Microsoft Corporation India Pvt. Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 5855/DEL/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82164 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 16-12-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 22-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ARISES OUT OF FINA L PASSED
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI GEORGE GEORGE K, JM ITA NO.5855/DEL/2010 ASSESSMENT YEAR : 2006-07 MICROSOFT CORPORATION INDIA PVT. LTD., F-40, NDSE, PART I, NEW DELHI. PAN : AAACM5586C VS. ADDL. CI T, RANGE-6, CR BUILDING, NEW DELHI. ( APPELLANT ) ( RESPONDENT ) ASSESSEE B Y : SHRI PERCY PARDIWALA, SR. ADVOCATE & SHRI VISHAL RAI DEPARTMENT B Y : S HRI PEEYUSH JAIN, CIT, DR & SHRI VIVEK KUMAR, SR. DR ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE FINA L ORDER PASSED BY THE ASSESSING OFFICER (AO) U/S 143(3) REA D WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) ON 25.10.2010 IN RELATION TO THE ASSESSMENT Y EAR 2006-07. ITA NO.5855/DEL/2010 2 2. GROUND NOS. 1 AND 2 ARE GENERAL WHICH DO NOT REQ UIRE ANY ADJUDICATION. 3. GROUND NO. 3 IS AGAINST RESTRICTING THE RATE OF DEPRECIATION ON ITG NETWORKING EQUIPMENTS AT 25% AS AGAINST 60% CLAIMED BY THE ASSESSEE. BRIEFLY STATED, THE FACTS OF THIS G ROUND ARE THAT THE ASSESSEE CLAIMED DEPRECIATION @ 60% ON ITG NETWORKI NG EQUIPMENTS UNDER THE BLOCK OF COMPUTERS. THE AO, F OLLOWING HIS ORDER FOR THE AY 2002-03, RESTRICTED THE RATE OF DE PRECIATION TO 25%. 4. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED FROM THE ASSESSMENT ORDER ITSELF THAT THE AO RESTRICTED THE CLAIM OF DE PRECIATION ON ITG NETWORKING EQUIPMENTS BY RELYING ON THE VIEW TAKEN BY HIM FOR THE AY 2002-03. THE SAID ASSESSMENT YEAR CAME UP F OR CONSIDERATION BEFORE THE TRIBUNAL IN ITA NO.4173/DE L/2010. VIDE ITS ORDER DATED 19.11.2010, A COPY OF WHICH IS AVAI LABLE ON RECORD, THE TRIBUNAL ACCEPTED THE APPLICABILITY OF HIGHER R ATE OF DEPRECIATION BY RELYING ON THE SPECIAL BENCH ORDER PASSED IN THE CASE OF DCIT VS. DATA CRAFT INDIA LTD. (2010) 133 TTJ (MUMB AI)(SB) ITA NO.5855/DEL/2010 3 377. IN THE ABSENCE OF ANY DISTINGUISHING FEATURE HAVI NG BEEN BROUGHT TO OUR NOTICE BY THE LD. DR ABOUT THE FACTS OF THE INSTANT YEAR AND THE PRECEDING YEAR, WE, RESPECTFULLY FOLLO WING THE PRECEDENT, ALLOW THIS GROUND OF APPEAL. 5. THE NEXT GROUND IS AGAINST THE DISALLOWANCE OF D EPRECIATION ON COMPANY OWNED VEHICLES AMOUNTING TO `1,23,84,597 /-. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE CLA IMED DEPRECIATION FOR THE SAID AMOUNT ON VEHICLES WHICH WERE OWNED BY IT BUT USED BY ITS EMPLOYEES. THE AO OBSERVED I N FINALIZING THE ASSESSMENT FOR THE ASSESSMENT YEAR 2005-06, WHICH H AS BEEN FOLLOWED FOR THE INSTANT YEAR, THAT THE EMPLOYEES W ERE DECIDING ABOUT THE CAR WHICH THEY WANTED TO PURCHASE AND, IN CASE OF PURCHASE OF HIGHER CATEGORY THAN THE SANCTIONED AMO UNT, THE ADDITIONAL AMOUNT WAS CONTRIBUTED BY THEM. HE FURT HER OBSERVED THAT THE EMPLOYEES WERE RESPONSIBLE FOR RUNNING AND MAINTENANCE OF VEHICLES AND ANY DAMAGE IN EXCESS OF NORMAL WEAR AND TEAR, WAS THE SOLE RESPONSIBILITY OF THE E MPLOYEES. THE FACT THAT THE ASSESSEE PURCHASED THE CARS AND PAID ROAD TAX LIABILITY ON SUCH CARS, DID NOT WEIGH WITH THE AO, WHO CAME TO ITA NO.5855/DEL/2010 4 HOLD THAT DEPRECIATION WAS NOT ALLOWABLE BECAUSE OF THE PERSONAL USE OF VEHICLES. 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, WE FIND IT AS AN UNDIS PUTED FACT THAT THE COMPANY PROVIDED VEHICLES TO ITS EMPLOYEES FOR THEIR USE FOR WHICH THE PURCHASE PRICE WAS PAID BY THE COMPANY, UNLESS IT EXCEEDED THE BENCHMARK FIXED BY IT. THE MAJOR REAS ON GIVEN BY THE AO FOR DISALLOWING DEPRECIATION IS THE PERSONAL USE OF VEHICLES BY THE EMPLOYEES OF THE COMPANY. THE DELHI BENCH O F THE TRIBUNAL IN DCIT VS. HARYANA OXYGEN LTD. (2001) 76 ITD 32 (DEL) HAS HELD THAT USE OF CAR BY DIRECTORS-EMPLOYEES OF A COMPANY CANNOT BE CHARACTERIZED AS USER FOR NON-BUSINESS PU RPOSE AND, HENCE, NO PART OF CAR EXPENSES INCURRED ON SUCH CAR S CAN BE DISALLOWED. THE HONBLE 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 WER E ENTITLED TO USE THE VEHICLES OF THE COMPANY FOR THE PERSONAL US E AS PER THE TERMS AND CONDITIONS OF THEIR APPOINTMENT, IT CANNO T BE SAID THAT THE ASSESSEE INCURRED EXPENDITURE FOR THE PERSONAL USE OF CARS BY THE DIRECTORS. THE HONBLE HIGH COURT FURTHER HELD THAT SUCH USER ITA NO.5855/DEL/2010 5 OF VEHICLES BY THE EMPLOYEES OF THE COMPANY CANNOT EVEN BE CONSIDERED AS NON-BUSINESS USER. THERE ARE INNUM ERABLE JUDGMENTS ON THIS POINT HOLDING THAT THERE CAN BE N O DISALLOWANCE OF DEPRECIATION OR OTHER EXPENSES ON MAINTENANCE OF THE VEHICLES USED BY THE DIRECTORS/EMPLOYEES BY TREATING IT AS P ERSONAL USER OR NON-BUSINESS USER OF THE COMPANY. WE FAIL TO SEE A NY RATIONALE IN TREATING THE AMOUNT OF DEPRECIATION ON CARS AS FOR PERSONAL USE, WHEN ADMITTEDLY THESE HAVE BEEN PROVIDED TO EMPLOYE ES. A COMPANY IS A SEPARATE LEGAL ENTITY DISTINCT FROM IT S DIRECTORS OR EMPLOYEES. AS SUCH, THERE CAN BE NO OCCASION TO TRE AT THE USE OF VEHICLES BY THE DIRECTORS/EMPLOYEES AS A PERSONAL U SE BY THE COMPANY. WE, THEREFORE, ORDER FOR THE DELETION OF T HE ADDITION OF DEPRECIATION ON SUCH VEHICLES. 7. GROUND NO. 5 IS AGAINST THE DISALLOWANCE OF `7 8,25,822/- TOWARDS RUNNING AND MAINTENANCE EXPENSES OF THE VEH ICLES 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. ITA NO.5855/DEL/2010 6 8. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS ISSU E IS SQUARELY COVERED BY THE ABOVE REFERRED JUDGMENTS OF THE HON BLE GUJARAT HIGH COURT AND THE TRIBUNAL ORDER PASSED BY THE DEL HI BENCH. THE SAME ANALOGY WHICH APPLIES FOR NOT MAKING ANY D ISALLOWANCE ON ACCOUNT OF DEPRECIATION FOR PERSONAL OR NON-BUSI NESS USE, EQUALLY APPLIES FOR NOT WARRANTING ANY DISALLOWANCE ON ACCOUNT OF RUNNING AND MAINTENANCE EXPENSES OF THE VEHICLES US ED BY THE EMPLOYEES OF THE COMPANY. WE, THEREFORE, ORDER FOR THE DELETION OF THE ADDITION. 9. GROUND NO. 6 IS AGAINST THE DISALLOWANCE OF PRI OR PERIOD EXPENSES AMOUNTING TO `78,63,993/-. THE ASSESS EE RAISED AN ADDITIONAL GROUND BEFORE THE DRP REQUESTING FOR ALL OWING DEDUCTION OF EXPENSES INCURRED FOR THE AY 2006-07, WHICH WERE DEBITED TO THE PROFIT & LOSS (APPROPRIATION) ACCOUN T FOR THE AY 2007-08, WITHOUT MAKING ANY CLAIM FOR DEDUCTION OF SUCH EXPENSES IN THE COMPUTATION OF INCOME FOR THE SAID ASSESSMENT YEAR. THE DRP DID NOT DEAL WITH THIS GROUND. THAT IS HOW, THE ASSESSEE IS IN APPEAL BEFORE US ON THIS ASPECT OF T HE MATTER. ITA NO.5855/DEL/2010 7 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD. IT IS PERTINENT TO NO TE THAT WE ARE DEALING WITH THE ASSESSMENT YEAR 2006-07 WITH THE FINANCIAL YEAR ENDING ON 31.3.2006. IN ITS ANNUAL ACCOUNTS FOR TH E YEAR ENDING 31.3.2007, THE ASSESSEE DEBITED PRIOR PERIOD EXPEN SES AMOUNTING TO `83,62,295/-. THESE EXPENSES WERE VOL UNTARILY NOT CLAIMED AS DEDUCTION IN THE COMPUTATION OF INCOME F OR THE AY 2007-08. A CLAIM WAS LODGED BEFORE THE DRP DURING THE COURSE OF THE PROCEEDINGS FOR THE A.Y. 2006-07 THAT DEDUCTION BE ALLOWED FOR A SUM OF `78,64,013/- AS THESE MUCH EXPENSES OU T OF THE TOTAL OF `83.62 LAKH, DISCHARGED DURING THE SUCCEEDING Y EAR RELATED TO THE YEAR UNDER CONSIDERATION. IT IS AXIOMATIC THAT THE PRIOR PERIOD EXPENSES APPEARING IN THE ACCOUNTS FOR THE AY 2007 -08 WOULD MEAN THAT THE EXPENSES WERE INCURRED FOR THE EARLIE R YEARS INCLUDING ASSESSMENT YEAR 2006-07. IF THERE ARE SO ME EXPENSES INCURRED FOR THE BUSINESS, WHICH ARE OTHERWISE DEDU CTIBLE, THEN DEDUCTION MUST FOLLOW. IT CANNOT BE A CASE THAT SUC H EXPENSES WOULD NOT QUALIFY FOR DEDUCTION EITHER IN THE YEAR OF INCURRING OR IN THE YEAR TO WHICH THEY RELATE. ADVERTING TO THE FA CTS OF THE INSTANT CASE, IT IS SEEN THAT THE ASSESSEE INCURRED SOME EX PENSES FOR THE ITA NO.5855/DEL/2010 8 PERIOD RELEVANT TO THE A.Y. 2006-07 DURING THE PER IOD RELEVANT TO THE A.Y. 2007-08 WITHOUT CLAIMING DEDUCTION IN THE COMPUTATION OF INCOME OF ANY OF THE YEARS. SUCH EXPENSES DESERV E TO BE ALLOWED AS DEDUCTION IN THE COMPUTATION OF INCOME, TO WHICH THEY PERTAIN. AS THE PRIOR PERIOD EXPENSES IN THE ACCO UNTS FOR THE A.Y. 2007-08 INDICATE THAT THEY PERTAIN TO THE A.Y. 2006 -07, THESE SHOULD BE RIGHTLY ALLOWED AS DEDUCTION IN SUCH EARL IER YEAR. IT IS NOT A CASE THAT THE ASSESSEE IS SEEKING DEDUCTION F OR PRIOR PERIOD EXPENSES APPEARING IN ITS ACCOUNTS FOR THE AY 2006 -07. IT IS SIMPLY CONTENDING FOR DEDUCTION OF EXPENSES RELATIN G TO THE AY 2006-07 DISCHARGED IN THE PERIOD RELEVANT TO THE AY 2007-08. THERE CAN BE NO REASON TO DENY DEDUCTION FOR SUCH E XPENSES GENUINELY INCURRED FOR THE PURPOSE OF BUSINESS, IF THESE ARE OTHERWISE DEDUCTIBLE AS PER LAW. SINCE THE AO DID NOT HAVE AN OCCASION TO CONSIDER THE OTHERWISE DEDUCTIBILITY OF SUCH EXPENSES, WE ARE OF THE CONSIDERED OPINION THAT THE ENDS OF J USTICE WOULD MEET ADEQUATELY IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO. WE O RDER ACCORDINGLY AND DIRECT HIM TO SCRUTINIZE THE DETAILS OF SUCH P RIOR PERIOD EXPENSES BOOKED IN THE ACCOUNTS FOR AY 2007-08 FOR ASCERTAINING ITA NO.5855/DEL/2010 9 IF THESE WERE INCURRED FOR THE AY 2006-07 AND THEN TO THAT EXTENT ALLOW DEDUCTION, IF THESE ARE OTHERWISE DEDUCTIBLE. 11. THE ONLY OTHER GROUND WHICH SURVIVES FOR OUR CO NSIDERATION IS AGAINST THE ADDITION OF `28,55,40,322/- MADE ON ACC OUNT OF TRANSFER PRICING ADJUSTMENT. BRIEFLY STATED, THE F ACTS OF THE CASE ARE THAT THE ASSESSEE REPORTED FOUR INTERNATIONAL T RANSACTIONS, VIZ., PROVISION OF MARKETING SUPPORT SERVICES WIT H VALUE OF `324,73,13,183/-; PROVISION FOR REGIONAL GUEST EMP LOYEE SERVICES; PROVISION OF MICROSOFT CONSULTING SERVICES; AND ASS IGNMENT OF PERSONNEL. THE TRANSFER PRICING OFFICER (TPO) GOT SATISFIED WITH THE ARMS LENGTH PRICE (ALP) OF ALL THE INTERNATION AL TRANSACTIONS EXCEPT THE FIRST ONE, NAMELY, PROVISION OF MARKETI NG SUPPORT SERVICES. THE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD TO BEN CHMARK THIS INTERNATIONAL TRANSACTION. PROFIT LEVEL INDICA TOR (PLI) WAS ADOPTED AS OPERATING PROFIT/TOTAL COST (OP/TC). TH E ASSESSEE COMPUTED ITS PERCENTAGE OF OPERATING PROFIT MARGIN AT 12.39% IN COMPARISON WITH THAT OF NINE COMPARABLES, ON THE BA SIS OF MULTIPLE YEAR DATA, AT 7.32%. THAT IS HOW, THE ASSE SSEE DEMONSTRATED THAT THIS INTERNATIONAL TRANSACTION WA S AT ALP. THE ITA NO.5855/DEL/2010 10 TPO REQUIRED THE ASSESSEE TO FURNISH BENCHMARK ANAL YSIS OF THESE COMPARABLE COMPANIES BY USING THE CURRENT YEAR DATA ALONE. IN DOING SO, THE ASSESSEE REDUCED THE COMPARABLES TO S EVEN. THE TPO REJECTED THREE COMPANIES GIVEN BY THE ASSESSEE AND ADDED FIVE NEW COMPANIES IN THE FINAL LIST OF COMPARABLES . IN DOING THIS EXERCISE OF REJECTING SOME OF THE COMPANIES CHOSEN BY THE ASSESSEE AND INCLUDING NEW COMPANIES, THE TPO OBSER VED THAT THE ASSESSEE WAS NOT ONLY ENGAGED IN THE DISSEMINAT ION OF INFORMATION AND PERFORMING LOW-END NON-COMPLEX FUNC TIONS, BUT ALSO CREATING SIGNIFICANT INTANGIBLES. HE REACHED THIS CONCLUSION DESPITE THE ASSESSEES SUBMISSION THAT IT WAS SIMPL Y CREATING AWARENESS OF THE MICROSOFT PRODUCTS AMONGST THE EXI STING AND POTENTIAL USERS BY HOLDING SEMINARS, CONFERENCES, A DVERTISEMENT IN PUBLIC MEDIA AND PROMOTIONAL CAMPAIGNS WHICH WAS NOTHING MORE THAN MARKETING SUPPORT SERVICES. THE ASSESSEE S CONTENTION THAT IT WAS PERFORMING SUCH ACTIVITIES ON COST PLUS BASIS, WITHOUT CREATING ANY INTANGIBLES FOR ITS AES, DID NOT PERSU ADE THE TPO IN HOLDING THAT THE ASSESSEE WAS CREATING SUBSTANTIAL MARKETING INTANGIBLES IN INDIA FOR ITS AES. HE DETERMINED OP/ TC OF THE FINALLY SELECTED NINE COMPANIES AT 22.18%. THAT IS HOW, TH E TRANSFER ITA NO.5855/DEL/2010 11 PRICING ADJUSTMENT AMOUNTING TO `28.55 CRORE WAS PR OPOSED, WHICH WAS MADE BY THE AO. THE ASSESSEE IS AGGRIEVED AGAINST SUCH ADDITION. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE O N THE FACT THAT THE ASSESSEE BENCHMARKED THE INTERNATIONAL TRANSACT ION OF PROVISION OF MARKETING SUPPORT SERVICES BY SELECT ING 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 INSTEA D OF MULTIPLE YEAR DATA, HAS ALSO NOT BEEN ASSAILED BY THE ASSESS EE. IN FACT, NO OTHER ASPECT OF THE TP ADJUSTMENT HAS BEEN CHALLENG ED EXCEPT THE DETERMINATION OF PLI OF THE COMPARABLES. HERE AGAIN, THE ASSESSEE HAS CONFINED ITSELF TO CHALLENGING THE INC LUSION OF FIVE NEW COMPANIES BY THE TPO IN THE FINAL LIST OF COMPA RABLES. WE ARE, THEREFORE, RESTRICTING OURSELVES IN EXAMINING THE COMPARABILITY OR OTHERWISE OF THE FIVE NEW COMPANIE S INTRODUCED BY THE TPO IN THE FINAL LIST OF COMPARABLES. ITA NO.5855/DEL/2010 12 13. BEFORE EMBARKING UPON MAKING AN ANALYSIS OF COM PARABILITY, IT IS SINE QUA NON TO FIRST ASCERTAIN THE CORRECT NATURE OF THE ASSESSEES ACTIVITY UNDER THE SEGMENT OF PROVISION OF MARKETING SUPPORT SERVICES. THE ASSESSEES TRANSFER PRICING STUDY REPORT INDICATES THAT THE ASSESSEE, A WHOLLY OWNED SUBSIDI ARY