Nokia India Pvt. Ltd. Vs DCIT (ITAT Delhi)
No Disallowance for non deduction of TDS u/s 194H /194J in absence of principal-agent relationship and technical services
Conclusion: Disallowance under Section 40(a)(ia) for non deduction of TDS u/s 194H and 194J on account of trade offers amounting to INR 834,92,63,976 provided by assessee to its distributors (HCL Info systems Ltd as well as other distributors) was not justified as there was absence of a principal-agent relationship thus, benefit extended to distributors could not be treated as commission under Section 194H and also, AO had not given any reasoning or finding to the extent that there was payment for technical service liable for withholding under Section 194J.
Held: Assessee company was incorporated in 1995 and it was a wholly owned subsidiary of Nokia Corporation, Finland. The company was primarily engaged in the business of trading and manufacturing of mobile handsets, spare parts and accessories. In addition to this activity, the company also undertook contract software development for its Associated Enterprises. AO made disallowance of the trade offers amounting to INR 834,92,63,976 provided by the assessee to its distributors (HCL Info systems Ltd as well as other distributors) under Section 40(a)(ia) in the final assessment order. It was held from Clause 2, 7, 8, 9, 14 and 19 of the “Agreement for the Supply of Cellular Mobile Phones” between HCL and the assessee, it was noted that relationship between assessee and HCL was that of principal to principal and not that of principal to agent. The discount which was offered to distributors was given for promotion of sales. This element could not be treated as commission. There was absence of a principal-agent relationship and benefit extended to distributors could not be treated as commission under Section 194H of the Act. As regards to applicability of Section 194J, AO had not given any reasoning or finding to the extent that there was payment for technical service liable for withholding under Section 194J. Marketing activities had 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 AO was not just and proper. The 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, did not seem tenable after going through the invoice and the debit notes. In fact, there was clear mentioned about the discount for sales promotion. Thus, on both the account the addition made by the Assessing Officer did not sustain.
FULL TEXT OF THE ITAT JUDGEMENT
These two appeals are filed by the Assessee and Revenue against the order dated 28.08.2015 passed by DCIT, Circle-18(2), New Delhi under section 143(3) r.w.s. 144C(13) for assessment year 2010-11.
2. At the time of hearing the Ld. AR pointed out application/letter dated 23.02.2018 for partial withdrawal of original grounds of appeal. From the perusal of that vide application/letter dated 23.02.2018 filed by the assessee before us, wherein it is stated that in addition to filing the instant appeal, the assessee also filed an application under Article 24 of the India – Finland Double Taxation Avoidance Agreement (DTAA) for initiation of Mutual Agreement Procedure (MAP) before the Indian and the Finnish Competent Authorities (CA) on the following issues:
(a) Disallowance under Section 40(a)(i) of the Act due to alleged failure to withhold tax on payments made to Nokia Corp towards:
(i) Purchase of end user operating software
(ii) Purchase of finished mobile phones
(b) Transfer pricing adjustments on account of:
(i) Contract R & D activities
(ii) AMP expenditure
(iii) Excessive software purchase price
A resolution has been arrived between the Indian and Finnish CAs on abovementioned taxation issues raised before the Tribunal in the instant appeal. The said resolution under Article 24 of the India-Finland DTAA has also been accepted by the assessee vide letter dated 20.02.20 18. As per Rule 44H of the Income Tax Rules, 1962 orders giving effect to the MAP resolution shall be passed by the Assessing Officer once all appeals are withdrawn by the appellant on the issues so resolved under MAP. Accordingly, the appellant herein i.e. assessee has withdrawn Ground Nos. 2 to 10 and Ground Nos. 15 and 18 in instant appeal for A.Y. 2010- 11. The Original Grounds of appeal are as under:
“Nokia India Private Limited (hereinafter referred to as ‘Appellant’) objects to the order passed under section 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) dated .8 August 2015 (received on 29 August 2015) by the learned Deputy Commissioner of Income Tax (hereinafter referred as ‘Ld. AO’) pursuant to the directions of the Dispute Resolution Panel (hereinafter referred as ‘Ld. DRP’) for the assessment year 2010-11 on the following grounds;
1. The order passed by the Ld. AO under section 143(3) read with section 144C of the Act is bad in law and on the facts and circumstances of the case and is liable to be set aside.
2. The Ld. AO and the Ld. DRP have erred in relying upon evidence collected in illegal survey and summons proceedings and erred in not relying upon the VTT report and software supply agreement.
3. The Ld. AO and the Ld. DRP have erred in disallowing the expenses amounting to INR 29,436,191,870 incurred by the Appellant on purchase of software from Nokia Corporation (“Nokia Corp”) under Section 40(a)(i) of the Act.
4. The Ld. AO and the Ld. DRP have erred in disallowing the expenses amounting to INR 4360,45,22,887 incurred by the Appellant on purchase of mobile phones and accessories from Nokia Corp under Section 40(a)(i) of the Act.
5. The Ld. TPO, Ld. AO and the Ld. DRP have erred in making transfer pricing additions amounting to INR 470,84,65,081 to the income of the Appellant on account of Advertising and Market Promotion expenses incurred by the Appellant.
6. Without prejudice to the above, despite the specific directions of the Ld. DRP to exclude selling and distribution expenses while computing the quantum of adjustment, the Ld. AO / TPO have failed to appreciate that the AMP expenditure incurred by the Appellant is essentially in the nature of sales promotion expenditure, and have erred in re-calculating the adjustment without excluding such expenditure. The Ld. AO / TPO have further erred in erroneously enhancing the adjustment (from Rs. 43 crores to Rs. 470.84 crores).
7. The Ld. TPO, Ld. AO and the Ld. DRP have erred in making transfer pricing additions amounting to Rs. 97,65,63,440 on account of Contract Software Development carried out by the Appellant for its Associated Enterprises.
8. Without prejudice to the above, the Ld. TPO, Ld. AO and the Hon’ble DRP have erred in further enhancing the adjustment by Rs. 17,53,680 (i.e. from Rs. Rs. 97,65,63,440 to Rs. 97,83,17,120), by using State Bank of India’s Prime Lending Rate as on 30th June of the relevant financial year (i.e. June 30, 2009) as interest rate, for making working capital adjustment.
9. The Ld. TPO, Ld. AO and the Ld. DRP have erred in disallowing a portion of the expense incurred by the Appellant amounting to INR 358,49,23,473 on purchase of software from Nokia Corp by treating it to be excessive under transfer pricing regulations.
10. Without prejudice to the above, the Ld. AO erred in further enhancing the adjustment proposed by the Ld. TPO by Rs. 21,07,29,467/-.
11. The Ld. AO and the Ld. DRP have erred making a disallowance of the trade offers amounting to INR 834,92,63,976 provided by the Appellant to its distributors (HCL Infosystems Ltd as well as other distributors) under Section 40(a)(ia) of the Act.
12. The Ld. AO and the Ld. DRP have erred in making a disallowance of Rs. 166,02,61,748 incurred by the Appellant on account of trade price protection paid to distributors as compensation for reduction in prices of handsets, and in ignoring all the evidence (including confirmations from dealers) submitted by the Appellant in this regard.
13. The Ld. AO and the Ld. DRP have erred in disallowing 25% of the total provision made by the Appellant amounting to INR 1,14,87,176 for obsolescence of inventory.
14. The Ld. AO and the Ld. DRP have erred in disallowing marketing expenditure incurred by the Appellant amounting to INR 58,56,03,845 by way of issuance of handsets on a free of cost (FOC) basis to employees, dealers and After Marketing Service Centres (AMSCs) on the ground that the same would give enduring benefit and cannot be claimed as revenue expenditure.
15. Further, the Ld. AO and the Ld. DRP have erred in disallowing expenditure incurred by the Appellant by way of issuance of FOC handsets when the Ld. TPO has already made an adjustment on account of “alleged excessive” Advertising and Market Promotion (AMP) expenses which includes the handsets issued on FOC basis and this has resulted in double disallowance of the same amount.
16. Without prejudice to the above, the Ld. AO and the Ld. DRP have erred in not allowing current year depreciation in respect of the FOC phones given to AMSCs for warranty purposes and to dealers for promotional purposes. The Ld. AO has also erred in not allowing earlier years’ depreciation in respect of the FOC phones despite the DRP’s direction in this regard.
17. The Ld. AO and the Ld. DRP have erred in making an addition of INR 19,52,02,050 to the income of the Appellant on account of difference in the value of sales appearing in the sales tax return and the audited financials of the Appellant.
18. The Ld. AO and the Ld. DRP have erred in disallowing the entire expense incurred by the Appellant on purchase of software under Section 40(a)(i) of the Act when a part of such expense had already been disallowed by the Ld. TPO as being excessive under transfer pricing and this has resulted in double disallowance of the same amount.
19. The Ld. AO and the Ld. DRP have erred in denying the benefit of deduction under Section 1 0AA of the Act to the Appellant on the non transfer pricing additions / disallowances made by them.
20. The Ld. AO has erred in not allowing the Appellant the full credit of pre-paid taxes.
21. The Ld. AO has erred in incorrectly computing the interest under Section 234B of the Act.
22. The Ld. AO has erred in levying interest under Section 234C of the Act.
23. The Ld. AO/TPO/DRP have erred in ignoring the judicial pronouncements relied upon by the Appellant.
24. The above grounds of appeals are independent and without prejudice to one another.
25. The Appellant craves leave to add/withdraw or amend any ground of appeal at the time of hearing.
3. Thus, the Revised Grounds of appeal on account of MAP settlement are as under:-~
ITA No. 5791/Del/2015 (Assessee’s appeal)
“Nokia India Private Limited (hereinafter referred to as ‘Appellant~) objects to the order passed under section 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) dated .8 August 2015 (received on 29 August 2015) by the learned Deputy Commissioner of Income Tax (hereinafter referred as ‘Ld. AO’) pursuant to the directions of the Dispute Resolution Panel (hereinafter referred as ‘Ld. DRP’) for the assessment year 2010-11 on the following grounds;
1. The order passed by the Ld. AO under section 143(3) read with section 144C of the Act is bad in law and on the facts and circumstances of the case and is liable to be set aside.
2. The Ld. AO and the Ld. DRP have erred making a disallowance of the trade offers amounting to INR 834,92,63,976 provided by the Appellant to its distributors (HCL Info systems Ltd as well as other distributors) under Section 40(a)(ia) of the Act.
3. The Ld. AO and the Ld. DRP have erred in making a disallowance of Rs. 166,02,61,748 incurred by the Appellant on account of trade price protection paid to distributors as compensation for reduction in prices of handsets, and in ignoring all the evidence (including confirmations from dealers) submitted by the Appellant in this regard.
4. The Ld. AO and the Ld. DRP have erred in disallowing 25% of the total provision made by the Appellant amounting to INR 1,14,87,176 for obsolescence of inventory.
5. The Ld. AO and the Ld. DRP have erred in disallowing marketing expenditure incurred by the) Appellant amounting to INR 58,56,03,845 by way of issuance of handsets on a free of cost (“FOG”) basis to employees, dealers and After Marketing Service Centres (“AMSCs”) on the ground that the same would give enduring benefit and cannot be claimed as revenue expenditure.
6. Without prejudice to the above, the Ld. AO and the Ld. DRP have erred in not allowing current year depreciation in respect of the FOC phones given to AMSCs for warranty purposes and to dealers for promotional purposes. The Ld. AO has also erred in not allowing earlier years’ depreciation in respect of the FOC phones despite the DRP’s direction in this regard.
7. The Ld. AO and the Ld. DRP have erred in making an addition of INR 19,52,02,050 to the income of the Appellant on account of difference in the value of sales appearing in the sales tax return and the audited financials of the Appellant.
8. The Ld. AO and the Ld. DRP have erred in denying the benefit of deduction under Section 1 OAA of the Act to the Appellant on the non transfer pricing additions / disallowances made by them.
9. The Ld. AO has erred in not allowing the Appellant the full credit of pre-paid taxes.
10. The Ld AO has erred in incorrectly computing the interest under section 234B of the Act.
11. The Ld. AO has erred in levying interest under Section 234C of the
12. The Ld AO / TPO/ DRP have erred in ignoring the judicial pronouncement relied upon by the Appellant.
13. The above grounds of appeals are independent and without prejudice to one another.”
ITA No. 5845/Del/2015 (Revenue’s appeal)
1. “Whether on the facts and circumstances of the ease, the Dispute Resolution Pane, (DRP) is legally justified in issuing directions to grant depreciation on the mobile ban sets valued a, Rs. 6,3,34,029/- ignoring provisions of section 32(1) of Income Tax Act, 1961 (the Act) and without considering a fact that ownership of these mobile handsets was transferred from the assessee to the dealers?
2. Whether on facts and circumstances of the case, the Dispute Resolution Panel (DRP) is legally justified in issuing directions to grant depreciation on the mobile handsets value at Rs.51,33,96,664/- issued free of cost during warranty period to After Marketing Service Centre (AMSCs) without considering the fact that value of Rs. 51,33,96,664/- was debited in P&L account as revenue expenditure and the Assessing Officer (AO) had accepted the claim of the assessee that expenditure of 51,33,96,664/- was revenue in nature?
3. Whether on facts and circumstances of the case, the Dispute Resolution Panel (DRP) is legally justified in issuing directions to grant depreciation on the mobile handsets without considering ownership of handsets and nature of expenditure?
4. That the appellant craves to add, amend, alter or modify any of the above grounds of appeal.”
4. The assessee company was incorporated in 1995 and it is a wholly owned subsidiary of Nokia Corporation, Finland. The company is primarily engaged in the business of trading and manufacturing of mobile handsets, spare parts and accessories. In addition to this activity, the company also undertakes contract software development for its Associated Enterprises. Nokia India has a manufacturing unit located in Chennai from where it manufactures mobile phones for the Indian market and as well as for export purpose. Nokia Corporation and its several worldwide affiliates form a group that occupies a leadership position in the global telecom industry. It is the world’s leading manufacturer and distributor of mobile telecom industry. The assessee, M/s. Nokia India Pvt. Ltd. filed its return of income on 14.10.2010 declaring a total income of Rs.694.97 crore. Subsequently, the return was revised on 30.03.2012, as the assessee increased its TDS credit to Rs.4,30,44,396/-. The return was processed u/s 143(1) of the Income Tax Act, 1961. The case was taken up for scrutiny and a notice u/s 143(2) of the Act dated 29.08.2011 was issued and served on the assessee. Further notice u/s 142(1)/143(2) along with detailed questionnaires were issued and served on the assessee. On behalf of the assessee, the Authorized Representative of the assessee appeared from time to time. Written submissions were filed by the assessee. During the course of assessment proceedings, the assessee was directed vide order dated 28.03.2014 to get its accounts audited u/s 142(2A) of the Act (“special audit”) and further directed to furnish the report within a period of 120 days from the date on which the order was received by the assessee. On 25.08.2014, the assessee received the audit report and same was submitted before the Assessing Officer. The assessee’s case for Assessment Year under consideration was referred to the Transfer Pricing Officer to determine the “Arm’s Length Price” u/s 92CA(3) of the Income Tax Act in respect of “international transactions” entered into by the assessee during the previous year 2009-10. The TPO passed an order dated 30.01.2014. The draft assessment order was passed u/s 143(3) r.w.s. 144C(1) on 22.10.2014, wherein the assessee’s income was proposed to be assessed at Rs.9787,82,85,371/- as against the returned income declared by the assessee at Rs.694,99,29,995/-. Against the draft assessment order, the assessee filed objections before the Dispute Resolution Panel on 2 1.11.2015. The DRP issued directions u/s 144C(5) of the Act on 31.07.2015. Accordingly, the final assessment order dated 28.08.20 15 was passed in accordance with the directions of the DRP. The Assessing Officer made following additions:
