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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-2’ NEW DELHI
Before: SHRI R. K. PANDA & MS SUCHITRA KAMBLE
This appeal is filed by the assessee against the Assessment Order dated 30/01/2015 passed u/s 143(3)/144C/92CA (4) of the Income Tax Act, for Assessment Year 2008-09.
2. The grounds of appeal
are as under:- “1. The final assessment order dated
30. January 2015 passed by the Deputy Commissioner of Income Tax, Circle 9(2) New Delhi (“AO”) pursuant to the directions of the Hon’ble Dispute Resolution Panel (“DRP”), draft assessment order passed by AO and the order dated
11. December 2014 passed by Additional Commissioner of Income Tax, Transfer Pricing Officer -1(3), New Delhi (“TPO”), is bad in law and void- ab-initio.
2. That on facts and in law, the AO has erred in computing the total income of the Appellant at INR 3,03,89,190/- as against the loss declared by the Appellant in its return of income amounting to INR 2,57,12,740/- by making an upward adjustment of INR 50,764,694/- and INR 53,37,240/- with respect to Transfer Pricing and Corporate Tax matters, respectively.
Part I - Transfer Pricing Grounds 3. That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant for international transaction pertaining to provision of IT services (“impugned transaction”).
That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting the comparable companies (viz. ADC India Communications Ltd., CMC Ltd., DCM Ltd., Glodyne Technoserve Ltd., Microland Ltd. and ORG Informatics Ltd.) which were considered as comparable by the Appellant for benchmarking the impugned transaction without considering the fact that these companies were engaged in providing similar services as compared to the Appellant.
That on facts of the case and in law, the DRP/TPO/AO have erred in re- characterizing the nature of the impugned transaction as provision of IT enabled services (“ITeS”) by stating that there is no difference between IT services and ITeS services as far as comparability is concerned and did not appreciate the functional profile of the Appellant.
That on facts of the case and in law, the DRP/TPO/AO have erred in conducting a fresh economic analysis by using arbitrary filters for identifying companies comparable to the Appellant. The arbitrary filters applied by the TPO and confirmed by the DRP/AO inter-alia include the following: • Rejecting companies having turnover less than INR 5 Crores which is inconsistent with their predecessors approach who adopted the turnover filter of 1 Crore for AY 2009-10 and AY 2008-09; • Rejecting companies having different accounting year than that of the Appellant; • Rejecting companies having services revenue less than 75 percent of the total income; • Rejecting company having employee cost less than 25 percent of the total sales; • Rejection of companies identified by the Appellant on account of having peculiar economic circumstances which are not in line with the •
industry trend, - companies which showed diminishing revenue trend; and • Rejecting companies having export revenue less than 75 percent of the operating revenue.
That on facts of the case and in law, the DRP/ TPO/AO have erred in using single year data for financial year (“FY”) 2009-10 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant’s claim for use of multiple year data for computing the arm’s length price.
That on facts of the case and in law, the DRP/TPO/AO have erred in selecting companies in the final set of alleged comparables which are functionally different as compared to the Appellant for the impugned transaction.
9. That on facts of the case and in law, the DRP/ TPO/AO have erred by selecting certain companies which are earning super normal profits as comparable to the Appellant for the impugned transaction.
That on facts of the case and in law, the DRP/TPO/AO erred and vitiated the principle of natural justice by not giving due cognizance to the detailed analysis and technical arguments submitted by the Appellant in respect of certain companies considered/ rejected for benchmarking of impugned transaction.
11. That on facts of the case and in law, the DRP/TPO/AO have erred in erroneously allocating the operating costs pertaining to related and unrelated segments on the basis of the respective segmental revenue of the Appellant without appreciating the segmental details submitted by the Appellant and re- determined the operating cost of the Appellant for benchmarking the impugned transaction.
12. That on facts of the case and in law, the DRP/TPO/AO have failed to include foreign exchange gains/losses and provision for doubtful debts while computing the operating margins of the Appellant and the comparable companies.
