M/s Dell International Services India Private Limited, Bangalore V. JCIT, Bangalore

ITA 3/BANG/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0210 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 06-06-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 01-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P CHANDRASHEKAR
• Keywords: Business income; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Additional depreciation; Earning of tax free income; Deemed to accrue or arise in india; Question of law; Bad and doubtful debts
• Section: 92C; 43B; 143(3); 14A; 115JB; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE S HRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO , ACCOUNTANT MEMBER I.T . (T.P) A. NO. 3 /BANG/20 13 (ASSESSMENT YEAR : 20 08 - 09 ) M/S. DELL INTERNATIONAL SERVICES INDIA PVT. LTD ., 12/A, 12/12A, 13/1A, DIVYASREE GREENS, CHALLAGHATTA VILLAGE, VARTHUR, HOBLI, BANGALORE - 570 071 . . APPELLANT. PAN AAACH 1925Q VS. JOINT COMMISSIONER OF INCOME T AX, LTU, BANGALORE. .. RESPONDENT. APPELLANT BY : SHRI SHARATH RAO, C.A. R E SPONDENT BY : SHRI P. CHANDRASHEKAR, CIT (D.R) DATE OF H EARING : 07.06.2016. DATE OF P RONOUNCEMEN T : 20 .7 .201 6 . O R D E R PER SHRI VIJAY P AL RAO, J .M . : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASSESS MENT ORDER DATED 29/10/2012 PASSED UNDER SECTION 143(3) READ 2 IT (TP) A NO. 3 /BANG/201 3 WITH SECTION 144C OF THE ACT IN PURSUANT TO THE DIRECTIONS OF DRP DATED 03/09/2012 FOR THE ASSESSMENT YEAR 2008 - 09. 2. THE ASSESSEE HAS FILED CONCISE GROUNDS OF THE APPEAL AS UNDER: G ENERAL GROUND: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSING OFFICER ( AO ), HAS ERRED IN COMPLETING THE ASSESSMENT OF THE APPELLANT AT AN INCOME OF INR 392,174,075 UNDER THE NORMAL PROVISIONS OF INCOME TAX ACT, 1961 ( THE ACT ) AND BOOK PROFIT OF INR 678,734,585 UNDER THE PROVISIONS OF SECTION 115JB OF THE ACT AS AGAINST THE TOTAL INCOME OF INR 185,145,994 ACCEPTED BY THE APPELLANT UNDER THE NORMAL PROVISIONS AND BOOK PROFITS OF INR 571,589,387 UNDER THE PROVISIONS OF 115JB OF THE ACT (CONSIDERING SUO - MOTO DISALLOWANCES). DISALLOWANCE UNDER SECTION 14A: 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DISPUTE RESOLUTION PANEL ( DRP ) HAS ERRED IN MAKING AN ADDITION OF INR 5,002,740 UNDER THE PROVISIONS OF S ECTION 14A OF THE ACT BY ATTRIBUTING EXPENSES EQUIVALENT TO 0.5 PERCENT OF THE AVERAGE VALUE OF THE INVESTMENTS HELD BY THE APPELLANT DURING THE YEAR, FAILING TO APPRECIATE THE CONTENTION OF THE APPELLANT THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING D IVIDEND INCOME AND THEREFORE, THE PROVISIONS OF SECTION 14A OF THE ACT WERE NOT APPLICABLE. 3. WITHOUT PREJUDICE, THAT THE AO / DRP HAS ERRED IN NOT CONSIDERING THE EXPENSES DISALLOWED UNDER SECTION 14A FOR ALLOCATION OVER VARIOUS UNITS, INCLUDING THOSE ENTI TLED TO DEDUCTION UNDER SECTION 10A OF THE ACT FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP HAS ERRED IN MAKING AN ADDITION OF INR 5,002,740 IN RESPECT OF EX PENSES DISALLOWED UNDER SECTION 14A FOR COMPUTING BOOK PROFIT UNDER THE PROVISIONS OF SECTION 115JB OF THE ACT. EXCHANGE GAIN ON FORWARD FOREIGN EXCHANGE CONTRACTS: 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP HAS ERRED IN AD DING UNREALIZED MARK TO MARKET ( MTM ) GAINS AMOUNTING TO INR 17,388,000,ON FORWARD FOREIGN EXCHANGE CONTRACTS TO THE INCOME OF THE APPELLANT, ALTHOUGH THE SAME REFLECTS A DECREASE IN THE BUSINESS INCOME DUE TO A CHANGE IN THE ACCOUNTING POLICY. 6. WITHOUT PREJUDICE, THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP HAS ERRED IN NOT ALLOCATING THE UNREALIZED MTM GAINS ARISING ON ACCOUNT OF FORWARD 3 IT (TP) A NO. 3 /BANG/201 3 FOREIGN EXCHANGE CONTRACTS TO THE UNITS ELIGIBLE FOR DEDUCTION UNDER SECTION 10A OF THE A CT , ALLEGING THAT - THE APPELLANT HAS FAILED TO FURNISH ANY DETAILS THEREOF; AND - THE GAINS HAD NOT BEEN DERIVED FROM SUCH ELIGIBLE UNITS AND HENCE COULD NOT BE ALLOCATED TO ELIGIBLE UNITS FOR DEDUCTION UNDER SECTION 10A OF THE ACT. 7. THAT ON THE FACT S AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP HAS ERRED IN MAKING ADDITION OF UNREALIZED MTM GAINS OF INR 17,388,000 ON ACCOUNT OF FORWARD FOREIGN EXCHANGE CONTRACTS FOR COMPUTING BOOK PROFIT UNDER THE PROVISIONS OF SECTION 115JB OF THE ACT . DISALLOWANCE ON PROVISION FOR LEAVE ENCASHMENT: 8. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN ADDING BACK PROVISION FOR LEAVE ENCASHMENT AMOUNTING TO INR 82,356,024 FOR COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT . 9. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP HAS ERRED IN NOT CONSIDERING AND GIVING SPECIFIC DIRECTION ON THE GROUND OF OBJECTION RAISED BY THE APPELLANT REGARDING PROPOSED ADDITION OF PROVISION FOR LEAVE ENCASHMENT AMOUNTING T O INR 82,356,024 FOR COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT EVEN THOUGH THE DRP HAS SPECIFICALLY OBSERVED THAT THE MATTER REGARDING BOTH PROVISION FOR GRATUITY AND LEAVE ENCASHMENT ARE COVERED IN FAVOUR OF THE APPELLANT BY THE DECISION OF THE SUPREME COURT IN BHARAT EARTH MOVERS LTD [(2000) 112 TAXMAN 61 (SC)]. ADDITION OF EXCESS DEPRECIATION FOR COMPUTATION OF BOOK PROFITS: 10. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/DRP HAS ERRED IN ADDING BACK AN AMOUNT OF INR 2,39 8,434 ON ACCOUNT OF ALLEGED EXCESS DEPRECIATION CLAIMED IN THE BOOKS, FOR COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT. 11. WITHOUT PREJUDICE,THE AO / DRP HAS ERRED IN COMPUTING THE ADDITIONAL DEPRECIATION WITHOUT APPRECIATING THE ACTUAL DATE OF ACQ UISITION / PUT TO USE OF RELEVANT ASSETS DISCLOSED IN THE TAX AUDIT REPORT. 4 IT (TP) A NO. 3 /BANG/201 3 TRANSFER PRICING: 12. THE ORDER PASSED BY THE DRP AND THE AO / TRANSFER PRICING OFFICER ( TPO ) IS NOT IN ACCORDANCE WITH THE LAW AND IS CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND IN ANY CASE IN VIOLATION OF THE PRINCIPLE OF EQUITY AND NATURAL JUSTICE. 13. THE DRP AND THE AO/TPO HAVE ERRED IN LAW AND ON FACTS IN REJECTING THE DETAILED BENCHMARKING ANALYSIS CONDUCTED BY THE APPELLANT AND EMBARKING ON A FRESH SEAR CH FOR COMPARABLES AND UPHOLDING THE ARM S LENGTH PRICE ( ALP ) OF 24.49 PERCENT AS PROPOSED BY THE TPO, FOR THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE APPELLANT AND FURTHER ERRED IN MAKING AN ADJUSTMENT OF INR 184,637,341. 14. AMONG THE OTHER COMPARA BLES CONSIDERED, THE DRP AND THE TPO HAS ERRED IN SELECTING THE FOLLOWING COMPANIES AS COMPARABLE COMPANIES: - INFOSYS TECHNOLOGIES LIMITED; - KALS INFOSYSTEMS LIMITED; AND - LGS GLOBAL LIMITED. 15. THE DRP AND THE AO/TPO HAS ERRED IN DETERMINING THE ALP BASED ON COMPANIES, WHICH ARE NOT COMPARABLE TO THE APPELLANT DUE TO VARIOUS FACTORS SUCH AS APPLYING INCORRECT/ ADDITIONAL FILTERS, NOT APPLYING FILTERS CONSISTENTLY, AD - HOC SELECTION OF COMPARABLES, SELECTING COMPARABLES WITH ABNORMALLY HIGH MARGINS OR SUBSTANTI ALLY HUGE TURNOVER, SELECTING COMPARABLES WHICH ARE FUNCTIONALLY DIFFERENT, SELECTING COMPARABLES ENGAGED IN SALE OF SOFTWARE PRODUCTS AND THAT HOLD HIGH BRAND VALUE,ETC. 16. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO / DRP / TPO HAS E RRED IN NOT GRANTING THE WORKING CAPITAL/RISK ADJUSTMENT, AS CLAIMED BY THE APPELLANT. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/TPO HAS ERRED BY NOT FOLLOWING THE DIRECTIONS ISSUED BY THE DRP AND MAKING A TRANSFER PRICING ADDITIO N TO THE ENTIRE VALUE OF TRANSACTIONS ENTERED INTO BY THE APPELLANT AND IN NOT RESTRICTING ADJUSTMENTS ONLY TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT (I.E. PROPORTIONATE ADJUSTMENTS) AND IGNORING ESTABLISHED JURISPRUDENCE IN THIS REGARD. 3. GROUND N O.1 IS GENERAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 4. GROUND NOS. 2 TO 4 ARE REGARDING DISALLOWANCE MADE UNDER SECTION 14A OF THE INCOME TAX ACT. THE AO NOTED THAT THE ASSESSEE HAS SHOWN 5 IT (TP) A NO. 3 /BANG/201 3 OPENING AN D CLOSING BALANCE OF INVESTMENT OF RS.90,50,15,000/ - AND RS.109,60,81,000/ - RESPECTIVELY. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS RECEIVED THE DIVIDEND INCOME OF RS. 2, 46, 99, 745/ - WHICH HAS BEEN CLAIMED EXEMPT. THE AO PROPOSED TO DISALLOW THE EXPENDITURE UNDER SECTION 14A READ WITH RULE 8D OF THE INCOME TAX RULES. IN RESPONSE THE ASSESSEE SUBMITTED THAT IT HAS NOT INCURRED ANY EXPENSES FOR EARNING THE DIVIDEND INCOME. THE AO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND MADE THE DISALLOWA NCE OF RS.50,02,740/ - BEING .5% OF AVERAGE VALUE OF INVESTMENT AS PER RULE 8D(2)(III). THE DISALLOWANCE COMPUTED AS PER RULE 8D WAS ALSO ADDED TO THE INCOME OF THE ASSESSEE WHILE COMPUTING THE BOOK PROFIT UNDER MAT PROVISIONS. AGGRIEVED BY THE ACTION OF THE AO THE ASSESSEE HAS RAISED THE OBJECTIONS BEFORE THE DRP BUT COULD NOT SUCCEED. 5. BEFORE US THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING THE DIVIDEND INCOME AND CONSEQUENTLY THE ASSESSEE HA S NOT DEBITED ANY EXPENDITURE RELATED TO THE EXEMPT INCOME IN THE PROFIT AND LOSS ACCOUNT, THEN THE SAME CANNOT BE BROUGHT WITHIN THE PURVIEW OF CLAUSE (F) OF EXPLANATION 1 6 IT (TP) A NO. 3 /BANG/201 3 TO SECTION 115 JB (2) OF THE ACT. HE HAS FURTHER CONTENDED THAT THE DISALLOWANCE MA DE UNDER SECTION 14A CANNOT BE AUTOMATICALLY IMPORTED FOR THE PURPOSE OF ADJUSTMENT TO THE BOOK PROFIT AS PER THE EXPLANATION TO SECTION 115 JB OF THE ACT. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT THE AUTHORITIES BELOW HAVE FOLLOWED THE DECISION OF THE MUMBAI BENCHES OF THE TRIBUNAL IN CASE OF DABAR INDIA LTD VERSUS ACIT 145 ITD 175 WHEREIN THE TRIBUNAL HAS HELD THAT THE EXPRESSION IN THE RELATION TO USED FOR MAKING THE DISALLOWANCE UNDER SECTION 14A HAS BEEN EMPLOYED IN THE EXPLANATION 1 TO SECTI ON 115JB(2) AS EXPENDITURE RELATABLE TO IN A MORE OR LESS SAME FORM. THUS, THE LD. THE DR CONTENDED THAT THE TRIBUNAL HAS TAKEN A VIEW THAT THE DISALLOWANCE MADE UNDER SECTION 14A CAN BE CONSIDERED AS AN EXPENDITURE RELATABLE TO THE EXEMPT INCOME FOR THE PURPOSE OF COMPUTING THE BOOK PROFIT UNDER SECTION 115JB. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. IT IS MANIFEST FROM THE DETAILS OF THE INVESTMENT THAT THERE ARE MOMENTS IN THE INVESTMENT PORTFOLIO OF THE ASSESSEE AND THEREFORE, THE ASSESSEE HAS TAKEN DECISIONS OF SALE AND PURCHASE OF THE INVESTMENTS DURING THE YEAR UNDER CONSIDERATION. ONCE THE MANAGEMENT 7 IT (TP) A NO. 3 /BANG/201 3 OF THE ASSESSEE IS INVOLVED IN TAKING THE DE CISION OF SELLING AS WELL AS PU RCHASING OF THE INVESTMENT S, THEN THE PROVISIONS OF SECTION 14A ARE ATTRACTED SO FAR AS THE INDIRECT EXPENDITURE IS CONCERNED. SECTION 14A OF THE INCOME TAX ACT ENVISAGES THE CONCEPT OF APPORTIONMENT OF THE INDIRECT EXPENDITURE WHICH HAS BEEN INCURRED FOR THE COMPOSITE ACTIVITY RES ULTING TAXABLE AS WELL AS EXEMPT INCOME. ACCORDINGLY, WE ARE OF THE VIEW THAT WHEN THERE IS NO DENIAL OF THE FACT THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS TAKEN THE DECISIONS FOR PURCHASE AND SALE OF THE INVESTMENTS AND THERE IS SIGNIFICA NT AMOUNT OF MOMENT IN THE INVESTMENT PORTFOLIO THEN IRRESPECTIVE OF THE ASSESSE NOT DEBITING ANY SPECIFIC EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT IN RESPECT OF EARNING THE TAX - FREE DIVIDEND INCOME, THE PROVISIONS OF SECTION 14A ARE ATTRACTED TO THE EXT ENT OF THE INDIRECT EXPENDITURE. HENCE, WE DO CONCURRENT/CONF I RM THE DISALLOWANCE MADE BY THE AO BEING 0 .5% OF THE AVERAGE INVESTMENT ON ACCOUNT OF INDIRECT EXPENDITURE UNDER SECTION 14A READ WITH RULE 8 D OF THE RULES. 7. AS REGARDS THE ADJUSTMENT OF T HE AMOUNT DISALLOWED UNDER SECTION 14A WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OUR INTENTION 8 IT (TP) A NO. 3 /BANG/201 3 WAS INVITED TO THE JUDGMENT OF HON ' BLE BOMBAY HIGH COURT IN CASE OF CIT VERSUS JSW ENERGY LIMITED 379 ITR 36, WHEREIN THE HONOURABLE HIGH COURT WHILE D EALING WITH AN IDENTICAL ISSUE HAS OBSERVED IN PARA S 9 AND 10 AS UNDER : 9. HOWEVER, THE TRIBUNAL ALSO NOTED THAT BY WAY OF ADDITIONAL GROUND THE ASSESSEE CHALLENGED DISALLOWANCE UNDER SECTION 14A IN CALCULATION OF BOOK PROFIT UNDER SECTION 115JB. THE T RIBUNAL THEREFORE HEARD BOTH SIDES ON ADDITIONAL GROUND AND IN PARAGRAPH 18 HELD THAT ONCE THE ACCOUNTS ARE PREPARED IN ACCORDANCE WITH INDIAN COMPANIES ACT, 1956, THEY HAVE BEEN APPROVED BY THE REGISTRAR OF COMPANIES, THEN, THE ASSESSING OFFICER MUST TAKE THOSE ACCOUNTS INTO CONSIDERATION. IF THE ASSESSEE HAS NOT DEBITED ANY ACTUAL EXPENDITURE RELATING TO THE EARNING OF THE EXEMPT INCOME, THEREFORE, THE PROVISIONS OF SECTION 14A CANNOT BE IMPORTED INTO THE COMPUTATION OF BOOK PROFIT UNDER SECTION 115JB OF THE INCOME TAX ACT, 1961. THEREFORE, EVEN CLAUSE (F) OF EXPLANATION TO SECTION 115JB WHICH REFERS TO THOSE AMOUNTS WHICH ARE DEBITED TO THE PROFIT AND LOSS ACCOUNT, ALONE CAN BE ADDED TO THE BOOK PROFIT, CANNOT APPLY. THEN, THE TRIBUNAL REFERRED TO THE ORD ER PASSED IN THE CASE OF ESSAR TELEHOLDINGS LTD. (SUPRA). MR.KAKA, LEARNED SENIOR COUNSEL IS RIGHT THAT IN CASE OF ESSAR TELEHOLDINGS WHEN SIMILAR ISSUE WAS RAISED THIS COURT DID NOT ENTERTAIN THE APPEAL AND IN THAT REGARD, HE RELIED UPON THE DIVISION BENC H ORDER PASSED ON 7TH AUGUST, 2014. ONE OF US (SHRI S.C. DHARMADHIKARI, J.) WAS A PARTY TO THIS ORDER. THE SAID ORDER READS AS UNDER : IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.438 OF 2012 THE COMMISSIONER OF INCOME TAX5, ...APPELLANT V/S M/S ESSAR TELEHOLDINGS LTD. ...RESPONDENT MR ABHAY AHUJA WITH MS PADMA DIVAKAR FOR APPELLANT. NONE FOR RESPONDENT. CORAM : S.C. DHARMADHIKARI AND B.P. COLABAWALLA JJ. DATE : 7TH AUGUST 2014. P.C. : 1. WE HAVE HEARD MR AHUJA, LEARNED COUNSEL APPEARING ON BEHALF OF THE APPELLANT ON THE QUESTIONS WHICH HAVE BEEN TERMED AS SUBSTANTIAL 9 IT (TP) A NO. 3 /BANG/201 3 QUESTIONS OF LAW. THEY ARE FORMULATED IN THIS MEMO OF APPEAL BY THE REVENUE AT PAGE 3. THEY READ AS UNDER : (A) WHETHER ON TH E FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE ITAT IS RIGHT IN SETTING ASIDE AND RESTORING BACK THE ISSUE TO THE FILE OF AO FOR DE NOVO ADJUDICATION IN LIGHT OF THE PROVISIONS OF RULE 8D ? (B) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HON'BLE ITAT IS RIGHT IN DELETING THE ADDITION OF RS.4.06 CRORES MADE BY THE AO U/S 14A OF THE ACT FOR THE PURPOSE OF COMPUTING BOOK PROFIT U/S 115JB(F) OF THE INCOME TAX ACT 1961 ? 3. IN RELATION TO THE SECOND QUESTION, MR AHUJA STATE D THAT IT IS A SUBSTANTIAL QUESTION OF LAW SIMPLY BECAUSE THE TRIBUNAL WHILE REMANDING AND RESTORING THE CASE TO THE FILE OF THE ASSESSING OFFICER HAS GIVEN A FINDING WITH REGARD TO THE COURSE TO BE ADOPTED AFTER RESTORATION BY THE ASSESSING OFFICER. THE T RIBUNAL SHOULD NOT HAVE DONE THIS. IN SUCH CIRCUMSTANCES, THE APPEAL RAISES SUBSTANTIAL QUESTIONS OF LAW. WE ARE OF THE VIEW THAT THE TRIBUNAL HAD ONLY REITERATED IN PARAGRAPH 8 OF THE ORDER UNDER CHALLENGE DELIVERED ON 29TH JULY 2011 THE FINDING ON THE EX PENDITURE AS PER RULE 8D R/W SECTION 14A OF THE INCOME TAX ACT 1961. IN RELATION TO THAT, THE TRIBUNAL HELD THAT RULE 8D IS NOT APPLICABLE TO THE A.Y. UNDER CONSIDERATION. HENCE, APPLYING THE PROVISIONS OF RULE 8D IS NOT JUSTIFIED. THE FURTHER FINDING OF T HE TRIBUNAL IS ONLY TO BRING TO THE NOTICE OF THE ASSESSING OFFICER THAT HE HAS TO ABIDE BY CLAUSE (F) OF EXPLANATION 115JB OF THE INCOME TAX ACT. IN SUCH CIRCUMSTANCES, WHAT THE TRIBUNAL HAS DONE IS TO INVITE ATTENTION OF THE ASSESSING OFFICER TO THE ORDE RS PASSED BY THE TRIBUNAL, DELHI BENCH. BEYOND THIS, WE DO NOT THINK THAT THE TRIBUNAL HAS ADJUDICATED THE CLAIM OR HAS ACCEPTED THE CONTENTIONS RAISED BEFORE IT BY EITHER SIDE. IN THESE CIRCUMSTANCES AND WHEN THE ASSESSING OFFICER IS EXPECTED TO DETERMINE THE CLAIM AFRESH AND IN ACCORDANCE WITH LAW, WE DO NOT SEE ANY BASIS FOR THE APPREHENSION AND WHICH IS VOICED BY MR AHUJA. WITH THIS ADDITIONAL CLARIFICATION, THE APPEAL DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. APPEAL IS DISMISSED. NO COSTS. ( B.P. COLABAWALLA J.) (S.C. DHARMADHIKARI J.) 10. HAVING HELD THAT THE MATTER IS SENT BACK TO THE ASSESSING OFFICER FOR RECONSIDERATION AND WHILE WORKING OUT THE DEDUCTION IN TERMS OF SECTION 14A READ WITH RULE - 8D, THE ASSSESSING OFFICER M UST TAKE NOTE OF CLAUSE (F) OF EXPLANATION TO SECTION 115JB OF THE I.T. ACT, THEN WE DO NOT THINK THAT QUESTIONS 1 AND 3 COULD BE ENTERTAINED. THE SAME CLARIFICATION AS IS GIVEN IN THE CASE OF M/S. ESSAR TELEHOLDINGS LTD. WOULD GOVERN THE PRESENT CASE. THE FACTS AND CIRCUMSTANCES BEING IDENTICAL, WE DO NOT THINK THAT THE APPEAL SHOULD BE ENTERTAINED ON QUESTION NOS.1 AND 3. IN THE ABSENCE OF ANY CONTRARY VIEW OR PRECEDENT OF HONOURABLE HIGH COURT, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE ASSESSING OFF ICER FOR 10 IT (TP) A NO. 3 /BANG/201 3 RECONSIDERING THE ISSUE OF WORKING OUT THE ADJUSTMENT AS PER CLAUSE (F) OF THE EXPLANATION TO SEC. 115JB OF THE AMOUNT CALCULATED UNDER SECTION 14A OF THE ACT IN THE LIGHT OF THE OBSERVATION OF THE HONOURABLE HIGH COURT. 