TMI Blog2022 (11) TMI 1352X X X X Extracts X X X X X X X X Extracts X X X X ..... e any recovery towards the warranty services and the out of pocket warranty charges paid to third parties and the same was upheld by the DRP - AR submitted that the Assessee has in fact recovered the expenses incurred in respect of the warranty services, with a mark up of 5%. Therefore, no further adjustment is warranted - HELD THAT:- We notice that the coordinate bench of the Tribunal in assessee s own case for the assessment year 2009-10 [ 2022 (3) TMI 1511 - ITAT BANGALORE ] since the services related to warranty are being handled by a third party and the assessee is being used only as a medium, the TPO is not correct in charging a markup on this amount. Hence, the objection relating to markup on the warranty cost is upheld. The TPO cannot charge a markup on warranty amount as such services are not rendered by the assessee to its AE - Respectfully following the above decision we direct the TPO to re-examine the issue raised in ground no.5 afresh. It is ordered accordingly. TDS u/s 194H - Disallowance u/s 40(a)(ia) of rebates given to customers - assessee submitted before the AO that taxes were not liable to be deducted at source on the rebate given to distributors - AO was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an it be said that any capital asset has been created in favour of the assessee. The quantum of expenditure cannot determine the nature of the expenditure. Therefore, we hold that this expenditure is revenue in nature. In assessee s case, the expenses are incurred for the purpose of refurbishing the showroom which provides the customers an environment where these products are sold in Dell exclusive stores We hold the expenses incurred by the assessee towards fixture and stores interiors expenses is an allowable expenses and the claim made by the assessee is directed to be accepted. This ground is allowed in favour of the assessee. - IT(TP)A No. 2834/Bang/2017 And IT(TP)A No.134/Bang/2018 - - - Dated:- 11-11-2022 - Shri George George K., Judicial Member And Ms. Padmavathy S, Accountant Member For the Assessee : Shri T. Suryanarayana, Advocate. For the Revenue : Shri Praveen Karanth, CIT(DR)(ITAT), Bengaluru. ORDER PER BENCH These cross appeals by the assessee and revenue are directed against the order of the CIT(Appeals)-5, Bengaluru dated 28.09.2017 passed u/s 143(3) r.w.s. 144C(3) of the Income-tax Act, 1961 [the Act] for the assessment year is 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Order bad in law and on facts The order passed by the Joint Commissioner of Income Tax, Large Tax Payers Unit ['the AO'], under section 143(3) of the Act and the order passed by the Commissioner of Income-Tax (Appeals) - 5, ['the CIT(A)'] under section 250 of the Act, are bad in law and on facts. Without prejudice to the generality of the above, the order issued by the Ld. AO is bad in law insofar as the fact that the AO did not issue to Dell International Services India Private Limited (for the merged entity Dell India Private Limited), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. The order issued by the Ld. CIT(A) did not take cognizance of the objections raised by the Appellant in relation to the transfer pricing matters while issuing the order under Section 250. The Ld. CIT(A) in his order did not adjudicate on the grounds raised by the Appellant with respect to the ad hoc adjustments proposed by the Ld. TPO in relation to the comparable companies for the impugned IT enabled services ('ITeS') and warranty charges. 2. Erroneous bifurcation of marketing and busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) erred in upholding the actions of the Ld. AO/ Ld. TPO. The Ld. AO/ Ld. TPO erred in rejecting the TP Study comparable companies despite these companies being functionally comparable. The Ld. CIT(A) also erred in confirming the same. The Ld. AO/ Ld. TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability, such as, (i) companies whose data for financial year ('FY') 2011-12 was not available, (ii) companies with service revenue less than 75% of total operating revenue, (iii) companies with related party transactions greater than 25% of sales (iv) companies with export sales less than 75% of total sales and (v) companies with different financial year ending (i.e. other than 31 March 2012). The Ld. CIT(A) also erred in confirming the same. The Ld. AO/ Ld. TPO also erred on facts in erroneously computing the margins of the Appellant and companies identified as comparable by the Ld. TPO viz. Cameo Corporation Services Limited, Concept Communication Ltd and Killick Agencies Marketing Ltd. The Ld. CIT(A) erred in confirming the same. The Ld. AO/ Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssimilar to the Appellant. The Ld. CIT(A) erred in not adjudicating the same. 5. Erroneous adjustment of Rs. 98.80 Crores as Warranty cost to be received from AEs The Ld. AO and Ld. TPO erred on facts in considering that the Appellant undertakes warranty obligations for the direct sales made by Dell Global B.V., The Netherlands, Singapore Branch ('DGBV'). This is based on mere surmises and conjectures and completely ignoring the facts and the functions assets and risk analysis of the Appellant in connection to the same. The Ld. DRP also erred in confirming the same. The Ld. TPO and Ld. AO erred on facts and in law in arbitrarily proposing an adjustment on account of warranty cost in relation to the marketing support services, to the tune of INR 87.04 Crores without considering the facts of the Appellant. The Ld. CIT(A) erred in not adjudicating the same. The Ld. TPO and Ld. AO erred in not following the directions of the Dispute Resolution Panel for the previous years and arbitrarily applied a mark-up of INR 11.76 Cr to the ad hoc warranty cost allocated. The Ld. CIT(A) erred in not adjudicating the same. The Ld. TPO and Ld. AO did not take into co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Logistic support services. 