M/s. Microsoft Corporation (India) Pvt. Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 5140/DEL/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5351 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2002-2003
• Appeal Filed On: 13-08-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: SANDEEP K KARHAIL S
• Keywords: Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Bad and doubtful debts; Capital expenditure
• Section: 143(3); 234B; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE HONBLE VICE PRESIDENT, SHRI N.K. SAINI AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.5140/DEL./2015 (ASSESSMENT YEAR : 2002--03) M/S. MICROSOFT CORPORATION (INDIA) PRIVATE LTD., VS. ADDL.CIT, RANGE 6, 807, NEW DELHI HOUSE, NEW DELHI. BARAKHAMBA ROAD, NEW DELHI 110 001. (PAN : AAACM5586C) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI NAGESHWAR RAO & SANDEEP K. KARHAIL, ADVOCATES REVENUE BY : SHRI SANJAY I. BARA, CIT DR DATE OF HEARING : 01.11.2018 DATE OF ORDER : 28.01.2019 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. MICROSOFT CORPORATION (INDIA) P RIVATE LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.05.2015 PASSED BY THE LD. CIT (APPEALS)-44, NEW DELHI AO QU A THE ASSESSMENT YEAR 2002-03 ON THE GROUNDS INTER ALIA T HAT :- TRANSFER PRICING GROUNDS 1. THAT ON FACTS AND IN LAW, THE LD. TPO/AO/ CIT(A) HAVE ERRED IN MAKING AN ADJUSTMENT OF INR 88,981,512 TO THE RETURNED ITA NO.5140/DEL/2015 2 INCOME OF THE APPELLANT IN RESPECT OF THE INTERNATI ONAL TRANSACTION PERTAINING TO PROVISION OF MARKETING SU PPORT SERVICES ('IMPUGNED TRANSACTION'). 2. THAT ON FACTS AND IN LAW, THE LD. TPO/ AO/ CIT(A ) HAVE GROSSLY ERRED BY NOT APPRECIATING THE CORRECT FUNCT IONAL PROFILE OF THE APPELLANT AND DRAWING AN ERRONEOUS CONCLUSION T HAT THE APPELLANT IS ENGAGED IN PROVIDING HIGH-END SERVICES AND THEREBY DETERMINING THE ARM'S LENGTH PRICE ('ALP') USING FU NCTIONALLY DISSIMILAR COMPANIES AS COMPARABLES. 3. THAT ON FACTS AND IN LAW, WHILE DETERMINING THE OPERATING MARGIN OF THE TESTED PARTY, THE LD. TPO/ AO/ CIT(A) ERRED BY: O FAILING TO APPRECIATE THAT THE ENTIRE BUSINESS OF T HE APPELLANT IS INTEGRATED AND OVERALL MARGIN OF THE APPELLANT FROM THE BUSINESS AS A WHOLE SHOULD BE CONSIDERED TO ARRIVE AT THE ALP; O FAILING TO CONSIDER THE REVISED SEGMENTAL PROFIT AN D LOSS ACCOUNT SUBMITTED BY THE APPELLANT WHEREIN THE OPER ATING PROFIT MARGINS OF THE APPELLANT FROM PROVISION OF MARKETING SUPPORT SERVICES, MICROSOFT CONSULTING SERVICES ('MCS'), PRODUCT SUPPORT SERVICES ('PSS') WERE BASED ON APPROPRIATE ALLOCATION OF OVERHEADS A MONG THESE SEGMENTS; O TREATING 'SEMINAR & TRAINING FEE' AND 'SOFTWARE CONSULTING INCOME' AS NON-OPERATING ITEMS; O WITHOUT PREJUDICE TO OTHER CONTENTIONS, EVEN IF THE 'SEMINAR & TRAINING FEE' AND 'SOFTWARE CONSULTING INCOME' ARE EXCLUDED AS NON-OPERATING ITEMS WHILE DETERMINING OPERATING PROFITABILITY, FAILING TO EXC LUDE THE RESPECTIVE COSTS INCURRED ON SUCH INCOME THEREBY VIOLATING THE PRINCIPLE OF MATCHING CONCEPT; 4. THAT ON FACTS AND IN LAW, THE LD. TPO/ AO/ CIT(A ) HAVE ERRED BY SELECTING FUNCTIONALLY DISSIMILAR COMPANIE S (INCLUDING CRISIL LIMITED AND ICRA LIMITED) TO THE FINAL SET O F COMPARABLES FOR THE IMPUGNED TRANSACTION AND HAVE T HUS RESORTED TO CHERRY PICKING OF COMPARABLES TO DETERM INE THE ALP FOR THE IMPUGNED TRANSACTION. 