TMI Blog2022 (1) TMI 337X X X X Extracts X X X X X X X X Extracts X X X X ..... cation development and unique phone numbers. We, therefore, hold that this is not a valid comparable and direct the Assessing Officer/TPO to exclude this company from the list of comparables. TDS u/s 194J/194H - Disallowance under section 40(a)(ia) of the Act on account of trade offers provided to distributors - HELD THAT:- As decided in own case [ 2020 (8) TMI 825 - ITAT DELHI] and [ 2020 (8) TMI 825 - ITAT DELHI] 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ak Chopra, Adv. And Sh.Ankul Goyal, Adv. For the Respondent : Sh. Shashi Bhusan Shukla, CIT DR ORDER PER KUL BHARAT, JM : This appeal filed by the assessee is against the order of Assessing Officer passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 ( the Act ), New Delhi dated 30.08.2017 for the Assessment year 2013-14. The assessee has raised following grounds of appeal:- 1. The order dated August 30, 2017, passed by the Learned Assessing Officer ( Ld. AO ) under Section 143(3) read with Section 144C of the Ad pursuant to the directions of the Hon'ble DRP dated July 3, 2017, is bad in law and on the facts and circumstances of the case and the same is liable to be set aside. 2. The Ld. AO and Hon'ble DRP have erred in relying upon evidence collected during illegal survey and summons proceedings; and in not relying upon the VTT Report and the Software Supply Agreement dated January 1,2006. 3. The Ld. AO and Hon'ble DRP have erred in disallowing expenses amounting to INR 173,92,63,200 incurred by the appellant, for purchase of software from Nokia Corporation ( Nokia Corp ), under Section 40(a(i) of the Act. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in not making any adjustment for royalty free use of brand by the appellant, while making adjustment on account of alleged brand promotion services. 5.9. The Ld. TPO / Ld. AO / Hon'ble DRP have erred in carrying out benchmarking of alleged excessive AMP expenses by using a flawed methodology which is not in accordance with any of the methods prescribed under Section 92C(1) of the Act. 5.10. The Ld. TPO /Ld. AO /Hon'ble DRP have erred in selecting comparables for benchmarking alleged market support services arbitrarily, without carrying out any comparable search. 5.11. The Ld. TPO / Ld, AO / Hon'ble DRP have erred in selecting inappropriate comparables for computation of arm's length margin on alleged excessive AMP expenses. 5.12. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in not making an adjustment to account for differences in the level of working capital employed by the appellant and comparables, while determining the ALP. 5.13. The Ld. TPO / Ld. AO/ Hon'ble DRP have erred in ignoring significant legal principles laid down in recent judicial decisions, regarding AMP expenses, relied upon by the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain quantitative filters adopted by the appellant while carrying out economic analysis in its transfer pricing documentation, to determine ALP. 7.3. The Ld. TPO / Ld. AO / Hon'ble DRP have erred in introducing certain inappropriate quantitative filters to carry out economic analysis, for determining ALP. 7.4. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in not rejecting comparables having turnover in excess of five times the turnover of the appellant, despite a ruling in favour of the appellant for AY 2002-03 by Hon'ble ITATI, which has also been confirmed by the Jurisdictional High Court of Delhi. 7.5. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in resorting to cherry picking' of comparables by arbitrarily selecting comparables from the list of companies rejected by the appellant without analysing all the companies rejected by the appellant. 7.6. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in rejecting the com parables, chosen by the appellant, on the basis of incorrect reasons and introducing certain additional, inappropriate, comparables while determining the ALP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch has also been confirmed by the Jurisdictional High Court of Delhi. 8.5. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in resorting to 'cherry picking' of comparables by arbitrarily selecting comparables from the list of companies rejected by the appellant without analysing all the companies rejected by the appellant. 8.6. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in rejecting the comparables, chosen by the appellant, on the basis of incorrect reasons and introducing certain additional, inappropriate, comparables while determining the ALP. 8.7. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in not making an adjustment to account for differences between the risk profile of the appellant and comparables, while determining the ALP. 8.8. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in not making an adjustment to account for difference in depreciation rates charged by the appellant vis-a-vis the comparables, while determining the ALP. 8.9. The Ld. TPO / Ld. AO /Hon'ble DRP have erred in treating 3 line items in the financials of comparables (i.e. for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software under transfer pricing regulations, and in simultaneously disallowing the entire expense under Section 40(a)(i), resulting in double disallowance of the same amount, in complete disregard of the directions of the Hon'ble DRP in this regard. 15. The above grounds of appeals are independent and without prejudice to one another. 16. The appellant craves leave to add / withdraw or amend any ground of appeal at the time of hearing. 2. In this case, the original file was misplaced. The file was subsequently re-constructed. On the basis of re-constructed file, the present appeal is being adjudicated. 