Income Tax Appellate Tribunal - Delhi
Microsoft Corporation India Pvt. Ltd., ... vs Assessee on 30 June, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM
ITA No.5766/Del/2011
Assessment Year : 2007-08
Microsoft Corporation India Vs. DCIT,
Pvt. Ltd., Circle 6(1),
807, Barakhamba Road, New Delhi.
New Delhi House,
New Delhi - 110 001.
PAN : AAACM5586C
(Appellant) (Respondent)
Assessee by : Shri Nageshwar Rao, Advocate
Department by : Shri Bhaskar Goswami, Sr. DR
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee emanates from the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act') on 24.10.2011 in relation to the assessment year 2007-08.
ITA No.5766/Del/2011
2. The first effective issue raised in this appeal is against the disallowance of depreciation on ITG Networking equipments by Rs.1,20,89,521 by reducing the rate of depreciation from 60% claimed by the assessee to 25%.
3. We have heard the rival submissions and perused the relevant material on record. It is noticed that similar issue came up for consideration before the Tribunal in the assessee's own case for the immediately preceding assessment year, i.e., 2006-07. Vide its order dated 18.12.2014 in ITA No.5855/Del/2010, the Tribunal has accepted the applicability of higher rate of depreciation by relying on the Special Bench order passed in the case DCIT vs. Data Craft India Ltd. (2010) 133 TTJ (Mum) (SB) 377. The Hon'ble Delhi High Court in the case CIT vs. BSES Yamuna Powers Ltd. 2010-TIOL-636-HC-DEL-IT has approved similar view by holding that depreciation on computer peripherals should be allowed at 60% instead of the regular rate of depreciation applicable to machinery. No distinguishing feature was pointed out by the ld. DR in the facts of the instant year vis-à-vis the preceding year. In view of the aforediscussed legal position, we decide this issue in favor of the assessee. 2 ITA No.5766/Del/2011
4. The next issue is against the disallowance of depreciation on company owned vehicles amounting to Rs.1,85,45,102/-.
5. After considering the rival submissions and perusing the relevant material on record, we find it as an undisputed fact that the company provided vehicles to its employees for their use for which the purchase price was paid by the company to the extent it did not exceed the fixed benchmark. The major reason given by the AO for disallowing depreciation is the personal use of vehicles by the employees of the company. The Delhi Bench of the Tribunal in DCIT vs. Haryana Oxygen Ltd. (2001) 76 ITD 32 (Del) has held that the use of cars by directors- employees of a company cannot be characterized as user for non-business purpose and, hence, no part of such car expenses can be disallowed. The Hon'ble Gujarat High Court in Sayaji Iron and Engineering Company vs. CIT (2002) 253 ITR 749 (Guj) has held that once the directors of the assessee company are entitled to use the vehicles of the company for personal use as per the terms and conditions of their appointment, it cannot be said that there was a personal use of cars. The Hon'ble High Court further held that such user of vehicles by the employees of the company 3 ITA No.5766/Del/2011 cannot even be considered as 'non-business user". There are innumerable judgments on this point holding that there can be no disallowance of depreciation or other expenses on maintenance of the vehicles used by the directors/employees by treating it as personal user or non-business user of the company. We fail to see any rationale in treating the amount of depreciation on cars as for personal use, when admittedly these have been provided to employees. A company is a separate legal entity distinct from its directors or employees. As such, there can be no question of treating the use of vehicles by the directors/employees as a personal use by the company. Similar issue has also been decided by the Tribunal in the assessee's own case for the preceding year in its favour. The relevant discussion has been made in paras 5 and 6 of the Tribunal order. We, therefore, order for the deletion of disallowance of depreciation on such vehicles.
6. The next issue is the disallowance of Rs.1,28,88,973/- towards running and maintenance expenses of the vehicles used by the employees of the assessee company. The AO, following the direction of the Dispute 4 ITA No.5766/Del/2011 Resolution Panel (DRP), held that 50% of running and maintenance expenses of the vehicles were to be disallowed for non-business purpose.
7. After considering the rival submissions and perusing the relevant material on record, we find that this issue is squarely covered by the above referred judgment of the Hon'ble Gujarat High Court and the Tribunal order passed by the Delhi Bench. The analogy which applies for not making any disallowance on account of depreciation for personal or non- business use, equally applies for not making any disallowance on account of running and maintenance expenses of the vehicles used by the employees of the company. Similar view has been taken by the tribunal in assessee's own case for the preceding year. Following the same, we, order for the deletion of the addition.