5. THAT ON FACTS AND IN LAW, THE LD. TPO/ AO/ CIT(A ) HAVE PASSED AN ORDER WHICH HAS COMPUTATIONAL ERRORS IN T HE MARGIN OF COMPARABLE COMPANIES, USED IN THE DETERMINATION OF THE ALP. ITA NO.5140/DEL/2015 3 6. THAT ON FACTS AND IN LAW, THE LD. AO HAS ERRED I N MAKING A REFERENCE TO THE LD. TPO DESPITE THE ABSENCE OF R EQUISITE PRECONDITIONS BEING MET IN LAW. CORPORATE TAX GROUNDS 7. THAT ON FACTS AND IN LAW, THE LD. AO/ CIT(A) HA VE GROSSLY ERRED BY DENYING THE CLAIM OF DEDUCTION OF BAD DEBT S WRITTEN OFF OF INR 1,399,500 WITH RESPECT TO RECEIVABLE FROM SC HOOL NET INDIA PRIVATE LIMITED. O THAT ON FACTS AND IN LAW, THE LD. AO/ CIT(A) HAVE N OT APPRECIATED THE PROVISIONS OF SECTION 36(1 )(VII) R EAD WITH SECTION 36(2) OF THE ACT WHICH DOES NOT REQUIRE THE APPELLANT TO PROVIDE ANY PROOF FOR THE CLAIM OF DED UCTION FOR BAD DEBTS IN ITS BOOKS OF ACCOUNTS CONSIDERING THE SAME WAS ALREADY OFFERED TO REVENUE IN PREVIOUS YEA R AND SUBSEQUENTLY WRITTEN OFF. 8. THAT ON FACTS AND IN LAW, THE LD. CIT(A) HAS ER RED IN LAW IN CONFIRMING THE DISALLOWANCE OF ADVANCES WRITTEN OFF CLAIMED AS DEDUCTIBLE UNDER SECTION 28 READ WITH SECTION 29 OF THE ACT OF INR 463,506. O THAT THE LD. CIT(A) ERRED ON FACTS AND IN LAW IN NO T APPRECIATING THAT THE AMOUNT SO WRITTEN OFF WAS NON - RECOVERABLE IN NATURE BEING A TRADING LOSS ON A REV ENUE ACCOUNT AND WAS INCIDENTAL TO THE BUSINESS. 9. THAT ON FACTS AND IN LAW, THE LD. CIT(A) HAS ERR ED IN LAW IN CONFIRMING THE DISALLOWANCE OF REGISTRAR OF COMP ANIES (ROC) EXPENSES OF INR 1,500 FOR INCREASE IN ITS PAID UP S HARE CAPITAL BY HOLDING THAT IT IS A CAPITAL EXPENDITURE. 10. THAT ON FACTS AND IN LAW, THE LD. CIT(A) HAS ER RED IN LAW IN CONFIRMING THE DISALLOWANCE OF PROFESSIONAL EXPE NSE OF INR 21,000 RELATED TO COMPLIANCE WITH FOREIGN REGIONAL REGISTRATION OFFICE ('FRRO') REQUIREMENTS IN RESPECT OF MS. MALA MIRCHANDANI (SPOUSE OF MR. SANJAY MIRCHANDANI) AT T HE TIME OF HER EXIT FROM INDIA. O THAT THE LD. CIT(A) HAS ERRED IN UPHOLDING THE LD. AO'S CONTENTION THAT THE EXPENSE OF INR 21,000 IS NOT A BUSINESS EXPENSE SINCE THE IT HAS BEEN INCURRED AFT ER MR. SANJAY MIRCHANDANI CEASED TO BE THE MANAGING DIRECT OR OF THE APPELLANT BEFORE THE START OF THE SUBJECT AS SESSMENT YEAR. 11. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. AO HAS ERRED IN CHARGING INTEREST UNDER SECTION 234B & ITA NO.5140/DEL/2015 4 234D AND INITIATING PENALTY UNDER SECTION 271 (1)(C ) OF THE ACT AS CONSEQUENCES OF THE ADDITIONS MADE IN THE ASSESSMEN T ORDER PASSED U/S 143(3) OF THE ACT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. MICROSOFT CORPORATIO N (INDIA) PRIVATE LTD., THE TAXPAYER IS A WHOLLY OWNED SUBSID IARY OF MICROSOFT CORPORATION, US, WHICH HAS ENTERED INTO S ALES AND MARKETING SUPPORT AGREEMENTS WITH THREE OF ITS ASSO CIATED ENTERPRISES (AES) TO CREATE AWARENESS OF MICROSOFT PRODUCTS IN INDIA THROUGH SEMINARS, CONFERENCES, ADVERTISING IN PUBLIC MEDIA AND PROMOTIONAL CAMPAIGNS. THE MICROSOFT PRODUCTS ARE SOLD IN INDIA THROUGH A NETWORK OF INDEPENDENT THIRD PARTY DISTRIBUTORS VIDE THREE AGREEMENTS WITH ITS AES VIZ. : ( I) MICROSOFT CORPORATION, US IN CONNECTION WITH ITS ONLINE BUSINESS OF MSN; (II) MICROSOFT OPERATIONS PTE LTD., SINGAPORE WIT H REGARD TO SALES TO RETAIL CUSTOMERS; AND (III) MICROSOFT LICENSING, INC. (MSLI) WITH REGAR D TO ORIGINAL EQUIPMENT MANUFACTURER (OEM) CUSTOMERS. 3. THE TAXPAYER HAS ALSO PROVIDED CONSULTATION SERV ICES TO MS CORP., US (TERMED AS GLOBAL MCS DELIVERY) FOR INFRA STRUCTURE AND DEPLOYMENT OF MS SOFTWARE. THE TAXPAYER ALSO PROVI DES PRODUCT SUPPORT SERVICES (PSS) TO THIRD PARTY CUSTOMERS, WH ICH SERVICES ARE PROVIDED FREE OF COST TO RETAIL CUSTOMERS OVER PHON ES, EMAILS, FAX ITA NO.5140/DEL/2015 5 AND VOICE RECORDINGS. PSS SERVICES ARE ALSO PROVID ED TO THIRD PARTY BUSINESS CUSTOMERS, FOR WHICH THE TAXPAYER RECEIVES REMUNERATION. 3. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AES, REPORTED I N FORM NO.3CEB AS UNDER :- S.NO. INTERNATIONAL TRANSACTIONS METHOD VALUE (IN RS.) 1. SERVICE FEE RECEIVED FOR MARKETING SUPPORT SERVICES TNMM 1,038,071,247 2. SERVICE FEE RECEIVED FOR SOFTWARE CONSULTING SERVICES TNMM 112,957,252 4. THE TAXPAYER IN ORDER TO BENCHMARK ITS INTERNATI ONAL TRANSACTIONS QUA MARKETING SUPPORT SERVICES, WHIC H IS IN DISPUTE, APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS T HE MOST APPROPRIATE METHOD (MAM) BY MAKING THE TAXPAYER, TE STED PARTY, WITH OPERATING PROFIT MARGIN ON COST (OP/TC) AS THE PROFIT LEVEL INDICATOR (PLI). THE TAXPAYER HAD CHOSEN FOUR COMP ARABLES HAVING ARITHMETIC MEAN OF 7.02% WITH OPERATING MARGIN OF T AXPAYER ON MARKETING SUPPORT SERVICES AT 11.63% AND FOUND ITS TRANSACTIONS AT ALP. 5. HOWEVER, THE LD. TRANSFER PRICING OFFICER (TPO) PROCEEDED ON THE PREMISE THAT MARKETING SUPPORT SERVICES REND ERED BY THE ASSESSEE ARE NOT AN ORDINARY LOW END SUPPORT SERV ICES AS THE TAXPAYER SERVICES INCLUDE STRATEGIC PLANNING AND BU DGETING FOR ITA NO.5140/DEL/2015 6 MEDIA CAMPAIGNS, WORKSHOP, ETC. ON WHICH SIGNIFICAN T EXPENDITURE IS INCURRED BY THE TAXPAYER. AFTER ADOPTING THE AF ORESAID APPROACH, THE TPO INTRODUCED FOUR NEW COMPANIES AS COMPARABLE S AND COMPUTED THE AVERAGE MARGIN OF COMPARABLE COMPANIES AT 19.56%. TPO HOWEVER AFTER ALLOWING WORKING CAPITAL ADJUSTME NT AND RISK ADJUSTMENT DETERMINED THE ADJUSTMENT OF RS.8,89,81, 512/- ON ACCOUNT OF ALP. 6. THE TAXPAYER CARRIED THE MATTER BY WAY OF FILING OBJECTIONS BEFORE THE LD. CIT (A) WHO HAS PARTLY ALLOWED THE A PPEAL. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIB UNAL BY WAY OF FILING THE PRESENT APPEAL. 7. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 8. UNDISPUTEDLY, THE LD. TPO HAS ACCEPTED THE TNMM AS MAM WITH OP/TC AS PLI. HOWEVER, THE TPO AFTER TREATING THE MARKETING SUPPORT SERVICES NOT AN ORDINARY SUPPORT SERVICES RATHER TREATED THE SAME AS HIGH END SERVICES ON THE GROUND THAT IT ENTAILS STRATEGIC PLANNING AND BUDGETING FOR MEDIA CAMPAIGN , SEMINAR, WORKSHOP, ETC., HAVING TECHNICALLY QUALIFIED ENGINE ERS, CAPABLE ENGINEERS OF HANDLING MARKETING AND TECHNICAL ASSIG NMENT SERVICES, ITA NO.5140/DEL/2015 7 LEADING TO SIGNIFICANT VALUE ADDITION TO THE MARKET ING INTANGIBLES OF THE TAXPAYER IN SOUTH ASIA (SA) REGION DIRECTLY IMP ACTING THE SALES OF MICROSOFT PRODUCTS IN THE SA REGION, BROAD BASED THE LIST OF COMPARABLES BY INTRODUCING FOUR NEW COMPARABLES, FI NALLY CHOSEN 8 COMPARABLES AND COMPUTED THEIR OPERATING MARGIN A S UNDER :- S.NO. NAME OF THE COMPANY ADJUSTED OPERATING PROFIT MARGIN (WEIGHTED AVERAGE FOR 99-00 AND 00-01) 1 CRISIL LTD. 54.42% 2 GILCON PROJECT SERVICES LTD. -.97% 3 ICRA LTD. 52.47% 4 IGE (INDIA) LTD. 5.86% 5 KITCO LTD. .68% 6 NIS SPARTA LTD. 6.29% 7 WATER & POWER CONSULTANCY SERVICES (I) LTD. 11.93% 8 VIMTA LABS LTD. 15.1% ARITHMETIC MEAN 18.22% 9. CONSEQUENTLY, THE TPO DETERMINED THE ALP OF INTE RNATIONAL TRANSACTIONS WITH ITS AE AS UNDER :- NAME OF THE AE VALUE OF THE INTERNATIONAL TRANSACTION ARMS LENGTH PRICE MICROSOFT CORP., US 87,313,635 + 661,604* 95,453,134 MICROSOFT OPERATING PTE LTD., SINGAPORE 914,892,283+6933080* 1,000,180,518 MICROSOFT LICENSING INC., US 35,865,329+270,621* 39,207,506 TOTAL 1,038,071,247+7,866,878 1,134,919,636 10. IN ORDER TO COMPRESS THE CONTROVERSY RAISED BY THE TAXPAYER IN THE PRESENT APPEAL, THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE LD. TPO/CIT (A) HAVE ERRED IN INTRODUCING ICRA LTD. AND CRISIL ITA NO.5140/DEL/2015 8 LTD. AS COMPARABLE FOR BENCHMARKING THE INTERNATION AL TRANSACTIONS WHICH ARE FUNCTIONALLY