DCIT, NEW DELHI vs. M/S. MICROSOFT CORPORATION INDIA PVT. LTD., NEW DELHI

Microsoft Corporation India Private Limited (“MCIL” or “MCIPL”), is the assessee. It was incorporated as a private company in India in July 1988 and was converted to a wholly owned subsidiary of MS Corp in January 1996. Assessee is engaged in the business of providing services in supporting the development of client/server applications, to assist customers in the successful allotment of Microsoft technology, both directly and through service providers and to provide training to authorised training centres to assist customers India operations of Microsoft licensed software.

During the financial year 2008-09 the assessee was engaged in providing marketing support to MS Corp and affiliated entities in return for a service fee and also provid software consulting services and other services. The international transactions of the assessee during the year with its Associated Enterprises (AEa) in respect of provision of marketing support services (“MSS”) was of a value of Rs. 7,11,86,08,559/-. Assessee selected the Transactional Net Margin Method (“TNMM”) as the Most Appropriate Method (MOM) for benchmarking of the international transaction for provision of MSS with a return on total operating cost (“OP/TC”) as the Profit Level Indicator (PLI) and computed the PLI at 16.75%. PLI of fourteen comparables on the basis of multiple data was computed at 8.91%, and concluded that international transaction is at arm’s length price. However, Ld. TPO, with reference to the A.Y.: 2009-10 - DCIT vs. Microsoft Corpn India P Ltd. C.O.375/Del/14 (In ITA 1206/Del/14) - Microsoft Corpn India P Ltd. vs. DCIT ITA 2529/Del/14 : A.Y.:2009-10 - Microsoft Corpn India P Ltd. vs. DCIT Show cause notice and the submissions of the assessee, rejected five comparables stating that the assessee is providing high-end market support services to its parent AE. Finally Ld. TPO selected a set of Nine comparables, and while rejecting the request of the assessee for working capital adjustment, made an adjustment of Rs. 51.75 crores.

Ld. DRP, by order dated 31/12/2013, referred to their own order for the assessment year 2008-09, directed the exclusion of M/s. Basiz Fund Services Private Limited from the final set of comparable companies and gave relief on certain corporate tax grounds.

Challenging the direction of DRP to exclude M/s. Basiz Fund Services Private Limited from final set of comparable companies, Revenue filed ITA 1206/Del/2014. By filing CO No 375/Del/2014, MCIPL is seeking consideration of Transfer Pricing study as final and valid for all purposes and exclusion of four companies - Apitco, Global procurement consultants, Killick agencies and Orient engineering from final set of comparable companies and inclusion of some comparable companies like Inmacs, Access India, EDCIL, Inhouse production, ITDC (seg) etc., MCIPL also for grant of working capital adjustment, whereas by way of ITA 2529/Del/2014, MCIPL is requesting for deletion of ad hoc disallowance made in relation to motorcar running expenditure and further relief by way of deleting excess income wrongly offered to tax due to erroneous and inadvertent automatic reversal of year end provision in books of accounts. .

Ground No. 1 is general in nature and ground No. 5 is a pre-matured one. Ground to relate to the disallowance of 50% of car running and maintenance expenses whereas grounds 3 and 4 relate to the excess income A.Y.: 2009-10 - DCIT vs. Microsoft Corpn India P Ltd. C.O.375/Del/14 (In ITA 1206/Del/14) - Microsoft Corpn India P Ltd. vs. DCIT ITA 2529/Del/14 : A.Y.:2009-10 - Microsoft Corpn India P Ltd. vs. DCIT of Rs. 2,04,88,369/-offered for taxation in the subject year erroneously on account of automatically worsen of year-end provisions in the accounting system of MCIPL.

In respect of ground No. 3 it is the finding of the Ld. AO that the freedom to use car was with the employee and the company only monitors it by putting an overall ceiling on the amount that can be claimed by the employee, for all practical purposes the vehicle is under the full control and command of the employee as such the possibility of employee making use of the vehicle for non-business purposes cannot be ruled out. By observing that the car policy of the company does not keep an eye on the purpose of use of car use but only on quantum of car use, Ld. AO found that in the absence of any record, 50% of running and maintenance expenses that is Rs. 1,74,94,518/-had to be disallowed being expenditure incurred for non-business purposes.

Ld. DRP recorded that the facts of this case are similar to the facts as in AY 2008-09 and for AY 2008-09 the Ld. DRP held that inasmuch as the issue was pending before the ITAT and has not reached finality, following the earlier year order declined to interfere with the order of the Ld. AO. By following the same, Ld. DRP declined to interfere with the order of the Ld. AO for this AY also.

It is brought to our notice that this issue is decided in favour of the assessee by the ITAT in respect of the assessment years 2006-07 vide order dated 18/12/2014 in and for assessment year 2007-08 by order dated 30/06/2015 in ITA No. 5766/Del/2011. We have gone through the order dated 09/02/2016 in ITA No. 6417/Del/2012 for the assessment year 2008-09 wherein after referring to the orders relating to the earlier assessment years, the Tribunal reached the very same conclusion in favour of the assessee. A.Y.: 2009-10 - DCIT vs. Microsoft Corpn India P Ltd. C.O.375/Del/14 (In ITA 1206/Del/14) - Microsoft Corpn India P Ltd. vs. DCIT ITA 2529/Del/14 : A.Y.:2009-10 - Microsoft Corpn India P Ltd. vs. DCIT Insofar as the continuity of these facts over the years is concerned, revenue does not dispute the same. When the facts continue to be similar, we do not find any reason to take a different view. We, therefore, respectfully following the consistent view taken by the tribunal for the assessment years 2006-07 to 2008-09 answer the issue in favour of the assessee and a direct the Ld. AO to delete the addition made on account of disallowance of car running and maintenance expenses.

Now coming to grounds No. 4 and 5, it is submitted by the Ld. AR that in the financial year 2007-08, the assessee company has been booking year-end provisions in its profit and loss account and out of such provisions the statutory auditors of the company had reversed half the amount being excess in nature at the time of finalisation of the books of accounts and claimed only the remaining half as deduction in the return of income. However, subsequently in the financial year 2008-09 the entire amount of provision was automatically reversed in the accounting system of the company as a normal industry practice instead of reversing the amount that was debited to the profit and loss account in financial year 2007-08, resulting in an additional amount being offered to tax in the written of income erroneously.

He further submitted that in the financial year 2012-13 the assessee had reversed the above additional income to square up the account and an expense has been debited to the profit and loss account. In the return of income for the financial year 2012-13 filed by the assessee such an amount was not claimed, and has been added back while computing the taxable income on and as emption that the same shall be allowed in the subject proceedings of financial year 2008-09. Assessee was of the view that it is more appropriate to claim this expense or reversal of income in the same financial A.Y.: 2009-10 - DCIT vs. Microsoft Corpn India P Ltd. C.O.375/Del/14 (In ITA 1206/Del/14) - Microsoft Corpn India P Ltd. vs. DCIT ITA 2529/Del/14 : A.Y.:2009-10 - Microsoft Corpn India P Ltd. vs. DCIT year in which the additional income was offered, by booking the same as “advances and deposits written off” in note 17 to the financial statements of financial year 2012-13.

Ld. AR submitted that an additional ground on this aspect was raised against the draft assessment order before the Ld. DRP, but the Ld. DRP has not considered the same in the directions passed on 31/12/2013.

On a careful consideration of the matter we find force in the submission of the Ld. AR. Inasmuch as factual verification is necessary on this aspect, we direct the Ld. AO to verify whether the assessee had reversed the provision to the extent of Rs. 2,04,88,269/-in the financial year 2007-08 itself, but by mistake of the automatically procedures reversaed the entire amount of Rs. 4,09,81,176/-thereby an additional amount of rupees Rs. 2,04,88,269/-was offered to tax erroneously, and to pass order in accordance with law. These grounds are, accordingly are restored to the file of the Ld. AO for the purpose of verification and passing orders a fresh.

As stated above, it is clear that the dispute in this appeal is confined to the benchmarking of 'Provision Of Market Support Services' (MSS) alone. Revenue is questioning the direction of the Ld. DRP to exclude M/s. Basiz Fund Services from the final set of comparables, stating that it is the result of non- examination of the order of Ld. TPO and ignoring the detailed reasons given in such order.

It is the argument of the Ld. DR that the rejection of M/s. Basiz Fund Services by Ld. DRP on the ground of functional dissimilarity is incorrect and the Ld. DRP has changed the filter from broad functional comparability to stick A.Y.: 2009-10 - DCIT vs. Microsoft Corpn India P Ltd. C.O.375/Del/14 (In ITA 1206/Del/14) - Microsoft Corpn India P Ltd. vs. DCIT ITA 2529/Del/14 : A.Y.:2009-10 - Microsoft Corpn India P Ltd. vs. DCIT to functional comparability and applied it only to one comparable. According to the Ld. DR the independent TP Auditor as well as the Ld. TPO selected the comparables from the entire list of companies providing marketing services keeping in view the broad functional comparability under TNMM, the above approach of the TP Auditor was never objected by the assessee and an identical approach was adopted by the Ld. TPO as such now the assessee cannot insist on strict functional comparability to object only those comparables where margin is high.

Further according to the Ld. DR it is a well settled proposition of law that assessee cannot approbate and reprobate. If strict functional comparability is adopted for selection of comparables then the matter needs to be restored to the Ld. TPO so as to stick to functional comparability of all comparables, including the comparables not objected by the assessee like Cyber Media Research, which is engaged in event management activities and ICRA Management Consulting, engaged in providing consultancy services in strategy, risk management, operations management, regulatory economics and transaction advisory can be tested.

He placed reliance on the decision reported in Copal research India (P.) Ltd Vs. DCIT (2016) 73 taxman.com 157 (Delhi-Trib) for the principle that mere possession of intangible will not make the comparable unfit for benchmarking and it can be excluded only when the possession of intangible impacts profitability. Basing on this Ld. DR argued that the onus was on the assessee to establish the profitability impact due to the position of intangibles, which the assessee failed to discharge.

Per contra, Ld. AR submitted that the Ld. DRP has rightly directed exclusion of M/s. Basiz Fund Services Private Limited from final set of A.Y.: 2009-10 - DCIT vs. Microsoft Corpn India P Ltd. C.O.375/Del/14 (In ITA 1206/Del/14) - Microsoft Corpn India P Ltd. vs. DCIT ITA 2529/Del/14 : A.Y.:2009-10 - Microsoft Corpn India P Ltd. vs. DCIT comparable companies as it is functionally not at all comparable to MSS service provided by MCIPL. Annual report of M/s. Basiz Fund Services Private Limited can be found at page 961 of the fourth paper book. As can be seen from page 985 where Schedule 13 to financials is set out, income was earned from preparation of financial statements, liquidity monitoring services, NAV accounting of international funds and consulting charges on US taxation etc. This company also owns intellectual-property and technical know-how as can be referred from page 981.

He further brought to our notice that the avowed objective of the company as set out at page 989 of the paperbook was to provide fund accounting services fund administrators, insurance companies, prime brokers, private equity funds in selected geographies, managed funds/portfolio accounts, family offices and internal fund accounting for which funds. Thus, it can be seen that the activities of M/s. Basiz Fund Services Private Limited and therefore, FAR are totally distinct and different from the FAR undertaken by MSS services provided by MCIPL. Ld. AR, therefore, prayed to reject the relief requested in department appeal number 1206/DEL/2014.

We have gone through the record in the light of the submissions on either side. During the financial year 2008-09 MCIPL continued to provide market support services. Transfer pricing study and the segmental financials extracted by TPO show that MSS was the major transaction. The assessee selected the transactional let margin method (“TNMM”) as the most appropriate method for benchmarking of the international transaction for provision of marketing support services with a return on total operating caste (“OP/TC”) as the profit level indicator and computed the PLI at 16.75% and computed the PLI of 14 comparables on the basis of multiple data at 8.91%. Ld. A.Y.: 2009-10 - DCIT vs. Microsoft Corpn India P Ltd. C.O.375/Del/14 (In ITA 1206/Del/14) - Microsoft Corpn India P Ltd. vs. DCIT ITA 2529/Del/14 : A.Y.:2009-10 - Microsoft Corpn India P Ltd. vs. DCIT TPO has not rejected the transfer pricing study, but proceeded to modify the economic analysis in connection with international transaction of MSS, by adopting the TNNM as the Most Appropriate Method.

A reading of the brief profile of overseas parent and MCIPL, as could be found at pages 775 and 776 of the paper book, the detailed analysis carried out in connection with this international transaction of MSS as has been incorporated at page 790 onwards, summary of financial statements can be found at page 890 and FAR from page 792 onwards of the paper book, and the audited financial statements of MCIPL as can be referred to at page 625 of paper book - justifies the finding of the Ld. DRP that the company M/s. Basiz Fund Services Private Limited is functionally dissimilar to the assessee inasmuch as such a company is involved in the fund accounting services, possessing significant intangible assets, the different employees profile, very significant growth in the revenue at 57.61% and earning of profits at 46.75% at supernormal level. Basing on these factors, Ld. DRP recorded a finding that the possession of significant intangibles and the functions performed by the M/s. Basiz Fund Services Private Limited stands apart from the companies providing simple Marketing Support Services like the assessee.

Further, it is clear from the order dated 30.01.2013, Ld. TPO notes that the facts remain same as in Ay 2005-06 to Ay 2008-09. Vide paragraph No. 3 of their order, Ld. DRP found that this issue has arisen for a consideration for the assessment year 2008-09 also. They are extracted the relevant portion of the order for the assessment year 2008-09 wherein the contentions on either side were examined, and ultimately it was held that the services rendered by the assessee are not high-end and the contentions of the assessee were acceptable. While respectfully following the decision of the Ld. DRP for A.Y.: 2009-10 - DCIT vs. Microsoft Corpn India P Ltd. C.O.375/Del/14 (In ITA 1206/Del/14) - Microsoft Corpn India P Ltd. vs. DCIT ITA 2529/Del/14 : A.Y.:2009-10 - Microsoft Corpn India P Ltd. vs. DCIT assessment year 2009-10, the Ld. DRP held filed the year under consideration also that the services of the assessee are not high-end ones and the contentions of the assessee were accepted.

It is not the case of the revenue that there is any change in the facts and circumstances involved in this matter from those file AY 2008-09 so as to prompt us to take a different view. As a matter of fact even for the assessment year 2008-09 Ld. DRP recorded that for preceding years also it was held that the services rendered by the assessee were not high-end ones, as such Ld. DRP accepted the view taken for the earlier years and held for the assessment year 2008-09 that the services rendered by the assessee was not of high-end. It is not the case of the revenue that such a finding of fact was disturbed by any appellate authority. It is, therefore, clear that such a finding of fact has attained finality. Facts being continued similar for all these years, we deem it necessary that the revenue has to follow the consistent view taken in the earlier years. We, therefore, find that the appeal No. 1206/Del/2014 is devoid of merits and is liable to be dismissed. We accordingly dismiss the same.

It is submitted before us and we also find from order dated 28/03/2014 passed by the TPO, pursuant to the directions given by the DRP, that the entire addition by way adjustment originally proposed by TPO got deleted. Inasmuch as we uphold the directions of the DRP to delete M/s. Basiz Fund Services Private Limited, the order dated 28/03/2014 holds well. In these circumstances the grounds raised in the cross objections have become only academic. We, therefore, find it not necessary to delve deeper into the grounds of cross objection, and, accordingly, dismissed the cross objections.