13. That on facts of the case and in law, the DRP has grossly erred in giving a direction to carry out a fresh calculation of the margins of comparables as per the guidelines provided by the Safe Harbour Notification dated 18 September 2013, without understanding that: • Appellant has not applied for being assessed under safe harbor provisions • Safe Harbour provisions do not reflect arm’s length nature of margins • Safe Harbour Rules cannot be applied retrospectively and are only applicable for assessment year (“AY”) 2013-14 and AY 2014-15 on specific application by a taxpayer
14. That on facts of the case and in law, the DRP/TPO/AO have failed to make appropriate adjustments to account for differences in working capital employed by the Appellant vis-a-vis comparables for impugned transaction.
That on facts of the case and in law, the DRP/TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-a-vis the alleged comparables for impugned transaction and in the process inter-alia neglected the Indian transfer pricing regulations, international guidelines on transfer pricing and judicial precedence in this regard.
That on facts of the case and in law, the DRP/AO has erred in confirming that AO/TPO has discharged his statutory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm’s length price determined by the Appellant and proceeding to determine the arm’s length price. Part II - Corporate Tax Grounds 17. That on the facts and circumstances of the case and in law, the DRP/AO erred in disallowing an amount of INR 53,37,340/- relating to provision made by the Appellant towards warranty expenses.
That on the facts and in the circumstances of the case, the AO has erred in initiating penalty under section 271(1)(c) of the Act, as consequences of the additions made in the assessment order passed under section 143(3) read with section 144C of the Act.
That on the facts and in the circumstances of the case, the AO has erred in charging interest under section 234B of the Act, as consequence of the additions made in the assessment order passed under section 143(3) read with section 144C of the Act.
The above grounds of appeal are mutually exclusive & without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.”
3. FUJITSU INDIA PRIVATE LIMITED is a wholly owned subsidiary of Fujitsu Technology Solutions, Holding, B.V, Netherlands (‘Fujitsu Netherlands’), incorporated in 1997. Fujitsu India is engaged in trading of IT products and provision of IT solutions and services in India. Portfolio of Fujitsu India includes servers, storage systems, workstations, notebooks, desktops & displays. Fujitsu India is also engaged in IT products Maintenance and Support services. During the year under consideration, the appellant was engaged in provision of IT services to its AEs. The said services were primarily in the nature of technical support pertaining to installation and implementation of goods sold directly by its AE in India. Broad portfolio of services includes: • Installation and commissioning • Integration services • Maintenance and support Services • Warranty Services
During the relevant AY, the assessee company undertook the following international transactions with its AEs, which were duly reported in the Accountant's Report (Form No, 3CEB), filed along with the assessee’s return of income.
S. International Transaction Method Amount No. Applied 1 Trading of Goods RPM 14,45,29,350 2 Provision of IT Services TNMM 17,82,69,410 Payment of provision of IT TNMM 10,65,67,562 Services 3 Business support services TNMM 5,03,07,734 4 Purchase of fixed assets CUP 1,31,46,625 5 Reimbursement of NA 91,29,510 Expenses 6 Recovery of Expenses NA 35,30,701 A reference was made u/s 92CA of the Income Tax Act, 1961 by the DCIT, Circle – 11(1), New Delhi for determination of Arm’s length price for the international transactions undertaken by the assessee during the Financial Year 2009-10. The TPO vide order dated 07.01.2015 recommended the Assessing Officer to make a TP addition of Rs. 5.87 crores on account of adjustment of arm’s length price pertaining to the international transaction of provision of IT services. In undertaking the same the TPO disregarded the quantitative and qualitative filters applied by the Assessee and instead used his own approach to select comparables for benchmarking the international transaction of provision of IT services. While doing so, the TPO changed the characterization of the assesse from IT service provider to ITES service provider and chose the following companies as comparable to the assessee company for the provision of IT services:
S. Company Name OP/OC% No. 1 Accentia Technologies 42.52% 2 Cosmic Global 18.28%
3 E4e Healthcare 31.03% 4 Fortune Infotech 22.80% 5 I gate global solutions Ltd. 24.54% 6 Infosys BPO Ltd. 31.44% 7 TCS E- serve International Ltd. 54.03% 8 TCS E-Serve Limited 63.42% 9 Jindal Intellicom Ltd. 13.62% 10 Satyam BPO Ltd. -12.65% Average 28.90% The draft assessment order was passed on 20.03.2014. The assessee filed objections before the DRP. The DRP vide directions/order dated 15.12.2014 upheld the approach of the TPO for benchmarking the international transaction of provision of IT services and rejected Satyam BPO Ltd. as a comparable company. The DRP also directed the TPO to correct margins of the comparable companies. The final comparable set is as follows:-
S. Company Name OP/OC% No. 1 Accentia Technologies 42.52% 2 Cosmic Global 18.28% 3 E4e Healthcare 31.03% 4 Fortune Infotech 22.80% 5 I gate global solutions Ltd. 24.54% 6 Infosys BPO Ltd. 31.44% 7 TCS E- serve International Ltd. 54.03%
8 TCS E-Serve Limited 63.42% 9 Jindal Intellicom Ltd. 13.62% Average 30.87% Thereafter, the TPO proposed an adjustment of Rs.5,07,64,694/- to the income of the assessee company. The Assessing Officer passed Assessment Order dated 30.01.2015 thereby making addition of Rs.5,07,64,694/- towards TP adjustment. The Assessing Officer also made addition of Rs. 53,37,240 towards disallowance of provision for warranty.