DISSIMILAR VIS--VIS THE TAX PAYER WHICH WE WOULD DISCUSS GROUND-WISE AS UNDER. GROUND NO.1 11. GROUND NO.1 NEED NO FINDINGS BEING GENERAL IN N ATURE AND HAVING NOT BEEN PRESSED BY THE LD. AR FOR THE TAXPA YER. GROUNDS NO.2, 3 & 4 12. BEFORE EXAMINING THE COMPARABILITY OF ICRA LIMI TED AND CRISIL LTD. VIS--VIS THE TAXPAYER, IT IS IMPERATIV E TO DECIDE THE ISSUE AS TO WHETHER THE ASSESSEE IS A HIGH END MARK ETING SUPPORTING SERVICES PROVIDER AS HAS BEEN HELD BY LD. TPO/CIT ( A) OR LOW END MARKETING SUPPORT SERVICES PROVIDER AS CONTENDED BY THE TAXPAYER. 13. THE LD. AR FOR THE TAXPAYER CONTENDED THAT MAR KETING SUPPORT SERVICES BEING PROVIDED BY THE TAXPAYER HA VE ALREADY BEEN HELD TO BE LOW END SERVICES IN TAXPAYERS OWN CASE BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE SUCCEEDING YEARS CITED AS MICROSOFT CORPORATION INDIA PVT. LTD. VS. DCIT IN I TA NO.5766/DEL/2011 ORDER DATED 30.06.2015 . 14. HOWEVER, ON THE OTHER HAND, THE LD. DR FOR THE REVENUE CONTENDED THAT SINCE THE TAXPAYER HAS BEEN PROVIDIN G MARKETING SUPPORT SERVICES IN HIGH END AREA LIKE IMPARTING TE CHNICAL TRAINING ITA NO.5140/DEL/2015 9 FOR WHICH IT HAS IMPLIED HIGHLY SKILLED MANPOWER, I T CANNOT BE TREATED AS A LOW END MARKETING SUPPORT SERVICES PRO VIDER. THE LD. DR FOR THE REVENUE ALSO REFERRED TO THE TABLE EXTRA CTED BY THE TPO IN PARA 6.2 PAGE 86 OF THE APPEAL FILE WHEREIN PROF ILE OF THE WORK FORCE WORKING WITH THE TAXPAYER HAS BEEN ACCEPTED. 15. BARE PERUSAL OF PARA 15 OF THE ORDER PASSED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2007-08 (SUPRA) SHOWS THAT THIS ISSUE HAS BEEN DECIDED IN F AVOUR OF THE TAXPAYER BY HOLDING THE MARKETING SUPPORT SERVICES BEING PROVIDED BY THE TAXPAYER AS LOW END SERVICES BY RETURNING FOLLOWING FINDINGS:- 15. BEFORE EXAMINING THE COMPARABILITY OF THE ABO VE FOUR COMPANIES, IT IS ESSENTIAL TO CONSIDER THE FUNCTION AL PROFILE OF THE ASSESSEE UNDER THIS TRANSACTION. THE ASSESSEE PROVI DED MARKETING SUPPORT SERVICES TO MS CORP AND AFFILIATE ENTITIES IN RETURN FOR SERVICE FEES. THE ASSESSEE DID NOT UNDERTAKE SALE O F 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 PR INT ELECTRONIC ADVERTISING, PROMOTIONAL CAMPAIGNS, ANTI-PIRACY DRI VES, ETC; AND PERFORMING OTHER ACTIVITIES WHICH INCLUDES: I. DISS EMINATION 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 OBJECT ION SO RAISED BY THE ASSESSEE WAS ACCEPTED THROUGH PARA 3.3 OF IT S DIRECTION. IT CAN BE OBSERVED FROM THE TPOS ORDER THAT THE ASSES SEE PROVIDED THESE SERVICES UNDER THE MASTER SERVICE AGREEMENT W ITH MICROSOFT CORPORATION. THIS AGREEMENT WAS EXECUTED ON 1.7.2003. THIS DISCERNS THAT THE NATURE OF MARKETIN G SUPPORT SERVICES RENDERED BY THE ASSESSEE DURING THE YEAR U NDER ITA NO.5140/DEL/2015 10 CONSIDERATION ARE SIMILAR TO THOSE OF THE PRECEDING YEAR AS BOTH THE YEARS ARE GOVERNED BY THE SAME MASTER SERVICE A GREEMENT DATED 1.7.2003. IT IS OBSERVED THAT TRANSFER PRICIN G ADJUSTMENT OF SUCH INTERNATIONAL TRANSACTION WAS MADE BY THE AUTH ORITIES BELOW FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2006- 07 ALSO. THE ADDITION ON ACCOUNT OF SUCH ADJUSTMENT WAS CHALLENG ED BY THE ASSESSEE BEFORE THE TRIBUNAL, WHICH HAS SINCE BEEN DISPOSED OF BY THE TRIBUNAL VIDE ITS ORDER DATED 18TH DECEMBER, 20 14. 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 PUR POSES OF THE INSTANT YEAR AS WELL WITHOUT BURDENING THIS ORDER W ITH THE REPETITION OF THE SAME. THE LD. DR WAS ALSO FAIR EN OUGH TO ADMIT THAT THERE IS NO DIFFERENCE IN THE NATURE OF MARKET ING SUPPORT SERVICES PROVIDED BY THE ASSESSEE DURING THE INSTAN T YEAR AS WELL AS THE PRECEDING YEAR. WITH THE ABOVE UNDERSTANDING OF THE NATURE OF MARKETING SUPPORT SERVICES RENDERED BY TH E ASSESSEE TO ITS AE, WE WILL NOW TRY TO ASCERTAIN WHETHER THE AB OVE REFERRED FOUR COMPANIES ARE, IN FACT, COMPARABLE OR NOT. 16. MORE SO, IT IS NOT THE CASE OF THE REVENUE THAT THE TAXPAYER HAS UNDERGONE A CHANGE IN ITS BUSINESS MODEL. 