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TMI Blog2020 (2) TMI 1038X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Ground No. 2 is allowed. Disallowance on account of Trade Price Protection (TPP) extended to distributors for reduction in prices of handsets - HELD THAT:- 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. This is evidenced by specific clause in the Trade Schemes filed before the AO vide submission dated 10.03.2014 trade scheme. In-fact, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial statements - HELD THAT:- The explanation given by the assessee was not justified through the evidences as to what extent sale reversals, debit notes received from the customer due to warranty prevented the assessee to given the financial statement which is less than the sales tax return. Denying benefit of deduction u/s 10AA on non transfer pricing additions/disallowances - HELD THAT:- The assessee failed to demonstrate the deduction claimed under Section 10A/10AA on non transfer pricing additions. There was no evidence produced before the Assessing Officer as to how the claim is tenable under Section 10A/10AA Full credit of pre-paid taxes - HELD THAT:- From the perusal of records, it can be seen that the proper credit of pre-paid taxes were not given by the Assessing Officer while calculating the total tax. Therefore, we direct the Assessing Officer to give proper credit of pre-paid taxes to the assessee after verifying the same. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Ground is partly allowed for statistical purpose. - ITA No. 5791/DEL/2015 And ITA No. 5845/DEL/2015 - - - Dated:- 20-2-2020 - Sh. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inafter referred as Ld. AO') pursuant to the directions of the Dispute Resolution Panel (hereinafter referred as 'Ld. DRP') for the assessment year 2010-11 on the following grounds; 1. The order passed by the Ld. AO under section 143(3) read with section 144C of the Act is bad in law and on the facts and circumstances of the case and is liable to be set aside. 2. The Ld. AO and the Ld. DRP have erred in relying upon evidence collected in illegal survey and summons proceedings and erred in not relying upon the VTT report and software supply agreement. 3. The Ld. AO and the Ld. DRP have erred in disallowing the expenses amounting to INR 29,436,191,870 incurred by the Appellant on purchase of software from Nokia Corporation ( Nokia Corp ) under Section 40(a)(i) of the Act. 4. The Ld. AO and the Ld. DRP have erred in disallowing the expenses amounting to INR 4360,45,22,887 incurred by the Appellant on purchase of mobile phones and accessories from Nokia Corp under Section 40(a)(i) of the Act. 5. The Ld. TPO, Ld. AO and the Ld. DRP have erred in making transfer pricing additions amounting to INR 470,84,65,081 to the income of the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,87,176 for obsolescence of inventory. 14. The Ld. AO and the Ld. DRP have erred in disallowing marketing expenditure incurred by the Appellant amounting to INR 58,56,03,845 by way of issuance of handsets on a free of cost (FOC) basis to employees, dealers and After Marketing Service Centres (AMSCs) on the ground that the same would give enduring benefit and cannot be claimed as revenue expenditure. 15. Further, the Ld. AO and the Ld. DRP have erred in disallowing expenditure incurred by the Appellant by way of issuance of FOC handsets when the Ld. TPO has already made an adjustment on account of alleged excessive Advertising and Market Promotion (AMP) expenses which includes the handsets issued on FOC basis and this has resulted in double disallowance of the same amount. 16. Without prejudice to the above, the Ld. AO and the Ld. DRP have erred in not allowing current year depreciation in respect of the FOC phones given to AMSCs for warranty purposes and to dealers for promotional purposes. The Ld. AO has also erred in not allowing earlier years depreciation in respect of the FOC phones despite the DRP s direction in this regard. 17. The Ld. AO and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as other distributors) under Section 40(a)(ia) of the Act. 3. The Ld. AO and the Ld. DRP have erred in making a disallowance of ₹ 166,02,61,748 incurred by the Appellant on account of trade price protection paid to distributors as compensation for reduction in prices of handsets, and in ignoring all the evidence (including confirmations from dealers) submitted by the Appellant in this regard. 4. The Ld. AO and the Ld. DRP have erred in disallowing 25% of the total provision made by the Appellant amounting to INR 1,14,87,176 for obsolescence of inventory. 5. The Ld. AO and the Ld. DRP have erred in disallowing marketing expenditure incurred by the) Appellant amounting to INR 58,56,03,845 by way of issuance of handsets on a free of cost ( FOG ) basis to employees, dealers and After Marketing Service Centres ( AMSCs ) on the ground that the same would give enduring benefit and cannot be claimed as revenue expenditure. 6. Without prejudice to the above, the Ld. AO and the Ld. DRP have erred in not allowing current year depreciation in respect of the FOC phones given to AMSCs for warranty purposes and to dealers for promotional purposes. The Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the above grounds of appeal. 4. The assessee company was incorporated in 1995 and it is a wholly owned subsidiary of Nokia Corporation, Finland. The company is primarily engaged in the business of trading and manufacturing of mobile handsets, spare parts and accessories. In addition to this activity, the company also undertakes contract software development for its Associated Enterprises. Nokia India has a manufacturing unit located in Chennai from where it manufactures mobile phones for the Indian market and as well as for export purpose. Nokia Corporation and its several worldwide affiliates form a group that occupies a leadership position in the global telecom industry. It is the world s leading manufacturer and distributor of mobile telecom industry. The assessee, M/s. Nokia India Pvt. Ltd. filed its return of income on 14.10.2010 declaring a total income of ₹ 694.97 crore. Subsequently, the return was revised on 30.03.2012, as the assessee increased its TDS credit to ₹ 4,30,44,396/-. The return was processed u/s 143(1) of the Income Tax Act, 1961. The case was taken up for scrutiny and a notice u/s 143(2) of the Act dated 29.08.2011 was iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60,45,22,887/- Sub-total 7304,07,14,757/- Transfer Pricing order u/s 92CA of the Act: 7 A) Advertising, Marketing and Promotional Expenditure 470,84,65,081/- 8 B) Software Development Services 97,83,17,120/- 9 C) Purchase of Software from Nokia Corp. 358,49,23,473/- Sub Total 927,17,05,674/- 10 Disallowance under section 40a(ia) of the Act for failure to deduct tax at Source (TDS) : A) For Trade Offers to HCL Inforsystem 562,15,92,920/- B) F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offers were floated by assessee for Distributors under schemes to maximize sales in each territory and incentivize high-performing Distributors who achieve their monthly sales targets. Therefore, discount is given to the Distributors which have been referred by the Assessing Officer as a benefit . The details of Trade offers were submitted at Pg. 199 to 203 of the Paper book Volume I by the Ld. AR. The Ld. AR further submitted that relationship between the assessee and HCL is that of principal to principal and not that of principal to agent. This fact is evident from Clause 2, 7, 8, 9, 14 and 19 of the Agreement for the Supply of Cellular Mobile Phones between HCL and the assessee. In the absence of a principal-agent relationship, such benefit extended to the Distributors cannot partake the character of commission liable for withholding tax under Section 194H of the Act. The Ld. AR relied upon the following case laws: Ahmedabad Stamp vendors Association vs. UOI (2002) 257 ITR 202 (Guj) CIT vs. Ahmedabad Stamp vendors Association (2012) 348 ITR 378 (SC) (SLP Dismissed against the HC order) CIT vs. Jai Drinks (P) Ltd. (2011) 336 ITR 238 (Del.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... targets given by the assessee to HCL. Therefore, The Ld. DR submitted that relationship between the assessee and HCL is that of principal to principal or principal to agent is not relevant. Alternatively, The Ld. DR submitted that as payments for technical service liable for withholding under Section 194J of the Act, a combination of various services has been rendered by HCL for which no consideration was payable by the assessee. Services being provided by HCL are consultancy in nature and covered by the nature of technical services defined under Explanation 2 to Section 9(1)(vii) of the Act and thereby subject to withholding provisions under Section 194J of the Act. 8. We have heard both the parties and perused all the relevant material available on record. It can be seen from Clause 2, 7, 8, 9, 14 and 19 of the Agreement for the Supply of Cellular Mobile Phones between HCL and the assessee that relationship between the assessee and HCL is that of principal to principal and not that of principal to agent. The discount which was offered to distributors is given for promotion of sales. This element cannot be treated as commission. There is absence of a principal-agent relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Eastern enterprise break-up is at Pg. 204 and the confirmation is at Page G.R.SARDA SONS break-up is at Pg. 204 and the confirmation is at Page 303. Fusion Voice Solutions break-up is at Pg. 204 and the confirmation is at Page 302. Fayam Enterprises break-up is at Pg. 204 and the confirmation is at Page 301. The Ld. AR further submitted that TPP is offered to distributors on handsets which have not been subject to trade offers/discounts. This is evidenced by specific clause in the Trade Schemes filed before the Assessing Officer vide submission dated 10.03.2014 trade scheme copies at Page 208- 299 of the Paper book Volume 1. Expenditure is allowable as revenue expenditure under Section 37(1) of the Act since it has been incurred wholly and exclusively for business and same cannot be questioned by the Assessing Officer. The Ld. AR relied upon the decision in case of CIT vs. Dalmia Cements (B.) Ltd. [2002] 254 ITR 377 (Del). 10. The Ld. DR submitted that the disallowance made on the ground that the assessee failed to justify the commercial expediency of the expenditure. The basis of computation, methodology of determining the stock lying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equirement for next 90 days . The Ld. AR submitted that obsolete inventory is defined as inventory which has not been consumed for last 90 days and will not be required for next 90 days. The Ld. AR submitted that provision represents 100% of non-moving inventory of spare parts/accessories of handsets which has been phased out. The Ld. AR further submitted that as these accessories are plastic or metallic parts net realizable value is zero. The Ld. AR submitted that method followed is the amount of provision created in a year is debited to the P L and actual obsolescence is charged to such provision. The Ld. AR submitted that excess provision if any is reversed and offered to tax in year of reversal. Further, the Ld. AR submitted that disallowance made by the Assessing Officer on account of provision for obsolescence of inventory has been deleted by the DRP in AY 2011-12. 13. The Ld. DR submitted that no evidence regarding computation of provision of obsolete stock. The Ld. DR submitted that provision being in the nature of unascertained liability cannot be allowed. The Ld. DR relied upon the Assessment Order. 14. We have heard both the parties and perused all the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the said expenditure is wholly and exclusively for the purpose of business of the assessee. The decision has also been affirmed by the Hon ble Delhi High Court. 16. The Ld. DR submitted that handsets of employees are capital assets as assessee will receive business benefits over a period of time. If ownership of the handsets is transferred to the employees, then same should be treated as perquisite eligible to withholding under section 192 of the Act. The Ld. DR submitted that handsets issued to After Marketing Service Centre s ( AMSC ) cannot be claimed under marketing expenditure as they are warranty expense and can be claimed if documentary evidence of reconciliation is available. No evidence that handsets have been issued to ultimate customers. Handsets issued to dealers with intention to display show the intention to reap benefit over a time. Thus, only depreciation could have been claimed on the same. 17. We have heard both the parties and perused all the relevant material available on record. In the present assessment year, the assessee is engaged in manufacture, import and sale of mobile handsets. The assessee has given mobile handsets to its employees, dealers, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As regards to Ground No. 9, the Ld. AR submitted that the Assessing Officer has not given full credit of pre-paid taxes, so the Assessing Officer be directed to give full credit of pre-paid taxes. 25. The Ld. DR relied upon the Assessment Order. 26. We have heard both the parties and perused all the relevant material available on record. From the perusal of records, it can be seen that the proper credit of pre-paid taxes were not given by the Assessing Officer while calculating the total tax. Therefore, we direct the Assessing Officer to give proper credit of pre-paid taxes to the assessee after verifying the same. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 9 is partly allowed for statistical purpose. 27. As regards to Ground No. 10 and Ground No. 11, the same is consequential, hence need not be adjudicated at this stage. 28. As regards to Revenue s appeal being ITA No. 5845/DEL/2015, the only issue is relating to depreciation which was already decided by us while giving finding to Ground No. 5 and 6 in assessee s appeal hereinabove. We held that the said expenditure is business expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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