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TMI Blog2020 (8) TMI 825X X X X Extracts X X X X X X X X Extracts X X X X ..... rated 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. Disallowance on account of trade price protection extended to distributors against reduction in prices of hands - HELD THAT:- As requisite confirmations were filed before the Assessing Officer. Thus, this 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. Ground is allowed. Disallowance of marketing expenditure incurred on account of issuance of handsets on free of cost basis - depreciation to be allowed on such handsets as an alternate plea if the free of cost handsets are held to be in the nature of capital expenditure - HELD THAT:- As decided in own case [ 2020 (2) TMI 1038 - ITAT DELHI] relying on the present assessment year, the assessee is engaged in manufacture, import and sale of mobile handsets. The assessee has given mobile handsets to it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ennai factory premises on 08.01.2013 and it was noted during the course of survey that ever since the commencement of operations at the manufacturing facility in Chennai i.e. in the period from Assessment Year: 2007-08 to Assessment Year: 2010-11, the assessee had been incurring expenditure on account of software and had been making payments for the same to Nokia Corporation, Finland totaling to USD 3,362,631,484/- (approximately ₹ 18,495 Crores) for use in manufacturing operations. The Department was of the opinion that the payment towards software was in the nature of royalty on which the assessee was liable to deduct withholding tax as per the provisions of the Income Tax Act, 1961. On the basis of the survey report, the jurisdictional TDS Assessing Officer passed an order u/s 201(1)/201(1A) of the Act holding that the software remittances were in the nature to royalty and that the assessee was liable to deduct tax at source at the time of remittance as per Sec.9 (i)(vi) read with section 195 of the Act and India Finland Double Taxation Avoidance Agreement (DTAA). The Assessing Officer, vide order dated 31.03.32014, held the assesee to be Permanent Establishment (PE) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant. 5.4 The Ld. TPO / Ld. AO / Hon ble DRP have erred on facts and in law in re-characterizing the AMP expenditure incurred by the appellant for its own business as expenditure incurred for providing brand promotion services to its AE, Nokia Corp, thereby warranting separate compensation. 5.5 The Ld. TPO / Ld. AO / Hon ble DRP have erred on facts and in law in inferring the existence of an international transaction of brand promotion services by holding that the AMP expenses incurred by the appellant are high , without any valid basis. 5.6 The Ld. TPO / Ld. AO / Hon ble DRP have erred in imputing a value to the alleged brand promotion services by arbitrarily classifying certain AMP expenses (amounting to INR 2,74,40,55,808/-), out of total AMP expenses of INR 4,166,867,176/- incurred by the appellant, as non-routine, without any basis. 5.7 The Ld. TPO / Ld. AO / Hon ble DRP have erred on facts and in law in not appreciating the fact that due to its compensation model, the appellant has already been reimbursed in respect of the alleged non-routine AMP expenses along with a mark-up of 3.77% and therefore the additions, if any, should be restricted to shortfall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hift profits outside India using information obtained by the tax authorities during survey proceedings which provided information / data pertaining to a different year i.e. Financial Year 2011-12. 6.4 The Ld. TPO / Ld. AO / Hon ble DRP have erred on facts and in law in determining the arm s length price ( ALP ) in respect of software by adopting a method which is not prescribed under Section 92C(1) of the Act. 6.5 The Ld. TPO /Ld. AO / Hon ble DRP have erred on facts and in law in making additions by selectively considering transaction of only those months where transaction value is higher than the ALP. 6.6. The Hon ble DRP has erred in disposing off the various objections raised by the appellant in a summary manner, without providing any reasons. 7. The Ld. TPO/ Ld. AO/ Hon ble DRP have erred in making transfer pricing adjustment amounting to INR 570,000,000/- in relation to provision of contract software development services by the appellant to its AE. The subgrounds in this respect are as under: 7.1 The Ld. TPO / Ld. AO / Hon ble DRP have erred on facts and in law in rejecting the economic analysis undertaken by the appellant in its transfer pricing docu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rges) as non-operating while computing operating margins of the comparables, for determining ALP. 7.12 Hon ble DRP has erred in disposing off the various objections raised by the appellant in a summary manner, without providing any reasons. 8. The Ld. AO and Hon'ble DRP have erred in disallowing expenses amounting to INR 7,16,24,39,495 incurred by the appellant on trade offers provided by it to its distributors (HCL Infosystems Ltd. as well as other distributors), under Section 40(a)(ia) of the Act. 9. The Ld. AO and Hon'ble DRP have erred in disallowing an amount of INR 61,00,11,882 incurred by the appellant on account of trade price protection paid to distributors (HCL Infosystems Ltd. as well as other distributors) as compensation for reduction in prices of the handsets, and in ignoring a the evidence (including confirmations from dealers) submitted by the appellant in this regard. 10. The Ld. AO and Hon'ble DRP have erred in disallowing marketing expenditure incurred by the appellant amounting to INR 37,54,59,000 by way of issuance of handsets on a free of cost ( FOC ) basis to employees, dealers and After Marketing Service Centres ( AMSC s ) on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le - 24 of India Finland DTAA has been accepted by the assessee vide letter dated 28th February, 2018. It was also submitted by the Ld. Authorized Representative that as per Rule-44H of the Income Tax Rules, 1962 (the Rules), the order given effect to the MAP resolution has to be passed by the Assessing Officer once all appeals are withdrawn by the assessee on the issues so resolved under MAP. The Ld. AR submitted that in line with the condition precedent as prescribed under Rule-44H of the Rules, the assessee seeks permission to withdraw ground Nos. 2, 3, 4, 5, 5.1 to 5.12, 6, 6.1 to 6.6, 7, 7.1 to 7.12, 11 13 in the captioned appeal. The Ld. AR also submitted that revised Form-36B has been filed. 4.0 The Ld. CIT-DR had no objection to the assessee in withdrawing the above said grounds of appeal. Keeping in view the submissions of the Ld. AR, we permit the withdrawal of the above mentioned grounds in the original Form-36B. 5.0 The remaining grounds now surviving before us, as contained in the revised Form-36B, are as under: 1. The order dated January 31, 2017, passed by the Learned Assessing Officer ( Ld. AO ) under Section 143(3) read with Section 144C of the Act pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment Year: 2010-11 which has since been deleted by the ITAT in assessee s own case in ITA No.5791/Del/2015 in order dated 20.02.2020. Our attention was drawn to the relevant paragraphs of the said order placed on record and it was submitted that in view of the ITAT ruling in Assessment Year: 2010-11 in assessee s own case in assessee s favour, on similar facts, this disallowance also deserves deletion. 6.1 Arguing for ground No.3 challenging the disallowance on account of trade price protection extended to the distributors against reduction in prices of handsets to the tune of ₹ 61,00,11,882/-, the Ld. AR submitted that this disallowance had been made on the ground that the assessee had failed to justify the commercial expediency of the expenditure. The Ld. Further submitted that this disallowance has also been made on the same ground as in assessment year 2010-11 which was also deleted by the Tribunal in assessee s own case vide order dated 20.02.2020 in ITA No.5791/Del/2015. Our attention was drawn to the relevant paragraphs of the said order and it was prayed that on identical facts, this year s disallowance also needs to be deleted. 6.2 Coming to ground No.4 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.1.1 Respectfully the following the Tribunal s order for Asst. Year: 2010-11 in assessee s own case, we delete this disallowance also. 8.2 Ground No.4 relates to the disallowance of marketing expenditure incurred on account of issuance of handsets on free of cost basis and Ground No.5 relates to depreciation to be allowed on such handsets as an alternate plea if the free of cost handsets are held to be in the nature of capital expenditure. This issue has also been decided in favour of the assessee by the Tribunal in assessee s own case for Asst. Year: 2010-11. The relevant observations of the Tribunal are contained in paragraphs 17 of the said order: 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, 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 for A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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