17. NATURE OF THE ACTIVITIES BEING PROVIDED BY THE TAXPAYER TO ITS AES UNDER THE SEGMENT PROVISIONS FOR MARKETING SUP PORT SERVICES WAS EXAMINED AT LENGTH IN TAXPAYERS OWN CASE FOR AY 2006-07 IN ITA NO.5855/DEL/2010 ORDER DATED 18.12.2014, COPY AVAILABLE AT PAGES 21 TO 43 OF THE PAPER BOOK VOL. I AND DECIDED IN FAVOUR OF THE TAXPAYER THAT THE TPOS APPROACH THAT, THE ASSESSEE IS NOT ONLY ENGAGED IN DISSEMINATION OF KNOWLEDGE BUT ALSO PROV IDING HIGH END MARKETING SERVICES LEADING TO CREATION OF MARKETING INTANGIBLES FOR ITS AE, IS NOT CORRECT . ITA NO.5140/DEL/2015 11 18. OPERATIVE PART OF THE ORDER PASSED BY THE COORD INATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2006-07 (SUPRA) IS EXTRACTED FOR READY PERUSAL AS UNDER :- 13. BEFORE EMBARKING UPON MAKING AN ANALYSIS OF COMPARABILITY, IT IS SINE QUA NON TO FIRST ASCERTAI N THE CORRECT NATURE OF THE ASSESSEES ACTIVITY UNDER THE SEGMENT OF PROVISION OF MARKETING SUPPORT SERVICES. THE ASSESSEES TRAN SFER PRICING STUDY REPORT INDICATES THAT THE ASSESSEE, A WHOLLY OWNED SUBSIDIARY OF MICROSOFT CORPORATION, PROVIDED MARKE TING SUPPORT SERVICES MAINLY TO MICROSOFT CORPORATION PTE LTD., SINGAPORE AND A SMALL PORTION OF REVENUE AROSE FROM SERVICES REND ERED TO MICROSOFT CORPN., UK. THE ASSESSEE WAS COMPENSATED FOR SUCH SERVICES WITH ACTUAL COSTS INCURRED WITH A MARK-UP OF 15% FOR SERVICES RENDERED TO MICROSOFT CORPORATION PTE LTD. , SINGAPORE AND 10% FOR SERVICES RENDERED TO MICROSOFT CORPN., UK. ALL THE OPERATING EXPENSES, DEPRECIATION, REALIZED FOREIGN EXCHANGE GAIN/LOSS AND BANK CHARGES WERE TAKEN INTO ACCOUNT FOR CALCULATING THE MARKUP. THE TPO HAS REPRODUCED REL EVANT CLAUSES OF THE ASSESSEES AGREEMENT WITH MICROSOFT CORPORATION PTE LTD., SINGAPORE ON PAGE 4 ONWARDS OF HIS ORDER. THIS AGREEMENT STIPULATES THAT THE ASSESSEE SHALL PROVID E PRODUCT SUPPORT SERVICES AND CONSULTING SERVICES FOR THE MI CROSOFT PRODUCTS IN THE DEFINED TERRITORY. CLAUSE 3 OF THE AGREEMENT PROVIDES THAT THE ASSESSEE SHALL HAVE A NON-EXCLUS IVE RIGHT TO MARKET MICROSOFT PRODUCTS IN THE TERRITORY. ITS DU TIES HAVE BEEN SET OUT IN CLAUSE 3.2 BY PROVIDING THAT THE ASSESSE E SHALL USE ITS BEST EFFORTS TO FURTHER THE INTEREST OF MO AND MAXI MIZE THE MARKETS FOR MICORSOFT PRODUCTS IN THE TERRITORY. I T HAS ALSO BEEN PROVIDED THAT THE ASSESSEE IN SOLICITING ORDERS SHA LL ONLY BE AUTHORIZED TO INFORM CUSTOMERS OF PRICE, PAYMENT DE LIVERY AND OTHER TERMS OFFERED BY MO IN ACCORDANCE WITH INFORM ATION RECEIVED FROM MO OR ITS AFFILIATES. IT FURTHER PROV IDES THAT THE ASSESSEE SHALL NOT ENTER INTO ANY AGREEMENTS WITH CUSTOMERS REGARDING MICROSOFT PRODUCTS, BUT SHALL INSTEAD PRO MPTLY SUBMIT WRITTEN CUSTOMER ORDERS TO MO OR ITS AFFILIATES AS APPROPRIATE, FOR ITS ACCEPTANCE OR REJECTION. THE NATURE OF SERVICE S PROVIDED BY THE ASSESSEE TO MICROSOFT CORPORATION, USA IS ALSO THAT OF MARKETING RESEARCH AND DEVELOPMENT. THUS, IT CAN BE SEEN THAT THE ASSESSEE IS BASICALLY ENGAGED IN CREATING AWARE NESS OF MICROSOFT PRODUCTS AMONGST EXISTING AND POTENTIAL U SERS OF MICROSOFT PRODUCTS IN INDIA THROUGH SEMINARS, CONFE RENCES, ADVERTISEMENT IN PUBLIC MEDIA AND PROMOTIONAL CAMPA IGNS. ALL THE EXPENSES INCURRED BY THE ASSESSEE ON SUCH SALES PROMOTION ACTIVITIES HAVE BEEN COMPLETELY REIMBURSED TO THE A SSESSEE WITH A