3. Vide letter dated 19.07.2019, the assessee had sought withdrawal of Ground Nos. 2 to 7 and 12 14 in the present appeal. Therefore, Ground Nos.2 to 7 and 12 14 are dismissed as withdrawn. 4. As per Form No.36B, the grounds remains to be adjudicated are as under:- 1. The order dated August 30, 2017 passed by the Learned Assessing Officer ( Ld. AO') under Section 143(3) read with Section 144C of the Act pursuant to the directions of the Hon'ble DRP dated July 03, 2017, is bad in law and on the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile computing operating margins of the comparables for determining the ALP. 2.10 Hon'ble DRP has erred in disposing off the various objections raised by the appellant in a summary manner, without giving any reasons. 3. The Ld. AO and Hon'ble DRP have erred in disallowing expenses amounting to INR 701,71,57,547 incurred by the appellant on trade offers provided by it to it's distributors (HCL Infosystems Ltd. as well as other distributors) under section 40(a)(ia) of the Act. 4. The Ld. AO and Hon'ble DRP have erred in disallowing an amount of INR 6,26,25,925 incurred by the Appellant on account of trade price protection paid to distributors (other than HCL Infosysterns Ltd.) as compensation for reduction in prices of the handsets, and in ignoring all the evidences (including confirmations from dealers) submitted by the Appellant in this regard, and further in ignoring the fact that on the basis of similar confirmations, trade price protection provided to HCL Infosystems Ltd. has been allowed. 5. The Ld. AO and Hon'ble DRP have erred in disallowing marketing expenditure incurred by the appellant amounting to INR 25,45,40,035 by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r pricing adjustment of ₹ 45,42,10,970/-. The Assessing Officer passed a draft assessment order dated 27.12.2016 against which the assessee had filed its objections before the Dispute Resolution Panel ( DRP ) who after considering the objections of the assessee revised transfer pricing adjustment amounting to ₹ 46,47,41,570/-. The Assessing Officer therefore, made adjustment of ₹ 46,47,41,570/-. In respect of non-transfer pricing issues, the Assessing Officer recorded that a survey operation u/s 133A of the Act, was conducted on the premises of the assessee. During the course of survey, it was found that certain payments without deducting the tax at source were made, therefore, the Assessing Officer made disallowance of ₹ 1,73,92,63,200/- on non-deduction of tax. Further, the Assessing Officer observed that as per the draft assessment order, (DCIT, Circle-2(2), International taxation, New Delhi dated 28.03.2016 in the matter of Nokia Corporation Ltd. for Assessment Year 2012- 13), there were finding in respect of existence of Nokia Corporation Ltd. of Nokia as Permanent Establishment ( PE ) in India. Therefore, the Assessing Officer made addition of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to ₹ 2,92,30,300/- in relation to provision of business support services by the appellant to its Associated Enterprises ( AE ). 11. The assessee has also raised sub-ground from the Ground No.2.1 to 2.10 in support of the Ground No.2. These grounds being argumentative and are in support of ground no.2 are being disposed of along with ground no.2 for the sake of brevity. 12. The ld. counsel for the assessee submitted that the authorities below grossly erred in making transfer pricing adjustment amounting to ₹ 2,92,30,300/- in relation to provision of business support services by the appellant to its AE. He submitted that the authorities below grossly erred in rejecting the economic analysis undertaken by the appellant in its transfer pricing documentation to determine the Arm s Length Price. Further, he submitted that the authorities below wrongly rejected certain quantitative filters adopted by the appellant while carrying out economic analysis in its transfer pricing documentation to determine the Arm's Length Price. He further submitted that the authorities below have erred in introducing certain inappropriate quantitative filters to carry out economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h if reduced from net profit of ₹ 1.29 crores will result in a loss and the profit liable indicator will be 8.7%. Further, it was submitted that the financials of the company do not provide a detailed description of the business operations of the company. The assessee placed reliance on the website extracts placed at pgs 470 to 473 of the paper book filed before the TPO. As per the website extracts, Axis Integrated Systems Limited is engaged in providing consultancy with regards Directorate General of Foreign Trade, customs/Excise Service Tax related services. Their area of expertise includes foreign trade policy related matters and excise benefits related matters and thus are incomparable to business support services rendered by the assessee. It was further contended that the mode of revenue recognition was not known and due to lack of complete financial report. The ld. counsel for the assessee placed reliance in the case of Pr CCIT vs M/s Li Fung (India) Pvt. Ltd. in ITA No.176/2019 for Assessment Year 2013-14, to buttress the contention that no comparison can be drawn between an entity that is captive service provider to its group entities and an entity like Axis which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to India starting with kerosene lamp and various other products like toaster, pressure cookers, slotted angles etc and their successful promotion, therefore, how this company was functionally similar to to the support service segment of the assessee, the Ld. counsel for the assessee placed reliance on decision of co-ordinate