY PROVIDING TRANSACTION PROCE SSING SERVICES AND VOICE BASED CUSTOMER CARE SERVICES TO THE CUSTOMERS OF ITS ASSOCIATED ENTERPRISES (AES). THE ASSESSEE, INTER ALIA, REPORTED AN INTERNATIONAL TRANSACTION O F TRANSACTION PROCESSING AND INTERNET AND VOICE BASED CUSTOMER CA RE SERVICES WORTH RS.9,78,563,935/-. TO DEMONSTRATE T HAT THIS INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH PRICE (ALP), THE ASSESSEE SELECTED TRANSACTIONAL NET MARGIN METHOD ( TNMM) AS THE MOST APPROPRIATE METHOD WITH THE PROFIT LEVEL I NDICATOR (PLI) OF OPERATING PROFIT TO TOTAL COST (OP/TC). AS AGAINST ITS PLI AT 5.62%, THE ASSESSEE SHOWED WEIGHTED PLI OF SEVEN COMPARABLE COMPANIES AT 9.18%. THE TRANSFER PRICING OFFICER (TPO) DID NOT TREAT TWO COMPANIES AS COMPARABLE, NA MELY, MAPRO INDUSTRIES LTD. AND NUCLEUS NETSOFT AND GIS I NDIA LTD., FOR THE REASONS GIVEN IN HIS ORDER. HE WORKED OUT O P/TC OF THE REMAINING FIVE COMPANIES AT 18.46%, WHICH RESULTED INTO EVENTUAL ADDITION ON ACCOUNT OF TRANSFER PRICING AD JUSTMENT AMOUNTING TO RS.13,40,26,353/-. 3. THE ASSESSEE CHALLENGED THE SAID ADDITION OF RS.13.40 CRORE BEFORE THE LD. CIT(A). AFTER CONSIDERING VARI OUS OBJECTIONS 3 RAISED BY THE ASSESSEE, THE LD. CIT(A) HELD THAT TH E ONLY CURRENT YEARS DATA WAS TO BE USED; THE TWO COMPANIES EXCL UDED BY THE TPO WERE LIABLE TO BE INCLUDED IN THE LIST OF C OMPARABLES; ONE COMPANY, NAMELY, GILTEDGE INFOTECH SERVICES LTD ., WAS NOT COMPARABLE; ARITHMETIC MEAN OF THE OPERATING PROFIT MARGIN, AFTER ADJUSTMENT OF WORKING CAPITAL DIFFERENCES, WA S TO BE COMPUTED AND CONSIDERED; AND THE ASSESSEE WAS ENTIT LED TO + 5% ADJUSTMENT IN TERMS OF THE PROVISO TO SECTION 92 C OF THE ACT. BOTH THE SIDES ARE IN APPEAL OPPOSING THE IMPU GNED ORDER TO THE EXTENT INDICATED IN THEIR RESPECTIVE APPEALS . 4. WE HAVE HEARD THE RIVAL SUBMISSIONS IN TH E LIGHT OF MATERIAL PLACED BEFORE US AND DECISIONS RELIED UPON . THE ASSESSEE HAS CHALLENGED SOME OF FACETS OF THE ADDIT ION MADE TOWARDS TRANSFER PRICING ADJUSTMENT, WHICH WE WILL DEAL WITH ONE BY ONE. I. ADJUSTMENT FOR DIFFERENCE IN DEPRECIATION RATES 5.1. THE FIRST ISSUE TAKEN UP BY THE LD. AR, RAI SED THROUGH GROUND 6(II) OF THE ASSESSEES APPEAL, IS AGAINST NOT GRANTING ANY ADJUSTMENT ON ACCOUNT OF DEPRECIATION CLAIMED B Y THE ASSESSEE IN ITS PROFIT & LOSS ACCOUNT AT THE RATES HIGHER THAN 4 THOSE STIPULATED IN SCHEDULE XIV TO THE INDIAN COMP ANIES ACT, 1956 (HEREINAFTER ALSO CALLED THE COMPANIES ACT). HE SUBMITTED THAT THE ASSESSEE CHARGED DEPRECIATION IN ITS P&L ACCOUNT ON STRAIGHT LINE METHOD (SLM) AT THE RATES HIGHER THAN THOSE PRESCRIBED UNDER SCHEDULE XIV OF THE COMPANIE S ACT, WHEREAS THE COMPARABLE COMPANIES CHARGED DEPRECIAT ION AT THE RATES SPECIFIED IN THE SCHEDULE, WARRANTING ADJ USTMENT IN THE OPERATING PROFIT MARGINS. 5.2. BEFORE DECIDING THE POSSIBILITY OF ALLOWING ANY ADJUSTMENT ON THIS COUNT, WE CONSIDER IT SINE QUA NON TO ASCER TAIN THE FACTUAL POSITION AS STATED BY THE LD. AR. IT WAS C ANDIDLY ACCEPTED THAT THOUGH THIS ISSUE WAS NOT TAKEN UP EI THER BEFORE THE TPO OR THE LD. CIT(A), BUT SIMILAR CONTENTION WAS MADE BEFORE THE DISPUTE RESOLUTION PANEL (DRP) FOR THE A SSESSMENT YEARS 2006-07 AND 2009-10. HE SUBMITTED THAT THE DR P CONCURRED WITH THE ASSESSEES CONTENTION ON THIS SC ORE FOR BOTH THE YEARS. IT WAS ALSO POINTED OUT THAT THOUGH THE REVENUE COULD NOT HAVE FILED APPEAL AS PER LAW AGAINST THE ORDER OF THE AO, GIVING EFFECT TO THE DIRECTION OF THE DRP, FOR THE A.Y. 2006- 07, BUT THE SAME WAS POSSIBLE FOR THE A.Y. 2009-10. HE PUT FORTH THAT THE REVENUE DID PREFER APPEAL AGAINST TH E AOS 5 ORDER, GIVING EFFECT TO THE DRPS DIRECTION FOR THE A.Y. 2009-10, BUT SUCH DIRECTION OF ALLOWING ADJUSTMENT ON ACCOUN T OF HIGHER DEPRECIATION RATES, HAS NOT BEEN ASSAILED. ACCENTUA TING ON THE PRINCIPLE OF CONSISTENCY, IT WAS PLEADED THAT SIMIL AR VIEW BE TAKEN FOR THE INSTANT YEAR AS WELL. 5.3. AS THIS ISSUE HAS BEEN TAKEN UP BEFORE US F OR THE FIRST TIME, WE CONSIDER IT EXPEDIENT TO VERIFY THE VERACI TY OF THE ASSESSEES CONTENTION ABOUT IT CHARGING DEPRECIATIO N AT HIGHER RATES IN COMPARISON WITH ITS COMPARABLES. THE QUEST ION OF ADJUDICATING SUCH ISSUE WOULD ARISE ONLY IF THERE, IN FACT, EXISTS SOME DIFFERENCE IN THE RATES AT WHICH THE ASSESSEE CHARGED DEPRECIATION VIS-A-VIS ITS COMPARABLES. IN THIS RE GARD, IT IS NOTICED THAT THE ASSESSEE CHARGED DEPRECIATION IN I TS PROFIT & LOSS ACCOUNT TO THE TUNE OF RS.19,49,90297/-. SCHED ULE OF FIXED ASSETS IS AVAILABLE ON PAGE 115 OF THE PAPER BOOK, INDICATING OPENING BALANCE OF THE ASSETS, ADDITIONS, DISPOSALS / ADJUSTMENTS AND CLOSING BALANCE. SIMILARLY, THE AMO UNT OF OPENING DEPRECIATION, DISPOSAL/ADJUSTMENTS AND DEPR ECIATION FOR THE YEAR UNDER CONSIDERATION HAVE ALSO BEEN GIV EN. IT CAN BE SEEN FROM NOTE 2(A) OF NOTES TO THE FINANCIAL S TATEMENTS, A COPY OF WHICH IS AVAILABLE ON PAGE 112 OF THE PAP ER BOOK, 6 THAT: DEPRECIATION ON FIXED ASSETS IS PROVIDED PRO -RATA TO THE PERIOD OF USE, BASED ON THE STRAIGHT-LINE METHOD AT THE RATES SPECIFIED IN SCHEDULE XIV OF THE COMPANIES ACT, 195 6, OR BASED ON THE MANAGEMENTS ASSESSMENT OF THE ECONOMIC USEF UL LIFE OF THE ASSET, WHICHEVER IS HIGHER, AS FOLLOWS : - LEASEHOLD IMPROVEMENTS 33.33% PLANT AND MACHINERY (INCLUDING COMPUTERS) 33.33% OFFICE EQUIPMENT 20.00% - 33.33% FURNITURE AND FIXTURES 20.00% SOFTWARE 33.33% MOTOR VEHICLES 33.33% 5.4. HERE, IT IS PERTINENT TO NOTE THAT SCHEDULE XIV TO THE COMPANIES ACT CONTAINS RATES OF DEPRECIATION ON VA RIOUS ASSETS UNDER DIFFERENT BLOCKS, BOTH ON WRITTEN DOWN VALUE AND STRAIGHT LINE BASIS. SOME OF THE RELEVANT RATES OF DEPRECIAT ION GIVEN IN THE SCHEDULE ARE AS UNDER : - NATURE OF ASSETS W.D.V. RATE (%) STRAIGHT LINE RATE (%) I. (A) BUILDINGS (OTHER THAN FACTORY BUILDINGS) 5 1.63 (B) FACTORY BUILDING 10 3.34 7 II. PLANT AND MACHINERY (I). GENERAL RATE APPLICABLE TO (A)PLANT & MACHINERY) 13.91 4.75 A. 5. MOTOR-CARS, MOTOR-CYCLES, SCOOTERS AND OTHER MOPEDS 25.89 9.5 C.4. DATA PROCESSING MACHINES INCLUDING COMPUTERS 40 16. 21 III. FURNITURE & FITTING 1. GENERAL RATE 18.1 6.33 5.5. ON A COMPARATIVE ANALYSIS OF SOME OF THE RA TES AT WHICH THE ASSESSEE CHARGED DEPRECIATION UNDER SLM IN ITS PROFIT AND LOSS ACCOUNT AND THOSE AS PER SCHEDULE XIV TO THE COMPANIES ACT, IT CAN BE SEEN THAT WHEREAS THE SLM RATE OF DE PRECIATION ON PLANT & MACHINERY AS PER THE SCHEDULE IS 4.75%, THE ASSESSEE CHARGED DEPRECIATION AT 33.33%. SIMILAR IS THE POSITION REGARDING OTHER ASSETS AS WELL. THE SLM RA TE OF DEPRECIATION PRESCRIBED UNDER THE SCHEDULE XIV ON C OMPUTERS IS 16.21%, WHEREAS THE ASSESSEE CHARGED DEPRECIATIO N AT AN ENHANCED SLM RATE OF 33.33%. IN LIKE MANNER, MOTOR VEHICLES HAVE BEEN DEPRECIATED BY THE ASSESSEE AT 33.33% ON SLM, AS AGAINST THE SLM RATE OF DEPRECIATION ON MOTOR VEHIC LES UNDER 8 THE SCHEDULE AT 9.50%. THIS SHOWS THAT THE ASSESSE E CHARGED DEPRECIATION IN ITS PROFIT & LOSS ACCOUNT AT THE SL M RATES HIGHER THAN THOSE PROVIDED IN THE SCHEDULE XIV TO THE COMP ANIES ACT. 5.6. NOW LET EXAMINE THE RATES AT WHICH THE COMPARA BLE COMPANIES PROVIDED DEPRECIATION IN THEIR RESPECTIVE P&L ACCOUNTS. THE LD. AR SUBMITTED THAT THE RATES OF DE PRECIATION CHARGED BY MAPRO INDUSTRIES LTD. AND KARVY CONSULTA NTS LTD. IN COMPARISON WITH THE RATES PRESCRIBED UNDER SCHEDULE XIV OF THE COMPANIES ACT MAY BE TAKEN AS CORRECT, WITHOUT ANY FURTHER NEED FOR ADJUSTMENT. TAKING US THROUGH THE ANNUAL R EPORT OF APEX LOGICAL DATA CONVERSION PVT. LTD., IT WAS SHOW N THAT THIS COMPANY PROVIDED DEPRECIATION ON THEIR FIXED ASSETS AT THE SLM RATES GIVEN AT PAGE 813 OF THE PAPER BOOK. ON A PER USAL OF THE RATES ON WHICH DEPRECIATION HAS BEEN CHARGED BY THI S COMPANY UNDER SLM, IT CAN BE SEEN THAT ALBEIT