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2020 (3) TMI 1133

..... s the most appropriate method the adjustments to the cost structure be allowed to iron out the differences between the AE and Non-AE transactions - HELD THAT:- Assessee being an institutional brokerage house has earned significant brokerage commission from FII clients, which included AE and Non AE enterprises. The transactions from Non-AE FII clients, the assessee is required to provide broader range of services viz-a-viz services to AE FII clients did not include marketing and international sales support. We find that the assessee is dependent on the overall CLSA group resources without which the brokerage from FII clients could not have materialized. The assessee also filed submission dated 27.10.2014 before the TPO providing detailed explanation with regard to the differences in services provided to the AE and Non-AEs and explanation in support that TNMM was the most appropriate method to determine the ALP of brokerage earned from AEs. We find merit in the submission that TNMM is the correct method and internal CUP would entail adhoc adjustment to price in so far as broking commission from AE and Non AEs are concerned. Operating model of J P Morgan India Pvt. Ltd. [2014 (2) TMI .....

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..... - HELD THAT:- We find that additional evidences have been filed which have bearing on the issue involved and accordingly, we remit the issue back to the file of the AO to decide the same in the light of these fresh evidences as per facts and law. Needless to mention that in case, the AO finds these expenses to be in capital in nature, then the assessee may be allowed depreciation on that part of the capital expenditure @60% in terms of provisions of the Income tax Rules. - ITA No.902/Mum/2016 - 3-2-2020 - Shri C N Prasad, Judicial Member And Shri Rajesh Kumar, Accountant Member For the Appellant : Mr Mukesh Butani, Ms Karishma Phatarphekar & Mr Harsh Shah For the Respondent : Ms Jothilakshmi Nayak ORDER PER RAJESH KUMAR, ACCOUNTANT MEMBER This appeal by the assessee is directed against the order of the DRP-1, Mumbai, dated 26.11.2015, u/s. 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) relating to A.Y. 2011-12. 2. Ground nos. 1 to 3 are general in nature and require no adjudication. 3. Ground nos. 4 read as under: Availing of intra-group services 4. On the facts and circumstances of the case and in law, the learned TPO / learned AO / Hon'ble DRP .....

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..... earch as well as a range of back office support services. The assessee filed its return of income on 25.11.2011 declaring total income at ₹ 214,39,00,518/-, which was processed u/s. 143(1) of the Income tax Act, 1961. Thereafter, the case was selected for scrutiny and the AO issued notice u/s. 143(2) and 142(1) of the Act, which were duly served on the assessee. The AO observed that the assessee had entered into international transactions with Associated Enterprises (AE) during the year, which have been listed in the auditor s report in Form No. 3CEB filed along with the return of income. In order to determine the arm s length price of these transactions, the matter was referred to the Jt. CIT Transfer Pricing-2(3), Mumbai (TPO). The TOP vide order u/s. 92CA(3), dated 30.01.2015, determined an adjustment of ₹ 151,68,82,394/- to be made to the transactions value of the transactions of the assessee with its AE. The Assessing Officer has computed the total income of the assessee under sub section (4) of section 92C in accordance with Arms Length Price determined by the TPO u/s. 92CA(3 of the Act. The adjustment comprised the following: Sr No. Particulars Amount 1 Provision .....

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..... counsel for the assessee submitted that despite assessee having submitted all necessary evidences qua the international transactions and transfer pricing report, the TPO has not followed any of the prescribed method u/s 92C of the Act, and, thus came to the conclusion that the arm s length price of the fees paid by the assessee to the Associate Enterprises is nil, which is wrong and against the provisions of the Act. The learned AR also submitted that the DRP has erred in upholding the order of the TPO wherein none of the prescribed methods was followed for determining the ALP of the international transactions with the Associate Enterprise. The assessee further submitted that payment of intra-group services is closely interlinked with brokerage income. Unless the assessee avails these intragroup services, it cannot earn brokerage income from FII clients. The learned AR submitted that assessee s case is covered by the decision of the Tribunal in its own case for A.Y. 2012-13, wherein the co-ordinate Bench has held that the order of the DRP in upholding the transfer pricing adjustment made by the TPO on estimation basis without following any prescribed method is bad in law. In the li .....

