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 Vs. Addl. CIT,
Pvt. Ltd., Range-6,
F-40, NDSE, Part I, CR Building,
New Delhi. New Delhi.
PAN : AAACM5586C
(Appellant) (Respondent)
Assessee by : Shri Percy Pardiwala, Sr. Advocate
& Shri Vishal Rai
Department by : Shri Peeyush Jain, CIT, DR &
Shri Vivek Kumar, Sr. DR
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee arises out of the final 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 25.10.2010 in relation to the assessment year 2006-07.
ITA No.5855/Del/2010
2. Ground Nos. 1 and 2 are general which do not require 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 ground are that the
assessee claimed depreciation @ 60% on ITG Networking
Equipments under the block of Computers. The AO, following his
order for the AY 2002-03, restricted the rate of depreciation to
25%.
4. After considering the rival submissions and perusing the
relevant material on record, it is noticed from the assessment
order itself that the AO restricted the claim of depreciation on ITG
Networking Equipments by relying on the view taken by him for
the AY 2002-03. The said assessment year came up for
consideration before the Tribunal in ITA No.4173/Del/2010. Vide
its order dated 19.11.2010, a copy of which is available on record,
the Tribunal accepted the applicability of higher rate of
depreciation by relying on the Special Bench order passed in the
case of DCIT vs. Data Craft India Ltd. (2010) 133 TTJ (Mumbai)(SB)
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377. In the absence of any distinguishing feature having been
brought to our notice by the ld. DR about the facts of the instant
year and the preceding year, we, respectfully following the
precedent, allow this ground of appeal.
5. The next ground is against the disallowance of depreciation
on company owned vehicles amounting to `1,23,84,597/-. The
facts apropos this ground are that the assessee claimed
depreciation for the said amount on vehicles which were owned
by it but used by its employees. The AO observed in finalizing the
assessment for the assessment year 2005-06, which has been
followed for the instant year, that the employees were deciding
about the car which they wanted to purchase and, in case of
purchase of higher category than the sanctioned amount, the
additional amount was contributed by them. He further 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 employees. 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
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hold that depreciation was not allowable because of the personal
use of vehicles.
6. 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, unless it
exceeded the benchmark fixed by it. 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 use of car by directors-employees of a company
cannot be characterized as user for non-business purpose and,
hence, no part of car expenses incurred on such cars 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 were entitled to
use the vehicles of the company for the personal use as per the
terms and conditions of their appointment, it cannot be said that
the assessee incurred expenditure for the personal use of cars by
the directors. The Hon'ble High Court further held that such user
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of vehicles by the employees of the company 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 occasion to treat the use of
vehicles by the directors/employees as a personal use by the
company. We, therefore, order for the deletion of the addition of
depreciation on such vehicles.
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.
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8. After considering the rival submissions and perusing the
relevant material on record, we find that this issue is squarely
covered by the above referred judgments of the Hon'ble Gujarat
High Court and the Tribunal order passed by the Delhi Bench.
The same analogy which applies for not making any disallowance
on account of depreciation for personal or non-business use,
equally applies for not warranting any disallowance on account of
running and maintenance expenses of the vehicles used by the
employees of the company. We, therefore, order for the deletion
of the addition.
9. Ground No. 6 is against the disallowance of `Prior period
expenses' amounting to `78,63,993/-. The assessee raised an
additional ground before the DRP requesting for allowing
deduction of expenses incurred for the AY 2006-07, which were
debited to the Profit & Loss (Appropriation) Account 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 the matter.
