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TMI Blog2021 (3) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... rence in the amount of adjustments/additions/ disallowances and except one additional ground nos.2.6 to 2.6.5 for benchmarking of "Project Management Services" in Assessment Year 2012-13 value of which has been taken at Nil, inter alia that :- "1. General 1.1. That on the facts and. in the circumstances of the case and in law, the Ld. AO erred in passing the impugned assessment order dated October 03, 2017 pursuant to the directions of the Hon'ble Dispute Resolution Panel (Hon'ble DRP) thereby computing the total income of the appellant at Rs. 1,380,032,000 as against returned loss of Rs. 62,390,267; and 1.2. That the assessment order passed by the Ld. AO pursuant to the directions of Hon'ble DRP is based on surmises and conjectures, and, without considering the facts and arguments submitted by the appellant during the course of assessment proceedings. 2. Transfer Pricing 2.1. That on facts and circumstances of the case and in law, the Ld. AO) Transfer Pricing Officer (,Ld. TPO')/ 'Hon'ble DRP' has erred in making transfer pricing adjustments to the extent of Rs. 394,552,611 in respect of the international transactions, alleging that the same t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P has erred in law and on facts by not sharing the relevant material / information relied upon to apply the 'Other Method' as most appropriate method for benchmarking the transaction of receipt of Technical Services. 2.5.6. The Ld. AO / TPO has erred in law and on facts by not appreciating the fact that the subject transaction has been benchmarked using Comparable Uncontrolled Price ('CUP') method; 2.6. That on the facts and circumstances of the case and in law, the Ld. AO/Ld.TPO/Hon'ble DRP has erred in making an adjustment of Rs. 355,413,945 in respect of international transaction pertaining to availing of Project Management Services from its AE alleging that the same to be not at arm's length. In doing so : 2.6.1. The Ld. AO / Ld. TPO / Hon'ble DRP has erred in law and on facts, by determining the arm's length payment for availing Project Management Services as 'Nil' and no acknowledging the fact that the services were actually received by the Appellant. 2.6.2. The Ld. AO / Ld. TPO / Hon'ble DRP has erred in law and on facts by not appreciating the rationale, back-up documentary evidence/explanation as provided by the Appellate during the course of the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract entered between the Appellant and its customers and thus, is an ascertained liability; 4.2 The Hon'ble DRP erred on the facts and in law in holding that such provision is an unliquidated damages made unilaterally on estimated basis and has not been computed on scientific basis, thereby completely ignoring the complete details furnished by the appellant providing details of customers, basis of calculation, period of delay, workings, copy of agreements, ; 4.3 Without prejudice to above, the Ld. AO and the Hon'ble DRP erred on the facts and in law in making disallowance of the provision under section 40(a)(ia) of the Act by holding that the provision for customer claims is compensation in the form of interest paid to customers and tax should have been deducted under section 194A of the Act; 5. Addition on account of advances written off - Rs. 8,533,563 5.1 The Ld. AO and the Hon'ble DRP erred on facts and in law in confirming the disallowance of advances written-off amounting to Rs. 8,533,563 on surmises and conjectures without appreciating that the expenditure was incurred wholly and exclusively for the purpose of business; 5.2 The Hon'ble DRP has erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed/Receivable 1 Provision of business support services - 2,085,914,472.00 2 Import of telecommunication equipments 483,717,622.00 - 3 Purchase of fixed assets 267,802,270.00 - 4 Purchase of spare parts 205,640,341 5 Availing of technical services 39,138,666 - 6 Reimbursement of expenses - 80,886,384.00 7 Recovery of Operational loss - 529,610,988 8 Return of goods and spares parts - 70,417,186 9 Availing of Project Management Services 355,413,945 - 6. The taxpayer challenged the benchmarking of two international transactions mentioned at Sl.Nos.5 & 9 qua availing of technical services and availing of project management services by AO/DRP/TPO by filing present appeals. Ld. TPO declining the contentions raised by the taxpayer proceeded to benchmark the transactions qua technical services and project management services by applying the benefit test claimed to be an internationally accepted method. 7. Ld. TPO also observed that in arm's length situation, one would pay fee for management and technical services only if the use of technology will give him greater economic benefit but, in the instant case, despite the us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect management services since AY 2004-05 onwards and has not drawn any adverse inference therein. It is also not in dispute that there is no change in the business model/ function performed and risk assumed qua the transaction in question by the taxpayer during the years under consideration. 14. Ld. TPO in order to benchmark international transactions qua intra-group services availed from AEs in respect of technical services for AYs 2012-13 & 2013-14 and benchmarking of project management services for AY 2012-13 considered both the transactions jointly and proceeded to conclude that the taxpayer has not established "cost benefit" analysis for availing the services in respect of ex-pats vis-à-vis independent employees. At the same time, as is evident from page 11 of the TP order under the heading "Findings on the basis of above", ld. TPO proposed to apply CUP as the MAM but all of sudden in order to make adjustment applied "other method" for benchmarking and re-determining the ALP of the transaction as Nil, as is evident at page 16 of the TP order. 15. Before the ld. DRP, the taxpayer has raised objections challenging the impugned order passed by the TPO which have been di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nepal and therefore, it had the relationship with third party sub-contractors in Nepal for rendering services to its customers. Thus, Huawei China assisted Huawei India by delivering services to the customer through the subcontractors. To conclude, Huawei India sub-contracted the assignment to Huawei China and Huawei China ensured that the services were delivered through the sub-contractors in Nepal." 