2019 (4) TMI 261 - AT - Income Tax

Disallowance on account of handsets issued on FOC basis to employees, dealers and After Market Service Centers - capitalization of marketing expenses - HELD THAT - Referring to the findings of the tribunal 2018 (1) TMI 1366 - ITAT DELHI and Hon ble High Court in assessee s own case 2018 (9) TMI 877 - DELHI HIGH COURT on the above issue hold the field, and we do not find any reason to take a different view from the same. While respectfully following, we hold that the assessee could not have claim title and depreciation, once the mobile phones had been given and ownership had been transferred to the employees, dealers, sales personnel and after sales service centres, and consequently the addition made by the learned AO on this aspect needs to be deleted. Closing Stock on account of handsets damaged in transit - HELD THAT - In respect of the value of the handsets damaged in transit is concerned, it comes only to ₹ 20,64,911/-which constitutes only 0.31% of appellant s total turnover for the year and while respectfully following the order in ACIT vs. Grohe India private limited 2014 (3) TMI 104 - ITAT DELHI , we hold that it is not unlikely that some of the items may have been damaged or lost during transit, therefore, such a shortage due to damage or loss has to be considered reasonably keeping in view the magnitude of such short is being 0.31% of the total turnover and hence cannot be held as an unusual loss. Further, we are convinced with the argument that if valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method and the closing stock of a particular year is the opening stock of the subsequent year as such it does not materially affected the accounts and profits disclosed by the assessee. the adjustment now sought to be made is revenue neutral and at best may result in requirement or postponement of revenue and in view of the concept of materiality which is well recognized both in accountancy and the law. Accounting standards notified by the CBDT under section 145(2) mandates that the concept of materiality be taken into consideration when finalizing the accounts of an assessee. Keeping in view all these things we are of the considered opinion that no addition on account of the closing stock due to the handsets damaged in transit is warranted in this matter - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of marketing expenses incurred by way of issuance of handsets on Free of Cost (FOC) basis to employees, dealers, and After Market Service Centers (AMSCs).
2. Addition to closing stock on account of handsets damaged in transit.

Detailed Analysis:

1. Disallowance of Marketing Expenses (FOC Handsets):

The assessee, a wholly-owned subsidiary of Nokia Corporation, Finland, filed its return for AY 2001-02 declaring nil income after setting off unabsorbed business losses and depreciation. The assessee claimed ?7,48,62,367/- as marketing expenses, including ?59,38,347/- for FOC handsets issued to employees, dealers, and AMSCs. The Assessing Officer (AO) disallowed the expenditure, treating the handsets as capital assets and allowing only 25% depreciation. This disallowance was upheld by the CIT(A) and the ITAT. However, the Delhi High Court remanded the matter for fresh consideration, leading to the AO repeating the disallowance in subsequent proceedings.

The assessee argued that the FOC handsets were part of the stock-in-trade and not capital assets, and the expenditure was allowable under Section 37(1) of the Income Tax Act. The handsets were issued for business purposes, such as interaction with dealers and replacing defective handsets under warranty. The ITAT, in the assessee's own case for AY 2003-04, had allowed the entire marketing expenditure on FOC handsets, noting that the handsets were no longer owned by the assessee and the expenditure was revenue in nature.

The Tribunal, following the precedent set in the assessee's own case and upheld by the High Court, held that the assessee could not claim title and depreciation once the handsets were given and ownership transferred. Consequently, the addition made by the AO on this aspect was deleted.

2. Addition to Closing Stock (Handsets Damaged in Transit):

The AO added ?80,03,258/- to the closing stock, including the value of 990 handsets damaged in transit and FOC handsets, treating them as capital assets. This addition was upheld by the CIT(A) and the ITAT in initial proceedings. The High Court remanded the matter for fresh consideration, leading to the AO repeating the addition in subsequent proceedings.

The assessee argued that the AO had erred in making a double addition by including the FOC handsets twice and that the damaged handsets should be written off as their net realizable value (NRV) was nil. The assessee's method of valuing closing stock, consistently followed over the years, was in accordance with AS-2 and certified by auditors. The damaged handsets were sold as scrap in future years, and the income was included in the taxable income of those years. The addition to closing stock was revenue-neutral as it would correspondingly increase the opening stock of the next year.

The Tribunal noted that the addition included the amount already disallowed as marketing expenditure. It further held that the value of handsets damaged in transit, constituting only 0.31% of the turnover, was reasonable and not unusual. The Tribunal emphasized the concept of materiality and revenue neutrality, directing the AO to delete the addition on account of closing stock due to handsets damaged in transit.

Conclusion:

The appeal of the assessee was allowed, with the Tribunal directing the deletion of additions related to marketing expenses on FOC handsets and closing stock due to handsets damaged in transit. The Tribunal's decision was based on the precedent set in the assessee's own case and the principles of materiality and revenue neutrality.