OF MICROSOFT CORPORATION, PROVIDED MARKETING SUPPORT S ERVICES MAINLY TO MICROSOFT CORPORATION PTE LTD., SINGAPORE AND A SMALL PORTION OF REVENUE AROSE FROM SERVICES RENDERED TO MICROSOFT CORPN., UK. THE ASSESSEE WAS COMPENSATED FOR SUCH SERVICES WITH ACTUAL COSTS INCURRED WITH A MARK-UP OF 15% FO R SERVICES RENDERED TO MICROSOFT CORPORATION PTE LTD., SINGAPO RE AND 10% FOR SERVICES RENDERED TO MICROSOFT CORPN., UK. ALL THE OPERATING EXPENSES, DEPRECIATION, REALIZED FOREIGN EXCHANGE G AIN/LOSS AND BANK CHARGES WERE TAKEN INTO ACCOUNT FOR CALCULATIN G THE MARK- UP. THE TPO HAS REPRODUCED RELEVANT CLAUSES OF THE ASSESSEES AGREEMENT WITH MICROSOFT CORPORATION PTE LTD., SING APORE ON PAGE 4 ONWARDS OF HIS ORDER. THIS AGREEMENT STIPULATES THAT THE ASSESSEE SHALL PROVIDE PRODUCT SUPPORT SERVICES AND CONSULTING SERVICES FOR THE MICROSOFT PRODUCTS IN THE DEFINED TERRITORY. CLAUSE 3 OF THE AGREEMENT PROVIDES THAT THE ASSESSEE SHAL L HAVE A NON- ITA NO.5855/DEL/2010 13 EXCLUSIVE RIGHT TO MARKET MICROSOFT PRODUCTS IN THE TERRITORY. ITS DUTIES HAVE BEEN SET OUT IN CLAUSE 3.2 BY PROVIDING THAT THE ASSESSEE SHALL USE ITS BEST EFFORTS TO FURTHER THE INTEREST OF MO AND MAXIMIZE THE MARKETS FOR MICORSOFT PRODUCTS IN THE TERRITORY. IT HAS ALSO BEEN PROVIDED THAT THE ASSESSEE IN SOLI CITING ORDERS SHALL ONLY BE AUTHORIZED TO INFORM CUSTOMERS OF PRI CE, PAYMENT DELIVERY AND OTHER TERMS OFFERED BY MO IN ACCORDANC E WITH INFORMATION RECEIVED FROM MO OR ITS AFFILIATES. IT FURTHER PROVIDES THAT THE ASSESSEE SHALL NOT ENTER INTO ANY AGREEME NTS WITH CUSTOMERS REGARDING MICROSOFT PRODUCTS, BUT SHALL I NSTEAD PROMPTLY SUBMIT WRITTEN CUSTOMER ORDERS TO MO OR IT S AFFILIATES AS APPROPRIATE, FOR ITS ACCEPTANCE OR REJECTION. THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE TO MICROSOFT CORP ORATION, USA IS ALSO THAT OF MARKETING RESEARCH AND DEVELOPMENT. THUS, IT CAN BE SEEN THAT THE ASSESSEE IS BASICALLY ENGAGED IN C REATING AWARENESS OF MICROSOFT PRODUCTS AMONGST EXISTING AN D POTENTIAL USERS OF MICROSOFT PRODUCTS IN INDIA THROUGH SEMINA RS, CONFERENCES, ADVERTISEMENT IN PUBLIC MEDIA AND PROM OTIONAL CAMPAIGNS. ALL THE EXPENSES INCURRED BY THE ASSESS EE ON SUCH SALES PROMOTION ACTIVITIES HAVE BEEN COMPLETELY REI MBURSED TO ITA NO.5855/DEL/2010 14 THE ASSESSEE WITH A MARK-UP OF 15% BY SINGAPORE AE. EVEN THOUGH SOME MARKETING INTANGIBLES GET CREATED BY TH E ASSESSEES SPENDING ON ADVERTISEMENT AND MARKETING EXPENSES, S UCH INTANGIBLES BELONG TO ITS AES BECAUSE THE ASSESSEE IS NOT INDULGING IN ANY SALE OR PURCHASE ACTIVITIES OF MIC ROSOFT 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 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 LAU NCHING OF THE PRODUCTS WITH BIG ADVERTISEMENT CAMPAIGNS, CUSTOMER INTERFACE AND PROVISION FOR TRAINING AND BACK-UP FOR USE OF P RODUCTS AND SOFTWARES. IN THIS REGARD, IT IS FIRSTLY RELEVANT TO NOTE THAT WE ARE DEALING WITH THE AY 2006-07 AND THE RELEVANT FINANC IAL YEAR ENDS ON 31.3.2006. ALL THE CLIPPINGS REFERRED TO BY THE TPO RELATE TO SUBSEQUENT YEARS. BE THAT AS IT MAY, IT CAN BE SEE N THAT THE INFERENCE DRAWN BY THE TPO THAT THE ASSESSEE IS NOT ONLY ENGAGED IN THE DISSEMINATION OF INFORMATION, BUT ALSO PROVI DING