TMI Blog2019 (11) TMI 1438X X X X Extracts X X X X X X X X Extracts X X X X ..... basis by creating customer awareness for the Microsoft products and also in certain cases, training and back up for the use of such products and software and not creating any market intangibles for its AE. So, the view taken by the TPO that the taxpayer is into providing high end marketing services leading to creation of high end tangibles for its AE is not sustainable. Comparable selection - CRISIL exclusion from the final set of comparables - Decision rendered by the coordinate Bench of the Tribunal in taxpayer s own case [ 2020 (9) TMI 185 - ITAT DELHI] in the similar facts and circumstances wherein there is no change in the business model and taxpayer is providing services under the same master service agreement, Crisil being owner of huge intangibles having been employed in order to achieve its target and that it is a high risk profile entity cannot be a suitable comparable vis- -vis the taxpayer who is a non-risk bearing routine marketing service provider to its AE working on cost plus mark up basis, hence ordered to be excluded. ICRA is not a suitable comparable vis- -vis the taxpayer on ground of functional dissimilarity but being into providing advisory servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermine the year of allowability if otherwise proved - corporate grounds are allowed for statistical purposes. - ITA No.5980/Del./2016 - - - Dated:- 28-11-2019 - Shri R.K. Panda, Accountant Member And Shri Kuldip Singh, Judicial Member ASSESSEE BY : Shri Nageshwar Rao, Advocate REVENUE BY : Shri Sanjay I. Bara, Senior DR ORDER Kuldip Singh, The Appellant, M/s. Microsoft Corporation (India) Pvt. Ltd. (MCIPL) (hereinafter referred to as the taxpayer ) by filing the present appeal sought to set aside the impugned order dated 18.07.2016 passed by the Commissioner of Income-tax (Appeals)44, New Delhi in an appeal challenging the orders passed by the ld. TPO/AO qua the assessment year 2003-04 on the grounds inter alia that :- Transfer Pricing Grounds 1. On facts and in law, the Ld. TPO/AOI CIT(A) have erred in making an adjustment of INR 71,092,606 to the returned income of the Appellant in respect of the international transaction pertaining to provision of marketing support services ( impugned transaction ). 2. That the Ld. TPO/CIT(A) has erred in law and on facts and circumstances of the case, by not accepting the economic analysis undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed as business loss under section 28 read with section 29 of the Act. 8.1 That the Ld. CIT(A) erred on facts and in law in not appreciating that the amount so written off was non-recoverable in nature being a trading loss on a revenue account and was incidental to the business of the Appellant. 9. That on the facts and in the circumstances of the case, the Ld. AO has erred in charging interest under section 234B 234C of the Act. 10. That the Ld. AO erred on facts and in law in initiating the penalty proceedings against the Appellant under section 271 (1)(c) of the Act. 3. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Microsoft Corporation (India) Private Limited (MCIPL), the taxpayer is a wholly owned subsidiary of Microsoft Corporation, US. The taxpayer creates awareness of Microsoft products in India in general through seminars, conferences, advertising in public media and promotional campaigns. Microsoft software in India is sold through a network of independent unrelated distributors. The taxpayer does not sell software in India on its own account but renders marketing services viz. maximizing the markets for Microso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g margin of comparables at 16.13% and proposed the arm s length price qua marketing support services at ₹ 118,15,53,563/- and added the difference of ₹ 10,28,40,459/- to the total income of the taxpayer. 7. The taxpayer carried the matter before the ld. CIT (A) by way of filing appeal, who has partly allowed the same. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 9. Ld. TPO in order to benchmark the international transactions viz. marketing support services transactions computed average at 16.13% after taking into account the adjustment qua economic cost of owning net working capital and the effect of such cost of operating income which is as under :- S. No. Name of the Company Adjusted Operating Profit Margin (weighted average for 99-00 and 00-01) 1 CRISIL Ltd. 48.49% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under :- 5.2 The details of the services rendered by the assessee to Microsoft Corporation USA These services are governed by Master Service Agreement with Microsoft Corporation USA. The Agreement is titled parent subsidiary Agreement dated 01/07/2003. Where Microsoft Corp. USA is called MSFT. The assessee is referred to as subsidiary''. The following services as per agreement are being rendered. 2. RESEARCH AND DEVELOPMENT Subsidiary hereby agrees to undertake such research and development work as requested and approved in writing by MSFT form time to time. Subsidiary may subcontract with third parties to perform some all of such work upon MSFT's approval. In the event that MSFT contracts directly with vendors in country MSFT may requested the subsidiary to provide assistance with regard to such contracts. 3. OTHER INTERCOMPANY SERVICES 3.1 Services: MSFT and subsidiary acknowledge that MSFT and/or its affiliated companies may from time to time provide corporate and other services to subsidiary and subsidiary may from time to time provide corporate and other services to MSFT and/or its affiliated companies. 3.2 Sales: MSFT and subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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 Microsoft 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14. When we examine the findings recorded by the ld. CIT (A) at page 43 of the impugned order recharacterizing the services rendered by the taxpayer under the master service agreement as high end by deviating from the earlier view taken by the Revenue confirmed by the Tribunal, we fail to find out any reason as to why the ld. CIT (A) has not followed the decision rendered by the Tribunal in taxpayer s own case for AY 2006-07 (supra). Ld. CIT (A) has treated the services rendered by the taxpayer to its AE as high end on the half-baked reasons which have been duly replied with decided by the coordinate Bench of the Tribunal in paras 13 14, extracted above, in favour of the taxpayer. 15. So, following the decision rendered by the coordinate Bench of the Tribunal in AYs 2006-07 and 2007-08, we are of the considered view that the taxpayer is a low end marketing support service provider on cost plus mark up basis by creating customer awareness for the Micros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on cost plus mark up basis. Moreover, Crisil has been rejected by the ld. DRP in taxpayer s own case for AY 2007-08 and 2008-09 being engaged into niche advisory services of financial market. 20. Coordinate Bench of the Tribunal in taxpayer s own case for AY 2002-03 excluded Crisil from the final set of comparables by returning following findings :- 23. It is brought to our notice by the ld. AR for the 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 taxpayer on the ground that, CRISIL is engaged in providing niche advisory services of financial markets and as such financially different. 24. When the taxpayer is proved to have provided similar marketing support services to its AE as it has provided in AYs 200708 to 2009-10, no cogent reason has been brought on record by the TPO/CIT (A) to depart from the consistent view taken in the succeeding years. Moreover, the company providing advisory services cannot be compared with the taxpayer who is into providing routine marketing support services to its AEs. 25. Moreover, audited financial of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -vis the taxpayer who is a non-risk bearing routine marketing service provider to its AE working on cost plus mark up basis, hence ordered to be excluded. ICRA LIMITED (ICRA) 22. The taxpayer sought to exclude ICRA on the grounds inter alia that it is providing rating services, advisory services and information services; that ICRA is into providing premium advisory services segment; and that ICRA has been excluded by the coordinate Bench of the Tribunal in taxpayer s own case in AY 2002-03 (supra) on ground of functional dissimilarity. 23. Perusal of the annual report available under the head Director s Report at pages 918, 923 924 shows that ICRA is into rating services, advisory services and information services. Furthermore, perusal of the TP order itself shows that TPO himself acknowledged in para 7.9 that ICRA is into providing premium financial advisory services as the rate of its employee cost is extremely high indicating that its personnel are key drivers of these businesses. Moreover, coordinate Bench of the Tribunal in taxpayer s own case for AYs 2002-03 and 2007-08 (supra) has excluded ICRA from the final set of comparables. The relevant findings returned in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entre for providing services in publishing of publicity material, technical bulletins, status report, providing consultancy services in the major field of irrigation, drainage, watershed management, etc., it is also providing services in the field of hydro-power, thermal power, transmission and distribution etc. and is into conducting environmental studies for mega projects in hydropower, water resources, ports and harbours, mining, industrial sector etc., ports and harbours division is involved in carrying out techno-economic feasibility studies, preparation of project reports, detailed engineering project implementation and monitoring, it is into providing planning and designing of rural and urban water supply schemes, sewage treatment and disposal schemes, laboratory testing, inspection etc. 27. Coordinate Bench of the Tribunal excluded WAPCOS from the final set of comparables in taxpayer s own case for AY 2006-07 by returning following findings :- 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting support services provider on cost plus mark up basis, hence ordered to be excluded. VIMTA LABS LTD. (VIMTA) 32. The taxpayer sought exclusion of Vimta as a comparable vis -vis the taxpayer on grounds inter alia that it is functionally different; that it has high proportion of plant and machinery applied and it has significant intangibles; that it is a high risk bearing entity; that it has been ordered to be excluded by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2006-07 and 2007-08 (supra). 33. Perusal of annual report, available at page 517 of the paper book, shows that Vimta is engaged in contract research (clinical and pre-clinical), clinical specialty diagnostics, analytical testing of water, food, drugs, chemicals, petroleum products, minerals, metals, etc. and environmental monitoring and impact assessment. Perusal of schedule forming part of the Accounts at page 527 of the paper book shows that it has displayed high proportion of plant and machinery. 34. Coordinate Bench of the Tribunal in AY 2007-08 in taxpayer s own case excluded Vimta in taxpayer s own case on ground of functional dissimilarity by returning following findings:- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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