2022 (11) TMI 1351 - AT - Income Tax

Tribunal grants partial relief in tax appeal, directs reassessment. Key issues: transfer pricing, warranty costs, TDS.

The Joint Commissioner of Income Tax, LTU, Bangalore Versus M/s. Dell International Services India Private Limited, (for the merged entity Dell India Private Limited) And (Vice-Versa)

The Joint Commissioner of Income Tax, LTU, Bangalore Versus M/s. Dell International Services India Private Limited, (for the merged entity Dell India ... Issues Involved:1. Transfer Pricing Adjustments2. Adjustment in respect of Warranty Cost3. Disallowance of Provision for Warranty4. Disallowance under Section 40(a)(ia) for Rebates Given to Customers5. Addition of Deferred Revenue6. Disallowance of Marked to Market (MTM) Losses7. Disallowance of Expenditure under Section 40(a)(ia)8. Credit for Tax Deducted at Source (TDS)9. Corporate Tax IssuesDetailed Analysis:1. Transfer Pricing Adjustments:The Tribunal addressed the bifurcation of marketing and business support services into IT Enabled Services (ITES) and Marketing Support Services (MSS). The Assessee provides business support services which include telephonic support, marketing support, and logistic support. The TPO had bifurcated these services into ITES and MSS segments and benchmarked them separately, which was upheld by the DRP. However, the Tribunal found that the services rendered by the Assessee do not fall under ITES merely because they use IT medium. The Tribunal remitted the issue back to the AO/TPO for fresh consideration in light of the DRP's directions for the assessment year 2013-2014.2. Adjustment in respect of Warranty Cost:The Assessee provides telephonic support services for products sold by its AE under warranty. The TPO made an adjustment on the basis that the Assessee had not made any recovery towards warranty services. The Tribunal noted that the Assessee had indeed recovered the expenses incurred with a markup of 5%. The issue was remitted back to the TPO for re-examination.3. Disallowance of Provision for Warranty:The Assessee created a provision for warranty services, which the AO disallowed, stating it was not scientific. The DRP confirmed the disallowance but allowed actual expenses incurred towards warranty. The Tribunal, citing previous decisions, held that the provision was based on a scientific method and directed the AO to allow the provision made towards warranty.4. Disallowance under Section 40(a)(ia) for Rebates Given to Customers:The AO disallowed rebates given to distributors, treating the relationship as principal-agent and thus subject to TDS under Section 194H. The Tribunal noted that the relationship was on a principal-to-principal basis and remitted the issue back to the AO for verification of the agreements and to decide the allowability based on the ratio laid down by the Hon'ble High Court.5. Addition of Deferred Revenue:The AO added deferred revenue to the taxable income, which was upheld by the DRP. The Tribunal found that the Assessee's method of recognizing revenue proportionately over the period of service was consistent with accounting principles and previous decisions. The addition was deleted.6. Disallowance of Marked to Market (MTM) Losses:The AO disallowed MTM losses on hedging transactions, considering them notional and contingent. The DRP directed the AO to verify if MTM gain was offered to tax in earlier years. The Tribunal held that MTM losses related to revenue assets are allowable as deductions and directed the AO to delete the disallowance.7. Disallowance of Expenditure under Section 40(a)(ia):The AO disallowed certain expenses for lack of TDS evidence. The Tribunal noted that the Assessee had provided substantial evidence for most expenses and directed the AO to allow the deduction, emphasizing that more than 95% compliance was achieved.8. Credit for Tax Deducted at Source (TDS):The Assessee claimed that the AO had not given full credit for TDS. The Tribunal directed the AO to verify and grant credit as per Form 26AS.9. Corporate Tax Issues:The Tribunal addressed various corporate tax issues, including forex loss addition deleted by the DRP and directions regarding MTM loss, following previous decisions and providing necessary directions for verification and compliance.Conclusion:The Tribunal allowed the Assessee's appeal partly and remitted several issues back to the AO/TPO for fresh consideration and verification. The Revenue's appeal was partly allowed for statistical purposes, with specific directions provided for each issue.