Bench of the Tribunal in the case of Hyundai Rotem Company in ITA No.7569/Del/2019 and Veolia India Private Limited in ITA No.6770/Del/2015. He submitted that in view of these decisions and the fact that the comparable was functionally different dissimilar to the assessee. This comparable ought not to have been included by the TPO. 14. Further, he contended that in case of Just Dial Limited, submissions were made before the TPO and objections were raised before the DRP. He submitted that this comparable ought to have been excluded on the basis of its functional difference. He submitted that Just Dial Ltd. operates a local search engine which assists general public in finding information pertaining to the nearby area. Such information may range from location of any restaurant/eateries etc. to general phone number enquiries. These services are in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company name OP/OC(%) WCA OP/OC(%) 1 APITCO Ltd. 16.82% 11.43% 2 Axis Integrated Systems Ltd. 38.19% 35.40% 3 ICRA Management Consulting Service Ltd. 2.42% 2.27% 4 Just Dial Ltd. 31.75% 31.92% 5 Killick Agencies Mktg. Ltd. 26.73% 26.50% 6 Marketing Consultants Agencies Ltd. 9.48% 8.59% Average 20.90% 18.50% 25.2 Accordingly, the arm s length price of the International transaction related to provision of business support services is computed as below:- Particulars Amount (INR) Operating Cost 219,000,000 Arm s Length Margin (%) 18.59% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble being functionally different and dissimilar to the assessee. We, therefore, direct the Assessing Officer/TPO to exclude this company from the list of comparables. 19. In respect of Just Dial Limited, we find merit in the contention of the ld. counsel for the assessee that this comparable is functionally different. Just Dial Limited operates a local search engine which assists general public in finding information pertaining to nearby area. Further, no segmental data is available and the company owns significant intangible assets in the form of goodwill, application development and unique phone numbers. We, therefore, hold that this is not a valid comparable and direct the Assessing Officer/TPO to exclude this company from the list of comparables. 19.1. In view of the above discussion, the Assessing Officer is hereby directed to exclude these three comparables and recompute the Arm's Length Price. In case, if the value falls within the permissible limit in that event, the Assessing Officer will delete the disallowance. Since, the ld. Counsel for the assessee did not argue on the other comparables and restricted his arguments to these three comparables only, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submissions The disallowance has been made on the same lines as AY 2010-11 and AY 2011-12. For AY 2010-11, the Hon'ble ITAT vide order dated 20.02.2020 in ITA No. 5791/Del/2015 in Para 8 of the order (Page No. 17 of Paper book) has adjudicated this issue in favour of the Assessee and held as under: 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 debit notes. In fact, there is clear m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perbook) has adjudicated this issue in favour of the Assessee and held as under: We have heard both the parties and perused all the relevant material available on record. 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 Assessing Officer vide submission dated 10.03.2014 trade scheme. In-fact, it was pointed out during the course of hearing that in Assessment Year 2008-09, even the Assessing Officer has allowed the deduction for the instant like expenditure. In Assessment Year 2008-09, the matter was remanded back to the file of the Assessing Officer, who has allowed the deduction with respect to the expenditure, where confirmations have been obtained from the recipients. In any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. The submissions of the assessee are reproduced hereunder:- Assessee s submissions The disallowance has been made on the same lines as AY 2010-11 and AY 2011-12. For AY 2010-11, the Hon'ble ITAT vide order dated 20.02.2020 in ITA No. 5791/Del/2015 in Para 17 of the order (Page No. 22 of Paperbook) has adjudicated this issue in favour of the Assessee and held as under: 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.Ys. 2003-04 by the Tribunal in ITA No. 2445/Del/201O order dated 30.01.2018 which was also affirmed by the Hon'ble High Court in ITA No. 955/2018 order dated 31.08.2018. Thus, Ground No.5 is allowed. The said ruling has also been followed while adjudicating the same issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt to reading something in the text of the provision which is not to be found in the text of the provision in Section 40(a)(ii) of the IT Act. 23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, education cess or any other cess , then, the legislature could have easily included reference to cess in clause (ii) of Section 40(a) of the IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the www.taxguru.in 12 TXA 17 18-13 dt.28.02.2020 deduction of amounts paid by a Assessee towards the cess , when it comes to computing income chargeable under the head profits and gains of business or profession. 34. In respect of Education Cess, the ld. DR opposed the submissions and supported the orders of the authorities below. 35. We find that this issue is no more res-integra as has been decided in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal following the judgment of the Hon ble Bombay High Court in the case of Sesa Goa Ltd. vs DCIT (2020) 423 ITR 426. Therefore, respectfully following the same, we hereby direct the Assessing Officer to delete ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
