JUNIPER NETWORKS INDIA PRIVATE LIMITED ,MUMBAI V. PRINCIPLE COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1, MUMBAI

ITA 2042/MUM/2024

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The case involves Juniper Networks India Private Limited, which appealed against the revisionary order passed by the Principal Commissioner of Income Tax, Central Circle-1, Mumbai. The revision was based on the grounds that the original assessment order allowed deductions without proper verification, which was claimed to be prejudicial to the interests of the Revenue. The Tribunal examined whether the PCIT was justified in invoking section 263 of the Income-tax Act, considering the detailed submissions and documentary evidence provided by the assessee, including compliance with transfer pricing regulations and the existence of a bilateral Advance Pricing Agreement (APA).

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 314193 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2017-2018
• Other Referred Cases: Malabar Industries Ltd. vs. CIT, Pr. CIT v. Lemon Tree Hotels Ltd, Biocon Ltd v. DCIT, Nova Nordisk India Pvt. Ltd. v. The Deputy Commissioner of Income Tax
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MAKING ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT; MAKING DETAILED SUBMISSIONS
• Keywords: Revenue expenditure; Transfer pricing; International transaction; Business expenditure; Fair market value; Principle of natural justice; Competent authority; Wholly owned subsidiary; Revision of order
• Section: 143(3); 263; 37(1)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH MUMBAI BEFORE SANDEEP SINGH KARHAIL, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No. 2042/MUM/2024 Assessment Year: 2017-18 Juniper Networks India Private Limited Unit 103, Platina, 1st Floor, Plot No. C 59, G Block, Bandra Kurla Complex Road, Bandra (East), Mumbai – 400051. (PAN: AAACJ8542K) Vs. Principal Commissioner of Income Tax, Central Circle-1, Mumbai (Appellant) (Respondent) Present for: Assessee : Shri Vijay Mehta, Ms. Forum Gudhka Mr. Harsh Bafna, CAs Revenue : Ms. Neena Jeph, CIT DR Date of Hearing : 11.02.2025 Date of Pronouncement : 09.05.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the revisionary order of Ld. PCIT(A) (Central), Mumbai – 1, vide order no. ITBA/REV/F/REV5/2023-24/1063399315(1) dated 26.03.2024, passed against the assessment order by Assessing Officer, Central Circle 2(4), Mumbai, u/s. 143(3) r.w.s. 144C(3) of the Income-tax Act, 2 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 1961 (hereinafter referred to as the “Act”), dated 18.06.2021 for Assessment Year 2017-18. 2. Grounds raised by the assessee are four in numbers, all of which relate to assumption of jurisdiction by the ld. PCIT for invoking the revisionary proceedings u/s.263 of the Act and passing the impugned order thereon. Grounds are not reproduced for the sake of brevity. 3. Brief facts of the case are that assessee is a wholly owned subsidiary of Juniper Networks International LLC, a US based company which in turn is wholly owned subsidiary of Juniper Networks Inc., USA. Assessee is engaged in the business of providing software development, IT enabled services and marketing support services to its Associated Enterprises (AEs). During the year under consideration, assessee entered into international transactions which included reimbursement of employees stock option plan expenses amounting to Rs.121,6690,756/-, duly reported in Form 3CEB. A reference u/s. 92CA(1) of the Act was made by the ld. Assessing Officer to the ld. Transfer Pricing Officer (TPO) for determination of Arms Length Price (ALP) in respect of international transactions entered into by the assessee with its AEs as reported in Form 3CEB filed by the assessee. Assessee had filed its return of income on 29.11.2017 reporting total income at Rs.257,28,07,920/-. The impugned assessment u/s. 143(3) was completed by determining total income at Rs.323,01,85,930/- after making transfer pricing adjustments of Rs.65,73,78,013/-, details of which is tabulated below: 3 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 Sr. No. Nature of services Total Adjustment (Amount in Rs.) 1. Adjustment on account of Receipts from Software Development Services 33,82,20,210/- 2. Adjustment on account of Receipts from IT enabled Services 26,70,95,053/- 3. Adjustment on account of Rendering of Marketing and Sales Support services 5,20,62,750/- 4. Total adjustment 65,73,78,013/- 4. Ld. PCIT on perusal of records observed that assessee was allowed deduction of Rs.121,60,90,756/- u/s. 37(1) on account of payment made to Juniper Networks Inc. (JNI) towards employees stock purchase plan (ESPP). According to ld. PCIT, the said claim was allowed without calling for details of the scheme of ESPP and without examining the details in this respect by the ld. Assessing Officer. According to him, ld. Assessing Officer did not examine the valuation of shares of JNI since it is not a listed public company, correctness of the claim for the discounted premium based on vesting period of entitlement of the employees and claim of expenditure booked by the assessee to the extent of options exercised by the employees. Since the claim was allowed without any making enquiries or verification on these counts, ld. PCIT observed that impugned assessment order passed by the ld. Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue. Accordingly, a show cause notice u/s.263 was issued on 06.03.2024. 4.1. Assessee before the ld. PCIT made elaborate submissions alongwith documentary evidences to demonstrate that all the details and disclosures were made in the return of income filed by the assessee as well as in the audited financial statements which were placed before 4 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 the ld. Assessing Officer as well as ld. TPO in the course of assessment and also that due enquiry was made both, by the ld. TPO and ld. Assessing Officer by raising queries in their respective notices issued u/s.142(1) which were duly complied with by the assessee and are on record. All these submissions made by the assessee forms part of the paper book placed before us, containing 171 pages. 5. Ld. Counsel for the assessee took us through all the facts and explanations corroborating by documents on record to demonstrate that effective examination and verification has been on the issue raised by the ld. PCIT. From the said submission made by the ld. Counsel, it is noted that assessee had made a disclosure in the computation of the total income by way of a note No.3, stating that assessee had claimed a deduction for share based payment of the aforesaid amount u/s.37 as business expenditure by placing reliance on certain judicial precedents. In its audited profit and loss account, assessee reported employee benefit expenses, details of which were given in note No.24, forming part of the financial statements, wherein share based payment expense was included. For this, Note No.31 mentioned details of the share based payments, ESPP and the share options outstanding during the year along with details of their vesting and becoming exercisable over period from the grant date. 5.1. It is also noted that in Form 3CEB, in clause 19, assessee reported these transactions of reimbursement on ESPP. In the clause 19, assessee reported this transaction of reimbursement of employees stock option plan expenses for which method used for determining the ALP is transactional net margin method (TNMM). Assessee analysed this transaction in its transfer pricing study report and submitted that it 5 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 had earned net cost plus margin (NCP) of 17.50% for the IT services segment which falls within the range of NCP margins of the comparables. While arriving at this margin, assessee had taken into account the impugned transaction of ESPP for which deduction was claimed. In the transfer pricing study report, assessee demonstrated by way of segmental profit and loss account of having NCP margin of 17.50% by applying the profit level indicator of operating profit/operating cost (OP/OC). Assessee reported 17.5% NCP margin on IT and ITES segment which according to it, is at ALP. 5.2. Ld. Assessing Officer by issue of notice u/s.142(1), dated 06.02.2021 had raised the query to provide details on the share based payment claimed u/s.37 as business expenditure which was duly complied with by the assessee vide submission dated 10.02.2021. In this submission, assessee has elaborately explained its claim, duly supported by corroborative documentary evidences. The said explanation is reproduced for ready reference. “During the year under consideration, the Company has claimed a deduction of Rs. 121.66,90,756 on account of payments made to Juniper Networks Inc (JNI) towards the Employee Stock Purchase Plan (ESPP) under section 37(1) of the Act- 1. The assessee is a part of the Juniper Group. JNI had established Juniper Networks, Inc. 2008 Employee Stock Purchase Plan (\"ESPP\") to provide the eligible employees of JNI and its designated subsidiaries (including the assessee) an opportunity to purchase JNI's Common Stock through accumulated payroll deductions. II. Employees who opt to purchase shares under ESPP, contribute to the plan by way of monthly deduction from their salary, a specific percentage starting from the offering date. There are periodical purchase dates within every offering period, on which shares of JNI are automatically purchased at a discount of 15% on the lower of fair market value of the shares on offering date and purchase date (exercise date). Thus, while the employees bear 85% of the fair market value of the shares, the balance 15% is borne by JNIPL iii. The contribution deducted from the employees' salary is transferred by the Assessee to JNI periodically. The amount of Rs. 121,66,90,756 represents the actual payments made by the assessee to JNI towards such 15% discount. Such 6 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 discount, i.e. the Share Based Expense (SBE) being a cost to the assessee is also recovered back with a mark-up of 17.50% from its associated enterprise. iv. During the year under consideration, the Company had debited expenditure of Rs. 1.23,80,98,024 towards SBE as reflected in the financial Statement (copy of the Financial Statement is provided to your goodself vide letter dated October 25, 2019) Such quantum of expenditure as debited to the Profit & Loss Account was determined on fair value basis considering the Ind-AS Accounting standards. However, against such quantum of expenditure actually debited by the Company; the Company has paid to JNI Rs. 1,21,66,90,756 during year under consideration. Resultantly, in the computation of income, the assessee has claimed an expenditure only to the extent of actual payments made during the year under consideration and accordingly made disallowance of Rs. 2,14,07,268 as reflected in the Computation of Income enclosed as Anneuxre 5 under the head Abny other expenses ot allowable. enclosed as Annexure 5 under the head Any other expenses not allowable. v. The SBE on issue of shares to employee is a revenue expenditure. The sole reason for such discount is to compensate them for the continuity of their service to the Company and thus it is an employee cost incurred by the Company. In this regard, the Assessee places reliance on the following decisions holding that expenditure incurred on allotment of shares to the employee in the course of their employment is revenue in nature a) Pr. CIT v. Lemon Tree Hotels Ltd [(2019) 104 taxmann.com 26 (Delhi High Court)) b) Biocon Ltd v. DCIT [(ITA No.248. 368 to 371 & 1206/Ban/2010) (ITAT Bangalore Special Bench)] c) Nova Nordisk India Pvt. Ltd. v. The Deputy Commissioner of Income Tax [ITA No. 1275/Bang/2011 (Bang ITAT)) vi Further, the discount of 15% of the market price of shares (i.e., difference between market price of shares and price paid by the employee) is considered as perquisite in the hands of the employee and the assessee has accordingly deducted and paid the taxes on such perquisite component.” 5.3. Also, ld. TPO issued a show cause notice dated 16.01.2021 and by referring to an adjustment made in Assessment Year 2016-17 in respect of short mark up charged from the AE by reducing the cost base on account of employee cost towards ESPP reimbursement, required the assessee to substantiate why similar adjustment should not be made in the impugned year also, for mark up not charged on the said employee cost. In this respect also, assessee furnished a detailed reply vide 7 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 submission dated 22.01.2021 and demonstrated that in the year under consideration, assessee has claimed a mark up on the said reimbursement of expenses. Assessee, categorically submitted that treatment of ESPP in Assessment Year 2016-17 is different from the year under consideration since in this year, it has been recovered with a mark up. 5.4. Yet, another show cause notice was issued by ld. TPO on 04.01.2021, whereby specific query was raised in order to explain the nature of international transaction relating to employee stock purchase and option plan along with furnishing of the relevant details. Assessee gave a detailed reply to this effect also vide its submission dated 22.01.2021. To explain the nature of the claim, it submitted a note which is also extracted below: “In this connection, the assessee submits that JNI had established Juniper Networks, Inc. 2008 Employee Stock Purchase Plan (ESPP) to provide the eligible employees of JNI and its designated subsidiaries (including the assessee) an opportunity to purchase JNI's Common Stock through accumulated payroll deductions Employees who opt to purchase shares under ESPP, contribute to the plan by way of a monthly deduction from their salary of a specific percentage starting from the offering date. There are periodical purchase dates within every offering period, on which shares of Juniper Networks Inc. are automatically purchased at a discount of 15% on the lower of fair market value of the shares on offering date and purchase date (exercise date). The contribution deducted from the employees salary is transferred by the Company to Juniper Networks Inc, periodically, on a cost-to-cost basis. Further, the Company also reimburses the expenditure incurred by Juniper Networks Inc, on account of the discount allowed to employees on the purchase of its shares under the ESPP.” 5.5. Subsequent to these show cause notices and replies by the assessee, ld. TPO passed an order u/s.92CA(3), dated 28.01.2021 and having considered the details in respect of reimbursement of employees stock option plan expenses, proposed a transfer pricing adjustment only 8 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 in respect of software development services, ITES and marketing and sales support services, details of which are already tabulated above. There was no adjustment proposed in the said order in respect of international transaction relating to reimbursement of employees stock option plan expenses. Ld. Assessing Officer by accepting the recommended adjustments by ld. TPO, assessed the total income of the assessee by making addition towards transfer pricing adjustment and completed the assessment. 6. In the revisionary proceedings, on the show cause notice issued by ld. PCIT, assessee again made a detailed submission on the issues raised, substantiating them by corroborative documentary evidences. It was pointed out before the ld. PCIT that initiation of the said proceeding itself is on an incorrect footing, since observation that JNI is not a listed company is incorrect. It was submitted that shares of JNI are listed on US Stock Exchange. 6.1. Further, assessee brought to the knowledge of the ld. PCIT that it had made an application for an Advance Pricing Agreement (APA) covering the year under consideration, inter alia, for benchmarking various transactions including the impugned transaction for which revisionary proceedings have been invoked, undertaken with Juniper US. Assessee submitted that competent authorities of India and USA had concluded a mutual agreement, wherein amongst other transactions, the competent authority also agreed that the impugned transaction, i.e., reimbursement of employee contribution pertaining to share based compensation to JNI should be considered as an operating cost in the hands of the assessee, since it is closely linked to the business operations of the assessee, for the purpose of determining the 9 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 charging of Arms Length mark up. Assessee thus, contended that in view of provisions contained in section 92CC(3), the bilateral APA shall be binding on the Income-tax authorities and therefore, the claim of assessee has been rightly allowed as a business expenditure u/s.37(1) of the Act by the ld. Assessing Officer. 6.2. Before us, assessee placed on record bilateral APA which is dated 30.03.2024 wherein the definition clause defines operating expenses which includes expenses reflected in statement of profit and loss account on employee stock option plan benefits or similar benefits such as restricted stock units, employee stock purchase and option plan granted by the AEs to the employees of the applicant and charged to the applicant. The applicant in the said agreement is the assessee. In the said clause of definition containing operating expenses, it is stated that for the purpose of calculating the operating profit of the applicant, certain items of notional expenses shall also be added to the operating expenses for the purpose of applying mark up. These items include cost of ESOP benefits or similar benefits recorded as per the consolidated financial statement of AE granted to the employees of the applicant but not charged to the applicant. In para-2 relating to term of the agreement, it states that it shall apply to consecutive five years commencing from previous year 2020-21 to previous year 2024-25 and roll back for previous year 2016-17 to 2019-20, relevant to Assessment Year 2017-18 to 2020-21 which are cumulatively referred as covered years. Thus, this agreement includes the impugned year of 2017-18 in the covered years. Ld. Counsel referred to provisions contained in section 92CA(4) whereby there is no discretion available to the ld. Assessing Officer but to proceed and compute the total income of the assessee in conformity with ALP as determined by the ld. TPO. 10 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 6.3. Before us, ld. Counsel also submitted that in the preceding two Assessment Years, i.e., 2015-16 and 2016-17, assessee did not charge mark up on the impugned transaction for which transfer pricing adjustment was made which was also referred by the ld. TPO in his show cause notice, seeking explanation by the assessee why similar adjustment should not be made in the year under consideration towards the mark up. In this respect, ld. Counsel pointed out that in the year under consideration, assessee has charged a mark up of 17.5% to bring the transaction at ALP which has not been disputed by the ld. TPO in the order passed by him. 6.4. Further, ld. Counsel also submitted that for the subsequent Assessment Year 2018-19, notice u/s.148A was issued wherein case of the assessee was sought to be reopened on account of share based payment which had been allowed as expenditure u/s.37 treating it as business expenditure without verifying details of ESPP resulting into under charging of income. After detailed deliberation on this issue in the proceeding u/s.148A, the case of the assessee for Assessment Year 2018-19 was held to be not a fit case for issuing notice u/s.148 vide order passed u/s.148A(d). 6.5. Thus, ld. Counsel strongly asserted that the issue raised by the ld. PCIT for invoking revisionary proceedings is a settled issue with the Department and the impugned assessment completed by the ld. Assessing Officer is not erroneous in so far it is prejudicial to the interest of Revenue. Amendment brought in by Finance Act, 2022, w.e.f. 01.04.2022. provided jurisdiction to relevant Principal Chief Commissioner or Chief Commissioner or Principal Commissioner of 11 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 Commissioner to invoke revisionary proceedings u/s.263 to revise the order of TPO passed u/s.92CA who is assigned the jurisdiction of the concerned Transfer Pricing Officer. Accordingly, it is emphasised that ld. PCIT has no jurisdiction for revising the order of ld. TPO. 7. We have heard both the parties and perused the material on record. The premise on which ld. PCIT invoked the revisionary proceedings and held the impugned assessment order to be erroneous in so far as prejudicial to the interest of Revenue is in respect of ld. Assessing Officer allowing the claim of the assessee without making enquiries or verification which should have been made for allowing the deduction of Rs.121,60,90,756/- u/s.37(1) of the Act on account of payments made to JNI towards ESPP. Admittedly, it is an undisputed fact on record that assessee had duly disclosed all the relevant details in its audited financial statements as well as computation of income and return filed thereon. It is also undisputed and uncontroverted that queries were raised multiple times both, by the ld. Assessing Officer and the ld. TPO in their respective proceedings, which have been duly complied with by the assessee by making detailed submissions supported by corroborative documentary evidences. 7.1. It also on record that assessee had entered into a bilateral APA u/s. 92CC of the Act and the year under consideration is covered year in terms of the said agreement. In the terms of the said agreement, cost of ESOP benefits have been considered while arriving at ALP margin for the purpose of transfer pricing regulations. Once an APA is in place, section 92CD governs the effect of APA whereby the ld. Assessing Officer is required to complete the assessment proceeding in accordance with the agreement, taking into consideration the modified return furnished 12 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 by the assessee. Ld. Assessing Officer is required to pass an order determining total income of the relevant Assessment Year having regard to and in accordance with the agreement. In this respect, nothing contrary is brought on record by the ld. CIT DR, since in the present case, assessee has claimed expenses from its AE after charging mark up which is at ALP, unlike the preceding two Assessment Years where the mark up was not charged on similar claim and transfer pricing adjustment was made. 8. From the above factual matrix of the issue raised by the ld. PCIT, we find that he has not applied his mind to arrive at a consideration which is erroneous in so far as prejudicial to the interest of the revenue, for passing the impugned order u/s 263 of the Act. We observe that in the course of proceedings u/s 263 of the Act before the Ld. PCIT, assessee had furnished the relevant details and explained the issues raised through the show cause notice by the Ld. PCIT, supporting its contentions by corroborative documentary evidences. It is well settled law that for invoking the provisions of section 263 of the Act, both the conditions that the order must be erroneous and prejudicial to the interest of revenue needs to be satisfied. This ratio stands laid down by various Hon'ble Courts. 9. For this, let us take the guidance of judicial precedence laid down by the Hon’ble Apex Court in the case of Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordships have held that twin conditions need to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and in so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of 13 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii) Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; [because AO has to discharge dual role of an investigator as well as that of an adjudicator] then in aforesaid any of the events, the order passed by the AO can be termed as erroneous order. Looking at the second limb as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue, one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the AO. Their Lordships held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law. 10. We find that the issue in the present case is purely on facts which are verifiable from the records of the assessee. Examination and verification of audited financial statements, notices issued u/s.142(1) and subsequent show cause notices both by ld. Assessing Officer and ld. TPO and relevant replies furnished by the assessee corroborated by documentary evidences, fact of bilateral APA in place which is dated 14 ITA No. 2042/Mum/2024 Juniper Network India Pvt. Ltd.; AY 2017-18 30.03.2024 u/s.92CC reveals the correct state of affairs in respect of the issue raised in the impugned revisionary proceedings for which both ld. PCIT and ld. CIT DR could not bring any material on record to controvert the verifiable factual position. 11. Accordingly, on the issues raised by the Ld. PCIT in the revisionary proceedings, no action u/s 263 of the Act is justifiable which in our considered view cannot be sustained under the facts and circumstances of the present case and judicial precedents dealt herein above. We, therefore, quash the impugned order u/s 263 of the Act and allow the grounds raised by the assessee. 12. In the result, appeal of the assessee is allowed. Order is pronounced in the open court on 09 May, 2025 Sd/- Sd/- (Sandeep Singh Karhail) (Girish Agrawal) Judicial Member Accountant Member Dated: 09 May, 2025 MP, Sr.P.S. Copy to : 1 The Appellant 2 The Respondent 3 DR, ITAT, Mumbai 4 5 Guard File CIT BY ORDER, (Dy./Asstt.Registrar) ITAT, Mumbai "