TMI Blog2021 (3) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... by the taxpayer and to decide the issue in the light of the decisions discussed in the preceding paras and by following the rule of consistency as in the earlier years i.e. in AY 2004-05 onwards, TPO himself has accepted availing of technical services at arm s length price as determined by the assessee. Disallowance being 30% of the total advertisement expense - Declining assessee's contentions that these advertisement expenses have been incurred wholly and exclusively for the purpose of taxpayer s business and not for any benefit to any group company or to a third party - HELD THAT:- As relying on J.J. Enterprises vs. CIT [ 2001 (9) TMI 6 - SUPREME COURT] disallowance of 30% of the advertisement expenses by the AO and confirming the same by the ld. DRP is not sustainable for the reasons inter alia that commercial expediency of any expenditure incurred by the taxpayer has to be examined with businessman standpoint and not with the perspective of tax authority; that advertisement expenses are revenue in nature; that merely because of the fact that advertisement expenditure incurred by the taxpayer has benefited the third party, the same cannot be disallowed; and that disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. The taxpayer has given complete detail of advances given at page 30 of the convenience paper book in tabulated form. So, in view of the matter, we are of the considered view that let this issue go back to AO to verify the facts if these advances were given for business purposes and decide afresh in the light of findings returned hereinbefore by providing opportunity of being heard to the taxpayer. - ITA No.7509/Del./2017, ITA No.7510/Del./2017 - - - Dated:- 24-2-2021 - Shri R.K. Panda, Accountant Member And Shri Kuldip Singh, Judicial Member For the Assessee : Shri Deepark Chopra, Advocate, Shri Harpreet S. Ajmani, Advocate, Shri Rohan Khare, Advocate, Ms. Sehr Chopra, Advocate For the Revenue : Shri Surender Pal, CIT DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Since common questions of facts and law have been raised in the aforesaid inter-connected appeals, the same are being disposed off by way of consolidated order to avoid repetition of discussion. 2. Appellant, Huawei Telecommunications (India) Company Pvt. Ltd. (HTICL) (hereinafter referred to as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the international transaction has been determined; 2.4. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO has grossly erred in not providing the Appellant with an opportunity to show cause the proposed TP adjustments and thereby disregarding the principles of natural justice; 2.5. 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 to the extent of ₹ 39,138,666 in respect of international transaction pertaining to availing of Technical Services from its Associated Enterprise ( AE') alleging the same to be not at arm's length. In doing so: 2.5.1. The Ld. Ld. AO / Ld. TPO/ Hon'ble DRP has erred in law and on facts, by determining the arm's length price for payment for availing Technical Services as 'Nil' and not acknowledging the fact that the services were actually received by the Appellant. 2.5.2. The Ld. AO / Ld. TPO/ Hon'ble DRP has erred in law and on facts by not appreciating the rationale, back-up information/ explanation as provided / submitted by the Appellant during the course of the assessment pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method for benchmarking the transaction of availing of Project Management Services. Corporate Tax 3. Addition on account of advertisement expenses ₹ 28,479,838 3.1 The Ld. AO and the Hon'ble DRP has erred on facts and in law in confirming a disallowance of INR 28,479,838 on an adhoc basis being 30% of total advertisement expenses of ₹ 94,932,796, without appreciating that the advertisement expenses have been incurred wholly and exclusively for the purpose of Appellant's business and it is irrespective of any benefit to any group company or to a third party; 3.2 The Ld. AO and the Hon'ble DRP erred on facts and in law in holding that the advertisement expenses have been incurred for creation of the brand of the group and thus is capital in nature; 3.3 Without prejudice to the above, the Ld. AO and the Hon'ble DRP erred in ignoring the fact that the advertisement expenses have already been recovered from the AEs at an agreed mark-up and therefore, based on the judgements of jurisdictional Tribunal, no disallowance of the advertisement expenses can be made; 3.4 Without prejudice to the above, the Ld. AO and Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble DRP erred in levying interest under section 234A, 234B and 234C of the Act. 7. That on the facts and circumstances of the case and in law, the Ld. AO and the Hon'ble DRP erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3. Briefly stated the facts necessary for adjudication of the issue at hand are : Huawai Technologies Co. Ltd. (HTCL) is one of the China s largest private sector telecom company for the year 2012 established in 1988 with Headquarter at Shenzhen Special Economic Zone in China for providing total solutions for mobile telecoms products and networks. Its projects and solutions ranged from complete telecoms solutions, network planning and design to manufacturing and management. HTCL has also Research Development (R D) support management across the world including in the USA, Sweden and Russia as well as in China. 4. Huawei Telecommunications (India) Company Pvt. Ltd., the taxpayer was incorporated on 23.07.2002 under the Indian Companies Act, 1956 being a subsidiary of Huawei Technologies Cooperatief U.A. which holds 90.11% of the total equity shareholding of the taxpayer. Huawei Tech Investment Co. Ltd., Hong Kong (H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices only if the use of technology will give him greater economic benefit but, in the instant case, despite the use of intangibles, the margin of the taxpayer is lower than the comparables which clearly shows that the techniques or branding has not provided any benefits to the services and thereby determined the Arm s Length Price (ALP) of this transaction at Nil as no independent person in similar circumstances would pay any such charges. 