9911796707
TMI Blog2016 (2) TMI 1171X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant : Sh.Vijay Iyer, CA and Sh. Sandeep Karhail, Adv. For The Respondent : Sh.Amrendra Kumar, CIT DR ORDER PER DIVA SINGH, JM The present appeal has been filed by the assessee assailing the correctness of the of the order dated 26.10.2012 passed by the AO pursuant to the directions of the Dispute Resolution Panel (hereinafter referred to as DRP ) 143(3) r.w.s 144C of the Income Tax Act, 1961 on the following grounds:- 1. That on facts and in law, the order passed by the Deputy Commissioner of Income Tax, Circle 6(1), New Delhi ('AO') under section 143(3) read with section 144C of the Income Tax Act, 1961 ( the Act') [after considering the adjustments proposed by the Additional Commissioner of Income Tax, Transfer Pricing-1 (3) ('TPO') in his order passed under section 92CA(3) of the Act], on the directions of the Hon'ble Dispute Resolution Panel ('DRP') is bad in law in as much as failed to appreciate the facts involved and the applicable law thereon. Part I - Transfer Pricing Grounds 2. That on facts and in law, the DRP has erred in confirming that TPO has discharged his statutory onus by establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted the Indian transfer pricing regulations, OECD guidelines on transfer pricing and judicial precedence. 3.6 That on facts and in law, the DRP and TPO/AO have erred by incorrectly computing the operating margins of the companies selected as comparable by the learned TPO. 3.7 That on facts and in law, the TPO I AO has erred in not rejecting TSR Darashaw Ltd. despite the specific directions of the DRP. 3.8 That on facts and in law, the TPO I AO has erred in not accepting ICRA Management Consulting Services Ltd in the set of comparable companies despite the specific directions of the DRP. 4. That on facts and in law, the Hon'ble DRP and Ld. TPOI AO have erred by not providing the benefit envisaged under section 92C(2) of the Act. Part - Corporate Tax Grounds 5. That on the facts and circumstances of the case and in law, the DRP and AO have erred both in facts and law by disallowing 50% of running and maintenance expenditure amounting to ₹ 1,51,00,500 with respect to the vehicles that were used for the purpose of the business of the Appellant. 6. That on the facts and circumstances of the case and in law, the DRP and AO have er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or all times to come. It was his submission that since in the year under consideration there is no impact consequently this position has been taken keeping the issue open for subsequent years. 4. Addressing the issue in the year under consideration it was submitted that out of the five comparables considered by the TPO, the assessee is aggrieved by the three comparables taken by the TPO. Relying upon the past decisions of the ITAT in assessee s own case, it was submitted that each of these comparables was considered by the ITAT as functionally incomparable and in the absence of any change in material facts relying upon the precedent in assessee s own case it was his submission that the three specific comparables taken by the TPO may be directed to be excluded. 4.1. For ready-reference, the comparables taken into consideration by the TPO are extracted hereunder from the synopsis filed:- IDC India Limited; ICRA Management Consulting Services Ltd; Vimta Labs Limited; Water and Power Consultancy Services India Limited; TCE Consulting Engineers Limited. (the grievance is posed to the last three comparables) 4.2. It was submitted that the ITAT in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 2007-08 assessment year. Accordingly it was his submission that the department would now be precluded from taking a contrary view. 5. The Ld. CIT DR, Mr. Amrender Kumar considering the background of the case wherein despite filing an appeal before the Hon ble High Court in 2006-07, the Revenue did not agitate the issue of exclusion of these specific comparables placed reliance upon the assessment order. 6. The record would show that the assessee company was incorporated on 22.07.1988 and as per record is stated to be primarily engaged in providing marketing support services to its Associated Enterprises (hereinafter referred to as AE ) in respect of the sale of Microsoft softwares in India. The company also provides the following services to independent customers in India:- Consultancy services in supporting the development of client server applications; Assist customers in the successful development of Microsoft technology, both directly and through service providers; and Provide training through authorized training centres to assist customers in the operation of Microsoft software. 6.1. The assessee in the year under consideration returned an income on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benchmarking of the international transactions for provision of marketing support service which is the subject matter of dispute in the present proceedings. Return on total operating cost was taken as a Profit Level Indicator (hereinafter referred to as PLI ). Operating Profit to Total Cost (hereinafter referred to as OP/TC ) margins revised by the assessee for MSS was disclosed at 16.17%. 6.5. The TPO carrying out the FAR analysis was of the view that the assessee was providing high end services to its AE. The documentation as presented by the assessee was considered by him in the following manner:- 6.1. As per the TP documentation submitted by the assessee, Microsoft India Provides Marketing Support Services with respect to creation of local marketing material, creation and execution of local marketing and advertising campaigns, public relation activities, market research and antipiracy campaigns. The responsibility of the overseas entity pertains to the approval of the budgets and it does not cover actual conduct and supervision of these services. As per the TP report, Part-3, states that Microsoft India provides marketing support to its group companies. These s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables as 7.90% on operating cost was at arm s length. Rejecting the three years data and taking into consideration the past position taken by the Revenue. 6.8. The TPO qua the specific comparables under consideration rejected the assessee s prayer. The general reasons for rejecting the arguments for all the comparables was as under:- 10. Selection of final set of comparables The above stated reply of the assessee has been considered in detail. However, there is no merit in the contentions of the assessee as all the afore-mentioned companies are engaged in providing consulting and support services like the assessee. The assessee is also providing high end marketing services and accordingly the companies selected also need to be performing similar high level activities. The findings in case of each comparables is given below. 6.9. Qua the specific comparable WAPCOS he rejected the arguments advanced by the assessee on the following reasoning:- 10.1. WAPCOS LTD.-The assessee has itself used this comparable during AY 2002-03, AY 2003-04, AY 2004- 05 while selecting the comparable for AY 2002-03, the assessee in its TP report had noted the said company performed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent functions. Therefore the company is considered as a comparable and is being taken this year also. 6.11. Similarly for retaining Vimta Lab Limited its inclusion was justified over ruling the opposition posed by the assessee on the following grounds:- 10.5. Vimta Labs Ltd. The reply of the assessee regarding use of this comparable has been considered Vimta Labs has been used as a comparable to the assessee by the TPO every year since AY 2002-03. Vimta Labs is in a similar service providing industry as that of the assessee. It provides high end services in the sectors of food and drugs analysis, clinical reference lab services, clinical trials and environmental assessment. The plea of the assessee that Vimta Labs employs skilled workforce in terms of PHDs and scientist and is hence performing high end services is true but at the same time the assessee is also employing highly skilled technical workforce for selling highly sophisticated and complex technological products. The assessee is also engaged in provision of high end services and creation of marketing intangibles. Therefore, based on the above, and for reasons as recorded in all of the previous four AYs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le presumption that facts are same as last year. Hence TPO is directed to include all the comparables in last year as accepted by the DRP. 8. On a reading of the above, it is borne out that both the TPO as well as the DRP were consistently of the view that facts and circumstances on the issues remained identical to the facts as considered in the earlier years. This fact is also borne out from the order of the Co-ordinate Bench dated 18.12.2014 in ITA No.5855/Del/2010 for 2006-07 assessment year wherein the discussion on this specific segment is available in paras 12, 13 14 and is extracted hereunder:- 12. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the assessee benchmarked the international transaction of Provision of marketing support services by selecting TNMM, which has also been accepted by the TPO as the most appropriate method. The change of benchmarking done by the TPO of the comparables on the basis of single year data instead of multiple year data, has also not been assailed by the assessee. In fact, no other aspect of the TP adjustment has been challenged except the determination of P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation, USA is also that of marketing research and development. Thus, it can be seen that the assessee is basically engaged in creating awareness of Microsoft products amongst existing and potential users of Microsoft products in India through seminars, conferences, advertisement in public media and promotional campaigns. All the expenses incurred by the assessee on such sales promotion activities have been completely reimbursed to the assessee with a mark-up of 15% by Singapore AE. Even though some marketing intangibles get created by the assessee s spending on advertisement and marketing expenses, such intangibles belong to its AEs because the assessee is not indulging in any sale or purchase activities of Microsoft products at its own. 14. The TPO has referred to certain clippings, mostly relating to the period of October/November, 2008 to bring home his point that the assessee is providing high-end marketing services after identifying the customers and its job is not simply to create market awareness by performing a low-end non-complex function. This, in the opinion of the TPO, is done by the launching of the products with big advertisement campaigns, customer interfa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so directed to be expelled from the list of comparables. (iv) WAPCOS: 18.1. This company was considered by the TPO as comparable on the same reasons, being, the assessee s inclusion of this company in the list of comparables for the AYs 2002-03 and 2003-04. 18.2. We find that this company operates in two segments, namely, Consultancy engineering projects and Lumpsum turnkey projects. This company provides consultancy services, such as, pre-feasibility report of hydroelectric projects, field investigation drilling of tube wells, etc. From the above description of the nature of activities performed by this company, it can be seen that the same is engaged in providing engineering and consultancy services, which can be of no match to the assessee s marketing support services. This company is also directed to be excluded from the list of comparables. (v) Vimta Labs Ltd.: 19.1. The TPO included this company in the list of comparables by noticing that it has been so used as comparable to the assessee by the TPO since the AY 2002-03. He further supported his finding by noticing that this company was providing similar services as provided by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 the nature of business totally alien to that of the assessee, cannot be considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered the issue in the following manner:- 4.14. Ground No.11: It is reported that disallowance of 50% car running expenses have been made in the past assessment years also and the matter is now before the ITAT. As the matter has not yet reached finality, the DRP declines to interfere with the AO s order and, therefore, for statistical purposes the disallowance of the AO is upheld. (emphasis provided) 11.1. It is seen that the Co-ordinate Bench in ITA No.5855/Del/2010 vide its order dated 18.12.2014 in 2006-07 assessment year discussed the issue in para 7 8 and allowed the same in favour of the assessee as would be evident from the following extract of the said order:- 7. Ground No.5 is against the disallowance of ₹ 78,25,822/- towards running and maintenance expenses of the vehicles used by the employees of the assessee company. The AO, following the direction of the Dispute Resolution Panel (DRP), held that 50% of running and maintenance expenses of the vehicles were to be disallowed for non-business purpose. 8. After considering the rival submissions and perusing the relevant material on record, we find that this issue is squarely covered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 11.3.The issue it is seen was agitated by the Revenue before the Hon ble High Court in 2006-07 assessment year and has held as under:- IN THE HIGH COURT OF DELHI AT NEW DELHI ITA 504/2015 PR.COMMISSIONER OF INCOME TAX-6........Appellant Through: Mr.Kamal Sawhney, Senior Standing Counsel with Mr.Shikhar Garg, Advocate. Versus MICROSOFT CORPORATION PVT.LTD...........Respondent Through CORAM DR.JUSTICE S.MURALIDHAR MR.JUSTICE VIBHU BAKHRU ORDER 12.10.2015 1. This appeal by the Revenue is against the order dated 18th December 2014 passed by the Income ..... 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