SOME OF THE D EPRECIATION RATES ACCORD WITH THOSE PRESCRIBED IN SCHEDULE XIV, BUT, THERE IS DIFFERENCE IN SOME CASES E.G. AIR CONDITIONER HA S BEEN DEPRECIATED AT 6.33% WHEREAS THE GENERAL RATE OF DE PRECIATION ON PLANT & MACHINERY UNDER SCHEDULE XIV IS 4.75%. SIMILAR IS THE POSITION REGARDING EPABX AND FAX ON WHICH THE C OMPANY CHARGED DEPRECIATION UNDER SLM AT 6.33%, WHEREAS TH E RATE 9 PRESCRIBED UNDER SCHEDULE XIV IS 4.75%. THERE ARE S OME OTHER ITEMS ALSO ON WHICH THE RATES OF DEPRECIATION CHARG ED BY THIS COMPANY ARE AT VARIANCE WITH THE RATES GIVEN UNDER SCHEDULE XIV OF THE COMPANIES ACT. 5.7. THE NEXT COMPANY IS ACE SOFTWARE EXPORTS LT D. ANNUAL ACCOUNTS OF THIS COMPANY INDICATE THROUGH NOTES TO ACCOUNTS THAT IT PROVIDED DEPRECIATION ON SLM IN ACCORDANCE WITH THE RATES SPECIFIED IN SCHEDULE XIV OF THE COMPANIES AC T. THE NEXT COMPANY IS NUCLEUS NETSOFT AND GIS INDIA LTD. NOTES TO ACCOUNT OF THIS COMPANY SHOW THAT IT ALSO PROVIDED DEPRECIA TION ON SLM AT THE RATES PRESCRIBED UNDER SCHEDULE XIV OF THE C OMPANIES ACT, EXCEPT FOR COMPUTERS ON WHICH DEPRECIATION WAS PROVIDED ON WRITTEN DOWN VALUE BASIS. LAST COMPANY IS FORTUN E INFOTECH LTD. ANNUAL ACCOUNTS OF THIS COMPANY MENTION THAT I T CLAIMED DEPRECIATION UNDER SLM AT THE RATES PRESCRIBED UNDE R SCHEDULE XIV OF THE COMPANIES ACT. 5.8. THE ABOVE DISCUSSION IS A POINTER TOWARDS T HE FACT THAT THE ASSESSEE CHARGED DEPRECIATION AT HIGHER RATES O N ITS ASSETS UNDER SLM IN COMPARISON WITH THESE FOUR COMPARABLE COMPANIES, WHICH LARGELY CLAIMED DEPRECIATION UNDER SLM AS 10 PER SCHEDULE XIV RATES, SUBJECT TO THE EXCEPTIONS A S MENTIONED ABOVE. 5.9. THE LD. AR PUT FORTH THAT TO NEUTRALIZE TH E EFFECT OF THE FAT AMOUNT OF DEPRECIATION CHARGED AT SUCH HIGHER R ATES BY THE ASSESSEE, A SUITABLE ADJUSTMENT WAS REQUIRED TO BE GIVEN IN THE COMPUTATION OF ITS OPERATING PROFIT. IN OPPUGNATIO N, THE LD. DR STRONGLY OBJECTED TO THE ALLOWING OF SUCH ADJUSTMEN T BY CONTENDING THAT SUCH ADJUSTMENT, IF ALLOWED, WOUL D HAVE SERIOUS REPERCUSSIONS ON THE PROFITS OF THE ASSESSE E COMPANY OVER THE YEARS INASMUCH AS THE PROFIT OF THE ASSESS EE FOR THIS YEAR DUE TO HIGHER RATES OF DEPRECIATION WOULD HAVE IMPACT OVER THE PROFIT OF THE COMPANY FOR SUCCEEDING YEARS , WHEN THE AMOUNT OF DEPRECIATION WOULD STAND REDUCED OR TOTAL LY WIPED OUT IN COMPARISON WITH COMPARABLES. CONSIDERING ONE YEAR IN ISOLATION WOULD DEFEAT THE COMPARABILITY FOR THE SU CCEEDING YEARS. IT WAS STATED THAT THE HIGHER AMOUNT OF DEPR ECIATION DUE TO HIGHER RATES FOR THE INITIAL YEARS GETS NEUTRALI ZED WITH THE RESULTANT LOWER AMOUNT OF DEPRECIATION FOR THE LATE R YEARS, THEREBY ULTIMATELY HAVING NO IMPACT ON THE OVERALL PROFITABILITY IN LONG RUN. HE RELIED ON CERTAIN DECISIONS, WHICH WE WILL SHORTLY ADVERT TO, FOR BOLSTERING HIS SUBMISSION IN THIS RE GARD. 11 5.10. THE PRIMARY QUESTION WHICH FALLS FOR OUR C ONSIDERATION IS WHETHER ANY ADJUSTMENT TO THE OPERATING PROFITS CAN BE MADE ON ACCOUNT OF THE DIFFERENCE IN THE RATES OF DEPREC IATION ON VARIOUS ASSETS. IN ORDER TO FIND AN ANSWER TO THIS QUESTION, IT IS RELEVANT TO NOTE THE MANDATE OF RULE 10B(1)(E), WHI CH EMBODIES THE MODUS OPERANDI FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION UNDER TNMM, AS UNDER : - (E) TRANSACTIONAL NET MARGIN METHOD, (E) TRANSACTIONAL NET MARGIN METHOD, (E) TRANSACTIONAL NET MARGIN METHOD, (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO CO STS 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 ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSA CTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF A NY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRIS ES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CL AUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRI CE IN RELATION TO THE INTERNATIONAL TRANSACTION. 12 5.11. A PERUSAL OF THE ABOVE RULE DIVULGES THAT SUB-CLAUSE (I) OF RULE 10B(1)(E) PROVIDES FOR DETERMINING THE NET OPERATING PROFIT MARGIN REALISED BY THE ASSESSEE FROM ITS INT ERNATIONAL TRANSACTION. SUB-CLAUSE (II) TALKS OF COMPUTING NE T PROFIT MARGIN REALISED BY A COMPARABLE UNCONTROLLED COMPANY. SUB- CLAUSE (III) PROVIDES THAT THE NET PROFIT MARGIN REALISED BY A COMPARABLE COMPANY, DETERMINED AS PER SUB-CLAUSE (I I) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, I F ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, ..... WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IT IS THIS ADJUSTED NET PROFIT MARGIN OF THE COMPARABLE COMPAN IES, AS DETERMINED UNDER SUB-CLAUSE (III), WHICH IS USED FO R THE PURPOSES OF MAKING COMPARISON WITH THE NET PROFIT M ARGIN REALISED BY THE ASSESSEE FROM ITS INTERNATIONAL TRA NSACTION AS PER SUB-CLAUSE (I). SUB-RULE (2) OF RULE 10B PROVI DES THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFER ENCE TO CERTAIN FACTORS WHICH HAVE BEEN ENUMERATED THEREIN. RULE 10B(3) STATES THAT AN UNCONTROLLED TRANSACTION SHAL L BE COMPARABLE TO AN INTERNATIONAL TRANSACTION, IF EITH ER THERE ARE 13 NO DIFFERENCES BETWEEN THE TWO OR A REASONABLY ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MATERIAL EF FECTS OF SUCH DIFFERENCES. WHEN WE READ SUB-CLAUSES (II) & (III) OF RULE 10B(1)(E) IN JUXTAPOSITION TO SUB-RULES (2) & (3) O F RULE 10B, THE POSITION WHICH EMERGES IS THAT THE NET OPERATING PR OFIT MARGIN OF THE COMPARABLE COMPANIES IS REQUIRED TO BE ADJUS TED IN SUCH A MANNER SO AS TO BRING BOTH THE INTERNATIONAL TRAN SACTION AND COMPARABLE CASES AT THE SAME PEDESTAL. IN OTHER WOR DS, IF THERE ARE NO DIFFERENCES IN THESE TWO, THEN THE NE T OPERATING PROFIT MARGIN OF THE COMPARABLE COMPANIES SHOULD BE CONSIDERED AS A BENCHMARK, BUT IN CASE THERE IS SO ME DIFFERENCE, THEN SUCH DIFFERENCE SHOULD BE IRONED O UT BY MAKING SUITABLE ADJUSTMENT TO THE OPERATING PROFIT MARGIN OF THE COMPARABLES. THAT IS THE WAY FOR BRINGING BOTH THE TRANSACTIONS, NAMELY, THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION, ON THE SAME PL ATFORM FOR MAKING A MEANINGFUL AND EFFECTIVE COMPARISON. 5.12. NOW THE MOOT QUESTION IS AS TO WHETHER VA RIATION IN THE RATES OF DEPRECIATION CAN BE CONSIDERED AS A RELEVA NT FACTOR NECESSITATING ADJUSTMENT IN THE OPERATING PROFIT MA RGIN OF THE COMPARABLES. THE LD. DR RELIED ON DCIT VS. SUMI MOTHERSON 14 INNOVATIVE ENGINEERING LTD. (2014) 150 ITD 195 (DEL HI) AND SOME OTHER DECISIONS TO BRING HOME HIS POINT OF VIE W OF NOT CARRYING OUT ANY ADJUSTMENT ON ACCOUNT OF DIFFERENC E IN DEPRECIATION. 5.13. THERE CAN BE NO DISPUTE ON THE PRINCIPLE T HAT CALCULATION OF OPERATING PROFIT AS ENVISAGED UNDER RULE 10B(1 )(E) EMBRACES CUMULATIVE EFFECT OF ALL THE ITEMS OF INCO ME AND EXPENSES WHICH ARE OF OPERATING NATURE. ORDINARILY, THERE CAN BE NO QUESTION OF CONSIDERING EACH ITEM OF SUCH OPE RATING EXPENSES OR INCOME IN ISOLATION DE HORS THE OTHER EXPENSES TO CLAIM ADJUSTMENT ON THE GROUND OF SUCH EXPENDITURE OR INCOME OF THE ASSESSEE ON THE HIGHER SIDE SEEN INDIVIDUALL Y OR AS A PERCENTAGE OF OTHER OPERATING EXPENSE/INCOMES IN CO MPARISON WITH ITS COMPARABLES. THE REASON IS OBVIOUS THAT WH EN WE CONSIDER THE OPERATING PROFIT MARGIN, THE EFFECT OF ALL THE INDIVIDUAL HIGHER OR LOWER ITEMS OF EXPENSES OR INC OMES GETS SUBMERGED IN THE OVERALL OPERATING PROFIT MARGIN, R ULING OUT THE NEED FOR ANY ADJUSTMENT ON ONE-TO-ONE COMPARISON. O NE COMPANY MAY HAVE TAKEN A BUILDING ON RENT FOR CARRY ING ON ITS BUSINESS, IN WHICH CASE, IT WILL PAY RENT WHICH WIL L FIND ITS PLACE IN THE OPERATING COSTS. FOR THE PURPOSES OF MAKING COMPARISON, 15 ONE CANNOT CONTEND THAT THE PAYMENT OF RENT BY ONE ENTERPRISE IN COMPARISON WITH A NON-PAYMENT OF RENT BY ANOTHER , SHOULD BE NEUTRALIZED BY GIVING PROPER ADJUSTMENT FROM THE OPERATING PROFIT OF THE COMPARABLE. THE