TaxTMI 
TaxTMI 
2022 (1) TMI 337
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....and in not relying upon the VTT Report and the Software Supply 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 i....
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.... DRP have erred on facts and in law in not making an adjustment to account for differences in the level of working capital employed by the appellant and comparables, 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 e....
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....f comparables by arbitrarily selecting comparables from the list of companies rejected by the appellant without analysing all the companies rejected by the appellant. 7.6. The Ld. TPO / Ld. AO / Hon'ble DRP have erred on facts and in law in rejecting the com 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 c....
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....an adjustment to account for differences between the risk profile of the appellant and comparables, while determining the ALP. 8.8. 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 comparables, while determining the ALP. 8.9. 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-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,....
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....drawal of Ground Nos. 2 to 7 and 12 & 14 in the present appeal. Therefore, Ground Nos.2 to 7 and 12 & 14 are dismissed as withdrawn. 4. As per Form No.36B, the grounds remains to be adjudicated are as under:- 1. "The order dated August 30, 2017 passed by the Learned Assessing Officer ('Ld. AO') under Section 143(3) read with Section 144C of the Act pursuant to the directions of the Hon'ble DRP dated July 03, 2017, is bad in law and on 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 determin....
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.... paid to distributors (other than HCL Infosysterns Ltd.) as compensation for reduction in prices of the handsets, and in ignoring all the evidences (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 provided to HCL Infosystems Ltd. has been allowed. 5. The Ld. AO and Hon'ble DRP have erred in disallowing marketing expenditure incurred by the appellant amounting to INR 25,45,40,035 by way of issuance of handsets 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 ....
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....at source were made, therefore, the Assessing Officer made disallowance of Rs. 1,73,92,63,200/- on non-deduction of tax. Further, the Assessing Officer observed that as per the draft assessment order, (DCIT, Circle-2(2), International taxation, New Delhi dated 28.03.2016 in the matter of Nokia Corporation Ltd. for Assessment Year 2012- 13), there were finding in respect of existence of Nokia Corporation Ltd. of Nokia as Permanent Establishment ("PE") in India. Therefore, the Assessing Officer made addition of Rs. 13,69,31,541/- related to PE on account of non-deduction of tax. Further, the Assessing Officer 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 ....
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....t in its transfer pricing documentation to determine the Arm's Length Price. Further, he submitted that the authorities below wrongly rejected certain quantitative filters adopted by the appellant while carrying out economic analysis in its transfer pricing documentation to determine the Arm's Length Price. He further submitted that the authorities below have erred in introducing certain inappropriate quantitative filters to carry out economic analysis for determining Arm's Length Price. Further, he has contended that the authorities below grossly erred in law in not rejecting the comparable having turnover in 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 in....
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....e assessee. It was further contended that the mode of revenue recognition was not known and due to lack of complete financial report. The ld. counsel for the assessee placed reliance in the case of Pr CCIT vs M/s Li & Fung (India) Pvt. Ltd. in ITA No.176/2019 for Assessment Year 2013-14, to buttress the contention that no comparison can be drawn between an entity that is captive service provider to its group entities and an entity like Axis which is providing liaisoning services to a large number of entities, further reliance was placed on the decision referred in the case of Bergen Engines India Pvt. Ltd. vs ACIT in 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 an....
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....ore the TPO and objections were raised before the DRP. He submitted that this comparable ought to have been excluded on the basis of its functional difference. He submitted that Just Dial Ltd. operates a local search engine which assists general public in finding information pertaining to the nearby area. Such information may range from location of any restaurant/eateries etc. to general phone number enquiries. These services are in the nature of Advertising Services. He submitted that no segmental data is available. The company owns significant intangible assets in the form of goodwill, application development and unique 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 ....
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.... 230,000,000 Difference between Arm's Length Price and Price charged by assessee 29,712,100 17. We have given thoughtful consideration to the rival submissions of the ld. counsel for the assessee and the ld. DR. We find merit in the contention of the Ld. counsel for the assessee that Axis Integrated Systems Limited was not a valid comparable in view of the fact that the entity level profitability taken by the TPO is incorrect. There was lack of segmental information. Financials of the company do not provide detailed description of the business operations of the company. Further, as per website extracts, Axis Integrated Systems Limited is engaged in providing consultancy with regard to Directorate General of Foreign Trade. 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 i....
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....e Tribunal. The submissions of the assessee are reproduced as under:- * Disallowance under section 40(a)(ia) of the Act on account of trade offers provided to distributors [Disallowance amount=Rs. 7,01,71,57,547/-] Revenue's case Relying on assessments made in previous years AO treated the Trade offers as commission liable to withholding under Section 194H of the Act. Specific allegations made in this regard are as under: a) Discounts were given by way of debit notes which were not adjusted or mentioned in the invoice generated upon original sales made by the assessee (Para 91 of the final assessment order at Page No. 885 of the Appeal Set Volume II). b) There is no provision in the agreement between HCL and the assessee for such discounts 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 ....
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....n 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." The said ruling has also been followed while adjudicating the same issue for AY 2011-12 in the order of this Hon'ble ITAT dated 17.08.2020 in ITA No.1883/Del/2017 at Para 8.0 of the order (Page 43 of the Paperbook) and for AY 2008-09 & AY 2012-13 vide order dated 15.10.2020 in ITA 6500-6501/Del/2017 at Para 8-9 & 13 of the order." 21. On the contrary, the ld. DR opposed the submissions and supported the orders of the authorities below. 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 Ye....
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....e order of the Co-ordinate bench in assessee's own case in the immediately preceding year, on identical facts, we delete the impugned disallowance. Thus, ground No.2 stands allowed." 23. Therefore, respectfully following the same, we hereby direct the Assessing Officer to delete the disallowance. Accordingly, this ground of the assessee is allowed. 24. Ground No.4 raised by the assessee is against the disallowance of Rs. 6,26,25,925/- on account of trade price protection paid to distributors. Disallowance on account of Trade Price Protection ('TPP' extended to distributors for reduction in prices of handsets) [Disallowance amount of Rs. 6,26,25,925/-] Revenue's case Disallowance made on the ground that the assessee failed to justify the commercial expediency of the expenditure. Specific allegation in this regard are as under: a) Basis of computation, 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 confirmatio....
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.... this expenditure is allowable as revenue expenditure under Section 37(1) of the Act since it has been incurred wholly and exclusively for business and same cannot be questioned by the Assessing Officer. Ground No.3 is allowed." The said ruling has also been followed while adjudicating the same issue for Assessment Year 2011-12 in the order of this Hon'ble ITAT dated 17.08.2020 in ITA No. 1883/Del/2017 at Para 8.1 of the order (Page No. 45-46 of the Paperbook) and for AY 2012-13 vide order dated 15.10.2020 in ITA 6501/Del/2017 at Para 17-18 of the order." 26. On the contrary, the ld. DR opposed the submissions and supported the orders of the authorities below. 27. We have heard the rival submission and perused the material available on record. We find that this issue is also 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 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. ....
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....d for AY 2012-13 dated 15.10.2020 in ITA 6501/Del/2017 at Para 23 of the order." 30. On the contrary, the ld. DR opposed the submissions and supported the orders of the authorities below. 31. We have heard the rival submission and perused the material available on record. We find that this issue is also 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 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 nos.5 & 6 are allowed. 32. Ground No.7 raised by the assessee is against the deduction towards amount of education cess and secondary and higher education cess paid. Deduction towards amount of education cess and secondary and higher education cess paid. [Disallowance amount-Rs. 5,10,84,318/-] 33. 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 the written submission. The submissions of ....