Fujitsu India Private Limited, Gurgaon V. Deputy Commissioner of Income-tax, New Delhi

ITA 1981/DEL/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 4477 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-02-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 06-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ANUBHAV RASTOGI ADVS
• Keywords: Related party transaction; Transfer pricing; Principle of natural justice; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 271(1)(c); 143(3); 234B

Judgement Text

1 ITA NO. 1981/DEL/2015 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBE R AND MS SUCHITRA KAMBLE, JUDIC IAL MEMBER ITA NO. 1981/DEL/2015 ( A .Y 2010-11) FUJITSU INDIA PVT. LTD. 3 RD FLOOR, BUILDING NO. 9B, PHASE- III, DLF CYBER CITY GURGAON AAACF4170D (APPELLANT) VS DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE 9 (2) NEW DELHI (RESPONDENT) APPELLANT BY SH. K. M. GUPTA & SH. ANUBHAV RASTOGI, ADVS RESPONDENT BY SH. RAKESH KUMAR, SR. DR ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE A SSESSMENT 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 PA SSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 9(2) NEW DELHI ( AO) PURSUANT TO THE DIRECTIONS OF THE HONBLE 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 PRI CING 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 C OMPUTING THE TOTAL INCOME OF THE APPELLANT AT INR 3,03,89,190/- AS AGAINST TH E LOSS DECLARED BY THE DATE OF HEARING 29.11.2018 DATE OF PRONOUNCEMENT 18.02.2019 2 ITA NO. 1981/DEL/2015 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 MATTE RS, RESPECTIVELY. PART I - TRANSFER PRICING GROUNDS 3. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/T PO/AO HAVE ERRED IN REJECTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE A PPELLANT FOR INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF IT SERVICES (IMPUGNED TRANSACTION). 4. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/T PO/AO HAVE ERRED IN REJECTING THE COMPARABLE COMPANIES (VIZ. ADC INDIA COMMUNICATIONS LTD., CMC LTD., DCM LTD., GLODYNE TECHNOSERVE LTD., MICRO LAND LTD. AND ORG INFORMATICS LTD.) WHICH WERE CONSIDERED AS COMPARAB LE BY THE APPELLANT FOR BENCHMARKING THE IMPUGNED TRANSACTION WITHOUT CONSI DERING THE FACT THAT THESE COMPANIES WERE ENGAGED IN PROVIDING SIMILAR S ERVICES AS COMPARED TO THE APPELLANT. 5. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/T PO/AO HAVE ERRED IN RE- CHARACTERIZING THE NATURE OF THE IMPUGNED TRANSACTI ON 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. 6. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/T PO/AO HAVE ERRED IN CONDUCTING A FRESH ECONOMIC ANALYSIS BY USING ARBIT RARY FILTERS FOR IDENTIFYING COMPANIES COMPARABLE TO THE APPELLANT. THE ARBITRAR Y 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 A DOPTED THE TURNOVER FILTER OF 1 CRORE FOR AY 2009-10 AND AY 2008-09; REJECTING COMPANIES HAVING DIFFERENT ACCOUNTING YEA R THAN THAT OF THE APPELLANT; REJECTING COMPANIES HAVING SERVICES REVENUE LESS TH AN 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 NO T IN LINE WITH THE 3 ITA NO. 1981/DEL/2015 INDUSTRY TREND, - COMPANIES WHICH SHOWED DIMINISHIN G REVENUE TREND; AND REJECTING COMPANIES HAVING EXPORT REVENUE LESS THAN 75 PERCENT OF THE OPERATING REVENUE. 7. THAT ON FACTS OF THE CASE AND IN LAW, T HE DRP/ TPO/AO HAVE ERRED IN USING SINGLE YEAR DATA FOR FINANCIAL YEAR (FY) 20 09-10 OF ALLEGED COMPARABLE COMPANIES WITHOUT CONSIDERING THE FACT THAT THE SAM E WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TRANSFE R PRICING DOCUMENTATION REQUIREMENTS AND DISREGARDING THE APPELLANTS CLAIM FOR USE OF MULTIPLE YEAR DATA FOR COMPUTING THE ARMS LENGTH PRICE. 8. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/TPO/AO HAVE ERRED IN SELECTING COMPANIES IN THE FINAL SET OF ALLEGED COM PARABLES WHICH ARE FUNCTIONALLY DIFFERENT AS COMPARED TO THE APPELLANT FOR THE IMPUGNED TRANSACTION. 9. THAT ON FACTS OF THE CASE AND IN LAW, TH E DRP/ TPO/AO HAVE ERRED BY SELECTING CERTAIN COMPANIES WHICH ARE EARNING SUPER NORMAL PROFITS AS COMPARABLE TO THE APPELLANT FOR THE IMPUGNED TRANSA CTION. 10. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/TPO/AO ERRED AND VITIATED THE PRINCIPLE OF NATURAL JUSTICE BY NOT GI VING DUE COGNIZANCE TO THE DETAILED ANALYSIS AND TECHNICAL ARGUMENTS SUBMITTED BY THE APPELLANT IN RESPECT OF CERTAIN COMPANIES CONSIDERED/ REJECTED F OR 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 PERTAINI NG TO RELATED AND UNRELATED SEGMENTS ON THE BASIS OF THE RESPECTIVE SEGMENTAL R EVENUE OF THE APPELLANT WITHOUT APPRECIATING THE SEGMENTAL DETAILS SUBMITTE D 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, T HE DRP/TPO/AO HAVE FAILED TO INCLUDE FOREIGN EXCHANGE GAINS/LOSSES AND PROVISION FOR DOUBTFUL DEBTS WHILE COMPUTING THE OPERATING MARGINS OF THE APPELLANT AN D 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 4 ITA NO. 1981/DEL/2015 COMPARABLES AS PER THE GUIDELINES PROVIDED BY THE S AFE 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 ARMS LENGT H NATURE OF MARGINS SAFE HARBOUR RULES CANNOT BE APPLIED RETROSPECTIVE LY AND ARE ONLY APPLICABLE FOR ASSESSMENT YEAR (AY) 2013-14 AND A Y 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 DIFF ERENCES IN WORKING CAPITAL EMPLOYED BY THE APPELLANT VIS-A-VIS COMPARABLES FOR IMPUGNED TRANSACTION. 15. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/ TPO/AO HAVE FAILED TO MAKE APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR VARY ING RISK PROFILES OF THE APPELLANT VIS-A-VIS THE ALLEGED COMPARABLES FOR IMP UGNED TRANSACTION AND IN THE PROCESS INTER-ALIA NEGLECTED THE INDIAN TRANSFE R PRICING REGULATIONS, INTERNATIONAL GUIDELINES ON TRANSFER PRICING AND JU DICIAL PRECEDENCE IN THIS REGARD. 16. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/A O 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 ARMS L ENGTH PRICE DETERMINED BY THE APPELLANT AND PROCEEDING TO DETERMINE THE ARMS LENGTH PRICE. PART II - CORPORATE TAX GROUNDS 17. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E 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 EX PENSES. 18. 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 PASSE D UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT. 19. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE AO HAS ERRED IN CHARGING INTEREST UNDER SECTION 234B OF TH E ACT, AS CONSEQUENCE OF THE ADDITIONS MADE IN THE ASSESSMENT ORDER PASSED U NDER SECTION 143(3) READ 5 ITA NO. 1981/DEL/2015 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, AMEN D, 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, NETHERL ANDS (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, WO RKSTATIONS, 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. TH E SAID SERVICES WERE PRIMARILY IN THE NATURE OF TECHNICAL SUPPORT PERTAINING TO IN STALLATION 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 UNDER TOOK THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES, WHICH WERE DULY REPORTED IN THE ACCOUNTANT'S REPORT (FORM NO, 3CEB), FILED ALONG WI TH THE ASSESSEES RETURN OF INCOME. 6 ITA NO. 1981/DEL/2015 S. NO. INTERNATIONAL TRANSACTION METHOD APPLIED AMOUNT 1 TRADING OF GOODS RPM 14,45,29,350 2 PROVISION OF IT SERVICES TNMM 17,82,69,410 PAYMENT OF PROVISION OF IT SERVICES TNMM 10,65,67,562 3 BUSINESS SUPPORT SERVICES TNMM 5,03,07,734 4 PURCHASE OF FIXED ASSETS CUP 1,31,46,625 5 REIMBURSEMENT OF EXPENSES NA 91,29,510 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 ASSESS EE DURING THE FINANCIAL YEAR 2009-10. THE TPO VIDE ORDER DATED 07.01.2015 R ECOMMENDED THE ASSESSING OFFICER TO MAKE A TP ADDITION OF RS. 5.87 CRORES ON ACCOUNT OF ADJUSTMENT OF ARMS LENGTH PRICE PERTAINING TO THE INTERNATIONAL TRANSACTION OF PROVISION OF IT SERVICES. IN UNDERTAKING THE SAME T HE TPO DISREGARDED THE QUANTITATIVE AND QUALITATIVE FILTERS APPLIED BY THE ASSESSEE AND INSTEAD USED HIS OWN APPROACH TO SELECT COMPARABLES FOR BENCHMAR KING THE INTERNATIONAL TRANSACTION OF PROVISION OF IT SERVICES. WHILE DOIN G SO, THE TPO CHANGED THE CHARACTERIZATION OF THE ASSESSE FROM IT SERVICE PRO VIDER TO ITES SERVICE PROVIDER AND CHOSE THE FOLLOWING COMPANIES AS COMPA RABLE TO THE ASSESSEE COMPANY FOR THE PROVISION OF IT SERVICES: S. NO. COMPANY NAME OP/OC% 1 ACCENTIA TECHNOLOGIES 42.52% 2 COSMIC GLOBAL 18.28% 7 ITA NO. 1981/DEL/2015 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 BP O 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 REJECTE D SATYAM BPO LTD. AS A COMPARABLE COMPANY. THE DRP ALSO DIRECTED THE TPO T O CORRECT MARGINS OF THE COMPARABLE COMPANIES. THE FINAL COMPARABLE SET IS A S FOLLOWS:- S. NO. COMPANY NAME OP/OC% 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 ITA NO. 1981/DEL/2015 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 PASS ED ASSESSMENT ORDER DATED 30.01.2015 THEREBY MAKING ADDITION OF RS.5,07 ,64,694/- TOWARDS TP ADJUSTMENT. THE ASSESSING OFFICER ALSO MADE ADDITIO N OF RS. 53,37,240 TOWARDS DISALLOWANCE OF PROVISION FOR WARRANTY. 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSEE FILED PRESENT APPEAL. 5. AS REGARDS TO GROUND NO. 1 AND 2, THE SAME ARE G ENERAL IN NATURE, HENCE DISMISSED. 6. THE LD. AR SUBMITTED THAT ON AGGREGATION OF INTE RNATIONAL AND DOMESTIC SEGMENTS PERTAINING TO IT SEGMENT, THE SEGMENTAL BI FURCATION OF REVENUES AND EXPENSES INTO INTERNATIONAL AND DOMESTIC SEGMENTS G IVEN TO THE LOWER AUTHORITIES ARE AS UNDER: PARTICULARS INTE RNATIONAL SEGMENT DOMESTIC SEGMENT TOTAL 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 OPERATING COST 168,602,347 66,624,626 235,226,973 OPERATING PROFIT 96,67,063 - 54,24,098 4,242,965 9 ITA NO. 1981/DEL/2015 NCP 5.73 - 8.14 1.80 HOWEVER, THE LD. AR SUBMITTED THAT THE TPO DISREGAR DED 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 L D. AR POINTED OUT THAT IN THE PECULIAR CIRCUMSTANCES OF THE PRESENT CASE, TO COMPUTE THE ARMS LENGTH PRICE OF THE AFOREMENTIONED TRANSACTION, THE SEGMEN TAL PROFITABILITY OF THE ASSESSEE COMPANY NEEDS TO BE TAKEN INTO CONSIDERATI ON AS AGAINST AGGREGATION OF INTERNATIONAL AND DOMESTIC SEGMENT OF THE ASSESS EE COMPANY. THE LD. AR FURTHER SUBMITTED THAT IN THE INSTANT CASE, THE OBJ ECTIVE IS TO COMPUTE THE ARMS LENGTH PRICE OF THE RELATED PARTY SALES TRANS ACTION OF THE ASSESSEE COMPANY WITH ITS AES 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 SOLU TIONS (P.) LTD. V. ACIT - 10(1) [2011] 11 TAXMANN.COM 264 (MUMBAI), WHEREIN I T HAS BEEN HELD THAT THE TNMM METHOD REQUIRES THE COMPARISON OF NET MARGIN R EALIZED BY THE AE FROM THE INTERNATIONAL TRANSACTIONS AND NOT THE COMPARIS ON OF OPERATING MARGIN OF THE AE WITH THE OPERATING MARGIN OF COMPARABLE AT E NTERPRISE 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 H ELD THAT SEGMENTAL PROFITABILITY SHOULD BE PREFERRED OV ER ENTITY LEVEL PROFITABILITY. 7. THE LD. AR FURTHER SUBMITTED THAT THE TPO WAS NO T CORRECT IN RE- CHARACTERIZING THE NATURE OF THE TRANSACTIONS AS PR OVISION OF IT ENABLED SERVICES (ITES) BY STATING THAT THERE IS NO DIFFERENCE BETWE EN 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 AS SESSEE COMPANY. THE ASSESSEE COMPANY IN THE TRANSFER PRICING DOCUMENTATION HAS P ROVIDED FOR A DETAILED FUNCTIONAL ANALYSIS STATING THE BUSINESS PROFILE IN CLUDING FUNCTIONS PERFORMED AND RISKS ASSUMED. THE LD. AR FURTHER SUBMITTED THA T FOR THE PURPOSE OF 10 ITA NO. 1981/DEL/2015 BENCHMARKING THE SAID TRANSACTIONS, A BROAD SET OF COMPARABLE COMPANIES HAVE BEEN CHOSEN WHICH ARE ENGAGED IN SIMILAR ACTIV ITY 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 ENGAG ED IN THE PROVISION OF LIMITED IT SUPPORT SERVICES FOR INSTALLATION AND CO MMISSIONING OF IT PRODUCTS DIRECTLY SOLD BY FUJITSU INDIAS AES TO CUSTOMERS I N INDIA AND THEREBY RE- CHARACTERIZING THE ASSESSEE COMPANY AS AN ITES COMP ANY. THE PRIMARY FUNCTION OF THE ASSESSEE COMPANY ONLY COMPRISES OF PROVIDING BASIC SUPPORT SERVICES ONCE THE IT PRODUCTS ARE SOLD BY THE AES T O THE CUSTOMERS IN INDIA. FURTHER, FOR THE PURPOSE OF THE SAID SERVICE, THE A SSESSEE COMPANY DERIVES ITS REVENUE ON A LUMP SUM BASIS AND THUS IT IS A RISK M ITIGATED ENTITY. ADDITIONALLY, THE ASSESSEE COMPANY DOES NOT EMPLOY PEOPLE HAVING HIGH END TECHNICAL SKILLS AS THE BASIC MAINTENANCE OF THE CO MPUTER SYSTEMS DOES NOT REQUIRE PEOPLE HAVING HIGH SKILLED TECHNICAL KNOWLE DGE. FOR IT SERVICE SEGMENT THE FUNCTIONAL ANALYSIS AND RISKS ASSUMED HAS BEEN PROVIDED BELOW: FUNCTIONS PERFORMED: 1. INSTALLATION AND COMMISSIONING: THE ASSESSEE COMPANY IS ENGAGED IN THE INSTALLATION AND COMMISSIONING OF IT PRODUCTS (BOTH HARDWARE AND SOFTWARE) SOLD BY ITS AES TO THIRD PARTY CUSTOMERS IN INDIA. THE SERVICES RENDERED RANGE FROM INTEGRATING NEW TECHNOLOGIES IN IT INFRA STRUCTURE TO PROVIDING SUPPORT SERVICES. 2. INTEGRATION SERVICES: THE ASSESSEE COMPANY PROVIDES SERVICES PERTAINING TO INTEGRATION OF NEW ELEMENTS TO EXISTING INFRASTR UCTURE SUCH AS HIGH END SERVERS, STORAGE SOLUTIONS, INTERNAL AND EXTERNAL N ETWORKS AS WELL AS INFRASTRUCTURE SOFTWARE. 3. MAINTENANCE AND SUPPORT SERVICES: TO SUPPORT THE RANGE OF SERVERS, DESKTOPS, NOTEBOOKS AND HANDHELD DEVICES, THE ASSES SEE COMPANY ALSO PROVIDES REPAIR AND MAINTENANCE SERVICES IN RELATIO N TO THE PRODUCTS SOLD DIRECTLY BY THE AES TO CUSTOMERS IN INDIA. 4. WARRANTY SERVICE: THE AES OF THE ASSESSEE COMPANY HAVE PASSED ON THEI R 11 ITA NO. 1981/DEL/2015 WARRANTY OBLIGATIONS/ AMC TO THE ASSESSEE COMPANY. UNDER THE SAID OBLIGATIONS THE ASSESSEE COMPANY IS ENGAGED IN REND ERING MAINTENANCE AND REPAIR SERVICES IN RELATION THE GOODS SOLD DIRECTLY BY THE A.ES IN INDIA. RISKS ASSUMED 1. MARKET RISKS: THE ASSESSEE COMPANY IS ENGAGED IN RENDERING SERVIC ES 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 WI TH 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 INDIRECTL Y. 2. FOREIGN EXCHANGE RISK: THE ASSESSEE COMPANY DOES NOT DIRECTLY ENTER INTO ANY CONTRACTS WITH THE CUSTOMERS OF ITS AES AN D THUS EARNS REVENUE FROM ITS AES ONLY. THE ASSESSEE COMPANY INVOICES IT S AES IN FOREIGN CURRENCY FOR ITS SERVICES AND THUS ASSUMES THE RISK OF FOREIGN EXCHANGE FLUCTUATIONS THE AES DO NOT BEAR ANY FOREIGN EXCHAN GE RISK. 3. SERVICE DELIVERY RISK: IF THE SERVICES RENDERED BY THE ASSESSEE COMPANY ARE NOT IN LINE WITH THE GROUP STANDARDS THE COMPAN Y IS DIRECTLY RESPONSIBLE FOR SUCH INCONSISTENCIES. ANY COST OF REWORK IS REQ UIRED TO BE BORNE BY THE ASSESSEE COMPANY THUS THIS RISK IS DIRECTLY BORNE B Y IT. 8. THE LD. DR RELIED UPON THE ORDER OF THE TPO/AO A ND THE DIRECTIONS OF THE DRP. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL T HE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS PERTINENT TO NOTE THAT T HE 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 W ERE FURTHER BIFURCATED INTO DOMESTIC AND INTERNATIONAL SEGMENT. BUT THE TPO HAS NOT TAKEN INTO ACCOUNT THE SAME WHILE PASSING THE ORDER AND REJECTED THE E CONOMIC ANALYSIS UNDERTAKEN BY THE ASSESSEE COMPANY FOR INTERNATIONA L TRANSACTIONS PERTAINING 12 ITA NO. 1981/DEL/2015 TO PROVISION OF IT SERVICES WHICH IS WITHOUT ANY CO NCRETE 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 ASSE SSEE IN RESPECT OF THE SEGMENTAL BIFURCATION OF ITS REVENUES AND EXPENSES INTO DIFFERENT OPERATING SEGMENTS. TO COMPUTE THE ARMS LENGTH PRICE OF THE AFOREMENTIONED TRANSACTION, THE SEGMENT PROFITABILITY OF THE ASSES SEE COMPANY NEEDS TO BE TAKEN INTO CONSIDERATION AS AGAINST AGGREGATION OF INTERNATIONAL AND DOMESTIC SEGMENT OF THE ASSESSEE COMPANY. THUS, IN THE PRESE NT CASE THE ARMS LENGTH PRICE OF THE RELATED PARTY TRANSACTIONS OF THE ASSE SSEE COMPANY HAS TO BE COMPUTED WITH ITS AES ON SEGMENTAL BASIS AND NOT T HAT OF PROFITABILITY OF THE ENTIRE SEGMENT WHICH INCLUDE BOTH AE AND NON AE TRA NSACTION. THIS SUBMISSION OF THE ASSESSEE IS WELL FORMED AND IS AC CEPTED AS THE ASSESSEE COMPANY HAS GIVEN ALL THE INFORMATION RELATING TO I NTERNATIONAL SEGMENT AND DOMESTIC SEGMENT WITH THE RELATED PARTY SALES TRANS ACTION OF THE ASSESSEE COMPANY WITH ITS AES. BESIDES THAT THE TPO HAS ALS O RE-CHARACTERIZED THE ASSESSEES LIMITED RISK IT SERVICES AS ITES, THEREB Y REJECTING THE FUNCTIONAL ANALYSIS AS DOCUMENTED IN THE TRANSFER PRICING DOCU MENTATION. THE TPO WHILE RE-CHARACTERIZING THE IT SERVICES AS IT ENABLED SER VICES 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 I T ENABLED SERVICES, THE ISSUES NEED TO BE ADDRESSED BY THE TPO AFTER TAKING INTO A CCOUNT ALL THE RELEVANT EVIDENCE PROVIDED BY THE ASSESSEE COMPANY DURING TH E ASSESSMENT PROCEEDINGS WHICH THE TPO FAILED TO TAKE INTO ACCOUNT. THEREFOR E, IT WILL BE APPROPRIATE TO REMAND BACK THE ENTIRE TRANSFER PRICING ISSUE TO TH E FILE OF THE TPO/AO. NEEDLESS TO SAY, THE ASSESSEE BE GIVEN DUE OPPORTUN ITY 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 PROVISI ON FOR WARRANTY, THE LD. AR SUBMITTED THAT A DETAILED SUBMISSION ON VARIOUS QUERIES RAISED BY THE AO 13 ITA NO. 1981/DEL/2015 WAS FILED BY THE ASSESSEE COMPANY, BUT THE ASSESSIN G OFFICER DID NOT ASK ANY FURTHER QUERIES. THE LD. AR SUBMITTED THAT THE ASSE SSING OFFICER DID NOT GIVE ANY OPPORTUNITY TO THE ASSESSEE COMPANY TO PROVE TH E CLAIM. THE LD. AR ALSO RELIED UPON THE DECISION OF ROTORK CONTROLS INDIA L TD. VS. CIT 314 ITR 62. 11. THE LD. DR RELIED UPON THE ORDER OF THE TPO/AO AND THE DIRECTIONS OF THE DRP. 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE COMPANYS SUBMISS IONS WERE NOT PROPERLY TAKEN INTO ACCOUNT BY THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS WHILE DECIDING THE PROVISION FOR WARRANTY. THEREFOR E, 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 PROCEEDI NGS. NEEDLESS TO SAY, THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING BY FOLLOWI NG PRINCIPLES OF NATURAL JUSTICE. THUS, GROUND NO. 17 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 13. AS REGARDS TO GROUND NOS. 18 AND 19, THE SAME A RE CONSEQUENTIAL, HENCE ARE NOT BEING ADJUDICATED AT THIS JUNCTURE. 14. IN RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH FEBRUARY, 2018 . SD/- SD/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 18/02/2019 R. NAHEED COPY FORWARDED TO: 14 ITA NO. 1981/DEL/2015 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE OF DICTATION 27.11.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 28.11.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 18 . 02 .201 9 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 18 .02 .201 9 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 18 .02 .201 9 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER