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TMI Blog2021 (1) TMI 475X X X X Extracts X X X X X X X X Extracts X X X X ..... ded in mobile phones imported by the assessee during the previous year - Taxability of software embedded in mobile phones - AO based on the assessment of NIPL for preceding years, proceeded with artificial splitting of the price of imported mobile phones into the price of embedded software and price of component in the ratio of 40:60 - as alleging that the artificial cost of embedded software such arrived is taxable as royalty in India (both under the provisions of the Act and as well as India-Finland Tax Treaty), AO proceeded with making disallowance u/s 40(a)(i) - HELD THAT:- Finished mobile phones were imported by the assessee from Nokia Corp for the purposes of sale against a lump-sum consideration and there was no separate payment made by the assessee towards the purchase of any software. The Revenue could not point out the distinguishing fact that there was a separate payment made for purchase of software embedded in mobile phones. The decision relied by the Ld. AR are apt for the present assessee s case and the CIT(A) has rightly deleted this addition.There is no need to interfere with the findings of the CIT(A). Hence, Ground No. 1 of the Revenue s appeal is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the confirmations available from the distributors, the nature of Trade Price Protection cannot be said to be a bogus expense nor protection against a probable loss. Ad-hoc disallowance of 25% of the amount of provision for obsolescence - DR submitted that no documentary evidence of such obsolescence of inventory was furnished - HELD THAT:- CIT(A) while deciding the issue clearly held that the assessee has mentioned these products in its books of accounts. But the fact remains whether the sale was not actually made in the present assessment year which is not emerging from the order of the CIT(A) and also that the Assessing Officer has also not given as to what is the reason for disallowance of 25% of the amount of provision for obsolescence on ad-hoc basis. Thus, it will be appropriate to remand back this issue to the file of the Assessing Officer with direction to determine and decide the same afresh in respect of the cost of obsolete items with reference to net realizable value. Ad-hoc disallowance of 25% of advertisement expenditure alleging same to be capital in nature - HELD THAT:- CIT(A) has observed that the assessee is engaged in trading of mobile handsets an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of the fact that the learned AO treated the cost incurred by the Appellant on phones issued to employees, dealers and Care centers either as a capital expense or not allowable as a business expense under the provisions of Section 37(1) of the Act. 1.2. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating that the cost of FOC phones issued to Care centers is in the nature of expenses incurred against defective phones and thus, allowable as business expense under the provisions of Section 37(1) of the Act. 1.3. That without prejudice to above, on the facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating the fact that the learned AO has not allowed tax depreciation on the cost of FOC phones issued to dealers, despite making a specific reference to the same in the assessment order dated December 26, 2016, thereby contradicting the aforesaid disallowance made by him. 1.4. That without prejudice to above, the learned CIT(A) has erred in not granting deduction of roll-over depreciation on the written down value of the FOC phones issued to dealers and employees, which were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nokia India Sales Private Limited on March 18, 2011. The assessee company is an indirectly wholly owned subsidiary of Nokia Corporation Oy, Finland and is engaged in the business of marketing, distribution and sales of mobile phones (including accessories) and services. This business of the assessee was earlier handled by M/s Nokia India Pvt. Ltd. (NIPL), another subsidiary of Nokia Corporation OY, till about end of December, 2012 and in that sense NIPL is business predecessor to the assessee. The assessee filed ereturn declaring total income of ₹ 286,06,91,570/- on 30/11/2014 and revised return declaring ₹ 296,66,91,570/- on 8/2/2014. The Assessing Officer assessed total income of the assessee and computed the same after addition and disallowance as under:- Returned Income as per revised return ₹ 296,66,91,570/- Add: Disallowance u/s 40(a)(i) for nondeduction of tax on payment for embedded software/royalty ₹ 1422,26,42,726/- Disallowance of Trade Offers to HCL Infosystems Ltd ₹ 669,23,96,959/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier findings. The CIT(A) also upheld the additions by the Assessing Officer and held that there was no supporting documents to show that phones were actually issued. The Ld. AR submitted that the Tribunal has already adjudicate this issue in case of Nokia India Pvt. Ltd. same entity referred to by the Assessing Officer, vide order dated 30.01.2018 in ITA No. 2445/Del/2010 for AY 2003-04 which has also been upheld by Hon ble jurisdictional High Court vide order dated 31 August 2018 in ITA 955/2018. 6. The Ld. DR submitted that the main ground of appeal of the assessee is against disallowance of free of cost phones allegedly given to employees, distributors and to customers as replacement of already sold phones. The assessee claimed that these expenses were incurred wholly and exclusively for the purpose of business hence must be allowed u/s 37. The Ld. DR submitted that before any expense is held to be allowable or disallowable, there has to be an expense and the assessee must prove with documentary evidence that it incurred expense. The Assessing Officer called for details with supporting evidence of expenditure claimed to have been incurred on supply of free of cost handset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer, based on the assessment of NIPL for preceding years, proceeded with artificial splitting of the price of imported mobile phones into the price of embedded software and price of component in the ratio of 40:60. Thereafter, alleging that the artificial cost of embedded software such arrived is taxable as royalty in India (both under the provisions of the Act and as well as India-Finland Tax Treaty), the Assessing Officer proceeded with making disallowance u/s 40(a)(i) of the Act of the impugned price of embedded software on the grounds that the assessee was liable to withhold tax at source thereon. The software embedded in the hardware (which is not supplied separately) is a standard operating software that can be used to activate and operate/ run the specific mobile handset supplied by Nokia Corp and is incapable of being traded by the assessee on a standalone basis. The Ld. AR submitted that the CIT(A) has recorded detailed reasons and deleted the addition following bindings decisions of Hon ble jurisdictional High Court in case of DIT v. Ericsson A.B [2012] 343 1TR 470, CIT vs. Alcatel Lucent Canada [2015] 372 ITR 476 (Delhi HC) and others and has rightly h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts provided by the assessee to HCL and other distributors are in the nature of income by way of commission and hence, liable for TDS under Section 194H of the Act and the Assessing Officer has alternatively alleged that such trade offers and discounts fall under the definition of fee for technical services liable for deduction at source under section 194J of the Act. The Assessing Officer relied on the findings in earlier assessments in case of NIPL. The Ld. AR further submitted that as the Assessee operated in a highly competitive and price sensitive mobile handset market, with rapidly evolving mobile products and technology, it extended discount schemes to its distributors from time to time as a part of its sales and marketing strategy, for promotion of sales of Nokia mobile phones across different regions. In business terminology, the discounts are called as trade offers . The discounts/ trade offers provided by the assessee were in accordance with standard mobile handset industry practice and were critical to maintain its competitive edge in a highly price sensitive and competitive mobile handset industry. The Assessing Officer wrongly presumed that it is immaterial to cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meanwhile, the position of facts relating to Nokia India Pvt. Ltd. wherein the similar issue was contested was decided in favour of the respective assessee and one of the parties in that case was HCL. The fact remains that the Assessing Officer in the present assessment year relied on assessments in previous year in case of predecessor entity i.e. Nokia India Private Limited (NIPL) and the Tribunal has adjudicated this issue in favour of the assessee s in case of NIPL vide order dated 20 February 2020 in ITA Nos. 5791/Del/2015 5845/Del/2015 for the Assessment year 2010-11. This decision of AY 2010-11 has been followed by the Tribunal in order dated 17.08.2020 for AY 2011-12 and in order dated 15.10.2020 for AY 2008-09 and 2012-13. The Tribunal in case of NIPL held as under: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of these expenses were not furnished. The same are extracted below: 39. Perusal of the replies filed by the assessee reveals that the assessee provides protection to its distributors against probable loss that they may suffer due to fall in prices of handsets. No details were also provided as to whether the company conducts any stock audit in respect of the number and type of handsets lying with the distributors on which the price protection was allowed. Neither was any basis of rates was provided on which the purported price protection was being booked. 40. A perusal of the confirmations provided show that these are stereotyped confirmations received from the various parties. The language of these confirmations is almost the same, the telephone numbers of the distributors is not given in the confirmations and even date is not mentioned in the confirmation documents. This in itself creates doubts regarding the confirmations received. In these circumstances, the benefit of price protection charges claimed to have been paid to these parties cannot be given. 41. It is also pertinent to mention that the trade price protection allowed was not debited as an expense item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / fall in the prices of handsets, known as TPP. Further, the Assessee also filed Party wise details of TPP expenses, along with independent confirmations obtained from distributors, during the course of the assessment proceedings before the Assessing Officer. However, the Assessing Officer proceeded to make the said disallowance purely on the basis of surmises and conjectures as alleged that there was no mechanism to determine the amount of price protection and that the confirmations received from parties stereotyped confirmation with similar language. The CIT(A) has rightly held that allegation of the Assessing Officer that confirmations were stereotyped is baseless in view of the fact that no specific format has been prescribed for such confirmations and that discounts in the form of TPP was result of commercial expediency and the Assessing Officer cannot step in the shoes of the business entity as laid down in binding judicial precedents. The Tribunal has adjudicated this issue in favour of the assessee s predecessor entity NIPL vide order dated 20.02.2020 for Assessment Year 2010-11 and this decision of Assessment Year 2010-11 has been followed by the Tribunal in order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 No. 3 is allowed. Thus, the issue is identical in the present assessee s case as well. The CIT(A) has also rightly held that based on the confirmations available from the distributors, the nature of Trade Price Protection cannot be said to be a bogus expense nor protection against a probable loss. Thus, Ground No. 4 of the Revenue s appeal is dismissed. 17. As regards to Ground No. 5 relating to ad-hoc disallowance of 25% of the amount of provision for obsolescence , the Ld. DR submitted that no documentary evidence of such obsolescence of inventory was furnished. Para 59 of the Assessment order reads as under: 59. In the case at hand, as neither proper reasons nor evidences in support of the assessee's claim of the provision for stock written off were made, the claim of the assessee is liable to be rejected. It is not the argument of the Revenue that such expenses are not required for the purpose of the assessee s business. But, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion if allowable in view of binding decision of Hon ble Supreme court in case of Rotork Control India Pvt. Ltd. Further, the issue has also been adjudicated and remanded to the file of the Assessing Officer by the Tribunal in case of NIPL for AY 2003-04 and the decision was also upheld by Hon ble High Court. 19. We have heard both the parties and perused the material available on record. From the perusal of the records, it can be seen that the Assessing Officer relied on orders of DRP and the Tribunal in case of NIPL and noted that facts are similar. The Tribunal in NIPL held as under: 14. We have heard both the parties and perused all the relevant material available on record. It can be seen that in A.Ys. 2000-01, 2001-02, and 2003-04, this issue was remanded back by the Tribunal to the file of the Assessing Officer with direction to determine and decide the same afresh in respect of the cost of obsolete items with reference to net realizable value. For A.Y. 2003-04, the Hon ble High Court upheld the findings of the Tribunal. Only in A.Y. 2011-12, the DRP has taken a different view by deleting the said additions. In the instant year, the Assessing Officer has not given an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of 25% of advertisement expenditure alleging same to be capital in nature, the Ld. DR relied upon the Assessment Order. 21. The Ld. AR submitted that disallowance of ad-hoc 25% of the advertisement and publicity expenses have been made by the Assessing Officer without giving any valid show cause/ opportunity to the assessee. Thee said advertising expenses have been incurred by the assessee on conducting road shows, participation in industry events, product advertising in all forums of media channels which includes magazines, newspaper, television, radio etc. for attracting customers, making customers aware of the different type of mobile handsets sold by the Company and enhancing its sales in India and only represent expenses incurred wholly and exclusively for the purpose of the business of the assessee and therefore, fully allowable under section 37(1) of the Act. The Assessing Officer wrongly held that such expenditure give enduring benefit to Assessee and leads to creation of goodwill reputation and credibility and capitalized 25% of advertisement expenses. The CIT(A) has rightly deleted the disallowance relying on the decision of Hon ble jurisdictional Delhi Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X
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