4. Being aggrieved by the Assessment Order, the assessee filed present appeal.
5. As regards to Ground No. 1 and 2, the same are general in nature, hence dismissed.
6. The Ld. AR submitted that on Aggregation of international and domestic segments pertaining to IT segment, the segmental bifurcation of revenues and expenses into international and domestic segments given to the lower authorities are as under: Particulars International Domestic Total Segment Segment Revenue 178,289,410 61,200,528 239,469,938 Direct Cost 130,598,176 33,217,100 163,815,276 Indirect Cost 38,004,171 33,407,526 71,411,697 Total 168,602,347 66,624,626 235,226,973 Operating Cost Operating 96,67,063 -54,24,098 4,242,965 Profit NCP 5.73 -8.14 1.80 However, the Ld. AR submitted that the TPO disregarded the above segmental information and did not consider the submissions of the assessee company and the DRP also confirmed the action of the TPO. The Ld. AR pointed out that in the peculiar circumstances of the present case, to compute the arm’s length price of the aforementioned transaction, the segmental profitability of the assessee company needs to be taken into consideration as against aggregation of international and domestic segment of the assessee company. The Ld. AR further submitted that in the instant case, the objective is to compute the arm’s length price of the related party sales transaction of the assessee company with its AE’s and not the profitability of the entire segment which include both AE and non AE transactions. The Ld. AR relied upon the Mumbai Tribunal decision in case of Symantec Software Solutions (P.) Ltd. V. ACIT - 10(1) [2011] 11 taxmann.com 264 (Mumbai), wherein it has been held that the TNMM method requires the comparison of net margin realized by the AE from the international transactions and not the comparison of operating margin of the AE with the operating margin of comparable at enterprise level. The Ld. AR also referred to the decision of Mumbai Tribunal in case of Technimount ICB India P. Ltd. vs. ACIT [ITA No. 7098/Mum/2010] wherein the Tribunal held that segmental profitability should be preferred over entity level profitability.
7. The Ld. AR further submitted that the TPO was not correct in re- characterizing the nature of the transactions as provision of IT enabled services (ITeS) by stating that there is no difference between IT services and ITeS services as far as comparability is concerned. The Ld. AR submitted that TPO did not appreciate the functional profile of the assessee company. The assessee company in the transfer pricing documentation has provided for a detailed functional analysis stating the business profile including functions performed and risks assumed. The Ld. AR further submitted that for the purpose of benchmarking the said transactions, a broad set of comparable companies have been chosen which are engaged in similar activity as that of the assessee company for 'IT Service’. The Ld. AR submitted that the TPO did not appreciate the business model of the assessee which is that of a limited risk service provider wherein the assessee company is only engaged in the provision of limited IT support services for installation and commissioning of IT products directly sold by Fujitsu India’s AEs to customers in India and thereby re- characterizing the assessee company as an ITES company. The primary function of the assessee company only comprises of providing basic support services once the IT products are sold by the AEs to the customers in India. Further, for the purpose of the said service, the assessee company derives its revenue on a lump sum basis and thus it is a risk mitigated entity. Additionally, the assessee company does not employ people having high end technical skills as the basic maintenance of the computer systems does not require people having high skilled technical knowledge. For IT service segment the functional analysis and risks assumed has been provided below: Functions performed:
1. 1. Installation and commissioning: The assessee company is engaged in the installation and commissioning of IT Products (both hardware and software) sold by its AE’s to third party customers in India. The services rendered range from integrating new technologies in IT infrastructure to providing support services.
2. Integration Services: The assessee company provides services pertaining to integration of new elements to existing infrastructure such as high end servers, storage solutions, internal and external networks as well as infrastructure software.
3. Maintenance and Support services: To support the range of servers, desktops, notebooks and handheld devices, the assessee company also provides repair and maintenance services in relation to the products sold directly by the AEs to customers in India.
4. Warranty Service: The AEs of the assessee company have passed on their warranty obligations/ AMC to the assessee company. Under the said obligations the assessee company is engaged in rendering maintenance and repair services in relation the goods sold directly by the A.E’s in India. • Risks Assumed 1. Market Risks: The assessee company is engaged in rendering services in relation to the direct sales made by its AEs. Thus, the AEs are responsible for identifying and retaining clients. They operate as independent distributors and therefore the market risk rests with them. Any decline in the market of AEs would also impact the revenues of the assessee company and thus is also subject to the said risk indirectly.
Foreign Exchange Risk: The assessee company does not directly enter into any contracts with the customers of its AEs and thus earns revenue from its AEs only. The assessee company invoices its AEs in foreign currency for its services and thus assumes the risk of foreign exchange fluctuations The AEs do not bear any foreign exchange risk.
Service delivery risk: If the services rendered by the assessee company are not in line with the group standards the company is directly responsible for such inconsistencies. Any cost of rework is required to be borne by the assessee company thus this risk is directly borne by it.
8. The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee company during the course of assessment proceedings, submitted the segmental bifurcation of its revenues and expenses into different operating segments (Trading, Provision of Market Support Services and IT services) which were further bifurcated into domestic and international segment. But the TPO has not taken into account the same while passing the order and rejected the economic analysis undertaken by the assessee company for international transactions pertaining to provision of IT services which is without any concrete reason. In fact, the TPO has taken Provision of IT services and payment for receipt of IT services in totality which are separately submitted by the assessee in respect of the segmental bifurcation of its revenues and expenses into different operating segments. To compute the arm’s length price of the aforementioned transaction, the segment profitability of the assessee company needs to be taken into consideration as against aggregation of international and domestic segment of the assessee company. Thus, in the present case the arm’s length price of the related party transactions of the assessee company has to be computed with its AE’s on segmental basis and not that of profitability of the entire segment which include both AE and non AE transaction. This submission of the Assessee is well formed and is accepted as the assessee company has given all the information relating to international segment and domestic segment with the related party sales transaction of the assessee company with its AE’s. Besides that the TPO has also re-characterized the assessee’s limited risk IT services as ITeS, thereby rejecting the functional analysis as documented in the Transfer Pricing Documentation. The TPO while re-characterizing the IT services as IT enabled Services has not given any finding or reasons as to why the same is done. Thus, on both account that is aggregation of international and domestic segments pertaining to IT segment and the re-characterization of the IT services as IT enabled Services, the issues need to be addressed by the TPO after taking into account all the relevant evidence provided by the assessee company during the assessment proceedings which the TPO failed to take into account. Therefore, it will be appropriate to remand back the entire Transfer pricing issue to the file of the TPO/AO. Needless to say, the assessee be given due opportunity of hearing by following principles of natural justice. Thus, Ground Nos. 3 to 16 are allowed for statistical purpose.
10. As regards to Ground No. 17 relating to provision for warranty, the Ld. AR submitted that a detailed submission on various queries raised by the AO was filed by the assessee company, but the Assessing Officer did not ask any further queries. The Ld. AR submitted that the Assessing Officer did not give any opportunity to the assessee company to prove the claim. The Ld. AR also relied upon the decision of Rotork Controls India Ltd. vs. CIT 314 ITR 62.
The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
We have heard both the parties and perused all the relevant material available on record. The assessee company’s submissions were not properly taken into account by the Assessing Officer during the Assessment Proceedings while deciding the provision for warranty. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer who will decide the same after taking into account all the submissions and evidence provided by the assessee company during the assessment proceedings. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Thus, Ground No. 17 is partly allowed for statistical purpose.
As regards to Ground Nos. 18 and 19, the same are consequential, hence are not being adjudicated at this juncture.
In result, appeal of the assessee is partly allowed for statistical purpose. Order pronounced in the Open Court on 18th February, 2018.