M/S. SCHNEIDER ELECTRIC IT BUSINESS INDIA PRIVATE LIMITED ,BANGALORE V. .DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-6(1)(1), BENGALURU

ITTPA 1126/BANG/2023

AI Insights

The case involves Schneider Electric IT Business India Pvt. Ltd., which appealed against the orders of the Deputy Commissioner of Income Tax and the Dispute Resolution Panel concerning transfer pricing adjustments and disallowances under Section 35DDA of the Income Tax Act for the assessment year 2017-18. The primary issues revolved around the computation of margins in the contract manufacturing segment and the disallowance of deductions claimed under Section 35DDA for expenses related to a Voluntary Retirement Scheme (VRS). The ITAT found that the AO and the Dispute Resolution Panel had not adequately considered the details and arguments presented by the assessee, leading to a decision to remand the matter back to the AO for a fresh assessment.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 474085 (ITAT-BANGALORE)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 20-12-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2017-2018
• Other Referred Cases: Lummus Technology Heat Transfer BV vs. ITA No. 6227/Del/2012, Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC), Goetze (India) Ltd. vs. CIT (2006) 284 ITR 323 (SC), CIT vs. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC)
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A SREENIVASA RAO
• Assessee Lawyers: ROHIT TIWARI
• Keywords: Set aside; Additional evidence; Revised return; Transfer pricing; International transaction; Depreciation; Rule of consistency; Notional interest; Working capital adjustments; Fuel Charges
• Section: 22; 13; 10B; 20

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER IT(TP)A No.1126/Bang/2023 Assessment Years : 2017-18 SP No. 44/Bang/2023 Schneider Electric IT Business India Pvt. Ltd., Tower C, 6th Floor, Bearys Global Research Triangle, Whitefield – Hoskote Main Road, Goravigere Village, Bengaluru – 560 067. PAN – AACCA 6398 Q Vs. The Dy. Commissioner of Income Tax, Circle – 6(1)(1), Bengaluru. . APPELLANT RESPONDENT Assessee by : Shri Rohit Tiwari, CA Revenue by : Shri A Sreenivasa Rao, CIT (DR) Date of hearing : 09.10.2024 Date of Pronouncement : 20.12.2024 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the order passed by the DCIT dated 29/11/2023 in ITA No. ITBA/AST/M/143(3)/2023- 24/1058355994(1) for the assessment year 2017-18. 2. The issues raised in grounds Nos. 1 to 3 in the memorandum of appeal are general in nature. Therefore, we do not find it necessary to IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 2 of 28 . adjudicate these grounds, and they are accordingly dismissed as infructuous. 3. During the hearing, the learned Authorized Representative (AR) submitted that the assessee had instructed him not to press the grounds of appeal bearing Nos. 4.1, 4.2, 4.4, 4.5, 4.7, and 4.10. Consequently, these grounds are dismissed as not pressed. 4. The issue raised in ground No. 4.3 of appeal memo is that the Ld. AO/TPO/DRP erred in computing the margin of the contract manufacturing segment as 1.79% instead of 7.70% due to the allocation of operating-specific expenses based on the revenue earned under different segments. 5. The facts, in brief, are that the appellant company is a wholly- owned subsidiary of Schneider Electric IT Corporation, USA. The assessee operates in the business of manufacturing and trading of power protection equipment, uninterruptible power supply (UPS) systems, and related accessories. The assessee's activities can be broadly categorized into three segments, which are detailed below: “Contract Manufacturing - The assessee procures certain raw materials and components from AEs and third parties which is used in manufacturing of UPS products and accessories and exports them as finished products to its AEs. Solution Business segment - The Company manufactures UPS products locally as per the requirements of the domestic / market. For such UPS products, the Company procures battery and other ancillary components domestically and sells the UPS products within the domestic market as an overall package \\ which includes associated sales and warranty IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 3 of 28 . support to its It is imperative to note that solution business segment is a third party business segment with no involvement Distribution segment - SEITB India imports finished products i.e. UPS from its AEs and third party suppliers for resale/ distribution in domestic market. The Company also provides after sale support and warranty support services along with the UPS products sold to its customers.” 6. The assessee, while benchmarking one of its segments, namely the contract manufacturing segment, adopted the Transactional Net Margin Method (TNMM) as the most appropriate method and selected the Profit Level Indicator (PLI) as Operating Profit/Operating Cost (OP/OC), which was calculated at 7.70%. Based on its Transfer Pricing (TP) study, the assessee claimed that its international transactions were at arm's length price (ALP). 