Transfer Pricing comparability requires functional parity; certain comparables excluded while tested margin remains within arm's length range.

Transfer pricing comparability requires functional parity of functions, assets and risks; accordingly Eclerx Services Ltd., Infosys BPO Ltd. and Accentia Technologies Ltd. were excluded as non-comparables and inclusion of remaining comparables did not alter the tested margin which stayed within the arm's length range. Slump sale or change of ownership does not ipso facto disentitle an otherwise eligible undertaking from claiming the undertaking-specific section 10A deduction, following coordinate precedents and CBDT guidance, though one unit (Titanium) was remitted for fresh fact-based AO adjudication. Depreciation is a statutory allowance and section 40(a)(ia) disallowance in respect of software depreciation was treated as infructuous; a post-return claim for goodwill depreciation was remitted for AO verification in light of binding precedent.

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Issues: (i) Whether specific comparables (Eclerx Services Ltd., Infosys BPO Ltd., Accentia Technologies Ltd., Accentia/Acropetal/ICRA/Jeevan) should be excluded or included for benchmarking ITeS transactions; (ii) Whether deduction under section 10A of the Income-tax Act, 1961 is allowable in respect of (a) UB Plaza STPI Unit acquired by slump sale, (b) Titanium STPI Unit (whether separate or expansion), and (c) STPI unit acquired from Reuters India Pvt. Ltd.; (iii) Whether depreciation on goodwill acquired by slump sale can be allowed though claimed after filing return; (iv) Whether depreciation on computer software is disallowable under section 40(a)(ia) for non-deduction of TDS.

Issue (i): Exclusion/inclusion of specified comparable companies for benchmarking ITeS segment.

Analysis: The Tribunal examined functional profiles, segmental details and precedential orders of coordinate benches and High Courts. Eclerx Services Ltd. and Infosys BPO Ltd. were found functionally dissimilar to the tested party (contract service provider) and excluded. Accentia Technologies Ltd. was found to be non-comparable on similar grounds and excluded. The remaining disputed comparables were considered in light of the +/-5% proviso under Section 92C(2) and the overall margin; inclusion of certain comparables would not cause an adverse adjustment beyond arm's length range.

Conclusion: Specified comparables Eclerx Services Ltd., Infosys BPO Ltd. and Accentia Technologies Ltd. are excluded; the revenue's plea to include certain other comparables is partly allowed but does not result in further adjustment as the tested margin remains within the arm's length range. (Result: in favour of Assessee on exclusions; partly in favour of Assessee overall for comparability.)

Issue (ii): Allowability of deduction under section 10A for UB Plaza Unit, Titanium Unit, and unit acquired from Reuters India Pvt. Ltd.

Analysis: For UB Plaza Unit and the unit acquired from Reuters India Pvt. Ltd., the Tribunal followed coordinate-bench precedent and CBDT Circular No.1/2013 to hold that slump sale / change of ownership does not, by itself, disqualify an otherwise eligible undertaking from claiming section 10A deduction. For Titanium Unit the Tribunal reviewed earlier inconsistent findings, identified lack of independent verification in prior orders, and concluded that the question requires fresh fact-based adjudication. The Tribunal directed de novo examination by the Assessing Officer with specified evidentiary requirements and allocation principles where facilities or costs are common.

Conclusion: UB Plaza Unit and the unit acquired from Reuters India Pvt. Ltd. - deduction under section 10A is allowed (in favour of Assessee). Titanium Unit - remitted to Assessing Officer for fresh adjudication (neutral; de novo verification required in favour of neither party at this stage).

Issue (iii): Allowance of depreciation on goodwill claimed during assessment proceedings (post-return) in light of Supreme Court precedent.

Analysis: The Tribunal accepted that the claim was raised consequent to the Supreme Court decision in CIT v. Smifs Securities Ltd. and observed that the Tribunal has jurisdiction to consider such a fresh claim; however, factual verification is necessary. The matter was remitted to the Assessing Officer for de novo verification in accordance with the Supreme Court ratio, with opportunity to the assessee to produce records.

Conclusion: Ground remitted for verification by Assessing Officer (partly allowed for statistical purposes; procedural remand).

Issue (iv): Disallowance under section 40(a)(ia) of depreciation on computer software for non-deduction of TDS.

Analysis: The Tribunal followed the Karnataka High Court and coordinate-bench decisions holding that section 40(a)(ia) targets revenue/outgoing expenditures and does not apply to statutory allowance of depreciation; the DRP rectification rendered the ground infructuous for the year under consideration.

Conclusion: Disallowance under section 40(a)(ia) in respect of depreciation on software is dismissed as infructuous (in favour of Assessee).

Final Conclusion: The appeals are partially allowed in favour of the assessee on key substantive issues (exclusion of certain comparables; allowance of section 10A deduction for UB Plaza and Reuters-acquired unit; deletion/infructuous treatment of software-depreciation disallowance), one issue (Titanium Unit) is remitted to the Assessing Officer for fresh factual adjudication, and one revenue appeal is dismissed as infructuous; overall the decision results partly in favour of the assessee.

Ratio Decidendi: Deduction under section 10A is undertaking-specific and an otherwise eligible undertaking does not lose entitlement solely because of change in ownership by slump sale; comparability for transfer pricing requires functional parity (functions, assets and risks), and section 40(a)(ia) does not apply to depreciation which is a statutory allowance rather than an outgoing expenditure.

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