8. The Assessee provides telephonic support services for standard problems to the customers who purchase the products sold by DGBV in India. In case an on-site service is required, the Assessee send third party service provider for such services. The technical support services include services in relation to products sold by DGBV which are under warranty period. In relation to warranty services, the cost of third party service provider and spares are borne by the Assessee, and recovered from DGBV. 9. The TPO held that the services under the technical and marketing services segment is essentially dissemination of information and the Assessee is acting as communication channel between the customers and the AEs, using IT medium. Thus, the services rendered by the Assessee are to be considered as ITES. Upon holding so, the TPO bifurcated the segment into ITES segment and MSS segment and benchmarked them separately. In arriving at this conclusion, the TPO relied on the order passed in the Assessee s case for the assessment year 2009-10 and 2010-11. The DRP confirmed the TPO s order. Aggrieved the assessee is in appeal before the Tribunal. 10. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical trials, but does not include any research and development services whether or not in the nature of contract research and development services; 13. From the above definition, it is evident that merely because services are rendered using IT medium, they cannot be termed as ITES. We also notice that the coordinate bench of the Tribunal in assessee s own case has considered the same issue and held that 7.8 We have heard rival submissions and perused the material on record. The TPO held that services under the technical and marketing services segment is essentially dissemination of information and the assessee is acting as communication channel between the customers and the AEs using IT medium. According to the TPO, those services rendered by the assessee are to be considered as ITES. After holding so, the TPO bifurcated segment into IT segment and MSS segment and bench marked them separately. 7.8.1 In this context, it is pertinent to note that for assessment year 2013-2014, the DRP granted relief to the assessee by holding that services rendered are in the nature of marketing support services. Copy of the DRP s order for assessment year 2013-2014 is placed on record a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t services and since no appeal preferred by the Revenue to the ITAT, the matter had attained finality. Therefore, we are of the view that the entire TP issue raised under marketing support services segment needs to be examined afresh by the AO / TPO in the light of the DRP s directions for assessment year 2013-2014. It is ordered accordingly. 14. In the year under consideration, the facts are similar to that of assessment year 2009-10 and therefore respectfully following the decision of the coordinate bench of the Tribunal, we remit the issue back to the AO/TPO for fresh consideration in the light of the DRP s directions for assessment year 2013-2014. It is ordered accordingly. These grounds are allowed for statistical purposes. 15. Since assessee s main issue relating technical and marketing support segments raised in ground no. 2 is restored to the AO / TPO for fresh consideration, the other grounds in this segment also are restored to the TPO for fresh adjudication (as the same would be relevant if TPO rejects the assessee s contentions in ground 2). The grounds I(2) to I (4) and I(6) to I(7) are allowed for statistical purposes. Adjustment determined in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s follows:- 6.6.6 The assessee is directed to demonstrate to the TPO that the above reimbursement has either been reduced from the costs or accounted for separately. In absence of such demonstration, the TPO can take the above to be a part of the warranty costs debited to the P L account and effect suitable adjustment. Since the services related to warranty are being handled by a third party and the assessee is being used only as a medium, the TPO is not correct in charging a markup on this amount. Hence, the objection relating to markup on the warranty cost is upheld. The TPO cannot charge a markup on warranty amount as such services are not rendered by the assessee to its AE. 8.7.1. In the light of the above directions of the DRP, which we are in consonance with the TPO, is directed to reexamine the issue raised in ground 10 afresh. It is ordered accordingly. 20. Respectfully following the above decision we direct the TPO to re-examine the issue raised in ground no.5 afresh. It is ordered accordingly. This ground is allowed for statistical purposes. CORPORATE TAX Disallowance under section 40(a)(ia) of rebates given to customers (Ground No. II (1) of Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng certain predetermined targets as set out by the Assessee, the distributors are eligible for rebate / volume discount at a predetermined rate. Therefore the nature of relationship between the Assessee and the distributors is that of a principal-to-principal and therefore there is no tax is liable to be deducted at source. This is evident from a reading of the agreement at page 2063 of Volume 5. 