HIGH-END ITA NO.5855/DEL/2010 15 MARKETING SERVICES LEADING TO CREATION OF MARKETING INTANGIBLE FOR ITS AE, IS NOT CORRECT. IT CAN BE SEEN FROM THE CL IPPING DATED 24 TH NOVEMBER, ON PAGE 19 OF THE TPOS ORDER THAT MICROS OFT CORPORATION INDIA PTE LTD., ANNOUNCED THE AVAILABIL ITY OF THE GET GENUINE SOLUTIONS (GGS) FOR WINDOWS, VISTA THROUGH WHICH CUSTOMERS WERE ABLE TO LEGALISE THEIR COUNTERFEIT O R UNLICENSED WINDOWS XP PROFESSIONAL PCS UNDER GGS BY SIMPLY P LACE(ING) AN ORDER WITH THEIR RESELLER TO LEGALISE THEIR COUNTER FEIT SOFTWARE. FROM THE ABOVE, IT IS CLEAR THAT THE ASSESSEE IS NO WHERE ENGAGED IN THE ACTUAL SELLING OF THE PRODUCTS TO THE CUSTOM ERS DIRECTLY. IT IS SIMPLY PROVIDING MARKETING SUPPORT SERVICES BY CREA TING CUSTOMER AWARENESS FOR THE MICROSOFT PRODUCTS AND ALSO IN CE RTAIN CASES PROVIDING TRAININGS AND BACK-UPS FOR THE USE OF SUC H PRODUCTS AND SOFTWARES. WITH THIS BACKGROUND OF THE NATURE OF T HE ASSESSEES ACTIVITY UNDER THIS SEGMENT, LET US ANALYSE AS TO W HETHER THE FIVE COMPANIES CHOSEN BY THE TPO ARE, IN FACT, COMPARABL ES. I. ENGINEERS (INDIA) LTD . : 15.1. THE ASSESSEE CONTENDED BEFORE THE TPO THAT THIS COMPANY WAS PROVIDING ENGINEERING AND RELATED TECHNICAL SER VICES FOR ITA NO.5855/DEL/2010 16 PETROLEUM REFINERIES AND OTHER INDUSTRIAL PROJECTS AND, HENCE, COULD NOT BE COMPARED WITH THE ASSESSEE. NOT CONVI NCED, THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLE S BY NOTICING THAT THE ASSESSEE ITSELF USED THIS COMPANY AS COMPA RABLE FOR THE ASSESSMENT YEARS 2003-04 AND 2004-05. IN VIEW OF T HE FACT THAT THE ASSESSEE INCLUDED THIS COMPANY IN THE LIST OF C OMPARABLES FOR THE EARLIER YEARS, THE TPO HELD THAT IT MUST BE SO INCLUDED IN THE FINAL LIST OF COMPARABLES FOR THE INSTANT YEAR AS W ELL. 15.2. WE DO NOT FIND ANY FORCE IN THE VIEW CANVAS SED BY THE TPO FOR INCLUDING THIS COMPANY IN THE LIST OF COMPARABL ES SIMPLY ON THE STRENGTH OF THE ASSESSEE TREATING IT AS COMPARA BLE FOR THE AYS 2003-04 AND 2004-05. IT GOES WITHOUT SAYING THAT T HERE CAN BE NO ESTOPPEL AGAINST THE CORRECT POSITION OF COMPARA BILITY. SIMPLY BECAUSE THE ASSESSEE CHOSE AN INCOMPARABLE COMPANY AS COMPARABLE FOR AN EARLIER YEAR, CANNOT BIND IT FOR ALL THE YEARS TO COME. WHAT IS REQUIRED TO BE EXAMINED IS THE ACTUAL COMPARABILITY FOR THE YEAR IN QUESTION RATHER THAN WHAT WAS DONE IN THE PAST. IF THE ASSESSEE, HAVING INCLUDED THE NAME OF A COMPANY IN ITS COMPARABLES FOR THE EARLIER YEARS OR EVEN FOR THE CURRENT YEAR, CONTENDS BEFORE THE TPO OR DRP ETC., THAT THIS ITA NO.5855/DEL/2010 17 COMPANY IS NOT, IN FACT, COMPARABLE, THEN IT IS FO R THE AUTHORITIES TO FIRST DECIDE THE COMPARABILITY ON MERITS AND THE N PROCEED FOR ITS INCLUSION OR EXCLUSION IN/FROM THE LIST OF COMP ARABLES. A MERE CLAIM MADE BY THE ASSESSEE FOR CONSIDERING A COMPAN Y AS COMPARABLE, DOES NOT IPSO FACTO LEAD TO ITS FINAL INCLUSION OR EXCLUSION. IT IS ONLY WHEN THE TPO EXAMINES THE A SSESSEES CONTENTION THAT HE CAN REACH A POSITIVE CONCLUSION ABOUT THE COMPARABILITY OF SUCH A COMPANY. SAME POSITION EQU ALLY APPLIES TO THE TPO AS WELL. SIMPLY BECAUSE A PARTICULAR CO MPANY WAS WRONGLY EXCLUDED BY HIM IN DETERMINING THE ALP OF A N INTERNATIONAL TRANSACTION FOR AN EARLIER YEAR, CANN OT DEBAR HIM FROM INCLUDING IT IN THE LIST OF COMPARABLES IN THE SUCCEEDING YEAR, IF IT IS ACTUALLY COMPARABLE. THE ESSENCE OF THE M ATTER IS TO EXAMINE THE COMPARABILITY AND NOT THE FACT AS TO WH ETHER IT WAS INCLUDED OR EXCLUDED IN THE PAST OR IN THE FUTURE. 