7. However, the Learned Transfer Pricing Officer (TPO) was not satisfied with the assessee's TP study concerning the contract manufacturing segment. While the assessee had calculated the PLI for the impugned segment at 7.70%, the TPO recomputed it at 1.79%. In doing so, the TPO allocated operating expenses proportionally based on the operating revenue of the three segments. Furthermore, the TPO conducted a fresh search for comparable companies and determined their margins to be between 7.75% and 9.19%. 8. Based on the above, the TPO proposed an adjustment of ₹115,35,40,461 under the manufacturing segment. The assessee filed objections before the Learned Dispute Resolution Panel (DRP), which upheld the TPO's action. Consequently, the final assessment order was passed by the Assessing Officer (AO). IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 4 of 28 . 9. Dissatisfied with the final assessment order, the assessee filed an appeal before the ITAT. The ITAT referred the matter back to the DRP for fresh adjudication. Following the directions of the ITAT, the DRP issued the directions to the AO/TPO restricting the adjustment for international transactions with AEs to ₹ 68,36,36,173/- only. 10. Being aggrieved by the direction/ order of the ld. DRP/TPO/AO, the assessee is in appeal before us. 11. The Ld. AR before us filed a paper book running from pages 1 to 2091, written submissions having 21 pages, a chart in concise form of 4 pages highlighting the relevant issues, a comparison sheet of 6 pages and contended that all the necessary details justifying the PLI of the assessee based on audit segmental data was furnished during the proceedings before the authorities below. But the same has been rejected merely on the reasoning that the audited segmental date has been certified on a later date and that too by any other auditor. However, no defect of whatsoever has been pointed out therein. As per the ld. AR, the assessee has prepared the segmental accounts by following the principles of transfer pricing wherein revenue and cost of each segment were allocated on the basis of sound allocation keys. The Ld. AR before us submitted the basis of allocation of Revenue and cost of each segment which is available at page no. 11 of the written submission. Accordingly, the ld. AR before us prayed to restore the issue to the file of the TPO for fresh adjudication after considering the details filed by the assessee as per the provisions of law. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 5 of 28 . 12. On the other hand, the Ld. DR vehemently relied on the order of the authorities below but raised no objection if the matter is set aside to the file of the TPO for fresh adjudication as per the provisions of law. 13. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the assessee has reported its financial transactions in 3 segments as elaborated above. In one of the segments i.e. contract manufacturing which is in dispute before us, the assessee has shown its financial transactions performance in the manner as detailed below: i. Revenue from operations (actual) Less ii. Direct cost of sales iii. Operating specific expenses iv. Common cost/ expenses 13.1 The TPO was satisfied with the above working shown by the assessee under contract manufacturing segment except operating specific expenses which was as per the assessee were incurred directly for impugned segment. As such, the TPO was of the view that such operating specific expenses should be allocated in the ratio of the revenue of different segments. The view of the TPO was also subsequently upheld by the DRP. The reasoning for allocating the operating specific expenses given by the authorities below are summarized as under: “a) When asked for a break up of operating expense allocation head wise, the same was not provided by assessee. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 6 of 28 . b) On being asked for a segregated list of product codes split between AE codes and the non-AFB business codes, the same was not provided by assessee. c) The claim of actual is untenable since common costs as per the segmental financials reported by the taxpayer is only Rs 60.3 cores whereas per books of account depreciation itself if Rs. 59.7 crones and therefore do not account for administrative expenses, top managements salaries, remuneration to directors. common travel cost, fuel charges, finance costs and various other costs. d) The segmental financials were not audited before filing of the 3CEB report. The proof of the same is the fact that the certificate copy given by a Chartered accountant Shri Sandeep is dated 08/01/2021 which is much alter it was proposed to reject the segmental financials claimed by the taxpayer. e) The said chartered accountant was summoned twice by sending summons to his e-mail ID mentioned in the certificate as well. But the said person did not appear. Hence the certificate issued (much after the filing of 3CEB report, and income tax returns) cannot be accepted. f) The need for approaching some other audit firm to certify segmental is not understood given that the statutory audit of financials and TP study were undertaken by another audit firm. 3.3.2 Thus the TPO has done a thorough analysis of the issue before arriving at conclusion of' rejecting the segmental financials submitted by the taxpayer. This panel does not found any inferiority in the view taken by the TPO/AO. Therefore, the ground no 3.1.3 raised on this issue is not tenable and liable to be rejected.” 