Tribunal allows 80% depreciation on server equipment, upholds goodwill depreciation, applies section 194J disallowance provisions

ITAT Bangalore ruled on multiple issues in this tax appeal. The tribunal allowed 80% depreciation on server/networking equipment, classifying it under instrumentation and monitoring systems, citing HC precedents. Depreciation on goodwill was upheld as an intangible asset following SC guidance in Smifs Securities. Revenue succeeded on section 194J disallowance, with tribunal applying amended provisions. For transfer pricing, Infosys was excluded from comparables following coordinate bench decisions, while LGS Global matter was remanded to CIT(A) for fresh adjudication rather than TPO referral.

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Issues Involved:
1. Rate of depreciation on server/networking equipment.
2. Depreciation on goodwill.
3. Disallowance u/s 194J.
4. Inclusion of Infosys Ltd. and LGS Global Ltd. as comparables.

Summary:

Issue 1: Rate of Depreciation on Server/Networking Equipment
The Revenue's appeal regarding the rate of depreciation on server/networking equipment was dismissed. The Tribunal noted that this issue is covered by the decision of the Madras High Court in the case of Dinamalar Vs. CIT (2016) 74 taxman.com 14 and the Hyderabad Tribunal in ACIT Vs. Ushodaya Enterprises Ltd., (2013) 33 taxmann.com 381. The Madras High Court had held that control panel boards and transformers could be classified under "Instrumentation and monitoring systems" and are entitled to depreciation at 80%.

Issue 2: Depreciation on Goodwill
The Tribunal upheld the CIT(A)'s decision to allow depreciation on goodwill, referencing the Supreme Court decision in Smifs Securities Ltd., 348 ITR 302, and the Delhi High Court's decision in Triune Energy Systems Vs. DCIT (2016) 65 taxman.com 288. It was noted that goodwill is an intangible asset and should be accounted for when a purchaser acquires a business for more than the fair market value of its net tangible assets. The Tribunal dismissed the Revenue's ground, stating that the judgment of the Supreme Court in Goetze (India) Ltd. [2006] 157 Taxman 1 (SC) does not apply to the powers of the Tribunal to entertain fresh claims.

Issue 3: Disallowance u/s 194J
The Tribunal allowed the Revenue's ground regarding disallowance u/s 194J, noting that the CIT(A) had relied on decisions that were not applicable post the amendment to the explanation of section 194J. The Tribunal held that the case falls within the ambit of the amended explanation to section 194J, and the violation committed by the assessee should be dealt with accordingly.

Issue 4: Inclusion of Infosys Ltd. and LGS Global Ltd. as Comparables
- Infosys Ltd.: The Tribunal upheld the CIT(A)'s decision to exclude Infosys Ltd. from the list of comparables, referencing the coordinate bench's decision in IT(T.P)A No. 1009/Bang/2014, which found Infosys Ltd. not functionally comparable to a software development service provider due to its significant intangibles and revenue from software products.
- LGS Global Ltd.: The Tribunal noted that the CIT(A) had remitted the issue back to the TPO for fresh adjudication, which was not appropriate. The Tribunal sent the issue back to the CIT(A) to decide afresh based on the material available.

Assessee's Appeal:
The Tribunal dismissed the assessee's appeal as academic, noting that the revised taxable income computed by the AO was lower than the income declared by the assessee, and the appeal effect had already been given.

Conclusion:
The Revenue's appeal was partly allowed for statistical purposes, and the assessee's appeal was dismissed.

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