8. Ground No. 7 is against not following the direction of the DRP about charging of interest u/s 234A.
9. Having heard both the sides and perused the relevant material on record, we find that the DRP dealt with the issue of charging of interest u/s 234A in para 3.14 of its direction and made the following observations:- 5 ITA No.5766/Del/2011
"The CBDT had in order u/s 119 issued in file number 225/13/2007 in LTA-II (pt) had extended the last date for filing the return to 15.11.2007 and assessee filed it on 13.11.2007. The AO is directed to verify the facts and take action as per facts as record and as per law."
10. It is an admitted position that the AO passed the final order without complying with the above direction given by the DRP in the context of charging interest u/s 234A. Under such circumstances, we set aside the assessment order on this issue and direct the AO to comply with the direction given by the DRP. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in this regard.
11. The next issue agitated in this appeal is against the addition amounting to Rs.43,28,67,761/- made by the AO on account of transfer pricing adjustment.
12. Briefly stated, the facts of the case are that the assessee was incorporated as a private company in India in July, 1988. It was converted into a wholly owned subsidiary of MS Corp in January, 1996. The assessee is engaged in providing services in supporting development of client server applications to assist customers in the successful development 6 ITA No.5766/Del/2011 of Microsoft Technology, both directly and through service providers and providing training through various training centres to assist customers in the operation of Microsoft licensed software. The assessee reported five international transactions in Form No. 3CEB which include 'Provision of marketing support services' with the transacted value of Rs.549,96,89,240/-. Apart from that, the assessee also reported international transaction of 'Provision of product support services' and 'Provision of Microsoft Consulting Solutions Services', etc. The assessee adopted the Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking its international transactions. The entire controversy in the present appeal rotates around the determination of the arm's length price of the international transaction of 'Provision of marketing support services.' With the help of certain comparables chosen, the assessee tried to demonstrate that this international transaction was at arm's length price (ALP). For proving this, the assessee adopted Profit level indicator (PLI) of Operating Profit to Total Cost (OP/TC). On a reference made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO), the latter shortlisted nine comparables with their average 7 ITA No.5766/Del/2011 OP/TC at 25.32%. By applying this benchmark, the TPO proposed transfer pricing adjustment in respect of 'Provision of marketing support services' to the tune of Rs.73,21,02,823/-. The assessee approached the Dispute Resolution Panel (DRP) on various aspects of the determination of ALP of this transaction. The DRP concurred with some of the points raised by the assessee. Certain directions were issued to the TPO, who vide his order dated 21.10.2011, giving effect to the directions rendered by the DRP, shortlisted the following six companies as comparables:-
S. Name of the company WC Adjusted OP/
No. OC-After DRP
Directions
1. IDC India Limited 13.94%
2. TSR Darashaw (Segmental) 33.90%
3. TCF Consulting Engineers Ltd. 18.04%
4. Vimta Labs Ltd. 26.34%
5. Water & Power Consultancy 32.92%
Services (India) Ltd. (WAPCOS)
6. ICRA Management Consulting 8.83%
Services Ltd.
Arithmetic Mean 22.33%
13. With the reduced OP/TC of the average of the above mentioned six comparables at 22.33%, the amount of transfer pricing adjustment was 8 ITA No.5766/Del/2011 slashed down to Rs.43,28,67,764/-. The AO made the above addition in the impugned order. The assessee is aggrieved against such addition on account of transfer pricing adjustment so made in the final assessment order.