MARK-UP OF 15% BY SINGAPORE AE. EVEN THOUGH SOME MA RKETING INTANGIBLES GET CREATED BY THE ASSESSEES SPENDING ON ITA NO.5140/DEL/2015 12 ADVERTISEMENT AND MARKETING EXPENSES, SUCH INTANGIB LES BELONG TO ITS AES BECAUSE THE ASSESSEE IS NOT INDULGING IN ANY SALE OR PURCHASE ACTIVITIES OF MICROSOFT PRODUCTS AT ITS OW N. 14. THE TPO HAS REFERRED TO CERTAIN CLIPPINGS, MOST LY RELATING TO THE PERIOD OF OCTOBER/NOVEMBER, 2008 TO BRING HO ME HIS POINT THAT THE ASSESSEE IS PROVIDING HIGH-END MARKETING S ERVICES AFTER IDENTIFYING THE CUSTOMERS AND ITS JOB IS NOT SIMPLY TO CREATE MARKET AWARENESS BY PERFORMING A LOW-END NON-COMPLE X FUNCTION. THIS, IN THE OPINION OF THE TPO, IS DONE BY THE LAUNCHING OF THE PRODUCTS WITH BIG ADVERTISEMENT CA MPAIGNS, CUSTOMER INTERFACE AND PROVISION FOR TRAINING AND B ACK-UP FOR USE OF PRODUCTS AND SOFTWARES. IN THIS REGARD, IT I S FIRSTLY RELEVANT TO NOTE THAT WE ARE DEALING WITH THE AY 2006-07 AND THE RELEVANT FINANCIAL YEAR ENDS ON 31.3.2006. ALL THE CLIPPINGS REFERRED TO BY THE TPO RELATE TO SUBSEQUENT YEARS. BE THAT AS IT M AY, IT CAN BE SEEN THAT THE INFERENCE DRAWN BY THE TPO THAT THE A SSESSEE IS NOT ONLY ENGAGED IN THE DISSEMINATION OF INFORMATION, B UT ALSO PROVIDING HIGH-END MARKETING SERVICES LEADING TO CR EATION OF MARKETING INTANGIBLE FOR ITS AE, IS NOT CORRECT. IT CAN BE SEEN FROM THE CLIPPING DATED 24 TH NOVEMBER, ON PAGE 19 OF THE TPOS ORDER THAT MICROSOFT CORPORATION INDIA PTE LTD., AN NOUNCED THE AVAILABILITY OF THE GET GENUINE SOLUTIONS (GGS) FOR WINDOWS, VISTA THROUGH WHICH CUSTOMERS WERE ABLE TO LEGALISE THEIR COUNTERFEIT OR UNLICENSED WINDOWS XP PROFESSIONAL P CS UNDER GGS BY SIMPLY PLACE(ING) AN ORDER WITH THEIR RESEL LER TO LEGALISE THEIR COUNTERFEIT SOFTWARE. FROM THE ABOVE, IT IS CLEAR THAT THE ASSESSEE IS NOWHERE ENGAGED IN THE ACTUAL SELLING O F THE PRODUCTS TO THE CUSTOMERS DIRECTLY. IT IS SIMPLY PROVIDING M ARKETING SUPPORT SERVICES BY CREATING CUSTOMER AWARENESS FOR THE MICROSOFT PRODUCTS AND ALSO IN CERTAIN CASES PROVID ING TRAININGS AND BACK-UPS FOR THE USE OF SUCH PRODUCTS AND SOFTW ARES. WITH THIS BACKGROUND OF THE NATURE OF THE ASSESSEES ACT IVITY UNDER THIS SEGMENT, LET US ANALYSE AS TO WHETHER THE FIVE COMP ANIES CHOSEN BY THE TPO ARE, IN FACT, COMPARABLES. 19. IN VIEW OF THE MATTER, WE ARE OF THE CONSIDERED VIEW THAT SINCE BUSINESS PROFILE OF THE TAXPAYER HAS NOT UNDE RGONE ANY CHANGE DURING THE YEAR UNDER ASSESSMENT, IT IS DIFF ICULT TO AGREE WITH THE CONTENTIONS RAISED BY THE LD. DR, WHO HAS SUPPORTED THE ORDER PASSED BY THE TPO/CIT (A) THAT THE TAXPAYER I S A HIGH END MARKETING SERVICE PROVIDER. MOREOVER, THERE IS NOT AN IOTA OF ITA NO.5140/DEL/2015 13 EVIDENCE THAT THE TAXPAYER IS PROVIDING HIGH END MA RKETING SERVICES LEADING TO THE CREATION OF MARKETING INTANGIBLES FO R ITS AE RATHER IT IS A ROUTINE MARKETING SUPPORT SERVICES PROVIDER BY CREATING CUSTOMER AWARENESS FOR THE MICROSOFT PRODUCTS AND S OMETIMES BY PROVIDING TRAINING AND BACK UP FOR THE USE OF SUCH PRODUCTS AND SOFTWARES. SO, TPO/CIT (A) HAVE ERRED IN TREATING THE TAXPAYER AS HIGH END MARKETING SUPPORT SERVICES PROVIDER IN ORD ER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY ITS AE DURING THE YEAR UNDER ASSESSMENT. 