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..... the Tribunal for A.Y. 2012-13, contended that the assessee vide submission dated 21.01.2015 filed detailed documentation to demonstrate rendition of intra group services by the AEs to the assessee. All these evidences were examined by the TPO as well as the DRP and after examination they brushed them aside giving generic reasons. The learned AR also submitted that the assessee also furnished PWC AUP report obtained by the assessee which states that services were actually received and cost incurred by the AE, basis of allocation etc. Referring to page 26 of the order of the TPO, the learned AR submitted that the TPO has never alleged that no evidences were provided or that no services have been rendered. 8. We have hearing the parties and perusal the material available on record including the decision of the co-ordinate Bench in ITA No. 1182/Mum/2017 for A.Y. 20212-13. We observe that identical issue was involved in that year and that coordinate Bench have decided the issue in favour of the assessee by observing as under: 10. We have heard the rival submissions and also perused the material on record including the cases relied upon the parties. The first issue pertains to the asses .....

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..... ing documents. The assessee was further asked to show cause as to why similar adjustment should not be made particularly in the light of the fact that similar adjustment on Intra Group payments was confirmed by the Ld. DRP in the A.Y. 2011-12 under the similar set of facts. 12. In response to the said query, the assessee submitted that it has entered into separate service level agreements with the CLSA service providers, pursuant to which the following services were rendered by them during the year relevant to the assessment year under consideration:- Broking Management, Client Management, CLSA U, Communications, Compliance, Credit Risk Management, Development Squad, Event Marketing, Finance and Accounting, Future & Options Management Support Services, Human Resources, Information Technology, Internal Audit, International Sales and Sales Trading Support, Legal, Management, Market Risk Management, Operational Risk Management, Regional Algorithm Business Support, Regional Research, Tax Planning and Management. 13. To substantiate its claim, the assessee inter alia submitted transfer pricing study report, copy of audited financials, copies of service level agreement entered into w .....

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..... een -2.88 and 25.13% and the arithmetic mean of the NPMs of comparable companies is 10.40%. On the other hand, the net profit margin of the assessee company for the financial year ended March 31, 2011 at entry level was 26.09%. In the light of the aforesaid facts, there is no merit in the findings of the Ld. TPO that the margin earned by the assessee at an entry level is not in accordance with the provisions of section 92C(2) of the Act. Under these circumstances, the action of the Ld. DRP in confirming the transfer pricing adjustment done by the Ld. TPO is not justified. The assessee has also submitted a supplementary analysis i.e. AUP report from Price Waterhouse Coopers (PWC) which certifies the cost and markup charged by AEs and KPMG benchmarking report, which determines arm s length markup for services availed. So, there is merit in the contention of the Ld. counsel that the assessee has complied with all requirements as prescribed under the Act and the Rules and the TP analysis has been carried out as per the provisions of law. We are therefore of the considered view that the assessee has discharged its onus by demonstrating that the transaction is at the arms length in accor .....

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..... e present case, all the items tabulated above were not provided by the same entity. They were provided by different entities. That these entities were all part of the same group is not determinative of the issue whether they were part of a single international transaction. Each party to the group is a separate legal entity. We do not rule out the possibility of these being a single international transaction where goods are sold and/or services are supplied by various entities within a group under a single transaction. That, however, would depend upon the facts of each case. The onus would be on the assessee to establish that though the goods were supplied and/ or the services were rendered by different legal entities they were part of an international transaction pursuant to an understanding between the various members of the group. This would be an issue of fact for the determination of the authorities under the Act. 1.1. The various international transactions of the assessee are: (i) Brokerage (ii) IT support services, (iii) Fees for sub-advisory services,(iv) Payment for intra-groups services (v) Interest (vi) Reimbursement of expenses and (vii) Bank charges. These transactions .....