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10. We have considered the rival submissions and perused the
relevant material on record. It is pertinent to note that we are
dealing with the assessment year 2006-07 with the financial year
ending on 31.3.2006. In its Annual accounts for the year ending
31.3.2007, the assessee debited `Prior period expenses'
amounting to `83,62,295/-. These expenses were voluntarily not
claimed as deduction in the computation of income for 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 out of the total
of `83.62 lakh, discharged during the succeeding year 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 earlier years
including assessment year 2006-07. If there are some expenses
incurred for the business, which are otherwise deductible, then
deduction must follow. It cannot be a case that such expenses
would not qualify for deduction either in the year of incurring or in
the year to which they relate. Adverting to the facts of the instant
case, it is seen that the assessee incurred some expenses for the
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period relevant to the A.Y. 2006-07 during the period relevant to
the A.Y. 2007-08 without claiming deduction in the computation
of income of any of the years. Such expenses deserve to be
allowed as deduction in the computation of income, to which they
pertain. As the `Prior period expenses' in the accounts 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 earlier year. It is
not a case that the assessee is seeking deduction for `Prior period
expenses' appearing in its accounts for the AY 2006-07. It is
simply contending for deduction of expenses relating 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 expenses
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 justice would
meet adequately if the impugned order on this issue is set aside
and the matter is restored to the file of AO. We order accordingly
and direct him to scrutinize the details of such `prior period
expenses' booked in the accounts for AY 2007-08 for ascertaining
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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 consideration is
against the addition of `28,55,40,322/- made on account of
transfer pricing adjustment. Briefly stated, the facts of the case
are that the assessee reported four international transactions,
viz., `Provision of marketing support services' with value of
`324,73,13,183/-; Provision for regional guest employee services;
Provision of Microsoft consulting services; and Assignment of
personnel. The Transfer Pricing Officer (TPO) got satisfied with
the arm's length price (ALP) of all the international transactions
except the first one, namely, `Provision of marketing support
services'. The assessee adopted Transactional net margin
method (TNMM) as the most appropriate method to benchmark
this international transaction. Profit level indicator (PLI) was
adopted as Operating profit/Total cost (OP/TC). The assessee
computed its percentage of operating profit margin at 12.39% in
comparison with that of nine comparables, on the basis of
multiple year data, at 7.32%. That is how, the assessee
demonstrated that this international transaction was at ALP. The
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TPO required the assessee to furnish benchmark analysis of these
comparable companies by using the current year data alone. In
doing so, the assessee reduced the comparables to seven. 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 observed that
the assessee was not only engaged in the dissemination of
information and performing low-end non-complex functions, but
also creating significant intangibles. He reached this conclusion
despite the assessee's submission that it was simply creating
awareness of the Microsoft products amongst the existing and
potential users by holding seminars, conferences, advertisement
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 persuade 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, the transfer
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pricing adjustment amounting to `28.55 crore was proposed,
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 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 PLI of the comparables. Here again, the
assessee has confined itself to challenging the inclusion of five
new companies by the TPO in the final list of comparables. We
are, therefore, restricting ourselves in examining the
comparability or otherwise of the five new companies introduced
by the TPO in the final list of comparables.
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ITA No.5855/Del/2010
13. Before embarking upon making an analysis of comparability,
it is sine qua non to first ascertain the correct nature of the
assessee's activity under the segment of `Provision of marketing
support services.' The assessee's Transfer pricing study report
indicates that the assessee, a wholly owned subsidiary of
Microsoft Corporation, provided marketing support services
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% 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 mark-
up. The TPO has reproduced relevant clauses of the assessee's
Agreement with Microsoft Corporation Pte Ltd., Singapore 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 `shall have a non-
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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 soliciting orders
shall only be authorized to inform customers of price, payment
delivery and other terms offered by MO in accordance with
information received from MO or its affiliates. It further provides
that the assessee `shall not enter into any agreements with
customers regarding Microsoft products, but shall instead
promptly submit written customer orders to MO or its affiliates as
appropriate, for its acceptance or rejection.' The nature of
services 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
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
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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 interface
and provision for training and back-up for use of products and
softwares. In this regard, it is 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 may, it can be seen that the
inference drawn by the TPO that the assessee is not only engaged
in the dissemination of information, but also providing high-end
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marketing services leading to creation of marketing intangible for
its AE, is not correct. It can be seen from the clipping dated 24th
November, on page 19 of the TPO's order that Microsoft
Corporation India Pte Ltd., announced 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 PCs under GGS by simply `place(ing) an
order with their reseller to legalise their counterfeit software.'
