TaxTMI 
TaxTMI 
TaxTMI 
2022 (1) TMI 337
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....ply Agreement dated January 1,2006. 3. The Ld. AO and Hon'ble DRP have erred in disallowing expenses amounting to INR 173,92,63,200 incurred by the appellant, for purchase of software from Nokia Corporation ("Nokia Corp"), under Section 40(a(i) of the Act. 4. The Ld. AO and Hon'ble DRP have erred in disallowing expenses amounting to INR 391,61,31,541 incurred by the appellant, for purchase of mobile phones and accessories from Nokia Corp, under Section 40(a)(i) of the Act. 5. The Ld, TPO / Ld. AO/ Hon'ble DRP have erred on facts and in law in enhancing the income of the appellant by INR 20,60,00,000 by making a transfer pricing adjustment on account of 'alleged excessive' Advertising, Marketing and Promotion ("AMP") expenses incurred by the appellant. The sub-grounds in this respect are as under: 5.1. The Ld. TPO / Ld. Assessing Officer/ Hon'ble DRP have erred in not accepting the arm's length analysis carried out by the appellant, for the NMP Sales segment as a whole, by applying Transactional Net Margin Method ("TNMM") and carrying out separate benchmarking in respect of AMP expenses. 5.2. The Ld. TPO/Ld. Assessing Officer/Hon'ble DRP hav....
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...., while determining the ALP. 5.13. The Ld. TPO / Ld. AO/ Hon'ble DRP have erred in ignoring significant legal principles laid down in recent judicial decisions, regarding AMP expenses, relied upon by the appellant. 6. The Ld. TPO/Ld. AO/ Hon'ble DRP have erred in disallowing a portion of the expense incurred by the appellant amounting to INR 4,38,59,670/- in respect of software purchased from Nokia Corp. by treating it to be excessive under the transfer pricing regulations. The sub-grounds in this respect are as under: 6. I. The Ld. TPO / Ld. AO / Hon'ble DRP have erred in not accepting the arm's length analysis undertaken by the appellant, for the NMP Sales segment as a whole, by applying TNMM and in separately benchmarking the purchase price of software 6.2. The Ld. TPO/ Ld. AO / Hon'ble DRP have erred on facts and in law in not appreciating that due to its compensation model, the appellant has already been reimbursed in respect of the alleged excessive software expenses, if any, along with an arm's length mark up. 6.3. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in making an adjustment on the basis of the assumption tha....
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....om parables, chosen by the appellant, on the basis of incorrect reasons and introducing certain additional, inappropriate, comparables while determining the ALP. 7.7. The Ld. TPO / Ld. AO / Hon'ble DRP have erred in computing the operating margins of certain comparable companies (i.e. pre and post working capital adjustment). 7.8. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in accepting com parables engaged in diverse activities even though sufficient segmental information is not available. 7.9. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in not making an adjustment to account for differences between the risk profile of the appellant and comparables, while determining the ALP. 7.10. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in not making an adjustment to account for difference in depreciation rates charged by the appellant vis-a-vis the com parables, while determining the ALP. 7.11. The Ld. TPO / Ld. AO / Hon'ble DRP have erred in treating 3 line items in the financials of comparables (i.e. foreign exchange gain and loss, provision for bad and doubtful debts and bank charges) as non-op....
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....he Ld. TPO / Ld. AO /Hon'ble DRP have erred in treating 3 line items in the financials of comparables (i.e. foreign exchange gain and loss, provision for bad and doubtful debts and bank charges) as non-operating while computing operating margins of the com parables, for determining ALP. 8.10. Hon'ble DRP has erred in disposing off the various objections raised by the appellant in a summary manner, without providing any reasons. \ 9. The Ld. AO and Hon'ble DRP have erred in disallowing expenses amounting to INR 701,71,57,547 incurred by the appellant on trade offers provided by it to its distributors (HCL Infosystems Ltd. as well as other distributors), under Section 40(a)(ia) of the Act. 10. The Ld. AO and Hon'ble DRP have erred in disallowing an amount of INR 6,26,25,925 incurred by the appellant on account of trade price protection paid to distributors (other than HCL Infosysterns Ltd.) as compensation for reduction in prices of the handsets, and in ignoring all the evidence (including confirmations from dealers) submitted by the appellant in this regard, and further in ignoring the fact that on the basis of similar confirmations, trade price protection prov....