MANIFEST REASON IS TH AT THE OTHER ENTERPRISE MAY HAVE ITS OWN OFFICE PREMISES AND THE AMOUNT OF DEPRECIATION ON SUCH PREMISES WILL ALSO FORM PART O F ITS OPERATING COST. WHEN WE CONSIDER THE OPERATING PROF IT OF THE FIRST ENTERPRISE WHICH IS PAYING RENT AND THEN COMP ARE IT WITH THE SECOND ENTERPRISE WHICH IS NOT PAYING ANY RENT BUT IS CLAIMING DEPRECIATION ON ITS OWN PREMISES, THE OVE RALL EFFECT OF RENT IN ONE CASE GETS COUNTERBALANCED WITH DEPRECIA TION ON PREMISES OF THE OTHER. SIMILAR IS THE POSITION OF A COMPANY HAVING PURCHASED NEW ASSETS CHARGING HIGHER AMOUNT OF DEPRECIATION ALLOWANCE IN ITS BOOKS OF ACCOUNTS VIS-A-VIS ANOTHER COMPARABLE COMPANY USING OLD ASSETS WITH LO WER AMOUNT OF DEPRECIATION. NO ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN THE AMOUNTS OF DEPRECIATION OF TWO CO MPANIES IS CALLED FOR WHEN THE OPERATING PROFITS ARE DETERMINE D BECAUSE IN THE CASE OF A COMPANY HAVING PURCHASED NEW ASSET, T HERE WILL BE LOWER REPAIR COST AND VICE VERSA . THE EFFECT OF ALL THE INDIVIDUAL ITEMS OF OPERATING EXPENSES AND INCOMES CULMINATES 16 INTO THE OPERATING PROFIT MARGIN. THAT IS WHY, THE LEGISLATURE HAS PROVIDED FOR COMPARING THE RATIO OF OPERATING PROF IT MARGIN TO A SIMILAR BASE OF THE ASSESSEE WITH THAT OF ITS COM PARABLES, THEREBY DISPENSING WITH THE NEED FOR MAKING ANY ADJ USTMENT ON ACCOUNT OF HIGHER OR LOWER AMOUNT OF INDIVIDUAL ITEMS OF EXPENSES AND INCOMES. MERELY BECAUSE THE AMOUNT OF DEPRECIATION OF ONE ENTERPRISE IS MORE OR LESS THAN THE OTHER, CAN NEVER BE A REASON TO SEEK ADJUSTMENT. SUCH HIGH ER AMOUNT OF DEPRECIATION MAY BE DUE TO LARGE SCALE OF THE CO MPANY AND HOST OF OTHER FACTORS. BY CONSIDERING PERCENTAGE OF OPERATING PROFIT MARGIN UNDER THE TNMM OF THE ASSESSEE AS WEL L AS COMPARABLES, THE HIGHER OR LOWER VOLUME OF TWO COMP ANIES BECOMES IMMATERIAL AND SO IS THE QUANTUM OF DEPRECI ATION. THE NITTY-GRITTY OF THE MATTER IS THAT NO ADJUSTMENT CA N BE ALLOWED SIMPLY FOR THE REASON THAT ONE COMPANY HAS CHARGED HIGHER AMOUNT OF DEPRECIATION VIS-A-VIS ITS COMPARABLE COMPANIES. NOT ONLY NO ADJUSTMENT ON THIS SCORE IS PERMISSIBLE , THE ASSESSEE CANNOT ALSO SEEK AN EXCLUSION OR INCLUSION OF A COMPANY ON THE GROUND THAT THE RATIO OF ITS DEPRECI ATION TO TOTAL EXPENSES IS MORE OR LESS IN COMPARISON WITH C OMPARABLES. IT IS SO FOR THE REASON THAT SUCH HIGHER PERCENTAGE OF 17 DEPRECIATION TO TOTAL EXPENSES IS MARGINALIZED BY T HE LOWER PERCENTAGE OF REPAIRS AND OTHER INCIDENTAL COSTS OF THE ASSETS AND VICE VERSA . 5.14. HOWEVER, THE POSITION MAY BE A LITTLE DI FFERENT WHEN THERE IS A DIFFERENCE IN THE RATES OF DEPRECIATION CHARGED BY TWO COMPANIES ON SIMILAR CATEGORY OF ASSETS. ONE COMPAN Y MAY ADOPT THE POLICY OF CHARGING DEPRECIATION ON ITS AS SETS IN CONFORMITY WITH THE RATES PRESCRIBED IN SCHEDULE XI V OF THE COMPANIES ACT AND OTHER COMPANY MAY ADOPT A POLICY OF CHARGING DEPRECIATION AT THE HIGHER RATES OR LOWER THAN THOSE PRESCRIBED UNDER SCHEDULE XIV. THIS CAN BE DEMONST RATED WITH THE HELP OF AN EXAMPLE. OTHER THINGS BEING EQUAL, I F THE OPERATING PROFIT OF COMPANY A, AFTER CLAIMING DEPRE CIATION OF RS.10 ON THE VALUE OF ASSET WORTH RS.50 WITH RATE O F DEPRECIATION 20%, IS RS.100, THE OPERATING PROFIT OF COMPANY B WITH EVERYTHING SAME INCLUDING THE VALUE OF ASSE TS AT RS.50, BUT WITH RATE OF DEPRECIATION 30%, WILL BE RS.95. IT SHOWS THAT THE COMPARABILITY IS JEOPARDIZED DUE TO HIGHER RATE OF DEPRECIATION CHARGED BY COMPANY B AT 30% IN COMPARI SON WITH LOWER RATE OF DEPRECIATION CHARGED BY COMPANY A AT 20%. IN SUCH A SITUATION, ALTHOUGH BOTH THE COMPANIES USE S IMILAR TYPE 18 OF ASSETS AND EVERYTHING ELSE IS ALSO EQUAL, BUT TH EIR RESPECTIVE OPERATING PROFIT PERCENTAGES UNDERGO CHANGE DUE TO HIGHER OR LOWER RATE OF DEPRECIATION, THEREBY DISTORTING THEI R COMPARABILITY. IT IS THIS DIFFERENCE IN THE AMOUNTS OF DEPRECIATION DUE TO DIFFERENT RATES OF DEPRECIATION AND NOT DUE TO DIFFERENT QUANTUMS OF DEPRECIATION SIMIPLICITOR, WHICH CALLS FOR BRINGING BOTH THE COMPANIES AT PAR. 5.15. AT THIS JUNCTURE, WE WILL CONSIDER THE RATIO OF THE DECISIONS RELIED BY THE LD. DR TO BOLSTER HIS SUBMI SSION FOR NOT GRANTING ANY ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN THE RATES OF DEPRECIATION ON SIMILAR ASSETS. IN SUMI MOTHERSON (SUPRA) , THE ASSESSEE REQUESTED FOR SUITABLE REDUCTION TOWAR DS HIGHER DEPRECIATION CHARGED BY IT, THEREBY BOOSTING ITS PE RCENTAGE OF DEPRECIATION TO SALES AT A MUCH HIGHER LEVEL THAN T HAT OF COMPARABLES. REJECTING THIS CONTENTION, THE TRIBUNA L HELD THAT IT IS NOT ALLOWED TO COMPARE EACH AND EVERY ITEM OF TH E OPERATING COST INCURRED BY THE ASSESSEE WITH SIMILAR COST IN THE CASE OF COMPARABLES TO ASK FOR ANY ADJUSTMENT. IT IS THE OV ERALL EFFECT OF ALL SUCH INDIVIDUAL ITEMS DESCENDING INTO OPERAT ING PROFIT, WHICH IS CONSIDERED FOR BENCHMARKING THE ASSESSEES INTERNATIONAL TRANSACTION AND IF THE AMOUNT OF DEPR ECIATION IS 19 DISTINCTLY COMPARED WITH COMPARABLES, LEAVING ASIDE OTHER RELATED AND CONSEQUENTIAL ITEMS, SUCH AS REPAIR COS TS ETC., THEN THE RESULTS ARE LIKELY TO BE DISTORTED. IT WAS FURT HER OBSERVED THAT TO ASK FOR ADJUSTMENT, IT IS ESSENTIAL THAT TH ERE SHOULD BE SOME INDEPENDENT AND SUBSTANTIAL REASON. IT WAS HEL D THAT : IN THE CONTEXT OF DEPRECIATION, ONE CAN RIGHTLY APPREC IATE THE NEED TO MAKE ADJUSTMENT, IF RATE OF DEPRECIATION CHARGED BY THE ASSESSEE VIS-A-VIS ITS COMPARABLES IS DIFFERENT. BUT THE SIMPLICITOR DIFFERENCE IN THE AMOUNT OF DEPRECIATIO N IS INCONSEQUENTIAL. 5.16. ALMOST SIMILAR PROPOSITION HAS BEEN LAID D OWN BY THE DELHI BENCH OF THE TRIBUNAL IN NOKIA INDIA (P) LTD. VS. DCIT 2014-TII-224-ITAT-DEL-TP BY DISAPPROVING THE EXCLUSION OF SOME COMPANIES ON THE STRENGTH OF THE FILTER OF LOW ER OR HIGHER DEPRECIATION AS A PERCENTAGE OF TOTAL COSTS. IN SO HOLDING, IT OBSERVED THAT THE HIGHER AMOUNT OF DEPRECIATION IS USUALLY COUPLED WITH THE LOWER REPAIR COST ETC., AND VICE VERSA . THAT IS HOW, IT HELD THAT : THERE CAN BE NO JUSTIFICATION IN APPLYING THE FILTER OF REJECTING THE COMPANIES WITH DEPRECIATION HIGHER OR LOWER THAN A PARTICULAR PERCENTAGE OF TOTAL COSTS. . IT IS, THUS, 20 OVERT THAT THESE TWO CASES RELIED BY THE LD. DR, IN FACT, SUPPORT THE CASE OF THE ASSESSEE RATHER THAN THE REVENUE. 5.17. ANOTHER CASE RELIED BY THE LD. DR IN 24/7 CUSTOMER COM PVT. LTD. VS. DCIT 2012-TII-143-ITAT-BANG-TP , AGAIN DOES NOT TAKE US ANY FURTHER. IN THAT CASE, THE ASSESSEE RAISED AN ADDITIONAL GROUND FOR SUITABLE ADJUSTMENT TOWARDS H IGHER RATE OF DEPRECIATION CHARGED BY THE ASSESEE VIS-A-VIS ITS COMPARBLES. IT IS PATENT FROM THE PENULTIMATE PARA OF THIS ORDE R THAT THE TRIBUNAL EVENTUALLY REMITTED THE ISSUE OF DEPRECIAT ION, AS RAISED THROUGH THE ADDITIONAL GROUND, TO THE FILE OF THE A O/TPO FOR A FRESH CONSIDERATION AND DECISION. SO, THIS ORDER AL SO DOES NOT SUPPORT THE CASE OF THE REVENUE. THE LAST CASE RELI ED BY THE LD. DR IS LASON INDIA PVT. LTD. VS. ACIT 2012-TII-47-ITAT-MAD -TP. THE ASSESSEE IN THAT CASE PROVIDED DEPRECIATION ON ASSETS UNDER SLM AT THE RATES HIGHER THAN THOSE PROVIDED I N SCHEDULE XIV, WHEREAS THE COMPARABLES PROVIDED FOR DEPRECIAT ION AS PER INCOME-TAX RULES ON WRITTEN DOWN VALUE METHOD. THE ASSESSEE CLAIMED BEFORE THE TRIBUNAL THAT IF DEPRECIATION OF THE ASSESSEE IS ALSO BROUGHT TO THE W.D.V. METHOD, THEN ITS OPER ATING PROFIT WOULD BE MORE. THE TRIBUNAL REJECTED THIS CLAIM OF THE ASSESSEE. IN OUR CONSIDERED OPINION, THE ADJUSTMENT HAS BEEN RIGHTLY 21 DENIED BECAUSE THE METHOD OF CHARGING DEPRECIATION WAS DIFFERENT AND FURTHER THE ASSESSEE SOUGHT ADJUSTMEN T FROM ITS PROFITS, WHICH IS NOT PERMISSIBLE AS WILL BE SEEN INFRA. THE LD. AR ALSO CANDIDLY ADMITTED THAT HIS POINT WAS LIMITE D TO THE ADJUSTMENT DUE TO DIFFERENCE IN THE RATES OF DEPREC IATION FROM SLM OF THE ASSESSEE TO SLM OF THE COMPARABLES AND N OT OTHERWISE AS IS THE POSITION IN LASON INDIA PVT. LTD. (SUPRA). 