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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SMT DIVA SINGH & SH.N.K.SAINI
reproduced hereunder from the TPO’s order itself:-
6.2. Show cause notice to the assessee “From the analysis of the functional profile of the assessee, FAR analysis conducted and on the basis of study material available on the website of the assessee, it was found in the previous years 2005-06 and 2006- 07 that the assessee was involved in creation of marking intangible and the economic, ownership of these intangibles is with the assessee for which it was not adequately compensated. On the basis of above analysis, the assessee was asked to show cause vide notice dated 06.09.2011 as to why as per the reasons recorded in the order for AY 2006-07 and 2007-08, the reimbursement received for marketing activities carried out by the MCIPL should not be considered as inadequate compensation in view of the marketing intangibles created. The assessee was also required to show cause as to why the comparables as discussed in order for AY 2007-08 should not be considered this year also for comparability analysis.” 6.7. Not satisfied with the explanation offered by the assessee and taking into consideration that in its original transfer pricing report the assessee had computed margins of 12 comparables companies using TNMM and three years data at average arithmetic mean of 7.90% based on which the assessee had claimed that its PLI of Page 12 of 34
I.T.A .No.-6417/Del/2012 6.17% compared to the arithmetic mean of the comparables as 7.90% on operating cost was at arm’s length. Rejecting the three years data and taking into consideration the past position taken by the Revenue.
6.8. The TPO qua the specific comparables under consideration rejected the assessee’s prayer. The general reasons for rejecting the arguments for all the comparables was as under:-
10. Selection of final set of comparables “The above stated reply of the assessee has been considered in detail. However, there is no merit in the contentions of the assessee as all the afore-mentioned companies are engaged in providing consulting and support services like the assessee. The assessee is also providing high end marketing services and accordingly the companies selected also need to be performing similar high level activities. The findings in case of each comparables is given below.” 6.9. Qua the specific comparable WAPCOS he rejected the arguments advanced by the assessee on the following reasoning:-
10.1.“WAPCOS LTD.-The assessee has itself used this comparable during AY 2002-03, AY 2003-04, AY 2004- 05 while selecting the comparable for AY 2002-03, the assessee in its TP report had noted the said company performed comparable functions as under:-
I.T.A .No.-6417/Del/2012
“Public sector enterprise was set up to channelize India expertise in Water Power Infrastructure and allied sectors for the benefit of developing countries and is now recognized amongst the top ranking consultancy organizations of the world in these sectors. The spectrum of services included Preliminary Investigations /Reconnaissance Feasibility, studies/planning/project formulation field investigation and testing, Engineering Designs, Drawing and ............................process, contract Management and construction supervision, operation and maintenance institutional Human Resource Development (source wwww.wapcos..) The assessee has again selected this comparable in AY 20003-04 commenting that the said company performs comparable functions as under:- “WAPCOS provides consulting services in the domestic and international water and power sectors. Service offered include market intelligence, feasibility studies, planning/project formulation, field investigations and testing, engineering designs, contract management, quality assurance & management and human resource development. Apart from the Indian sub-continent, WAPCOS renders consultancy services in over 30 developing countries. This company was once again treated as comparable company in AY 2004-05 and AY 2006-07 also with the same comments as mentioned above. Therefore, the I.T.A .No.-6417/Del/2012 company is considered as a comparable and is being taken this year also.” However, it seen from the Annual Report for FY 2007-08 that this company has a reportable segment of consultancy and engineering products. The entity level result will not be desirable, when a comparable segment is available. Hence, it is decided to use that to that segment as a comparable.” 6.10. For retaining TCE Consulting Engineers Ltd. the assessee’s arguments were rejected on the following reasons:-
10.2. TCE Consulting:-This company was itself selected by the assessee as comparable company during AY 2004-05 with comments as under:- “TCE Consulting Engineers Ltd., a Tata Group company is engaged in provision of engineering services such as operation and design engineering, upgradation & renovation services, survey & field investigation services, etc. It is not the case of the assessee that this company is performing different functions or the assessee itself is performing different functions. Therefore the company is considered as a comparable and is being taken this year also.” 6.11. Similarly for retaining Vimta Lab Limited its inclusion was justified over ruling the opposition posed by the assessee on the following grounds:-
I.T.A .No.-6417/Del/2012 10.5. Vimta Labs Ltd. “The reply of the assessee regarding use of this comparable has been considered Vimta Labs has been used as a comparable to the assessee by the TPO every year since AY 2002-03. Vimta Labs is in a similar service providing industry as that of the assessee. It provides high end services in the sectors of food and drugs analysis, clinical reference lab services, clinical trials and environmental assessment. The plea of the assessee that Vimta Labs employs skilled workforce in terms of PHDs and scientist and is hence performing high end services is true but at the same time the assessee is also employing highly skilled technical workforce for selling highly sophisticated and complex technological products. The assessee is also engaged in provision of high end services and creation of marketing intangibles. Therefore, based on the above, and for reasons as recorded in all of the previous four AYs, Vimta Labs is also selected as functionally comparable to the assessee for the purpose of benchmarking its international transaction. This company was treated as comparable company since AY 2002-03. Therefore, the company is considered as a comparable and is being taken this year also.”
The issue was agitated by the assessee before the DRP wherein the objection No.3 was posed objecting to the TPO’s finding that the I.T.A .No.-6417/Del/2012 assessee was providing high marketing services. The said objection was decided by the DRP in assessee’s favour. This fact is evident from the following extract of Objection No.3 made by the assessee and the reason of the DRP in deciding the issue in favour of the assessee:-
4.3. “Ground No.3:This issue had arisen last year too before the DRP. The contentions of the assessee which are as follows had been examined by the DRP. • Creating awareness of Microsoft products in India through seminars, conferences, limited advertising in public media, promotional campaigns Etc. • Expanding the markets for Microsoft retail products in India through local print and electronic advertising, promotional campaign, antipiracy drives, etc; and • Performance other activities which includes the following:- o Dissemination of information to potential customers; o Commenting on any developments in the territory affecting the industry in which MCIPL functions; o Investigating feasibility of new markets for Microsoft retail products and basic market research; and o Provide miscellaneous marketing support.
I.T.A .No.-6417/Del/2012
The profile as described above, had been accepted by the DRPO, we find facts and circumstances are same this year too, hence the view of DRP remains same. In view of DRP, the assessee services are not high end and the objection is accepted.” 7.1. We find that however, the DRP did not agree with the assessee’s objections to the exclusion of the above mentioned comparables. The specific reasons given by the DRP for rejecting the objection is reproduced hereunder:-
4.5. “Ground No.4.1 and 8: The profile of the company is same as accepted by DRP last year. Hence for comparability analysis the comparables accepted last year must be used this year also unless their profile has undergone any change and is therefore no longer comparable. No such fact has been brought to our notice hence it is a reasonable presumption that facts are same as last year. Hence TPO is directed to include all the comparables in last year as accepted by the DRP.”
On a reading of the above, it is borne out that both the TPO as well as the DRP were consistently of the view that facts and circumstances on the issues remained identical to the facts as considered in the earlier years. This fact is also borne out from the order of the Co-ordinate Bench dated 18.12.2014 in for 2006-07 assessment year wherein the Page 18 of 34
I.T.A .No.-6417/Del/2012 discussion on this specific segment is available in paras 12, 13 & 14 and is extracted hereunder:-
“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.
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
I.T.A .No.-6417/Del/2012 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 markup. 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- 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
I.T.A .No.-6417/Del/2012 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 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.
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 I.T.A .No.-6417/Del/2012
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 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.T.A .No.-6417/Del/2012 8.1. It is seen that the Co-ordinate Bench has made the relevant discussion qua these comparables in paras 17.1 & 17.2 qua the TCE Consulting Engineers Ltd.; paras 18.1 & 18.2 qua WAPCOS and paras 19.1 & 19.2 qua Vimta Labs. These paras are extracted for ready-reference:-
(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. 18.2. We find that this company operates in two segments, namely, Consultancy & engineering projects
I.T.A .No.-6417/Del/2012 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) Vimta 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 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 I.T.A .No.-6417/Del/2012 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.”
It is further seen that the Co-ordinate Bench vide its order dated 30.06.2015 in in 2007-08 assessment year has reiterated this factual position as is evident from para 19- 24 of the said order. These paras are also reproduced hereunder for ready-reference:-
ii. TCE Consulting Engineers Ltd. 19. “This company was considered by the TPO as comparable on the strength of his reason of inclusion in the list of comparables for the AYs 2002-03 and 2003- 04.
We find 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. It is axiomatic that I.T.A .No.-6417/Del/2012 there can be no comparison of this company with the assessee’s international transaction of rendering marketing support services. The Hon’ble Delhi High Court in CIT VS. Verizon India (P.) Ltd. (2014) 360 ITR 342 (Del) has held that Marketing services provided by companies cannot be compared with Engineering services provided by assessee. This company has also been held by the tribunal to be incomparable in its order for the immediately preceding assessment year passed in the case of the assessee itself. As such, this company is also directed to be excluded from the list of comparables. iii. Vimta Labs Ltd.: 21. The TPO included this company in the set of comparables by noticing that it has been so used as comparable with the assessee since the AY 2002-03. He further supported his finding by noticing that this company was providing similar services as provided by the assessee.
We do not find any force in the functional comparability of this company with the assessee. 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. A cursory look at the nature of services provided by this company divulges
I.T.A .No.-6417/Del/2012 that the same is functionally dissimilar from 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. Similar view has been taken by the Tribunal in the case of the assessee for the immediately preceding assessment year. We, therefore, direct the exclusion of this company from the list of comparables. iv. WAPCOS: 23. This company was considered by the TPO as comparable on the reason of its inclusion in the list of comparables for the AYs 2002-03 and 2003-04.
We find that this company operates in two segments, namely, `Consultancy & engineering products’ and ‘Lumpsum turnkey projects’. It is noticed that the TPO has considered only `Consultancy and engineering products segment’ for the purposes of comparison and has not taken into consideration the other segment of `Lumpsom turnkey projects’. The company, under the alleged comparable segment, provides consultancy services, such as, pre-feasibility report of hydroelectric projects, field investigation drilling of tube wells, etc. From the above description of the activities performed by the company under this I.T.A .No.-6417/Del/2012
segment, it is vivid that the same is engaged in providing engineering and consultancy services, which can be no match to the assessee’s marketing support services. Similar view has been taken by the Tribunal in the case of the assessee for the immediately preceding assessment year. This company is also directed to be excluded from the list of comparables.”
In view of the above detailed factual position wherein we find that the Revenue though has filed an appeal in 2006-07 assessment year before the Hon’ble High Court has taken a decision not to assail the findings of the Co-ordinate Bench directing the exclusion of these three comparables on similar facts and the view taken by the Co-ordinate Bench has been followed in 2007-08 assessment year.
We find that there been no change in the profile of the assessee and the profile of the comparables and in the absence of any contrary fact as was canvassed before the Co-ordinate Bench respectfully following the precedent the following three comparables are directed to be excluded:-
• Vimta Labs Limited; • Water and Power Consultancy Services India Limited; • TCE Consulting Engineers Limited.
I.T.A .No.-6417/Del/2012
The next issue agitated by the assessee is addressed in Ground No.5. A perusal of the discussion on the issue which has led to the passing of the order under challenge would show that the DRP considered the issue in the following manner:-
4.14. “Ground No.11: It is reported that disallowance of 50% car running expenses have been made in the past assessment years also and the matter is now before the ITAT. As the matter has not yet reached finality, the DRP declines to interfere with the AO’s order and, therefore, for statistical purposes the disallowance of the AO is upheld.” (emphasis provided) 11.1. It is seen that the Co-ordinate Bench in ITA No.5855/Del/2010 vide its order dated 18.12.2014 in 2006-07 assessment year discussed the issue in para 7 & 8 and allowed the same in favour of the assessee as would be evident from the following extract of the said order:-
7. “Ground No.5 is against the disallowance of Rs.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.
I.T.A .No.-6417/Del/2012
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.” 11.2. The issue came up for consideration in 2007-08 assessment year again and the Co-ordinate Bench vide order dated 30.06.2015 in again taking the facts and circumstances as identical concluded the issue in assessee’s favour as would be evident from the following para:-
“The next issue is against the disallowance of depreciation on company owned vehicles amounting to Rs.1,85,45,102/-.
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 to the extent it did not exceed the fixed benchmark. The major reason given by the AO
I.T.A .No.-6417/Del/2012 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 the use of cars by directors employees of a company cannot be characterized as user for non-business purpose and, hence, no part of such car expenses 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 are entitled to use the vehicles of the company for personal use as per the terms and conditions of their appointment, it cannot be said that there was a personal use of cars. The Hon’ble High Court further held that such user 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 question of treating the use of vehicles by the directors/employees as a personal use by the company.
I.T.A .No.-6417/Del/2012
Similar issue has also been decided by the Tribunal in the assessee’s own case for the preceding year in its favour. The relevant discussion has been made in paras 5 and 6 of the Tribunal order. We, therefore, order for the deletion of disallowance of depreciation on such vehicles.” 11.3.The issue it is seen was agitated by the Revenue before the Hon’ble High Court in 2006-07 assessment year and has held as under:-
IN THE HIGH COURT OF DELHI AT NEW DELHI ITA 504/2015 PR.COMMISSIONER OF INCOME TAX-6........Appellant Through: Mr.Kamal Sawhney, Senior Standing Counsel with Mr.Shikhar Garg, Advocate. Versus MICROSOFT CORPORATION PVT.LTD...........Respondent Through CORAM DR.JUSTICE S.MURALIDHAR MR.JUSTICE VIBHU BAKHRU ORDER 12.10.2015 1. This appeal by the Revenue is against the order dated 18th December 2014 passed by the Income Tax Appellate Tribunal (‘ITAT’) in for the Assessment Year (‘AY’) 2006-07.
I.T.A .No.-6417/Del/2012 1A.The main issue for consideration in this appeal is whether the ITAT was correct in allowing the depreciation claim under Section 32 of the foreign Assessee company in relation to certain vehicles registered under its name, but given to its employees for their use.
The ITAT has in the impugned order, while rejecting the Revenue’s contention relied upon the decision of the Gujarat High Court in Sayaji Iron and Engineering Company v. CIT (2012) 253 ITR 749 (Guj.) where it was held that once the directors of the Assessee company are entitled to use the vehicles of the company for their personal use as per the terms and conditions of their appointment, it cannot be said that the same was a personal expenditure. In other words, it continues to be business expenditure and is not disallowable as such. The Court is not persuaded to hold a different view in the matter.
No substantial question of law arises. The appeal is dismissed.”
12. In these peculiar facts and circumstances, the grounds raised by the assessee has to be allowed. Accordingly in terms of the above decisions, the appeal of the assessee is partly allowed as most of the issues have not been agitated in the present appeal.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
I.T.A .No.-6417/Del/2012
The order is pronounced in the open court on 09th of February, 2016.