2015 (5) TMI 349 - AT - Income Tax

Infosys, Persistent, Wipro Excluded as Comparables in Transfer Pricing; Recruitment Expenses Upheld Under Revenue Rules

The ITAT Delhi held that Infosys Technologies Ltd., Persistent Systems Ltd., and Wipro Ltd. are not comparable to the assessee for transfer pricing ... Transfer pricing adjustment - choice of certain comparables in respect of `Software development segment’ - international transactions to the Transfer Pricing Officer (TPO) for determination of their arm’s length price (ALP) - two international transactions in dispute are ‘Provision of software development services’ and `Provision of marketing support services’ - Transactional Net Margin Method (TNMM) - inclusion of 3 companies in the set of comparables - i) Infosys Technologies Ltd.; ii) Persistent Systems Ltd.; and iii) Wipro Ltd. - Held that:- It can be seen that the TPO included this company in the list of comparables by rejecting the assessee’s contention about the brand of this company helping in earning huge profits and also the brand related profits swelling its ultimate profit rate. We find that the assessee is a captive unit rendering services to its AEs alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon’ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. [2013 (7) TMI 696 - DELHI HIGH COURT] considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with similar factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon’ble Delhi High Court held Infosys Ltd., to be incomparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are more or less similar inasmuch as the assessee is also a captive service provider with a limited number of employees at its disposal and also not owning any branded products with no expenditure on R&D at its own etc. When we consider the cumulative effect of all the above factors, we find that by no standard, the assessee can be compared with Infosys Technologies Ltd. Respectfully following the judgment of the Hon’ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd. to be incomparable with the assessee company. This company is, therefore, directed to be excluded from the list of comparables. Persistent Systems Ltd. cannot be included in the list of comparables. TPO observed this company to be engaged in software development services with predominant revenues from software development services - As there is no separate segmental information and it has been considered as comparable on entity level, it implies that the total revenue considered also consist of some part from product licences. In such circumstances, it is not possible to ascertain the impact of such revenue on the total revenue of this company. Further, there is no information available from the Annual report of this company or the data collected by the TPO u/s 133(6) of the Act to divulge the amount of revenue from software development services alone to the exclusion of revenue from product licences. As the assessee is not engaged in the sale of any software products, this company on entity level, cannot be considered as comparable. The Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. Vs. ACIT, vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., also a company engaged in providing software development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India Pvt. Ltd. Vs. ACIT [2015 (2) TMI 319 - ITAT DELHI] vide its order dated 22.12.2014. The ld. DR could not point out any distinguishing feature in the factual matrix of the assessee in question and Toluna India Pvt. Ltd. [2014 (10) TMI 424 - ITAT DELHI], and Lear Automotive India Pvt. Ltd. [2015 (2) TMI 319 - ITAT DELHI]. Since both these companies are also engaged in the business of providing software development services to its AEs, similar to the activity done by the assessee, respectfully following the precedents, we order for the exclusion of this company from the list of comparables. Wipro Ltd. (Seg.) be treated as incomparable as this company is also operating as a full-fledged risk taking entity; engaged in providing technology infrastructure services, testing services, package implementation having more than 82,000 employees. It has its own R&D centre. It incurred around 11% of net sales as expenditure on research and development. None of the above factors match with the assessee company. Also there was a merger of Wipro Infrastructure Engineering Ltd., Wipro Healthcare IT Ltd., Quantech Global Services Ltd., with this company during the year in question. Exclusion of certain companies from the list of comparables in the ‘Marketing support services’ segment - Held that:- Choksi Laboratories Ltd.is basically engaged in providing testing services for various products and also offers services in the field of pollution control. As against this, the services provided by the assessee are purely in the nature of identifying customers for its AEs and providing technical support services to their customers. We fail to appreciate as to how marketing support services can be equated with testing services. When we peruse Schedule of fixed assets of this company, it can be seen that the major asset is ‘Instruments.’ It is with the help of these instruments that the company is providing services in the nature of testing of various products. By no standard, this company can be considered as comparable with the assessee. WAPCOS Ltd. (Seg.) is not comparable as this company has maintained accounts on entity level and there is no bifurcation available in respect of the services similar to those provided by the assessee under this segment, this company on entity level cannot be considered as comparable. Recruitment and training expenses - CIT(A) deleted addition - Held that:- The view taken by the ld. CIT(A) that the training expenses are to be allowed as revenue expenses is acceptable - Decided against revenue. Addition on account of Sundry balances written off - CIT(A) deleted addition - Held that:- The ld. AR fairly admitted that the ld. CIT(A) partly deleted the addition by considering additional evidence which was not there before the AO. Under such circumstances, we do not propose to examine the merits of the addition, which has been deleted in violation of rule 46A of the Income-tax Rules, 1962. Accordingly, the impugned order on this issue is set aside and the matter is sent to the file of AO for deciding it afresh as per law, after allowing a reasonable opportunity of being heard to the assessee. - Decided in favour of revenue for statistical purposes. Issues Involved:1. Choice of comparables in the Software Development segment.2. Exclusion of certain companies from the list of comparables in the Marketing Support Services segment.3. Deduction on account of training and recruitment expenses.4. Deletion of addition on account of Sundry balances written off.Detailed Analysis:1. Choice of Comparables in the Software Development Segment:The assessee, a wholly-owned subsidiary of Ciena Corporation, USA, engaged in software development and marketing support services, reported four international transactions. The Transfer Pricing Officer (TPO) accepted two transactions but disputed the 'Provision of software development services' and 'Provision of marketing support services'. The TPO used the Transactional Net Margin Method (TNMM) and rejected multiple year data, relying solely on current year data. He rejected 14 out of 20 comparables proposed by the assessee and added 13 new companies, finalizing 19 comparables with an average profit margin of 25.20%, leading to a transfer pricing adjustment of Rs. 5,25,78,549/-. The CIT(A) excluded Celestial Biolabs and adjusted margins for Kals Information Systems Ltd. and Softsol India Ltd., reducing the average profit margin to 20.48%, leading to deletion of the addition.The assessee contested the inclusion of Infosys Technologies Ltd., Persistent Systems Ltd., and Wipro Ltd. The Tribunal found Infosys Technologies Ltd. incomparable due to its giantness, risk profile, and ownership of branded products, following the Delhi High Court's ruling in CIT vs. Agnity India Technologies (P) Ltd. Persistent Systems Ltd. was excluded due to its involvement in software products without segmental information. Wipro Ltd. was excluded due to its full-fledged risk-taking nature, R&D expenditure, and recent mergers, making it incomparable.2. Exclusion of Certain Companies from the List of Comparables in the Marketing Support Services Segment:The assessee reported 'Provision of marketing support services' with a profit margin of 13.58%. The TPO rejected the assessee's comparables and selected 10 new companies, leading to a transfer pricing adjustment of Rs. 33,13,077/-. The CIT(A) excluded Apitco Ltd., Rites Ltd., and Vapi Waste and Affluent Management Company Ltd., leading to deletion of the addition. The assessee contested the inclusion of Choksi Laboratories Ltd. and WAPCOS Ltd. (Seg.), while the Revenue contested the exclusion of Apitco Ltd.Choksi Laboratories Ltd. was found incomparable due to its primary engagement in testing services, unlike the assessee's marketing support services. WAPCOS Ltd. (Seg.) was excluded due to its involvement in infrastructure development projects, distinct from the assessee's services. Apitco Ltd. was excluded due to its diverse services, with only 12% income from research studies similar to the assessee's services, and lack of segmental bifurcation.3. Deduction on Account of Training and Recruitment Expenses:The assessee claimed Rs. 2,24,62,589/- towards recruitment and training expenses. The AO allowed 20% as current year deduction and treated 80% as capital expenditure, disallowing Rs. 1,79,70,072/-. The CIT(A) deleted the addition, aligning with the jurisdictional High Court's judgment in CIT vs. Solus Pharmaceuticals Ltd., which held training expenses as revenue expenses.4. Deletion of Addition on Account of Sundry Balances Written Off:The CIT(A) partly deleted the addition on account of Sundry balances written off, considering additional evidence not presented before the AO. The Tribunal set aside the order on this issue, remitting it back to the AO for fresh examination, allowing the assessee to present new evidence.Conclusion:The Tribunal directed the AO/TPO to recompute the ALP of the 'Software development services' segment afresh, excluding Infosys Technologies Ltd., Persistent Systems Ltd., and Wipro Ltd. from the comparables. In the 'Marketing support services' segment, Choksi Laboratories Ltd. and WAPCOS Ltd. (Seg.) were excluded, and the CIT(A)'s exclusion of Apitco Ltd. was upheld. The deletion of addition on training and recruitment expenses was upheld, while the issue of Sundry balances written off was remitted back to the AO for fresh examination. Both appeals were allowed for statistical purposes.