14. We have heard the rival submissions and perused the relevant material on record. The controversy before us relates to the determination of ALP of the international transaction of 'Provision of marketing support services.' At this juncture, we want to record that the assessee adopted TNMM as the most appropriate method for determining the ALP of this international transaction, which method has been approved by the TPO. The assessee has not objected to any other aspect of the determination of ALP by the TPO in his final order giving effect to the directions given by the DRP, except for the inclusion of the following four companies:-
S.No. Name of the company WC Adjusted
OP/ OC-After
DRP Directions
1. TSR Darashaw (Segmental) 33.90%
2. TCF Consulting Engineers Ltd. 18.04%
3. Vimta Labs Ltd. 26.34%
4. Water & Power Consultancy 32.92%
Services (India) Ltd. (WAPCOS)
9
ITA No.5766/Del/2011
15. Before examining the comparability of the above four companies, it is essential to consider the functional profile of the assessee under this transaction. The assessee provided Marketing support services to MS Corp and affiliate entities in return for service fees. The assessee did not undertake sale of Microsoft software, but, only created awareness and promoted sale of Microsoft products in India. The 'Marketing support services' undertaken by the assessee include : Expanding the markets for Microsoft retain products in India through local print electronic advertising, promotional campaigns, anti-piracy drives, etc; and Performing other activities which includes: i. Dissemination of information to potential customers; ii. Commenting on any development in the territory affecting the industry in which MCIPL functions; iii. Investigating feasibility of new markets for Microsoft retain products and basic market research; and iv. Provide miscellaneous marketing support. Reversing the order of the TPO, the DRP did not find the assessee to have provided any high-end niche services and resultantly, the objection so raised by the assessee was accepted through para 3.3 of its direction. It can be observed from the TPO's order that the assessee provided these services under the 10 ITA No.5766/Del/2011 Master Service Agreement with Microsoft Corporation. This Agreement was executed on 1.7.2003. This discerns that the nature of marketing support services rendered by the assessee during the year under consideration are similar to those of the preceding year as both the years are governed by the same Master Service Agreement dated 1.7.2003. It is observed that transfer pricing adjustment of such international transaction was made by the authorities below for the immediately preceding assessment year 2006-07 also. The addition on account of such adjustment was challenged by the assessee before the Tribunal, which has since been disposed of by the Tribunal vide its order dated 18th December, 2014. A detailed description of the nature of provision of marketing support services has been set out in paras 13 and 14 of the above referred order of the tribunal, which is adopted for the purposes of the instant year as well without burdening this order with the repetition of the same. The ld. DR was also fair enough to admit that there is no difference in the nature of marketing support services provided by the assessee during the instant year as well as the preceding year. With the above understanding of the nature of marketing support services rendered by the assessee to its AE, we will 11 ITA No.5766/Del/2011 now try to ascertain whether the above referred four companies are, in fact, comparable or not.
i. TSR Darashaw (Segmental)
16. This company was chosen by the assessee as comparable in its transfer pricing study report. The TPO accepted the functional comparability of this segment of the company with the assessee's marketing support services agreement. The ld. AR contended that this company was wrongly included in the list of comparables and the same should be excluded. The ld. DR objected to the exclusion of this company on the ground that since the assessee voluntarily included it in the final set of comparables, now it cannot turn around to contend its incomparability.
17. We are not inclined to uphold the objection taken by the ld. DR on the inclusion of this company as comparable merely on the fact that the assessee treated it as comparable in its TP study report. It goes without saying that there can be no estoppel against correctness. If the assessee inadvertently includes a company in its final set of comparables, which is, in fact, not comparable, he has a right to agitate before the authorities that 12 ITA No.5766/Del/2011 this company may be excluded. This right of the assessee does not, in any manner, prejudice the powers of the authorities to examine the comparability of the company which is sought to be excluded. If, on making such an analysis, the authorities find that the company so agitated as functionally incomparable, is comparable, then there can be no reason to exclude the same. If, however, the company turns out to be functionally dissimilar from the assessee, then, there can be no rationale in continuing to treat it as comparable despite the functional variation. The crux is that what really matters is the actual comparability and not the wrong view canvassed by the assessee in the original reporting. What is true for the assessee is equally true for the Revenue as well. The authorities are fully competent to consider the comparability of the companies treated by the assessee as comparable. If the analysis undertaken by the TPO shows that some of the companies so construed by the assessee as comparable are, in fact, not comparable, then, such companies are liable to be excluded. The Special Bench of the Tribunal in the case of DCIT vs. Quark Systems (P) Ltd. (2010) 132 TTJ (Chd) (SB) 1, has held that an assessee is entitled to raise a claim for the first time before the tribunal even through an 13 ITA No.5766/Del/2011 additional ground that a company was wrongly included in the list of comparables. In view of the foregoing discussion, we are of the considered opinion that the objection taken by the ld. DR in outrightly rejecting the assessee's contention, is untenable.