13.2 However, the above observations of the authorities below, apparently, do not align with the details filed by the assessee before them. In this regard we note that, the TPO has raised the queries vide letter dated 15-1-2021, placed on page 1456 of the paper book. The relevant extract of the query is reproduced as under: IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 7 of 28 . 13.3 The above queries raised by the TPO were duly answered by the assessee vide letter dated 19-1-2021, placed on pages 1454-1455 of the paper book. The relevant extract of the replies is reproduced as under: IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 8 of 28 . IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 9 of 28 . 13.4 Besides the above, it is a fact on record that segment-wise data, certified by the auditor namely Sandeep K and Company, placed on pages 1371 to 1373 of the paper book, was filed much later during the assessment proceedings. The question arises whether such data can be rejected merely on the reasoning that it was filed belatedly during the assessment proceedings. In this regard, we find pertinent to refer the order of Delhi Tribunal in the case of Lummus Technology Heat Transfer BV (ITA No. 6227/Del/2012) dated 21-02-2014 wherein it was observed as under: “4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 10 of 28 . 5. Rule 10B(1)(e) of the Income Tax Rules, which deals with the Transactional Net Margin Method, provides requires that “the net profit margin realised by the enterprise (i.e. the assessee) from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base” is compared with “ the net profit margin realised by the enterprise ( i.e. the assessee) or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base” – of course, subject to comparability adjustments which could affect the amount of net profit margin in uncontrolled conditions. It is not at all necessary, as the authorities below seem to suggest, that such net profit computations, in the case of internal comparables (i.e. assessee’s transactions with independent enterprise), are based on the audited books of accounts or the books of accounts regularly maintained by the assessee. In our considered view, all that is necessary for the purpose of computing arm’s length price, under TNMM on the basis of internal comparables, is computation of net profit margin, subject to comparability adjustments affecting net profit margin of uncontrolled transactions, on the same parameters for the transactions with AEs as well as Non AEs, i.e. independent enterprises, and as long as the net profits earned from the controlled transactions are the same or higher than the net profits earned on uncontrolled transactions, no ALP adjustments are warranted. It is not at all necessary that such a computation should be based on segmental accounts in the books of accounts regularly maintained by the assessee and subjected to audit. We are, therefore, of the view that the authorities below were in error in rejecting the segmental results on the ground that the segmental accounts were not audited and that these segmental accounts were not maintained in the normal course of business. As regards vague generalizations by the TPO to the effect that these accounts are manipulated, that allocation basis of expenses is unfair and that these accounts conceal true profitability, we find that these observations are too sweeping and generalized the observations to have any merits. In any event, learned counsel for the assessee has painstakingly taken us through the segmental accounts, pointed out the basis of allocation of the expenses. We have noted that the allocation of expense is on the man hour basis, which is quite fair and reasonable, and that every person has to punch in hours on a specific project. We have also noted that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by the TPO. Taking into account all these factors, as also entirety of the case, we are of the considered view that the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable. We are also of the view that the size of the uncontrolled transaction or transactions being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions. Size of the comparable does IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 11 of 28 . matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable. If the size of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is too small, it may provoke an inquiry by the TPO to ensure that it is not a contrived transaction outside the normal course of business or with regard to other significant factors surrounding smallness of such transaction. However, in our considered view, in none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee’s transactions with non AEs, on the ground that the volume of business with non AEs was too small vis- à-vis business with AEs. In view of these discussions, as also bearing in mind entirety of the case, the assessee was quite justified in adopting internal TNMM and comparing the profit earned on its transactions with AEs with profit earned with non- AEs. Accordingly, the ALP adjustment of Rs 2,72,42,940 deserves to be deleted. We order so. The assessee gets the relief accordingly.” 