ORANGE BUSINESS SERVICES INDIA SOLUTIONS PVT. LTD.,GURGAON vs. DCIT, CIRCLE-3, GURGAON

Keeping in view the fact that the Transfer Pricing Officer had in the preceding years accepted that the assessee was engaged in IT Services (i.e. including software development and ITES) as is evident from the assessment order, which are part of the ITAs 419 of 2016 and 405 of 2016 and considering the fact that due to paucity of time, the assessee could not produce evidence before the ITAT. The order of the ITAT dated 15th February, 2018 is set aside and the ITAT is directed to examine the issue whether the assessee is engaged in the activity of software development after considering the additional evidence placed before this Court namely Annexures A-6 to A-13 and any other evidence which may be produced after hearing both the parties and allowing sufficient opportunity to the revenue to verify the same.”

Briefly stated the facts necessary for adjudication of the controversy at hand are : Orange S.A., formerly known as France Telecom S.A., is a French multinational telecommunication corporation, serving more than 225 customers in nearly 35 countries. Orange S.A. is a leading European wireless operator and broadband service provider, with nearly 175 million mobile customers and more than 15 million broadband subscribers.

The taxpayer, an Indian entity and a part of Orange Group is a subsidiary of EGN BV, Netherlands, which is into providing information technology enabled network management / technical support and other back office support services to its group companies. It also undertakes software developments services for developing software applications which are used within the Orange Group.

However, ld. TPO rejected Contract Software Development Services (CSDS) segment as claimed by the taxpayer and characterized the taxpayer as ITES provider only. Consequently, ld. TPO proceeded to consider the total amount of revenue pertaining to ITES segment and benchmarked the transactions considering the comparables of that business segment. Ld. TPO introduced some new filters and selected different set of comparables to benchmark the international transactions. Ld. TPO finally selected 12 comparables having average of 23.94% as against 17.30% computed by the taxpayer and proceeded to propose ALP of the transaction relating to provisions of ITES as under :-

Consequently, ld. TPO proposed an amount of Rs.13,67,86,810/- as adjustment u/s 92CA of the Act.

The taxpayer carried the matter by way of filing objections before the ld. DRP who have not accepted the same and upheld the order passed by the ld. TPO. In compliance with the orders passed by the ld. TPO/DRP, AO made adjustment in the final assessment order. The Tribunal vide order dated 15.02.2018 also upheld the aggregation of IT and ITES segment and remanded the matter back to ld. TPO for selection of comparables operating in both IT and ITES segment. The taxpayer carried the matter before the Hon’ble High Court challenging the segmentation of rejection of CSDS and ITES segment by the TPO/DRP and the Tribunal. 10. Hon’ble High Court set aside the matter and remanded the case back to the Tribunal to examine the issue, “whether the assessee is engaged in the activities of software development after considering the additional evidence placed before this court, namely, Annexure A-6 to A-13 and any other evidence which may be produced after hearing both the parties to the appeal.”

We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.

Undisputedly, the taxpayer company has been held to be engaged in IT services and ITES by the AO as well as TPO vide their orders passed in AYs 2010-11 and 2011-12. It is also not in dispute that there is not an iota of material in the TP order as well as DRP order if there is any change in the business model of the taxpayer during the year under assessment i.e. AY 2013-14.

When we peruse the order passed by the Tribunal particularly para 10, it is a matter of fact that the taxpayer had failed to present before the Tribunal authenticated data in respect of ITES and CSDS. Thus, the taxpayer had failed to prove its claim that highly qualified persons were used for CSDS and lowly qualified persons were used for ITES services and had also failed to substantiate its segregated revenue in respect of IT and ITES segments.

Before Hon’ble High Court, the taxpayer has candidly admitted that it could not produce evidence before the Tribunal due to paucity of time as only one working day was granted by the Tribunal to file any additional evidence. Now, the taxpayer has produced additional evidence in the form of Annexures A-6 to A-13 before the Hon’ble High Curt/Tribunal, to prove the fact that the taxpayer is engaged in two distinct activities i.e. CSDS and ITES services.