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..... ng entity level TNMM but it has to be benchmarked applying CUP. Therefore, on facts of this case the transactions cannot be aggregated. Hence, objections regarding rejection of entity level TNMM and application of CUP are rejected. 17. The Ld DRP has upheld the transfer pricing adjustment made by the Ld.TPO in the light of the judgments of the Hon ble High Court of Delhi in Sony Ericsson s case (supra) and the P&H High Court in the case Knorr- Bremse India Pvt. Ltd.(supra) in which it has been held that the answer to the issue whether a transaction is at an arm s length is not dependent on whether the transaction results in the assessee s profit. But the only important aspect which is to be seen is whether the transaction entered into is bona fide or the same has been entered into for the purpose of diverting the profits. The Ld. DRP has further relied on the decision of the ITAT Mumbai in the case of Goldman Sachs (India) Securities Private Limited v ACIT (ITA No. 7724/Mum/2011) and ITAT Bangalore in the case of M/s Fosroc Chemicals India Private Limited in IT (TP) A No. 148/Bang/2014 for AY 2009-10 in which the Tribunal has upheld the application of CUP as MAM for benchmarkin .....

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..... his is negative, so man hours are not allocated Total 1466742784 100 10000 19. The Ld. TPO has justified the method of estimating the hours devoted by the AE in respect of various services claimed to be availed by the assessee holding as under:- 5.11.2 In the absence of all these details regarding the number of employees working with the AE, the salaries paid to these employees, the educational qualification of these employees, the number of hours dedicated by these employees towards the services rendered to the assessee, the undersigned is constrained to go by estimation to the best judgment, to quantify the value of the services if at all any being rendered by the AE to the assessee. Without prejudice to the contention of the undersigned, regarding the services being rendered by the AE to the assessee. However after considering the evidence filed by the assessee, as a matter of abundant precaution, the undersigned proceeds to make a reasonable estimate, of whatever little services that can be said to have been rendered in the facts and circumstances of this case. Having regard to the nature of services which are claimed to have been rendered in the instant case, the undersigned e .....

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..... ermit the TPO to determine the arm s length price on estimation basis. We are therefore, of the considered view that the arms length determined by the Ld. TPO is not in accordance with the provisions of the Act and the ratio of law laid down by the Hon ble jurisdictional High Court. On the other hand the intra group services are closely linked to the business of the assessee and the assessee s benchmarking approach is based on TNMM. Further as pointed out by the Ld. counsel, the Delhi Bench of the Tribunal in the case of Knorr Bremse India P. Ltd. vs. AICT 77 taxmann.com 101 (Delhi Tri), has held that payment of intra group services may be benchmarked using TNMM. The observations of the Tribunal are as under:- 18. As regards to the application of method for determining the Arm s Length Price, we are of the view that the method to be used to determine arm s length price for intragroup services should be in accordance with the guidelines in Chapter- I, II & III ÖECD Transfer Pricing Guidelines which provides the various methods to be applied and the CUP method is likely to be a most appropriate method where there is a comparable service provided between independent enterpris .....

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..... the facts of the case, provisions of the Law and the cases discussed in the foregoing paras, we are of the considered view that the transfer pricing adjustment made by the Ld. TPO on ad hoc basis is not sustainable in law. Since, the order passed by the TPO u/s 92 CA(3) of the Act is not sustainable, the Ld. DRP ought to allowed the objection filed by the assessee. Hence, we decide both the questions mentioned in para No 17 (supra) in negative and further hold that the assessment order passed by the AO pursuant to the directions passed by the Ld DRP u/s 144(5) of the Act, is not sustainable in law. 24. Now the issue arises as to whether the legal infirmity in the impugned order can be cured by restoring the issue to the Ld. TPO? On the said issue the Ld. counsel for the assessee heavily relied on the judgment of the Hon ble Jurisdictional High Court, delivered in CIT vs. Kodak India Pvt. Ltd.,(supra) in which the coordinate Bench had declined to restore the issue similar to the present case to the file of TPO holding that the methods as prescribed by the legislature are mandatory and not directory and when the mandatory provision is either superseded or ignored it affects the juri .....

