Trading and Support Go Hand-in-Hand: ITAT Rules in Favour of Juniper India: Transfer Pricing dispute
In a recent ruling that underscores the importance of substance over form in transfer pricing, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) quashed a transfer pricing adjustment made against Juniper Networks Solution India Pvt Ltd for AY 2020–21. The Tribunal held that the company’s trading and after-sales services were too closely linked to be split into separate segments. This decision offers valuable clarity on how businesses should approach benchmarking international transactions under the Income Tax Act, especially when using the Transactional Net Margin Method (TNMM).
Background: Trading Plus Services, Treated as One
Juniper Networks India functions primarily as a limited risk distributor, importing and selling networking equipment like routers and switches sourced from its overseas associated enterprises (AEs). Alongside product sales, it also offers after-sales service and customer support to Indian clients.
For transfer pricing compliance, Juniper applied TNMM at the entity level, combining its trading and service activities into a single, unified business segment.
What the Tax Department Did Differently
The Transfer Pricing Officer (TPO) wasn’t convinced. Instead of accepting the entity-wide benchmarking, he split Juniper’s business into two distinct parts:
• Trading segment: Distribution of networking products
• Service segment: Customer support and after-sales services
Based on a revenue ratio, the TPO allocated costs between the two and made a transfer pricing adjustment—but only for the trading segment. This approach lacked any in-depth functional analysis, which became the crux of the dispute.
Tribunal’s View: Interdependence Is Key
The ITAT didn’t mince words. It observed that Juniper’s trading and service functions were inherently interlinked. In fact, many service activities were carried out in collaboration with the AEs, and the services themselves stemmed directly from product sales.
Calling it a “chicken-and-egg” situation, the Tribunal noted that neither segment could exist without the other. Just because a separate service team exists doesn’t mean there’s a standalone business segment.
On Segmentation: Not Just a Numbers Game
Even if segmentation was to be considered, the Tribunal ruled that it couldn’t be done arbitrarily using revenue-based splits. Instead, a proper functional analysis—including how resources like manpower and overheads are actually used—should guide any such division.
In Juniper’s case, the revenue recognition policy itself showed how deeply intertwined the two functions were, further weakening the Revenue’s argument.
Final Ruling: Adjustment Set Aside
The ITAT concluded that the TPO’s segmentation lacked analytical depth and was not backed by business realities. As a result, the transfer pricing adjustment was struck down, and the company’s entity-level TNMM benchmarking was upheld.
Key Takeaways for Taxpayers and Professionals
• Integrated business functions should be benchmarked together: When trading and support services go hand in hand, separating them just for transfer pricing adjustments won’t hold water.
• Substance over superficial segmentation: Revenue-based cost allocations, without a solid functional rationale, are likely to be challenged.
• Proper documentation is critical: Chartered Accountants and tax advisors should ensure that TP documentation clearly captures the economic interdependence of functions.
• Beware of arbitrary reassessments: This ruling also offers a cautionary note for cases involving reassessment notices under Section 148—such artificial segmentation could lead to prolonged litigation.
The copy of the order is as under:
