AI Drafter 
TaxTMI 
TaxTMI 
2019 (11) TMI 1438
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....A) has erred in law and on facts and circumstances of the case, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules. 3. That on facts and in law, the Ld. TPOI AOI CIT(A) have grossly erred by not appreciating e correct functional profile of the Appellant and drawing an erroneous conclusion that the Appellant is engaged in providing high-end services and thereby determining the arm's length price ("ALP") using functionally dissimilar companies as comparables. 4. That on facts and in law, while determining the operating margin of the tested party, the Ld. TPOI AOI CIT(A) erred by: * Failing to appreciate that the entire business of the Appellant is integrated and overall margin of the Appellant from the business as a whole should be considered to arrive at the ALP; * Failing to consider the revised segmental profit and loss account submitted by the Appellant wherein the operating profit margins of the Appellant from provision of marketing support services, Microsoft Consulting Services ("MCS"), Product Support Services ("PSS") were based on appropriate allocation of....
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.... 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 Microsoft retail products including all local advertising and performing other activities including dissemination of information to potential customers, commenting on any developments in the territory affecting the software industry, investigating feasibility of new markets for Microsoft retail products, and also provides Microsoft Consultancy Services and Product Support Services to support its sale and marketing efforts in India. 4. During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprises (AE) as reported in Form 3CEB as under :- S.No. International Transaction Method Value (in Rs.) 1 Provision of marketing support services TNMM 1,07,87,13,104 2 Service fee received for software consulting services TNMM 1,29,96,683 3 Assignment of personnel TNMM 89,91,796 5. The taxpayer in order to benchmark its international transactions applied Transactional Net Margin Method (TNMM) with Op....
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....ta Ltd. 7.59% 7 Water & Power Consultancy (I) Ltd. 14.37% 8 Vimta Labs Ltd. 23.50% 9 Priya International Ltd. 11.39% 10 Rites Limited 18.05% 11 Ujjawal Limited 1.05% ARITHMETIC MEAN 16.13% 10. Undisputedly, business transactions qua marketing support services of the taxpayer with its AE is identical to the preceding as well as succeeding years which have already been decided in its favour. 11. Before ld. CIT (A), the taxpayer challenged 6 comparables eg. CRISIL Ltd., ICRA Ltd., Vimta Labs, Engineers India Ltd., Rites Ltd. and WAPCOS. Ld. CIT (A) has not agreed with the findings returned by the ld. DRP in the various assessment years in case of the taxpayer by observing that services under the agreement, namely, marketing representation agreement cannot be said to be "low end" rather characterized the services rendered by the taxpayer to its AE under the master service agreement as "services of high end" which are not relating to only marketing but also relating to research & development and thereby retained all the aforesaid six comparables in the final list to benchmark the international transactions qua marketi....
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....cent (110%) of Subsidiary's actual expenses, less revenues, incurred in connection with its duties provide such expenses comply with subsidiary budget, as adjusted from time to time, and provide, further such expenses are not already compensated pursuant to another section of this Agreement or another agreement between Subsidiary and MSFT and any MSFT affiliate. The fee shall be exclusive of any applicable consumption tax such as a Value Added Tax or a Goods and Service Tax, which consumption tax shall be the responsibility of MSFT." 13. Aforesaid FAR of the taxpayer in AY 2006-07 under the same master service agreement titled as "parent service agreement dated 01.07.2003" considered Research & Development not marketing. Aforesaid FAR of the taxpayer has been duly considered by the coordinate Bench of the Tribunal vide order dated 18.12.2014 in ITA No.5855/Del/2010 in taxpayer's own case by returning following findings :- "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 stud....
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....t 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 marketing services leading to creation of marketing intangible for its AE, is not correct. It can be seen from the clipping d....
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....nclude CRISIL Ltd., ICRA Ltd., Vimta Labs Ltd., Water and Power Consultancy Services (India) Ltd. (WAPCOS) and Rites Ltd. as comparables which approach is not sustainable because high end companies cannot be compared vis-à-vis routine low end marketing support services provider. We would proceed to examine the suitability of aforesaid comparables chosen by the TPO/CIT(A) vis-à-vis the taxpayer to benchmark the international transactions qua marketing support services one by one. TRANSFER PRICING GROUNDS CRISIL LTD. (CRISIL) 17. The taxpayer sought to exclude Crisil from the final set of comparables to benchmark the international transactions qua market support services on the grounds inter alia that Crisil is providing non-comparable services as it operates in three segments, viz., credit rating agency, advisory and R&D; that Crisil is premium service provider; that Crisil is a high risk bearing entity and is having significant intangibles; and that Crisil has been excluded by the Tribunal in taxpayer's own case for AY 2002-03, 2007-08 and 2008-09. 18. Ld. DR for the Revenue, on the other hand, relied on the orders of the lower Revenue authorities. 19. Per....
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....ith "r" subscript) to indicate non-credit risk * First rated debt transaction for an acquisition * Two new State Government ratings * Government of India guaranteed debt ratings * First rated take-out cum guarantee facility by an infrastructure development finance institution. Corporate Sector Rating Services (CSRS) Revenue growth in corporate sector ratings was mainly driven by refinancing of debt due to the continuous drop in interest rates. New offerings such as the Advance Rating Services and structured ratings have grown significantly and account for 30% of the CSRS billings. The 42 new companies rated during 2001-02 constituted 30% of CSRS initial rating fees. The CSRS has also made significant progress in generating business from standard and Poor's. Although this is still a small component of its revenues, there is a significant order book as on date and CSRS expects to double its international revenues in the current year. Government's disinvestment programme and a further round of refinancing by stronger corporate, are expected to drive CSRS revenues in the coming year." 26. Furthermore, from the financial con....
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....f the annual report, available at pages 547, 553 & 557 of the paper book, shows that there is no segmental information available and keeping in view the diversified function performed by ICRA, it cannot be taken at entity level. Moreover, under TNMM, the TPO has a wide discretion of choosing comparables as there is wide range of such comparables available for benchmarking the international transactions. 29. Furthermore, ICRA has been held to be incomparable vis-àvis the taxpayer by the coordinate Bench of the Tribunal in the taxpayer's own case for AY 2007-08 (supra) by holding that since ICRA has been providing advisory services, it can be a no match to the company providing actual marketing support services. Since there is no change in the profile of the taxpayer during the year under assessment as it has been providing similar marketing support services to its AE, ICRA is not a valid comparable vis-à-vis taxpayer, hence ordered to be excluded." 24. In view of what has been discussed above and following the order passed by the coordinate Bench of the Tribunal in taxpayer's own case for AYs 2002-03 and 2007-08 (supra), we are of the considered view that I....
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....m the list of comparables." 28. Keeping in view the facts and circumstances of the case, WAPCOS is into providing distinct services and is a 100% Government owned company, being not driving by profit motive and following the decision of the coordinate Bench of the Tribunal in taxpayer's own case for AY 2006-07 (supra), it cannot be a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. RITES LTD. (RITES) 29. The taxpayer sought exclusion of Rites on grounds inter alia that it is functionally dissimilar and that it is a Government of India undertaking under the aegis of Indian Railways; that Rites has been excluded by the DRP in taxpayer's own case for AY 2007-08 on the ground that it is functionally different being in niche area of engineering consultancy. 30. Rites has been excluded by the Tribunal in taxpayer's own case for AY 2006-07 (supra) by returning following findings :- "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 leas....
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....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 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." 35. In view of facts and circumstances of the case and following the order passed by the coordinate Bench of the Tribunal (supra), we order to exclude Vimta from the final set of comparables on ground of functional dissimilarity vis-à-vis the taxpayer, hence ordered to be excluded from the final set of comparables. CORPORATE GROUNDS 36. Assessing Officer made disallowance of Rs. 17,82,532/- claimed by the taxpayer on account of deposit made to MTNL of Rs. 7,65,214/....