2022 (3) TMI 292 - AT - Income Tax

TDS u/s 194H - disallowance made u/s. 40(a)(ia) on sales rebate - HELD THAT - As relying on ASUS INDIA PVT. LTD. 2020 (10) TMI 510 - ITAT MUMBAI principal- agent relationship between the assessee and the dealers/distributors is not discernible. Therefore, the rebate/discount given cannot be treated as commission under section 194H - Our aforesaid reasoning rendered in context of ground no. 2, would equally apply to this ground as well. Therefore, the disallowance made under section 40(a)(ia) deserves to be deleted. As regards the contention of the learned Departmental Representative that the provision is not allowable as expenditure, we are afraid, we cannot entertain such claim at this stage. As could be seen from the facts on record, the AO has not raised any doubt with regard to the genuineness or allowability of expenditure. He has disallowed part of such expenditure simply for the reason that tax has not been deducted at source in terms of section 194H. Commissioner (Appeals) has also approved the aforesaid decision of the Assessing Officer. Therefore, the limited issue before us is the validity of disallowance under section 40(a)(ia) - Decided in favour of assessee. Disallowance u/s. 40(a)(ia) by disallowing the expenditure on account of refurbish and rebate on defective products - HELD THAT - AR before us had brought several fresh facts which was apparently either not argued before this Tribunal or stated before the lower authorities while adjudicating the issue under consideration. Hence, we deem it fit and appropriate in the interest of justice and fair play, to set aside this issue to the file of the ld. AO for denovo adjudication in accordance with law. In the said set aside assessment proceedings, the ld. AO shall factually examine all the contentions of the assessee and take a reasoned view uninfluenced by either his views taken in the assessment order or by the order of the ld. DRP or by this Tribunal in A.Y₹ 2016-17 and 2017-18. This direction is given in view of the fact that this issue being a repetitive issue as pointed out by the ld. AR, would have the recurring effect in all the years for the assessee. So, it would be relevant to bring all the facts pertaining to this issue on record. Accordingly, the ground No. 5 raised by the assessee is allowed for statistical purposes. Transfer Pricing (TP) adjustment made in respect of provision of Marketing Support Services (MSS) - Comparabile selection - HELD THAT - Axis Integrated Systems Ltd., is functionally not comparable with the marketing support services rendered by the assessee. We direct the ld. TPO to exclude Inmacs Management Services Ltd., from the final list of comparables chosen by him for benchmarking the marketing support service transaction of the assessee.

Summary

Issues Involved:
1. Disallowance under section 40(a)(ia) of the Income Tax Act.
2. Transfer Pricing (TP) adjustment for Marketing Support Services (MSS).

Issue-wise Analysis:

1. Disallowance under section 40(a)(ia) of the Income Tax Act:

Ground No. 1:
- The assessee did not press Ground No. 1 at the time of hearing; hence, it was dismissed as not pressed.

Ground Nos. 2, 3, 4, and 6:
- These grounds pertain to disallowances made under section 40(a)(ia) for:
- Conditional Discount Scheme (?7,99,20,387)
- Volume Discount (?6,07,15,612)
- Octroi and Insurance Expenses (?1,95,79,691)
- Provision for Sales Rebate (?55,33,096)
- The Tribunal found that similar issues were adjudicated in the assessee's favor for A.Y. 2016-17, where it was held that the disallowances under section 40(a)(ia) were not applicable as the payments did not attract the provisions of section 194C/194H.
- The Tribunal reiterated that the relationship between the assessee and dealers/distributors was on a principal-to-principal basis, not principal-agent, thus not requiring TDS under section 194H.
- Consequently, Ground Nos. 2, 3, 4, and 6 were allowed.

Ground No. 5:
- This ground challenges the disallowance of expenditure on refurbish and rebate on defective products (?13,56,11,831).
- The AO disallowed 30% of this amount (?4,06,83,549) under section 40(a)(ia), treating it as a payment for repairs, which should have attracted TDS.
- The Tribunal noted that the issue had been decided against the assessee in A.Y. 2016-17 but acknowledged new arguments and facts presented by the assessee.
- The Tribunal set aside the issue to the AO for a fresh examination, directing the AO to consider all contentions and take a reasoned view.

2. Transfer Pricing (TP) adjustment for Marketing Support Services (MSS):

Ground Nos. 7-10:
- The assessee challenged the TP adjustment of ?56,33,036 for MSS.
- The Tribunal noted that the assessee provided MSS to its AE and received fees, which were benchmarked separately by the TPO.
- The Tribunal held that marketing support services and distribution functions are interlinked and should be aggregated for benchmarking.
- The Tribunal also addressed the issue of excluding certain comparables (Axis Integrated Systems Ltd. and Inmacs Management Services Ltd.) from the final list used by the TPO.
- It was found that Axis Integrated Systems Ltd. was not comparable as it engaged in consultancy and liasoning services, and Inmacs Management Services Ltd. provided consultancy, audit, and legal advisory services, which were not comparable to MSS.
- The Tribunal directed the exclusion of these two comparables, resulting in the assessee’s margin being at arm’s length.
- Consequently, the TP adjustment of ?56,33,036 was deleted.

Ground No. 13:
- This ground was general in nature and did not require specific adjudication.

Conclusion:
- The appeal of the assessee was allowed for statistical purposes, with specific directions given for fresh examination and deletion of certain adjustments.