15.3. IT CAN BE SEEN FROM THE TPOS ORDER THAT H E INSISTED ON THE INCLUSION OF THIS COMPANY ON THE SOLE REASON OF THE ASSESSEE TREATING IT AS COMPARABLE FOR THE TWO EARLIER YEARS . SUCH A VIEW CANNOT BE COUNTENANCED WITHOUT EXAMINING THE CORREC T NATURE AND THE FUNCTIONAL PROFILE OF THIS COMPANY. ITA NO.5855/DEL/2010 18 15.4. IT CAN BE SEEN THAT ENGINEERS (INDIA) LT D., IS A COMPANY PROVIDING ENGINEERING AND RELATED TECHNICAL SERVICE S FOR PETROLEUM REFINERIES AND OTHER INDUSTRIAL PROJECTS. THIS COMPANY HAS TWO BUSINESS SEGMENTS, NAMELY, CONSULTANCY & EN GINEERING PROJECTS AND LUMPSUM TURNKEY PROJECTS. THESE SERVI CES ARE IN THE NATURE OF ENGINEERING SERVICES, WHICH, BY NO ST ANDARD, CAN BE COMPARED WITH THE MARKETING SUPPORT SERVICES PROVID ED BY THE ASSESSEE TO ITS AES. THE HONBLE JURISDICTIONAL HI GH COURT IN CIT VS. VERIZON INDIA (P) LTD. (2014) 360 ITR 342 (DEL) HAS HELD THAT MARKETING SERVICES CANNOT BE COMPARED WITH THE ENGI NEERING SERVICES. IN THAT CASE, THE ASSESSEE PROVIDED MARK ETING SERVICES AND THE AUTHORITIES BELOW CONSIDERED SOME COMPANIES , PROVIDING ENGINEERING SERVICES, AS COMPARABLE. THE HONBLE H IGH COURT APPROVED THE VIEW TAKEN BY THE TRIBUNAL IN HOLDING THAT MARKETING SERVICES PROVIDED BY THAT ASSESSEE WERE E NTIRELY DIFFERENT FROM THE SET OF SERVICES IN THE NATURE OF ENGINEERING SERVICES RENDERED BY THE COMPARABLES. AS ADMITTEDL Y, ENGINEERS (INDIA) LTD., IS ENGAGED IN PROVIDING ENGINEERING S ERVICES, THE SAME CANNOT BE CONSIDERED AS COMPARABLE WITH THE AS SESSEE, ITA NO.5855/DEL/2010 19 WHO IS ENGAGED IN PROVIDING MARKETING SUPPORT SERVI CES. THIS COMPANY IS, THEREFORE, DIRECTED TO BE EXCLUDED FROM COMPARABLES. (II) RITES LTD. : 16.1. THIS COMPANY WAS CONSIDERED BY THE TPO AS COMPARABLE ON THE SAME REASONS, BEING, THE ASSESSEES INCLUSIO N OF THIS COMPANY IN THE LIST OF COMPARABLES FOR THE AYS 2002 -03 AND 2003- 04. 16.2. WE FIND THAT THIS COMPANY IS PRIMARILY A CO NSULTANCY ORGANIZATION RENDERING CONSULTANCY SERVICES IN ALL FACETS OF TRANSPORTATION. ITS MAJOR AREAS OF OPERATIONS ARE CONSULTANCY SERVICES; EXPORT OF ROLLING STOCK, EQUIPMENTS AND S PARES; AND LEASING OF RAILWAY ROLLING STOCK AND EQUIPMENTS. I T CAN BE SEEN THAT THE FUNCTIONAL PROFILE OF THIS COMPANY IS NOWH ERE NEAR THE ASSESSEE, WHICH IS SIMPLY PROVIDING MARKETING SUPPO RT SERVICES BY LARGELY CREATING CUSTOMER AWARENESS FOR THE MICROSO FT PRODUCTS IN INDIA. THIS COMPANY IS, THEREFORE, DIRECTED TO BE EXCLUDED. ITA NO.5855/DEL/2010 20 (III) TCE CONSULTING ENGINEERS LTD.: 17.1. THIS COMPANY WAS CONSIDERED BY THE TPO AS C OMPARABLE ON THE SAME REASONS, BEING, THE ASSESSEES INCLUSI ON OF THIS COMPANY IN THE LIST OF COMPARABLES FOR THE AYS 2002 -03 AND 2003- 04. 