20. IN THE BACKDROP OF THE AFORESAID PROFILE OF THE TAXPAYER, NOW WE WOULD EXAMINE THE COMPARABILITY OF TWO COMPARABL ES VIZ. CRISIL LTD. AND ICRA LTD. VIS--VIS THE TAXPAYER IN ORDER TO BENCHMARK THE TRANSACTIONS ONE BY ONE. CRISIL LIMITED (CRISIL) 21. THIS IS TPOS COMPARABLE WHICH THE TAXPAYER HAS SOUGHT TO EXCLUDE FROM THE FINAL SET OF COMPARABLES ON GROUND OF FUNCTIONAL DISSIMILARITY. THE TAXPAYER HAS PROVIDED NUMBER OF BUSINESS DESCRIPTION OF CRISIL SHOWING ITS PROFILE AS EARNIN G INCOME BY PROVIDING RATING, ADVISORY AND INFORMATION SERVICES . UNDER THE ADVISORY SERVICES SEGMENT, THE COMPANY PROVIDES ECO NOMIC, INFRASTRUCTURE, LNG/GAS AS WELL AS CORPORATE ADVISO RY SERVICES. ITA NO.5140/DEL/2015 14 THE INFORMATION DIVISION UNDERTAKES RESEARCH TO ENA BLE COMPANIES TO EXPLOIT BUSINESS OPPORTUNITIES OPTIMALLY. 22. HOWEVER, THE TPO RETAINED CRISIL AS A COMPARABL E ON THE GROUND THAT CRISIL IS PROVIDING PREMIUM LEVEL SERVI CES AND OPERATING IN SIMILAR FIELD OF CREDIT RATING AND FIN ANCIAL ADVISORY SERVICES TO ITS CLIENTS. 23. IT IS BROUGHT TO OUR NOTICE BY THE LD. AR FOR T HE TAXPAYER IN TABULATED FORM THAT CONTINUOUSLY IN AYS 2007-08 TO 2009-10, CRISIL (ADVISORY AND INFORMATION SEGMENT) HAS BEEN REJECTED BY THE DRP AS A VALID COMPARABLE VIS--VIS THE TAXPAYE R ON THE GROUND THAT, CRISIL IS ENGAGED IN PROVIDING NICHE ADVISORY SERV ICES OF FINANCIAL MARKETS AND AS SUCH FINANCIALLY DIFFERENT . 24. WHEN THE TAXPAYER IS PROVED TO HAVE PROVIDED SI MILAR MARKETING SUPPORT SERVICES TO ITS AE AS IT HAS PROV IDED IN AYS 2007-08 TO 2009-10, NO COGENT REASON HAS BEEN BROUG HT ON RECORD BY THE TPO/CIT (A) TO DEPART FROM THE CONSISTENT VI EW TAKEN IN THE SUCCEEDING YEARS. MOREOVER, THE COMPANY PROVIDING ADVISORY SERVICES CANNOT BE COMPARED WITH THE TAXPAYER WHO I S INTO PROVIDING ROUTINE MARKETING SUPPORT SERVICES TO ITS AES. 25. MOREOVER, AUDITED FINANCIAL OF CRISIL, AVAILABL E AT PAGE 426 OF THE PAPER BOOK (ANNUAL REPORT), SHOWS THAT 7 4% OF ITS INCOME IS FROM RATING SERVICES. RATING SERVICES HA VE BEEN ITA NO.5140/DEL/2015 15 EXPLAINED IN THE ANNUAL REPORT, AVAILABLE AT PAGE 4 11 OF THE PAPER BOOK, AS UNDER :- SOME LANDMARKS ACHIEVED BY THE RATINGS DIVISION IN 2001-02 ARE HIGHLIGHTED BELOW : GRADING OF HEALTHCARE INSTITUTIONS LAUNCHED WITH TH E ANNOUNCEMENT OF GRADES ASSIGNED TO THREE HOSPITALS INTRODUCTION OF A NEW RATING SYMBOL (WITH R SUBSC RIPT) TO INDICATE NON-CREDIT RISK FIRST RATED DEBT TRANSACTION FOR AN ACQUISITION TWO NEW STATE GOVERNMENT RATINGS GOVERNMENT OF INDIA GUARANTEED DEBT RATINGS FIRST RATED TAKE-OUT CUM GUARANTEE FACILITY BY AN INFRASTRUCTURE DEVELOPMENT FINANCE INSTITUTION. CORPORATE SECTOR RATING SERVICES (CSRS) REVENUE GROWTH IN CORPORATE SECTOR RATINGS WAS MAIN LY DRIVEN BY REFINANCING OF DEBT DUE TO THE CONTINUOUS DROP IN I NTEREST RATES. NEW OFFERINGS SUCH AS THE ADVANCE RATING SERVICES AND STRUCTURED RATINGS HAVE GROWN SIGNIFICANTLY AND ACC OUNT FOR 30% OF THE CSRS BILLINGS. THE 42 NEW COMPANIES RATED D URING 2001- 02 CONSTITUTED 30% OF CSRS INITIAL RATING FEES. TH E CSRS HAS ALSO MADE SIGNIFICANT PROGRESS IN GENERATING BUSINE SS FROM STANDARD AND POORS. ALTHOUGH THIS IS STILL A SMAL L COMPONENT OF ITS REVENUES, THERE IS A SIGNIFICANT ORDER BOOK AS ON DATE AND CSRS EXPECTS TO DOUBLE ITS INTERNATIONAL REVENUES I N THE CURRENT YEAR. GOVERNMENTS DISINVESTMENT PROGRAMME AND A F URTHER ROUND OF REFINANCING BY STRONGER CORPORATE, ARE EXP ECTED TO DRIVE CSRS REVENUES IN THE COMING YEAR. 26. FURTHERMORE, FROM THE FINANCIAL CONDITIONS EXPL AINED AT PAGE 423 OF THE ANNUAL REPORT, IT HAS COME ON RECORD THA T HUGE INTANGIBLES HAVE BEEN EMPLOYED BY CRISIL IN ORDER T O ACHIEVE ITS TARGETS, WHICH MAKE IT INCOMPARABLE VIS--VIS THE T AXPAYER. CONSEQUENTLY, WE ORDER TO EXCLUDE CRISIL FROM THE F INAL SET OF COMPARABLES. ITA NO.5140/DEL/2015 16 ICRA LIMITED (ICRA) 27. THIS IS TPOS COMPARABLE WHICH THE TAXPAYER HAS SOUGHT TO EXCLUDE FROM THE FINAL SET OF COMPARABLES ON GROUND OF FUNCTIONAL DISSIMILARITY. HOWEVER, THE LD. TPO RETAINED ICRA ON THE GROUND THAT IT IS OPERATING IN SIMILAR FIELD OF CREDIT RAT ING BUSINESS AND FINANCIAL ADVISORY SERVICES TO ITS CLIENTS. UNDISP UTEDLY, ICRA HAS BEEN REJECTED AS A VALID COMPARABLE BY THE REVENUE ON THE OBJECTION OF FUNCTIONAL DISSIMILARITY RAISED BY THE TAXPAYER IN AYS 2006-07 TO 2009-10, AS PER COMPILATION GIVEN BY THE TAXPAYER DURING THE COURSE OF ARGUMENTS AVAILABLE ON RECORD. 28. MOREOVER, PERUSAL OF THE ANNUAL REPORT, AVAILAB LE AT PAGES 547, 553 & 557 OF THE PAPER BOOK, SHOWS THAT THERE IS NO SEGMENTAL INFORMATION AVAILABLE AND KEEPING IN VIEW THE DIVER SIFIED FUNCTION PERFORMED BY ICRA, IT CANNOT BE TAKEN AT ENTITY LEV EL. MOREOVER, UNDER TNMM, THE TPO HAS A WIDE DISCRETION OF CHOOSI NG COMPARABLES AS THERE IS WIDE RANGE OF SUCH COMPARAB LES AVAILABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. 29. FURTHERMORE, ICRA HAS BEEN HELD TO BE INCOMPARA BLE VIS-- VIS THE TAXPAYER BY THE COORDINATE BENCH OF THE TRI BUNAL IN THE TAXPAYERS OWN CASE FOR AY 2007-08 (SUPRA) BY HOLDING THAT SINCE ICRA HAS BEEN PROVIDING ADVISORY SERVICES, IT CAN B E A NO MATCH TO THE COMPANY PROVIDING ACTUAL MARKETING SUPPORT SERV ICES. SINCE ITA NO.5140/DEL/2015 17 THERE IS NO CHANGE IN THE PROFILE OF THE TAXPAYER D URING THE YEAR UNDER ASSESSMENT AS IT HAS BEEN PROVIDING SIMILAR M ARKETING SUPPORT SERVICES TO ITS AE, ICRA IS NOT A VALID COM PARABLE VIS-- VIS TAXPAYER, HENCE ORDERED TO BE EXCLUDED. GROUNDS NO.5 & 6 30. GROUNDS NO.5 & 6 ARE DISMISSED HAVING NOT BEEN PRESSED DURING THE COURSE OF ARGUMENTS. GROUND NO.7 31. AO NOTICED THAT AN AMOUNT OF RS.13,99,500/- HAS BEEN WRITTEN OFF ON 27.03.2002 PERTAINING TO SCHOLL NET INDIA PVT. LTD. AND SOUGHT TO ALLOW THE SAME BY THE TAXPAYER. IT I S THE CASE OF THE TAXPAYER THAT ALTHOUGH THE ENTRY FOR WRITE OFF THIS AMOUNT HAS NOT BEEN PASSED DURING THE FINANCIAL YEAR 2001-02, THE ALLOWANCE IN RESPECT OF BAD DEBT EXPENSES HAS BEEN CLAIMED DURIN G THE YEAR UNDER ASSESSMENT AND SOUGHT TO ALLOW THE SAME. 32. WHEN IT IS THE CATEGORIC CASE OF THE TAXPAYER T HAT ITS CONTRACT WITH SCHOLL NET INDIA PVT. LTD. WAS CANCELLED AND I T DID NOT RENDER ANY SERVICES RATHER ERRONEOUSLY GENERATED AN INVOIC E IN RESPECT OF THE SAID CUSTOMER AND AS SUCH, REVENUE HAD BEEN INC LUDED IN THE REVENUE FOR AY 2001-01 AND OFFERED FOR TAX ACCORDIN GLY, WE ARE OF THE CONSIDERED VIEW THAT WHEN NO SERVICES HAVE BEEN RENDERED BY THE TAXPAYER TO THE SAID CUSTOMER, THE SAME ARE ENT ITLED TO BE ITA NO.5140/DEL/2015 18 ADJUSTED IN THE BOOKS OF ACCOUNT OF THE TAXPAYER. IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT T HIS AMOUNT HAS BEEN WRONGLY CLASSIFIED AS BAD DEBT AND ISSUE IS RE QUIRED TO BE SET ASIDE TO THE LD. TPO/AO TO VERIFY THE CONTENTIONS R AISED BY THE TAXPAYER TO ALLOW IT IF NO PREJUDICE IS CAUSED TO T HE REVENUE BECAUSE OF THE FACT THAT THIS AMOUNT HAS BEEN INCLU DED BY THE TAXPAYER IN ITS REVENUE FOR AY 2001-02 AND HAVE OFF ERED TO TAX ACCORDINGLY. GROUND NO.7 IS DETERMINED IN FAVOUR O F THE TAXPAYER FOR STATISTICAL PURPOSES. GROUNDS NO.8, 9 & 10 33. GROUNDS NO.8, 9 & 10 ARE DISMISSED HAVING NOT B EEN PRESSED DURING THE COURSE OF ARGUMENTS. GROUND NO.11 34. GROUNDS NO11 BEING CONSEQUENTIAL IN NATURE NEED S NO SPECIFIC FINDINGS. 35. RESULTANTLY, THE APPEAL FILED BY THE TAXPAYER I S HEREBY PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 28 TH DAY OF JANUARY, 2019. SD/- SD/- (N.K. SAINI) (KULDIP SINGH) VICE PRESIDENT JUDICIAL MEMBER DATED THE 28 TH DAY OF JANUARY, 2019 TS ITA NO.5140/DEL/2015 19 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A). 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.