5.18. THE SUM AND SUBSTANCE OF THE ABOVE CASES IS THAT NEITHER ANY ADJUSTMENT CAN BE MADE FOR A SIMPLICITO R HIGHER/LOWER AMOUNT OF DEPRECIATION IN ITSELF OR AS A PERCENTAGE OF THE TOTAL OPERATING EXPENSES NOR AN OTHERWISE CO MPARABLE COMPANY CEASES TO BE COMPARABLE BECAUSE OF THE ABOV E FACTORS. HOWEVER, AN ADJUSTMENT IS CALLED FOR WHEN THERE IS A DIFFERENCE IN THE RATES OF DEPRECIATION ON SIMILAR TYPES OF ASSETS UNDER SIMILAR METHOD OF CHARGING DEPRECIATION. AT T HE COST OF REPETITION, WE WANT TO ACCENTUATE THE LINE OF DISTI NCTION BETWEEN TWO CASES, VIZ., FIRST IN WHICH THE AMOUNT OF DEPRECIATION IS MORE DUE TO HIGHER VALUE OF THE ASS ETS EMPLOYED BY ONE COMPANY AND SECOND, IN WHICH THE AM OUNT OF DEPRECIATION IS MORE NOT DUE TO HIGHER VALUE OF THE ASSETS EMPLOYED BY ONE COMPANY BUT DUE TO HIGHER RATES OF 22 DEPRECIATION. WHEREAS, THE FIRST SITUATION WOULD NO T CALL FOR ANY ADJUSTMENT, THE SECOND ONE WOULD WARRANT ADJUSTMENT IN THE OPERATING PROFIT OF THE COMPARABLE COMPANY. THAT IS WHERE RULE 10B(1)(E) (II) & (III) READ WITH RULES 10B(2) & (3) COME INTO PLAY FOR NEUTRALISING THE DIFFERENCE IN THE OPERATING PR OFITS OF THE TWO OTHERWISE COMPARABLE COMPANIES BY MAKING A REASONABLY ACCURATE ADJUSTMENT ... TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES . 5.19. NOW THE NEXT QUESTION IS AS TO IN WHOSE HA NDS THE ABOVE ADJUSTMENT SHOULD BE ALLOWED. THE LD. AR ARGU ED THAT THE EXCESSIVE RATE OF DEPRECIATION CHARGED BY THE A SSESSEE SHOULD BE LOWERED TO THE RATES AS PRESCRIBED UNDER SCHEDULE XIV TO THE COMPANIES ACT SO AS TO BRING A PARITY BE TWEEN THE RATES OF DEPRECIATION CHARGED BY THE ASSESSEE VIS-A-VIS ITS COMPARABLES. THIS CONTENTION IN OUR CONSIDERED OPIN ION, IS NOT TENABLE. IT HAS BEEN NOTICED ABOVE THAT RULE 10B(1) (E)(III) CONTEMPLATES THE MAKING OF ADJUSTMENT TO THE NET PR OFIT MARGIN OF THE COMPARABLES DETERMINED UNDER SUB-CLAUSE (II) TO RULE 10B(1)(E). EVEN RULE 10B(3) ALSO REQUIRES THE MAKIN G OF ADJUSTMENT IN THE HANDS OF COMPARABLES TO ELIMINATE THE MATERIAL EFFECTS OF DIFFERENCES. THUS, THE ADJUSTME NT CAN BE 23 MADE ONLY IN THE HANDS OF THE COMPARABLES OPERATIN G PROFIT MARGIN AND NOT TO THAT OF THE ASSESSEE. 5.20. THE LD. DR PLEADED FOR NOT ALLOWING ANY ADJU STMENT ON THIS SCORE BY ARGUING THAT THE DIFFERENCE IN THE RATES OF DEPRECIATION BY THE ASSESSEE AND COMPARABLES DOES N OT AFFECT THE COMPUTATION OF THE NET OPERATING PROFIT MARGIN ON A LONG TERM BASIS. HE STATED THAT THE HIGHER RATES OF DEPR ECIATION WOULD NO DOUBT LOWER THE PROFIT IN THE EARLIER YEAR S, BUT SUCH REDUCTION OF PROFITS WOULD BE SET OFF WITH THE HIGH ER AMOUNT OF PROFIT DUE TO LOWER AMOUNT OF DEPRECIATION IN THE L ATER YEARS, THEREBY, NULLIFYING THE EFFECT OF SUCH HIGHER RATE OF DEPRECIATION OVER THE LIFE TIME OF AN ASSET. ASSERTING ON THIS ARGUMENT, THE LD. DR STATED THAT NO ADJUSTMENT COULD BE ACCORDIN GLY ALLOWED. 5.21. THIS CONTENTION, IN OUR CONSIDERED OPINION DOES NOT MOVE FORWARDS THE CASE OF REVENUE FOR THE REASON TH AT CHAPTER X OF THE ACT REQUIRES COMPUTATION OF INCOME FROM IN TERNATIONAL TRANSACTIONS HAVING REGARD TO ALP ON YEAR TO YEAR B ASIS. THERE IS NO PROVISION FOR DETERMINING THE ALP OF AN INTER NATIONAL TRANSACTION FOR MORE THAN ONE YEAR IN A CONSOLIDATE D MANNER. UNLIKE THE HITHERTO DETERMINATION OF UNDISCLOSED IN COME FOR THE BLOCK PERIOD AS PROVIDED UNDER CHAPTER XIV-B OF THE ACT, AS 24 OPPOSED TO YEAR-TOYEAR BASIS, THERE IS NO SUCH PRO VISION FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION FOR MORE THAN ONE YEAR BY CONSIDERING A FEW YEARS AS ONE UNI T DURING WHICH AN ASSET IS PUT TO USE. NOT ONLY IS THIS EXER CISE IMPERMISSIBLE UNDER THE LAW, BUT IS ALSO IMPRACTICA L OF APPLICATION. VARIOUS ASSETS WILL HAVE VARYING USEF UL LIFE SPANS DUE TO DIFFERENT RATES OF DEPRECIATION AND THEIR US EFUL LIFE WILL NOT TERMINATE AT ONE COMMON POINT OF TIME, SO AS TO FACILITATE THE MAKING OF ADJUSTMENT AT SUCH POINT OF TIME. BE THAT AS IT MAY, SINCE THE LEGISLATURE REQUIRES DETERMINATION O F ALP OF AN INTERNATIONAL TRANSACTION ON YEARLY BASIS, WHAT WE NEED TO DO IS TO FIND OUT THE EFFECT OF DEPRECIATION ON YEAR TO Y EAR BASIS AND NOT ON A CONSOLIDATED BASIS EXTENDING TO THE LIFE T IME OF SUCH ASSETS. 5.22.1. THE LD. DR MADE STILL ANOTHER CONTENTION OPPOSING THE ASSESSEES STAND. IT WAS ARGUED THAT RE-CALCULATING THE OPERATING PROFITS OF THE COMPARABLE COMPANIES BY PR OVIDING DEPRECIATION ON SLM IN THE HANDS OF COMPARABLES AT THE HIGHER RATES, AT PAR WITH THE ASSESSEES, WOULD DISTORT TH E COMPARISON. HE EXPLAINED HIS POINT OF VIEW BY STATING THAT NO D OUBT WITH THE INCREASE IN THE RATES OF DEPRECIATION OF THE COMPAR ABLES FOR THE 25 CURRENT YEAR AT PAR WITH THE ASSESSEE, WOULD ACHIEV E COMPARABILITY, BUT THIS WOULD ADVERSELY AFFECT THE CALCULATION OF OPERATING PROFIT OF THE COMPARABLES BECAUSE OF THE INCLUSION OF PROPORTIONATE DEPRECIATION ALSO ON THE ASSETS WHICH STILL APPEAR IN THEIR BOOKS BUT ACTUALLY DEPRECIATED FULLY DUE T O PARITY WITH THE ASSESSEES HIGHER RATES OF DEPRECIATION. IT WA S EXPLAINED WITH THE HELP OF AN EXAMPLE IN WHICH THE ASSESSEE I S CHARGING DEPRECIATION UNDER SLM AT THE RATE OF 33.33% ON A P ARTICULAR ASSET CONSIDERING THE USEFUL LIFE OF THREE YEARS, A S AGAINST THE COMPARABLES PROVIDING DEPRECIATION ON SIMILAR ASSET UNDER SLM AT THE RATE OF 16.21% BY IMPLIEDLY CONSIDERING ITS USEFUL LIFE A LITTLE OVER SIX YEARS. HE EXPLAINED THAT THE COMPAR ABLE COMPANY PROVIDING DEPRECIATION AT 16.66% ON SLM WOU LD CONTINUE TO HOLD ASSETS IN 4 TH , 5 TH AND 6 TH YEAR AS WELL AND THE AMOUNT OF DEPRECIATION IN THESE THREE YEARS WILL AL SO BE AT 16.21% DESPITE THE FACT THAT THIS PARTICULAR ASSET HAS EXHAUSTED ITS USEFUL LIFE AFTER THREE YEARS AS HAS BEEN DONE BY THE ASSESSEE. THIS PROPOSITION, IN THE OPINION OF T HE LD. DR, WARRANTED REDUCTION IN THE AMOUNT OF DEPRECIATION O F COMPARABLES COMPANIES TO THE EXTENT OF 16.21% OF TH E VALUE OF SUCH ASSET FROM 4 TH TO 6 TH YEARS. IT WAS THUS PLEADED THAT IF 26 SOME ADJUSTMENT IS TO BE ALLOWED IN FAVOUR OF THE A SSESSEE IN LINE WITH THE ABOVE ARGUMENTS OF THE LD. AR, THEN A SIMULTANEOUS NEGATIVE ADJUSTMENT ON ACCOUNT OF THE ABOVE FACTOR SHOULD ALSO BE DIRECTED. 5.22.2. THIS CONTENTION ADVANCED ON BEHALF OF THE REVENUE CAN BE PROPERLY APPRECIATED IF ONE UNDERSTANDS THE STRIKING DISSIMILARITIES BETWEEN THE SCHEME OF CHARGING DEPR ECIATION UNDER THE INCOME-TAX ACT, 1961 AND THE COMPANIES AC T, 1956. THE CONCEPT OF BLOCK OF ASSETS EXISTS UNDER THE ACT BY WHICH ALL THE ASSETS OF A PARTICULAR SPECIES HAVING THE SAME RATE OF DEPRECIATION ARE CONSIDERED TOGETHER AS ONE UNIT. THIS CAN BE SEEN FROM SEC. 2(11) OF THE ACT, WHICH DEFINES 'B LOCK OF ASSETS' TO MEAN A GROUP OF ASSETS FALLING WITHIN A CLASS OF ASSETS COMPRISING (A) TANGIBLE ASSETS, BEING B UILDINGS, MACHINERY, PLANT OR FURNITURE; (B) INTANGIBLE ASSETS, BEING .., IN RESPECT OF WHICH THE SAME PERCENTAGE OF DEPRECIATION IS PRESCRIBED. UNDER THE SCHEME OF B LOCK OF ASSETS, DEPRECIATION IS CHARGED ON THE TOTAL WRITT EN DOWN VALUE OF SUCH BLOCK AS APPEARING AT THE END OF THE YEAR AT THE PRESCRIBED RATES. THERE IS NO PROVISION FOR CHARGI NG DEPRECIATION ON INDIVIDUAL ASSETS. SIMILARLY, THERE IS NO 27 MANDATE FOR COMPUTING CAPITAL GAIN AT THE TIME OF T RANSFER OF SUCH INDIVIDUAL ASSETS, UNLESS THE BLOCK OF ASSETS CEASES TO EXIST AS SUCH. CAPITAL GAINS ARE COMPUTED U/S 50 OF THE ACT UNDER TWO PRESCRIBED SITUATIONS BY CONSIDERING THE BLOCK OF ASSETS IN ENTIRETY DE HORS THE EVENT OF SALE OF INDIVIDUAL ASSET. FIRST IS THE SITUATION UNDER