24. The ld AR drew our attention to the various clauses of the agreement to substantiate that the transaction of the Assessee with its distributors in relation to rebate / discount is on principal-to-principal basis and hence the provisions of 194H are not applicable. Further the ld. AR relied on the following case laws in this regard - - Harihar Cotton Pressing Factory v. CIT (Reported in [1960] 39 ITR 594 (Bombay) - Ahmedabad Stamp Vendors Association v. UOI (Reported in [2002] 124 Taxman 628 (Gujarat)) - CIT v. Ahmedabad Stamp Vendors Association (Reported in [2012] 25 taxmann.com 201 (SC - Bharti Airtel Ltd. v. DCIT (Reported in [2014] 52 taxmann.com 31 (Karnataka) - CIT v. United Breweries Ltd. (Reported in [2017] 80 taxmann.com 123 (Andhra Pradesh and Telangana) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stributors require examination to verify the claim of the assessee. We therefore remit this issue to the AO for verification of the agreements which the assessee has entered into with the distributors in relation to discount/rebate transactions and decide the allowability based on the ratio laid down by the Hon ble High Court after giving reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes. 27. Respectfully following the above decision we remit this issue to the AO for verification of the agreements which the assessee has entered into with the distributors in relation to discount/rebate transactions and decide the allowability based on the ratio laid down by the Hon ble High Court after giving reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes. Disallowance of deferred revenue [Ground No.II(2)] 28. The Assessee is engaged in the business of sale of computer hardware, and also offers warranty service to the customers, which represents a contractual obligation on part of the Assessee to provide services for a defined period for a given consideration agreed. Though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike goods(spares) and services are yet to occur and hence, in line with the generally accepted accounting principles, revenue is recognized on a straight line basis over the period of contract. Any portion of consideration for which invoices have been raised but, some portion of the contract period pertains to subsequent year would be classified under other liabilities and the same would be recognized as revenue in the year in which obligation to provide the services arise. To illustrate, say the Company sells a laptop in December 2011 along with warranty for two years. In such a case, proportionate revenue towards warranty services for four months would be accounted in FY 2011-12 and the balance would be carried forward to the next two years and offered to tax based on time proportion. Thus, though the full consideration for providing the service is agreed and received during the FY 11-12, the obligation to service the customer arises over a period of time in FY 11-12 (4 months), 12-13(12 months) and 13-14 (8 months). Thus, the contracts which are extending beyond the current financial year, the consideration towards such contracts should also be assessed to tax on annua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the order of AO is that the amount received towards warranty is not refundable even when the customer cancels the warranty agreement. The relevant extract from the DRP order reads as under Having heard the assessee we find that the assessee has stated that the amount so received on account of installation services and upsell warranty services was part of the goods sale process and not refundable to the payers even if the service could not be ultimately utilized by the customer. Even where such customer opts to cancel using the service being offered by assessee, the unutilized balance was not refundable. Thus, the amount paid was for outright purchase of services and not an advance to be appropriated against future use of the service. The assessee acquires the absolute right to utilize the amount so received. Thus, the income crystallizes as soon as a customer makes payment. The right to receive the income vests with the assessee as soon as the services are purchased by customers. Since, the assessee employed mercantile system of accounting, income would accrue with receipt and it cannot be considered as advance income, which could be deferred for tax purpose. 32. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to provide the services arise. In Assessee s case, as the obligation to provide the warranty services which could involve outflow of resources like goods(spares) and services are yet to occur and hence it is submitted that in line with the generally accepted accounting principles, the revenue is recognized on a straight line basis over the period of contract. Under the Act, income accrues or arises when the assessee acquires a right to receive the same and the right to receive is coupled with the liability on the other party to make the payment. Further in relation to contracts for services extending beyond the financial year 2009-10 under consideration, the Assessee is under a contractual obligation to render the service to the customer in the subsequent years and the same would involve outflow of cost/resources for the Assessee. It is also important to note that, in case the contract is cancelled, the Assessee is liable to refund the consideration received originally, less cost of services already rendered. From the detailed working and sample invoices submitted before the DRP (pages 2294 and 2541 to 3192 of Volume 6 of the paperbook) that the when the services are rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was engaged in the purchase and sale of tractors, motor cycles, etc., and doing their repairing. It had received advances from the buyers of tractors to cover their service charges for a period of one year after the expiry of initial warranty period. It had shown same on the liability side in the balance sheet for the assessment year 1978-79 under the head 'Post-Warranty Service Advances' (PWS Advances). It used to make