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

ITA/604/2017

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The case involves Fujitsu India Pvt. Ltd., the appellant, contesting a transfer pricing adjustment made by the Assessing Officer/Transfer Pricing Officer (TPO) under the Income Tax Act, 1961. The primary contention was regarding the method of allocating common expenses between different segments of the business for the purpose of determining the Arm's Length Price (ALP) of international transactions. The appellant argued for the use of the 'headcount' method, which was rejected by the TPO and the ITAT, leading to the appeal. The High Court of Delhi examined whether the rejection of the headcount method was justified and whether a functionally different company was a suitable comparable for transfer pricing purposes.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 756109 (HC-DELHI)
• Appeal Type: Others
• Pronouncement Date: 13-02-2019
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. EHTP India Pvt. Ltd., M/S Continental Carriers vs. Commissioner of Income Tax, New Delhi
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: AJIT SHARMA
• Assessee Lawyers: G C SRIVASTAVA; SU VINAY DASH
• Keywords: Arm's Length Price; Common expenses; Comparable Companies; Gross Profit Margin; International Transactions; Transactional Net Margin Method; Transfer pricing; Segment Allocation
• Section: 260A

Judgement Text

"$~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 1. 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?” 2. The brief facts are that for the A.Y. 2008-09, the assessee [i.e. the appellant] reported its international transactions, including international ITA 604/2017 Page 1 of 4 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. 3. 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 was rejected by the TPO, DRP and later by the ITAT in the impugned order. 4. 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 ITA 604/2017 Page 2 of 4 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. 5. 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. 6. 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. ITA 604/2017 Page 3 of 4 7. 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. 8. The appeal is partly allowed in the above terms. 9. 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‟ ITA 604/2017 Page 4 of 4 "