ITAT Mumbai Bench Rules on Transfer Pricing and Section 10A Deductions for Thomson Reuters

Case Overview: The Income Tax Appellate Tribunal (“ITAT”), “H” Bench, Mumbai, recently handed down a significant judgment in ACIT v. M/s. Thomson Reuters India Services Pvt. Ltd. (IT(TP)A Nos. 231/Bang./2014 & 266/Bang./2014; CO No.22/Mum./2020), concerning transfer pricing adjustments and deductions under Section 10A of the Income Tax Act, 1961. The case involved Thomson Reuters India Services Pvt. Ltd. ("the assessee"), challenging an assessment order related to the assessment year 2009-10. The assessee appealed the order, and the Revenue filed a cross-appeal and cross-objection.

Key Parties and Bench: The case was heard by Shri Amarjit Singh (Accountant Member) and Shri Sandeep Singh Karhail (Judicial Member) of the ITAT Mumbai Bench. The appellant was the Assistant Commissioner of Income Tax, and the respondent was M/s. Thomson Reuters India Services Pvt. Ltd.

Timeline and Dispute: The assessee filed its return of income on September 30, 2009, and a revised return on June 19, 2010. The Transfer Pricing Officer (“TPO”) proposed substantial transfer pricing adjustments, and the Assessing Officer (“AO”) issued a draft assessment order. The Dispute Resolution Panel (“DRP”) provided partial relief, leading to the impugned final assessment order on January 31, 2014. The subsequent appeals and cross-objections followed.

The Core Issues: The appeals centered around several key issues:

• Transfer Pricing Adjustments: The assessee challenged the TPO's selection of comparable companies for benchmarking its international transactions (software development services and ITeS). The assessee argued that the TPO incorrectly included several companies that were not functionally comparable, leading to inflated transfer pricing adjustments.

• Section 10A Deductions: The assessee claimed deductions under Section 10A for profits derived from various units, including the UB Plaza, Titanium, and a unit acquired from Reuters India Pvt. Ltd. The Revenue disallowed these deductions, arguing that the assessee did not fulfill all the conditions under Section 10A. These conditions related to the assessee's acquisitions via slump sales and whether separate units could claim deductions.

• Depreciation on Goodwill: The assessee also challenged the denial of depreciation on goodwill, which arose from the acquisition of various units, arguing that the Supreme Court's decision in CIT v. Smifs Securities Ltd. supported its claim. The Revenue countered this, relying on provisions like Explanation 7 of Section 43(1) and past judgments.

• Advance Tax Discrepancies: A minor issue involved a discrepancy in the calculation of advance tax paid by the assessee.

ITAT's Decision and Reasoning: The ITAT examined each issue meticulously. Regarding the transfer pricing adjustments, the Tribunal agreed with the assessee on several points, directing the exclusion of certain companies deemed not functionally comparable. The ITAT extensively analyzed the functions, assets, and risks of each challenged comparable to provide substantial reasons for their exclusion. The Tribunal referenced several judicial precedents to support its conclusions and applied a detailed functional analysis.

Regarding the Section 10A deductions, the ITAT relied heavily on its own previous decisions in similar cases involving the assessee, concluding that deduction under section 10A is undertaking/unit specific. The Tribunal found in favor of the assessee, citing relevant Circular No. 1/2013 and the fact that slump sales would not affect deduction eligibility. Similarly, rulings on the depreciation on goodwill were based on precedent and examination of past rulings. The issue of depreciation on goodwill was ultimately sent back to the AO for further scrutiny after reviewing additional documents.

Implications: This judgment provides crucial clarity on the application of transfer pricing regulations and Section 10A deductions in similar cases. The emphasis on functional comparability in transfer pricing and the interpretation of Section 10A in the context of slump sales will be important for other software companies. The detailed analysis of each comparable company should serve as a guide for future transfer pricing assessments.

Conclusion: The ITAT's judgment partially allowed the assessee's appeal, essentially overturning the substantial transfer pricing adjustments and granting the Section 10A deductions. It dismissed the Revenue's appeal and cross-objections, while directing further examination of the depreciation on goodwill claim by the AO. This judgment serves as a useful precedent, emphasizing the importance of functional comparability analysis in transfer pricing cases and clarifying the interpretation of Section 10A for specific situations.