2022 (1) TMI 337 - AT - Income Tax

TP Adjustment of business support services - comparable selection - Functional dissimilarity - HELD THAT - Axis Integrated Systems Limited was not a valid comparable in view of the fact that the entity level profitability taken by the TPO is incorrect. There was lack of segmental information. Financials of the company do not provide detailed description of the business operations of the company. Further, as per website extracts, Axis Integrated Systems Limited is engaged in providing consultancy with regard to Directorate General of Foreign Trade. Therefore, we hereby direct the Assessing Officer to exclude this comparable. Killick Agencies and Marketing Limited being functionally different and dissimilar to the assessee. We, therefore, direct the Assessing Officer/TPO to exclude this company from the list of comparables. Just Dial Limited operates a local search engine which assists general public in finding information pertaining to nearby area. Further, no segmental data is available and the company owns significant intangible assets in the form of goodwill, application development and unique phone numbers. We, therefore, hold that this is not a valid comparable and direct the Assessing Officer/TPO to exclude this company from the list of comparables. TDS u/s 194J/194H - Disallowance under section 40(a)(ia) of the Act on account of trade offers provided to distributors - HELD THAT - As decided in own case 2020 (8) TMI 825 - ITAT DELHI and 2020 (8) TMI 825 - ITAT DELHI there is absence of a principalagent 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. - Decided in favour of assessee Disallowance on account of trade price protection paid to distributors - allowable revenue expenditure u/s 37 or not? - HELD THAT - As decided in own case 2020 (8) TMI 825 - ITAT DELHI it is market practice that if there is any change in prices of handsets by competitors, change in life of mobile model, change in market demand of particular model which affects the sales, the distributor is protected by the Trade Price Protection. This is actually a commercial expediency in modern day technological changes which are very fast and vast. Besides, Trade Price Protection is offered to distributors on handsets which have not been subject to trade offers/discounts - so far as the instant year is concerned, we have already noted in the earlier paragraph that the requisite confirmations were filed before the Assessing Officer. Thus, this expenditure is allowable as revenue expenditure under Section 37(1). Disallowance of marketing expenditure incurred on account of issuance of handsets on Free of Cost ( FOC ) basis - HELD THAT - As decided in own case 2020 (8) TMI 825 - ITAT DELHI 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. This issue is decided in favour of the assessee. Deduction towards amount of education cess and secondary and higher education cess paid - HELD THAT - We find that this issue is no more res-integra as has been decided in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal following the judgment of the Hon ble Bombay High Court in the case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT Therefore, respectfully following the same, we hereby direct the Assessing Officer to delete the disallowance.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Transfer pricing adjustment for business support services.
3. Disallowance of expenses on trade offers.
4. Disallowance of trade price protection expenses.
5. Disallowance of marketing expenditure on free handsets.
6. Deduction of education cess and secondary and higher education cess.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order dated August 30, 2017, was bad in law and liable to be set aside. However, this ground was general in nature and needed no separate adjudication.

2. Transfer Pricing Adjustment for Business Support Services:
The assessee challenged the transfer pricing adjustment of INR 2,92,30,300 related to business support services provided to its Associated Enterprises (AE). The key arguments included:
- Rejection of economic analysis and quantitative filters by the authorities.
- Incorrect inclusion of certain comparables like Axis Integrated Systems Limited, Killick Agencies and Marketing Limited, and Just Dial Limited due to lack of segmental information and functional dissimilarity.

Judgment:
The Tribunal found merit in the assessee's contention regarding the exclusion of the three comparables. It directed the Assessing Officer to exclude these comparables and recompute the Arm's Length Price. If the value falls within the permissible limit, the disallowance should be deleted.

3. Disallowance of Expenses on Trade Offers:
The assessee argued that the disallowance of INR 7,01,71,57,547 on trade offers provided to distributors was incorrect. The Revenue treated these trade offers as commission liable to withholding under Section 194H or as payments for technical services under Section 194J.

Judgment:
The Tribunal found that the issue was covered in favor of the assessee by previous Tribunal decisions. It directed the Assessing Officer to delete the disallowance, affirming that the relationship between the assessee and HCL was principal to principal, not principal to agent.

4. Disallowance of Trade Price Protection Expenses:
The assessee contended that the disallowance of INR 6,26,25,925 on account of trade price protection paid to distributors was unjustified. The Revenue argued that the assessee failed to justify the commercial expediency of the expenditure.

Judgment:
The Tribunal noted that this issue was also covered in favor of the assessee by previous Tribunal decisions. It directed the deletion of the disallowance, recognizing that trade price protection is a common market practice and commercially expedient.

5. Disallowance of Marketing Expenditure on Free Handsets:
The assessee challenged the disallowance of INR 25,45,40,035 incurred on issuing handsets free of cost to employees, dealers, and service centers. The Revenue treated this as a capital expenditure providing enduring benefit.

Judgment:
The Tribunal found this issue to be covered in favor of the assessee by previous Tribunal decisions. It directed the deletion of the disallowance, affirming that the handsets were given free of cost and thus rightly treated as business expenditure.

6. Deduction of Education Cess and Secondary and Higher Education Cess:
The assessee argued for the deduction of education cess and secondary and higher education cess paid during the year, citing the Bombay High Court's decision in Sesa Goa.

Judgment:
The Tribunal agreed with the assessee and directed the Assessing Officer to allow the deduction, following the precedent set by the Bombay High Court in Sesa Goa.

Conclusion:
The appeal was partly allowed, with significant relief granted to the assessee on multiple grounds, including transfer pricing adjustments, disallowances of trade offers, trade price protection, marketing expenditure, and deduction of education cess.