13.5 Furthermore, it was also pointed out by the TPO that the auditor was issued summon for personal appearance but he failed to appear. This fact of the TPO appears to be contrary as pointed out by the ld. AR. As per the ld. AR, the auditor visited to the income tax office as evident from the email written by the auditor vide dated 25-1-2021, placed on page 777 of the paper book. The relevant extract is reproduced as under: IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 12 of 28 . 13.6 From the above detailed discussion, we note that all the necessary details have not been looked into by the TPO despite having before them. Therefore, in the interest of justice and fair play we are inclined to restore the issue to the file of the TPO for fresh adjudication as per the provisions of law. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes. 14. The next issue raised by the assessee in ground Nos. 4.6 and 4.8 in the memo of appeal is that the Ld. AO/TPO/DRP erred in considering the Genus Power Infrastructure Limited in place of Genus Innovation Limited in the final set of comparable viz a viz the Ld. AO/TPO erred in disregarding the corrected margins of comparable companies submitted on the direction of Hon’ble DRP. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 13 of 28 . 15. The Ld. DRP in the second-round of litigation/ proceeding has directed the Ld. TPO to include the Genus Innovation Limited in comparable list because this was accepted by the Ld. TPO during the assessment proceedings. However, the Ld. DRP rejects the claim of the assessee that Genus Power Infrastructure Limited should not be included in the set of comparable as it is functionally dissimilar from the assessee company. Additionally, the Ld. DRP was of the view that the Genus Power Infrastructure Limited has generated its major revenue from energy metering and smart metering solution therefore, the selection of Genus Power Infrastructure Limited by the Ld. TPO is correct. 15.1 Regarding the difference in the margin calculated by the assessee vis-a-vis by the TPO of the comparable companies, the ld. DRP observed that the assessee has not pointed out any defect in the margin calculated by the TPO. However, the ld. DRP was pleased to issue the direction to the TPO to verify the necessary details and calculate the margin of the comparable companies afresh as per the provisions of law. 15.2 Being aggrieved by the order/direction of the ld. DRP/TPO/AO, the assessee is in appeal before us. 15.3 The Ld. AR before us submitted that the Ld. TPO wrongly selected the Genus Power Infrastructure Limited in the place of Genus Innovation Limited while considering the selection of comparable companies therefore, the Genus Power Infrastructure Limited should not be included in the comparable companies selected. The ld. AR also submitted that such company Genus Power Infrastructure Limited was IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 14 of 28 . excluded by the ld. DRP from the list of the comparable while calculating the ALP of the assessee in the subsequent assessment year 2018-19. 15.4 The Ld. AR also submitted that the calculation of margin calculated by the Ld. TPO of the comparable companies is not correct as compared to the margin computed by the assessee. 16. On the contrary, the Ld. DR placed his reliance on the order of the authorities below. 17. We have heard the rival contentions of both the parties and perused the materials available on record. As regards the exclusion of the comparable namely Genus Power Infrastructure Limited, we note that the Ld. DRP in the case of the assessee for the assessment year 2018-19 has excluded such company as comparable on the reasoning that the activity of the company is dissimilar to the activity of the assessee. 17.1 Once the revenue itself has accepted that such company Genus Power Infrastructure Limited in the later assessment year is dissimilar to the activity of the assessee, we are of the view that such comparable is liable to be excluded while calculating the ALP of the assessee company in the year in dispute. As such, this finding of the ld. DRP in the later assessment year, reproduced above, requires to be verified at the level of the TPO as per law. 17.2 Regarding the difference in the calculation of the margin by the assessee and the TPO of the comparable companies, we note that this IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 15 of 28 . requires verification at the level of the TPO as per the provisions of law and in line of the direction issued by the DRP. Accordingly, we set aside the issue to the file of the TPO for fresh adjudication as per the provisions of law. Hence the ground of appeal of the assessee is hereby allowed for the statistical purposes. 18. The next issue raised by the assessee in ground 4.9 in the memo of appeal is that the Ld. AO/TPO/DRP erred in not considering the various economic adjustment including working capital adjustment to determine the ALP margin. 