2021 (6) TMI 1129 - AT - Income Tax

Recruitment and training expenditure and retention bonus expenditure - Allowable revenue expenditure - staff recruitment expenses have been incurred mainly for payment to third party recruitment agency and access to various job sites like Naukri.com and the referral books - HELD THAT - As respectfully following decision of coordinate bench in assessee s own case 2018 (4) TMI 638 - ITAT DELHI we allow grounds of appealand direct ld AO to treat Training staff Recruitment and retention bonus as revenue expenditure. TP Adjustment - comparable selection - Thirdware solutions Pvt Ltd - HELD THAT - This comparable has been considered in the case of assessee by Coordinate bench in WIPRO LIMITED C/O WIPRO ENERGY IT SERVICES INDIA PRIVATE LIMITED (FORMERLY KNOWN AS SAIC INDIA PRIVATE LIMITED) 2018 (4) TMI 638 - ITAT DELHI and has excluded the same. There is no change in facts and FAR of assessee or comparable shown to us. Exclusion is Wipro technology services Ltd. - DRP though held that Wipro technology services Ltd is functionally comparable however not dealt with the argument of the assessee with respect to its transactions with Citigroup. In view of this we find that there is controlled transaction in this company and therefore it cannot be included. We direct the learned AO/TPO to exclude the same. E Info chips Bangalore Ltd - AO tried to draw the support for deriving the conclusion that this company passes the employee cost filter by showing the profit and loss of financial year 2010 11 however the learned assessing officer has not given the profit and loss account schedules for the year ended on 31st of March 2010 of this comparable. The learned departmental representative could not show us any reason that why this schedules of the profit and loss account are not provided to the assessee. Even the learned DRP as we have already held is silent on this aspect. When the complete information about the comparable is not available in a reasonable manner it cannot be considered for the comparability analysis of an international transaction of the assessee by including it. For this reason only we direct the learned transfer-pricing officer to exclude this comparable. Accordingly all the above three comparables i.e. Third ware Techonlogies Solutions Limited Wipro technologies Ltd and E Infochips Banglore Limited are directed to be excluded from the comparability analysis. To this extent the transfer pricing grounds of the appeal of the assessee are allowed.

Summary

Issues Involved:
1. Treatment of recruitment and training expenses.
2. Treatment of retention bonus as capital expenditure.
3. Transfer Pricing adjustments and comparability analysis.
4. Jurisdictional error in referring the matter to the Transfer Pricing Officer (TPO).
5. Computation of interest under sections 234B, 234C, and 234D of the Income Tax Act, 1961.

Detailed Analysis:

1. Treatment of Recruitment and Training Expenses:
The assessee contested the disallowance of recruitment and training expenses, arguing that these are revenue expenditures and should be fully deductible. The tribunal found that the issue is covered in favor of the assessee by earlier orders in its own case for the assessment years 2008-09 and 2009-10. The tribunal noted that such expenses are necessary for the business and do not provide an enduring benefit. Therefore, these expenses should be allowed as revenue expenditures.

2. Treatment of Retention Bonus as Capital Expenditure:
The assessee challenged the treatment of retention bonus as capital expenditure. The tribunal referred to its earlier decision for the assessment year 2008-09, where it was held that the retention bonus is a revenue expenditure. The tribunal reiterated that the retention bonus is paid to retain key employees and is necessary for the business, thus qualifying as a revenue expenditure under section 37 of the Income Tax Act. Consequently, the tribunal allowed the deduction of the full amount of the retention bonus.

3. Transfer Pricing Adjustments and Comparability Analysis:
The assessee contested the inclusion of certain comparables by the TPO, specifically Thirdware Solution Limited, Wipro Technology Services Ltd., and E-Infochips Bangalore Ltd. The tribunal found that:
- Thirdware Solution Limited: This company was excluded in the assessee's own case for the assessment year 2009-10 due to functional dissimilarity and lack of segmental information. The tribunal directed the TPO to exclude this company.
- Wipro Technology Services Ltd.: The tribunal noted that this company has related party transactions with Citigroup and was included by the TPO without giving the assessee an opportunity to be heard. Due to the controlled transactions, the tribunal directed the exclusion of this company.
- E-Infochips Bangalore Ltd.: The tribunal observed that the financial statements of this company were incomplete, missing several schedules of the profit and loss account. Without complete information, the company could not be considered a valid comparable. The tribunal directed the exclusion of this company.

4. Jurisdictional Error in Referring the Matter to the TPO:
The assessee argued that the reference to the TPO was made without recording the necessary reasons, as required under section 92CA(1) of the Income Tax Act. However, this ground was not pressed by the assessee during the hearing, and thus, it was dismissed by the tribunal.

5. Computation of Interest under Sections 234B, 234C, and 234D:
The assessee did not advance any arguments regarding the computation of interest under sections 234B, 234C, and 234D. Therefore, these grounds were dismissed by the tribunal.

Conclusion:
The tribunal allowed the appeal in part, directing the AO to treat recruitment, training expenses, and retention bonus as revenue expenditures. It also ordered the exclusion of the three comparables contested by the assessee in the transfer pricing analysis. The remaining grounds were either not pressed or dismissed due to lack of arguments. The final assessment order was modified accordingly.