JUNIPER NETWORKS SOLUTION INDIA PRIVATE LIMITED,NEW DELHI vs. ASSESSMENT UNIT, NFAC ITD, NEW DELHI

This appeal preferred by the assessees is directed against the assessment order dated 27.07.2024 passed by the Income Tax Department, Assessment Unit u/s 143(3) read with section 144C(13)/144B of the Income-tax Act, 1961 (for short ‘the Act”) for Assessment Year 2020-21 pursuant to the directions of the Dispute Resolution Panel u/s 144C(5) of the Act.

The assessee company has filed its return of income on 12.01.2021 vide acknowledgement no. 204286211120121 declaring total loss of Rs.49,78,97,850/-and deemed total income u/s 115JB at Rs.0/-. The case of the assessee was selected for scrutiny assessment under CASS, therefore notice u/s 143(2) of the Income-tax Act, 1961 was issued to the assessee company vide notice bearing DIN: ITBAIAST/S/143(2)/2021- 22/1033793662(1) dated 29.06.2021. The return of the assessee was selected for scrutiny through CASS on the following issues :– S.No. Issue i. Claim of Any Other Amount Allowable as Deduction in Schedule BP ii. Imports iii International Transactions

A reference u/s 92CA(1) of the Act, was made to the TPO on 29.12.2021 in respect of the international transactions/specific domestic transactions reported in Form No. 3CEB filed by the assessee company. Notice u/s. 142(1) of the Act alongwith questionnaire was also issued and duly served upon the assessee.

The case was referred to TPO on the basis of information that the assessee has reported international transactions reported in the form no 3CEB. The profile of the assessee was reproduced by the TPO in his order at page of 1 of the order and the same are also reproduced by the AO, which had already reproduced in brief facts above. We also observed that the TPO himself observed that the assessee is doing trading activity, in the second limb, it is providing maintenance /warranty services in India. He further observed that both the business functions are having different nature as well as expenses and profit. He rejected the claim of the assessee that they are inextricably linked. The assessee has benchmarked for margin on entity level for TNM Method, which included profit from trading and service businesses. The TPO rejected the claim and however accepted the TNMM. He proceeded to split the trading segment results from the combine results as under:

Aggrieved with the above order, the assessee filed objections before the DRP and filed their grounds of objections, also filed detailed submissions. After considering the same, the DRP has sustained all the findings of the AO/TPO except allowed the working capital adjustment to be computed on the adjusted margins in accordance with the OECD guidelines. Accordingly, the TPO revised the weighted average adjusted mean of the comparable after allowing the working capital adjustments, which is reproduced at page 2 of the order giving effect to the DRP order, the median determined by him is 8.12% in comparison to the 35th and 65th percentile. TPO found that the operating margin of the assessee is within the ALP, accordingly, the adjustment was reduced to nil.

Against the order of Final assessment order and directions of DRP on the issue of rejecting the various objections raised before the DRP, which DRP had sustained the findings of TPO and given relief only on the issue of working capital adjustment, assessee filed the following grounds of appeal :-

On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act. The Appellant prays that the Ld. AO be directed to drop the penalty proceedings under section 270A of the Act. Each Ground is without prejudice to and independent of each other.”

At the time of hearing, ld. AR submitted that the assessee is mainly involved in the import and distribution business, it is involved only in distribution and not a service provider. In this regard, he brought to our notice recording of nature and profile of the assessee at page 1 of TPO order and also para 5.8 of the DRP order where they have clearly recorded the FAR analysis. Further he brought to our notice the TP study submitted by the assessee, which is placed at pages 23 to 34 of the paper book. With reference to above material on record, he submitted that the lower authorities have recorded the nature of service segment, the assessee provides after sale services in the form of AMC through its own employees. After recording the same, they observed that these are two legs of transactions form separate class of transactions involve different levels of risk involved. He brought to our notice the observations of the DRP that under TP regulations, the bench marking should be done on transaction to transaction basis unless the transactions are so closely inter- linked and continuous that separate evaluation of the same is not possible. Whereas in the given case, the same are fundamentally different, it can be segregated. Therefore, he sustained the findings of TPO and ld. DRP also rejected all other objections raised by the assessee.

He further brought to our notice agreement placed at page 578 of the paper book. He submitted that as per the above agreement and recital, the assessee wishes to market and distribute software and customer services, avail services as defined in clause 1.4 of the agreement from the AE. He also brought to our notice nature of customer services mentioned in clause 1.4. He submitted that the functions of the assessee company are intertwined with the trading segment. Further he brought to our notice page 591 of the paper book, which is the letter written to TPO indicating that both products and services were procured by the assessee from its AE and no payment was made by the assessee towards procurement of services.

