TMI Blog2022 (3) TMI 292X X X X Extracts X X X X X X X X Extracts X X X X ..... issue before us is the validity of disallowance under section 40(a)(ia) - Decided in favour of assessee. Disallowance u/s. 40(a)(ia) by disallowing the expenditure on account of refurbish and rebate on defective products - HELD THAT:- AR before us had brought several fresh facts which was apparently either not argued before this Tribunal or stated before the lower authorities while adjudicating the issue under consideration. Hence, we deem it fit and appropriate in the interest of justice and fair play, to set aside this issue to the file of the ld. AO for denovo adjudication in accordance with law. In the said set aside assessment proceedings, the ld. AO shall factually examine all the contentions of the assessee and take a reasoned view uninfluenced by either his views taken in the assessment order or by the order of the ld. DRP or by this Tribunal in A.Y₹ 2016-17 and 2017-18. This direction is given in view of the fact that this issue being a repetitive issue as pointed out by the ld. AR, would have the recurring effect in all the years for the assessee. So, it would be relevant to bring all the facts pertaining to this issue on record. Accordingly, the ground No. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Conditional Discount Scheme (ground No.2 before us) ₹ 26,71,93,971/- (ii) Volume Discount on achievement of target sales (Ground No.3 before us) ₹ 20,66,53,421/- iii) Reimbursement of octroi and insurance on actual basis (Ground No.4 before us) ₹ 6,52,65,636/- iv) Provision for sales rebate relying on percentage of sales rebate to sales of past years (Ground No.6 before us) ₹ 1,84,43,654/- v) Refurbish and rebate on defective products (Ground No.5 before us) ₹ 13,56,11,831 Total ₹ 69,31,68,513 3.2. We find the disallowance made by the ld. AO u/s. 40(a)(ia) of the Act in respect of Ground No. 2, Ground No. 3, Ground No. 4 and Ground No. 6 as referred supra were subject matter of adjudication by this Tribunal in ITA No. 943/Mum/2020 in assessee's own case for A.Y. 2016-17 dated 05/10/2020 wherein the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit Loss Account, a copy of which is at Page-3 of the paper book, the learned Authorised Representative submitted, major revenue during the year was generated from sale of notebooks, tablets, pad-phones, mobile phones and accessories, which have a fiercely competitive market. Due to quick technological advance, these products become out dated/obsolete within a very short span, therefore, have to be sold at a discounted price. The learned Authorised Representative submitted, the assessee does not have any principal-agent relationship with any of the dealers/distributors and once the assessee sells/delivers the goods to the dealers/distributors, sale is complete. The assessee does not enter into any sales with the end users. Therefore, the sale contract between the assessee and the dealers/distributors ends on delivery of goods to them. That being the case, there is no principal- agent relationship. In this context, he drew our attention to the agreement entered with Flipkart India Private Ltd. (in short Flipkart ). Drawing our attention to various clauses of such agreement, the learned Authorised Representative submitted, the agreement makes it clear that once the assessee sells ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act between the assessee and Flipkart. The learned Departmental Representative submitted, as per the terms of the contract, the packaging of the goods is being carried out by the assessee. Further, the assessee also undertakes the liability to replace any defective goods. Drawing our attention to the copy of the invoice placed at Page-27 of the paper book, the learned Departmental Representative submitted, assessee's contention that there is a principal-to-principal relationship with Flipkart and the sale contract concludes upon sale being effected to Flipkart is also incorrect as the assessee has raised the invoice in the name of end user i.e., Rashi Enterprises. Thus, he submitted, in the given facts of the case, Flipkart has acted as an agent between the assessee and the end user to whom the product has been ultimately sold. The learned Departmental Representative submitted, as per the terms of the contract with Flipkart, the assessee has to indemnify for any loss or defect in the product sold. That shows that there is no principal-to- principal relationship in respect of the sale made. He submitted, merely relying upon the contract one cannot determine the true nature and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had provided conditional rebate/discount of ₹ 42,13,01,780 to 29 distributors/dealers to whom various products, such as, notebooks, zenphones, tablets, zenpads, eeebooks, accessories, etc., were sold for a total amount of ₹ 1768,78,77,006. It is further relevant to observe, out of the 29 dealers/distributors to whom products were sold, the assessee had entered into a written contract only with Flipkart. On a perusal of the agreement with Flipkart, a copy of which is at Page-5 of the paper book, it is seen that as per the terms of the contract, the assessee is required to sell goods/products as per the purchase order to be placed by Flipkart. As per Para-(iii) of the agreement, the assessee is required to deliver the product to Flipkart in accordance with the specifications and prices as specified in the purchase order. Further, the terms of the agreement makes it clear that the total ownership to the products shall pass on to Flipkart at the time of delivery of such products to Flipkart. Para-(iv) of the agreement provides that Flipkart has to provide the assessee relevant information in order to supply products as sought by Flipkart from time-to-time. It furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at such payments come within the purview of section 194C/194H of the Act. A reading of section 194C of the Act would suggest that in respect of any payment made to a contractor/sub-contractor for carrying out any work, including supply of labour, would be subject to deduction of tax at source at the appropriate rate. In the facts of the present case, the assessee has entered into a sale contract, simpliciter, for sale of its products to dealers/distributors. Certainly, the transaction between the assessee and the dealers/distributors cannot be termed as a contract for work. The assessee simply sells its products to dealers/distributors who, in turn, sell them to the end users. Therefore, there is no element of work as defined under clause (iv) of Explanation to section 194C of the Act. Therefore, under no circumstances, section 194C of the Act would be applicable to the discount/rebate. 