Revenue expenditure on leased premises and transfer pricing comparables were allowed after functional and factual verification.

Disallowance of rent equalisation reserve, reversal of provisions for bonus, gratuity and leave encashment, and MAT credit computation all required verification of the assessment record, so each issue was remitted for fresh decision. Expenditure on workstations and interior works in leased premises was treated as revenue expenditure because it did not create a capital asset and was incurred for efficient business operations, so the deduction was allowed. In transfer pricing, L&T Infotech Ltd. and Persistent Systems Ltd. were excluded as comparables due to functional and segmental concerns, while the working capital adjustment issue was remitted for recomputation.

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Issues: (i) Whether the disallowance of rent equalisation reserve required verification of the actual rent treatment in later assessment years; (ii) whether the reversal of provisions for bonus, gratuity and leave encashment could be taxed without examining the earlier allowance position; (iii) whether expenditure on workstations and interior works in leased premises was revenue expenditure or capital expenditure; (iv) whether the MAT credit required recomputation on verification of the record; and (v) whether the identified transfer pricing comparables were to be excluded and whether working capital adjustment was to be granted.

Issue (i): Whether the disallowance of rent equalisation reserve required verification of the actual rent treatment in later assessment years.

Analysis: The claim arose from a reserve created to reflect enhanced rent liability. The basis of the dispute was whether the same expenditure had been allowed in later years, since a double disallowance could result if the provision was disallowed in the year of creation and the corresponding actual payment was also not considered in subsequent years. The matter therefore turned on verification from the record.

Conclusion: The issue was remitted to the Assessing Officer for verification and fresh decision.

Issue (ii): Whether the reversal of provisions for bonus, gratuity and leave encashment could be taxed without examining the earlier allowance position.

Analysis: The claim related to reversal of earlier provisions. The relevant consideration was whether the original provision had been disallowed in the year of claim, because if it had not been allowed earlier, taxing the reversal would amount to double addition. The record had to be examined to determine the correct treatment.

Conclusion: The issue was remitted to the Assessing Officer for examination and fresh decision.

Issue (iii): Whether expenditure on workstations and interior works in leased premises was revenue expenditure or capital expenditure.

Analysis: The expenditure was incurred for setting up workstations and carrying out interior works in leased premises. The relevant test was whether the outlay resulted in creation of a capital asset or enduring capital advantage, or whether it was incurred in the process of carrying on business. On the facts, the expenditure did not bring into existence a capital asset and was incurred for efficient running of the business.

Conclusion: The expenditure was held to be revenue in nature and the assessee's claim was allowed.

Issue (iv): Whether the MAT credit required recomputation on verification of the record.

Analysis: The dispute concerned the quantum of MAT credit to be given. The correctness of the credit claimed depended on the assessment record and required verification before final allowance.

Conclusion: The issue was remitted to the Assessing Officer for verification and fresh decision.

Issue (v): Whether the identified transfer pricing comparables were to be excluded and whether working capital adjustment was to be granted.

Analysis: L&T Infotech Ltd. and Persistent Systems Ltd. were found to be unsuitable comparables on the basis of the functional profile and the absence of reliable segmental comparability. The working capital issue also required adjustment in principle to bring the tested party and comparables on a proper footing, with recomputation to be made in accordance with law.

Conclusion: L&T Infotech Ltd. and Persistent Systems Ltd. were directed to be excluded, and the working capital adjustment issue was remitted for recomputation.

Final Conclusion: The appeal succeeded on the revenue expenditure issue and obtained further relief on transfer pricing comparability, while the remaining disputed items were sent back for verification and fresh adjudication, resulting in overall partial success for the assessee.

Ratio Decidendi: Expenditure incurred on leased premises is deductible as revenue expenditure if it is incurred in the course of business and does not bring into existence a capital asset, while transfer pricing comparability and working capital adjustments must be determined on functional similarity and proper factual verification.

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