ASSISTANT COMMISSIONER OF INCOME TAX CORPORATE CIRCLE-1(1), CHENNAI, CHENNAI vs. M/S. HITACHI SOLUTIONS INDIA PVT LTD, CHENNAI

The Revenue has raised the following grounds of appeal: A. Whether the ld.CIT(A) was right in holding that the amortisation of depreciation should be considered as non-operating expense for computing the margin of the Assessee. B. Whether the ld.CIT(A) was right in excluding comparable companies M/s.Nihilent Limited and M/s.Cybage Software Private Ltd. and M/s.Daffodil Software Private Ltd.

The facts in brief are that M/s.Hitachi Solutions India Private Limited, (herein called as "Assessee") company incorporated in India. It is a subsidiary of Hitachi Solutions America Limited. It provides IT services to its AEs. For the Assessment Year (‘AY’) 2020-21, the assessee filed its return of income on 15.02.2021, declaring Rs.9,76,73,920/- taxable income under the normal provisions of the Act and book profits of Rs.8,26,66,613/- as per the provisions of Section 115JB of the Act. Accordingly, Rs.1,12,39,008/- tax liability was determined under the provisions of section 115JB of the Act.

A reference was made u/s.92CA(1) of the Act to the Deputy Commissioner of Income-tax, Transfer Pricing Officer, Corporate Circle - 2(1), Chennai (“Transfer Pricing Officer” or “TPO”) for determination of the arm’s length price (“ALP”) of the international transactions entered into by the assessee with its Associated Enterprise (“AE”) dated 27.01.2022. The TPO disregard the submissions filed by the assessee and passed the impugned Transfer Pricing (‘TP’) order on 31.05.2023 proposing a total adjustment of Rs.9,75,29,719/-.

Subsequent to the order of the TPO, the AO passed a draft assessment order on 12.09.2023 u/s.144C r.w.s 92CA (3) of the Act. Subsequently, the AO has passed Final Assessment order dated 20.10.2023.

The TPO held that depreciation and amortization fall under the category of operating expenses. Depreciation is an expense that takes into account the estimated useful life of plant and equipment. Amortization works in the same way but pertains to intangible assets such as goodwill, patents and copy rights.

The ld.CIT(A) decided the issue in favour of the assessee holding that the goodwill arisen out of the amalgamation with effect from 01.04.2016 is an extraordinary item as it is not part of the regular operating expenditure. Further, the ld.CIT(A) relied on the decision of this Tribunal in assessee’s own case in IT(TP)A No.17/Chny/2024 dated 06.06.2025 and directed the AO/TPO to recompute the margins by treating the amortisation of goodwill as non-operating expenditure.

The ld.CIT(A) also directed the AO/TPO to exclude M/s.Daffodil Software Pvt. Ltd. from the list of comparables as the company is into software products and not the IT segement, by relying on the decision of this Tribunal in the case of Genesys telecom Labs India Private Ltd in IT(TP)A.No.38/Chny/2024 dated 28.11.2024.

The ld.CIT(A) also directed the AO/TPO to exclude M/s.Nihilent Limited from the list of comparables as the company is engaged in the diversified services and segmental results are not available, by relying on the decision of this Tribunal in the case of Ingram Micro India SSC (P.) Ltd [2024] 159 taxmann.com 109 (Mumbai – Trib.).

The ld.CIT(A) further directed the AO/TPO to exclude M/s.Cybage Software (P) limited from the list of comparables as the company owing to

Aggrieved by the order of the ld.CIT(A) the revenue is in appeal before us.

The ld.DR relied on the grounds of appeal and the orders of the TPO and prayed for reversing the order of the ld.CIT(A) by confirming the order of the AO.

Per contra, the ld.AR submitted that the assessee has claimed amortization of goodwill as a deduction for the purpose of computation of its margins. According to the ld.AR the amount recorded as goodwill in the books of accounts of the assessee is the excess consideration paid in relation to the assets purchased by way of the amalgamation. The difference in purchase value treated as goodwill cannot be identified to any specific characteristic or value generating intangible that can support the operations of the assessee in the future and is a result of the accounting treatment. Further, undertaking reorganization of business is not a regular activity of the assessee. Hence, the resultant goodwill is non-recurring and an extra-ordinary item of expenditure which is not incurred for the purpose of rendering the services to AEs, i.e., its operations. Accordingly, the expenses under consideration are not common business expenditures (goodwill arising out of a merger) that any third-party comparable companies would have incurred in the course of its business.

Further, the ld.AR stated that the services rendered by the assessee before and after the amalgamation have not undergone any change. In an independent scenario, no third-party service provider would increase the price of its services for acquiring another company without any change in its service offerings. Amortization of goodwill is exceptional cost and none of the comparable companies have such expenses. Accordingly, it is to be eliminated from the operating margin earned by the assessee so as to bring it at parity with

We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with submissions and case laws relied upon by both the parties. The present dispute is squarely covered by the jurisdictional Tribunal decision in Assessee’s own case in IT(TP)A.No.17/Chny/2024 dated 06.06.2025. We have gainfully extracted the relevant portion of the decision as under: “22. We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with submissions and case laws relied upon by both the parties. The present dispute is covered by the various courts and tribunals by holding it as amortization of goodwill is an abnormal item arising out of business acquisition and therefore not part of operating expenditure. Considering the present facts and judicial precedents as discussed supra, we direct the AO/TPO to grant adjustment of amortization of goodwill by excluding from operating expenditure by allowing the related grounds of appeal of the assessee.”

