9911796707
TMI Blog2025 (3) TMI 1457X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and information support services. For the year under consideration, the assessee filed its return of income on 30/09/2009, declaring a total income of Rs.27,81,46,799/- after claiming deduction under section 10A of the Act. The assessee filed its revised return of income on 19/06/2010, declaring a total income of Rs.17,91,11,890/-. The return filed by the assessee was selected for scrutiny and statutory notices under sections 143(2) and 142(1) of the Act were issued and served on the assessee. Pursuant to the reference by the Assessing Officer ("AO") under section 92CA(1) of the Act, the Transfer Pricing Officer ("TPO") proposed a total Transfer Pricing Adjustment of Rs.68,95,54,409/- vide order dated 21/01/2013, passed under section 92CA(3) of the Act. In conformity, the AO passed the draft assessment order dated 25/03/2013, under section 143(3) r.w. section 144C(1) of the Act after making various additions/disallowances. While deciding the assessee's objections against the additions/disallowances made by the TPO/AO, the learned DRP vide its directions dated 12/12/2013, granted partial relief to the assessee. In conformity with the directions issued by the learned DRP, the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al ground no. 4] 5. That the learned AO erred in not giving effect to the direction of the DRP that the working capital adjustment should be computed at actual figures without any cap, and thus, consequently () erroneously upheld the working capital adjusted mean mark-up on cost of the comparable companies as incorrectly computed in the TP order and (i) arbitrarily upheld the rejection of Thinksoft Global Services Ltd. and FCS Software Solutions Ltd by the TPO as comparables only for the reason that they were having a working capital impact of more than 4%. [corresponding to original ground no. 5l 6. That the learned AO erred in not giving effect to the direction of the DRP to look into the rectification petition filed by the Appellant under section 92CA(s) read with section 154 of the Act in relation to the arithmetical error in the computation of the arm's length price by the learned TPO. [corresponding to original ground no. 6] 7. The learned AO/DRP erred in law and on facts in ignoring the limited risk profile of Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO by not allowing appropriate adjustments under Rule 10B of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific. (f) That the learned Assessing Officer erred in applying the provisions of sub-section 7A to section 10A of the Act in the Company's case. (g) That the learned Assessing Officer erred in holding that continuance of tax holiday under section 10A is only restricted to a case of amalgamation or a demerger. (h) That the learned Assessing Officer and the learned DRP erred in not relying on Circular No 1, dated January 17, 2013 which has clarified that slump sale would not result into any splitting or reconstruction of existing business and the claim for deduction under section 10A of the Act cannot be denied on a mere ground of change in ownership. [corresponding to original ground no. 9] 10 (a) That on the facts and circumstances of the case, the learned Assessing Officer and the learned DRP erred denying deduction under section 10A of the Act in respect of Titanium STPI Unit. (b) That the learned Assessing Officer and the learned DRP failed to appreciate that Titanium unit is a newly established undertaking and has received STPI approval and hence is eligible for deduction under section 10A of the Act. (c) That the learned Assessing Officer and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation on goodwill under section 32 of the Act in respect of undertaking acquired from Thomson Business Information India Private Limited (TBI) and RIPL. (c) That the learned Assessing Officer failed to appreciate that as the time limit for filing the revised return of income for AY 2009-10 had elapsed post the order of the Hon'ble Supreme Court in the case of CIT vs Smifs Securities Ltd (348 ITR 302)(SC), the claim was made during the course of assessment proceedings. [corresponding to original ground no. 12] 13. That the learned Assessing Officer has incorrectly considered advance tax as Rs. 97,000,000 instead of Rs. 97,700,000. [corresponding to original ground no. 13] 14. That the learned Assessing Officer erred in consequently levying interest under section 234B of the Act. [corresponding to original ground no. 14] 15. That the learned Assessing Officer erred in levying interest under section 234D of the Act. [corresponding to original ground no. 15] 16. That the Appellant craves leave to add to and / or to alter, amend, rescind, modify, the grounds herein above or produce further documents before or at the time of hearing of this Appeal. [corresponding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Receipt for ITeS 377,22,52,411 3. Reimbursement of expenses 6,81,07,251 10. For benchmarking the international transaction of "Provision of Software Development Services", the assessee adopted the Transactional Net Margin Method ("TNMM") as the most appropriate method with the Profit Level Indicator ("PLI") of Operating Profit to Total Cost ("OP/TC"). By considering itself the tested party, the assessee identified 17 comparable companies with