WHICH THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE ASSET TOGETHER WITH THE FULL VALUE OF SUCH CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF ANY OTHER CAPITAL ASSET FALLING WITHIN THE BLOCK OF THE ASS ETS DURING THE PREVIOUS YEAR, EXCEEDS THE AGGREGATE OF ( I ) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER OR TRANSFERS; ( II ) THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AT THE BEGINNING OF THE PREVIOUS YEAR; AND ( III ) THE ACTUAL COST OF ANY ASSET FALLING WITHIN THE BLOCK OF ASSETS ACQUI RED DURING THE PREVIOUS YEAR. IT IS THIS EXCESS WHICH IS DEEMED TO BE THE CAPITAL GAINS ARISING FROM THE TRANSFER OF SHORT-TE RM CAPITAL ASSETS. SECOND IS THE SITUATION IN WHICH ANY BLO CK OF ASSETS CEASES TO EXIST AS SUCH, FOR THE REASON THAT ALL T HE ASSETS IN THAT BLOCK ARE TRANSFERRED DURING THE PREVIOUS YEAR . IN SUCH A SITUATION, THE COST OF ACQUISITION OF THE BLOCK OF ASSETS IS TAKEN 28 AS THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AT THE BEGINNING OF THE PREVIOUS YEAR, AS INCREASED BY T HE ACTUAL COST OF ANY ASSET FALLING WITHIN THAT BLOCK OF AS SETS, ACQUIRED BY THE ASSESSEE DURING THE PREVIOUS YEAR. THE INCO ME RECEIVED OR ACCRUING AS A RESULT OF SUCH TRANSFER OR TRANSFE RS IS DEEMED TO BE THE CAPITAL GAINS ARISING FROM THE TRANSFER O F SHORT-TERM CAPITAL ASSETS. A CAREFUL PERUSAL OF THE ABOVE PROV ISIONS DECIPHERS THAT THE INDIVIDUAL ASSETS ON THEIR PURCH ASE MERGE WITH OTHER ASSETS OF THAT BLOCK, THEREBY LOSING THE IR SEPARATE IDENTITY. DEPRECIATION IS PROVIDED ON THE BASIS OF THE WRITTEN DOWN VALUE OF SUCH BLOCK AND NOT THE W.D.V. OF SUC H INDIVIDUAL ASSETS. EVEN THE EVENT OF THEIR TRANSFER ALSO DOES NOT LEAD TO AUTOMATIC CHARGING OF CAPITAL GAINS, UNLESS THE CAS E FALLS UNDER EITHER OF TWO CLAUSES OF SECTION 50. ASSESSEE GETS DEPRECIATION ON THE W.D.V. OF SUCH ASSETS, WHICH STAND MERGED WI TH THE W.D.V. OF THE BLOCK, EVEN AFTER THEIR TRANSFER, OF COURSE SUBJECT TO THE PROVISIONS OF SECTION 50 AND OTHER RELEVANT SECTIONS. 5.22.3. NOW LET US EXAMINE THE POSITION UNDER T HE INDIAN COMPANIES ACT, 1956. SECTION 349 DEALS WITH THE DET ERMINATION OF NET PROFITS. SUB-SECTION (1) PROVIDES THAT IN CO MPUTING THE NET PROFITS OF A COMPANY IN ANY FINANCIAL YEAR, : (A) CREDIT SHALL 29 BE GIVEN FOR THE SUMS SPECIFIED IN SUB-SECTION (2) AND CREDIT SHALL NOT BE GIVEN FOR THOSE SPECIFIED IN SUB-SECTI ON (3); AND (B) THE SUMS SPECIFIED IN SUB-SECTION (4) SHALL BE DEDU CTED, AND THOSE SPECIFIED IN SUB-SECTION (5) SHALL NOT BE DED UCTED.. CLAUSE (K) OF SUB-SECTION (4) STATES THAT DEDUCTION SHALL BE ALLOWED FOR DEPRECIATION TO THE EXTENT SPECIFIED I N SECTION 350. THE LATER SECTION, IN TURN PROVIDES THAT: THE AMOU NT OF DEPRECIATION TO BE DEDUCTED IN PURSUANCE OF CLAUSE (K) OF SUB- SECTION (4) OF SECTION 349 SHALL BE THE AMOUNT OF D EPRECIATION ON ASSETS AS SHOWN BY THE BOOKS OF THE COMPANY AT T HE END OF THE FINANCIAL YEAR EXPIRING AT THE COMMENCEMENT OF THIS ACT OR IMMEDIATELY THEREAFTER AND AT THE END OF EACH SUBSE QUENT FINANCIAL YEAR, AT THE RATE SPECIFIED IN SCHEDULE X IV. CLAUSE (D) OF SUB-SECTION (3) STATES THAT IN MAKING THE C OMPUTATION AFORESAID, NO CREDIT SHALL BE GIVEN FOR PROFITS FROM THE SALE OF ANY IMMOVABLE PROPERTY OR FIXED ASSETS OF A CAPITAL NATURE COMPRISED IN THE UNDERTAKING OR ANY OF THE UNDERTAK INGS OF THE COMPANY, UNLESS THE BUSINESS OF THE COMPANY CONSIST S, WHETHER WHOLLY OR PARTLY, OF BUYING AND SELLING ANY SUCH PROPERTY OR ASSETS: AT THIS STAGE, IT IS RELEVANT TO NOTE THE PRESCRIPTION OF THE PROVISO TO THIS CLAUSE WHICH S TIPULATES THAT : 30 WHERE THE AMOUNT FOR WHICH ANY FIXED ASSET IS SOLD EXCEEDS THE WRITTEN-DOWN VALUE THEREOF REFERRED TO IN SECTI ON 350, CREDIT SHALL BE GIVEN FOR SO MUCH OF THE EXCESS AS IS NOT HIGHER THAN THE DIFFERENCE BETWEEN THE ORIGINAL COST OF THAT FI XED ASSET AND ITS WRITTEN DOWN VALUE. CLAUSE (D) OF SUB-SECTION (5) FURTHER PROVIDES THAT IN MAKING THE COMPUTATION AFORESAID, NO DEDUCTION SHALL BE ALLOWED FOR LOSS OF A CAPITAL NA TURE INCLUDING LOSS ON SALE OF THE UNDERTAKING OR ANY OF THE UNDER TAKINGS OF THE COMPANY OR OF ANY PART THEREOF NOT INCLUDING AN Y EXCESS REFERRED TO IN THE PROVISO TO SECTION 350 OF THE WR ITTEN-DOWN VALUE OF ANY ASSET WHICH IS SOLD, DISCARDED, DEMOLI SHED OR DESTROYED OVER ITS SALE PROCEEDS OR ITS SCRAP VALUE . PROVISO TO SECTION 350 PROVIDES THAT: IF ANY ASSET IS SOLD, DISCARDED, DEMOLISHED OR DESTROYED FOR ANY REASON BEFORE DEPRE CIATION OF SUCH ASSET HAS BEEN PROVIDED FOR IN FULL, THE EXCES S, IF ANY, OF THE WRITTEN-DOWN VALUE OF SUCH ASSET OVER ITS SALE PROCEEDS OR, AS THE CASE MAY BE, ITS SCRAP VALUE, SHALL BE WRITT EN OFF IN THE FINANCIAL YEAR IN WHICH THE ASSET IS SOLD, DISCARDE D, DEMOLISHED OR DESTROYED. 5.22.4. ON A READING OF SECTIONS 349 IN CONJUNCT ION WITH SECTION 350 OF THE COMPANIES ACT, IT EMERGES THAT D EPRECIATION 31 ON EACH ASSET IS SEPARATELY PROVIDED AT THE RATES S PECIFIED IN SCHEDULE XIV FOR THE PURPOSES OF THE DETERMINATION OF PROFIT. IF AN ASSET IS SOLD OR DISCARDED BEFORE PROVIDING FULL DEPRECIATION ON IT, THEN THE EXCESS OF THE W.D.V. OF SUCH ASSET OVER ITS SALE PRICE/SCRAP VALUE, TO THE EXTENT PROVIDED, SHALL BE WRITTEN OFF IN THE FINANCIAL YEAR IN WHICH THE ASSET IS SOLD OR DI SCARDED. IN THE CONVERSE SITUATION, WHERE THE AMOUNT FOR WHICH ANY FIXED ASSET IS SOLD EXCEEDS THE WRITTEN-DOWN VALUE THEREOF REFE RRED TO IN SECTION 350, THEN CREDIT SHALL BE GIVEN FOR SO MUCH OF THE EXCESS, TO THE EXTENT PROVIDED, AS IS NOT HIGHER TH AN THE DIFFERENCE BETWEEN THE ORIGINAL COST OF THAT FIXED ASSET AND ITS W.D.V. IN THE YEAR OF ITS SALE. THESE TWO SITUATIO NS CAN BE DEMONSTRATED WITH THE HELP OF A SIMPLE EXAMPLE. IF ASSET A WITH ORIGINAL COST OF RS. 100 HAVING W.D.V. OF RS.40 IS SOLD FOR RS.50, THEN THE PROFIT OF RS.10 IS TO BE CREDITED TO THE P ROFIT AND LOSS ACCOUNT FOR THE YEAR OF SALE OF SUCH ASSET. IF ASS ET A WITH ORIGINAL COST OF RS. 100 HAVING W.D.V. OF RS.40 IS SOLD FOR RS.30, THEN THE LOSS OF RS.10 IS TO BE DEBITED TO THE PROF IT AND LOSS ACCOUNT FOR THE YEAR OF SALE/SCRAPPING OF SUCH ASSE T. 5.22.5. ON A COMPARATIVE STUDY OF THE SCHEME FOR CHARGING DEPRECIATION AND TREATMENT OF PROFIT/LOSS ON THE SA LE OF SPECIFIC 32 ASSETS UNDER BOTH THE STATUTES, WE OBSERVE THAT WHE REAS, THE ACT DOES NOT RECOGNIZE INDIVIDUAL ASSETS FOR THE PU RPOSES OF ALLOWING DEPRECIATION AND GRANTS DEPRECIATION ON TH E BLOCK OF ASSETS, THE COMPANIES ACT RECOGNIZES THE EXISTENCE OF SEPARATE ASSETS AND STIPULATES DEPRECIATION ON EACH ASSET DI STINCTLY IN THE PROFIT AND LOSS ACCOUNT. WHEN AN ASSET IS SOLD, THERE IS NO SCOPE FOR CALCULATING PROFIT OR LOSS ON SALE OF EAC H ASSET IN EXCESS OF ITS W.D.V. UNDER THE ACT. IT IS DONE ONLY FOR THE BLOCK OF ASSETS IN THE MANNER GIVEN AND TO THE EXTENT ENS HRINED IN SECTION 50. ON THE OTHER HAND, THE COMPANIES ACT MA NDATES CLAIMING DEDUCTION FOR LOSS OR CREDITING GAIN ON TH E SALE OF EACH ASSET SEPARATELY TO ITS PROFIT AND LOSS ACCOUNT, WH ICH IS NOT IN EXCESS OF DIFFERENCE BETWEEN THE ORIGINAL COST AND THE W.D.V. OF SUCH ASSET. 