2025 (3) TMI 1457 - AT - Income Tax

Companies excluded from transfer pricing benchmarking due to functional incomparability and lack of segmental data

ACIT, Circe-12 (4) Versus M/s. Thomson Reuters India Services Pvt. Ltd. Bangalore And M/s. Thomson Reuters India Services Pvt. Ltd Versus DCIT, Circe-12 (4), Bangalore

ITAT Mumbai held that several companies including Infosys Ltd, Persistent Systems Ltd, Tata Elexi Ltd, and Bodhtree Consulting Ltd should be excluded from ... TP Adjustment - Comparable selection - whether the assessee is a software product company or provides contract software development services? - HELD THAT:- Infosys Ltd. - As having considered the functions performed, assets employed and risks assumed by both entities, we are of the considered view that being a contract software development service provider, the assessee cannot be compared with the company as giant in its operations as Infosys Ltd. Accordingly, we direct the TPO/AO to exclude Infosys Ltd while benchmarking the international transaction pertaining to “Provision of Software Development Services”. Persistent Systems Ltd be excluded while benchmarking the international transaction pertaining to “Provision of Software Development Services” in the absence of relevant segment information of Persistent System Ltd, which is comparable to the assessee's international transaction under consideration. Tata Elexi Ltd. (Segmental) is not functionally comparable to the assessee. Hence, we direct the TPO/AO to exclude Tata Elexi Ltd.(segmental) while benchmarking the international transaction pertaining to “Provision of Software Development Services” Bodhtree Consulting Ltd. company is earning revenue from various streams, therefore, in the absence of relevant segmental information, this company cannot be said to be functionally comparable to the assessee. Further, as regards the submission of the learned DR that the assessee is seeking exclusion of its own comparable, as noted in the foregoing paragraphs, there is no estoppel on the taxpayer from pointing out that a particular company has been wrongly taken as a comparable. Accordingly, we direct the TPO/AO to exclude Bodhtree Consulting Ltd. while benchmarking the international transaction pertaining to “Provision of Software Development Services”. TP Adjustment in relation to the international transaction of “Provision of ITeS” - Eclerx Services Ltd be excluded as not functionally comparable. Cosmic Global Ltd. be excluded while benchmarking the international transaction pertaining to “Provision of ITeS”. Accentia Technologies Ltd. develops its own software and renders medical transcription services, while the assessee, as noted in the foregoing paragraph, compiles data from various publicly available sources, which is used as an input by the associated enterprises in its various products and databases, which are created, maintained and owned by the associated enterprises. Thus, we direct the TPO/AO to exclude Accentia Technologies Ltd. while benchmarking the international transaction pertaining to “Provision of ITeS”. Infosys BPO Ltd be excluded as a comparable on the basis of its high brand value and consequent higher profitability. Denial of deduction claimed u/s 10A in respect of the UB Plaza Unit - Since the year under consideration is the 3rd year of claim of deduction u/s 10A of the Act by the assessee in respect of the UB Plaza Unit, which has been allowed by the coordinate bench in the first year of claim, in absence of any change in facts and law AO is directed to allow the deduction claimed u/s 10A of the Act in respect of the UB Plaza Unit in the year under consideration. As a result, Ground No.9, raised in the assessee appeal, is allowed. Denial of deduction claimed u/s 10A in respect of the Titanium STPI Unit - Since the year under consideration is the second year of the claim of deduction u/s 10A in respect of the Titanuim Unit, Bangalore, therefore respectfully following the decision of the coordinate bench cited supra, AO is directed to allow the deduction claimed by the assessee u/s 10A with respect to the Titanium Unit, Bangalore. Accordingly, Ground raised in assessee’s appeal, is allowed. Denial of deduction claimed u/s 10A with respect to the unit acquired from Reuters India Pvt. Ltd.- HELD THAT:- The issue arising in the present appeal is recurring in nature and has been decided in favour of the assessee by the decision of the coordinate bench of the Tribunal. Accordingly, we direct the AO to allow the deduction claimed under section 10A of the Act with respect to the unit acquired from RIPL. Denial of the claim of depreciation on goodwill - whether the assessee is entitled to claim depreciation on goodwill which arose on account of merger/amalgamation, being the excess amount of consideration over the value of net assets of the entity acquired, came up for consideration before various Courts/Tribunals? - HELD THAT:- As in the present case, it is evident that neither the AO nor the learned DRP considered the details filed by the assessee, as one of the reasons for rejecting the assessee’s claim was that the same was made by way of a letter instead of filing the revised return of income by placing reliance on the decision in Goetze India Limited [2006 (3) TMI 75 - SUPREME COURT] We further find that vide letter dated 25/06/2021, the Revenue requested for verification of factual details with respect to the claim of depreciation on goodwill. Therefore, we are of the considered view that this issue be restored to the file of the jurisdictional AO for de novo adjudication, in light of the decisions cited supra, after examining the details filed by the assessee. Since this issue is restored to the AO for consideration afresh, it is needless to mention that the AO can seek any other information from the assessee for complete adjudication of this issue and the assessee can also furnish any other documents in support of its claim. Exclusion of communication expenses and travel expenses from both export turnover as well as the total turnover while computing deduction u/s 10A - HELD THAT:- We find that this issue is now decided in favour of the taxpayer in CIT v/s HCL Technologies Ltd, [2018 (5) TMI 357 - SUPREME COURT] Accordingly, respectfully following the aforesaid decision, we do not find any infirmity in the directions of the learned DRP in excluding the communication expenditure and travel expenditure from the total turnover also to the extent it was excluded from the export turnover. As a result, the impugned final assessment order on this issue is upheld and Grounds No. 2 and 3, raised in Revenue’s appeal, are dismissed. Disallowance on software items u/s 40(a)(ia) - HELD THAT:- We find that the learned DRP while issuing the directions to the AO to delete the disallowance of depreciation on computer software made under section 40(a)(ia) of the Act, followed the aforesaid decision of the Hon’ble Karnataka High Court in Tally Solutions Pvt. Ltd. [2020 (12) TMI 1160 - KARNATAKA HIGH COURT] Thus, in the absence of any contradictory decision on this issue being placed on record, we do not find any infirmity in the directions issued by the learned DRP. As a result, the impugned final assessment order on this issue is upheld. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the Transfer Pricing Officer (TPO) correctly included or excluded certain companies as comparables for benchmarking the international transaction of 'Provision of Software Development Services' and 'Provision of ITeS'.Whether the assessee is entitled to deductions under section 10A of the Income Tax Act for various units, including UB Plaza Unit, Titanium STPI Unit, and the unit acquired from Reuters India Pvt. Ltd.Whether the assessee's claim for depreciation on goodwill is allowable under section 32 of the Income Tax Act.Whether the Dispute Resolution Panel (DRP) correctly directed the exclusion of communication and travel expenses from both export turnover and total turnover for computing deductions under section 10A.Whether the deletion of disallowance on software items under section 40(a)(ia) was justified.2. ISSUE-WISE DETAILED ANALYSISTransfer Pricing Related IssuesThe TPO included several companies as comparables for benchmarking the international transaction of 'Provision of Software Development Services'. The assessee challenged the inclusion of Infosys Ltd., Persistent Systems Ltd., Tata Elexi Ltd. (Segmental), and Bodhtree Consulting Ltd. The Tribunal found these companies to be functionally dissimilar to the assessee, which provides contract software development services, and directed their exclusion based on precedents and the functional profile of the assessee.Similarly, for 'Provision of ITeS', the assessee contested the inclusion of Eclerx Services Ltd., Cosmic Global Ltd., Accentia Technologies Ltd., and Infosys BPO Ltd. The Tribunal found these companies to be functionally different, with some engaged in Knowledge Process Outsourcing (KPO) and others having high brand value and profitability, and thus directed their exclusion.Deductions under Section 10AThe Tribunal addressed the denial of deductions under section 10A for the UB Plaza Unit, Titanium STPI Unit, and the unit acquired from Reuters India Pvt. Ltd. The Tribunal found that the deduction under section 10A is undertaking-specific and should not be denied merely due to a change in ownership. The Tribunal relied on previous decisions and CBDT Circular No. 1/2013, which clarified that a slump sale does not result in the splitting or reconstruction of an existing business.Depreciation on GoodwillThe Tribunal considered the assessee's claim for depreciation on goodwill arising from the acquisition of business units. The Tribunal noted that the assessee's claim was based on the Supreme Court's decision in Smifs Securities Ltd., which held that goodwill is an asset under section 32 eligible for depreciation. The Tribunal directed the AO to re-examine the claim in light of the valuation reports and other details provided by the assessee.Exclusion of Expenses from TurnoverThe Tribunal upheld the DRP's direction to exclude communication and travel expenses from both export turnover and total turnover while computing deductions under section 10A. This decision was based on the Supreme Court ruling in HCL Technologies Ltd., which supports such exclusion.Disallowance on Software ItemsThe Tribunal upheld the deletion of disallowance on software items under section 40(a)(ia), following the Karnataka High Court's decision in Tally Solutions Pvt. Ltd., which held that depreciation is not an outgoing expenditure and thus not subject to disallowance under section 40(a)(ia).3. SIGNIFICANT HOLDINGSThe Tribunal established several core principles:Transfer pricing comparables must be functionally similar to the tested party, and significant differences in business models, risk profiles, and intangibles justify exclusion.Deductions under section 10A are undertaking-specific, and a change in ownership does not negate eligibility if the unit otherwise qualifies.Goodwill arising on amalgamation or acquisition can be considered an intangible asset eligible for depreciation under section 32, provided it is properly valued and recorded.Expenses excluded from export turnover must also be excluded from total turnover for consistency in computing deductions under section 10A.Depreciation is an allowance and not an expenditure subject to disallowance under section 40(a)(ia).The Tribunal's final determinations included the exclusion of certain companies from the set of comparables for transfer pricing, the allowance of section 10A deductions for specific units, the remand of the depreciation on goodwill issue for further examination, and the upholding of the DRP's directions on turnover exclusions and software disallowance.