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

Ciena India Pvt. Ltd. Versus DCIT

Ciena India Pvt. Ltd. Versus DCIT - [2015] 40 ITR (Trib) 524 (ITAT [Del]) 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.