5.22.6. WITH THE ABOVE LEGAL POSITION AT HAND, L ET US EVALUATE THE CONTENTION OF THE LD. DR THAT THE COMPARABLES C OMPANIES DEPRECIATION FOR THE CURRENT YEAR WOULD ALSO INCLUD E DEPRECIATION IN RESPECT OF THE ASSETS WHICH HAVE SE EN THE END OF THEIR USEFUL LIFE BUT STILL CONTINUE TO FORM PAR T OF THE SCHEDULE OF FIXED ASSETS BECAUSE OF PROVIDING DEPRECIATION A T LOWER RATES ON SUCH ASSETS IN COMPARISON WITH THE ASSESSEE. TH IS 33 CONTENTION OF THE LD. DR, THOUGH APPEARS ATTRACTIVE AT THE FIRST BLUSH, BUT LOSES ITS SHINE ON AN IN-DEPTH ANALYSIS. IT IS SEVERELY SIMPLE THAT IF AN ASSET HAS REACHED THE MILESTONE O F THE END OF ITS USEFUL LIFE, THEN IT WOULD BE EITHER SOLD OR DI SCARDED. ORDINARILY, NO COMPANY WOULD CONTINUE TO HOLD OBSOL ETE ASSETS. ONCE AN ASSET IS SOLD AFTER ITS USEFUL LIFE, THE CO MPANY WILL WRITE OFF THE UNAMORTIZED DEPRECIATION IN THE YEAR OF ITS SALE OR DISCARDING, BY CONSIDERING ITS SALE PRICE AND W.D .V. AND HENCE IT WOULD CEASE TO APPEAR IN THE BOOKS OF ACCOUNT. O NCE IT DOES NOT APPEAR IN THE BOOKS OF ACCOUNT, THERE CAN BE NO QUESTION OF ANY DEPRECIATION ON IT IN THE LATER YEARS AS HAS BE EN PUT FORTH ON BEHALF OF THE REVENUE. CONTINUING WITH THE EXAMP LE GIVEN BY THE LD. DR, WE FIND THAT THE PARTICULAR ASSET ON THE COMPLETION OF ITS USEFUL LIFE OF THREE YEARS WOULD BECOME OBSOLETE IN FOURTH YEAR AND SOLD/DISCARDED BY THE C OMPANY AND THE SHORT-FALL IN THE AMOUNT AND DEPRECIATION CHARG ED OVER ITS COST WOULD BE ACCORDINGLY WRITTEN OFF IN ITS ACCOUN TS. IN SUCH A SITUATION, THAT PARTICULAR ASSET WITH USEFUL LIFE OF THREE YEARS WOULD CEASE TO APPEAR IN THE SCHEDULE OF FIXED ASS ETS OF THE COMPARABLE COMPANY AT THE END OF FOURTH, FIFTH AND SIXTH YEARS 34 RESPECTIVELY, AS SUCH, NO VALUE OF SUCH ASSETS WILL BE AVAILABLE FOR DEPRECIATION IN THE NEXT YEAR(S). 5.23. TURNING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE METHOD OF CHARGING DEPRECIATION, BOTH BY THE ASSESS EE AND ITS COMPARABLES, IS BY AND LARGE THE SAME THAT IS SLM. THE ASSESSEE IS SEEKING ADJUSTMENT ONLY DUE TO HIGHER R ATES OF DEPRECIATION CHARGED BY IT UNDER SLM WITH THE LOWER RATES OF DEPRECIATION CHARGED BY FOUR COMPARABLE COMPANIES, OTHER THAN MAPRO INDUSTRIES LTD. AND KARVY CONSULTANTS LT D. IN VIEW OF ABOVE DISCUSSION, WE HOLD THAT THE OPERATING PRO FIT MARGINS OF THESE FOUR COMPARABLE COMPANIES SHOULD BE RECOMP UTED BY THE TPO/AO IN LINE WITH THE RATES OF DEPRECIATION C HARGED BY THE ASSESSEE UNDER SLM. TO PUT IT SIMPLY, THE AMOUNT OF DEPRECIATION OF THE FOUR COMPARABLE COMPANIES ON TH EIR ASSETS SHALL ALSO BE RECOMPUTED UNDER THE SLM ALONE AS PER THE RATES AT WHICH THE ASSESSEE HAS PROVIDED DEPRECIATION. IN DOING SO, IF THE COMPARABLE COMPANIES HAVE CHARGED DEPRECIATION AT A LOWER RATE IN COMPARISON WITH THE ASSESSEE, THEN SU ITABLE INCREASE SHOULD BE MADE TO THEIR AMOUNT OF DEPRECIA TION AND IF THE COMPARABLES HAVE CHARGED DEPRECIATION AT A HIGH ER RATE IN COMPARISON WITH THE ASSESSEE ON SOME OF THE ASSETS, THEN 35 SUITABLE REDUCTION SHOULD BE MADE IN THE AMOUNT OF THEIR DEPRECIATION. HERE IT IS SIGNIFICANT TO NOTE THAT O NE OF THESE FOUR COMPANIES, NAMELY, NUCLEUS NETSOFT AND GIS INDIA LT D HAS CHARGED DEPRECIATION ON ALL ITS ASSETS UNDER SLM EX CEPT FOR COMPUTERS, ON WHICH IT PROVIDED DEPRECIATION ON WRI TTEN DOWN VALUE BASIS. THE TPO SHOULD SEE IF HE CAN CORRECTLY DEDUCE THE AMOUNT OF DEPRECIATION, ON THE BASIS OF DATA AVAILA BLE, FOR THE YEAR ON COMPUTERS ALSO UNDER SLM. IF DUE TO ONE R EASON OR THE OTHER, SUCH PRECISE CALCULATION IS NOT POSSIBLE, TH EN NO ADJUSTMENT SHOULD BE CARRIED OUT IN THE CALCULATION OF THE OPERATING PROFITS OF THIS COMPANY, EVEN ON OTHER IT EMS OF ASSETS. ORDINARILY, WE WOULD HAVE ORDERED FOR THE E XCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES IN THE EV ENT OF NO POSSIBILITY OF COMPUTING DEPRECIATION ON COMPUTERS UNDER THE SLM BY CONVERTING IT FROM W.D.V. METHOD, BECAUSE O F THIS BEING A MATERIAL FACTOR AND NOT QUANTIFIABLE. BUT SINCE N EITHER THE ASSESSEE NOR THE REVENUE SEEK THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES, WE CANNOT SUO MOTU ORDER SO. WE, THEREFORE, SUM UP OUR CONCLUSION ON THIS ASPECT OF THE MATTER BY HOLDING THAT IF THE ASSESSEE AS WELL AS THE COMP ARABLE COMPANIES ARE USING THE SLM AND THERE IS A DIFFEREN CE IN THE 36 RATES OF DEPRECIATION CHARGED BY THEM, THEN THERE I S A NEED TO MAKE SUITABLE ADJUSTMENT TO THE PROFITS OF THE COMP ARABLES. II. RISK ADJUSTMENT 6.1. THE LD. COUNSEL CONTENDED THAT THE ASSESSEE UNDERTOOK NO RISKS OR MINIMAL RISKS WHILE RENDERING SERVICES TO ITS AES UNDER THIS SEGMENT, IN CONTRAST TO THE RISKS UNDERT AKEN BY THE COMPARABLES FINALLY SELECTED. TAKING US THROUGH THE TRANSFER PRICING STUDY REPORT CONDUCTED BY THE ASSESSEE, TH E LD. AR SUBMITTED THAT THE ASSESSEE IS A CAPTIVE BPO SERVIC E PROVIDER IMMUNE TO ANY RISKS. IT WAS PUT FORTH THAT ITS FOR EIGN AE UNDERTAKES ALL THE RISKS RELATING TO MARKETING IN I DENTIFYING THE PROSPECTIVE CUSTOMERS IN THE US; ENTERING INTO CONT RACTS WITH THE CLIENTS FOR THE PROVISION OF THE AGREED SERVICE S; UNDERTAKING RESPONSIBILITY FOR THE QUALITY OF THE S ERVICES PROVIDED BY THE ASSESSEE; AND FOR THE ACCURACY OF THE INFORMATION CONVEYED TO CUSTOMERS. IN CONTRAST TO MINIMAL OR NO RISKS UNDERTAKEN BY THE ASSESSEE IN PROVIDING SU CH SERVICES, THE LD. AR SUBMITTED THAT THE COMPARABLE COMPANIES ARE FULL RISK BEARING ENTITIES AND ACCORDINGLY RISK ADJUSTME NT WAS 37 REQUIRED TO BE ALLOWED. ON THE OTHER HAND, THE LD. DR OPPOSED THIS CONTENTION. 6.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, WE NOTE FROM PAGE 14 O F THE ASSESSEES TP STUDY REPORT THAT THE FOREIGN AE IS T O IDENTIFY AND PURSUE CUSTOMERS IN THE US; ENTER INTO CONTRACT WIT H THE CLIENTS; AND UNDERTAKE RESPONSIBILITY FOR THE QUALITY OF SER VICES. AT THE SAME TIME, IT IS APPARENT FROM THE SAME TP STUDY RE PORT THAT THOUGH THE ASSESSEE IS NOT LIABLE TO END-CUSTOMERS, BUT IT IS REQUIRED TO ADHERE TO THE GROUP STANDARDS. A VERY I MPORTANT FACTOR IS THE UTILISATION RISK. THE ASSESSEE IS RESPONSIBLE FOR EFFECTIVE UTILIZATION OF ITS RESOURCES AND ITS FORE IGN AE DID NOT ASSURE THE ASSESSEE OF A MINIMUM LEVEL OF UTILIZATI ON. THUS, IT IS CLEAR THAT THE ASSESSEE BEARS EXCESS CAPACITY OR UTILIZATION RISK IN RESPECT OF THE PROVISION OF SERVICES. IT M EANS THAT THE ASSESSEE IS RESPONSIBLE FOR EFFECTIVE UTILIZATION O F ITS RESOURCES AND THERE IS NO ASSURANCE OF THE VOLUME OF BUSINESS GENERATING FROM ITS AE. IF THERE IS NO/LESS BUSINESS, THE ASS ESSEE WILL CONTINUE TO INCUR COSTS FOR WHICH THERE WILL BE NO COMPENSATION FROM THE AE. APART FROM THAT, THE ASSESSEE ALSO BEA RS FOREIGN EXCHANGE FLUCTUATION RISK BECAUSE IT INCURS EXPENSE S IN INDIAN 38 RUPEES, WHEREAS ITS REVENUES ARE EARNED IN US DOLLA RS. OTHER THAN THAT, THE ASSESSEE ASSUMES A GREATER BUSINESS RISK WHICH HAS BEEN STATED ON PAGE 15 OF THE TP STUDY REPORT. THE ASSESSEE IS UNDER CONSTANT PRESSURE TO ENSURE COMPE TITIVENESS OF THE RATES IT CHARGES. THE FOREIGN AE SHALL CONTI NUE TO SUB- CONTRACT PROVISION OF SERVICES TO THE ASSESSEE AS L ONG AS IT IS FEASIBLE, GIVEN THE QUALITY AND COST OF SERVICES. THUS, IT IS CLEAR THAT THE ASSESSEE BEARS SUBSTANTIAL BUSINESS RISKS WITH REGARD TO ITS OPERATIONS. IN THE LIGHT OF THE ABOVE, IT I S EVIDENT THAT THE ARGUMENT TENDERED BY THE LD. AR ABOUT THE ASSESSEE BEARING NO RISK OR MINIMAL RISK, IS SANS MERIT. WE DO NOT F IND THE ASSESSEE TO BE ONLY A CAPTIVE UNIT, NOT ASSUMING AN Y RISK AT ALL OR MINIMAL RISK. TAKING A HOLISTIC VIEW OF THE MAT TER, WE FIND THAT THE ASSESSEE IS HYBRID OF A CAPTIVE UNIT COMBI NED WITH THE ATTRIBUTES OF RISK TAKING ENTREPRENEURIAL UNIT. 6.3. COMING TO THE ARGUMENT OF THE LD. AR FOR ALL OWING ADJUSTMENT FOR THE GREATER RISKS ASSUMED BY THE COM PARABLE COMPANIES, WE FIND THIS CONTENTION TO BE DEVOID OF ANY STRENGTH. EXCEPT FOR REFERRING TO CERTAIN SUBMISSIO NS ADVANCED BEFORE THE LD. CIT(A) TO CONTEND THAT THE FUNCTIONS PERFORMED BY FORTUNE INFOTECH LTD., WERE MORE THAN THOSE OF THE ASSESSEE, 39 WHICH CONTENTION CAME TO BE REJECTED BY THE LD. CIT (A), THE LD. AR HAS PLACED NO MATERIAL ON RECORD WORTH THE NAME TO INDICATE THE LEVEL OF RISKS UNDERTAKEN BY THE COMPARABLE COM PANIES. THERE IS HARDLY ANY NEED TO ACCENTUATE THAT IT IS F OR THE ASSESSEE TO PLACE ON RECORD MATERIAL INDICATING DIF FERENCES IN ITS INTERNATIONAL TRANSACTION AND COMPARABLES, IF I T SEEKS ANY ADJUSTMENT ON SUCH ACCOUNT. ONLY WHEN SUCH DIFFERE NCES ARE POINTED OUT, THAT THE AUTHORITIES CAN PROCEED TO CA LCULATE THE EFFECT OF SUCH DIFFERENCES ON THE OPERATING PROFIT MARGINS OF THE COMPARABLES. REVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE SUBMISSION MADE BY THE LD. AR THAT THE ASS ESSEE IS A CAPTIVE UNIT NOT UNDERTAKING ANY RISKS VIS-A-VIS ITS COMPARABLES, IS PARTLY INCORRECT AND PARTLY UNSUBSTANTIATED. AS WE HAVE NOTICED ABOVE THAT THE ASSESSEE HAS ALSO UNDERTAKEN BUSINESS/CAPACITY/FOREIGN EXCHANGE FLUCTUATION RISK S, THE CONTENTION THAT THE ASSESSEE DID NOT BEAR ANY/MINIM AL RISKS, DOES NOT MERIT ACCEPTANCE. THE OTHER PART OF THE A RGUMENT ABOUT THE COMPARABLES UNDERTAKING MUCH MORE RISKS, IS NOT SUBSTANTIATED WITH ANY WORTHWHILE EVIDENCE. IN SUC H CIRCUMSTANCES, WE ARE UNABLE TO ALLOW ANY RISK ADJU STMENT IN THE OPERATING PROFIT MARGINS OF THE COMPARABLES ON THIS SCORE. 