20. However, findings of the ld. TPO given in para 10.6.3 go to prove that the contentions raised by the taxpayer has not been taken into account rather issue has been decided on the basis of surmises that no independent entity would pay for such services without any cost benefit analysis and that the taxpayer has not furnished any evidence as to the cost benefit analysis. These contentions have not been taken into consideration by the ld. DRP even. The taxpayer has also brought on record benefits derived by the taxpayer from the receipt of such services. Even, the said contract agreement between taxpayer and HTCL, which is available at page 164 of the paper book, has not been considered. 21. Identical question as to applying "benefit test" and commercial expediency by the ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns with the standpoint of a businessman and not by sitting on the chair of the businessman. Moreover, in the instant case, assessee has brought on record plethora of evidence for availing of the technical services and payment made for technical services received on the basis of USD 1600 per man-month on actual time spent by the relevant personnel, copy of technical services agreement between the taxpayer and the Huawei, China and also brought on record invoices filed on sample basis for availing technical services, but all these documents have not been examined by the TPO/DRP rather benchmarked the technical services/project management services availed of by the taxpayer from its AE at nil by mechanically dealing with the issue by applying the benefit test and commercial expediency test and has not provided opportunity of being heard to the taxpayer at the time of abruptly applying the other method. 25. So, in the given circumstances, we are of the considered view that this issue is liable to be remitted back to the TPO to decide afresh by examining all the evidences brought on record by the taxpayer and to decide the issue in the light of the decisions discussed in the preceding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit of business of the taxpayer". So, disallowance made by the AO and confirmed by the ld. DRP is not sustainable. 29. The taxpayer has categorically brought on record the bifurcation of the advertisement expenses at page 221 & 204 of the paper book for AYs 2012-13 & 2013-14 respectively. It is the settled principle of law that to examine the question whether an expenditure was wholly and exclusively incurred for the purpose of business, reasonableness of the same has to be examined from the standpoint of the businessman and not of the Revenue Department. Even otherwise, ad hoc disallowance of expenditure on account of incidental third party benefit is not permissible. 30. Hon'ble Supreme Court in case of SA Builders Ltd. vs. CIT 289 ITR 26 (SC) has held that, "the expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurred for the purpose of business. Such expenditure may not have been incurred under legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of "commercial expediency". So, we are of the considered view that commercial expediency of an expenditure incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very year, the respondent-Assessee has been incurring substantial expenditure on advertisements. The Assessing Officer, in the assessment order, had referred to the fact that similar additions were also made in the Assessment Year 2008-09. Keeping in view the nature and character of the respondent-Assessee's business, every year expenditure has to be incurred to make and keep public informed, aware and remain in limelight. This requires continuous and repeated publicity and advertisements to remain in public eye, to do business by attracting customers. It is an expenditure of trading nature. The aforesaid aspect has been highlighted by the Delhi High Court in CIT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi) and CIT v. Casio India Ltd. [2011] 355 ITR 196 [2012] 20 taxinann.com 449(Del)." 33. Similarly, findings returned by the AO and confirmed by the ld. DRP that advertisement expenses incurred by the taxpayer will increase the brand image of the group company of Huawei Technology and disallowed the advertisement expenses to the tune of 30% is also not sustainable. Hon'ble Supreme Court in case of Sassoon J. David and Co. P. Ltd. vs. CIT 118 ITR 261 (SC) held that, " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r customer claim on the ground that the amount provided by the taxpayer pertaining to actual delays/defaults occurred as per the terms of the contract entered between the taxpayer and its customers and as such is an "ascertained liability". The taxpayer has raised specific objections before the ld. DRP, available at paves 256-274 and 217-234 for AYs 2012-13 & 2013-14 respectively, and also brought on record evidence in the form of credit-memo in relation to liquidated damages and details of liquidated damages, chart showing trend and utilization of provision of customer claims from AYs 2010-11 to 2014-15 and extract of audited financials for AYs 2010-11 to 2016-17 to show the details of provision of customer claims and extract of contract entered into between the taxpayer and customer claims from pages 6 to 26 of the convenience paper book. 37. Ld. AR for the taxpayer contended that AO/DRP have erred in making/confirming the disallowance towards provision of customer's claim without appreciating the fact that amount provided by the taxpayer is in relation to the actual delays/defaults occurred as per the terms of the contract entered into between the taxpayer and its customers, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income-tax Act, 1961. The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NDS NO.5 TO 5.3 OF ITA NO.7509/DEL/2017 (AY 2012-13) ITA NO.7510/DEL/2017 (AY 2013-14) 43. The taxpayer challenged the disallowance/confirmation of advances written off to the tune of Rs. 85,33,563/- & Rs. 61,60,172/- for AYs 2012-13 & 2013-14 by AO/DRP on the ground that without appreciating the fact that expenditure was incurred wholly and exclusively for the purpose of business. Ld. DRP confirmed this disallowance made by the AO on the ground that the companies generally held the salaries or allowances for such kind of settlements when the employees leave the companies and the company is under no obligation to pay the payments and if any such payment has been made by the employees, then it must form part of perquisite of the employees for claiming deduction by the company. Since the taxpayer has not been able to provide complete details of these amounts, the employees on whose behalf these amounts have been paid, it cannot be considered as liability of the employer. 44. AO has primarily made disallowance on the ground that taxpayer has failed to furnish any evidence to support the claim of the expenditure. When we examine pages 30 to 47 & 48 to 75 for AYs 2012-13 & 2013-14 r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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