19. The Ld. DRP with respect to the working capital adjustment was of the view that rule 10B of income tax rules allows the adjustments to eliminate material effects on price, cost, or profits in comparable transactions. The Ld. DRP, however, note that the assessee unable to demonstrate the impact of differences in working capital and materially affects the price, cost or profits. 19.1 The Ld. DRP was also of the view that the accounts payable & receivables are the balance sheet items and only shows the position at the end of financial year and do not adequately reflect working capital dynamic throughout the year. The Ld. DRP also was of the view that working capital adjustments require specific factor such as business cycle, business activity etc. The Ld. DRP therefore rejects the claim of the assessee that differences of receivables and payables between the assessee and comparables requires working capital adjustment. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 16 of 28 . 20. Being aggrieved by the order/direction of the ld. DRP/TPO/AO, the assessee is in appeal before us. 21. The Ld. AR before us submitted that the Hon’ble ITAT in ITA No. 185/Bang/2022 vide order dated 01-09-2022 has clearly directed the DRP to grant the benefit of working capital adjustment after having regard to the comparable companies. But the ld. DRP has violated the direction issued by the ITAT by not granting the benefit of working capital adjustment. 22. On the other hand, the ld. DR vehemently supported the order of the authorities below. 23. We have heard the rival contentions of both the parties and perused the materials available on record. At this juncture, it is pertinent to refer the direction issued by the ITAT in ITA No. 185/Bang/2022 vide order dated 1-9-2022 which are reproduced as under: 10. Ground No.4.9 of the assessee’s appeal is reproduced below:- “4.9. disregarding various economic adjustments including working capital adjustment in determining the arm's length profit margin.” 10.1 We remit this issue also to the file of Ld. DRP to grant actual working capital adjustment to the assessee in accordance with law. 23.1 The direction of the ITAT is clear and specific and therefore the authorities below have to comply the same. However, it is the duty of the assessee to make the necessary working in support of the working capital adjustment and provide the same to the TPO for necessary action. Accordingly, this ground of appeal of the assessee is set aside to the file of the TPO for fresh adjudication as per the provisions of law. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 17 of 28 . 24. The next issue raised by the assessee in grounds Nos. 5.1 to 5.3 of the appeal memo pertains to the disallowance of a deduction amounting to ₹22,04,576/- claimed under section 35DDA of the Act. 24.1 The assessee contends that the Learned AO and DRP erred in making the disallowance despite the direction of the Hon’ble ITAT to the AO/DRP to decide the issue after duly considering the submissions made by the appellant. The assessee further asserts that the AO/DRP failed to provide an opportunity for a hearing or issue a show-cause notice before making the disallowance, thereby violating the principles of natural justice. 25. The assessee claimed an expenditure of ₹1,10,22,880/- incurred under a Voluntary Retirement Scheme (VRS) during the year under consideration. In accordance with provision of section 35DDA of the Act, the assessee amortized 1/5th of the expenditure. During the assessment proceedings, the assessee submitted supporting documents, including a copy of the VRS scheme, sample copies of Form 16 of employees who opted for the scheme, settlement slips, and sample copies of VRS agreements signed by employees. Additionally, through its submission dated 8th March 2021, the assessee provided a detailed breakup of VRS expenses, asserting that payments to employees under the VRS were made through banking channels. 25.1 However, the AO raised concerns regarding the claim. The AO observed that the VRS scheme was valid only for a one-month period, from 15th July 2016 to 14th August 2016. Contrary to this, the applications for VRS and the payments were reportedly made well after IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 18 of 28 . the scheme's validity period. The AO also noted discrepancies in the details provided: the VRS payment was claimed in respect of 11 employees, but details were submitted only for three employees. Furthermore, the assessee did not furnish the bank statements evidencing the payments made under the VRS. 25.2 Based on these findings, the AO concluded that the assessee's claim lacked sufficient substantiation. As a result, the AO proposed to disallow the VRS claim and made an addition to the total income of the assessee. 25.3 The assessee preferred to filed objection before the learned DRP. However, the learned DRP rejected the objection of the assessee. Accordingly, the final assessment was passed by the AO by disallowing the impugned claim of the assessee. 25.4 The assessee carried out the dispute before the Tribunal in IT(TP)A No. 185/Bang/2022. The Tribunal vide order dated 1st September 2022 set aside the issue to file of the learned DRP with certain direction detailed as under: “12.1 The assessee claimed voluntary Retirement Scheme expenditure of Rs.22,O ,576/-. The assessee has not furnished the full details other than name of the person to whom the payment has been made in accordance with Voluntary Retirement Scheme and not produced the terms and conditions of this scheme and documentary evidence. Hence, the claim of the assessee is rejected. In view of the above findings, we remit this to the file of Ld. DRP with the direction to the assessee to produce necessary details as sought by the Ld. DRP.” 25.5 In the set aside proceedings the Ld. DRP noted that the assessee failed to make submission and provide the necessary documents. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 19 of 28 . Accordingly, the learned DRP in-absence submission from the assessee called for the remand report from the Ld. AO where the Ld. AO submits that the claim of the assessee as deduction u/s 35DDA is not justifiable on the reason as mentioned below. “5.3 Panel 5.3.1 The assessee company has not submitted complete details during, the assessment proceedings, hence, this panel has sought a remand report vide letter dated 16.10.202 i on this issue from the AO. In response to the same, the AO has replied vide letter dated 20.10.202 i and submitted that the veracity of assessee claim as deduction u/s 35DDA is not clearly established due to the following reasons: a) In the scheme furnished at page no.1271 of the paper book, it can be seen that the scheme is valid/ in force only for one month i.e. 15.07.2016 to 1.1.08.2016. Whereas, the information submitted at the time of the assessment proceeding shows that the month in which the VRS was applied/effected was much later. Refer to Annexurc-6 of the submission made by the assessee on 08,03.2021. Further, in connection to this, application at page no. 276 of paper book pertaining to Mr. Arockia Raj A may be referred to. It is seen that application has been made on 07.03.2017 much later than the date of scheme. The application of the other two employees is also post the period when the VRS was active. b) Only 3 sets of applications and particulars of employees seeking the VRS has been furnished. Rest 08 applications have not been furnished. However, upon verification of the available applications, i.e. Arockia Raj A, Hamantha M and Nalini Manjunath, the figures mentioned in the settlement slip matched with that of the claims. Further, the total salary paid as per Form- 16 and settlement slip furnished matches. c) No hank statement has been furnished to indicate tilt' transaction made. In absence of this exact period when this VRS scheme was given effect cannot be ascertained, No signature has been affixed by the concerned employee on the final salary settlement slip and further nu confirmation has been provided by the assessee from the concerned employees regarding the receipt of the emoluments corresponding to the VRS. 5.3.2 After carefully perusing the remand report submitted by AO. this Panel is of considered view that the Assessee is not able to substantiate its claim by producing all the relevant details. The AO has pointed out certain inconsistency in assessee's claim which remains unrebutted from assesses side. Therefore, the disallowance of deduction u/s 35D1)A of the IT Act, 1961 made by AO is justifiable.” IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 20 of 28 . 25.6 The Ld. DRP also noted that the assessee during the assessment proceedings was not opposed to the point raised by the Ld. AO therefore the same remains unexplained and also the assessee does not justify the claim of deduction u/s 35DDA by furnishing the relevant details. The Ld. DRP therefore upheld the disallowance of deduction u/s 35DDA of the Act. 26. Being aggrieved by the order/direction of the ld. DRP/AO, the assessee is in appeal before us. 27. The Ld. AR before us contended that the assessee has claimed the deduction of Rs. 22,04,576/- being 1/5 of VRS payment to its employees in accordance with the provision of section 35DDA of the Act. 27.1 The Ld. AR before us also stated that relevant documents such as copy of VRS Scheme, copy of sample Form No. 16, copy of sample VRS agreement were submitted by the assessee to the lower authorities to justify the claim of deduction on account of VRS payment u/s 35DDA of the Act. 27.2 The Ld. AR further contended that the claim of deduction u/s 35DDA of the Act is duly accepted by the lower authorities in the assessee’s own case in the A.Y. 2020-21, where the matter was also discussed during the assessment proceedings. 28. On the other hand, the ld. DR vehemently supported the order of the authorities below. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 21 of 28 . 29. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the assessee claimed a deduction of ₹ 22,04,576/- under Section 35DDA of the Act, being 1/5th of the VRS expenses amortized over five years, in line with the statutory requirements of the said provision. We note that the assessee had provided evidence, including a copy of the VRS scheme, sample copies of Form 16 issued to employees, settlement slips, and VRS agreements, to substantiate its claim. Additionally, the assessee furnished a detailed breakup of the VRS expenses and asserted that all payments were made through banking channels. These submissions, prima facie, demonstrate the genuineness and compliance of the assessee’s claim with the provisions of Section 35DDA of the Act. 29.1 We further emphasize that consistency in assessment is a fundamental principle of tax jurisprudence. In the subsequent assessment year i.e. A.Y. 2020-21, i.e., the fourth year of the assessee's claim for amortization, the Revenue has accepted the deduction under Section 35DDA of the Act during the scrutiny assessment. The facts and circumstances for the relevant assessment year are identical to those of the subsequent year. Therefore, we find no justification for a deviation in the current year when the deduction has been allowed in the fourth year of amortization without any dispute. The allowance in the subsequent year underscores the legitimacy of the assessee’s claim and necessitates a consistent approach by the Revenue. The principle of consistency, as upheld by the Hon’ble Supreme Court in Radhasoami Satsang v. CIT IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 22 of 28 . (1992) 193 ITR 321 (SC), requires that similar treatment should be given for identical facts and circumstances unless there is a material change. 29.2 Additionally, we observe that the AO has raised concerns regarding the timing of the VRS payments and discrepancies in documentation for some employees. In this regard we are of the view that these issues could have been addressed had the assessee been granted a reasonable opportunity to furnish additional evidence. Moreover, the partial documentation submitted by the assessee, such as details for three employees, was not disputed for its authenticity. Therefore, disallowing the entire claim solely due to gap in documentation i.e. application after stipulated period of scheme is unwarranted, particularly when the claim aligns with statutory requirements and has been consistently accepted in subsequent years. 29.3 In light of these findings, we conclude that the deduction claimed by the assessee under Section 35DDA of the Act is valid and allowable. The disallowance made by the AO and upheld by the DRP is accordingly set aside. Thus, we direct the AO to allow the deduction as claimed by the assessee. Hence, the ground of appeal of the assessee is hereby allowed. 30. The next issue raised by the assessee in ground No. 6.1 to 6.5 is that the AO/DRP erred in now allowing the additional claim of Rs. 5,41,28,664/- on account Ind-AS adjustment on preference share made during the assessment proceedings. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 23 of 28 . 31. The assessee, during the assessment proceedings, submitted a revised computation of income, making an additional claim for a deduction of ₹5,41,28,664/- on account of Ind-AS adjustments related to preference shares. The deduction arose from the booking of notional interest income on preference shares to comply with Ind-AS provisions, which was inadvertently not reduced while computing taxable income. 31.1 The claim of the assessee was rejected by AO by holding that the impugned claim was not made in the income tax return. Therefore, in absence of claim made in return the same cannot be allowed. 32. The aggrieved assessee preferred to file objection before the learned DRP. The learned DRP confirmed the view taken by the AO. Then the assessee carried mater before the tribunal in IT(TP)A No. 185/Bang/2022. The Tribunal vide order dated 1st September 2022 set aside the issue to file of the learned DRP with certain direction detailed as under: “14.1 We have heard the rival submissions and perused the materials available on record. The assessee has made claim on this count in revised return. The Ld. DIP has directed the AO to verify the validity of revised return so claimed to have been filed by the assessee and consider the sane if the revised return is valid return as per the provisions of the Act for computing total income of the assessee: In our opinion, appellate authority could entertain the claim of the assessee, even though no revised return is filed. Hence, we direct the Ld. DRP to examine this issue afresh.” 33. The Learned DRP in set aside proceeding again rejected the assessee's claim, citing that such an additional deduction could only be made by filing a revised return of income, rather than through a revised computation of income. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 24 of 28 . 34. Being aggrieved by the direction of the learned DRP the assessee is in appeal before us. 35. The Learned AR before us argued that the Hon’ble ITAT, in the first round of proceedings, explicitly directed the DRP to examine the issue afresh and allow the deduction even if it was not claimed through a revised return. The AR emphasized that the omission of the deduction was an inadvertent error, and the notional interest income should be excluded to ensure compliance with the directions of the Hon’ble ITAT and accurate determination of taxable income. 