40 III. WHETHER NO T.P. ADJUSTMENT BECAUSE OF THE GROU P SUFFERING LOSS 7.1. THE LD. AR TOOK UP STILL ANOTHER LEGAL ISSU E CONTENDING THAT THE TRANSFER PRICING ADJUSTMENT SHOULD BE REST RICTED TO THE OVERALL PROFIT AT THE GROUP LEVEL. HE PUT FORTH THA T SINCE THE OVERALL EXL GROUP SUFFERED LOSSES, NO TP ADJUSTMENT SHOULD BE SUSTAINED. TO BUTTRESS THIS CONTENTION, HE HIGHLIGH TED THE BACKGROUND LEADING TO THE INTRODUCTION OF CHAPTER-X IN THE ACT BY WHICH SHIFTING OF PROFITS FROM INDIAN JURISDICTI ON TO OUTSIDE JURISDICTIONS WAS PROPOSED TO BE CHECKED. RELYING ON SOME TRIBUNAL ORDERS, THE LD. AR ARGUED THAT THE TRANSFE R PRICING ADJUSTMENT CANNOT BE MADE WHEN THE OVERALL GROUP IS IN LOSS. IT WAS FRANKLY ACCEPTED THAT THIS ISSUE WAS NOT TAK EN UP BEFORE THE AUTHORITIES BELOW AND IT IS FOR THE FIRST TIME THAT THE ASSESSEE RAISED IT BEFORE THE TRIBUNAL. REFERRING TO CERTAIN ADDITIONAL EVIDENCE IN THE SHAPE OF COPY OF CONSOLI DATED FINANCIAL STATEMENTS OF EXL SERVICES.COM, INC., AND EXL SERVICE HOLDINGS, INC., THE LD. AR CONTENDED THAT THE GROUP SUFFERED LOSS AS WAS MANIFEST FROM THE CONSOLIDATED FINANCIAL STA TEMENTS OF EXL SERVICES HOLDINGS (INC.), BEING THE ULTIMATE HO LDING 41 COMPANY OF ALL THE ENTITIES. IN VIEW OF THERE BEING LOSS IN THE GROUP AS A WHOLE, THE LD. AR CONTENDED THAT THE TP ADJUSTMENT SHOULD BE RESTRICTED TO THE LOSS AT THE GROUP LEVEL AND THERE BEING NO PROFIT AVAILABLE, NO ADJUSTMENT WAS CALLED FOR. THE LD. DR STRONGLY OPPOSED THIS CONTENTION WITH THE HELP O F SOME TRIBUNAL ORDERS, NOT APPROVING SUCH AN APPROACH. 7.2. WE HAVE HEARD THE RIVAL SUBMISSIONS IN THE LIGHT OF THE MATERIAL PLACED BEFORE US AND PRECEDENTS RELIED UPO N. IN ORDER TO APPRECIATE THIS CONTENTION ADVANCED ON BEHALF OF THE ASSESSEE, IT IS IMPORTANT TO NOTE THE SCHEME OF CHA PTER X OF THE ACT, WITH THE CAPTION SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX. SECTION 92(1) PROVIDES THAT : ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVI NG REGARD TO THE ARMS LENGTH PRICE. THE MANNER OF COMPUTATION OF THE ARMS LENGTH PRICE HAS BEEN SET OUT IN SECTION 92C. THIS SECTION TALKS OF COMPUTING ALP IN RELATION TO AN INTERNATIO NAL TRANSACTION. WHEN WE GO TO RULE 10B, WHICH PROVIDE S THE MODUS OPERANDI FOR THE DETERMINATION OF THE ALP UNDER SECTION 92C, IT CAN BE SEEN THAT SOME METHODS HAVE BEEN PRE SCRIBED FOR THIS PURPOSE. ALL THE METHODS PROVIDE MECHANISM FOR THE DETERMINATION OF ALP OF AN INTERNATIONAL TRANSACTIO N. THERE IS 42 NO REFERENCE WHATSOEVER IN THE ENTIRE TRANSFER PRIC ING LEGISLATION FOR RESTRICTING THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION OR THE AMOUNT OF TRANSFER PRICING ADJUSTMENT BY VIEWING THE OVERALL PROFITABILITY OF ALL THE ENTITIES OF THE GROUP TAKEN TOGETHER. SUCH A CONTENTION PUT FORTH ON BEHALF OF THE ASSESSEE DOES NOT STAND TO ANY LOGIC BECAUSE CHAPTER-X OF THE ACT PROVIDES FOR COMPUTATION OF IN COME FROM AN INTERNATIONAL TRANSACTION HAVING REGARD TO ITS A LP. NEITHER ANY SECTION OF CHAPTER-X NOR ANY RULE PRESCRIBES AN UPPER LIMIT FOR RESTRICTING THE TP ADJUSTMENT AS DETERMINED IN THE MANNER LAID DOWN IN RULE 10B, TO THE LEVEL OF THE OVERALL PROFITABILITY OR LOSS OF THE GROUP AS A WHOLE. IN THE ABSENCE OF AN Y SUCH PROVISION SET OUT IN CHAPTER-X FOR LIMITING THE TP ADJUSTMENT TO THE LOSS AT THE GROUP LEVEL, WE ARE CONSTRAINED TO ACCEPT THIS ARGUMENT. 7.3. FURTHER, WE FIND LOGIC IN THE LEGISLATURE NOT PROVIDING SUCH A PROVISION CAPPING THE ALP/TP ADJUSTMENT. IT IS QUITE POSSIBLE THAT SOME OF THE ASSOCIATED ENTERPRISES OF THE OVERALL GROUP MAY SUFFER LOSS DUE TO THEIR OWN INEFFICIENCI ES AND WRONG BUSINESS DECISIONS AND THE CONSEQUENCES OF SUCH WRO NG DECISIONS TAKEN BY THEM CANNOT BE ALLOWED TO AFFECT THE ALP OF 43 THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASS ESSEE IN INDIA. THIS CAN BE ILLUSTRATED WITH THE HELP OF AN EXAMPLE IN WHICH THERE ARE THREE AES, VIZ., AE-A IN INDIA (WIT H PROFIT OF ` 100), AE-B IN PAKISTAN (WITH LOSS OF ` 150) AND A E-C IN UK (WITH PROFIT OF ` 25). IF AE-B SUPPLIES GOODS WORT H ` 50/- TO AE-A AT ` 60, THEN, THE OTHERWISE TP ADJUSTMENT OF ` 10 (`60-`50) IN THE HANDS OF AE-A CANNOT BE ABORTED SIMPLY FOR THE REASON THAT THE GROUP AS A WHOLE INCURRED LOSS OF ` 25/- (`100- `150+`25). THE CHAPTER-X REQUIRES THE COMPUTATION OF INCOME OF AE-A IN INDIA AT `110/- WITH TRANSFER PRICING ADJUSTMENT OF ` 10/-. THE SIMPLE FACT THAT AE-B INCURRED LOSS CAN BE NO REASO N TO STOP THE INDIAN AUTHORITIES FROM MAKING TP ADJUSTMENT OF ` 1 0/- IN THE HANDS OF AE-A, WHICH IS OTHERWISE WELL DESERVED AND RIGHTLY CALLED FOR IN CONFORMITY WITH THE RELEVANT PROVISI ONS. THUS, IT IS CRYSTAL CLEAR THAT THE OVERALL LOSS INCURRED BY GRO UP COMPANIES AS A WHOLE CAN NEVER BE A CRITERIA TO DESIST FROM M AKING ANY TP ADJUSTMENT, WHICH IS OTHERWISE CALLED FOR AS PER TH E STATUTORY PROVISIONS UNDER THE ACT. THIS ARGUMENT, BEING DEV OID OF ANY WORTH, DESERVES TO BE AND IS HEREBY REPELLED. 8.1. THE NEXT ISSUE RAISED BY THE LD. AR IS ABOU T THE EXCLUSION OF FORTUNE INFOTECH LTD FROM THE LIST OF COMPARABLES. 44 THE LD. AR ARGUED THAT THIS COMPANY, THOUGH INCLUDE D BY THE ASSESSEE VOLUNTARILY AS COMPARABLE IN ITS TP STUDY REPORT, IS FUNCTIONALLY INCOMPARABLE AND HENCE BE EXCLUDED. TO SUPPORT HIS CONTENTION FOR ITS EXCLUSION, THE LD. AR RELIED ON AN ORDER PASSED BY THE BANGALORE BENCH OF THE TRIBUNAL IN 24/7 CUSTOMER COM PVT. LTD. (SUPRA) IN WHICH THIS COMPANY HAS BEEN DIRECTED TO BE EXCLUDED FOR THE SUCCEEDING YEA R. IT WAS STRESSED THAT THE PROFIT MARGIN OF THIS COMPANY WAS HIGHER DUE TO ABNORMAL CIRCUMSTANCES. THIS CONTENTION WAS OPP OSED BY THE LD. DR. BY REFERRING TO CERTAIN MATERIAL FROM T HE PAPER BOOK INDICATING THAT THE HIGHER PROFIT FOR THE YEAR WAS NOT DUE TO ABNORMAL CIRCUMSTANCES. HE RELIED ON THE ORDER OF NOKIA INDIA (SUPRA) TO CONTEND THAT A COMPANY CANNOT BE CONSIDERED AS INCOMPARABLE BECAUSE OF HIGHER TURNOVER/PROFIT MARG IN. 8.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE HOLD IN PRINCIPLE, THAT THERE CAN BE NO FETTERS ON THE ASSESSEE IN CLAIMING BEFORE TH E AUTHORITIES THAT A PARTICULAR COMPANY WAS INADVERTENTLY INCLUDE D IN THE LIST OF COMPARABLES. EVENTUALLY, IT IS FOR THE TPO TO CO NSIDER THE ARGUMENT AND THEN DECIDE WHETHER IT IS COMPARABLE O R NOT. THE MERE MAKING OF A CLAIM OF INCOMPARABILITY DOES NOT 45 AUTOMATICALLY LEAD TO EXCLUSION. IF A COMPANY, WHIC H IS ACTUALLY NOT COMPARABLE, BUT WAS INADVERTENTLY INCLUDED BY T HE ASSESSEE IN THE LIST OF COMPARABLES, THE SAME IS LI ABLE TO BE EXCLUDED. 