FUJITSU INDIA PVT. LTD. vs. DCIT, CIRCLE 11(1)

ITA/604/2017HC DelhiDLHC01286518201713 February 2019Author: HON'BLE MR. JUSTICE SUNIL GAUR4 pages

AI SummaryPartly Allowed

What did the High Court hold?

The High Court partly allowed the appeal. Regarding the first issue concerning the allocation of common expenses, the Court held that the 'headcount' method is a recognized principle and was acknowledged in CIT vs. EHTP India Pvt. Ltd. While acknowledging that the headcount method has not been universally accepted and was rejected in M/S Continental Carriers vs. CIT (2016) 384 ITR 102, the Court noted that the rejection in that case was based on the assessee not following a consistent method and the issue being in the context of Section 80(4) deductions. In the present case, the Court found that the assessee's choice to rely on the headcount principle, as an alternative to the turnover method, could not have been rejected per se, especially since the tax authorities broadly agreed that expenditure could be allocated. Therefore, the question of law was answered in favour of the assessee. Regarding the second issue concerning comparables, the Court noted that the ITAT had remitted the matter for reconsideration of a specific comparable (M/S Indus Technical and Financial Consultants Ltd.) because the ITAT did not rely on website details. The Court stated it would not pass a final decision on merits and left it open for the authorities to consider all relevant material, including credible material regarding the comparables.

What were the facts?

The assessee, Fujitsu India Pvt. Ltd., is engaged in online market support services. For Assessment Year 2008-09, it reported international transactions, including receipts for services rendered. The Transfer Pricing Officer (TPO), applying the Transactional Net Margin Method (TNMM), determined an arm's length price (ALP) resulting in a transfer pricing adjustment of ₹2,63,21,723/-. The Assessing Officer (AO) finalized the assessment on September 28, 2012, after rejecting the assessee's challenge to the draft assessment order. The assessee appealed to the Income Tax Appellate Tribunal (ITAT) and subsequently to the High Court.

What were the issues?

1. Whether the ITAT erred in law and fact by not appreciating that gross profit margin is an unsuitable allocation key for dividing common expenses between various segments, especially when the predominant segment is the service segment for which gross profit calculation is not feasible? (Question of law) 2. Whether, in law and the facts and circumstances, the Tribunal erred in accepting a functionally different company as a comparable and rejecting the appellant's reliance on the company's website for ascertaining its nature of business? (Question of law) Assessee's contentions: - For issue 1, the assessee argued that the 'headcount' method is a suitable allocation key for common expenses, citing the High Court's decision in CIT vs. EHTP India Pvt. Ltd. (2013) 350 ITR 41 (Del.). - For issue 2, the assessee contended that if the TPO relied on internet material for comparables, the assessee should also be permitted to rely on similar material. Revenue's contentions: - For issue 1, the Revenue relied on the ITAT's order, which rejected the headcount principle as irrational due to salary disparities between segments.

Which sections of the Income-tax Act were involved?

Section 260A,Section 80(4)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances

$~137 * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 604/2017 FUJITSU INDIA PVT. LTD. ..... Appellant Through: Mr. G.C. Srivastava & Mr. Suvinay Kumar Dash, Advs. versus DCIT, CIRCLE 11(1) ..... Respondent Through: Mr. Ajit Sharma, Adv. for Mr.Ashok Manchanda, Sr. Std. Counsel. CORAM: HON’BLE MR. JUSTICE S. RAVINDRA BHAT HON’BLE MR. JUSTICE PRATEEK JALAN

O R D E R %

13.02.

2019

The following questions of law were framed for consideration by this Court in the Assessee‟s appeal under Section 260A of the Income Tax Act, 1961 (hereinafter, the „Act‟) :- “(i) Whether the ITAT erred in the facts of the case and in law in not appreciating that gross profit margin is not a suitable allocation key for dividing common expenses between various segments since the predominant segment of the appellant is the service segment for which, calculation of gross profit cannot be done? (i) Whether, in the facts and circumstances of the case and in law, the Tribunal erred in accepting a functionally different company as a comparable and in further rejecting the appellant‟s reliance on the company‟s website for ascertaining its nature of business?”

The brief facts are that for the A.Y. 2008-09, the assessee [i.e. the appellant] reported its international transactions, including international transaction of „Receipts for services rendered‟; it engages itself in online market support services. The reference was made to the Transfer Pricing Officer who, on an application of the Transactional Net Margin Method (TNMM) benchmarked the international transactions and arrived at the ALP. This resulted in the AO making an order which included transfer pricing adjustment of ₹2,63,21,723/-. The assessee challenged this draft assessment order, which was however rejected on 27.08.2012.The final assessment was therefore completed on 28.09.2012. The assessee appealed.

As far as the first question is concerned, while arriving at the transfer pricing adjustment by the ALP, the Assessing Officer/TPO had to allocate certain common expenditure. The tax authority applied the first principle of apportionment, which resulted in proportionate allocation of expenditure attributable to the concerned segments. After completion of this step, a sum of ₹9.79 crores, remained as un-allocable costs. For this, the assessee sought to use the “headcount” method for allocation as the allocation principle to ascribe the segment to which the expenses were to be considered. The assessee‟s arguments with respect to application of the “headcount” basis Tribunal‟s order and submitted that the rejection of the headcount principle was justified. The Tribunal‟s reasoning was that the headcount principle was irrational given the disparity of salaries of the employees of the different segments.

It is apparent that the headcount basis is an acceptable principle and known to law. EHTP India Pvt. Ltd. (supra) recognized it; although the Court took note of the previous practice of the assessee, at the same time it did not in any manner frown upon the application of that principle.

This Court notices that the principle of applying the headcount method has not been universally accepted and was in fact rejected in M/S assessee had not followed the consistent method; and that the issue of allocation of such expenditure was in the context of deduction claimed under Section 80(4). This Court is of the opinion that the two possible choices, i.e. turnover method as well as the headcount method in the present case was not justified. Concededly, the expenditure incurred by the assessee was common for two different segments. The tax authorities broadly agreed that expenditure could be allocated on the basis of proportionate turnover of the concerned segment. Having done so, the alternative was open to accept one or the other principle. Therefore, the choice of the assessee in relying upon the headcount principle per se could not have been rejected. The question of law, therefore, is answered against the Revenue and in favour of the assessee.

As far as the second question goes, we notice that the ITAT has remitted the matter for consideration of one of the comparables i.e. for M/S Indus Technical and Financial Consultants Ltd. The reasoning of the ITAT was that the details on the website, could not be relied upon. It was argued and perhaps quite correctly that this comparable was included by the TPO relying upon the material available at that time from the internet. If such were the decision, the assessee could possibly also have relied upon material similar to such material. In any event, this Court does not propose to pass any final decision on the merits. Pursuant to the remand, it is open to the authorities to take into consideration all the relevant material including credible material available with respect to the comparables in question. The question of law number two is answered accordingly.

The appeal is partly allowed in the above terms.

The next date of hearing fixed in the Appeal i.e. 14.02.2019 stands cancelled.

S. RAVINDRA BHAT, J

PRATEEK JALAN, J FEBRUARY 13, 2019 „pv‟

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