Fidelity Information Services India Pvt. Ltd. vs Deputy Commissioner Of Income Tax, Circle 1(1), Chandigarh

THE FACTS

SUBMISSIONS

ANALYSIS AND DISCUSSION

“GOVERNMENT OF INDIA

MINISTRY OF FINANCE

INCOME TAX DEPARTMENT

OFFICE OF THE DEPUTY COMMISSIONER OF INCOME TAX

DCIT CIR 1(1), CHANDIGARH

To, FIDELITY INFORMATION SERVICES INIDA PRIVATE LIMITED S-405, LGF ,GREATER KAILASH PART II NEW DELHI 110048, Delhi India
PAN: AAGCS0395D	AY: 2016-17		DIN & Order No : ITBA/AST/F/144C/2019-20/1023349922(1)		Dated: 28/12/2019
Name of the assessee		FIDELITY INFORMATION SERVICES INIDA PRIVATE LIMITED
Address of the assessee		S-405, LGF ,GREATER KAILASH PART II ,NEW DELHI 110048 , Delhi, India
Status		COMPANY
Range/Circle/Ward		DCIT CIR 1(1), CHANDIGARH
Resident/Resident but not Ordinary resident/ Non-resident		Resident
Date of Hearing		18/07/2017, 29/09/2017, 24/06/2019, 25/07/2019, 23/08/2019, 03/09/2019, 12/11/2019, 04/12/2019
Section/Sub-section under which assessment is made		143(3) of the I.T. Act, 1961
Date of Order		28/12/2019

Draft Order u/s 144C of the Income-tax Act 1961

1.

The assessee filed its original return of income for the A.Y. 2016-17 on 30.11.2016 declaring a total income of Rs. 57,57,85,770/-. The assessee company revised its ITR on 29.04.2017 for the AY 2016-17 declaring total income of Rs. 62,14,07,780/-. The case was selected for scrutiny through CASS. Statutory notice under section 143(2) was issued on 03.07.2017 which was duly served on the assessee. Subsequently, questionnaire alongwith statutory notice u/s 142(1) was issued on 17.06.2019 and further from time to time as per the case history on ITBA portal. In response to the said notices requisite details were furnished on ITBA Portal by the assessee company.

1.1

M/s Second foundation India Pvt. Ltd. (now known as Fidelity Information Services India Pvt. Ltd.) was incorporated on 15.04.2002 as a private limited company in New Delhi, India. The company is a subsidiary company of M/s Second foundation Inc, USA, a company incorporated in United States of America. The company is primarily engaged in providing software development services to M/s Second foundation Inc, USA. The company renders software development services from India. This unit is registered under the software technology park of India (STPI) Scheme formulated by Govt. of India.

1.2

While examining the case, it was noticed that the assessee had entered into international transactions during the year under consideration and having large value of international transactions in services. After taking approval from the Worthy Pr. Commissioner of Income Tax-I, Chandigarh vide letter No. Pr. CIT-1/Chd/Judl./2018- 19/791 dated 19.06.2018, the case was referred to the Transfer Pricing Officer (TPO), New Delhi, vide letter F. No. DCIT/Circle 1(1)/Chd./2018-19/1698 dated 28.06.2018 as one of the reasons of the selection of the case was based on TP Risk Parameter, for determining the arm's length price in relation to the international transactions u/s 92CA of the I.T Act, 1961.

1.3

The Deputy Commissioner of Income-Tax (Transfer Pricing)-1(3)(1), New Delhi passed order u/s 92CA(3) of the Income Tax Act, 1961 on 20.02.2019, wherein no adverse inference was drawn by the TPO as the assessee company had entered into Advance Pricing Agreement (APA) with the Central Board of Direct Taxes on 06.02.2017 and the A.Y. 2016-17 is covered as APA year. The order of the TPO is reproduced hereunder:

“OFFICE OF THE

DEPUTY COMMISSIONER OF INCOME TAX

TRANSFER PRICING OFFICER-1(3)(1)

ROOM NO. 510, 5th FLOOR, E-2 BLOCK,

CIVIC CENTER, NEW DELHI,

ORDER U/S 92 CA (3) OF THE INCOME TAX ACT, 1961

1 Name of the Assessee : M/s Fidelity Information Services India Pvt. Ltd. S-405, Greater Kailash, Part-II, New Delhi-110048.

2 Permanent Account No. : AADGC50395D

3 Status : Company

4 Assessment Year : 2016-17

5 Previous Year : 2015-16

6 Order U/S : 92CA (3)

7 Dates of Hearing : As per record

8 Date of Order : 20/2/19

1.

A reference u/s 92CA(1) of the I.T. Act, 1961 was received from DCIT, Circle-1(1), Chandigarh, to determine the ‘Arm’s Length Price’ in respect of International transactions entered into by M/s Fidelity Information Service India Private Limited (here-in-after called as “the assessee”) with its Associate Enterprises (AEs) during the FY 2015-16. In response to notice u/s 92CA(2) of the I.T. Act, 1961 Mr. Chirag Aggarwal, the authorized representatives of the Company, appeared from time to time. The Transfer pricing documentation containing functional and economic analysis prescribed under Rule 10D of the Income Tax Rules was submitted and placed on record.

2. Business Profile of the Assessee

The assessee company was incorporated on 15^th April 2002 as a private limited company in New Delhi, India. The assessee company acts as a captive service provider and is engaged in the provision of software services primarily comprising custom application development, Integration, maintenance, support and testing. The assessee provides these services from its units in Chandigarh (to be moved to Mohall shortly) and Bangalore.

3.

During the F.Y.2015-16, the taxpayer has reported the following International transactions in Form 3CEB:-

S. No.	AEs	Nature of Transaction	Amount (in Rs.)	Method
1	Fidelity Information service Inc US	Sales of services	3041212728	TNMM
2	Second Foundation Inc US	Sales of services	119664402	TNMM
3	Fidelity National information services Inc US	ESOP-RSU expense	24012960	TNMM
4	Fidelity National information services Inc US	ESPP Expense	7061021	TNMM
5	Fidelity Information service Inc. US	Unbilled Revenue	264889523	TNMM
6	Fidelity National information services Inc US	Trade Payables	21690766	TNMM

4.

It was intimated by the AR during the TP proceedings that the assessee has already entered into Advance Pricing Agreement (APA) with the Central Board of Direct Taxes on 06.02.2017 and the A.Y.2016-17 is covered as APA Year. Further, the assessee modified return in view of section 92CD of the I.T Act, 1961 read with the rule 10RA of the I.T. Rules, 1962 on 29.04.2017 and the annual compliance report was filed on 05.05.2017 as per rule 10(D) of IT. Rules, 1962. The assessee in this regard filed the Copy of abovesaid APA as well as other submissions.

5.

In view of the functional and economic analysis of assessee, no adverse inference is drawn in respect of the international transactions undertaken by the assessee during the F.Y. 2015-16.

(Saddik Ahmed)

Deputy Commissioner of Income Tax, Transfer Pricing Officer-1(3)(1), New Delhi

Copy to

1.

The CIT (Transfer Pricing)-1, New Delhi for information please.

2.

The Addl. CIT, TPO-1(3), New Delhi for information please.

3.

The DCIT, Circle-1(1), Chandigarh for necessary action.

4.

The Assessee

(Saddik Ahmed)

Deputy Commissioner of Income Tax, Transfer Pricing Officer-1(3)(1), New Delhi”

1.4

In response to statutory notices under section 143(2)/142(1), Ms. Divya Shingari, CA submitted the reply on ITBA from time to time.

2. Addition on account of foreign travelling expenses:

2.1

The assessee company, during the year under consideration, has debited travelling expenses amounting to Rs.18,69,28,806/- in the profit and loss account. Out of this, the foreign traveling expenses were Rs.13,73,32,347/-. As per the assesse these travelling expenses have been incurred for providing services to M/s Second Foundation Inc., USA and Fidelity information Services Inc., USA. As per the agreement with M/s Second Foundation, Inc. USA, a copy of which is already on record in earlier years, the assessee company is not required to incur any expense on account of foreign travelling for servicing of the clients of M/s Second Foundation Inc., USA. During the course of assessment proceeding, the assessee company vide notice u/s 142(1) dated 30.11.2019 was asked to justify foreign traveling expenses incurred by the assessee company amounting to Rs. 13,73,32,347/-.

2.2

In response thereto, the assessee company vide letter dated 11.12.2019 stated as under on this issue: xxxx xxxx xxxx xxxx

2.

After considering the facts of the case, it is held that providing of service to the foreign clients on behalf of M/s SF USA and M/s Fidelity Information Services Inc, USA was not the responsibility of the assessee company, therefore, the expenditure incurred on foreign traveling amounting to Rs.13,73,32,347/- is treated as expenditure pertaining to M/s SF Inc, USA and M/s Fidelity Information Services Inc. USA and is disallowable in the hands of the assessee company.

2.1

In this regard, it is important to mention that no new fact has been brought out by the assessee company while giving its submissions on this issue. That the assessee company has new service agreements with both the said customers under which the assessee company is rendering services to the said customers and that the customers remunerate the assessee on cost + 16.60% and further that the cost which is charged by the assessee to its respective customers includes interalia the travel cost, does not in any way make this an eligible business expenditure of the assessee company.

2.2

No details have been provided regarding the inclusion of the said expenses in the cost charged by the assessee company to its clients. Further, as per para 3.1 of Article 3 of the said settlement agreement filed by the assessee, cost shall include the allocable portion of all normal and ordinary course operating expenses including travel cost. However, the assessee has failed to prove that the said foreign travel cost is a normal and ordinary course business expense and thus the foreign travel expense are not allowable u/s 37(1) of the I.T. Act, 1961.

2.3

For the A.Y. 2006-07 the case of the assessee is pending for adjudication before the Hon’ble ITAT in second round. During the A.Y. 2011-12 the Hon’ble DRP’s vide its order dated 23.12.2015 directed to verify whether the foreign travelling expenses have been reimbursed by the customers. On verification as per the directions of Hon’ble DRP for A.Y. 2011-12, it was noticed that the bill of re-imbursement pertained to ‘Software Development Charges’. The assessee was asked to produce documentary evidence regarding approval granted by the customers i.e. 2nd foundations Inc. USA & Fidelity Information Services, Inc. USA for reimbursement of foreign travelling expenses. However the assessee expressed his inability to produce the same. Thus, the assessee failed to establish that the foreign travelling expenses were re-imbursed by its customers i.e. 2nd foundations Inc. USA & Fidelity Information Services, Inc. USA. Accordingly the foreign travelling expenses were added back during the A.Y. 2011-12. However, the Hon’ble ITAT has deleted the addition made on foreign travelling expense but the order was not acceptable to the Department but further appeal u/s 260A of the Act was not filed as the tax effect involved was below the monetary limits prescribed.

2.4

Further, the assessee has not been successful to explain how these expenses related to the normal business of the assessee. It is also pertinent to mention here that the reason for the disallowance is not based on whether the expenses have been incurred by the assessee or not, but on the allowability of the expense as such.

2.5

The assessee company had to provide the services for development of computer software and allied products on specific orders and specifications provided from time to time by M/s SF Inc. USA. Further, M/s. SF Inc USA was to provide technical support for the development of the software to the assessee company. It was further seen from the various clauses of the agreement that the assessee company was to develop specific software as per the direction of the company M/s SF Inc USA. Therefore, the assessee company was only engaged in development of computer software and allied products for M/s SF Inc USA and was not required to do any servicing on behalf of M/s SF Inc. USA.

2.6

It has further been observed that as per terms of agreement, the responsibility for servicing of clients’ of M/s SF Inc. USA is that of M/s SF Inc. USA only. The responsibility of the assessee company was limited to the development of the software as per the technical specifications provided by M/s SF Inc. USA. In fact, the assessee company was not receiving any servicing income for servicing the clients of M/s SF Inc. USA. The expenses incurred for servicing of the clients of M/s SF Inc. USA were not the responsibility of the assessee company, as per the terms of the agreement. Further, all the expenses for the stay of the visiting employees of the assessee company to foreign companies were being met by M/s SF Inc. USA. The assessee company was bearing only the foreign traveling expenses and visa expenses of the visiting employees. In fact, the cost of foreign traveling expenses and visa expenses of the visiting employees was to be borne by M/s SF Inc. USA, as during the foreign visits by the assessee’s employees, they were basically rending services to M/s SF Inc. USA and not to the assessee company. Thus, the copy of communication is respect of the employees is no way challenges the arguments taken by the AO for disallowing the expenses.

2.7

The assessee had also furnished sample invoices raised to customers Second foundation Inc and Fidelity Information Services, LLC. The assessee had once again tried to establish that the persons had actually travelled abroad to work on the projects. These invoices in description of charges only mentions month-wise software development charges. No segregation whatsoever is provided with regard to foreign travelling expenses. Further, the main question is not whether the person had travelled abroad or not. The main issue at hand is whether the expenses were allowable in the business of the assessee. The invoices also do not establish that the expense was an allowable expense.

2.8

The assessee has mentioned in its reply dated 11.12.2019 that the issue of allowability of foreign travelling expenses has been decided by the Hon’ble ITAT in favour of assessee for the AY 2011-12 and 2012-13 and further, for the AY 2014-15 the Ld. CIT(A) has allowed this issue in favour of the assessee. In this regard, it is pertinent to mention that the department has not accepted the decision of the Hon’ble ITAT for the AY 2011-12 and 2012-13 but further appeals u/s 260A were not filed due to tax effect being less than monetary limits prescribed. Further, it is worthwhile to mention here that the Ld. CIT(A) in the case of the assessee for the A.Y. 2014-15 has deleted the addition made on the issue of foreign travelling expenses by simply relying upon the order of Hon’ble ITAT in the case of the assessee for the A.Y. 2011-12 & 2012-13. The said order of the Ld. CIT(A) has not been found acceptable and the department has filed further appeal which is pending for adjudication before the Hon’ble ITAT.

2.9

Keeping in view above and in the facts and circumstance in the case, it is found that the expenditure on account of foreign travelling of Rs. 13,73,32,347/-for A.Y. 2016-17 is not allowable to the assessee and therefore an amount of Rs. 13,73,32,347/-is proposed to be added to the returned income of the assessee. I am satisfied that the case of the assessee is fit for initiating penalty u/s 271(1)(c) for furnishing inaccurate particulars of income.

3. Computation of Income

3.1

With these comments, the total income of the assessee is computed as under:-

Particulars	Amount Rs.
Profits and gains from the business	Rs.62,14,07,780/-
Add: Addition on account of foreign travelling expenses as discussed in Para 2.9 above	Rs. 13,73,32,347/-
Total Assessed Income	Rs. 75,87,40,127/-

3.2

Since this is a draft order u/s 144C(1) r.w.s. 143(3) of the Income Tax Act, 1961, no demand notice, penalty notice u/s 271(1)(c) of the Act, interest u/s 234A, 234B and 234C of the act or challan is being issued to the assessee company. As per provision of section 144C(2) of the Act, the assessee company is given period of 30 days from the receipt of this draft order to file its acceptance or objections of the variations made in the draft assessment order.”

“143(3) On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such order evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him on the basis of such assessment.”

“2.9

Keeping in view above and in the facts and circumstance in the case, it is found that the expenditure on account of foreign travelling of Rs. 13,73,32,347/-for A.Y. 2016-17 is not allowable to the assessee and therefore an amount of Rs. 13,73,32,347/-is proposed to be added to the returned income of the assessee. I am satisfied that the case of the assessee is fit for initiating penalty u/s 271(1)(c) for furnishing inaccurate particulars of income.

3.

xxxx xxxx xxxx xxxx

3.1

xxxx xxxx xxxx xxxx

3.2

Since this is a draft order u/s 144C(1) r.w.s. 143(3) of the Income Tax Act, 1961, no demand notice, penalty notice u/s 271(1)(c) of the Act, interest u/s 234A, 234B and 234C of the act or challan is being issued to the assessee company. As per provision of section 144C(2) of the Act, the assessee company is given period of 30 days from the receipt of this draft order to file its acceptance or objections of the variations made in the draft assessment order.” (emphasis supplied)

“12.

First of all, the petitioner is admittedly not a foreign company. Secondly, the Transfer Pricing Officer has not proposed any variation to the return filed by the petitioner. The consequence of this is that the Assessing Officer cannot propose an order of assessment that is at variance in the income or loss return. The Transfer Pricing Officer has accepted the return filed by the petitioner. In view of which, neither of the two conditions are satisfied in the case of the petitioner and thus the petitioner for the purposes of section 144C(15)(b) is not an "eligible assessee". Since the petitioner is not an eligible assessee in terms of section 144C(15)(b), no draft order can be passed in the case of the petitioner under section 144C(1). (emphasis supplied)

“8.

From the above, it is clear that for assessment year relevant for our purposes, on account of procedure undertaken in section 92CA of the Act, there was no variation in the income by virtue of order of Transfer Pricing Officer. That being the position, the petition cannot be stated to be an eligible assessee as defined in clause(b) of sub-section (15) of section 144C of the Act. Procedure for issuance of draft order calling for his objection and taking further steps as laid down under section 144C therefore, would not apply.” (emphasis supplied)

6.

In the facts of the present case, it is not in dispute that the petitioner is not a non-resident or a foreign company as contemplated under section 144C(15)(b)(ii). The question is whether the petitioner would fall within the definition of “eligible assessee” as contemplated under section 144C(15)(b)(i). On a plain reading of the said provision, the petitioner can be stated to be an “eligible assessee” only if there is a case of variation referred to in the said sub-section (1) and which arises as a consequence of the order passed by the Transfer Pricing Officer under sub-section (3) of section 92CA. In the facts of the present case, it is an admitted position that there was no variation in the income of the petitioner by virtue of the order of the Transfer Pricing Officer. That being the position, the petitioner cannot be stated to be an “eligible assessee” as defined in clause (b) of sub-section (15) of section 144C of the Income-tax Act. Once this is the case, the entire procedure for issuance of a draft order calling for the petitioner's objections thereon and taking further steps as laid down under section 144C would, therefore, not apply.

7.

xxxx xxxx xxxx xxxx

8.

xxxx xxxx xxxx xxxx

9.

xxxx xxxx xxxx xxxx

10.

In view of the above discussion, it is clear that the petitioner in the present case, not being an “eligible assessee” in terms of section 144C(15)(b) of the Income-tax Act, the Assessing Officer was not competent to pass the draft assessment order under section 144C(1) of the Income-tax Act. Consequently, there was no occasion for him to thereafter pass a final assessment order under section 143(3) read with section 144C(3) read with section 144B of the Income-tax Act. Accordingly, the draft assessment order dated March 8, 2025; the final assessment order dated April 7, 2025 and the demand notice dated April 7, 2025 as well as the show-cause notices dated April 7, 2025 seeking to impose penalty, are all hereby quashed and set aside.” (emphasis supplied)