2020 (10) TMI 718 - AT - Income Tax

TDS u/s 194J - Disallowance u/s 40(a)(ia) - failure to withhold tax on payments made to Nokia Corporation towards purchase of end user operating software, purchase of hardware and finished goods and purchase of software embedded in finished goods - HELD THAT - As decided in own case 2020 (2) TMI 1038 - ITAT DELHI AO 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. 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. - Decided in favour of assessee. Disallowance on account of trade price protection paid by the assessee - HELD THAT - Following the order of the Co-ordinate Bench for A.Y. 2010-11 in assessee s own case 2020 (2) TMI 1038 - ITAT DELHI and for similar reasons hold that the disallowance on account of trade price protection was not warranted in the present case. We therefore, set aside the action of AO. Thus ground of appeal of the assessee is allowed. Disallowance of warranty expenses - HELD THAT - As relying on case A.Y. 2010-11 in assessee s own case 2020 (2) TMI 1038 - ITAT DELHI disallowance was not warranted in the present case. We therefore, set aside the addition made by AO. Thus ground of appeal of the assessee is allowed.

Issues Involved:
1. Disallowance of expenses under section 40(a)(ia) of the Income Tax Act for A.Y. 2008-09 and A.Y. 2012-13.
2. Disallowance on account of trade price protection for A.Y. 2012-13.
3. Disallowance of marketing expenditure for A.Y. 2012-13.
4. Non-allowance of depreciation on free-of-cost phones for A.Y. 2012-13.

Detailed Analysis:

1. Disallowance of Expenses Under Section 40(a)(ia) for A.Y. 2008-09:
The assessee, a subsidiary of Nokia Corporation, Finland, filed its return for A.Y. 2008-09 declaring an income of ?909,98,53,004/-. The assessment was completed, determining a higher income of ?1520,44,16,770/-. Subsequently, a notice under section 148 was issued, and the case was referred to the Transfer Pricing Officer (TPO) to determine the “Arm’s Length Price” for international transactions. The TPO recommended an adjustment of ?5500,366,412/-, leading to a proposed assessment of ?8052,48,62,672/-. The assessee challenged this before the Dispute Resolution Panel (DRP), which resulted in a revised income of ?7875,30,97,404/-.

The primary issue was the disallowance of ?191,75,43,450/- under section 40(a)(ia) due to non-deduction of tax at source on trade incentives provided to distributors, including HCL Infosystems Ltd. The AO held that the amounts paid were in the nature of commission, attracting section 194H, and disallowed the expenses. The DRP upheld the AO's decision.

Upon appeal, the Tribunal noted that the relationship between the assessee and HCL was principal-to-principal, not principal-to-agent, and the discounts offered were for sales promotion, not commission. Citing previous Tribunal decisions in the assessee’s favor for A.Y. 2010-11 and 2011-12, the Tribunal held that the disallowance under section 40(a)(ia) was not warranted and allowed the appeal.

2. Disallowance of Expenses Under Section 40(a)(ia) for A.Y. 2012-13:
The assessee raised similar grounds for A.Y. 2012-13, challenging the disallowance of ?987,59,99,645/- under section 40(a)(ia). The Tribunal reiterated its findings from A.Y. 2008-09, holding that the disallowance was not justified and allowed the appeal.

3. Disallowance on Account of Trade Price Protection for A.Y. 2012-13:
The AO disallowed ?40,87,83,096/- out of the total ?1,01,45,00,889/- claimed as trade price protection, citing insufficient details and lack of business justification. The DRP upheld the disallowance partially.

The Tribunal, referencing its decisions for A.Y. 2010-11 and 2011-12, noted that trade price protection is a standard industry practice to protect distributors from losses due to price drops. It held that the expenditure was allowable under section 37(1) as it was incurred wholly and exclusively for business purposes. The disallowance was set aside, and the appeal was allowed.

4. Disallowance of Marketing Expenditure for A.Y. 2012-13:
The AO disallowed ?22,15,43,032/- spent on mobile handsets given free of cost to employees, dealers, and service centers, treating them as capital assets. The DRP directed the AO to verify the factual position.

The Tribunal, citing its earlier decisions, held that the handsets given free of cost were rightly treated as business expenditure and reduced from inventory. It affirmed that such expenditure was allowable under section 37(1). The disallowance was set aside, and the appeal was allowed.

5. Non-Allowance of Depreciation on Free-of-Cost Phones for A.Y. 2012-13:
The AO did not allow depreciation on handsets given free of cost, treating them as capital expenses. The Tribunal, following its previous rulings, held that the expenditure was revenue in nature and depreciation should be allowed. The addition was set aside, and the appeal was allowed.

Conclusion:
Both appeals filed by the assessee for A.Y. 2008-09 and A.Y. 2012-13 were allowed, with the Tribunal setting aside the disallowances made by the AO and DRP. The Tribunal's decisions were based on consistent findings from earlier years, emphasizing the principal-to-principal relationship with distributors and the standard industry practice of trade price protection.

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