Transfer Pricing Appeals: Exclusion of Comparables, Depreciation Rate Upheld, Working Capital Adjustment Granted

The Tribunal partly allowed the assessee's appeals by directing the exclusion of certain comparable companies for Transfer Pricing purposes due to functional dissimilarity and upholding the lower depreciation rate for leasehold improvements. The Tribunal also instructed the Assessing Officer/TPO to grant the working capital adjustment to the assessee. The order was pronounced on 07.08.2020.

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Issues Involved:
1. Transfer Pricing Adjustment in the Marketing Support Service Segment.
2. Allowance of Depreciation Rate.

Detailed Analysis:

1. Transfer Pricing Adjustment in the Marketing Support Service Segment:

The assessee, a wholly-owned subsidiary of Microsoft Corporation, US, engaged in creating awareness of Microsoft products in India, reported various international transactions with its Associated Enterprises (AEs) for the assessment years 2004-05 and 2005-06. The Transfer Pricing Officer (TPO) made adjustments in the marketing support services segment, which the assessee contested.

The TPO selected a list of comparable companies for benchmarking the marketing support services, which included Besant Raj International Ltd., Engineers India Limited, Mahindra Acres Consulting Engineers, Priya International Limited, RITES Ltd., TCE Consulting Engineers Ltd., Ujjwal Limited, Water & Power Consultancy Services Ltd., CRISIL, VIMTA LABS, KITCO, and ICRA. The assessee objected to the inclusion of six companies, namely WAPCO Ltd, CRISIL Ltd, ICRA Ltd, RITES Ltd, VIMTA Lab, and Engineers India Ltd, citing functional dissimilarity.

The Tribunal found merit in the assessee’s contention, noting that these companies had been excluded in the assessee’s own case in earlier and subsequent assessment years. The Tribunal referenced specific findings from previous years, highlighting the functional dissimilarity of these companies with the assessee’s marketing support services. For instance, CRISIL was excluded because it provided niche advisory services in financial markets, which involved high intangibles and a high-risk profile, unlike the routine marketing support services provided by the assessee. Similarly, ICRA was excluded due to its involvement in rating and advisory services, which were functionally different from the assessee’s services.

The Tribunal directed the Assessing Officer/TPO to exclude the six contested comparable companies from the final list, allowing the grounds related to Transfer Pricing adjustments.

2. Allowance of Depreciation Rate:

The second issue concerned the rate of depreciation allowed on additions to fixed assets. The assessee claimed depreciation at 15% under the block of furniture and fixtures for leasehold improvements, whereas the Assessing Officer allowed depreciation at 10%, treating the expenditure as part of the building based on Explanation 1 to section 32 of the Income Tax Act.

The CIT(A) upheld the Assessing Officer’s decision, noting that the expenditure was primarily on civil and interior works, electrical fittings, and air-conditioning, which constituted improvements to the building with enduring benefits. The CIT(A) referenced a similar decision for the assessment year 2005-06, where such expenditures were treated as building improvements eligible for 10% depreciation.

The Tribunal agreed with the CIT(A), concluding that the nature of the expenditure indicated improvements to the building, thus justifying the 10% depreciation rate. The Tribunal dismissed the assessee’s grievance on this issue.

Additional Consideration:

The Tribunal also addressed a prayer for allowing the benefit of working capital adjustment. Noting that the TPO had allowed such adjustments in earlier and subsequent years, the Tribunal directed the Assessing Officer/TPO to grant the working capital adjustment to the assessee.

Conclusion:

Both appeals by the assessee were partly allowed, with the Tribunal directing the exclusion of certain comparable companies for Transfer Pricing purposes and upholding the lower depreciation rate for leasehold improvements. The order was pronounced in the open court on 07.08.2020.

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