From the above, it is clear that the assessee is nowhere engaged
in the actual selling of the products to the customers directly. It is
simply providing marketing support services by creating customer
awareness for the Microsoft products and also in certain cases
providing trainings and back-ups for the use of such products and
softwares. With this background of the nature of the assessee's
activity under this segment, let us analyse as to whether the five
companies chosen by the TPO are, in fact, comparables.
i. Engineers (India) Ltd. :
15.1. The assessee contended before the TPO that this company
was providing engineering and related technical services for
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petroleum refineries and other industrial projects and, hence,
could not be compared with the assessee. Not convinced, the
TPO included this company in the list of comparables by noticing
that the assessee itself used this company as comparable for the
assessment years 2003-04 and 2004-05. In view of the fact that
the assessee included this company in the list of comparables for
the earlier years, the TPO held that it must be so included in the
final list of comparables for the instant year as well.
15.2. We do not find any force in the view canvassed by the TPO
for including this company in the list of comparables simply on
the strength of the assessee treating it as comparable for the AYs
2003-04 and 2004-05. It goes without saying that there can be
no estoppel against the correct position of comparability. 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
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company is not, in fact, comparable, then it is for the authorities
to first decide the comparability on merits and then proceed for
its inclusion or exclusion in/from the list of comparables. A mere
claim made by the assessee for considering a company as
comparable, does not ipso facto lead to its final inclusion or
exclusion. It is only when the TPO examines the assessee's
contention that he can reach a positive conclusion about the
comparability of such a company. Same position equally applies
to the TPO as well. Simply because a particular company was
wrongly excluded by him in determining the ALP of an
international transaction for an earlier year, cannot debar him
from including it in the list of comparables in the succeeding year,
if it is actually comparable. The essence of the matter is to
examine the comparability and not the fact as to whether it was
included or excluded in the past or in the future.
15.3. It can be seen from the TPO's order that he 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 correct nature
and the functional profile of this company.
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15.4. It can be seen that Engineers (India) Ltd., is a company
providing engineering and related technical services for
petroleum refineries and other industrial projects. This company
has two business segments, namely, Consultancy & Engineering
projects and Lumpsum Turnkey projects. These services are in
the nature of engineering services, which, by no standard, can be
compared with the marketing support services provided by the
assessee to its AEs. The Hon'ble jurisdictional High Court in CIT
vs. Verizon India (P) Ltd. (2014) 360 ITR 342 (Del) has held that
marketing services cannot be compared with the engineering
services. In that case, the assessee provided marketing services
and the authorities below considered some companies, providing
engineering services, as comparable. The Hon'ble High Court
approved the view taken by the Tribunal in holding that
marketing services provided by that assessee were entirely
different from the set of services in the nature of engineering
services rendered by the comparables. As admittedly, Engineers
(India) Ltd., is engaged in providing engineering services, the
same cannot be considered as comparable with the assessee,
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who is engaged in providing marketing support services. 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 assessee's inclusion 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 consultancy
organization rendering consultancy services in all facets of
transportation. Its major areas of operations are consultancy
services; Export of Rolling Stock, Equipments and Spares; and
leasing of Railway Rolling Stock and Equipments. It can be seen
that the functional profile of this company is nowhere near the
assessee, which is simply providing marketing support services by
largely creating customer awareness for the Microsoft products in
India. This company is, therefore, directed to be excluded.
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(iii) TCE Consulting Engineers Ltd.:
17.1. 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.
17.2. It is noticed 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. As such,
there can be no comparison of this company with the assessee
company. This company is also 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.
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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) 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 further supported
his finding by noticing that this company was providing 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 from the Annual
report of this company, a copy of which is available at page 155
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of the third paper book, that the 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. On a cursory look at the nature of services
provided by this company, it transpires that the same is
functionally dissimilar from that of 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 a comparable. We, therefore, direct the exclusion
of this company from the list of comparables.
20. No other issue of the addition on account of 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 arm's length price of the
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international transaction of `Provision of market support services'
afresh by excluding these five companies from the list of
comparables. All other aspects of the computation of ALP done by
the TPO earlier, are final. Needless to say, the assessee 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 18.12.2014.
Sd/- Sd/-
[GEORGE GEORGE K.] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 18th December, 2014.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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