36. On the contrary, the Learned DR strongly supported the orders passed by the authorities below, arguing against the allowance of the additional claim through a revised computation of income. 37. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note the coordinate bench of ITAT, in the first round of proceedings, explicitly directed the Ld. DRP to examine the issue afresh and allow the claim, even if it was not made by filing a revised return of income. This direction overrides the technical requirement of filing a revised return as per the general principles, making the rejection of the claim by the Ld. DRP inconsistent with the ITAT’s specific instructions. Thus, the rejection of the claim based solely on the lack of a revised return contravenes the binding directions of the ITAT. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 25 of 28 . 37.1 The Hon’ble Supreme Court in Goetze (India) Ltd. v. CIT (2006) 284 ITR 323 (SC) clarified that while the AO may not entertain claims made otherwise than through a revised return, appellate authorities such as the ITAT have the jurisdiction to consider additional claims made through revised computations. The relevant observation of Hon’ble supreme court reads as under: 4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs. 37.2 In the present case the assessee made the claim during the assessment proceedings via a revised computation of income. The appellate authority is empowered to allow legitimate claims even if they were not included in the original or revised return of income. 37.3 The assessee booked notional interest income on preference shares to comply with Ind-AS requirements. However, while computing taxable income, the assessee inadvertently failed to exclude this notional interest income, which is not taxable under the Income Tax Act. The notional interest income is a book entry required under Ind-AS, with no real accrual or receipt of income. Such notional entries are not taxable under the Income Tax Act. Taxable income must be computed based on actual accrual or receipt as per the provisions of the Income Tax Act, irrespective of accounting adjustments under Ind-AS. IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 26 of 28 . 37.4 The adjustment merely seeks to correct an inadvertent error to ensure that only the correct taxable income is subjected to tax. Denying this adjustment would lead to taxation of income that is neither accrued nor received. The notional interest income on preference shares arises solely due to compliance with Ind-AS provisions. Allowing the claim would not result in any undue benefit to the assessee but merely to ensure that the correct taxable income is assessed. The adjustment is revenue-neutral as it rectifies the inadvertent inclusion of notional income. 38. We further note that rejecting a legitimate claim due to procedural technicalities, particularly when the ITAT has issued explicit directions to examine and allow the claim, would result in unjust enrichment for the Revenue. The Hon’ble Supreme Court in CIT v. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC) emphasized that tax authorities must act fairly and cannot deny legitimate claims based on procedural lapses alone. 38.1 Based on the above discussion we conclude that the claim of ₹5,41,28,664/- on account of Ind-AS adjustment for preference shares is a legitimate claim, as the notional interest income is not taxable under the Income Tax Act. The ITAT’s binding directions to examine the issue afresh and allow the claim supersede the procedural requirement of filing a revised return. The assessee brought the claim to the notice of the authorities during assessment proceedings through a revised computation, which suffices under the circumstances. The legal precedents, including Goetze (India) Ltd., support the consideration of such claims at the appellate stage, even if they were not included in the IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 27 of 28 . original or revised return. However, it is pertinent to note that lower authorities have not verified the genuineness of claim of the assessee. As such the lower authorities rejected the claim on technical count. Hence, we for the sake of the justice and fairness hereby direct the AO consider the claim of the assessee in the light of above discussion and allow the claim after verification if find genuine. Hence, the ground of appeal of the assessee is hereby allowed subject to the direction stated above. 39. In the result, the appeal of the assessee is allowed. Coming to S.A. No.44/Bang/2023 for the assessment year 2017-18 40. Since the appeal of the assessee is allowed as discussed above, on the main issue, the stay petition filed by the assessee is dismissed as infructuous. 41. In the combined result, the appeal of the assessee is allowed and the stay petition filed by the assessee is dismissed as infructuous. Order pronounced in court on 20th day of December, 2024 Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 20th December, 2024 / vms / IT(TP)A No.1126/Bang/2023 & SP No.44/Bang/2023 Page 28 of 28 . Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore "