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2021 (1) TMI 475 - AT - Income TaxAllowable business expense u/s 37(1) - disallowance of free of cost (CFOC ) phones issued to employees, dealers and Care centers - These handsets were issued to care centers as Swap hand-sets in the event the handset sold to the customer were found to be defective and could not be repaired during the warranty period - HELD THAT - From the perusal of the submissions of the assessee before the Assessing Officer and the CIT(A), it can be seen that only sample copies were given and extensive details of each party was not given before the Revenue authorities. Therefore, we direct the assessee to produce the details in consonance to the claim of the assessee before the Assessing Officer. Thus, we remand back this issue to the file of the Assessing Officer for taking into account the evidences for consideration of assessee s claim and thereafter passing the order as per the decision of the Tribunal in case of Nokia India Pvt. Ltd. same entity referred to by the Assessing Officer 2018 (9) TMI 877 - DELHI HIGH COURT TDS u/s 195 - non deduction of TDS on software embedded in mobile phones imported by the assessee during the previous year - Taxability of software embedded in mobile phones - AO based on the assessment of NIPL for preceding years, proceeded with artificial splitting of the price of imported mobile phones into the price of embedded software and price of component in the ratio of 40 60 - as alleging that the artificial cost of embedded software such arrived is taxable as royalty in India (both under the provisions of the Act and as well as India-Finland Tax Treaty), AO proceeded with making disallowance u/s 40(a)(i) - HELD THAT - Finished mobile phones were imported by the assessee from Nokia Corp for the purposes of sale against a lump-sum consideration and there was no separate payment made by the assessee towards the purchase of any software. The Revenue could not point out the distinguishing fact that there was a separate payment made for purchase of software embedded in mobile phones. The decision relied by the Ld. AR are apt for the present assessee s case and the CIT(A) has rightly deleted this addition.There is no need to interfere with the findings of the CIT(A). Hence, Ground No. 1 of the Revenue s appeal is dismissed. TDS u/s 194H or 194J - Disallowances u/s 40(a)(ia) - Trade discounts/trade offers to HCL and other distributors - primary allegation of AO is that such trade offers and discounts provided by the assessee to HCL and other distributors are in the nature of income by way of commission and hence, liable for TDS under Section 194H of the Act and the Assessing Officer has alternatively alleged that such trade offers and discounts fall under the definition of fee for technical services liable for deduction at source under section 194J - HELD THAT - In the present assessment year, the CIT(A) has observed that one of the scheme documents shows that HCL is eligible for raising a credit note if it achieves prescribed sales target during a given month. The other scheme was in relation to rebate towards specific model of phone issued to select set of stores. These schemes are given to promote the sales and in effect given as reduction in the purchase consideration paid by the distributor. The assessee has also submitted the third party confirmations which was received by them from various distributors to demonstrate that the relationship between the assessee and its distributors is on principal-to-principal basis, and that trade offers/discounts have been extended by the assessee to them. Thus, the facts are identical in the present case as well to that of NIPL 2020 (2) TMI 1038 - ITAT DELHI . Therefore, there is no need to interfere with the finding of the CIT(A) and in light of the decision of the Tribunal in NIPL, Ground Nos. 2 and 3 in revenues appeal are dismissed . Disallowance of Trade Price protection expenses - HELD THAT - From the perusal of the records it can been seen that the Assessee filed Party wise details of Trade Price Protection expenses, along with independent confirmations obtained from distributors, during the course of the assessment proceedings before the learned assessing officer. The additional evidence was also filed before the CIT(A) and despite the opportunity given to the Assessing Officer, the Assessing Officer choose not to file remand report on this issue. Thus, the contention of the Ld. DR that no evidence was filed by the assessee appears to be incorrect. The Tribunal has adjudicated this issue in favour of the assessee s predecessor entity NIPL 2020 (2) TMI 1038 - ITAT DELHI . CIT(A) has also rightly held that based on the confirmations available from the distributors, the nature of Trade Price Protection cannot be said to be a bogus expense nor protection against a probable loss. Ad-hoc disallowance of 25% of the amount of provision for obsolescence - DR submitted that no documentary evidence of such obsolescence of inventory was furnished - HELD THAT - CIT(A) while deciding the issue clearly held that the assessee has mentioned these products in its books of accounts. But the fact remains whether the sale was not actually made in the present assessment year which is not emerging from the order of the CIT(A) and also that the Assessing Officer has also not given as to what is the reason for disallowance of 25% of the amount of provision for obsolescence on ad-hoc basis. Thus, it will be appropriate to remand back this issue to the file of the Assessing Officer with direction to determine and decide the same afresh in respect of the cost of obsolete items with reference to net realizable value. Ad-hoc disallowance of 25% of advertisement expenditure alleging same to be capital in nature - HELD THAT - CIT(A) has observed that the assessee is engaged in trading of mobile handsets and its accessories and had claimed certain expenditure on advertisement as revenue expenditure. But the Assessing Officer treated the said expenditure as deferred revenue expenditure and allowed a proportion of advertising expenses. The CIT(A) relied upon the decision of the Hon ble Delhi High Court in case of Spice Distribution Ltd. 2014 (9) TMI 732 - DELHI HIGH COURT wherein the Hon ble High Court held that the said expenditure is revenue in nature. It is pertinent to note that the assessee incurred these expenses on conducting road shows, participation in industry events, product advertising in all forums of media for attracting customers which eventually leads to enhancement of sales of the assessee company in India. Thus, these expenses are incurred in relation to the business only and therefore, are revenue in nature. Hence, there is no need to interfere with the findings of the CIT(A).
Issues Involved:
1. Disallowance of cost incurred on free of cost (FOC) phones issued to employees, dealers, and care centers. 2. Deletion of disallowance under Section 40(a)(i) for non-deduction of tax on payment for embedded software/royalty. 3. Deletion of disallowance under Section 40(a)(ia) on account of trade offers to HCL Infosystems Ltd. and other distributors. 4. Deletion of disallowance on account of trade price protection. 5. Deletion of disallowance on account of obsolescence of inventory. 6. Deletion of disallowance on account of advertisement and publicity expenses. Issue-wise Detailed Analysis: 1. Disallowance of Cost Incurred on FOC Phones: The assessee argued that the cost of phones issued free of cost to care centers, dealers, and employees should be allowable as business expenses under Section 37(1) of the Income Tax Act. These phones were used for promotional purposes and as replacements for defective phones. The assessee provided sample stock requisition forms to the Assessing Officer (AO) but did not furnish complete details. The AO and CIT(A) disallowed the expense, treating it as capital in nature. The Tribunal remanded the issue back to the AO, directing the assessee to provide detailed evidence supporting the claim, following the precedent set in the case of Nokia India Pvt. Ltd. 2. Deletion of Disallowance under Section 40(a)(i) for Non-Deduction of Tax on Payment for Embedded Software/Royalty: The AO disallowed ?1422,26,42,726/- for non-deduction of tax on payments for embedded software, treating it as royalty. The CIT(A) deleted this disallowance, following the jurisdictional High Court's decisions in similar cases, holding that the payment for embedded software in mobile phones is not separately taxable as royalty. The Tribunal upheld CIT(A)’s decision, noting that the finished mobile phones were imported for a lump-sum consideration without separate payment for software. 3. Deletion of Disallowance under Section 40(a)(ia) on Account of Trade Offers to HCL Infosystems Ltd. and Other Distributors: The AO disallowed trade offers and discounts extended to HCL Infosystems Ltd. and other distributors, treating them as commission or consultancy services requiring TDS under Sections 194H or 194J. The CIT(A) deleted these disallowances, citing that the relationship was on a principal-to-principal basis and not principal-agent. The Tribunal upheld this decision, referencing prior Tribunal decisions in the assessee's predecessor entity, Nokia India Pvt. Ltd., and confirming the nature of trade offers as discounts rather than commission or consultancy fees. 4. Deletion of Disallowance on Account of Trade Price Protection: The AO disallowed ?19,52,32,441/- claimed as trade price protection, citing lack of evidence and stereotyped confirmations from distributors. The CIT(A) allowed the expense, noting that the assessee provided detailed confirmations and party-wise details. The Tribunal upheld CIT(A)’s decision, referencing the Tribunal’s prior rulings in similar cases, confirming that trade price protection is a commercially expedient practice in the mobile handset industry. 5. Deletion of Disallowance on Account of Obsolescence of Inventory: The AO made an ad-hoc disallowance of 25% of the provision for obsolescence, citing lack of evidence. The CIT(A) allowed the provision, referencing Accounting Standard -2 and the Supreme Court's decision in the case of Woodward Governor, which supports the allowance of such provisions. The Tribunal remanded the issue back to the AO for fresh determination, directing the AO to consider the cost of obsolete items with reference to net realizable value. 6. Deletion of Disallowance on Account of Advertisement and Publicity Expenses: The AO treated 25% of advertisement and publicity expenses as capital in nature, alleging they provided enduring benefits. The CIT(A) deleted this disallowance, following the Delhi High Court's decision in the case of Spice Distribution Ltd., which held that advertisement expenses are revenue in nature. The Tribunal upheld CIT(A)’s decision, noting that the expenses were incurred for business promotion and were revenue in nature. Conclusion: The Tribunal partly allowed the appeals for statistical purposes, remanding specific issues back to the AO for fresh consideration while upholding CIT(A)’s decisions on other issues. The stay application filed by the assessee was dismissed as infructuous.
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