15. Insofar as applicability of section 194H is concerned, a reading of the said section would make it clear that while making any payment which is in the nature of commission/brokerage other than insurance commission, would be subject to deduction of tax at the appropriate rate. Explanation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale transaction between two parties is on principal-to-principal basis, there is no element of service being rendered by one party to another and discount given to retailers is only for promoting sales, therefore, cannot be termed as commission. The Hon'ble Jurisdictional High Court in Intervate India Pvt. Ltd. (supra) has expressed similar view that when the relationship between the seller and buyer is that of a principal-to-principal, the discount given cannot be termed as commission. On the contrary, the decision in case of PMS Diesels Ors. (supra) cited by the learned Departmental Representative is contextually different, hence, would not be applicable to the facts of the present case. 16. It is relevant to observe, in course of hearing the learned Departmental Representative drawing our attention to Page-27 of the paper book had submitted that the assessee has not directly sold its products to Flipkart but has sold to end users as the invoice is raised in the name of end user. However, on a perusal of the facts on record, we find the aforesaid submission of the learned Departmental Representative factually incorrect. A reference to Page-27 of the paper book would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d learned Commissioner (Appeals). 21. Having considered rival submissions and perused the material on record, we are of the view that our reasoning while deleting the disallowance under section 40(a)(ia) of the Act in respect of ground no. 2 would equally apply to this issue as well, since, the Revenue has failed to establish any principle-agent relationship between the assessee and the dealers/distributors to whom volume discount was given. Therefore, following our detailed reasoning given in respect of ground no. 2, we delete the disallowance made by the Assessing Officer. 22. In ground no. 4, the assessee has challenged the disallowance under section 40(a)(ia) of the Act made by the Assessing Officer in respect of reimbursement of octroi and insurance to dealers/distributors. 23. As could be seen from the facts on record, the assessee had reimbursed octroi paid on the products sold by the dealers/distributors as well as insurance claimed against ASUS products to the dealers/distributors on actual basis. The Assessing Officer was of the view that such reimbursement amounting to ₹ 4,13,94,071, is in the nature of commission as the liability to pay octroi and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act, nor there is any principal-agent relationship between the assessee and the dealers/distributors to treat the payment made as commission in terms of section 194H r/w its Explanation. Therefore, we are of the view that since the payment made by the assessee are not covered under section 194C/194H of the Act, no disallowance under section 40(a)(ia) of the Act could have been made. At the cost of repetition, we must observe that considering the limited issue arising in the present appeal as to whether the reimbursement of octroi/insurance claimed is covered under section 194C/194H of the Act, thereby, requiring deduction of tax at source, we refrain from expressing any opinion whether the expenditure is allowable as a business expenditure at the hands of the assessee. This ground is allowed. 34. In ground no. 6, the assessee has challenged the disallowance of ₹ 1,40,91,023, being the provision for sales rebate under section 40(a)(ia) of the Act. 35. Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has created provision for an amount of ₹ 4,69,70,076, towards sales rebate on the basis of ratio of percentage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer has disallowed a part of the provision made towards sales rebate under section 40(a)(ia) of the Act by treating it as commission under section 194H of the Act. The learned Commissioner (Appeals) has also confirmed the aforesaid decision of the Assessing Officer. Therefore, the precise issue arising before us is the validity of disallowance made under section 40(a)(ia) of the Act by treating the expenditure claimed as payment towards commission. As discussed earlier, while dealing with the issue raised in other grounds which are more or less identical to the issue raised in this ground, we have held that as per the facts on record, a principal- agent relationship between the assessee and the dealers/distributors is not discernible. Therefore, the rebate/discount given cannot be treated as commission under section 194H of the Act. Our aforesaid reasoning rendered in context of ground no. 2, would equally apply to this ground as well. Therefore, the disallowance made under section 40(a)(ia) deserves to be deleted. As regards the contention of the learned Departmental Representative that the provision is not allowable as expenditure, we are afraid, we cannot entertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee would have been liable to deduct tax at source while making payment for such repairs to the professional as it would be covered under section 194C/194J of the Act. The assessee having failed to deduct tax at source, the ld. AO disallowed 30% amounting to ₹ 4,06,83,549, under section 40(a)(ia) of the Act. The disallowance was also sustained by ld. CIT(A). 