Following the above decision, we uphold the order of the ld.CIT(A) and hence the grounds of appeal raised by the revenue in this regard stands dismissed.

The TPO rejected the assessee’s contentions and concluded that the company is engaged in rendering software services, business consulting in the area of enterprise transformation, change and performance management and

The Ld.CIT(A) accepted the assessee’s contentions and by relying on the jurisdictional Tribunal decision in the Assessee’s own case directed the TPO to exclude this comparable company.

The Ld DR relied on the order of the TPO and contended that under TNMM broad functional comparability is sufficient and therefore this comparable company should be retained.

The ld.AR for the assessee submitted that the comparable company is: • Functionally different • Insufficient segemental information • Company has developed significant intangibles • Upper turnover filter not applied though the turnover exceeded Rs.200 crores

We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with submissions and case laws relied upon by both the parties. The present issue is squarely covered by the jurisdictional Tribunal decision in Assessee’s own case in IT(TP)A.No.17/Chny/2024 dated 06.06.2025. We have gainfully extracted the relevant portion of the decision as under: “30. We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with submissions and case laws relied upon by both the parties. On perusal of the financials the company we note that it is engaged in the business activity of transformation, digital transformation, brand and marketing transformation, platform and technology transformation, and data science and analytics services, which is not similar to the activities carried out by the assessee. Further, the Company’s turnover for the subject year was around Rs.280 crores and accordingly, companies with turnover greater than Rs.200 Crores are to be excluded from the comparable set. Therefore, considering the present facts and judicial precedents as discussed supra, we direct the AO/TPO to exclude this company from the comparable by allowing the related grounds of appeal of the assessee.”

Following the above decision, we uphold the order of the ld.CIT(A) and hence the Ground No.3 raised by the revenue in this regard stands dismissed.

The TPO rejected the assessee’s contentions and concluded that the company is engaged in the software and sub-segmentation is not a necessary requirement for a comparable under TNMM.

The Ld.CIT(A) accepted the assessee’s contentions and by relying on the jurisdictional Tribunal decision in the Assessee’s own case directed the TPO to exclude this comparable company.

The Ld.DR relied on the order of the TPO and contended that under TNMM broad functional comparability is sufficient and therefore this comparable company should be retained.

The ld.AR for the assessee contended that the comparable company is:

We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with submissions and case laws relied upon by both the parties. The present issue is squarely covered by the jurisdictional Tribunal decision in Assessee’s own case in IT(TP)A.No.17/Chny/2024 dated 06.06.2025. We have gainfully extracted the relevant portion of the decision as under: “34. We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with submissions and case laws relied upon by both the parties. On perusal of the financials the company we note that it is engaged in provision of product engineering services, transformational services, support services and provides diversified digital solutions and earning supernormal profits which is an aberration from the industry. The Company earns a weighted average upwards of 55% on cost and is unrepresentative of industry trends. Further, we also note that the subject year, Cybage has a turnover greater than Rs.734 crores approx. and accordingly, companies with turnover greater than Rs.200 Crores are to be excluded from the comparable set. Therefore, considering the present facts and judicial precedents

Following the above decision, we uphold the order of the ld.CIT(A) and hence the Ground No.3 raised by the revenue in this regard stands dismissed.

The TPO rejected the assessee’s contentions and concluded that the company is engaged in the software and sub-segmentation is not a necessary requirement for a comparable under TNMM.

The Ld.CIT(A) accepted the assessee’s contentions and by relying on the jurisdictional Tribunal decision in the case of Genesys telecom Labs India Private Ltd in IT(TP)A No.38/Chny/2024 dated 28.11.2024 directed the TPO to exclude this comparable company.

The Ld.DR relied on the order of the TPO and contended that under TNMM broad functional comparability is sufficient and therefore this comparable company should be retained.

The ld.AR for the assessee contended that the comparable company is:

We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with submissions and case laws relied upon by both the parties. The present issue is squarely covered by the jurisdictional Tribunal decision in the case of Genesys telecom Labs India Private Ltd in IT(TP)A.No.38/Chny/2024 dated 28.11.2024. We have gainfully extracted the relevant portion of the decision as under: “8.2 We have heard rival submissions and perused the material on record. The financials for the year ending 31.03.2020 with regard to the company, Daffodil Software Pvt. Ltd., is placed on record. On perusal of the same, we find Daffodil Software Pvt. Ltd., is also having revenue from sale of products. We also find from notes to financial statement as on 31.03.2020 (Note 15 – Inventories and Note 21

In the result, the appeal of the Revenue and the cross objection of the Assessee both are dismissed.