On the other hand, Ld DR heavily relied on the detailed findings of lower authorities.

Considered the rival submissions and material placed on record. We observed that the assessee is a wholly owned subsidiary of Juniper Network International B.V, Netherlands. It is part of a network of affiliated companies engaged in the business of designing, developing, “1.4 “Customer Services” means : (a) Product maintenance services (including any of the following or any combination thereof: distribution of Software Releases and certain upgrades, remote technical services, repair services, and technical support for diagnosis and remediation of Hardware, Software or system defects) in the form of offerings and terms and conditions authorised under policies established by Juniper or its Affiliates from time to time; (b) professional services (including pre-defined and custom services to address a broad range of engagements including, but not limited to. product installation and configuration, network- level design, implementation and monitoring); ( c) educational services (including a wide variety of training courses and technical certification programs) ; (d) resident engineering services (including, but not limited to, analysing network configurations, assisting with network inventory tracking and management to support the network. testing product features and functionality, providing technical and product workshops, troubleshooting the network and supporting operations, developing network and equipment operating procedures, evaluating technical specifications tor interoperability, and assisting in the definition of key performance indicators for the network and services); and (e) such other services provided by JNSIPL to the Customer.”

Even for the argument, if we segregate the segments on the basis of activities, we observed that the TPO had simply divided on the basis of revenue without considering the fact that the majority of the service segment is established only for the purpose of dealing with the after sales services. If that be the case, at least he should have considered for 80:20. This would have given the result appropriate.

Coming to the issue of revenue recognition, we observed that the assessee recognises the revenue on the basis of below: “f. Revenue from contracts with customers Revenue is recognized when promised goods or services are transferred to customers In an amount that reflects (he consideration to which the Company expects to be entitled in exchange for those goods or services by following a five-step process. (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price. (4) allocate the transaction price, and (5) recognize revenue when or as the Company satisfies a performance obligation as further described below. Identify the contract with a customer: The Company generally considers a sales contract or agreement with an approved purchase order as a customer contract provided that collection is considered probable, which is assessed based on the creditworthiness of the customer as determined by credit checks, payment histories, and/or other circumstances. The Company combines contracts with a customer if contracts are negotiated with a single commercial substance or contain price dependencies Identify the performance obligations in the contract: Product performance obligations include hardware and software license and service performance obligations include maintenance. software post-contract sup pan, training, and professional services. Certain software licenses and related post-contract support are combined into a single performance obligation when the maintenance updates are crucial to the continued functionality of the software. Determine the transaction price: The transaction price for the Company's contracts with its customers consists of both fixed and variable consideration provided it is probable that a significant reversal of revenue will not occur when the uncertainty related to variable consideration is resolved. Fixed consideration includes amounts to be contractually billed to the customer while variable consideration includes estimates for rights of return, rebates, and price protection. which are based on historical sales returns and price protection credits, specific criteria outlined in rebate agreements, and other factors known at the time. The Company generally invoices customers for hardware, software licenses and related maintenance arrangements at time of delivery. and professional services either up front or upon meeting certain milestones. Customer invoices are generally due within 30 to 90 days after issuance. The Company's contracts with customers typically do not include significant financing components as the period between the transfer of performance obligations and timing of payment are generally within one year.

From the above, it is relevant to notice the identification of the performance obligations in the contract, it says “Product performance obligations include hardware and software licenses, and service performance obligations include maintenance, software post-contract, training and professional services. Certain software licenses and related post-contract support are combined into a single performance obligation when the maintenance updates are critical to the continued functionality of the software.” From the above revenue recognition of the assessee company indicate that the trading and services performances are intertwined and cannot be separated. The action of the revenue is wrong to divide the segments into two and allocate the cost on the basis of revenue of segment without properly analysing the nature of functions and intertwined services transaction with the products marketed by the assessee with the assistance of original manufacturer and actual services provider, in this case, JNI BV, Netherland. Therefore, we are in agreement with the submissions of the assessee in this case and you cannot divide the peculiar nature of the trading business of the assessee with the services provided by it to the Indian customers with the assistance of its AE. In the result, ground no 3 raised by the assessee is allowed in its favour.

In the result, appeal filed by the assessee is allowed in the above terms. Order pronounced in the open court on this 24th day of October, 2025.