4.2. At the outset, the ld. AR before us stated that this issue had been decided against the assessee by this Tribunal for A.Y. 2016-17 in ITA No. 943/Mum/2020 dated 05/10/2020. But he stated that terms agreed upon by the assessee with dealers is that the dealers have to completely undertake the repair works at their end if there occur any repairs and assessee would compensate the dealers by giving 30% flat discount on the price of the product sold to them, to take care of the same on their regular sales. The ld. AR pointed out that this fact was not argued before the Tribunal in A.Y. 2016-17. Accordingly, he pleaded that the decision rendered by this Tribunal in A.Y. 2016-17 becomes factually distinguishable. He also drew our attention to the sample invoice and credit note raised by the assessee which apparently reveal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judicating the issue under consideration. Hence, we deem it fit and appropriate in the interest of justice and fair play, to set aside this issue to the file of the ld. AO for denovo adjudication in accordance with law. In the said set aside assessment proceedings, the ld. AO shall factually examine all the contentions of the assessee and take a reasoned view uninfluenced by either his views taken in the assessment order or by the order of the ld. DRP or by this Tribunal in A.Yrs. 2016-17 and 2017-18. This direction is given in view of the fact that this issue being a repetitive issue as pointed out by the ld. AR, would have the recurring effect in all the years for the assessee. So, it would be relevant to bring all the facts pertaining to this issue on record. Accordingly, the ground No. 5 raised by the assessee is allowed for statistical purposes subject to above mentioned directions. 5. The Ground Nos. 7-10 raised by the assessee are challenging the Transfer Pricing (TP) adjustment made in respect of provision of Marketing Support Services (MSS). 5.1. We have heard rival submissions and perused the materials available on record. The assessee is a private limited company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 56,33,036/- as under:- Particulars Amount (INR) Marketing and Advertising cost 3,18,08,173 Mean of comparable margins 31,71% Margin to be earned 1,00,86,372 Total marketing support fees receivable 4,18,94,545 Total marketing support fees actually received 3,62,61,509 Adjustment Amount 56,33,036 5.4. This ALP adjustment was upheld by the ld. DRP and hence, the ld. AO added the same in the final assessment order. 5.5. We find that the total international transactions carried out by the assessee with its AE are as under:- S. No Nature of Transaction Amount (in Rs.) Method adopted 1 Import of finished goods 1231,86,01,503 TNMM 2 Purchase of marketing samples ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts in India. Hence, marketing services becomes an integral part of distribution business as they are interlinked and interdependent. None can function in isolation. Hence, we hold that all these transactions are to be aggregated. 5.9. With regard to yet another argument advanced by the ld. AR that profit margin should not be calculated with reference to pass through cost, we find that the ld. AR stated Marketing expenses (details are enclosed in page 341 of the Paper Book filed before us) mainly comprise of services availed from third parties such as cost of marketing materials, advertising, courier charges, insurance etc. The assessee neither performs any additional functions with respect to such costs nor such activities involve any service element of the assessee. 5.10. Per contra, the ld. DR stated that argument regarding marketing expenses referred in page 341 of the paper book are being raised by the assessee for the first time. He argued that whether costs can be treated as pass-through costs is a fact specific exercise and the onus is on the assessee to demonstrate why the costs should be allowed as pass-through costs. The intercompany agreements and actual conduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Services. Hence, the company is functionally comparable to the assessee. Hence, it has been rightly selected by the TPO as comparable. The objection of the assessee in this case is therefore rejected. B) INMACS Management Services Limited ('INMACS') The Assessee contended that INMACS is majorly engaged in provision of services in the nature of management consultancy, corporate finance, audit, tax and legal advisory services and it employs professionals who are highly educated and have a vast experience in the field of taxation, costing, finance and accounts to provide high quality services. Thus, the Assessee prayed that this company is not functionally comparable and should be excluded. We have considered the facts of the case in the submissions made. As per annual report, the company is providing services in the field of Risk Management and Business process reengineering which are in the nature of Business Support Services. Hence, the company is functionally comparable to the assessee. Hence, it has been rightly selected by the TPO as comparable. The objection of the assessee in this case is therefore rejected. 5.13. We find lot of force in the argum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s margin 14% and accordingly, assessee's revenue would be at arm's length in respect of provision of marketing support services. 5.16. Yet another argument advanced by the ld. AR was that the ld. DRP while accepting the above two comparables had observed that these companies are engaged in business support services and hence comparable with the assessee. However, the ld. DRP had rejected the comparables chosen by the assessee by observing that market research is not a comparable of business of the assessee and event management is not comparable to business of the assessee. This depicts the contradictory stand by the ld. DRP. We are in agreement with this argument advanced by the ld. AR. In view of the aforesaid observations, we direct the ld. TPO/AO to delete the TP adjustment made in the sum of ₹ 56,33,036/-. Accordingly, the Ground Nos. 7-12 raised by the assessee are allowed. 6. The Ground No. 13 raised by the assessee is general in nature and does not require any specific adjudication. 7. In the result, appeal of the assessee is allowed for statistical purposes. Order pronounced on 22/02/2022 by way of proper mentioning in the notice board. - - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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