Case Number: ITA 140/DEL/2019
Appellant: Fujitsu Consulting India Pvt. Ltd., New Delhi
Respondent: ACIT, Circle-9(2), New Delhi
Assessment Year: 2014-15
Result: 2014-15
Case Filed on: 2019-01-09
Order Type: Final Tribunal Order
Date of Order: 2019-08-09
Pronounced on: 2019-08-09
In this detailed case analysis, we delve into the appeal filed by Fujitsu Consulting India Pvt. Ltd. (the appellant) against the order of the Commissioner of Income Tax (Appeals)-44, New Delhi, pertaining to the assessment year 2014-15. The crux of the dispute revolves around the issuance of credit notes to associated enterprises and the resulting adjustment of income.
Fujitsu Consulting India Pvt. Ltd. is engaged in providing computer software consulting, system design, enterprise application, and computer programming services. It operates as one of the global delivery centers of the Fujitsu group, rendering services to its Associated Enterprises (AEs) using an estimated cost-plus pricing methodology.
The appellant filed its return of income declaring Rs. 74,37,01,710, which was later revised to Rs. 75,04,24,590. During the assessment proceedings, it was noted that Fujitsu had issued credit notes worth Rs. 39 crores to its AEs. This adjustment was purportedly made to align with the intercompany agreements and the Global Trading Model (GTM) of the Fujitsu group.
The appellant argued that the issuance of credit notes was necessary due to lower costs incurred and gains from foreign exchange, which made the revenue billed higher than what was due as per the agreement. The credit notes were issued to rectify this overbilling. Fujitsu claimed that even after issuing the credit notes, it maintained a profit margin of 20.64% on its costs, which was higher than the margin of comparable companies (11.31%) and the safe harbour margin (20%).
Furthermore, the appellant contended that the credit notes were in line with the contracts and the arms length principle as required by Section 92(1) of the Income Tax Act, 1961. They emphasized that the adjustments were made to ensure fair and accurate pricing in accordance with the intercompany agreements.
The AO argued that the credit notes were issued to maintain an acceptable level of operating profit and repatriate the balance to the AEs, effectively diverting profits to evade taxes in India. The AO viewed the Rs. 39 crores as profits that accrued to the appellant and were diverted through the issuance of credit notes. As a result, an upward adjustment was made, considering this amount as undisclosed income.
The CIT (A) upheld the AO’s decision, dismissing the appeal. The CIT (A) agreed with the AO’s interpretation that the credit notes were an attempt to manipulate taxable profits. The CIT (A) also noted that the appellant failed to disclose these transactions properly in Form 3CEB, leading to the conclusion that the credit notes were issued with an intent to evade taxes.
The Income Tax Appellate Tribunal (ITAT) scrutinized the contentions of both parties. The Tribunal observed that the CIT (A) had summarily rejected the appellant’s contentions without independent application of mind or detailed examination of the facts and agreements involved.
The Tribunal emphasized the need for a speaking order, where the CIT (A) should have thoroughly examined and considered all contentions raised by the appellant. It noted that the CIT (A) merely accepted the AO’s conclusions without proper adjudication of the issues at hand.
Consequently, the ITAT decided to remit the case back to the CIT (A) for re-adjudication. The CIT (A) was directed to pass a speaking order after duly considering all the appellant’s contentions and providing a fair opportunity for representation.
The case of Fujitsu Consulting India Pvt. Ltd. vs ACIT highlights the complexities involved in transfer pricing adjustments and the issuance of credit notes in intercompany transactions. The Tribunal’s decision underscores the importance of detailed and independent adjudication at the appellate level, ensuring that all relevant facts and contentions are thoroughly examined before arriving at a conclusion.
This case serves as a critical reference for multinational companies and tax authorities in understanding the nuances of transfer pricing, contractual adjustments, and the application of the arms length principle in international transactions.
Order Pronounced: 9th August, 2019
Members: R.K. Panda (Accountant Member) and Sudhanshu Srivastava (Judicial Member)
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