18. Coming to the merits of comparability, we find that this company has three segments, which inter alia include: 'Pay Roll and Trust Fund activity (Pay Roll).' It is this segment which has been considered by the assessee as comparable. This company on an overview is a broking and investment banking house. Its other segments are : 'Registrar and Transfer Agent activity (R&D)' and 'Records management activity (Records).' The segment of 'Pay Roll' was considered by the assessee as comparable in its TP study report and the same is now assailed. Under the 'Pay Roll' segment, this company undertakes pay roll and employee trust fund administration and management. When we compare the nature of pay roll activity undertaken by this company with the marketing support services rendered by the assessee to its AEs, we find that both are way apart from each other. There can be no logical comparison between a specific pay roll services rendered by a company to its clients with the marketing support 14 ITA No.5766/Del/2011 services rendered by the assessee to its AEs. This company is, therefore, directed to be excluded from the final set of comparables. ii. TCE Consulting Engineers Ltd.
19. This company was considered by the TPO as comparable on the strength of his reason of inclusion in the list of comparables for the AYs 2002-03 and 2003-04.
20. We find that this company is engaged in the provision of engineering services, such as, operation and design engineering, upgradation & renovation services, surveys & field investigation services. This company is operating only in one segment, namely, engineering consultancy services. It is axiomatic that there can be no comparison of this company with the assessee's international transaction of rendering marketing support services. The Hon'ble Delhi High Court in CIT VS. Verizon India (P.) Ltd. (2014) 360 ITR 342 (Del) has held that Marketing services provided by companies cannot be compared with Engineering services provided by assessee. This company has also been held by the tribunal to be incomparable in its order for the immediately preceding assessment 15 ITA No.5766/Del/2011 year passed in the case of the assessee itself. As such, this company is also directed to be excluded from the list of comparables.
iii. Vimta Labs Ltd.:
21. The TPO included this company in the set of comparables by noticing that it has been so used as comparable with the assessee since the AY 2002-03. He further supported his finding by noticing that this company was providing similar services as provided by the assessee.
22. We do not find any force in the functional comparability of this company with the assessee. Spectrum of the services rendered by this company covers analytical food and drugs; clinical reference lab services to address the specialties and central lab services for clinical trials; clinical trials phase-I-IV and BA/BE studies; pre-clinical safety assessments; and environmental assessments. A cursory look at the nature of services provided by this company divulges that the same is functionally dissimilar from the assessee. How a company conducting clinical trials on foods and drugs can be considered as comparable with the assessee undertaking marketing support services, is anybody's guess. This company being in 16 ITA No.5766/Del/2011 the nature of business totally alien to that of the assessee, cannot be considered as a comparable. Similar view has been taken by the Tribunal in the case of the assessee for the immediately preceding assessment year. We, therefore, direct the exclusion of this company from the list of comparables.
iv. WAPCOS:
23. This company was considered by the TPO as comparable on the reason of its inclusion in the list of comparables for the AYs 2002-03 and 2003-04.
24. We find that this company operates in two segments, namely, `Consultancy & engineering products' and 'Lumpsum turnkey projects'. It is noticed that the TPO has considered only `Consultancy and engineering products segment' for the purposes of comparison and has not taken into consideration the other segment of `Lumpsom turnkey projects'. The company, under the alleged comparable segment, provides consultancy services, such as, pre-feasibility report of hydroelectric projects, field investigation drilling of tube wells, etc. From the above description of the 17 ITA No.5766/Del/2011 activities performed by the company under this segment, it is vivid that the same is engaged in providing engineering and consultancy services, which can be no match to the assessee's marketing support services. Similar view has been taken by the Tribunal in the case of the assessee for the immediately preceding assessment year. This company is also directed to be excluded from the list of comparables.
25. In view of the foregoing discussion, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of the ALP of the international transaction of 'Provision of marketing support services' in line with our above directions, after allowing a reasonable opportunity of being heard to the assessee.