adjustment of the amount received from PWS Advances Account to the Workshop Income Account during the quarter in which the work of repairs and services was done, and included the amount so adjusted as income of the relevant year. Out of the aggregate amount shown in PWS Advances Account, the Assessing Officer treated proportionate sum for the period covered as the assessee's income for the assessment year in question. The Commissioner invoked section 263 and held that the entire amounts received in the previous year towards PWS Advances were trading receipts of the year directly connected with the business of servicing and repairs of tractors. He, accordingly, set aside the assessment. On appeal, the Tribunal upheld the Assessing Officer's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as pertaining to year and another pertaining to the subsequent assessment year and, therefore, excluded from consideration in determining the total income of year. The Assessing Officer treated it as income and taxed the same. The Tribunal has held that it is not taxable income. On a reference the Hon'ble Court held the amount that was received was only as charges for the services to be rendered in future. The services may be rendered or may not be rendered depending upon withdrawal of the money as and when the customer required. So, it is highly uncertain as to whether it would at all remain as income of the assessee. Only when the service is done the assessee has a right over the amount that was deposited. Till then, he has no right over the same. It is in that sense till then, it cannot be considered as an income of the assessee and is not eligible to tax. 95. The Mumbai ITAT in the case of IOT Infrastructure Energy Services Ltd. (supra) had to deal with identical case. The facts of that case were that the Assessee had not offered for tax an amount being difference between progress billing as on 31-32007 and cumulative revenue booked as per accounts as on 31-32007 in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepted and the addition made by the AO as confirmed by the DRP is hereby deleted. This ground accordingly is allowed in favour of the assessee. 35. Respectfully following the decision of the coordinate bench we hold that the claim of the assessee deserves to be accepted and the addition made by the AO as confirmed by the DRP is hereby deleted. This ground accordingly is allowed in favour of the assessee. Disallowance of fixtures and stores interiors expenses (Ground Nos.II (3) 36. For the year under consideration the Assessee incurred an expenditure amounting to Rs. 4,25,15,813/- towards fixture and stores interiors expenses. The expenditure was claimed as being revenue in nature and deductible under Section 37(1) of the Act for the reason that the said expenditure was incurred for maintaining uniformity in the franchisee stores and the Assessee neither owns nor derives any enduring benefit on such expenditure, 37. The AO classified the expenditure as capital in nature for the reasons that (i) the Form 3CD filed for AY 2012-13 noted the said expenditure aggregating Rs. 4,25,15,813/- as capital expenditure debited to profit and loss account; (ii) it was incurred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nishing the retail showrooms where the assessee s products are sold by the retailers i.e., franchisees. On perusal of the ledger of these expenses, the AO found that expenses include furniture for the stores, designs of the stores, etc. The AO on perusal of the agreement between the assessee and one of the franchisees viz., Pioneer Sports Company, New Delhi, found that all cots of refurbishment of the shop including and not limited to the cost of any new hardware and software solution shall be borne by the Nike i.e., the Assessee. According to the AO, these items of expenses cannot be regarded as revenue expenses as they endure for a longer period of time. The AO also made a reference to clause 12 of the agreement whereby the franchisee has to bear the insurance of goods and fixtures supplied by the assessee. Considering all these aspects, the AO concluded that the expenditure as a capital expenditure and he accordingly disallowed the claim of the assessee for deduction. The DRP agreed with the conclusions of the AO. 33. The learned Counsel for the assessee submitted that expenses are purely revenue in nature and the intention was to ensure that the franchisee showrooms confirme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2015, order dated 13.07.2018. 35. We have given a careful consideration to the rival submissions. The decision rendered by the ITAT Delhi in the case of Carrier Air-conditioning (supra) was a case of renovation to a leased premises and the finding was that it was a complete replacement of the existing premises. In this case we are concerned with refurbishing a show room to make it attractive for customers to visit and purchase assessee s products. In the given circumstances, we are of the view that the decision in the case of Emdee Apparels (supra) is applicable. Consequently, the claim made by the assessee is directed to be accepted and the relevant grounds of appeal are allowed. 43. The Assessee is primarily engaged in the manufacturing and trading of Dell brand Computer hardware and peripheral products. The sale of all these products in India are also carried out under a Franchise model. Under the said model, third party contractors would act as a Franchisee for the Assessee in India, where the said Franchise would open exclusive shops/ stores for sale of its products. To maintain the set standards and to ensure all the Franchise stores provides the customers an environmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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