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..... se and the ratio laid down by the courts of law discussed above, we hold that since the TPO has not made the transfer pricing adjustment by following the mandatory provisions of the law and determined the same on estimation basis, action of the Ld. DRP in upholding the TP adjustment so made by the Ld. TPO is bad in law. So far as the cases relied upon by the Ld. DR is concerned, we are of the considered view that the facts of the said cases are different from the facts of the present case. Since, the Ld. TPO has not determined the arm s length price in accordance with the provisions of law, there is no reason to hold that the TNMM method applied by the assessee is not the most appropriate method within the meaning of section 92C of the Act. 27. We therefore, decide Ground No. 3 to 3.4 of the appeal in favour of the assessee and allow the appeal of the assessee and direct the AO to delete the upward adjustment of ₹ 143,67,42,784/- confirmed by the Ld. DRP. 9. We have considered the facts for A.Y. 2011-12 viz-a-viz A.Y. 2012-13. Only difference in these two years is that in A.Y. 2012-13, the TPO has given allowance on the basis of adhoc rate per hour and in A.Y. 2011-12, the TP .....

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..... he TPO observed that assessee has also rendered similar services to the overseas non-AEs, from whom the assessee charged commission/brokerage @ 0.250%. The rate of commission charged by the assessee from overseas non-AE is more than the rate of commission charged from AE while rendering equity broking services. Accordingly, a show cause notice was issued to the assessee as to why the ALP of the brokerage commission received from AEs should not be benchmarked under CUP method of 0.25% in line with the brokerage commission received from the overseas non-AEs. The assessee replied to the show cause notice is reproduced as under: (A) The assessee has submitted that TNMM is the most appropriate method for benchmarking the above transaction. The assessee submitted that it has given due consideration to all the facts and circumstances related to the transactions that it executed for AE and has earned a margin on operating income of 15.44% as compared to the average margin on operating income of 16.27% earned by independent comparable India brokerage houses. (B) A number of functions namely, client origination activities, dedicated sales and sales trading staff in the New York, London and H .....

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..... UP is considered as the most appropriate method, the assessee submitted on a without prejudice basis, that reasonable and accurate adjustments should be made to enhance the comparability/ eliminate the material differences, as between the transactions that the assessee executes for its AE and non AE FU clients. In other words, the commission rate received by the assessee from its non AE FU clients remunerates it for functions that are performed by its AEs for such clients. In other words, the assessee also receives commission income from its non AE FU clients for functions that it does not perform and hence the internal CUP so identified, needs to be adjusted to reflect the fact that the remuneration received by the assessee from its non AE clients compensates it for functions that are performed offshore for those clients by the AEs. Based on the above argument, the assessee submitted the adjustment working to the comparable CUP. (I) The Assessee further submitted adjustments based on volume, submitting that the average rate of only Top 10 clients in each category should be considered as a CUP or by only considering clients who have had a turnover of higher than 2000 crores. 12. Th .....

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..... ssessee company. It is well known that the CLSA Group is involved in raising private equity for private equity investment as well as its own investment in various entities. It is also involved in cross border investment banking and M&A deals. Therefore it has to maintain managers for client management as well as sale and is any benefit has accrued to the assessee company, the same is only incidental. (iv) The assessee has filed various research reports generated by its AEs to prove that the research is provided by the AE. This is not correct as the assessee company has its own research sitting in India. Therefore, it is more likely to prepare research report on Indian market and in fact it must be feeding it AE who may be compiling the research generated by the Indian entity. Even if it is assumed that the research is done by AE even then it is for all the public at large which are used by both Non-AEs and AEs. It is also seen that in all the reports submitted by the assessee company, the research relating to India, has been providing by the assessee company. Therefore there is no direct nexus between the research done by the AE and the benefit accruing to the assessee company. .....

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..... ost appropriate method. The learned AR further submitted that if the Bench is of the view that CUP method should be adopted as the most appropriate method based on a non-binding precedent in the case of J P Morgan India (P) Ltd. (supra), similar adjustments to the cost structure should be allowed to iron out the differences between the AE and Non-AE transactions. The learned AR vehemently pointed out that the decision of co-ordinate Bench in the case of J P Morgan India (P) Ltd. (supra), has no binding precedence despite order of Hon ble Bombay High Court, as the High Court has refused to admit the appeals and merely affirmed the orders of lower authorities including the CIT(A) and the Tribunal. The learned AR prayed that the TNMM may be adopted as the most appropriate method and, without prejudice, if CUP method is to be adopted as the most appropriate method the adjustments to the cost structure be allowed to iron out the differences between the AE and Non-AE transactions. 15. The learned DR, on the other hand, submitted that the assessee has bench marked the transaction by using TNMM and since the assessee is rendering similar services to overseas AEs, the TPO has rightly propos .....

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..... s from third party FII clients. We also noted that assessee could not have generated business from FII clients without the support of CLSA group resources, for which it is paying intra group service charges. Hence, in such a case, TNMM could be used as the most appropriate method. In view of these facts and circumstances, we are of the view that assessee has rightly followed the TNMM as the most appropriate method and the decision of the co-ordinate Bench in the case of J P Morgan India Pvt Ltd. (supra) is not applicable to the present set of facts of the assessee. Accordingly, we are inclined to set aside the order of the DRP and direct the TPO/AO to delete the adjustment of brokerage income of ₹ 21,73,90,712/-.Ground no.5 is allowed. 17. Ground no.6 reads as under: Provision of sub-advisory services and information technology ('IT') support services 6. On the facts and circumstances of the case and in law, the learned TPO / learned AO / Hon'ble DRP has erred in proposing/ upholding an adjustment to the ALP determined by the Appellant in respect of provision of sub-advisory services and IT support services by the Appellant to its AEs. In doing so, the learned TPO .....

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..... the DRP s directions the TPO computed the addition of ₹ 1,49,08,248/- 19. The TPO rejected GC Vak Software and Exports Limited as comparable on the ground that the said company incurred losses in the software segment. The TPO also observed that it had 85% of the business from North America and due to economic slow down in the said region CG VAK faced difficulty and suffered losses in the subsequent year also. The DRP upheld the rejection of the comparable by the TPO on the ground that there was persistent losses in the comparable software segment and other income included foreign currency income of ₹ 46 lacs, which is unallowable. 20. The learned AR submitted before the Bench that the said comparable is not a persistent loss maker. He referred to page nos. 442 & 781 of the paper-book, which shows the profit margin of 7.46%, 8.80% and 6.42% for the year ending March 2009, 2010 and 2011 respectively. The learned AR further submitted that TPO himself admitted that the margin of this year is 6.42 % by referring to page 41 of the TPO s order. We find merit in the arguments of the learned AR that the company cannot be excluded merely because it has incurred loss. The cas .....

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..... hes of the Tribunal, wherein the said companies have been excluded from the list of valid comparables. Ness Technologies India Private Limited vs. DCIT [2016] 76 taxmann.com 209 Orange Business Services India Solutions Private Limited. Vs. DCIT [2016] 71 taxmann.com 206 Clear 2 Pay India (P.) Ltd vs. ITO [2018] 95 taxmann.com 284 Alcatel Lucent India Limited vs. DCIT [2016] 74 taxmann.com 105 Similarly, the learned AR relied on the following judgments of Hon ble Jurisdictional High Court wherein it has been held that a company involved in software product cannot be compare to a company providing software development services : CIT vs. PTC Ltd. [2017] 395 ITR 176 CIT vs. Principal Global Services P Ltd. [2018] 95 taxmann.com 315 On these facts and ratio laid down by the Tribunal and the Hon ble Jurisdictional High Court, we are of the view that Infosys Ltd. and Zylog System Ltd. are to be excluded from the list of comparables. 23. Wipro Technologies Limited: The TPO has observed that activities of the company comprise of software related support services, primarily information technology software solutions/maintenance and technology support services. Further, he also observed that 9 .....

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..... gin is higher than the remaining comparables. 25. The other issue challenged by the assessee before us is against the addition of ₹ 67,62,961/- with regard to sub-advisory services. The assessee is providing investment services to its AE and Non-AEs. The assessee has used TNMM to benchmark these transactions. The TPO has not disturbed the benchmarking method used by the assessee. However, he did not agree with the assessee s margin, which is 26% on the basis of the following comparables: Crisil Ltd. ICRA Management Consulting Services Ltd. IDC (India) Ltd. Mecklai Financial Services Ltd. The TPO rejected all the comparable companies and identified only two comparables viz. Motilal Investment Advisors Pvt. Ltd. and Ladderup Corporate Advisory Private Limited and computed an addition of ₹ 99,06,632/- However, the DRP did not agree for the inclusion of comparable companies from assessee s transfer pricing study report and allowed exclusion of one TPO comparable company i.e. Motilal Investment Advisors Pvt. Ltd. According, as per the directions of the DRP the TPO computed the addition at ₹ 67,62,961/-. 26. The learned AR submitted before us that the TPO has himself ac .....

