2020 (8) TMI 825 - AT - Income Tax

TDS u/s 194H OR 194J - Disallowance 40(a)(ia) on account of trade offers - HELD THAT - As relying on own case 2020 (2) TMI 1038 - ITAT DELHI Relationship between the assessee and HCL is that of principal to principal and not that of principal to agent. The discount which was offered to distributors is given for promotion of sales. This element cannot be treated as commission. There is absence of a principal-agent relationship and benefit extended to distributors cannot be treated as commission under Section 194H of the Act. As regards to applicability of Section 194J of the Act, the Assessing Officer has not given any reasoning or finding to the extent that there is payment for technical service liable for withholding under Section 194J. Marketing activities have been undertaken by HCL on its own. Merely making an addition under Section 194J without the actual basis for the same on part of the Assessing Officer is not just and proper. The Ld. DR s contention that discounts were given by way of debit notes and the same were not adjusted or mentioned in the invoice generated upon original sales made by the assessee, does not seem tenable after going through the invoice and the debit notes. In fact, there is clear mentioned about the discount for sales promotion. Thus, on both the account the addition made by the Assessing Officer does not sustain. Disallowance on account of trade price protection extended to distributors against reduction in prices of hands - HELD THAT - As requisite confirmations were filed before the Assessing Officer. Thus, this expenditure is allowable as revenue expenditure under Section 37(1) of the Act since it has been incurred wholly and exclusively for business and same cannot be questioned by the Assessing Officer. Ground is allowed. Disallowance of marketing expenditure incurred on account of issuance of handsets on free of cost basis - depreciation to be allowed on such handsets as an alternate plea if the free of cost handsets are held to be in the nature of capital expenditure - HELD THAT - As decided in own case 2020 (2) TMI 1038 - ITAT DELHI relying on the present assessment year, the assessee is engaged in manufacture, import and sale of mobile handsets. The assessee has given mobile handsets to its employees, dealers, sale personnel etc. for free of cost and thus no longer owned the said handsets. Thus, the said cost was rightly taken as business expenditure by the assessee and was rightly reduced from the inventory.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act.
2. Transfer Pricing adjustments.
3. Disallowance of marketing expenditure.
4. Depreciation on free-of-cost (FOC) phones.
5. Legality of the assessment order.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) of the Income Tax Act:
The appellant challenged the disallowance of expenses amounting to INR 7,16,24,39,495/- on trade offers provided to distributors, which the Department treated as commission liable for withholding tax under Section 194H. The Tribunal noted that this issue had been resolved in favor of the assessee in the previous assessment year (2010-11) where it was established that the relationship between the assessee and HCL was that of principal to principal, not principal to agent. Consequently, the discount offered to distributors for sales promotion could not be treated as commission. The Tribunal followed its previous decision and deleted the disallowance.

2. Transfer Pricing Adjustments:
The appellant had initially raised multiple grounds related to Transfer Pricing adjustments, including those on contract research and development activities, advertising, marketing and promotion (AMP) expenditure, and excessive software purchase price. However, following a resolution under the Mutual Agreement Procedure (MAP) between Indian and Finnish Competent Authorities, the appellant sought to withdraw these grounds. The Tribunal permitted the withdrawal, noting no objection from the CIT-DR.

3. Disallowance of Marketing Expenditure:
The appellant contested the disallowance of INR 37,54,59,000/- for marketing expenditure incurred by issuing handsets on a free-of-cost basis to employees, dealers, and After Marketing Service Centres (AMSCs). The Tribunal observed that this issue had also been resolved in favor of the assessee in the previous assessment year (2010-11), where it was held that such expenditures were revenue in nature and incurred wholly and exclusively for business purposes. Following this precedent, the Tribunal deleted the disallowance.

4. Depreciation on Free-of-Cost (FOC) Phones:
The appellant argued that if the expenditure on FOC phones was treated as capital expenditure, then depreciation should be allowed. Since the Tribunal held the expenditure to be revenue in nature, this ground became infructuous and was dismissed.

5. Legality of the Assessment Order:
The appellant contended that the assessment order dated January 31, 2017, passed under Section 143(3) read with Section 144C of the Act, was bad in law. Given the Tribunal's findings favoring the appellant on the substantive grounds, this issue did not require separate adjudication.

Conclusion:
The Tribunal allowed the appeal partly, deleting the disallowances related to trade offers and marketing expenditure, and dismissing the ground on depreciation as infructuous. The appeal was resolved in favor of the appellant on the main issues, following precedents set in the previous assessment year. The order was pronounced on 17/08/2020.