8.3. TURNING TO THE FACTS OF THIS COMPANY, WE FI ND THAT THE LD. AR HAS HARPED ON HIGHER OP/OC MARGIN OF THIS CO MPANY FOR THE YEAR UNDER CONSIDERATION AT 108%, IN CONTRAST TO 67% FOR THE PRECEDING YEAR AND 39% FOR THE SUCCEEDING YEAR TO CONTEND FOR ITS EXCLUSION DUE TO ABNORMAL PROFITS. IN OUR C ONSIDERED OPINION, THE YEAR IN QUESTION CANNOT BE CONSIDERED AS ABNORMAL WHEN VIEWED IN THE LIGHT OF THE FACT THAT ITS PROFI T RATE HAS PROGRESSED FROM THE PRECEDING YEAR. THE DECLINE IN THE PROFIT RATE FOR THE SUCCEEDING YEAR IS DUE TO THE REASONS GIVEN BY THE COMPANY IN ITS ANNUAL REPORT FOR NEXT YEAR, A COPY WHICH IS AVAILABLE ON PAGES 178 ONWARDS OF THE PAPER BOOK. I N HIS MESSAGE TO THE SHAREHOLDER, THE MANAGING DIRECTOR O F THE COMPANY STATED THAT THE YEAR ENDING 31 ST MARCH 2004 (I.E. SUCCEEDING YEAR) WAS A YEAR OF CONSOLIDATION IN WHI CH IT SACRIFICED IMMEDIATE PROFITS FOR MUCH LARGER GAINS BY PREPARING OURSELVES FOR FUTURE GROWTH. THE ANNUAL REPORT OF THIS COMPANY FOR THE NEXT YEAR INDICATES THAT IT DE VELOPED ITS 46 OWN INTANGIBLES IN SUCH NEXT YEAR. THESE FACTORS IN DICATE THAT FINANCIAL YEAR 2003-04 RELEVANT TO ASSESSMENT YEAR 2004-05 WAS ABNORMAL FOR FORTUNE INFOTECH LTD. BUT FOR THAT , ITS PROFIT PROGRESSED FROM ASSESSMENT YEAR 2002-03 TO ASSESSME NT YEAR 2003-04 IN QUESTION. 8.4. REFERENCE TO THE TRIBUNAL ORDER IN THE CASE OF 24/7 CUSTOMER (SUPRA), FOR SEEKING EXCLUSION OF FORTUNE INFOTECH LTD., IS AGAIN MISPLACED. THE PALPABLE REASON FOR O UR THIS CONCLUSION IS THAT THE TRIBUNAL ORDER IN THAT CASE IS FOR THE ASSESSMENT YEAR 2004-05 AND WE HAVE NOTICED FROM TH E ANNUAL REPORT OF THIS COMPANY THAT IT WAS AN ABNORMAL YEAR OF ITS OPERATIONS IN WHICH IT SACRIFICED IMMEDIATE PROFITS FOR LARGER GAINS IN FUTURE BY DEVELOPING ITS OWN INTANGIBLE. I T IS FURTHER RELEVANT TO NOTE THAT THE FUNCTIONAL PROFILE OF THI S COMPANY IS SIMILAR TO THAT OF THE ASSESSEE COMPANY AS IT IS AL SO A BPO, AS IS THE ASSESSEE. IT WAS NOT DUE TO SOME INADVERTENCE T HAT THE ASSESSEE INITIALLY INCLUDED THIS COMPANY IN THE LIS T OF COMPARABLES. IT CAN BE SEEN FROM PAGE 43 OF THE IMP UGNED ORDER THAT THIS COMPANY FIGURED IN THE TP REPORTS O F THE ASSESSEE ACROSS THE EARLIER YEARS AND THE ASSESSEE CHOSE IT ON THE BASIS OF FUNCTIONAL SIMILARITY AND THIS CONTINU ED EVEN FOR THE 47 SUCCEEDING YEAR. FURTHER THERE ARE NO SPECIFIC INTA NGIBLES USED BY FORTUNE INFOTECH LTD IN ITS OPERATIONS FOR THE Y EAR UNDER CONSIDERATION. WE CANNOT PERMIT THE EXCLUSION OF TH IS OTHERWISE COMPARABLE COMPANY FROM THE LIST OF COMPARABLES ON THE SIMPLE GROUND OF HIGHER PROFIT EARNED BY IT DURING THE EXTANT YEAR. FIRST PROVISO TO SECTION 92C(2) PROVIDES THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIAT E METHOD, THE ALP SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES. IT THEREFORE, TRANSPIRES THAT THE INDIAN LE GISLATION TALKS OF CONSIDERING ALL THE COMPARABLES AND THEN FINDING OU T THE ARITHMETIC MEAN OF THE PRICE/PROFIT OF SUCH COMPARA BLES. UNLIKE SOME COUNTRIES ADOPTING INTERQUARTILE RANGE, WHICH IS ALSO CALLED MIDDLE FIFTY, THE INDIAN LEGISLATION STIPULA TES FOR CALCULATING ARITHMETIC MEAN OF PRICE/PROFIT OF ALL THE OTHERWISE COMPARABLE COMPANIES. SIMPLY BECAUSE THE PROFIT RAT E OF A COMPANY IS HIGHER OR IT HAS A HIGHER TURNOVER, CAN BE NO REASON TO SEEK EXCLUSION. THIS HAS BEEN HELD BY THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF NOKIA INDIA (SUPRA). 8.5. IN VIEW OF ABOVE DISCUSSION, WE ARE OF THE CO NSIDERED OPINION THAT FORTUNE INFOTECH LTD. IS A COMPARABLE COMPANY 48 WARRANTING ITS INCLUSION IN THE LIST OF COMPARABLES . THE CONTRARY CONTENTION OF THE LD. AR IN THIS REGARD IS REJECTED . 9. HAVING DEALT WITH ALL THE ISSUES RAISED BY TH E LD. AR ON THE ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT, WE SE T ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND SEND THE MATTER BA CK TO THE TPO/AO FOR MAKING A FRESH DETERMINATION OF THE ALP UNDER THIS SEGMENT IN CONFORMITY WITH OUR ABOVE OBSERVATIONS A ND CONCLUSIONS, AFTER ALLOWING A REASONABLE OPPORTUNIT Y OF HEARING TO THE ASSESSEE. 10.1. GROUND NOS. 16 AND 17 OF THE ASSESSEES AP PEAL ARE AGAINST THE SUSTENANCE OF DISALLOWANCE OF PROVISION OF EXPENSES AMOUNTING TO ` 32,08,612/-. 10.2. BRIEFLY STATED, THE FACTS OF THESE GROUNDS ARE THAT THE ASSESSEE CREATED PROVISION FOR EXPENSES TO THE TUNE OF ` 5,18,03,004/- AND CLAIMED DEDUCTION FOR THE SAME. AS THE ASSESSEE FAILED TO FURNISH SPECIFIC BILLS FOR WHICH THE ABOVE PROVISION WAS MADE, THE AO MADE ADDITION OF EQUAL S UM. THE LD. CIT(A) OBSERVED THAT THE ASSESSEE WAS NOT PROVI DED ADEQUATE OPPORTUNITY OF ADDUCING NECESSARY EVIDENCE IN SUPPORT OF ITS CLAIM OF PROVISION FOR EXPENSES. AFT ER CONSIDERING 49 THE RELEVANT MATERIAL FURNISHED BY THE ASSESSEE, TH E LD. CIT (A) DELETED ADDITION OF ` 4.85 CRORE FOR WHICH THE INVO ICES WERE AVAILABLE. AS REGARDS THE REMAINING AMOUNT OF ` 32. 08 LAC FOR WHICH THE INVOICES WERE NOT AVAILABLE, THE LD. CIT (A) SUSTAINED THE ADDITION. THE ASSESSEE IS AGGRIEVED AGAINST TH E SUSTENANCE OF ADDITION TO THIS EXTENT. 10.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT TH E ASSESSEE IS CONSTANTLY MAKING PROVISION FOR EXPENSES ON YEAR-TO -YEAR BASIS ON THE ESTIMATE OF REASONABLE EXPENSES INCURRED BUT THE BILLS NOT RECEIVED UP TO THE YEAR-ENDING. WHEN IN THE SU BSEQUENT YEAR, THE BILLS ARE RECEIVED, SUCH PROVISION IS REV ERSED. IF THE ACTUAL AMOUNT OF EXPENSES FOR WHICH THE PROVISION W AS MADE FALLS SHORT OF SUCH PROVISION, THEN DEDUCTION IS CL AIMED FOR THE EXCESS EXPENDITURE AND IN THE CONVERSE SITUATION, T HE EARLIER EXCESS PROVISION CREATED IS REVERSED IN THE SUCCEED ING YEAR. THIS METHOD OF ACCOUNTING HAS BEEN ACCEPTED BY THE REVENUE IN THE PAST WITHOUT ANY QUESTION. NOW SIMPLY BECAU SE THE INVOICES WERE NOT AVAILABLE WHEN THE MATTER WAS CON SIDERED BY THE LD. CIT(A), IT CANNOT BE SAID THAT THE LIABILIT Y CEASED TO EXIST. FROM THE DETAILS OF THE SUSTENANCE OF DISALLOWANCE, IT CAN BE 50 SEEN THAT THE EXPENSES ARE BASICALLY IN THE NATURE OF PROFESSIONAL FEE, TELEPHONE EXPENSES, COMMUNICATION EXPENSES AND CONSULTATION, ETC. THE POINT FOR DETERMINATION OF THE QUESTION OF DEDUCTION IS THE CRYSTALIZATION OF LIAB ILITY FOR INCURRING SUCH EXPENSES AND NOT THE ACTUAL RECEIPT OF THE INVOICES. THIS CONTENTION RAISED ON BEHALF OF THE ASSESSEE ABOUT THE INCURRING OF ACTUAL LIABILITY IN RESPECT OF THESE EXPENSES HAS NOT BEEN CONTROVERTED ON BEHALF OF THE REVENUE. GOING BY THE MANDATE OF THE MERCANTILE SYSTEM OF AC COUNTING AND FOLLOWING THE RULE OF CONSISTENCY, WE ORDER FOR THE DELETION OF THE ADDITION SUSTAINED IN THE FIRST APPEAL. THI S GROUND OF APPEAL IS ALLOWED. 11. THE LAST GROUND ABOUT CHARGING OF INTEREST IS CONSEQUENTIAL. 12.1. THE ONLY ISSUE RAISED BY THE REVENUE IN ITS APPEAL IS AGAINST THE DELETION OF ADDITION OF ` 40,50,472/-, BEING RENT EQUALIZATION RESERVE INCLUDED IN THE PROVISION FOR EXPENSES AMOUNTING TO ` 5.18 CRORE. THE CLAIM OF THE REVENU E IS THAT THIS AMOUNT IS NOT IN THE NATURE OF EXPENSE. 51 12.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS ISSU E IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE JURISDICTIO NAL HIGH COURT IN CIT VS. VIRTUAL SOFT SYSTEMS LTD. (2012) 205 TAXMAN 257 (DEL) , IN WHICH IT HAS BEEN HELD THAT THE LEASE EQUALIZATION CHARGES DEBITED TO THE PROFIT & LOSS A CCOUNT CANNOT BE DISALLOWED. SIMILAR VIEW HAS BEEN TAKEN B Y THE HONBLE KARNATAKA HIGH COURT IN PRAKASH LEASING LTD. VS. DCIT (2012) 208 TAXMAN 464 (KAR) . IN VIEW OF THE ABOVE JUDICIAL PRECEDENTS, WE UPHOLD THE VIEW TAKEN BY THE LD. CIT (A) IN DELETING THIS ADDITION. THIS GROUND FAILS. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 22/12/2014. SD/ SD/ SD/ SD/- -- - SD/ SD/ SD/ SD/- -- - (GEORGE GEORGE K.) (R. S. SYAL ) JUDICIAL MEMBER ACCOUN TANT MEMBER DATED: 22/12/2014 DK 52 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTR ASSISTANT REGISTR ASSISTANT REGISTR ASSISTANT REGISTRAR ARAR AR