8. GROUND NOS. 5 TO 7 ARE REGARDING ADDITION ON ACCOUNT OF EXCHANGE GAIN ON FORWARD CONTRACTS . DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT ACCOUNTING POLICY IN RESPECT OF ACCOUNTING OF PROFIT/LOSS ON FORWARD CONTRACT WAS CHANGED DURING THE YEAR, RESULTING IN REDUCTION OF INCOME IN RESPECT OF FOREIGN EXCHANGE GAIN ON FORWARD CONTRACT BY A SUM OF RS.1,73,88,000/ - . THE ASSESSEE SUBMITTED BEFORE THE AO THAT LOSSES DUE TO FOREX FLUCTUATION ON FORWARD CONTRACT WERE DEBITED TO THE PROFIT AND LOSS ACCOUNT, WHEREAS THE GAIN WAS NOT BE RECOGNISED IN THE PROFIT AND LOSS ACCOUNT AS PER THE ACCOUNTING POLICY. IT WAS NOT DISPUTED THAT UP TO THE LAST ASSESSMENT YEAR, THE ASSESSEE WAS RECOGNISING GAIN OR LOSS ARISING DUE TO CHANGE IN THE VALUE OF THE FORWARD CONTRACT . IN THE Y EAR UNDER CONSIDERATION, THE ASSESSEE HAS CHANGED ITS ACCOUNTING POLICY AND HAS DISCLOSED THE IMPACT OF SUCH CHANGE IN THE NOTES TO THE ACCOUNTS AS PER THE ACCOUNTING STANDARDS. THE ASSESSEE 11 IT (TP) A NO. 3 /BANG/201 3 POINTED OUT THAT THE RELEVANT DISCLOSER HAVE BEEN MADE IN THE NOT E 10 OF SCHEDULE 13 OF THE NOTE TO ACCOUNTS . ALTERNATIVELY THE ASSESSEE CONTENDED THAT EVEN IF MARK TO MARKET(MTM) GAIN IS TO BE ADDED TO THE INCOME OF THE ASSESSE THE SAME SHOULD BE ALLOWED FOR DEDUCTION UNDER SECTION 10A OF THE ACT. THE AO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT THE GAIN IN RESPECT OF FOREIGN EXCHANGE FLUCTUATION WHICH WAS NOT ACCOUNTED FOR BY THE ASSESSEE DUE TO CHANGE OF ACCOUNTING POLICY DURING THE YEAR IS CLEARLY A REVENUE RECEIPT TO BE INCLUDED IN THE INCOME OF TH E ASSESSEE. AS REGARDS THE CLAIM OF DEDUCTION UNDER SECTION 10A THE AO DENIED THE SAME FOR WANT OF NECESSARY DETAILS FOR CALCULATION OF THE CLAIM. THE ASSESSEE RAISED THE OBJECTIONS BEFORE THE DRP AGAINST THE DENIAL OF THE CHANGE IN ACCOUNTING POLICY AND A S WELL AS THE DEDUCTION UNDER SECTION 10A. THE DRP HAS REJECTED THE OBJECTIONS AND CONFIRMED THE ACTION OF THE AO. 9. BEFORE US LD. AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS CHANGED THE ACCOUNTING POLICY OF RECOGNISING THE GAIN/LOSS ARISIN G FROM FOREIGN EXCHANGE FLUCTUATION ON FORWARD CONTRACT WHICH IS IN ACCORDANCE WITH THE ACCOUNTING STANDARDS. THE ASSESSEE HAS DULY DISCLOSED THE SAID 12 IT (TP) A NO. 3 /BANG/201 3 CHANGE OF THE ACCOUNTING POLICY IN THE NOTE 10 OF SCHEDULE 13 TO THE ACCOUNTS. THEREFORE, ONCE THE ASSESS EE HAS DISCLOSED THE IMPACT OF SUCH CHANGE IN THE NOTES TO ACCOUNTS AS REQUIRED UNDER THE ACCOUNTING STANDARDS THEN IN THE ABSENCE OF ANY FINDING THAT THE CHANGE HAS BEEN MADE ONLY WITH A VIEW TO DISTORT THE FINANCIAL RESULTS THE ASSESSING OFFICER IS NOT J USTIFIED IN REJECTING THE ACCOUNTING TREATMENT GIVEN BY THE ASSESSEE. ALTERNATIVELY, THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT SUCH A GAIN WOULD BE REGARDED AS BUSINESS INCOME OF THE ASSESSEE AND THEREFORE THE SAME IS ELIGIBLE FOR DEDUCTION UNDER SECTI ON 10A. THE LD. AR HAS POINTED OUT THAT ALL THE UNDERTAKINGS OF THE ASSESSEE ARE ELIGIBLE FOR DEDUCTION UNDER SECTION 10A AND ACCORDINGLY THE INCOME ARISING FROM FLUCTUATION GAIN ON FORWARD CONTRACT WHICH ARE MARKED TO MARKET, THEN SUCH INCOME WOULD BE REG ARDED AS THE INCOME OF THE UNDERTAKING AND CONSEQUENTLY ELIGIBLE FOR DEDUCTION UNDER SECTION 10A. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DECISION OF HONOURABLE JURISDICTIONAL HIGH COURT IN CASE OF CIT VERSUS MOTOROLA INDIA ELECTRONICS PRIVATE LIMITED 225 TAXMEN 11 (KARNATAKA). 13 IT (TP) A NO. 3 /BANG/201 3 9.1 ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT THE ASSESSEE HAS NOT BROUGHT ON RECORD THE IMPENDING CIRCUMSTANCES UNDER WHICH THE ASSESSEE HAS CHANGED ITS ACCOUNTING POLICY DURING THE YEAR UNDER CONSIDERATION. IT IS UNDISPUTED FACT THAT DUE TO THE CHANGE IN THE ACCOUNTING POLICY THE ASSESSEE HAS NOT OFFERED THE DUE INCOME ON ACCOUNT OF FOREIGN EXCHANGE GAIN ON FORWARD CONTRACT. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. AS REGARDS THE ELIGIBILITY FO R DEDUCTION UNDER SECTION 10A THE LD. DR HAS SUBMITTED THAT WHEN THIS INCOME IS NOT DERIVED FROM THE INDUSTRIAL UNDERTAKING AND PARTICULARLY FROM EXPORT OF GOODS THEN IT HAS NO FIRST DEGREE NEXUS WITH THE UNDERTAKING TO CLAIM THE DEDUCTION UNDER SECTION 10 A. HE HAS RELIED UPON THE DECISION OF HONOURABLE SUPREME COURT IN CASE OF LIBERTY INDIA V. CIT 317 ITR 218 AS WELL AS THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE FOREIGN EXCHANGE GAIN ON FORWARD CONTRACT DOES NOT SATISFY THE CONDITION FOR IN CLUDING IN THE EXPORT TURNOVER. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON THE RECORD. THERE IS NO IMPEDIMENT FOR THE CHANGE OF ACCOUNTING POLICY IF THE PURPOSE OF CHANGE IS TO COMPLY WITH THE 14 IT (TP) A NO. 3 /BANG/201 3 ACCOUNTING STANDARD AND NOT TO ACHIEVE ANY UNDER HAND OBJECTIVE. IN OTHER WORDS THE CHANGE IN THE ACCOUNTING POLICY SHOULD NOT LEAD TO THE DISTORTION OF THE FINANCIAL RESULTS AND ONCE IT HAS BEEN CHANGED IT SHOULD BE FOR A LONG - LASTING PERIOD TO MAINTAIN THE CONSISTENCY OF RECOGN ISING THE REVENUE AND TREATMENT OF THE PARTICULAR INCOME OR LOSS. THOUGH THERE IS AN IMPACT ON THE TAXABLE INCOME OF THE ASSESSEE DUE TO THE CHANGE IN THE ACCOUNTING POLICY FOR NOT RECOGNISING THE FOREIGN EXCHANGE GAIN AS INCOME IN RESPECT OF FORWARD CONTR ACTS HOWEVER, IF THE CHANGE AS WELL AS THE IMPACT IN THE FINANCIAL RESULTS DUE TO SUCH CHANGE HAS BEEN DULY DISCLOSED BY THE ASSESSEE AS REQUIRED UNDER THE ACCOUNTING STANDARDS AND SUCH CHANGE HAS BEEN MADE TO FOLLOW THE ACCOUNTING STANDARDS AND NOT INTEND ED TO SUPPRESS THE INCOME OR TO MISREPRESENTS THE RESULTS THEN SUCH CHANGE CANNOT BE REJECTED. THE ASSESSING OFFICER HAS REJECTED THE REVENUE RECOGNITION ON ACCOUNT OF FOREIGN EXCHANGE GAIN ON FORWARD CONTRACTS WITHOUT EXAMINING THE RELEVANT FACTS WHETHER THE ASSESSEE IS CONTINUING FOLLOWING THE SAME ACCOUNTING POLICY AND WHETHER THE CHANGE OF ACCOUNTING POLICY IS IN COMPLIANCE OF THE ACCOUNTING STANDARD. THEREFORE, WE ARE OF THE VIEW THAT IF THIS CHANGE IN 15 IT (TP) A NO. 3 /BANG/201 3 THE ACCOUNTING POLICY IS CONSISTENTLY FOLLOWED BY THE ASSESSEE IN THE FOLLOWING YEARS AND THE ASSESSEE HAS ALREADY DISCLOSED THE CHANGE IN THE ACCOUNTING POLICY AS WELL AS IMPACT OF CHANGE IN THE BOOKS OF ACCOUNTS AND PARTICULARLY IN THE NOTES TO ACCOUNTS UNDER SCHEDULE 13 THEN IT CANNOT BE REJECTED WITHO UT POINTING OUT THE DEFECT IN POLICY OR ANY ULTERIOR MOTIVE OF SUCH CHANGE. THE ASSESSING OFFICER HAS NOT DISPUTED THE DISCLOSER OF THE CHANGE IN THE ACCOUNTING POLICY AND IMPACT OF THE SAME IN THE NOTES TO ACCOUNTS. ACCORDINGLY, WE SET ASIDE THIS ISSUE T O THE RECORD OF THE AO TO THE EXAMINE THE SAME IN THE LIGHT OF THE ABOVE OBSERVATIONS AND BY CONSIDERING THE FACT WHETHER THE ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING THE SAME ACCOUNTING POLICY FOR A SUBSTANTIAL PERIOD IN FUTURE. 10.1 AS REGARDS ELIGI BILITY OF DEDUCTION UNDER SECTION 10A I T IS PERTINENT TO NOTE THAT IF THE FORWARD CONTRACTS ENTERED INTO BY THE ASSESSEE ARE FULLY BACK ED BY THE EXPORT THEN THE GAIN OR LOSS ON SUCH FORWARD CONTRACTS WOULD BE REGARDED AS BUSINESS INCOME. THEREFORE, WHEN TH E FORWARD CONTRACTS ARE VALUED AT MARK TO MARKET, AND FULLY BACKED BY THE EXPORT TRANSACTIONS THEN THE GAIN OR LOSS ARISING FROM SUCH 16 IT (TP) A NO. 3 /BANG/201 3 CONTRACTS WOULD BE IN THE NATURE OF BUSINESS INCOME OF THE ASSESSEE. CONSEQUENTLY WHEN ALL THE UNDERTAKING ARE ELIGIBLE F OR DEDUCTION UNDER SECTION 10A THEN THE INCOME FROM FOREIGN EXCHANGE GAIN ON FORWARD CONTRACT IS ELIGIBLE FOR DEDUCTION UNDER SECTION 10A. ACCORDINGLY, SO FAR AS THE INCOME ON ACCOUNT OF GAIN ON FOREIGN EXCHANGE FLUCTUATION ON FORWARD CONTRACTS WHICH ARE F ULLY BACK ED BY THE EXPORT TRANSACTIONS THE SAME IS TO BE TREATED AS INCOME DERIVED FROM INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF SECTION 10A. THE HONOURABLE JURISDICTI ONAL HIGH COURT IN CASE OF CIT VS. MOTOROLA INDIA ELECTRONICS P RIVATE LIMITED (SUPRA) AF TER CONSIDERING THE JUDGMENT OF HONOURABLE SUPREME COURT IN CASE OF L IBERTY INDIA V. CIT (SUPRA) HAS HELD IN P ARA 7 AND 8 AS UNDER: 7. THE SUBMISSION OF THE APPELLANT(S) [ASSESSEE(S)] IN NUTSHELL WAS THAT THE AMOUNT OF DUTY DRAWBACK/DEPB WAS INTENDED TO NEUTRALIZE THE INCIDENCE OF DUTY ON INPUTS CONSUMED/UTILIZED IN THE MANUFACTURE OF EXPORTED GOODS RESULTING INTO INCREASED PROFITS DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING WHICH PROFITS QUALIFIED FOR DEDUCTION UNDER S. 80 - IB. ACCORDING TO T HE APPELLANT(S) SINCE NO EXCISE DUTY/CUSTOMS DUTY WAS PAYABLE ON RAW MATERIALS CONSUMED/UTILIZED IN MANUFACTURING GOODS EXPORTED OUT OF INDIA, THE DUTY PAID STOOD REFUNDED UNDER S. 37(2)(XVIA) OF THE CENTRAL EXCISE ACT, 1944 AND UNDER S. 75 OF THE CUSTOMS ACT, 1962 READ WITH CUSTOMS, CENTRAL EXCISE DUTIES AND SERVICE - TAX DRAWBACK RULES, 1995. 