2020 (2) TMI 1038 - AT - Income Tax

Distributor discounts and Trade Price Protection payments treated as sales promotion and deductible; TDS and obsolescence issues remanded

Whether discounts/debits to distributors amounted to commission liable to TDS under ss.194H/194J - Tribunal found contractual terms established a ... TDS u/s 194H OR 194J - disallowance u/s 40(a)(ia) on trade offers provided to distributors - HELD THAT:- 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 - 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 mentioned about the discount for sales promotion. Thus, on both the account the addition made by the Assessing Officer does not sustain. Ground No. 2 is allowed. Disallowance on account of Trade Price Protection (TPP) extended to distributors for reduction in prices of handsets - HELD THAT:- 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 AO 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 AO has allowed the deduction for the instant like expenditure. In Assessment Year 2008-09, the matter was remanded back to the file of the AO, who has allowed the deduction with respect to the expenditure, where confirmations have been obtained from the recipients. In any case, so far as the instant year is concerned, we have already noted in the earlier paragraph that the requisite confirmations were filed before the Assessing Officer. Thus, this expenditure is allowable as revenue expenditure under Section 37(1) since it has been incurred wholly and exclusively for business and same cannot be questioned by the Assessing Officer. Disallowance of 25% of provision for obsolescence of inventory - HELD THAT:- Only in A.Y. 2011-12, the DRP has taken a different view by deleting the said additions. In the instant year, the Assessing Officer has not given any independent reasoning for making an ad-hoc disallowance of 25% of the total expenditure. Considering the history of the dispute, the matter is remanded back to the file of the Assessing Officer to decide in the light of the precedents, and keeping in mind that the direction of DRP in Assessment Year 2011-12 has been accepted by the Department (as pointed out before us that no appeal was filed by Revenue in Assessment Year 2011-12). Needless to say, the assessee be given opportunity of hearing by following principles of natural justice in the remanded proceedings. Ground No. 4 is partly allowed for statistical purpose. Disallowance of marketing expenditure incurred on account of issuance of handsets on Free of Cost (‘FOC’) basis - depreciation to be allowed if the aforesaid expenditure is held to be capital expenditure - HELD THAT:- 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 as relying on on case [2018 (9) TMI 877 - DELHI HIGH COURT]. Addition on account of difference in value of sales appearing in sales tax return and audited financial statements - HELD THAT:- The explanation given by the assessee was not justified through the evidences as to what extent sale reversals, debit notes received from the customer due to warranty prevented the assessee to given the financial statement which is less than the sales tax return. Denying benefit of deduction u/s 10AA on non transfer pricing additions/disallowances - HELD THAT:- The assessee failed to demonstrate the deduction claimed under Section 10A/10AA on non transfer pricing additions. There was no evidence produced before the Assessing Officer as to how the claim is tenable under Section 10A/10AA Full credit of pre-paid taxes - HELD THAT:- From the perusal of records, it can be seen that the proper credit of pre-paid taxes were not given by the Assessing Officer while calculating the total tax. Therefore, we direct the Assessing Officer to give proper credit of pre-paid taxes to the assessee after verifying the same. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Ground is partly allowed for statistical purpose. Issues Involved:1. Disallowance under Section 40(a)(i) due to failure to withhold tax on payments made to Nokia Corp.2. Transfer pricing adjustments.3. Disallowance under Section 40(a)(ia) on account of trade offers.4. Disallowance on account of Trade Price Protection (TPP).5. Disallowance of provision for obsolescence of inventory.6. Disallowance of marketing expenditure incurred on issuance of handsets on Free of Cost (FOC) basis.7. Addition on account of difference in value of sales appearing in sales tax return and audited financial statements.8. Denial of deduction under Section 10AA on non-transfer pricing additions/disallowances.9. Credit of pre-paid taxes.10. Depreciation on mobile handsets issued free of cost.Detailed Analysis:1. Disallowance under Section 40(a)(i):The issue related to disallowance due to the alleged failure to withhold tax on payments made to Nokia Corp for the purchase of end-user operating software and finished mobile phones. The resolution was reached under Article 24 of the India-Finland DTAA, accepted by the assessee, leading to the withdrawal of related grounds of appeal.2. Transfer Pricing Adjustments:The transfer pricing adjustments were related to contract R&D activities, AMP expenditure, and excessive software purchase price. These issues were also resolved under the MAP settlement, leading to the withdrawal of the related grounds of appeal.3. Disallowance under Section 40(a)(ia) on Account of Trade Offers:The assessee argued that Section 194H was not applicable as the trade offers were post-sale discounts, not commissions. The Tribunal found that the relationship between the assessee and HCL was that of principal to principal, not principal to agent, and thus, the discounts could not be treated as commissions. The Tribunal also found no basis for applying Section 194J. Therefore, the addition by the AO was not sustained, and the ground was allowed.4. Disallowance on Account of Trade Price Protection (TPP):The TPP was offered to distributors to counter price changes and protect against probable losses. The Tribunal found that this was a commercial practice and allowable under Section 37(1) as a revenue expenditure. The ground was allowed.5. Disallowance of Provision for Obsolescence of Inventory:The provision was made based on a scientific formula and past experience. The Tribunal remanded the matter back to the AO to decide in light of precedents, noting that the DRP had deleted similar additions in AY 2011-12. The ground was partly allowed for statistical purposes.6. Disallowance of Marketing Expenditure on Issuance of Handsets on FOC Basis:The handsets were issued for business purposes, including replacements under warranty and promotional displays. The Tribunal upheld that this was a business expenditure, not a capital expenditure, and allowed the ground. Consequently, the ground for depreciation became infructuous and was dismissed.7. Addition on Account of Difference in Value of Sales:The Tribunal found that the explanation for the difference between sales as per sales tax return and audited financial statements was not justified with evidence. The ground was dismissed.8. Denial of Deduction under Section 10AA:The Tribunal found that the assessee failed to demonstrate the eligibility for deduction under Section 10AA on non-transfer pricing additions. The ground was dismissed.9. Credit of Pre-paid Taxes:The Tribunal directed the AO to give proper credit for pre-paid taxes after verification, adhering to principles of natural justice. The ground was partly allowed for statistical purposes.10. Depreciation on Mobile Handsets Issued Free of Cost:The Tribunal held that the expenditure on handsets issued free of cost was a business expenditure, thus the question of depreciation did not survive. The Revenue's appeal on this issue was dismissed.Conclusion:The assessee's appeal was partly allowed for statistical purposes, and the Revenue's appeal was dismissed. The Tribunal's order emphasized the importance of commercial expediency, proper documentation, and adherence to legal precedents in resolving tax disputes.