17.2. IT IS NOTICED THAT THIS COMPANY IS ENGAGED IN THE PROVISION OF ENGINEERING SERVICES, SUCH AS, OPERATION AND DES IGN ENGINEERING, UPGRADATION & RENOVATION SERVICES, SUR VEYS & FIELD INVESTIGATION SERVICES. THIS COMPANY IS OPERATING O NLY IN ONE SEGMENT, NAMELY, ENGINEERING CONSULTANCY SERVICES. AS SUCH, THERE CAN BE NO COMPARISON OF THIS COMPANY WITH THE ASSESSEE COMPANY. THIS COMPANY IS ALSO DIRECTED TO BE EXPEL LED FROM THE LIST OF COMPARABLES. (IV) WAPCOS: 18.1. THIS COMPANY WAS CONSIDERED BY THE TPO AS COMPARABLE ON THE SAME REASONS, BEING, THE ASSESSEES INCLUSIO N OF THIS COMPANY IN THE LIST OF COMPARABLES FOR THE AYS 2002 -03 AND 2003- 04. ITA NO.5855/DEL/2010 21 18.2. WE FIND THAT THIS COMPANY OPERATES IN TWO S EGMENTS, NAMELY, CONSULTANCY & ENGINEERING PROJECTS AND LUMP SUM TURNKEY PROJECTS. THIS COMPANY PROVIDES CONSULTANC Y SERVICES, SUCH AS, PRE-FEASIBILITY REPORT OF HYDROELECTRIC PR OJECTS, FIELD INVESTIGATION DRILLING OF TUBE WELLS, ETC. FROM TH E ABOVE DESCRIPTION OF THE NATURE OF ACTIVITIES PERFORMED B Y THIS COMPANY, IT CAN BE SEEN THAT THE SAME IS ENGAGED IN PROVIDIN G ENGINEERING AND CONSULTANCY SERVICES, WHICH CAN BE OF NO MATCH TO THE ASSESSEES MARKETING SUPPORT SERVICES. THIS COMPAN Y IS ALSO DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE S. V) VINITA 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 FURTH ER SUPPORTED HIS FINDING BY NOTICING THAT THIS COMPANY WAS PROVI DING SIMILAR SERVICES AS PROVIDED BY THE ASSESSEE. 19.2. WE DO NOT FIND ANY FORCE IN THE FUNCTIONAL COMPARABILITY OF THIS COMPANY WITH THE ASSESSEE. IT CAN BE SEEN FRO M THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH IS AVAILABL E AT PAGE 155 ITA NO.5855/DEL/2010 22 OF THE THIRD PAPER BOOK, THAT THE SPECTRUM OF THE S ERVICES RENDERED BY THIS COMPANY COVERS ANALYTICAL FOOD AND DRUGS; CLINICAL REFERENCE LAB SERVICES TO ADDRESS THE SPEC IALTIES AND CENTRAL LAB SERVICES FOR CLINICAL TRIALS; CLINICAL TRIALS PHASE-I-IV AND BA/BE STUDIES; PRE-CLINICAL SAFETY ASSESSMENTS; AND ENVIRONMENTAL ASSESSMENTS. ON A CURSORY LOOK AT THE NATURE OF SE RVICES PROVIDED BY THIS COMPANY, IT TRANSPIRES THAT THE SA ME IS FUNCTIONALLY DISSIMILAR FROM THAT OF THE ASSESSEE. HOW A COMPANY CONDUCTING CLINICAL TRIALS ON FOODS AND DRUGS CAN B E CONSIDERED AS COMPARABLE WITH THE ASSESSEE UNDERTAKING MARKETING SUPPORT SERVICES, IS ANYBODYS GUESS. THIS COMPANY BEING I N THE NATURE OF BUSINESS TOTALLY ALIEN TO THAT OF THE ASSESSEE, CAN NOT BE CONSIDERED AS A COMPARABLE. WE, THEREFORE, DIRECT THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. 20. NO OTHER ISSUE OF THE ADDITION ON ACCOUNT O F THE TP ADJUSTMENT WAS PRESSED BY THE LD. AR. 21. IN VIEW OF THE ABOVE DISCUSSION, WE SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND SEND THE MATTER BACK TO THE FILE OF TPO/AO WITH A DIRECTION TO RE-COMPUTE ARMS LENGTH PRICE O F THE ITA NO.5855/DEL/2010 23 INTERNATIONAL TRANSACTION OF PROVISION OF MARKET S UPPORT SERVICES AFRESH BY EXCLUDING THESE FIVE COMPANIES FROM THE L IST OF COMPARABLES. ALL OTHER ASPECTS OF THE COMPUTATION O F ALP DONE BY THE TPO EARLIER, ARE FINAL. NEEDLESS TO SAY, THE AS SESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH EXERCISE. 22. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 18.12.201 4. SD/- SD/- [ GEORGE GEORGE K. ] [ R.S. SYAL ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 18 TH DECEMBER, 2014. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.