2021 (3) TMI 48 - AT - Income Tax

Appeals Allowed for Fresh Examination: Emphasis on Fair Hearing and Evidence Consideration

Huawei Telecommunications (India) Pvt. Ltd. Versus DCIT, Circle 2 (1), New Delhi.

The Tribunal allowed the appeals for statistical purposes, remitting several issues back to the AO/TPO for fresh examination and decision-making. The ... TP Adjustment - determining ALP of project management services - HELD THAT:- In the instant case, assessee has brought on record plethora of evidence for availing of the technical services and payment made for technical services received on the basis of USD 1600 per man-month on actual time spent by the relevant personnel, copy of technical services agreement between the taxpayer and the Huawei, China and also brought on record invoices filed on sample basis for availing technical services, but all these documents have not been examined by the TPO/DRP rather benchmarked the technical services/project management services availed of by the taxpayer from its AE at nil by mechanically dealing with the issue by applying the benefit test and commercial expediency test and has not provided opportunity of being heard to the taxpayer at the time of abruptly applying the other method. So, in the given circumstances, we are of the considered view that this issue is liable to be remitted back to the TPO to decide afresh by examining all the evidences brought on record by the taxpayer and to decide the issue in the light of the decisions discussed in the preceding paras and by following the rule of consistency as in the earlier years i.e. in AY 2004-05 onwards, TPO himself has accepted availing of technical services at arm’s length price as determined by the assessee. Disallowance being 30% of the total advertisement expense - Declining assessee's contentions that these advertisement expenses have been incurred wholly and exclusively for the purpose of taxpayer’s business and not for any benefit to any group company or to a third party - HELD THAT:- As relying on J.J. Enterprises vs. CIT [2001 (9) TMI 6 - SUPREME COURT] disallowance of 30% of the advertisement expenses by the AO and confirming the same by the ld. DRP is not sustainable for the reasons inter alia that commercial expediency of any expenditure incurred by the taxpayer has to be examined with businessman standpoint and not with the perspective of tax authority; that advertisement expenses are revenue in nature; that merely because of the fact that advertisement expenditure incurred by the taxpayer has benefited the third party, the same cannot be disallowed; and that disallowance of any expenditure on ad hoc basis is not permissible in law, hence ordered to be deleted. Disallowance of provision for customer claim - Addition on the ground that the amount provided by the taxpayer pertaining to actual delays/defaults occurred as per the terms of the contract entered between the taxpayer and its customers and as such is an “ascertained liability” - HELD THAT:- Provision for customer claim is a liability which can be used only by using a substantial decree of estimation. When the taxpayer has brought on record ample evidence in the form of credit memo in relation to liquidated damages and details of liquidated damages, chart showing trend and utilization of provision of customer claims from AYs 2010-11 to 2014-15 and extract of audited financials for AYs 2010-11 to 2016-17, to show that the details of customer claims and extract of contract entered into between the taxpayer and the customer claims, available from pages 6 to 26 of the convenience paper book, this provision has to be measured by using substantial decree of estimation. Moreover, historical trend brought on record by the taxpayer also shows the actual use of provision for customer claim. As relying on Rotork Controls India P. Ltd [2009 (5) TMI 16 - SUPREME COURT] evidence brought on record by the taxpayer shows that required conditions have been fulfilled and as such, provision made qua the amount provided by the taxpayer pertaining to actual delays and defaults occurred in terms of the contract entered into between the taxpayer and its customers is to be considered as “ascertained liability”. So, AO/DRP have erred in making disallowance on account of provision for customer claims. So, it is ordered to be deleted subject to verification of data brought on record by the taxpayer as discussed in the preceding paras. Addition of advances written off - as contented once the advance has been written off in the books of account, it is sufficient to claim the deduction of the advances written off u/s 37 of the Act and taxpayer is not required to prove that the advances written off is irrecoverable as per section 37(1) of the Act - HELD THAT:- Hon’ble Supreme Court in case of TRF Ltd [2010 (2) TMI 211 - SUPREME COURT] held that, “After 1st April, 1989 it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.” The taxpayer has given complete detail of advances given at page 30 of the convenience paper book in tabulated form. So, in view of the matter, we are of the considered view that let this issue go back to AO to verify the facts if these advances were given for business purposes and decide afresh in the light of findings returned hereinbefore by providing opportunity of being heard to the taxpayer. Issues Involved:1. Transfer Pricing Adjustments2. Disallowance of Advertisement Expenses3. Disallowance of Provision for Customer Claims4. Disallowance of Advances Written Off5. Levy of Interest under Section 234A, 234B, and 234C6. Initiation of Penalty Proceedings under Section 271(1)(c)Issue-Wise Detailed Analysis:1. Transfer Pricing Adjustments:The taxpayer, Huawei Telecommunications (India) Company Pvt. Ltd., challenged the transfer pricing adjustments made by the AO/TPO/DRP for the assessment years 2012-13 and 2013-14. The TPO applied the 'benefit test' and determined the arm’s length value of technical services and project management services at nil. The Tribunal noted that the Revenue had accepted the arm’s length value of similar transactions in previous years without adverse inference. The Tribunal found that the TPO/DRP did not provide sufficient opportunity for the taxpayer to be heard and did not consider the plethora of evidence provided by the taxpayer. The Tribunal remitted the issue back to the TPO for fresh examination, emphasizing that the TPO should determine the ALP from a business perspective and not by applying the benefit or commercial expediency test.2. Disallowance of Advertisement Expenses:The taxpayer contested the disallowance of 30% of advertisement expenses by the AO/DRP, arguing that these expenses were incurred wholly and exclusively for business purposes. The Tribunal found that the disallowance was made on an ad hoc basis without proper justification. The Tribunal highlighted that commercial expediency should be judged from the businessman’s perspective and not from the tax authority’s viewpoint. The Tribunal ordered the deletion of the disallowance, citing legal precedents that support the taxpayer’s position.3. Disallowance of Provision for Customer Claims:The taxpayer challenged the disallowance of provisions for customer claims, arguing that these were ascertained liabilities related to actual delays/defaults as per contractual terms. The Tribunal referred to the Supreme Court’s decision in Rotork Controls India P. Ltd. v. CIT, which established that provisions for liabilities can be recognized if they meet certain conditions. The Tribunal found that the taxpayer had provided ample evidence to support the provision for customer claims and ordered the deletion of the disallowance, subject to verification of the data by the AO.4. Disallowance of Advances Written Off:The taxpayer contested the disallowance of advances written off, arguing that these were incurred for business purposes. The Tribunal noted that the taxpayer had provided detailed evidence of the advances written off. Citing the Supreme Court’s decision in TRF Ltd. v. CIT, the Tribunal held that once an advance is written off in the books, it is sufficient to claim a deduction. The Tribunal remitted the issue back to the AO for verification and fresh decision-making.5. Levy of Interest under Section 234A, 234B, and 234C:The Tribunal found that the ground related to the levy of interest under Sections 234A, 234B, and 234C was consequential in nature and did not require specific findings.6. Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal found that the ground related to the initiation of penalty proceedings under Section 271(1)(c) was premature and did not require specific findings.Conclusion:The Tribunal allowed the appeals for statistical purposes, remitting several issues back to the AO/TPO for fresh examination and decision-making. The Tribunal emphasized the need for a fair hearing and proper consideration of evidence provided by the taxpayer.