26. Before parting with this issue, we will like to deal with an argument put forth by the ld. DR. He submitted that the TPO did not properly consider the nature of the `Marketing support services' provided by the assessee and also accepted some companies chosen by the assessee as comparable which were, in fact, not comparable. He invited our attention towards the only remaining two companies in the list of comparables, 18 ITA No.5766/Del/2011 namely, IDC India Ltd., and ICRA Management Consulting Services Ltd. It was stated that these two companies are not comparable with the assessee's marketing support service segment. In the backdrop of the above arguments, it was requested that the entire issue of determination of the ALP of the international transaction of `Provision of marketing services' should be set aside and the matter be remitted to the TPO for a de novo adjudication by considering an altogether fresh set of comparables.
27. We find force in the submission advanced by the ld. DR to the extent of improper examination of the case done by the authorities in not properly appreciating the nature of services performed by the assessee in this international transaction, which led to the acceptance of improper comparables selected by the assessee. It is however, clear from the order of the TPO that he was well aware with a distinct international transaction of provision of marketing support services, which expression has been repeatedly used by him in the order. Thus, it can be seen that after elimination of the above discussed four companies, the only two companies which survive in the list of comparables are IDC Ltd. and ICRA Management Consulting Services Ltd. Annexure III to the TP study report 19 ITA No.5766/Del/2011 indicates the nature of activity carried out by these companies. Page 390 of the paper book gives the nature of business done by IDC India Ltd., as under:-
"IDC (India) Limited is an information technology (IT) research & advisory firm. The company provides business insights to providers, builders and users of information technology. The company is focusing on go-to-marketing (GTM) services as key area of operations. The company earns all its income in the form of research and survey income."
28. As regards ICRA Management Consulting Services Ltd., the assessee's TP study report divulges the nature of activity undertaken by this company as under:-
"ICRA Management Consulting Services Ltd., was incorporated in 2005 with the objective of taking over the entire business of the Management Consulting Division of ICRA Limited. The operations pertaining to the Advisory services division of ICRA Limited during FY 2005-06 have been transferred to ICRA Management Consulting Services Ltd."
29. A careful perusal of the nature of business done by IDC (India) Ltd. transpires that this company is an Information technology research and advisory firm. This company earns all its income in the form of research and survey. We fail to appreciate as to how this company can be 20 ITA No.5766/Del/2011 considered as comparable with the international transaction of `Provision of marketing support services' rendered by the assessee to its AE. Similar is the position regarding ICRA Management Consulting Services Ltd., which is providing 'Advisory services.' In our considered opinion, a company providing advisory services can be no match with a company providing actual marketing support services. Despite this clear mismatch of the functional profile of the assessee's international transaction of `Provision of marketing support services' with the IT research/Advisory services provided by these two companies, we are unable to accept the contention of the ld. DR to order a de novo adjudication. It is patent that the assessee in the instant appeal is aggrieved against the inclusion of the afore discussed four companies from a total set of six companies. It has no issue with the inclusion of IDC Ltd., and ICRA Management Consulting Services Ltd. The Revenue is not in appeal before us. In such circumstances, we are unable to remedy the situation to the advantage of the Revenue inasmuch as it is the TPO who has accepted the comparability of these two companies with the assessee's marketing support services. As such, our hands are tied to hold that the two surviving companies in the 21 ITA No.5766/Del/2011 final list of comparables which are, in fact, not comparable, be also excluded and a fresh determination of the ALP be done. We are, ergo, leaving this issue here only with the hope that a better and more wiser analysis will be done by the TPOs in the days to come.
30. The assessee has raised an additional ground reading as under:-
"That on the facts and in the circumstances of the case, an expense of Rs.207,549 disallowed by the Learned Assessing Officer as prior period expenses should be allowed as an expense in AY 2007-08 since it pertains to the said AY."
31. It is apparent from the text of ground itself that it is a legal ground and does not require any fresh investigation of facts for its determination. This ground is, therefore, admitted for disposal on merits.
32. After considering the rival submissions and perusing the relevant material on record, we find that similar issue cropped up before the Tribunal through additional ground for the AY 2006-07. This has been dealt with by the Tribunal in its order vide paras 9 and 10. The Tribunal has restored the issue to the file of AO with certain directions. Respectfully following the precedent, we direct the AO to decide this issue 22 ITA No.5766/Del/2011 in conformity with the direction given by the Tribunal by its order for the AY 2006-07.
33. In the result, the appeal is partly allowed.
The order pronounced in the open court on 30 .06.2015.
Sd/- Sd/-
[A.T. VARKEY] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 30th June, 2015.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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