The ld. AR for the taxpayer drew our attention towards pages 227 to 284 of the convenience compilation which is complete details and resumes qua the educational and professional experience of the key employees of the taxpayer working in IT segment. Evidence brought on record in the tabulated form under the head “details as per head count for FY 2012-13” shows that the taxpayer has engaged a team for software development of highly qualified engineers to perform software development activities.

All these facts substantiate the claim of the taxpayer that it has a full-fledged team of software development engineers to carry out its software development activities and they are carrying out software development activities independently. The taxpayer has also brought on record list of employees working in contracts of contract software development services /ITES services along with the monthly cost of each employee available at pages 285 to 345 of the convenience compilation.

When we examine this evidence in the light of the order passed by the AO/TPO in AYs 2010-11 & 2011-12, there is no change in the functional profile of the taxpayer company and likewise, there is no change in the international transactions as well as functions performed by the taxpayer. The TPO/DRP/Tribunal have reached the conclusion that because of paucity of evidence the taxpayer has failed to substantiate that it is carrying out activities in two segments viz. CSDS and ITES.

So, when Revenue has been accepting and benchmarking such international transactions in segregated manner in earlier years in taxpayer’s own case and there is no change in the nature of international transactions as well as functional profile of the taxpayer during the year under assessment vis-à-vis earlier assessment years, following the “rule of consistency” as has been held by Hon’ble Supreme Court in Radhaswami Satsang vs. CIT (1992) 193 ITR 321 (S.C.), we are of the considered view that both the segments viz. CSDS and ITES are required to be benchmarked independently/in segregated manner.

Now, the next question arises is as to how to allocate certain common expenses incurred by the taxpayer in various segments for the purpose of calculation of the gross profit margin. Ld. AR for the taxpayer while replying upon the decision rendered by Hon’ble High Court of Delhi in case of Fujitsu India Private Ltd. vs. DCIT in ITA 604/2017 order dated 13.02.2019 contended that in such situation, “head count” method for allocation of such common expenses needs to be applied.

Hon’ble High Court in the case of Fujitsu India Private Ltd. (supra) upheld the head count principle by returning following findings :-

Mr. Srivastava, learned counsel appearing on behalf of the assessee relied upon the judgment of the this Court in Commissioner of Income Tax vs. EHTP India Pvt. Ltd. (2013) 350 ITR 41(Del.). In that decision, the Court indicated broadly that if headcount had been the basis for proportionate allocation of costs, there was no objection or illegality attached to it. The Court of course in that case was cognizant of the circumstances that the principle of headcount had been applied consistently in the past by the assessee. Learned counsel for the Revenue relied upon the 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 Continental Carriers vs. Commissioner of Income Tax, New Delhi (2016) 384 ITR 102. At the same time, the Court did say so on the basis that the 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.”

So, keeping in view the evidence brought on record by the taxpayer and following the reasons rendered by Hon’ble High Court of Delhi in case of Fujitsu India Private Ltd. (supra), we are of the considered view that ld. TPO should allocate common expenditure incurred by the taxpayer in two segments i.e. ITES & IT segment for the purpose of benchmarking the two separate transactions for calculation of the gross profit margin by applying the “head count” method.

In the first round of litigation, ld. TPO in this case had proceeded to benchmark international transactions qua CSDS and ITES segment by adopting aggregated approach. Now, as per our findings returned in the preceding paras, both the segments i.e. CSDS and ITES are required to be benchmarked independently.

Since the issue of benchmarking the international transactions is required to be examined qua both the segments i.e. CSDS and ITES separately and independently for factual analysis of taxpayer’s TP study, the case is remanded back to ld. TPO who shall determine the ALP of international transactions of both the segments independently afresh after providing an opportunity of being heard to the parties. Consequently, the appeal filed by the taxpayer is allowed for statistical purposes. Order pronounced in open court on this 15th day of July, 2021.