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..... dvisors P. Ltd. [ITA No. 216 of 2016] CIT v. General Atlantic Private Ltd. [ITA No. 1993 of 2013] CITv. Goldman Sachs (India) Securities PvL Ltd. [ITA No. 2222 of 2013] 27. The learned DR, on the other hand, relied on the orders of lower authorities. 28. After hearing both the parties and going the material available on record as also the decisions cited, we observe that in the above cases, the co-ordinate Bench has held that Ladderup Corporate Advisors has to be excluded as the said company is into investment banking business and not rendering non-binding investment services. Similarly, Bombay High Court in the case of New Silk Route Advisors P. Ltd General Atlantic Private Ltd. and Goldman Sachhs (India) Securities Pvt Ltd. (supra), has held that merchant banking business cannot be company to nonbinding investment advisory services Respectfully, following the ratio laid down by the Hon ble Jurisdictional High Court and the co-ordinate Benches, we direct the TPO to exclude Ladderup Corporate Advisory Private Limited from the list of comparables. 29. Similarly, the assessee has argued before us that for the inclusion of Mecklai Financial Services Ltd., ICRA Management Consulting Se .....

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..... followed is TNMM, learned AR relied on the decision of Diageo India (P) Ltd. vs. DCIT [2013] 28 ITR(T) 242. 31. The learned DR relied on the order of the authorities below. 32. We have both the sides and perused material on record. We do not find force in the observation of the TPO that the said company is a persistent loss making company, which is clear from pages 561 and 577 of the paper-book. It has incurred loss only during the year. We also find merit in the argument of the learned AR that product similarity is not important when the method selected for benchmarking is TNMM. The case of the assessee is supported by the case laws, which has been discussed above. Accordingly, we direct the TPO to hold Mecklai Financial Services as a valid comparable. 33. In the case of ICRA Management Consulting Services Ltd. the TPO observed that it is in the business of providing management consulting and advisory services to clients, who are corporate, banks, government, multi-lateral agencies, institutional investors etc. According to the TPO, the services provided by this company are in no way related to the services provided by the assessee and, therefore, it was rejected as a comparable. .....

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..... comparables. The AO is directed accordingly.The ground no.6 is allowed. 36. Ground nos. 7 to 9 read as under: 7. On the facts and circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in disallowing the expenditure, in the nature of repair and maintenance, of INR 4,43,68,457 by treating the same as capital in nature. 8. Without prejudice to Ground 7, on the facts and circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in considering the entire repairs and maintenance expenditure amounting to INR 4,43,68,457 towards computers as against INR 3,59,00,484 pertaining to computers. Balance amount of repairs and maintenance expenditure amounting to INR 84,67,973 does not relate to computers. 9. Without prejudice to Grounds 7 and 8 above, on the facts and circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in allowing depreciation at the rate of 25 percent on repairs and maintenance expenditure, disallowed and accordingly capitalized, amounting tolNR 3,59,00,484 relating to computers as against the applicable rate of depreciation of 60 percent as prescribed under Rule 5 of the Rules read with Section 32 of .....

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..... ve bearing on the correct appreciation on the issue, and accordingly may be set aside to the file of the AO for fresh adjudication. The learned AR submitted that the expenses were revenue in nature. The learned AR also contended that if these expenses were in case held as capital in nature then depreciation @60% may be allowed in so far as it relates to computers. The learned DR, on the other hand, opposed the contentions of the learned AR and prayed before the Bench that the order of the DRP may be upheld on the issue as it has also directed to allow 25% as depreciation expenses. 39. After hearing both the parties, we find that additional evidences have been filed which have bearing on the issue involved and accordingly, we remit the issue back to the file of the AO to decide the same in the light of these fresh evidences as per facts and law. Needless to mention that in case, the AO finds these expenses to be in capital in nature, then the assessee may be allowed depreciation on that part of the capital expenditure @60% in terms of provisions of the Income tax Rules. Accordingly, this ground is allowed for statistical purposes. 40. In the result, the appeal is allowed. Order pron .....

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