8. ON THE NATURE OF DEPB IT WAS SUBMITTED THAT THE AMOUNT OF DEPB WAS GRANTED UNDER EXIM POLICY ISSUED IN TERMS OF POWERS CONFERRED UNDER S. 5 OF THE FOREIGN TRADE (DE VELOPMENT AND REGULATION) ACT, 1992. ACCORDING TO THE APPELLANT(S), THE DEPB SCHEME IS A DUTY REMISSION SCHEME WHICH ALLOWS DRAWBACK OF IMPORT CHARGES PAID ON INPUTS USED IN THE EXPORT PRODUCT. THE OBJECT BEING TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY O N THE IMPORT CONTENT OF THE EXPORT PRODUCT BY WAY OF GRANT OF DUTY CREDIT. THE DEPB BENEFIT IS FREELY TRANSFERABLE. THUS, ACCORDING TO 17 IT (TP) A NO. 3 /BANG/201 3 THE APPELLANT(S), DUTY DRAWBACK/DEPB BENEFIT RECEIVED HAD TO BE CREDITED AGAINST THE COST OF MANUFACTURE OF GOODS/PURCHAS ES DEBITED TO THE P&L A/C. THAT, SUCH CREDIT WAS NOT AN INDEPENDENT SOURCE OF PROFIT. IN THIS CONNECTION RELIANCE HAS BEEN PLACED ON AS - 2 ISSUED BY ICAI ON 'VALUATION OF INVENTORIES' WHICH INDICATES THAT WHILE DETERMINING COST OF PURCHASE, COST OF CONVERSI ON AND OTHER COSTS INCURRED IN BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION SHOULD BE CONSIDERED AND THAT TRADE DISCOUNTS, REBATES, DUTY DRAWBACK AND SUCH OTHER SIMILAR ITEMS HAVE TO BE DEDUCTED IN DETERMINING THE COST OF PURCHASE. PLAC ING RELIANCE ON AS - 2, IT WAS SUBMITTED THAT WHERE EXCISE DUTY PAID WAS SUBSEQUENTLY RECOVERABLE BY WAY OF DRAWBACK, THE SAME WOULD NOT FORM PART OF THE MANUFACTURING COST. IT WAS SUBMITTED ON BEHALF OF THE APPELLANT(S) THAT PAYMENT OF EXCISE DUTY/CUSTOMS D UTY ON INPUTS CONSUMED IN MANUFACTURE OF GOODS BY AN INDUSTRIAL UNDERTAKING ELIGIBLE FOR DEDUCTION UNDER S. 80 - IB, WAS INEXTRICABLY LINKED TO THE MANUFACTURING OPERATIONS OF THE ELIGIBLE UNDERTAKING WITHOUT WHICH MANUFACTURING OPERATIONS CANNOT BE UNDERTAK EN, HENCE THE DUTY, WHICH WAS PAID IN THE FIRST INSTANCE AND WHICH HAD DIRECT NEXUS TO THE MANUFACTURING ACTIVITY WHEN RECEIVED BACK, HAD FIRST DEGREE NEXUS WITH THE INDUSTRIAL ACTIVITY OF THE ELIGIBLE UNDERTAKING AND CONSEQUENTLY THE REIMBURSEMENT OF THE SAID AMOUNT CANNOT BE TREATED AS INCOME OF THE ASSESSEE(S) DE HORS THE EXPENSE ORIGINALLY INCURRED BY WAY OF PAYMENT OF DUTY. CONSEQUENTLY, ACCORDING TO THE APPELLANT(S), RECEIPT OF DUTY DRAWBACK/DEPB STOOD LINKED DIRECTLY TO THE MANUFACTURE/PRODUCTION OF GOODS AND THEREFORE HAD TO BE REGARDED AS PROFITS DERIVED FROM ELIGIBLE UNDERTAKING QUALIFYING FOR DEDUCTION UNDER S. 80 - IB OF THE 1961 ACT. ON BEHALF OF THE APPELLANT(S) IT WAS FURTHER SUBMITTED THAT THIS COURT S DECISION IN STERLING FOOD (SUPRA) DEALT WI TH AVAILABILITY OF DEDUCTION UNDER S. 80HH WITH RESPECT TO PROFIT ON SALE OF IMPORT ENTITLEMENTS. THE SAID DECISION, ACCORDING TO THE APPELLANT, HAD NO APPLICABILITY TO THE ISSUE UNDER CONSIDERATION FOR THE REASON THAT IMPORT ENTITLEMENT/REP LICENCE WAS GR ANTED BY THE GOVERNMENT ON THE BASIS OF EXPORTS MADE; THE SAME WERE GRANTED GRATUITOUSLY WITHOUT ANTECEDENT COST HAVING BEING INCURRED BY THE INDUSTRIAL UNDERTAKING, UNLIKE DUTY DRAWBACK AND DEPB, WHICH HAD DIRECT LINK TO THE COSTS INCURRED BY SUCH INDUSTR IAL UNDERTAKING BY WAY OF PAYMENT OF CUSTOMS/EXCISE DUTY IN RESPECT OF DUTY PAID INPUTS USED IN THE MANUFACTURE OF GOODS MEANT FOR EXPORT AND IN SUCH CIRCUMSTANCES, PROFIT FROM SALE OF IMPORT ENTITLEMENTS/REP LICENCE WAS IN THE NATURE OF WINDFALL AND IT WA S IN THOSE CIRCUMSTANCES, THAT THE APEX COURT HELD THAT SOURCE OF PROFIT ON SALE OF IMPORT ENTITLEMENTS WAS NOT THE INDUSTRIAL UNDERTAKING BUT THE SOURCE WAS THE EXPORT PROMOTION SCHEME. ACCORDING TO THE APPELLANT(S), IN THE CASE OF SALE OF IMPORT ENTITLEM ENTS/REP LICENCE, THE SOURCE WAS THE SCHEME FRAMED BY GOVERNMENT OF INDIA WHEREAS IN THE CASE OF DEPB/DUTY DRAWBACK, THE SOURCE WAS THE FACT OF PAYMENT OF DUTY IN RESPECT OF INPUTS CONSUMED/UTILIZED IN THE MANUFACTURE OF GOODS MEANT FOR EXPORT. THAT, BUT F OR SUCH PAYMENTS OF DUTY ON INPUTS USED IN THE MANUFACTURE OF GOODS MEANT FOR EXPORTS, INDUSTRIAL UNDERTAKING(S) WOULD NOT BE ENTITLED TO THE BENEFIT OF DUTY DRAWBACK/DEPB, NOTWITHSTANDING, THE EXPORT PROMOTION SCHEME OF THE GOVERNMENT AND, THEREFORE, THER E WAS A DIRECT AND IMMEDIATE NEXUS BETWEEN PAYMENT OF DUTY ON SUCH INPUTS AND RECEIPT OF DUTY DRAWBACK/DEPB. IN THIS CONNECTION RELIANCE WAS PLACED ON THE JUDGMENT OF THE GUJARAT HIGH COURT IN THE CASE OF CIT VS. INDIA GELATINE & CHEMICALS LTD. (2005) 194 CTR (GUJ) 492 : (2005) 275 ITR 284 (GUJ). LASTLY, IT WAS SUBMITTED ON BEHALF OF THE APPELLANT(S) THAT THERE WAS NO DIFFERENCE BETWEEN ADVANCE LICENCE SCHEME AND DUTY DRAWBACK/DEPB. IN THIS CONNECTION IT WAS URGED THAT DUTY DRAWBACK REGIME REQUIRED THE INDU STRIAL UNDERTAKING TO PAY IN THE 18 IT (TP) A NO. 3 /BANG/201 3 FIRST INSTANCE THE DUTY ON INPUTS AND THEREAFTER SEEK REIMBURSEMENT ON PROFIT OF GOODS MANUFACTURED USING SUCH DUTY PAID INPUTS, HAVING BEEN EXPORTED. THE INDUSTRIAL UNDERTAKING ALTERNATIVELY COULD AVAIL OF ADVANCE LICENCE SCHEME WHERE UNDER THE INDUSTRIAL UNDERTAKING COULD IMPORT INPUTS TO BE USED FOR MANUFACTURE OF GOODS MEANT FOR EXPORT WITHOUT PAYMENT OF DUTY. IN THE CASE WHERE THE INDUSTRIAL UNDERTAKING ENJOYED THE BENEFIT OF ADVANCE LICENCE SCHEME, THE PROFIT AS SHOWN IN P&L A/C WAS REGARDED AS INCOME DERIVED FROM INDUSTRIAL UNDERTAKING ENTITLED TO DEDUCTION UNDER S. 80 - IB OF THE 1961 ACT WITHOUT ANY ADJUSTMENT WHEREAS WHEN THE SAME INDUSTRIAL UNDERTAKING WHEN IT OPTS FOR DUTY DRAWBACK IS DENIED THE BENEFIT OF DEDUCTION UNDER S. 80 - IB ON THE DUTY REMITTED. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE WHEN THE AO HAS DENIED THE DEDUCTION UNDER SECTION 10A IN RESPECT OF THE FOREIGN EXCHANGE FLUCTUATION GAIN ON FORWARD CONTRACTS FOR WANT OF NECESSARY DETAILS WE SET ASIDE THIS ISSUE TO THE RECORD OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION IN THE LIGHT OF THE JUDGMENT OF HONOURABLE JURISDICTIONAL HIGH COURT IN CASE OF CIT VERSUS MOTOROLA INDIA ELECTION PRIVATE LIMITED AND AFTER VERIFYING THE AMOUNT OF INCOME ARISI NG ON MARK TO MARKET GAIN. 11. GROUND NOS . 8 & 9 ARE REGARDING ADDITION OF PROVISION FOR LEAVE ENCASHMENT WHIL E COMPUTING BOOK PROFIT . THE ASSESSING OFFICER ADDED BACK PROVISION FOR GRATUITY OF RS.45,00,26,696/ - AS WELL AS PROVISION FOR LEAVE ENCASHMENT OF RS.8,23,56, 024/ - WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT. WHILE DECIDING THE OBJECTIONS OF THE ASSESSE THE DRP HAS ALLOWED THE CLAIM AND DELETED THE ADDITION ON ACCOUNT OF 19 IT (TP) A NO. 3 /BANG/201 3 PROVISION FOR GRATUITY HOWEVER, THE ISSUE OF ADJUSTMENT MAKE TO THE BOOK PROFIT ON ACCOUNT OF PROVISION FOR LEAVE ENCASHMENT HAS NOT BEEN ADJUDICATED BY THE DRP. 12. BEFORE US THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT THOUGH PRINCIPALLY THE DRP HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSE HOWEVER, THE LEAVE E NCASHMENT ISSUE HAS NOT BEEN ADJUDICATED WHILE DIRECTING THE AO NOT TO MAKE THE ADJUSTMENT. HE HAS REFERRED THE FINDING OF THE DRP IN PARA 4.3 OF THE DIRECTIONS AND PLEADED THAT THE AO MAY BE DIRECTED NOT TO MAKE ADJUSTMENT ON ACCOUNT OF LEAVE ENCASHMENT. THE LD. AR HAS POINTED OUT THAT IT IS AN ASCERTAIN LIABILITY AND BASED ON ACTUARIAL VALUATIONS AT THE BALANCE SHEET DATE. THE LD. AR HAS FURTHER POINTED OUT THAT SINCE IT WAS A PROVISION AND THE ACTUAL PAYMENT WAS NOT MADE DURING THE YEAR THEREFORE, THE AS SESSEE ITSELF HAS DISALLOWED THIS AMOUNT UNDER SECTION 43B OF THE ACT IN THE NORMAL COMPUTATION BUT IT IS AN ASCERT AIN LIABILITY AND BASED ON THE A CTUARIAL VALUATION CARRIED OUT BY AN INDEPENDENT ACTUARY THEN NO ADJUSTMENT CAN BE MADE WHILE COMPUTING THE B OOK PROFIT. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE ORDER OF THE ASSESSMENT OFFICER. 20 IT (TP) A NO. 3 /BANG/201 3 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD . THE DRP WHILE DEALING WITH THE ISSUE HAS GIVEN THE DIRECTIONS TO THE AO IN PARA 4.3 OF THE ORDER AS UNDER: 4.3 THE ASSESSEE HAS OBJECTED THAT THE ASSESSING OFFICER HAS ERRED IN PROPOSING TO ADD BACK PROVISION FOR GRATUITY TO INR 45,026,696, WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT. IT IS SEEN THAT TH E ASSESSEE HAS MADE ADJUSTMENT T O THE BOOK PROFIT BY TREATING PROVISION FOR GRATUITY AS AN UNASCERTAINED LIABILITY. THIS ISSUE IS HOWEVER, NOW SETTLED IN FAVOUR OF THE TAX PAYERS BY THE JUDGEMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MO VERS LTD. 245 ITR 428 (SC), WHEREIN THE SC HAS HELD THAT LIABILITY ON ACCOUNT OF GRATUITY AND LEAVE ENCASHMENT IS ALLOWABLE AS A DEDUCTION WHILE COMPUTING BOOK PROFITS. THE OBJECTION OF THE ASSESSEE ON THIS ACCOUNT IS THEREFORE SUSTAINED AND THE ASSESSING OFFICER IS DIRECTED NOT TO MAKE ADJUSTMENT OF RS.4,50,26,696 TO THE BOOK PROFIT ON ACCOUNT OF PROVISION FOR GRATUITY. AS IT IS CLEAR FROM THE FINDING OF THE DRP THAT ON PRINCIPLE THE DRP HAS ACCEPTED THAT THE ISSUE IS NOW COVERED BY THE JUDGMENT OF H ONOURABLE SUPREME COURT IN CASE OF BHARAT EARTH MOVERS LTD 245 ITR 428, WHEREIN IT WAS HELD THAT LIABILITY ON ACCOUNT OF GRATUITY AS WELL AS LEAVE ENCASHMENT IS ALLOWABLE AS DEDUCTION WHILE COMPUTING BOOK PROFITS. O NLY ONE PART OF THE CLAIM REGARDING PROVI SION FOR GRATUITY WAS ADJUDICATED BY THE DRP AND THE OTHER ASPECT OF THE ISSUE REGARDING PROVISION FOR LEAVE ENCASHMENT WAS NOT ADJUDICATED. THEREFORE, WE ARE 21 IT (TP) A NO. 3 /BANG/201 3 OF THE VIEW THAT THE MATTER IS REQUIRED TO BE EXAMINED BY THE AO IN THE LIGHT OF THE DECISIONS OF THE HONOURABLE SUPREME COURT IN CASE OF BEML (SUPRA) AND BY CONSIDERING THE FACT WHETHER THE LIABILITY IS AN ASCERTAIN LIABILITY BASED ON ACTUARIAL VALUATION AT THE DATE OF BALANCE SHEET CARRIED OUT BY AN INDEPENDENT ACTUARY. ACCORDINGLY, THIS ISSUE IS S ET ASIDE TO THE RECORD OF THE AO TO DECIDE THE SAME AFRESH IN TERMS OF THE ABOVE OBSERVATIONS. 14. GROUND NOS.10 & 11 ARE REGARDING ADDITION OF EXCESS DEPRECIATION FOR COMPUTATION OF BOOK PROFIT. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE IS FOLL OWING POLICY OF CAPITALIZING AMOUNT AND THEN DEPRECIATING THE SAME @ 100% IN RESPECT OF THE ASSET COSTING UP TO RS.45,000. THOUGH THE ASSESSEE CLAIMED DEPRECIATION AS PER THE PROVISIONS OF THE ACT FOR NORMAL COMPUTATION OF INCOME HOWEVER WHILE COMPUTING THE BOOK PROFIT THE A.O NOTED THAT THE DEPRECIATION OF 100% IN RESPECT OF THE ASSETS UPTO RS.45,000 IS NOT A S PER THE SCHEDULE XIV OF THE COMPANIES ACT WHICH PERMITS 100% DEPRECIATION IN RESPECT OF THE ASSETS COSTING RS.5,000 OR LESS. ACCORDINGLY, THE A SSESSING OFFICER AFTER ALLOWING THE DEPRECIATION SPECIFIED AS PER THE SCHEDULE VI OF THE COMPANIES ACT MADE 22 IT (TP) A NO. 3 /BANG/201 3 THE ADDITION OF THE EXCESS DEPRECIATION CLAIMED BY THE ASSESSEE TO THE TUNE OF RS.4,79,078. THE DRP CONFIRMED THE ACTION OF THE ASSESSING OFFICER. 15. BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE IS FOLLOWING A PARTICULAR POLICY ON DEPRECIATION AND DEPRECIATING THE ASSET COSTING UPTO RS.45,000 @ 100% IN THE BOOKS OF ACCOUNTS. HE HAS SUBMITTED THAT THERE IS NO BAR FOR ADOPTING A HIGHER RATE THAN PROVIDED UNDER THE SCHEDULE XIV OF THE COMPANIES ACT. THE ASSESSEE HAS DULY DISCLOSED IN THE ACCOUNTS THE HIGHER RATE OF DEPRECIATION APPLIED IN RESPECT OF THE ASSETS COSTING UPTO RS.45,000. IN SUPPO RT OF HIS CONTENTION, HE HAS REFERRED TO THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS INDIA ON SCHEDULE XIV OF THE COMPANIES ACT AND SUBMITTED THAT THE COMPANY CAN WRITE OFF FULLY LOW VALUE ITEM ON THE CONSIDERATION OF MATERIALITY W HETHER SUCH ACCOUNTING POLICY IS FOLLOWED BY A COMPANY, THE SAME SHOULD BE DISCLOSED IN THE ACCOUNTS. THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE RATE OF DEPRECIATION PROVIDED UNDER SCHEDULE XIV IS MINIMUM FOR THE COST OF THE ASSETS AND IF A COMPANY FOLLOWED AN 23 IT (TP) A NO. 3 /BANG/201 3 ACCOUNTING POLICY OF CHARGING DEPRECIATION @ 100% ON LOW VALUE ITEMS OF MORE THAN RS.5,000 THE SAME IS PERMISSIBLE. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF MALAYAL A MANORAMA CO. LTD. VS. CIT (2008) 300 ITR 251 (SC) AS WELL AS DECISION IN THE CASE OF APOLLO TYRES LTD. VS. CIT (2002) 255 ITR 273 (SC) . 16. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS CONTENDED THAT APPLYING THE DEPRECIATI ON @ 100% ON THE ASSET COSTING UPTO RS.45,000 IS NOT PROVIDED UNDER THE SCHEDULE XIV OF THE COMPANIES ACT. THERE IS NO BASIS OF CHARGING 100% DEPRECIATION ON THE ASSETS COSTING RS.45,000 AND FIXING THE THRESHOLD LIMIT OF LOW COST ITEM. THE LEARNED DEPARTM ENTAL REPRESENTATIVE HAS FURTHER CONTENDED THAT THE DECISIONS OF HON'BLE SUPREME COURT ARE NOT APPLICABLE IN THE CASE OF THE ASSESSEE WHEN THE BOOKS OF ACCOUNTS ARE NOT PREPARED AS PER PART II & III OF SCHEDULE VI OF THE COMPANIES ACT. HE HAS RELIED UPON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF DYNAMIC ORTHO PEDICS (P) LTD. VS. CIT (2010) 321 ITR 300 AND SUBMITTED THAT THE HON'BLE SUPREME COURT HAS TAKEN A DIFFERENT VIEW IN THE SUBSEQUENT DECISION. 24 IT (TP) A NO. 3 /BANG/201 3 17. WE HAVE CONSIDERED THE RIVAL SUBM ISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT AS PER SCHEDULE XIV OF THE COMPANIES ACT 100% DEPRECIATION IS PROVIDED IN RESPECT OF THE ASSTS COSTING UPTO RS.5,000. THE ASSESSEE HAS PLACED RELIANCE ON THE GUIDING NOTE OF THE ICAI ON SCHEDULE XIV OF THE COMPANIES ACT WHICH READS AS UNDER : 10. ACCORDING TO THE ABOVE NOTE, ALL INDIVIDUAL ITEMS OF FIXED ASSETS WHOSE ACTUAL COST DOES NOT EXCEED RS.5,000 SHALL BE CHARGED DEPRECIATION AT THE RATE OF 100%. HOWEVER, IN RESPECT O F THE FIXED ASSETS ACQUIRED PRIOR TO DECEMBER 16, 1993, ALTERNATIVE BASES OF COMPUTING THE DEPRECIATION CHARGE ARE PERMITTED. THE AMOUNT OF WRITE OFF IN RESPECT OF LOW VALUE ASSETS WOULD ALSO THEREFORE DEPEND UPON THE ALTERNATIVE CHOSEN. 11. IT IS N OTED THAT NOTE 4 TO SCHEDULE XIV REQUIRES, INTER ALIA, THAT WHERE DURING ANY FINANCIAL YEAR ANY ADDITION HAS BEEN MADE TO ANY ASSET, THE DEPRECIATION ON SUCH ASSETS SHOULD BE CALCULATED ON A PRO - RATA BASIS FROM THE DATE OF SUCH ADDITION. SINCE NOTE 8 TO S CHEDULE XIV (REPRODUCED ABOVE) PRESCRIBES THE RATE OF DEPRECIATION OF 100 PER CENT, PRO - RATA DEPRECIATION SHOULD BE CHARGED ON ADDITION OF THE SAID LOW VALUE ITEMS OF FIXED ASSETS ALSO. HOWEVER, A COMPANY CAN WRITE OFF FULLY, LOW VALUE ITEMS ON THE CONSIDE RATION OF MATERIALITY. WHERE SUCH AN ACCOUNTING POLICY IS FOLLOWED BY A COMPANY, THE SAME SHOULD BE DISCLOSED APPROPRIATELY IN THE ACCOUNTS. THUS THERE IS NO DISPUTE THAT EVEN IN THE GUIDING NOTE LOW COST ITEMS NOT EXCEEDING RS.5,000 SHALL BE CHARGED DEPRECIATION @ 100%. THE ONLY EXCEPTION PROVIDED IS THAT A LOW VALUE ITEM ON CONSIDERATION OF 25 IT (TP) A NO. 3 /BANG/201 3 MATERIALITY CAN BE WRITTEN OFF FULLY IF SUCH AN ACCOUNTING POLICY IS FOLLOWED BY A COMPANY. THEREFORE IT GIVES THE SCOPE OF EXCEEDING THE THRESHOLD LIMIT OF RS. 5,000 IN THE C ASES WHERE THE USEABLE LIFE OF LOW VALUE ITEM IS NOT LASTING MORE THAN ONE FINANCIAL YEAR. HOWEVER THIS CANNOT BE APPLIED AS A GENERAL RULE FOR DECIDING THE THRESHOLD LIMIT OF LOW VALUE ITEM ARBITRARILY. IT CAN BE UNDERSTANDABLE IN A PARTI CULAR CASE IF A LOW VALUE ITEM COSTING SLIGHTLY MORE THAN RS.5 ,000 HAS A USEABLE LIFE OF ONLY ONE YEAR THEN THE COMPANY MAY WRITE OFF FULLY SUCH LOW VALUE ITEM BY FOLLOWING AN ACCOUNTING POLICY WHICH SHOULD BE DISCLOSED PROPERLY IN THE ACCOUNTS. IN THE CA SE OF THE ASSESSEE FIXING OF THE LOW COST ITEM OF RS.45,000 HAS NO BASIS AND EVEN THE ASSESSEE HAS NOT BROUGHT ON RECORD TO SHOW THAT THIS LIMIT OF LOW COST OF RS.45,000 IS FIXED BECAUSE OF THE USEABLE LIFE OF THE ASSETS NOT EXCEEDING ONE YEAR. THE HON'BL E SUPREME COURT IN THE CASE OF DYNAMIC ORTHO PEDICS (P) LTD . VS. CIT (2010) 321 ITR 300 (SC) WHICH IS THE SUBSEQUENT AND LATEST DECISION ON THE POINT HAS HELD IN PARAS 7 AND 8 AS UNDER : 7. IN OUR VIEW, WITH RESPECT, THE JUDGMENT OF THIS COURT IN MALAYA LA MANORAMA CO. LTD. VS. CIT (SUPRA) NEEDS RECONSIDERATION FOR THE FOLLOWING REASONS : CHAPTER XII - B OF THE ACT CONTAINING 'SPECIAL PROVISIONS RELATING TO CERTAIN COMPANIES' WAS INTRODUCED IN THE IT ACT, 1961, BY THE FINANCE ACT, 1987, W.E.F. 1ST APRIL, 19 88. IN FACT, S. 115J REPLACED S. 80VVA OF THE ACT. SEC. 115J (AS IT STOOD AT THE RELEVANT TIME), INTER ALIA, PROVIDED THAT WHERE THE TOTAL INCOME OF A COMPANY, AS COMPUTED 26 IT (TP) A NO. 3 /BANG/201 3 UNDER THE ACT IN RESPECT OF ANY ACCOUNTING YEAR, WAS LESS THAN THIRTY PER CENT OF IT S BOOK PROFIT, AS DEFINED IN THE EXPLANATION, THE TOTAL INCOME OF THE COMPANY, CHARGEABLE TO TAX, SHALL BE DEEMED TO BE AN AMOUNT EQUAL TO THIRTY PER CENT OF SUCH BOOK PROFIT. THE WHOLE PURPOSE OF S. 115J OF THE ACT, THEREFORE, WAS TO TAKE CARE OF THE PHEN OMENON OF PROSPEROUS ZERO TAX COMPANIES NOT PAYING TAXES THOUGH THEY CONTINUED TO EARN PROFITS AND DECLARE DIVIDENDS. THEREFORE, A MAT WAS SOUGHT TO BE IMPOSED ON ZERO TAX COMPANIES. SEC. 115J OF THE ACT IMPOSES TAX ON A DEEMED INCOME. SEC. 115J OF THE ACT IS A SPECIAL PROVISION RELATING ONLY TO CERTAIN COMPANIES. THE SAID SECTION DOES NOT MAKE ANY DISTINCTION BETWEEN PUBLIC AND PRIVATE LIMITED COMPANIES. IN OUR VIEW, S. 115J OF THE ACT LEGISLATIVELY ONLY INCORPORATES PROVISIONS OF PARTS II AND III OF S CH. VI TO 1956 ACT. SUCH INCORPORATION IS BY A DEEMING FICTION. HENCE, WE NEED TO READ S. 115J(1A) OF THE ACT IN THE STRICT SENSE. IF WE SO READ, IT IS CLEAR THAT, BY LEGISLATIVE INCORPORATION, ONLY PARTS II AND III OF SCH. VI TO 1956 ACT HAVE BEEN INCORPO RATED LEGISLATIVELY INTO S. 115J OF THE ACT. THEREFORE, THE QUESTION OF APPLICABILITY OF PARTS II AND III OF SCH. VI TO 1956 ACT DOES NOT ARISE. IF A COMPANY IS A MAT COMPANY, THEN BE IT A PRIVATE LIMITED COMPANY OR A PUBLIC LIMITED COMPANY, FOR THE PURPOS ES OF S. 115J OF THE ACT, THE ASSESSEE - COMPANY HAS TO PREPARE ITS P&L A/C IN ACCORDANCE WITH PARTS II AND III OF SCH. VI TO 1956 ACT ALONE. IF, WITH RESPECT, THE JUDGMENT OF THIS COURT IN MALAYALA MANORAMA CO. LTD. (SUPRA) IS TO BE ACCEPTED, THEN THE VERY PURPOSE OF ENACTING S. 115J OF THE ACT WOULD STAND DEFEATED, PARTICULARLY WHEN THE SAID SECTION DOES NOT MAKE ANY DISTINCTION BETWEEN PUBLIC AND PRIVATE LIMITED COMPANIES. IT NEEDS TO BE REITERATED THAT, ONCE A COMPANY FALLS WITHIN THE AMBIT OF IT BEING A MAT COMPANY, S. 115J OF THE ACT APPLIES AND, UNDER THAT SECTION, SUCH AN ASSESSEE - COMPANY WAS REQUIRED TO PREPARE ITS P&L A/C ONLY IN TERMS OF PARTS II AND III OF SCH. VI TO 1956 ACT. THE REASON BEING THAT RATES OF DEPRECIATION IN R. 5 OF THE IT RULES, 196 2, ARE DIFFERENT FROM THE RATES SPECIFIED IN SCH. XIV OF 1956 ACT. IN FACT, BY THE COMPANIES (AMENDMENT) ACT, 1988, THE LINKAGE BETWEEN THE TWO HAS BEEN EXPRESSLY DELINKED. HENCE, WHAT IS INCORPORATED IN S. 115J IS ONLY SCH. VI AND NOT S. 205 OR S. 350 OR S. 355. THIS WAS THE VIEW OF THE KERALA HIGH COURT IN THE CASE OF CIT VS. MALAYALA MANORAMA CO. LTD. (SUPRA), WHICH HAS BEEN WRONGLY REVERSED BY THIS COURT IN THE CASE OF MALAYALA MANORAMA CO. LTD. VS. CIT (SUPRA). 8. FOR THE AFORESTATED REASONS, THE REGIS TRY IS DIRECTED TO PLACE THIS CIVIL APPEAL BEFORE THE LEARNED CHIEF JUSTICE FOR APPROPRIATE DIRECTIONS AS WE ARE OF THE VIEW THAT THE MATTER NEEDS RECONSIDERATION BY A LARGER BENCH OF THIS COURT. THUS IT IS CLEAR THAT THE EARLIER DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF MALAYALA MANORAMA LTD. (SUPRA) HAS BEEN DISTINGUISHED BY THE DIVISION BENCH AND RE FERRED THE MATTER FOR CONSIDERATION BY THE LARGER BENCH. EVEN OTHERWISE WHEN THE ASSESSEE HAS NOT BROUGHT ON RECORD THE BASIS FOR FIXING THE LOW COST OF THE ASSET AT RS.45,000 FOR THE 27 IT (TP) A NO. 3 /BANG/201 3 PURPOSE OF APPLYING 100% DEPRECIATION THEN THE SAID ACCOUNTING TREATMENT OF THE ASSESSEE IS CONTRARY TO THE PROVISIONS OF SCHEDULE XIV OF THE COMPANIES ACT AND THEREFORE THE ASSESSING OFFICER IS EMPOWERED TO MAKE THE NECESSARY ADJUSTMENTS. THERE IS NO DISPUTE THAT THE ASSESSING OFFICER HAS ALLOWED THE DEPRECIATION @ PROVIDED UNDER THE SCHEDULE XIV OF THE COMPANIES ACT IN RESPECT OF THE ASSETS IN QUESTION . ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN T HE IMPUGNED ORDER QUA THIS ISSUE. GROUND NOS. 12 TO 14 ARE REGARDING TRANSFER PRICING ADJUSTMENT. 18. THE ASSESSEE IS INVOLVED IN THE PROVISIONS OF SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) BESIDES OTHER INTERNATIONAL TRA NSACTIONS. THE DISPUTE IS ONLY WITH REGARD TO THE INTERNATIONAL TRANSACTIONS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES TO THE AES. THE INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE ARE AS UNDER : NATURE OF INTERNATIONAL TRANSACTIONS METHOD SELECT ED VALUE OF INTERNATIONAL TRANSACTIONS (INR) PROVISION OF SOFTWARE SERVICES / IT INFRASTRUCTURE SERVICES. TNMM 2,291,287,095 PROVISION OF CORPORATE EXPENSES CHARGED BACK TNMM 146,729,086 PROVISION OF RECEIVING OF SERVICES TNMM 61,566,042 28 IT (TP) A NO. 3 /BANG/201 3 REIMBURSEMENT OF EXPENSES -- 183,124,076 BUY BACK OF SHARES -- 12,528,492 BAD DEBTS WRITTEN OFF / ESOP RECHARGES TNMM 30,268,030 19. THE ASSESSEE BENCH MARKED ITS INTERNATIONAL TRANSACTIONS BY SELECTION OF 21 COMPARABLE COMPANIES AND ADOPTING TNMM AS MAM WIT H AVERAGE MARGIN OF 5.21% AS AGAINST THE ASSESSEE'S MARGIN OF 17.22%. THE TPO REJECTED THE TP ANALYSIS OF THE ASSESSEE AND CARRIED OUT A FRESH SEARCH. THE TPO FINALLY CONSIDERED 10 COMPARABLE COMPANIES WITH AVERAGE PLI OF 24.49% AS UNDER : SL.NO. NAME OF COMPARABLE OP/TC % 1. INFOSYS TECHNOLOGIES LTD. 39.62 2. MINDTREE CONSULTING LTD. 15.34 3. R SYSTEMS INTERNATIONALLTD 15.30 4. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 12.83 5. KALS INFORMATION SYSTEMS LTD.(SEG.) 41.94 6. LANCO GLOBAL SYSTEM S LTD. 26.46 7. QUINTEGRA SOLUTIONS LTD. 9.75 8. ACCEL TRANSMATIC LTD. (SEG.) 15.72 9. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. (SEG.) 33.4 10. I - FLEX SOLUTIONS LTD. 34.62 AVERAGE 24.49 29 IT (TP) A NO. 3 /BANG/201 3 ACCORDINGLY, THE TPO PROPOSED AN ADJUSTMENT UNDER SECTION 92CA OF RS.20,26,85,019. IN THE PRESENT APPEAL, THE ASSESSEE IS SEEKING EXCLUSION OF THREE COMPARABLE COMPANIES AS UNDER : I) INFOSYS TECHNOLOGIES LTD. II) KALS INFO SYSTEMS LTD. III) LGS GLOBAL LTD. 20. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HA S SUBMITTED THAT THE COMPARABILITY OF THESE THREE COMPANIES HAS BEEN EXAMINED BY THIS TRIBUNAL IN A SERIES OF DECISION S AND IN A LATEST DECISION IN THE CASE OF GXS INDIA VS. ITO IN IT(TP)A NO.1444/BANG/2012 DT.31.7.2015 FOR THE ASSESSMENT YEAR 2008 - 09 AGAI N DECIDED THE COMPARABILITY OF THESE THREE COMPANIES. 21. THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE ISSUE OF COMPARABILITY OF THESE THREE COMPANIES IS COVERED BY THE SAID DECISION OF THE TRIBUNAL. HE HAS FURTHER POINTED OUT THA T THE INFOSYS TECHNOLOGIES LTD . WAS PART OF THE TP STUDY HOWEVER , THE ASSESSEE RAISED THE OBJECTION AGAINST THE INCLUSION OF THIS COMPANY IN THE SET OF COMPARABLES BEFORE THE DRP. HE HAS REFERRED TO THE OBJECTIONS RAISED 30 IT (TP) A NO. 3 /BANG/201 3 BEFORE THE DRP AS WELL AS BEFORE T HE TPO AT PAGE 250 OF THE PAPER BOOK I. HOWEVER, THE DRP HAS NOT ADJUDICATED ON THIS ISSUE. 22. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE TPO HAS CONSIDERED THE SEGMENTAL DATA OF THE KALS INFOSYSTEMS LTD. AN D THEREFORE THE OBJECTIONS OF THE ASSESSEE CANNOT BE ACCEPTED. AS REGARDS THE INFOSYS TECHNOLOGIES LTD., THE PREDOMINANT BUSINESS ACTIVITY OF THE SAID COMPANY IS SOFTWARE DEVELOPMENT SERVICES AND OTHER ACTIVITIES ARE INSIGNIFICANT THEREFORE MORE THAN 90% REVENUE IS EARNED FR O M THE SOFTWARE DEVELOPMENT SERVICES THEN THE COMPARABILITY OF THE SAID COMPANY CANNOT BE QUESTIONED ON THE GROUND OF INSIGNIFICANT ACTIVITY OR FUNCTION. SIMILAR CONTENTION HAS BEEN ADVANCED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE I N RESPECT OF LGS GLOBAL LTD. THAT THE PREDOMINANT ACTIVITY OF THE SAID COMPANY IS SOFTWARE DEVELOPMENT SERVICES AND MORE THAN 75% OF REVENUE HAS BEEN EARNED FROM THE SOFTWARE DEVELOPMENT SERVICES. 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. AT THE OUTSIDE WE NOTE THAT THE FUNCTIONAL 31 IT (TP) A NO. 3 /BANG/201 3 COMPARABILITY OF THE INFOSYS TECHNOLOGIES LTD. AND KALS INFOSYSTEMS LTD. HAVE BEEN CONSIDERED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL VIDE ORDER DT.31.7.2015 IN THE CASE OF G XS INDIA TECHNOLOGY CENTRE PVT. LTD. VS. ITO (IT(TP)A NO.1444/BANG/2012) IN PARAS 11 & 12 HELD AS UNDER : 11. INFOSYS TECHNOLOGIES LTD. THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT THIS COMPANY CANNOT BE CONSIDERED AS GOOD COMPARABLES OF THE ASS ESSEE BECAUSE THIS COMPANY OWN INTANGIBLES APART FROM THE INDUSTRY LEADER IN THE FIELD. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S CISCO SYSTEMS (IND.) PVT.LTD. 11.1 ON T HE OTHER HAND, LEARNED DR HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THIS COMPANY IS ENGAGED IN THE SAME BUSINESS THAT OF THE ASSESSEE AND THEREFORE, IT IS A GOOD COMPARABLE OF A SOFTWARE DEVELOPMENT COMPANY. 11.2 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE MATERIAL ON RECORD. WE NOTE THAT THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN CASE OF CISCO SYSTEMS (IND.)PVT. LTD (SUPRA) HAS CONSIDERED AND EXAMINED THE FUNCTIONAL COMPARABILITY OF THIS COMPANY IN PARA - 26.2 AS UNDER ; 26.2 INFOSYS LTD.: - AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSIDERED TO BE FUNCTIONALLY DIFFERENT FROM A COMPANY PROVIDING SIMPLE SOFTWARE DEVELOPMENT SERVICES, AS THIS COMPANY OWNS SIGNI FICANT INTANGIBLES AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IN THIS REGARD, WE FIND THAT THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TDPLM SOFTWARE SOLUTIONS LTD. V. DCIT, ITA NO.1303/BANG/2012, BY ORDER DATED 28.11.2013 WITH REGARD TO THI S COMPARABLE HAS HELD AS FOLLOWS: - 11.0 INFOSYS TECHNOLOGIES LTD. 11.1 THIS WAS A COMPARABLE SELECTED BY THE TPO. BEFORE THE TPO, THE ASSESSEE OBJECTED TO THE INCLUSION OF THE COMPANY IN THE SET OF COMPARABLES, ON THE GROUNDS OF TURNOVER AN D BRAND ATTRIBUTABLE PROFIT MARGIN. THE TPO, HOWEVER, REJECTED THESE OBJECTIONS RAISED BY THE ASSESSEE ON THE GROUNDS THAT TURNOVER AND BRAND ASPECTS WERE NOT MATERIALLY RELEVANT IN THE SOFTWARE DEVELOPMENT SEGMENT. 11.2 BEFORE US, THE LEARNED AUTH ORISED REPRESENTATIVE CONTENDED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO VARIOUS PARTS OF THE ANNUAL REPORT OF THIS COMPANY TO SUBMIT THAT THIS COMPANY COMMANDS SUBSTANTIAL 32 IT (TP) A NO. 3 /BANG/201 3 BRAND VALUE, OWNS INTELLECTUAL PROPERTY RIGHTS AND IS A MARKET LEADER IN SOFTWARE DEVELOPMENT ACTIVITIES, WHEREAS THE ASSESSEE IS MERELY A SOFTWARE SERVICE PROVIDER OPERATING ITS BUSINESS IN INDIA AND DOES NOT POSSESS EITHER ANY BRAND VALUE OR OWN ANY INTANGIBLE OR INTELLECTUAL PROPERTY RIGHTS (IPRS). IT WAS ALSO SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT : - (I) THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. IN ITA NO.227/BANG/2010 HAS HELD THAT A COMPANY OWNING INTANGIBLES CANNOT BE COMPARED TO A LOW RISK CAPTIVE SERVICE PROVIDER WHO DOES NOT OWN ANY INTANGIBLE AND HENCE DOES NOT HAVE AN ADDITIONAL ADVANTAGE IN THE MARKET. IT IS SUBMITTED THAT THIS DECISION IS APPLICABLE TO THE ASSE SSEE'S CASE, AS THE ASSESSEE DOES NOT OWN ANY INTANGIBLES AND HENCE INFOSYS TECHNOLOGIES LTD. CANNOT BE COMPARABLE TO THE ASSESSEE ; (II) THE OBSERVATION OF THE ITAT, DELHI BENCH IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.3856 (DEL )/2010 AT PARA 5.2 THEREOF, THAT INFOSYS TECHNOLOGIES LTD. BEING A GIANT COMPANY AND MARKET LEADER ASSUMING ALL RISKS LEADING TO HIGHER PROFITS CANNOT BE CONSIDERED AS COMPARABLE TO CAPTIVE SERVICE PROVIDERS ASSUMING LIMITED RISK ; (III) THE COMPANY HAS GENERATED SEVERAL INVENTIONS AND FILED FOR MANY PATENTS IN INDIA AND USA ; (IV) THE COMPANY HAS SUBSTANTIAL REVENUES FROM SOFTWARE PRODUCTS AND THE BREAK UP OF SUCH REVENUES IS NOT AVAILABLE ; (V) THE COMPANY HAS INCURRED HUGE EXPENDITURE FOR RESEARCH AND DEVELOPMENT; (VI) THE COMPANY HAS MADE ARRANGEMENTS TOWARDS ACQUISITION OF IPRS IN AUTOLAY , A COMMERCIAL APPLICATION PRODUCT USED IN DESIGNING HIGH PERFORMANCE STRUCTURAL SYSTEMS. IN VIEW OF THE ABOVE REASONS, THE LEARNED AUTHORISED REP RESENTATIVE PLEADED THAT, THIS COMPANY I.E. INFOSYS TECHNOLOGIES LTD., BE EXCLUDED FORM THE LIST OF COMPARABLE COMPANIES. 11.3 PER CONTRA, OPPOSING THE CONTENTIONS OF THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMPARABILITY CANNOT BE DECIDED MERELY ON THE BASIS OF SCALE OF OPERATIONS AND THE BRAND ATTRIBUTABLE PROFIT MARGINS OF THIS COMPANY HAVE NOT BEEN EXTRAORDINARY. IN VIEW OF THIS, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE DECISION OF THE TPO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. 11.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAS BROUGHT ON RECORD SUFFICIENT EVIDENCE TO ESTABLISH THAT THIS COMPANY I S FUNCTIONALLY DIS - SIMILAR AND DIFFERENT FROM THE ASSESSEE AND HENCE IS NOT COMPARABLE AND THE FINDING RENDERED IN THE CASE OF TRILOGY E - BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2007 - 08 IS APPLICABLE TO THIS YEAR ALSO. WE ARE INCLINED TO CONCUR WITH THE ARGUMENT PUT FORTH BY THE ASSESSEE THAT INFOSYS TECHNOLOGIES LTD IS NOT FUNCTIONALLY COMPARABLE SINCE IT OWNS SIGNIFICANT INTANGIBLE AND HAS HUGE REVENUES FROM SOFTWARE PRODUCTS. IT IS ALSO SEEN THAT THE BREAK UP OF REVENUE FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS IS NOT AVAILABLE. IN THIS VIEW OF THE MATTER, WE HOLD 33 IT (TP) A NO. 3 /BANG/201 3 THAT THIS COMPANY OUGHT TO BE OMITTED FROM THE SET OF COMPARABLE COMPANIES. IT IS ORDERED ACCORDINGLY. THE DECISION RENDERED AS AFORESAID PERTAINS TO A.Y. 2008 - 09 . IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AND CIRCUMSTANCES AS IT PREVAILED IN AY 08 - 09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. RESPECTFULLY FO LLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT INFOSYS LTD. BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES . FOLLOWING THE FINDINGS OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM T HE LIST OF COMPARABLES. 12. KALS INFORMATION SYSTEMS LTD: THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT THIS COMPANY IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS. THIS COMPANY IS ALSO ENGAGED IN THE PROVISION OF TRAIN ING SERVICES AND SOFTWARE SERVICES. 12.1 THE LEARNED AR THUS, SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THE BUSINESS OF THE ASSESSEE. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF THE CO - ORDINATE BENCH OF TH IS TRIBUNAL IN CASE OF 3DPLM SOFTWARE SOLUTIONS LTD (SUPRA) AS WELL AS IN THE CASE OF CISCO SYSTEMS INDIA PVT. LTD., (SUPRA). 12.2 ON THE OTHER HAND, LEARNED DR HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE TPO HAS CONSI DERED THE SEGMENTAL DATA OF THIS COMPANY. THEREFORE, THIS COMPANY IS A GOOD COMPARABLE OF THE ASSESSEE. 12.3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE FUNCTIONAL COMPARABILITY OF THIS COMP ANY HAS BEEN EXAMINED BY THIS CO - ORDINATE BENCH OF THIS TRIBUNAL IN CASE OF 3DPLM SOFTWARE SOLUTIONS LTD.(SUPRA) AND ALSO IN CASE OF M/S CISCO SYSTEMS INDIA PVT. LTD.,(SUPRA) THE RELEVANT FINDING OF THE TRIBUNAL IN CASE OF CISCO SYSTEMS (SUPRA) IN PARA - 26. 3 AS UNDER; 26.3 KALS INFORMATION SYSTEMS LTD.: - AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT THIS COMPANY HAS BEEN CONSIDERED AS NOT COMPARABLE TO A PURE SOFTWARE DEVELOPMENT SERVICES COMPANY BY THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TRILOGY E - BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA). THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL: - (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE ANNUAL REPOT , THE SALARY 34 IT (TP) A NO. 3 /BANG/201 3 COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS. 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNAL S DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006 - 07 ON ACCOUNT OF IT BEING FUNCTIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE A S FOLLOWS: 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARABLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFER ENCE TO PAGES 185 - 186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HAS SUBMITTED AN EXTR ACT ON PAGES 185 - 186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH THAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACTUALLY R EBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THUS ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMI TED SHOULD BE REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSE SSEE THAT THIS COMPANY IS NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, WE HOLD THAT KALS INFORMATION SYSTEMS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE . FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. FOLLOWING THE EARLIER ORDERS OF THIS TRIBUNAL WHEREIN ALL THE RELEVANT FACTS WERE EXAMINED BY THE TRIBUNAL AND IT WAS FOUND THAT THESE TWO 35 IT (TP) A NO. 3 /BANG/201 3 COMPANIES CANNOT BE CONSIDERED AS GOOD COMPARABLE WITH COMPAN Y PROVIDING SOFTWARE DEVELOPMENT SERVICES AS CAPTIVE SERVICE PROVIDER. ACCORDINGLY, WE DIRECT THE A.O./TPO TO EXCLUDE THESE TWO COMPANIES FROM THE LIST OF COMPARABLES. IT IS PERTINENT TO NOTE THAT IN THE CASE OF KALS INFOSYSTEMS LTD., NO SEGMENTAL DATA HAS BEEN REPORTED HOWEVER THE TPO HIMSELF HAS COMPUTED THE MARGIN OF SOFTWARE DEVELOPMENT SERVICES WHICH CANNOT BE ACCEPTED WITHOUT GIVING SUPPORTING DETAILS OF EXPENDITURE TO BE ALLOCATED TO VARIOUS ACTIVITIES. LGS GLOBAL LIMITED. 24. THE LEA RNED AUTHORISED REPRESENTATIVE HAS POINTED OUT THAT THIS COMPANY IS HAVING THE ACTIVITY OF BPO SERVICES AND THEREFORE IN THE ABSENCE OF SEGMENTAL DATA, COMPOSITE DATA FROM SOFTWARE DEVELOPMENT SERVICES AND BPO CANNOT BE COMPARED WITH THE ASSESSEE. 25. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT MORE THAN 75% OF THE REVENUE IS EARNED BY THIS COMPANY FROM SOFTWARE DEVELOPMENT SERVICES AND THEREFORE IT IS A GOOD COMPARABLE. 36 IT (TP) A NO. 3 /BANG/201 3 26. WE HAVE CONSIDERED THE RIVAL SUBMISSIO NS AS WELL AS THE RELEVANT MATERIAL ON RECORD. AT PAGE 26 OF THE ANNUAL REPORT OF THIS COMPANY, THE DETAILS OF THE SERVICES AND SALES PROVIDED BY THIS COMPANY INCLUDES: (I) CONSULTANCY SERVICES (II) ENTERPRISE SYSTEM SOLUTIONS (III) BPO (I V ) CUST OM DEVELOPMENT, ETC. THUS IT IS APPARENT FROM THE VARIOUS SERVICES UNDERTAKEN BY THIS COMPANY THAT IT ENGAGED IN DIVERSIFIED ACTIVITY INCLUDING BUSINESS PROCESS OUTSOURCING (BPO) IN THE FIELD OF HUMAN RESOURCES, LIFE SCIENCES, LEGAL SERVICES, SUPPLY CHAI N MANAGEMENT, SALES AND CUSTOMER CARE ETC. WE FURTHER NOTE THAT THE COMPANY HAS NOT RE PORT ED SEGMENTAL DATA AND THEREFORE THE COMPOSITE DATA FROM THE DIVERSIFIED ACTIVITY OF THIS COMPANY CANNOT BE COMPARED WITH THE ASSESSEE'S SOFTWARE DEVELOPMENT ACTIVI TY. ACCORDINGLY, WE DIRECT THE A.O. / TPO TO EXCLUDE THIS COMPANY FROM THE SET OF COMPARABLES. 27. THE NEXT GRIEVANCE OF THE ASSESSEE IS REGARDING WORKING CAPITAL ADJUSTMENT. THE TPO DENIED THE WORKING CAPITAL ADJUSTMENT WHILE PASSING THE IMPUGNED ORDER. 37 IT (TP) A NO. 3 /BANG/201 3 28. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS SUBMITTED THE DETAILS OF THE OUTSTANDING RECEIVABLES WITH THE RELATED PARTIES AS WELL AS THE DIFFERENCE LEVEL OF ACCOUNTS RECEIVABLE AND PAYABLE IN RE SPECT OF THE COMPARABLE COMPANIES. THUS IT IS CONTENDED THAT THE RISK ASSUMED BY THE COMPANIES IS GREATER THAN THE NO RISK ASSUMED BY THE ASSESSEE WITH THE RELATED PARTIES AND THEREFORE WORKING CAPITAL ADJUSTMENT IS REQUIRED ON THIS ACCOUNT AS COMPARABLE COMPANIES ARE EXPECTED TO RETURN HIGHER DUE TO THE DIFFERENCE IN RISK INVOLVED. ACCORDINGLY THE LEARNED AUTHO RISED REPRESENTATIVE HAS PLEAD ED THAT THE A.O./TPO MAY BE DIRECTED TO GRANT THE APPROPRIATE RISK ADJUSTMENT. IN SUPPORT OF HIS CONTENTION, HE HA S RELIED UPON THE DECISION OF THIS TRIBUNAL IN THE CASE OF M ERCER CONSULT ING (INDIA) P. LTD. VS. DCIT REPORTED IN 150 ITD 1. 29. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE TPO AS WELL AS DRP HAVE CONSIDERED THE CLAIM OF THE ASSESSEE AND FOUND THAT IT IS NOT A FIT CASE TO GRANT ANY RISK ADJUSTMENT. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 38 IT (TP) A NO. 3 /BANG/201 3 30. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE TPO AS WELL AS DRP HAS DENIED THE RISK ADJUSTMENT ON THE GROUND THAT THE ASSESSEE HAS NOT FURNISHED THE RELEVANT DETAILS TO DEMONSTRATE THAT THERE IS A DIFFERENCE IN THE LEVEL OF WORKING CAPITAL EMPLOYED BY IT VIS - - VIS THE COMPARABLE. SINCE THE ASSESSEE IS A CAPT IVE SERVICE PROVIDER THEREFORE THE LEVEL OF INVENTORY, TRADE RECEIVABLE AND TRADE PAYABLE IS CERTAINLY BE DIFFERENT FROM THE COMPARABLE COMPANIES WHO ARE DEALING WITH THIRD PARTIES. THE CO - ORDINATE BENCH OF DELHI TRIBUNAL IN THE CASE OF M ERCER CONSULT IN G (INDIA) P. LTD . (SUPRA) HAS CONSIDERED AN IDENTICAL ISSUE IN PARAS 16.1 AND 16.2 AS UNDER : 16.1. THE NEXT ISSUE RAISED BY THE LD. AR IS AGAINST NON - GRANTING OF WORKING CAPITAL ADJUSTMENT CLAIMED BY THE ASSESSEE FOR THE FIRST TIME BEFORE THE TPO. TH E ASSESSEE REQUESTED THE TPO TO GRANT WORKING CAPITAL ADJUSTMENT. THE ASSESSEE S CLAIM WAS JETTISONED ON THE GROUND THAT THE ASSESSEE FAILED TO DEMONSTRATE THAT THERE WAS A DIFFERENCE IN THE LEVELS OF WORKING CAPITAL EMPLOYED BY IT VIS - A - VIS THE COMPARABLE S. THE TPO FURTHER OBSERVED THAT: THE CLAIM OF WORKING CAPITAL ADJUSTMENT IS NOT A MATTER OF RIGHT. HE FURTHER WENT ON TO ADD THAT THE ISSUE OF WORKING CAPITAL CAN BE RELEVANT WHEN THERE IS A SITUATION OF INVENTORY REMAINING TIED UP OR RECEIVABLES BEING HELD UP AND SUCH SITUATION WILL NOT BE RELEVANT TO THE SERVICE INDUSTRY. THAT IS HOW THE ASSESSEE S CONTENTION ON THIS ISSUE WAS REPELLED. THE DRP ALSO FOLLOWED THE SUIT BY NOTICING THAT THE WORKING CAPITAL ADJUSTMENT IS DIFFICULT TO APPLY DUE TO THE LACK OF ACCURATE AND RELIABLE DATA. IT ALSO HELD THAT THE ISSUE OF WORKING CAPITAL WOULD BE RELEVANT ONLY WHEN THERE IS A SITUATION OF INVENTORY REMAINING TIED UP OR RECEIVABLES BEING HELD UP. THE ASSESSEE CONTESTS THE NON - GRANTING OF THE WORKING CAPITAL ADJUST MENT. 16.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE VIEWPOINT CANVASSED BY THE AUTHORITIES BELOW IS SANS 39 IT (TP) A NO. 3 /BANG/201 3 MERIT. WORKING CAPITAL ADJUSTMENT IS ORDINARILY CONFINED TO INVENTORY, TRADE RECEIVABLES AND T RADE PAYABLES. IF A COMPANY CARRIES ON HIGH TRADE RECEIVABLES, IT WOULD MEAN THAT IT IS ALLOWING ITS CUSTOMERS A RELATIVELY LONGER PERIOD TO PAY THEIR AMOUNT WHICH WILL RESULT INTO HIGHER INTEREST COST AND THE RESULTANT LESS PROFIT. SIMILARLY, BY CARRYING HIGH TRADE PAYABLES, A COMPANY BENEFITS FROM A RELATIVELY LONGER PERIOD AVAILABLE TO IT TO PAY BACK ITS SUPPLIERS WHICH LOWERS THE INTEREST COST AND ACCELERATES PROFITS. TO HAVE A LEVEL PLAYING FIELD, IT IS SINE QUA NON THAT THE WORKING CAPITAL ADJUSTMENT SHOULD BE CARRIED OUT TO BRING TWO OTHERWISE COMPARABLE CASES AT PAR WITH EACH OTHER. WE ARE UNABLE TO COMPREHEND ANY REASON OR RHYME TO RESTRICT THE GRANT OF WORKING CAPITAL ADJUSTMENT ONLY IN THE CASE OF MANUFACTURERS OR TRADERS. WHAT IS TRUE FOR THESE C ATEGORIES OF BUSINESSES IS FULLY TRUE FOR A SERVICE PROVIDER AS WELL. IT IS A DIFFERENT MATTER THAT IN THE CASE OF SERVICE PROVIDER, NO WORKING CAPITAL ADJUSTMENT WOULD BE REQUIRED TOWARDS HIGHER OR LOWER INVENTORY, BUT THE SAME MAY BE WARRANTED IN RESPECT OF HIGHER OR LOWER TRADE RECEIVABLES/PAYABLES. SINCE THE AUTHORITIES BELOW HAVE REJECTED THE ASSESSEE S CONTENTION FOR GRANT OF WORKING CAPITAL ADJUSTMENT AT THE THRESHOLD, WHICH IN OUR CONSIDERED OPINION IS NOT CORRECT, WE SET ASIDE THE IMPUGNED ORDER AN D REMIT THE MATTER TO THE FILE OF THE TPO/AO FOR EXAMINING THE ASSESSEE S CLAIM FOR GRANT OF WORKING CAPITAL ADJUSTMENT ON MERITS AND THEREAFTER, ALLOW THE SAME, IF IT IS AVAILABLE. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED AN ADEQUATE OPPORTUNITY OF H EARING. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE AND FOLLOWING THE ORDER OF THE CO - ORDINATE BENCH (SUPRA), WE SET ASIDE THIS ISSUE TO THE RECORD OF THE A.O/TPO TO EXAMINE THE CLAIM OF WORKING CAPITAL ADJUSTMENT PROPERLY AND THEN DECIDE THE SAME AS PER LAW. 31. SINCE WE HAVE EXCLUDED THREE COMPANIES FROM THE SET OF COMPARABLES, THEREFORE THE A.O./TPO TO RECOMPUTED THE ALP AFTER CONSIDERING THE WORKING CAPITAL ADJUSTMENT IF ANY. NEEDLESS TO SAY THE BENEFIT OF THE PROVISO TO SECTION 92C OF THE ACT BE ALSO CONSIDERED IN 40 IT (TP) A NO. 3 /BANG/201 3 CASE COMPARABLE PRICE FALLS WITHIN THE TOLERANCE RANGE OF + OR 5% OF THE ASSESSEE. 32. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 20TH DAY O F JULY, 201 6 . SD/ - ( INTURI RAMA RAO ) ACCOUNTANT MEMBER SD/ - ( VIJAY PAL RAO ) JUDICIAL MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I .T. 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE