2020 (3) TMI 244 - AT - Income Tax

Deduction of liability of education cess - HELD THAT - Education Cess, which is not disallowable item, on its payment, the cess is an allowable expenditure as per provision of section 40(a)(ii) of the Act. See M/S. BAJAJ ALLIANZ GENERAL INSURANCE COMPANY LTD. 2019 (8) TMI 370 - ITAT PUNE TP Adjustment - comparable selection - HELD THAT - Assessee company is engaged in the business of Software Development, Consultancy Services, and Technical Support Services, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Admission of additional ground for deduction of education cess.
2. Exclusion of Persistent Systems Limited as a comparable for software development services.
3. Exclusion of Thirdware Solutions Limited as a comparable for software development services.
4. Exclusion of MPS Limited as a comparable for technical support services.

Detailed Analysis:

1. Admission of Additional Ground for Deduction of Education Cess:
The assessee filed an application for the admission of an additional ground based on the Supreme Court's decision in NTPC Vs. CIT (229 ITR 383), arguing that the liability for education cess should be allowed as a deduction while computing total income. The Tribunal admitted this additional ground, noting that it was purely a question of law and did not require fresh verification of facts. The Tribunal referenced previous decisions, including DCIT Vs. Bajaj Allianz General Insurance Company Limited and Atlas Copco (India) Limited Vs. ACIT, which supported the deduction of education cess. Consequently, the additional ground was allowed in favor of the assessee.

2. Exclusion of Persistent Systems Limited as a Comparable for Software Development Services:
The assessee contended that Persistent Systems Limited was not comparable due to its engagement in Outsourced Software Product Development (OPD) and significant differences in business operations. Despite the TPO's and DRP's observations that Persistent Systems Limited had been considered comparable in previous years and had consistent functions, the Tribunal found that the company was functionally different. It cited multiple judicial precedents, including decisions from the Delhi High Court and various ITAT benches, which excluded Persistent Systems Limited from comparables due to its involvement in product development and lack of segmental information. The Tribunal directed the exclusion of Persistent Systems Limited from the final list of comparables.

3. Exclusion of Thirdware Solutions Limited as a Comparable for Software Development Services:
The assessee argued that Thirdware Solutions Limited was not comparable due to its revenue from software products and high-end application implementation services. The TPO and DRP had included this company in the comparables list, noting its significant revenue from software services. However, the Tribunal observed that Thirdware Solutions Limited was functionally dissimilar, engaged in diversified activities, and lacked segmental information. Citing decisions from various ITAT benches, including M/s. EMC Software and Services India Pvt. Ltd. Vs. JCIT and M/s. John Deere India Pvt. Ltd. Vs. ACIT, the Tribunal directed the exclusion of Thirdware Solutions Limited from the comparables list.

4. Exclusion of MPS Limited as a Comparable for Technical Support Services:
The assessee contended that MPS Limited was engaged in high-end content development activities, akin to Knowledge Processing Outsourcing (KPO) services, making it non-comparable to the assessee's technical support services. The TPO and DRP had considered MPS Limited functionally similar to the assessee. However, the Tribunal found that MPS Limited's activities, including type-setting, data digitization, and content development, were high-end and more aligned with KPO services. Referencing cases like Emerson Electric Company (India) Private Limited Vs. ACIT and United Health Group Information Services Pvt. Ltd. Vs. ACIT, the Tribunal concluded that MPS Limited should be excluded from the comparables list.

Conclusion:
The Tribunal directed the exclusion of Persistent Systems Limited, Thirdware Solutions Limited, and MPS Limited from the final list of comparables, rendering the remaining grounds of appeal academic. Consequently, the appeal was allowed in favor of the assessee. The order was pronounced on February 17, 2020.