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2015 (5) TMI 349 - AT - Income TaxTransfer pricing adjustment - choice of certain comparables in respect of Software development segment - Held that - Infosys Technologies Ltd. in view the huge turnover, economies of scale, brand value and other factors pointed out by ld. counsel in his submissions and also keeping in view the decision of Hon ble Delhi High Court in the case of Aginity India Technologies Pvt. Ltd. 2010 (11) TMI 852 - ITAT DELHI & (2013 (7) TMI 696 - DELHI HIGH COURT) cannot be included in 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.
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