8. AO also disallowed 30% of the advertisement expenditure towards public relation service, promotion activities, commercial advertisement, sponsorship, print media, media monitoring and analysis etc. by treating the same as capital expenditure to the tune of ₹ 2,84,79,838/- ₹ 90,74,855/- in AYs 2012-13 2013-14 respectively. AO also made disallowance of ₹ 101,08,56,249/- ₹ 12,86,11894/- in AYs 2012-13 2013-14 respectively on account of provision made by the taxpayer for customer claim u/s 37 or 40(a)(ia) of the Act. AO also made addition of ₹ 85,33,563/- ₹ 61,60,172/- in AYs 2012-13 2013-14 respectively on account of advances written off. 9. The taxpayer carried the matter before the ld. Dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 disposed off. 16. Ld. AR for the taxpayer contended inter alia that the TPO has returned his finding without providing sufficient opportunity of being heard qua both the transactions i.e. technical services and project management services; that ld. DRP while confirming the benefit test for availing technical services has not considered the relevant evidence and no separate findings have been returned on the issue of benchmarking of project management services ; that in the alternative, ld. DRP erred in holding that availing of intra-group services are allowable u/s 37 of the Act without appreciating that no such findings have been returned in the draft order passed by the AO and no separate show-cause notice was issued to the taxpayer to decide this issue. 17. Perusal of the order passed by the TPO/DRP/AO goes to prove that the ld. DRP passed the order without providing opportunity of being heard to the taxpayer because when the taxpayer has specifically raised the issue that initially TPO propose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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/DRP/AO in benchmarking of technical services and project management services at nil has been decided by the coordinate Bench of the Tribunal in Danisco India (P) Ltd. vs. DCIT (2020) 120 taxmann.com 224 (Delhi-Trib.) by following other cases decided by the Tribunal in identical facts and circumstances of the case viz. Emerson Climate Technologies (India) Ltd. vs. DCIT (2018) 90 taxmann.com 125 (Pune-Trib), Dresser Rand India (P) Ltd. vs. Addl.CIT and also by relying upon the decision rendered by Hon ble Delhi High Court in case of Hive Communication Pvt. Ltd. in Income-tax Appeal 306/2011 and reached the conclusion that in such like circumstances ld. TPO in order to benchmark the transaction has to determine whether the price paid by the assessee for the services availed is what an independent enterprise would have paid for the same services and the analysis done by the TPO in the nature of services and the benefits arising to the assessee on availing such services was b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered 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 paras and by following the rule of consistency as in the earlier years i.e. in AY 2004-05 onwards, TPO himself has accepted availing of technical services at arm s length price as determined by the assessee. Needless to say that TPO is to decide the issue afresh by providing an opportunity of being heard to the taxpayer. Consequently, Grounds No.2 to 2.6.5 of ITA No.7509/DEL/2017 (AY 2012-13) and Grounds No.2 to 2.5.6 of ITA NO.7510/DEL/2017 (AY 2013-14) are determined in favour of the taxpayer for statistical purposes. GROUNDS NO.3 TO 3.4 OF ITA NO.7509/DEL/2017 (AY 2012-13) ITA NO.7510/DEL/2017 (AY 2013-14) 26. The taxpayer challenging the disallowance of ₹ 28,479,838/- ₹ 90,74,855/- being 30% of the total advertisement expenses of ₹ 94,932,796/- ₹ 30,249,518/- for AYs 2012-13 2013-14 respectively by declining its contentions that these advertisement expenses have been incurred wholly and exclusively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 incurred by a businessman has to be examined from the perspective of business person and not from the perspective of a tax authority. 31. Hon ble Supreme Court in case of Empire Jute Company Ltd. vs. CIT 124 ITR 1 (SC) lay down the principle for determining whether an expenditure incurred is in the nature of revenue or capital held as under : There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. What is material is to considered the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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, the fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfied otherwise the tests laid down by law. 34. Similarly, Hon ble Supreme Court in case of J.J. Enterprises vs. CIT 254 ITR 216 (SC) held the disallowance of any expenditure on ad hoc basis not sustainable by returning following findings :- In its principal order, the Tribunal had concluded that the addition was unsustainable because it had been made 'on the basis of pure guess work'. The revenue moved the High Court under section 256(2) of the Income-tax Act, 1961, and the High Court called for a reference on the basis that the question was a question of law. -We are unable to agree with the High Court. In the first place, the Tribunal has held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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, thus is an ascertained liability and relied upon the decision of coordinate Bench of the Tribunal in DCIT vs. Nokia Siemens Networks India Pvt. Ltd. in ITA No.3202/Del/2014 order dated 31.01.2018. 38. We have perused the order passed by the Tribunal in case of Nokia Siemens Networks India Pvt. Ltd. (supra) wherein the identical issue has been examined by returning following findings:- 8. In the present case from page no. 136 of the assessee's paper book, it is noticed that total provision for liquidated damages was of ₹ 19,66,51,910/- out of which ₹ 2,04,52,238/- were utilized and credited / written back, the remaining amount of ₹ 17,61,99,672/- was the actual amount of the damages which were accounted for in the profit and loss account. In the instant case, the learned CIT(A) categorically stated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37. 40. So, following the decision rendered by the coordinate Bench of the Tribunal and proposition laid down by the Hon ble Supreme Court, provision for customer claim is a liability which can be used only by using a substantial decree of estimation. When the taxpayer has brought on record ample evidence in the form of credit memo in relation to liquidated damages and details of liquidated damages, chart showing trend and utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 respectively of the convenience paper book, the taxpayer has given complete details of the advances written off. 45. It is contended by the ld. AR for the taxpayer that once the advance has been written off in the books of account, it is sufficient to claim the deduction of the advances written off u/s 37 of the Act and taxpayer is not required to prove that the advances written off is irrecoverable as per section 37(1) of the Act. 46. Hon ble Supreme Court in case of TRF Ltd. vs. CIT (2010) 323 ITR 397 (SC) held that, After 1 st April, 1989 it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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