an adjusted average margin of 11%. As the assessee computed its own PLI at 14%, accordingly, it claimed that the international transaction of "Provision of Software Development Services" is at ALP. 11. During the transfer pricing assessment proceedings, the TPO by applying additional filters rejected 12 comparable companies selected by the assessee finding them to be not satisfying one or the other filter. The TPO also introduced 6 new comparable companies, i.e. Kals Information Systems Ltd., R.S. Software (India) Ltd., Tata Elexi Ltd. (Segmental), Sasken Communication Technologies Ltd., Zylog Systems Ltd., and Infosys Ltd., claiming them to be satisfying all the filters. By rejecting the contentions raised by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a software product company, and therefore, the companies selected by the TPO are comparable to the assessee, as the same are also software product companies. 15. Before adjudicating each comparable under challenge, it is necessary to decide whether the assessee is a software product company or provides contract software development services. In this regard, it is pertinent to note the functions performed by the assessee in relation to the international transaction of "Provision of Software Development Services", which are stated in the transfer pricing study as follows: - "2 Technology - Software development services 4.3.59 The functions currently performed under the technology team can be broadly classified under two heads (a) application development and b) technical support to other departments. a) Application Development 4.3.60 Application Development in relation to various in-house applications for all locations worldwide under the Thomson Reuters Financial umbrella is done at various offices of Thomson Reuters worldwide including Thomson India. 4.3.61 The application development staff is involved in various stages of the Software Development Life Cycle. The soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ready for release. b) Technical Support 4.3.70 Technical support involves providing technical infrastructure to all the departments, application supports, infrastructure, hardware and software support, database maintenance, etc. 4.3.71 The typical cycle of services provided by Thomson India includes input of data by analysts in the Data Repositories and transferring of the data through web related services to Group Companies, which are finally provided to the Global Customer's Segment Group for deployment. In this cycle, Thomson India's general Content Technology Group (CTG) and Technology Operations group provides technology support to data analysts and to data repositories. c) Product Support/Management 4.3.72 Thomson India product management team supports management of products relating to the following segments of Thomson Financial Investment Banking, Investment Management, Institutional Equities and Retail Wealth management. 4.3.73 The product managers in Thomson India support the segment or lead product managers in Thomson Financial in activities such as writing functional requirements, cases, prioritizing bugs and providing commercial support. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket risk: Thomson India does not have any exposure to market risk as it renders services exclusively for Thomson Reuters and is compensated irrespective of the success or failure of its activity. 4.52 Product & Technology risk: Thomson India does not have ultimate customer interface and provides services to Thomson Reuters, hence does not bear any risk account of any liability arising in terms of product or technology. 4.5.3 Credit risk: Thomson India is assured of its payment from Thomson Reuters and hence does not bear any risk of non-payment for services provided 4.5.4 Foreign exchange risk: Thomson India invoices Thomson Reuters in foreign currency for its services. However, foreign exchange gain / loss are included in the revenue/cost base as case in determining the contractual markup. 17. From the perusal of the functions performed, assets employed and risks assumed by the assessee in relation to the international transaction of "Provision of Software Development Services", it is evident that the assessee is engaged in providing contract software development services to its associated enterprises, playing a very limited role in the software development life cycle f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other hand, the learned DR vehemently relied upon the order passed by the lower authorities. 20. We have considered the submissions of both sides and perused the material available on record. From the perusal of the annual report of Infosys Ltd for the financial year 2008-09, forming part of the paper book from pages 1116-1209, we find that the company has a turnover of Rs. 20,264 crores from software services and products and incurred expenditure on brand building, selling and marketing, advertisement and sales promotion. Further, the company made an addition of Rs. 12 crore to its intangible assets, during the year. From the annual report, we further find that the company has developed its own software solution namely "Finacle", Digital Convergence Platform, and Shopping Trip 360. Further, there is no separate segment information between software products and software services. On the other hand, we find that the assessee has a total turnover of Rs. 155 crores from contract software development services. Further, no expenditure has been incurred on brand building, selling and marketing, advertisement and sales promotion, and it also does not undertake any research and develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted that the Tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the Tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent-assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted." 22. We find that the coordinate bench of the Tribunal in assessee's own case in M/s Thomson Reuters India Services Private Ltd v/s ACIT, in IT(TP)A No. 1206/Bang./2011, for the assessment year 2007-08, vide order dated 06/04/2017, directed the exclusion of Infosys Ltd., finding the same to be not comparable to the assessee. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation of Persistent System Ltd, which is comparable to the assessee's international transaction under consideration, we are of the considered view that Persistent System Ltd. cannot be considered for benchmarking the international transaction pertaining to "Provision of Software Development Services". We also find that the coordinate bench of the Tribunal in the assessee's own case for the assessment year 2007-08, cited supra, directed the exclusion of Persistent System Ltd., finding the same to be not comparable to the assessee. 26. Insofar as the submission of the learned DR that the assessee is seeking exclusion of its own comparable, it is pertinent to note that the Special Bench of the Tribunal in DCIT v/s Quark Systems Private Limited, reported in [2010] 38 SOT 307 (Chd.) (SB), held that there is no estoppel on the taxpayer from pointing out that a particular company has been wrongly taken as a comparable. We further find that the aforesaid decision rendered by the Special Bench of the Tribunal has been affirmed by the Hon'ble Punjab and Haryana High Court in CIT v/s Quark Systems Private Limited, reported in [2011] 244 CTR 542 (P&H). Similarly, it was held by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company, under the Software Development Services segment, the company has businesses such as Product Design Services (Design and Development of Hardware and Software), Innovation Design and Engineering (Mechanical Design with a focus on Industrial Design) and Visual Computing Lab Division (Animation and Special Effects). Further, in the Segment Reporting, there is no further sub-classification of the revenue earned from aforesaid businesses under the Software Development Services segment, thus there is no clarity as to how much revenue was earned by the company only from Software Development Services. Since this 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. We find that the coordinate bench of the Tribunal in Cisco Systems (India) Private Ltd v/s DCIT, reported in (2014) 50 taxmann.com 280 (Bang- Trib.), after considering the response received from the company under section 133(6) of the Act that Tata Elexi Ltd. cannot be considered as comparable to any other software services company because of its complex nature, directed exclusion of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest on bank fixed deposits, miscellaneous income, etc. Since this 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". 32. To sum up, we direct that the four companies, i.e. Infosys Ltd., Tata Elexi Ltd. (Segmental), Persistent Systems Ltd. and Bodhtree Consulting Ltd., be excluded while benchmarking the international transaction of "Provision of Software Development Services". Ground No.8(i), raised in assessee's appeal, is decided accordingly. 33. The issue arising in Ground No.8(ii), raised in assessee's appeal, pertains to Transfer Pricing Adjustment in relation to the international transaction of "Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding financial position of funds and updating fund manager profiles to be populated in the databases owned by TR group. * Entity Management Content: This team maintains disclosure database by giving effect to all corporate actions. The data is collected through the guidance reports and financial statements already available in public domain. No data is collected afresh. * Depository content: This team places navigational tags on all the SEC Edgar filings to enable client's access to the relevant information on the database. c) News Team: The news team covers company announcements, domestic market coverage, economic forecasts, and provides monthly reports on stock exchanges to be populated in the database owned by TR group. Customer Service Group: This group provides low-end help-desk support, defines and administers user access rights, and supports front-end teams in resolving customer queries. Cash Application Activity: This team matches invoices against payments made by customers and tracks outstanding amounts. Editorial Operations: The editorial operations support Thomson Scientific business by compiling information related to journals, indexing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR sought the exclusion of four companies, i.e. Eclerx Services Ltd., Cosmic Global Ltd., Accentia Technologies Ltd., and Infosys BPO Ltd. Accordingly, in view of the submissions made by the learned AR, we are confining our findings in Ground No.8(ii), only in respect of the aforesaid four companies. (a) Eclerx Services Ltd. 39. The first comparable challenged by the assessee is Eclerx Services Ltd. This company was included as comparable by the TPO vide order passed under section 92CA(3) of the Act on the basis that the company is functionally comparable and satisfies all the filters. The TPO further held that once the company's services fall in the definition of ITeS, there is no reason to exclude the same on the basis that they are the nature of KPO. The learned DRP vide its directions rejected the objections filed by the assessee. Being aggrieved, the assessee has challenged the inclusion of this company as comparable. 40. We have considered the submissions of both sides and perused the material available on record. From the perusal of the annual report of Eclerx Services Ltd for the financial year 2008-09, forming part of the paper book from pages 1374-1435, we find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, design and support. While, on the other end of the spectrum ITeS would also include voice-based call centers that render routine customer support for their clients. Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous." 42. Thus, in view of the aforesaid observations of the Hon'ble Delhi High Court would do not find any merits in the aforesaid findings of the TPO in selecting Eclerx Services Ltd. as comparable to the assessee. We also find that the coordinate bench of the Tribunal in the assessee's own case for the assessment year 2007-08, cited supra, directed the exclusion of E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparables to determine the ALP of the Respondent's transactions. (ii) The aforesaid finding of fact by the Tribunal has not been shown to be perverse. In fact, the reasons indicated in the impugned order to hold that Vishal Technologies Ltd., is not a comparable, would equally apply to M/s. Cosmic Global Ltd., (iii) Thus, the sub-question (II) as proposed does not give rise to any substantial question of law. Thus, not entertained." 45. 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. Therefore, respectfully following the decision of the Hon'ble Jurisdictional High Court (cited supra), we direct the TPO/AO to exclude Cosmic Global Ltd. while benchmarking the international transaction pertaining to "Provision of ITeS". (c) Accentia Technologies Ltd. 46. The next comparable challenged by the assessee is Accentia Technologies Ltd. This company was included as comparable by the TPO vide order passed under section 92CA(3) of the Act on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. Being aggrieved, the assessee has challenged the inclusion of this company as comparable. 49. During the course of hearing, learned AR submitted that Infosys BPO Ltd is engaged in high end software services and owns IPs. The learned AR further submitted that Infosys BPO Ltd has a high brand value and operates on a huge economic upscale and able to command and generate better profits. Learned AR also submitted that even if assessee has taken Infosys BPO Ltd as a comparable in its transfer pricing study report, considering the vast differences with the tested party, Infosys BPO Ltd should be excluded. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities. 50. We have considered the rival submissions and perused the material available on record. We find that the Hon'ble Delhi High Court in PCIT vs EVALUESERVE SEZ (Gurgaon) Pvt Ltd., in ITA No. 241 of 2018, vide judgment dated 26/02/2018, dismissed the appeal filed by the Revenue and upheld the conclusion reached by the coordinate bench of the Tribunal in, inter-alia, excluding Infosys BPO Ltd as a comparable on the basis of its high brand value and consequent higher profitability. The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Thus, respectfully following the aforesaid decision of Hon'ble Delhi High Court in EVALUESERVE SEZ (Gurgaon) Pvt Ltd. (supra), we direct the TPO/AO to exclude Infosys BPO Ltd for benchmarking the international transaction of "Provision of ITeS". 52. To sum up, we direct that the four companies, i.e. Eclerx Services Ltd., Cosmic Global Ltd., Accentia Technologies Ltd., and Infosys BPO Ltd., be excluded while benchmarking the international transaction of "Provision of ITeS". As a result, Ground No.8(ii), raised in assessee's appeal, is allowed. 53. The issue arising in Ground No.10, raised in assessee's appeal, pertains to the denial of deduction claimed under section 10A of the Act in respect of the UB Plaza Unit. 54. The brief facts of the case pertaining to this issue emanating from the records are: The UB Plaza Unit at Bangalore was earlier owned by M/s. Thomson Information India Pvt. Ltd., which was acquired on slum sales prices by the assessee through a business tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause its owner has changed. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as follows: - "17. The assessee submitted that it acquired the UB Plaza Unit, which is registered with the STPI authorities, from TBIIPL with effect from 01.07.2005 pursuant to a Business Transfer Agreement dated 15.06.2005 on a slump sale basis. UB Plaza Unit was, admittedly, a eligible unit for deduction u/s 10A from its formation, i.e. on 24.03.2004, and TBIIPL had been allowed the deduction u/s.10A from the first year of its formation till the period it held the Unit, i.e. till 30.06.2005. Once it acquired the UB Plaza Unit, it claimed deduction u/s 10A for the balance period of eligibility, i.e. from assessment year 2006-07 onwards. Pertinently, its claim for deduction u/s 10A for the said Unit for the immediately preceding year, being the first year after the Unit's acquisition, was allowed by the A 0 vide the assessment order dated 13.09.2010. Accordingly, it claimed in its return of income for the present a y Rs. 10,25,52,834/- as the deduction u/s 10A. Despite, the AO disallowed its claim on the ground that it did not fulfill the conditions necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee's plea. Deduction u/s 10A cannot be denied to the UB Plaza Unit, which is otherwise undisputedly an eligible unit, merely on the ground that it was acquired via a slump sale. Deduction u/s 10A is undertaking / unit specific and that, therefore, an undertaking otherwise eligible for deduction u/s 10A cannot be denied only because its owner has change. The AO has rightly allowed the deduction in the earlier year. The AO is directed to allow the deduction for the balance period of eligibility. 56. Since the year under consideration is the 3rd year of claim of deduction under section 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, respectfully following the decision cited supra, the AO is directed to allow the deduction claimed under section 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. 57. The issue arising in Ground No.10, raised in assessee's appeal, pertains to the denial of deduction claimed under section 10A of the Act in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Titanium Unit also. He submitted that in view the tribunal order in Assessment Year 2007-08 as per which the assessee iS eligible for deduction u/s. 10A in respect of UB Plaza Unit, deduction should be allowed for Titanium Unit also. He also submitted that in para 12.5 of the assessment order, it is also an objection of the AO that the assessee company had not been able to establish that the Titanium Unit is a separate unit by furnishing a Asset Schedule of the Titanium Unit to establish that it fulfills the provisions of section 10A(2) of the I.T. Act, 1961 along with a separate approval from the Software Technology Park of India [STPI] to establish that it is a separate and independent unit for the purpose of the claim of deduction u/s. 10A of the I.T. Act, 1961. At this juncture, a query was made by the bench regarding stand of the assessee as to whether the Titanium Unit is extension of UB Plaza Unit or a separate unit because if it is extension of UB Plaza Unit then the deduction for this unit will also be allowable up to the year up to which deduction is allowable for UB Plaza Unit and if it is a separate unit then the assessee has to establish that this unit fulfills al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected to allow the deduction claimed by the assessee under section 10A with respect to the Titanium Unit, Bangalore. Accordingly, Ground No.10, raised in assessee's appeal, is allowed. 61. The issue arising in Ground No.11, raised in assessee's appeal, pertains to the denial of deduction claimed under section 10A of the Act with respect to the unit acquired from Reuters India Pvt. Ltd. 62. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the Financial Year 2008-09, the assessee took over the business relating to ITeS from Reuters India Pvt. Ltd. ("RIPL") as a concern on slump sale basis pursuant to business transfer agreement dated 09/09/2008, w.e.f 01/04/2008. As per the assessee, the RIPL unit is eligible to claim deduction under section 10A of the Act in respect of profits derived from the export of computer software. During the assessment proceedings, the assessee submitted that the said unit had claimed deduction under section 10A of the Act in the hands of RIPL for the first time in the assessment year 2005-06. Since the ultimate transfer of the unit under the business transfer agreement took place on 01/09/2008, RIPL claimed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... STPI unit of RIPL under slump sale arrangement would result in splitting up or reconstruction of business already in existence, since non-STPI unit is not transferred. The AO also observed that the unit was formed by acquisition of previously used assets and there by the unit does not fulfil the conditions for claiming deduction under Section 10A(2) of the Act. We found that deduction of RIPL unit is covered on the principlein assessee's own case based on deductions for UB Plaza unit in A.Y. 2007-08 (acquired through slump sale) vide order dated 06.04.2017. Following the reasoning given by the Tribunal in its order dated 06.04.2017, we do not find any merit for declining the claim in respect of unit acquired from RIPL Unit." 64. During the hearing, the learned DR could not show any reason to deviate from the aforesaid order and no change in facts and law was alleged in the relevant assessment year. 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, respectfully following the decision cited supra in assessee's own case, we direct the AO to allow the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... livered after filing the return of income, it was forced to file its claim in the form of a letter at the time of assessment proceedings. The AO, vide draft assessment order, disagreed with the submissions of the assessee and held that as per the details furnished by the assessee, goodwill of Rs. 2,01,93,589/- arose in the books of the assessee during the financial year 2005-06 on account of the assessee taking over the business of Thomson Business Information India Private Limited, w.e.f. 15/06/2005. However, the assessee did not claim any depreciation on goodwill under the Act for the assessment year 2006-07 and subsequently. Further, it was noted that the difference between the consideration paid and the value of net assets was treated as goodwill by the assessee. The AO held that since depreciation on goodwill was not claimed in the first year of acquisition, it is not possible to arrive at the correctness of allowability of depreciation on goodwill claim by the assessee in the year under consideration. The AO further held that the difference between the consideration paid and net assets acquired cannot be considered goodwill at face value without ascertaining: - A) Whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited as a going concern on a slump sale basis, pursuant to an agreement dated 15/06/2005. The difference between the purchase consideration and net assets taken over by the assessee, i.e. Rs. 2,01,93,589/-, was recognised as goodwill in the financial statement, during the financial year 2005-06, by the assessee. Further, during the financial year 2008-09, the assessee took over the business relating to ITeS from Reuters India Private Limited as a going concern on a slump sale basis, pursuant to an agreement dated 09/09/2008. Similar to the earlier transaction, the difference between the purchase consideration and net assets taken over by the assessee, i.e. Rs. 47,22,51,519/-, was recognised in the financial statement as goodwill, during the financial year 2008-09, by the assessee. By placing reliance upon the decision of the Hon'ble Supreme Court in Smifs Securities Ltd (supra), the assessee for the first time during the year under consideration claimed that the amount paid towards the acquisition of goodwill would be covered within the definition of "intangibles" as per the provisions of the Act, and the assessee is eligible to claim depreciation on such goodwill. It is evident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined at any stage by the lower authorities. 73. We find that the issue of 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. We find that the Hon'ble Delhi High Court in Triune Energy Services Private Limited v/s DCIT, reported in [2016] 237 Taxman 230 (Delhi), by referring to Accounting Standard 10, held that consideration paid in excess of the value of tangible assets is classifiable as goodwill eligible for depreciation. We further find that recently the coordinate bench of the Tribunal in Dow Chemical International (P.) Ltd. v/s DCIT, reported in [2024] 169 taxmann.com 290 (Mumbai - Trib.), vide order dated 25/11/2024, after consideration of various submissions/decisions and after detailed analysis of various provisions of the Act, as are relied upon by the Revenue in the present case, concluded that the taxpayer is entitled to claim depreciation on goodwill under section 32 of the Act arising on account of amalgamation. The relevant findings of the coordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." 4. Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 5. In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. 6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which depreciation was claimed in Smifs Securities Ltd. (supra), i.e. the difference between the value of net assets acquired and consideration paid, is similar to the instant case. Thus, at the outset, we are of the considered view that the Revenue having once accepted the computation of goodwill in one case and not challenged its correctness, it will not be opened to the Revenue to challenge its correctness in the case of the other assessee without just cause. In support of the aforesaid conclusion, gainful reference can be made to the decision of the Hon'ble Supreme Court in Berger Paints India Ltd. v. Commissioner of Income-tax [2004] 135 Taxman 586/266 ITR 99 (SC). 19. As regards the submission of the Revenue that the amount of Rs. 67,52,67,157 is merely the difference between the purchase consideration and the net assets acquired of the amalgamating company and the goodwill was nothing but a balancing factor while merging the accounts of the amalgamating company into the accounts of the assessee, we find that the "Purchase Method" of accounting for amalgamation as per Accounting Standard-14 requires the amalgamated company to account for the amalgamation by incorporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(1)(ii) of the Act in light of the decision of the Hon'ble Supreme Court in Smifs Securities Ltd. (supra). 20. As regards the anticipated advantages/benefits/profitability to its business which is attributable to the goodwill, the assessee vide submission dated 15/04/2024 placed on record the sales and profitability of the assessee, pre-amalgamation and post-amalgamation, along with relevant extracts of the balance sheet and profit and loss account for the relevant period, which are summarised as follows: - Sales & Profitability of DCIPL pre-merger is as under: Assessment Year Sales (Rs. in mn) EBITDA (Rs. in mn) 2015-16 19,564.80 1,820.79 2014-15 18,845.05 1,623.57 2013-14 16,430.82 1,439.92 Sales & Profitability of DCIPL (amalgamated entity) post-merges is as under: Assessment Year Sales (Rs. in mn) EBITDA (Rs. in mn) 2018-19 42,168.63 4,023.65 2017-18 36,342.78 3,509.68 2016-17 28,981.43 2,461.71 21. Therefore, from the aforenoted comparative analysis of sales and profitability of the assessee, pre-amalgamation and post-amalgamation, it is clearly evident that the sales as well as EBITDA of the assessee increased in the assessment years 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own business. Further, reliance has also been placed upon the provisions of Explanation 2(b) to section 43(6) of the Act, which lays down a similar principle as Explanation 7 to section 43(1) of the Act and provides that actual cost of the block of assets in the case of amalgamated company shall be the Written Down Value of the block of assets in the case of amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year. Thus, from the careful perusal of the aforesaid provisions, it is evident that the same pre-supposes either the existence of a block or the value of goodwill forming part of such block or the asset has actual cost to the amalgamating company. However, in the instant case, as noted above, the goodwill arising on account of amalgamation was neither reflected as an asset nor was part of the block of assets belonging to the amalgamating company. We find that while considering the applicability of the provisions of the sixth proviso to section 32(1), Explanation 7 to section 43(1) and Explanation 2(b) to section 43(6) of the Act in a similar factual matrix wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not placed any submission as to how the same is relevant to the present case. In any case, we have already dealt with the issue of applicability of the provisions of Explanation 7 to section 43(1) of the Act in the foregoing paragraphs. c) In Millennium Engineers and Contractors Ltd. v. Dy. CIT [IT Appeal No. 668 (Pun.) of 2022, dated 30-10-2023], the resultant consideration paid/payable by the taxpayer under the approved scheme was even much less than the value of net assets acquired by it. Therefore, the coordinate bench vide order dated 30/10/2023 concluded that there was no scope for the purchase of goodwill by excess payment of purchase consideration. Thus, it is clearly evident that the facts of the aforesaid case are completely different from the facts under consideration before us. d) The decision in the case of ACIT v. Dosti Reality Ltd. [IT Appeal No. 2043 (Mum.) of 2022, dated 13-4-2023], is also distinguishable on facts as the "pooling of interest" method was followed to account for the amalgamation in the books of the amalgamated entity as compared to "Purchase Method" adopted in the present case. e) Lastly, the decision in the case of United Breweries Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of the assets acquired cannot be considered as goodwill for the purpose of allowing depreciation under the Act. It is further evident that, in the aforesaid decisions, the conclusion in favour of the taxpayer was reached after due examination of the materials placed on record which were also considered by the lower authorities. However, 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 (supra). 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, having considered the facts and circumstances of the present case, 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 af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Resolution Panel erred in directing the AO to compute deduction us 10A in the above manner by placing reliance on the decision of Hon'ble High Court of Karnataka in the case of M/s Tata Elsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case, the DRP erred in directing the AO to allow depreciation on the software items without appreciating that the same is contrary to the provisions of Section 40(a)(ia) and Section 194J as the claim of depreciation is in the nature of business expenditure. 5. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed." 80. Ground No.1 raised in Revenue's appeal is general in nature. Therefore, the same needs no separate adjudication. 81. The issue arising in Grounds No.2 and 3, raised in Revenue's appeal, pertains to the exclusion of communication expenses and travel expenses from both export turnover as well as the total turnover while computing deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2021] 123 taxmann.com 21 (Karn.), The following question of law came up for consideration before the Hon'ble Karnataka High Court: - "Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the disallowance made under section 40(a)(ia) in respect of depreciation on intellectual property rights by relying upon the decisions which has not reached finality and without appreciating that the Assessing Officer rightly invoked provisions of section 40(a)(ia) of the Act as the assessee had failed to deduct tax on payments made in respect of purchase of software as required under section 195 of the Act?" 86. While deciding the issue in favour of the taxpayer, the Hon'ble Karnataka High Court, in the aforesaid decision, observed as follows: - "10. Thus, from close scrutiny of section 40(a)(i) of the Act, it is axiomatic that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable& ..... X X X X Extracts X X X X X X X X Extracts X X X X
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