Police, which is playing in the tournament following the withdrawal of a Bangladeshi club, held Manang on 1-1 in the regular 90 minutes and added 20 minutes, forcing the winner to be decided through the tie-breaker.
In the tie-breaker, Jumanu Rai, Bharat Shah and Hem Tamang scored for Police, while Suman Subedi was denied by Manang goalie Kiran Chemjong.
Sujal Shrestha and African recruit Mousa were the only players of Manang who succeeded in converting penalties while Anil Gurung, Chico and Biswash Shrestha failed to score.
Earlier, Binod Karki, the 61st minute replacement of Dinesh Gurung, put Police ahead in the 70th minute. Binod pounced in Jumanu's Rai's header off Rabin Shrestha's freekick after goalie Kiran dropped the ball from his grip.
However, Sujal Shrestha leveled the score in the second minute of injury time. Sujal scored from the spot kick he earned after Ajit Bhandari handled the ball inside danger zone.
Though Manang adopted attacking approach in the first half, it failed to score. Police came up with improved show after the break and piled consistence pressure on Manang.
After becoming sure that the match would be decided by tie-breaker, Police substituted its goal keeper with a minute to go in extra time.
Roshan Khadka, who replaced Bishal Shrestha, won the man-of-the-match award for helping Police to win the match.
Police coach Ananta Thapa said that the match had to be decided by penalties after referee committed mistake in the dying moments of the match.
Meanwhile, Manang coach Chhiring Lopsang Gurung said that his side did not perform well following the hectic match schedules and players were also drained out.
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