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....n the facts and circumstances of the case and the same is liable to be set aside. 2. The Ld. TPO / Ld. AO /Hon'ble DRP have erred in making transfer pricing adjustment amounting to INR 2,92,30,300/ - in relation to provision of business support services by the appellant to its AE. The sub-grounds in this respect are as under: 2.1 The Ld. TPO/ Ld. AO/Hon'ble DRP have erred in rejecting the economic analysis undertaken by the appellant in its transfer pricing documentation, to determine the ALP. 2.2 The Ld. TPO/ Ld. AO/Hon'ble DRP have erred in rejecting certain quantitative filters adopted by the appellant while carrying out economic analysis in it's transfer pricing documentation to determine the ALP. 2.3 The Ld. TPO/ Ld. AO/Hon'ble DRP have erred in introducing certain inappropriate quantitative to carry out economic analysis for determining ALP. 2.4 The Ld. TPO/ Ld. AO/Hon'ble DRP have erred on facts and in law in not rejecting comparable having turnover in excess of five times the turnover of the appellant, despite a ruling in favour of the appellant for AY 2002-03 by Hon'ble ITAT, which has also been confirmed by Jurisdictional High Court o....
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....ets on a free of cost ("FOC') basis to employees, dealers and After Marketing Servicing Centres (" AMCS") on the ground that the same would give enduring benefit and cannot be claimed as revenue expenditure. 6. The Ld. AO and Hon'ble DRP have erred in not allowing current year depreciation in respect of the FOC phones given to AMSC's for warranty purposes and to dealers for promotional purposes even though these expenses were treated as capital expenses. The Ld. AO has also erred in not allowing earlier years' depreciation in respect of the FOC phones. 7. The above grounds of appeals are independent and without prejudice to one another. 8. The appellant craves leave to add; withdraw or amend any ground of appeal at the time of hearing." 5. Apart from that, the assessee has raised additional grounds vide letter dated 04.11.2020 that read as under:- 7. "That on the facts and circumstances of the case and in law, the learned Assessing Officer has erred in not granting a deduction of the education cess and secondary and higher education cess (collectively referred to as "cess") paid by the Appellant during the year under consideration:- 7.1. That the Ld.AO. ....
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....r noticed that as per the international taxation, that software component is taxable as 'Royalty' under the Income Tax Act as well as the India Finland DTAA. 7. During the course of assessment proceedings, the assessee was asked as to why the payment of Rs. 3,77,92,00,000/- should not be disallowed in view of section 40(a)(i) of the Act on account of non-withholding of tax. In response thereto, the assessee filed its reply. However, the reply was not found to be acceptable hence, the Assessing Officer made disallowance of Rs. 3,77,92,00,000/- u/s 40(a)(i) of the Act on account of non-deduction of tax. Further, the Assessing Officer noticed that during the year under consideration, the assessee had offered trade incentive to distributor of Rs. 7,01,71,57,547/-. The assessee was asked as to why the tax is not deductible. The response of the assessee was not found acceptable to the Assessing Officer. Therefore, he made addition of Rs. 4,65,26,69,531/- on account of non-deduction of tax. Further, the expenditure related to the trade discounts to distributors amounting to Rs. 2,36,44,88,016/- was also disallowed u/s 40(a)(i) of the Act for the same reasoning. Further, the Assessing Off....
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.... excess of five times the turnover of the assessee despite the decision by the Tribunal and the same is confirmed by the Hon'ble High Court in assessee's own case for Assessment Year 2002-03. He submitted that the authorities below were not correct in resorting to cherry picking of comparable by arbitrarily selecting comparables from the list of companies rejected by the assessee without analyzing all the companies. He submitted that the DRP erred in rejecting the comparables chosen by the assessee on the basis of incorrect reasons and introducing certain additional inappropriate comparables. He further submitted that the authorities below were not correct in making adjustment on account of differences between the risk profit of the assessee and comparables while determining the Arm's Length Price. Further, he submitted that the authorities below failed to make an adjustment to account for difference in depreciation rates charged by the assessee vis-à-vis comparables while determining the Arm's Length Price. The TPO erred in treating three line items in the financial of comparables i.e. foreign exchange gain and loss, provisions for bad and doubtful debts and bank ch....
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....ITA No.7802/Del/2017. To buttress the contention that the company was engaged in providing services related to Directorate General of Foreign Trade, customs/Excise & Service Tax related services, clearly these services are in the nature of the concultancy or services of expert nature and cannot be compared with routine support services of raising invoices, coordination with customers, logistics etc. 13. He further contended that in the case of Killick Agencies and Marketing Limited, it was stated that before the authorities below the main income was from services and commission for support services. The objection was raised before the DRP but no specific direction was given. He submitted that this comparable ought not to have been included as Killick Agencies is engaged in marketing of marine equipment like specialized propulsion systems, marine engines, ship lighting & navigation lighting systems, dredges and dredge equipment, ship building presses, rescues boats and specialized davits, reverse osmosis water systems and special acoustic communication equipment for defense. He submitted that screenshot of the website of the company was provided on page 333 of the paper book. He fu....
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.... phone numbers. Further, he placed reliance on the website extract of the company placed at page 473 to 476 of the paper book. He further submitted that there is different model of revenue recognition. He submitted that Just Dial Limited has a higher turnover of Rs. 362 crores which is more than five times the turnover of Nokia India in relation to BSS segment. Reliance was placed on the decision of the Hon'ble Delhi High Court in assessee's own case pertaining to Assessment Year 2002-03 in ITA No.676/2015, wherein, the Hon'ble Delhi High Court upheld the decision of the Tribunal in ITA No.242/Del/2010. In that decision, the Tribunal had upheld that the upper turnover filter of Rs. 50 crores which was five times the turnover of NIPL for the relevant segment. The ld. counsel for the assessee placed reliance on the decision referred in the case of Bergen Engines India Pvt. Ltd. vs ACIT in ITA No.7802/Del/2017. In that case Just Dial was rejected by the DRP. The reliance was also placed in the case of Barclays Technology Centre India (P.) Ltd. vs ACIT [2015] 56 taxmann.com 386 (Pune Trib.). He submitted that if these three comparables are excluded then there would not be any need to m....
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....Therefore, in view of the pronouncements as relied upon by the assessee in the Pr. CCIT vs M/s LI &Fung (India) Pvt. Ltd. in ITA No.176/2019 and the decision in the Bergen Engines India Pvt. Ltd. vs ACIT in ITA No.7802/Del/2017, we hereby direct the Assessing Officer to exclude this comparable. 18. In respect of Killick Agencies and Marketing Limited also, we find merit in the submission of the ld. counsel for the assessee that this comparable is functionally different as the main income was from services and commission for support services as Killick Agencies is engaged in marketing of marine equipment like specialized propulsion systems, marine engines, ship lighting & navigation lighting systems. Further, Killick Agencies act as an agent for various foreign principals for sale of dredgers, dredging equipment, steerable rudder, propellers, maritime and aviation lighting, acoustic communication, etc. Further, it has been demonstrated before us that this company for the financial year 2012-13 earned more than its revenue from commission income, which was accounted for when the equipment/machinery is installed at the customers designated place. Therefore, in view of the decision of....
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....unts which was over and above the pre-agreed invoice price (Para 90 of the final assessment order at Page No. 885 of the Appeal Set Volume II). c) HCL would be entitled to specific incentives on meeting the "Monthly Target Value" as per the approved Scheme and the pay-out is dependent on the achievement of certain percentage of targets given by NIPL to HCL (Para 90 of the final assessment order at Page No. 885 of the Appeal Set Volume II). d) Relationship between the assessee and HCL is that of principal to principal or principal to agent is not of relevance (Para 92 of the final assessment order at Page No. 886 of the Appeal Set Volume II). Alternatively, as payments for technical service liable for withholding under Section 194J of the Act. Specific allegations made in this regard are as under: a) A combination of various services has been rendered by HCL for which no consideration was payable by the assessee (Para 94 of the final assessment order at Page No. 886 of the Appeal Set Volume II). Services being provided by HCL are consultancy in nature and covered by the nature of technical services defined under Explanation 2 to Section 9(1)(vii) of the Act and thereby subje....
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.... 22. We have heard the rival submission and perused the material available on record. We find that this issue is squarely covered in favour of the assessee by the decision of the Coordinate Bench of the Tribunal in assessee's own case vide ITA No.1883/Del/2017 for Assessment Year 2011-12 and also in ITA Nos. 6500-6501/Del/2017 for Assessment Years 2008-09 and 2012-13. Relevant observation of the order in ITA No.1883/Del/2017 is reproduced hereunder:- "8.0 We have heard both the parties and have also perused the material on record. We have also perused the order of the Tribunal in the immediately preceding year in the assessee's own case for Asst. Year: 2010-11 in ITA No.5791/Del/2015 vide order 20.02.2020 and we are in agreement with the contention of the Ld. AR that the issues are squarely covered in favour of the assessee on the issues now surviving before us by the said order of the Tribunal. With respect to ground No.2 relating to disallowance 40(a)(ia) on account of trade offers amounting to Rs. 7,16,24,39,495/-, we find that this issue has been decided in favour of the assessee vide paragraph 8 of the said order and the same is reproduced herein under for a ready reference....
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...., methodology of determining the stock lying unsold with the dealer, details of dates/periods and model for which TPP is offered was not provided (Para 108 of the final assessment order at Page No. 889 of the Appeal Set Volume II). b) Confirmations are stereotyped confirmation which makes the same doubtful (Para 110 of the final assessment order at Page No. 889 of the Appeal Set Volume II). c) Expense on account of TPP is not justified since it is in addition to trade offers being provided to the distributors and retailers (Para 112 of the final assessment order at Page No. 889 of the Appeal Set Volume II). d) TPP has not been debited as an expense but has been directly adjusted from total sales (Para 111 of the final assessment order at Page No. 889 of the Appeal Set Volume II). 25. The ld. counsel for the assessee submitted that this issue is squarely covered in favour of the assessee. He reiterated the submissions as made in the written submission. The submissions of the assessee are reproduced hereunder:- Assessee's submissions The disallowance has been made on the same lines as A Y 2010-11 and AY 2011-12. For AY 2010-11, the Hon'ble ITAT vide order dated 20.02.2....
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....ar 2011-12 and also in ITA No. 6501/Del/2017 for Assessment Year 2012-13. Respectfully following the order of the Tribunal for Assessment Year 2011-12 and 2012-13, we delete the disallowance. Accordingly, ground no.4 is allowed. 28. Ground Nos. 5 & 6 raised by assessee are against the disallowance of marketing expenditure of Rs. 25,45,40,035/- incurred on account of issuance of handsets on Free of Cost ('FOC') basis. Disallowance of marketing expenditure incurred on account of issuance of handsets on Free of Cost ('FOC') basis. [Disallowance amount-Rs. 25,45,40,035/-] Revenue's case * Cell phones and accessories given to service centres, dealers and employees free of cost is put to use for the business of the assessee. * The handsets are used in the business during the year and in the future also, an enduring benefit is being derived. Thus it was alleged that the expenditure is a capital expenditure and not a revenue expenditure. (Para 127 of the final assessment order at Page No. 895 of the Appeal Set Volume Il). 29. The ld. counsel for the assessee submitted that this issue is also squarely covered in favour of the assessee. He reiterated the submissions as made in t....
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....s issue is also squarely covered in favour of the assessee. He reiterated the submissions as made in the written submission. The submissions of the assessee are reproduced hereunder:- Assessee's submissions Co-ordinate Bench of the Hon'ble ITAT vide order dated 14.09.2020 in ITA No. 3765/Del/2017 following the order of the Hon'ble High Court of Bombay (Panaji Bench) in Sesa Goa 423 ITR 426 has allowed deduction for the amount of education cess and secondary and higher education cess (Page no. 543 of the Paperbook). The Hon'ble High Court observed as follows- "43 the legislature, in Section 40(a)(ii) has provided that" any rate or tax levied" on "profits and gains of business or profession" shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession" and there is no reference to any 'cess'. Obviously therefore, there is no scope to accept Ms. Linhares's contention that "cess" being in the nature of a "Tax" is equally not deductable in computing the income chargeable under the head "profits and gains of business or profession". Acceptance of such a contention will amount to reading something in the....