Nokia India Sales Pvt. Ltd Vs Addl. CIT (ITAT Delhi)
Conclusion: In present facts of the case, the Hon’ble Tribunal held that creating a demand for non-deduction of tax while the recipient has paid taxes on the same amount would result in recovery of taxes on the same amount twice and on the issue of providing handsets to the dealers, it was held that the same would be treated as business expenditure.
Facts: The present appeal has been filed by the assessee against the order dated 31.10.2017 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961. In present facts of the case, Nokia India Sales Pvt. Ltd. (NISPL) was incorporated as Nokia Sales Services Pvt. Ltd. in December 2008 and is engaged in the business of marketing, distribution and sales of mobile phones including accessories and services. The Assessing Officer resorted to disallowance of Rs.155.05 Crores and Rs.58.31 Crores u/s 40(a)(ia) of the Income Tax Act, 1961 on account of non-withholding of taxes u/s 194H of the Act on the discount extended to HCL Infosystems Ltd. The assessee entered into an agreement with HCL for obtaining the following services:
Purchase and sale of mobile phones from the assesse, Promotions and Advertisement of products using the assessee’s trademark “Nokia”, Discussion on market trends, Discussion on activities of assessee’s competitors, After sales matters discussion, Marketing plan discussion, Assistance in obtaining the type approval and Performing warranty and/or after warranty services and repairs of the products for end-user customers.
On going through the various clauses of the agreement, the AO held that the payment made by the way of debit notes to HCL are not trade discounts but were payments for specific services which varied from consultancy to technical services in nature. Being consultancy and technical services in nature, the Assessing Officer held that the provision pertaining to TDS are attracted.
The Hon’ble Tribunal observed that the fact in this case is that, prima facie the assessee has defaulted in deducting the tax and at the same time, the recipient has offered the amounts received to tax which is not in dispute. Creating a demand for non-deduction of tax while the recipient has paid taxes on the same amount would result in recovery of taxes on the same amount twice. Therefore, it was observed that the ld. Assessing Officer has gone strictly by the letter and procedure of the Act leaving aside the spirit of the legislation.
Further, it was observed that the failure to adhere to the provisions of TDS result in delay of payments to the exchequer of the state, initiation of penalty provision u/s 271C and intervention in recovery provisions u/s 201(1). The Assessing Officer has to look into these provisions jointly and severally as to whether there was a default in recovery, whether there was a delay in recovery, whether there was a infarction of the penal provisions or not and invoke the appropriate provisions of the Act to deal with different situations. Therefore, while allowing the appeal on this ground it was held that the taxes have been duly received by the state from the recipient and any further action to recover the same from the assessee would amount to double taxation.
On another issue pertaining to Expenditure on free mobile sets given to dealers u/s 37(1), the AO disallowed the amount claimed by the assessee on account of free phones/mobile sets given to care centres employees and dealers.
It was observed by the Hon’ble Tribunal that as the ownership in such handsets did not remain with the assessee and having regard to the manner in which the assessee’s business was organized in India, the number of distributors selling Nokia cellular handsets and the commercial reasons for which such expenses were incurred by the assessee, such expenditure undoubtedly represents a revenue expenditure, which has been incurred for the purpose of the business of the assessee. Thus the same should be allowable as a business expense under the provisions of Section 37(1) of the Act and disallowance in this regard is not warranted in the case of the assessee.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the assessee against the order dated 31.10.2017 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961.
2. Following grounds have been raised by the revenue:
“1. That on the facts and circumstances of the case and in law, the Ld. AO has grossly erred in determining the taxable income of the Appellant for the subject assessment year at Rs. 323,10,98,940/-, as against the returned income of Rs. 96,62,41,210/-on the basis of additions made in the case of Nokia India Pvt. Ltd. (“NEPL”), purportedly for the reason that the Appellant is the successor of NLPL’s distribution business of mobile phones, and in complete disregard of the factual matrix of the business model of the Appellant and NIPL.
Corporate Tax Grounds
2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in making a disallowance of Rs.155,05,28,276/- and Rs.58,31,18,115/- under Section 40(a)(ia) of the Act on account of alleged non-withholding of taxes by the Appellant under Section 194H of the Act on trade offers/ discounts extended to HCL Infosystems Ltd. (“HCL”) and other distributors respectively.
2.1 That on the facts and circumstances of the case and in law, the Ld. AO has erred in alleging that the trade offers/ discounts provided by the Appellant to HCL and other distributors are in the nature of ‘income by way of commission’ and hence, liable to deduction of tax under Section 194H of the Act.
2.2 That on the facts and circumstances of the case and in law, the Ld. AO has erred in not appreciating the fact that the relationship between the Appellant and HCL/ other distributors is on a ‘Principal to Principal’ basis and that the trade offers/ discounts extended in respect of the Appellant’s trading transaction with HCL/ other distributors cannot be characterized as ‘income in the nature of commission’, liable to tax deduction at source under Section 194H of the Act.
2.3 That on the facts and circumstances of the case and in law, the Ld. AO and Hon’ble DRP have erred in observing that the amounts incurred by the Appellant towards such trade offers/ discounts extended to HCL/ other distributors alternatively fall within the ambit of ‘fees for technical services’ as defined under Explanation 2 to Section 9(1)(vii) of the Act and thus, allegedly liable to tax deduction at source under Section 194J of the Act.
2.4 That on the facts and circumstances of the case and in law, the Ld. AO has factually erred in observing that HCL is engaged in provision of warranty, marketing, after sales services and repairs etc., on behalf of the Appellant in lieu of which, trade offers/ discounts are extended by the Appellant to HCL/ other distributors, in complete disregard of the fact that the Appellant and HCL/ other distributors work on principal-to-principal basis and undertake any marketing or promotional activity to promote their own business.
2.5 That without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. AO has also erred in denying the benefit of second proviso to Section 40(a)(ia) of the Act to the Appellant merely on the premise that the declarations provided by the Appellant are not in the format prescribed under the Act (Form 26A), in total disregard of the fact that the requirement of submitting the confirmations in Form 26A was never communicated to the Appellant neither by the Hon’ble DRP in its directions nor by the Ld. AO while issuing the remand report against the application for additional evidence filed by the Appellant.
2.6 That without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. AO has erred in not appreciating the fact that the second proviso to Section 40(a)(ia) of the Act is curative and clarificatory in nature, and was introduced to provide relief to the payer-assessees in cases where the payee has already considered the amount in question in its return of income and discharged the tax liability thereon, which fact has been clearly brought out in the confirmations provided by HCL and other distributors.
2.7 That on the facts and circumstances of the case and in law, the Ld. AO has also erred in not exercising the discretionary powers vested to him under Section 133(6) of the Act and calling for information in relation to trade offers/ discounts extended by the Appellant directly from HCL and other distributors, even though the Appellant had duly submitted PAN and other relevant details of HCL and other distributors before the Ld. AO.
3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in disallowing an amount of Rs. 2,30,24,337/- being trade price protection (“TPP”) given to its distributors.
3.1 That on the facts and circumstances of the case and in law, the Ld. AO has erred in not appreciating the fact that the TPP is offered by the Appellant to its distributors on account of reduction in prices of the mobile handsets lying in stock, which is supported by independent confirmations/ evidences and that the same is standard industry practice for carrying out the business of the Appellant.
3.2 That on the facts and circumstances of the case and in law, the Ld. AO has factually erred in observing that the Appellant has failed to furnish any authenticated documentary evidence in support of the claim of TPP or provide the procedure followed for determination of the amount of TPP provided to Distributors, whereas all necessary documentation and justification for allowability of such claim was filed before the Ld. AO in the course of assessment proceedings.
3.3 That on the facts and circumstances of the case and in law, while disallowing the claim of the Appellant, the Ld. AO has erred in observing that the Appellant has not been able to prove as to how TPP given to distributors has been passed on to the ultimate customers, whereas such premise is completely irrelevant in determination of allowability or genuineness of any expense transaction.
4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in disallowing the cost incurred by the Appellant on phones issued to employees, dealers and Care centers, treating to be in the nature of capital expense or not allowable as a business expense under the provisions of Section 37(1) of the Act.
4.1 That on the facts and circumstances of the case and in law, the Ld. AO has erred in alleging that FOC phones issued to Care centers is in the nature of warranty expense and disallowing the same for want of reconciliation of their cost with the provision for warranty, without appreciating the fact that the said reconciliation was never sought from the Appellant during the course of assessment proceedings.
4.2 Without prejudice to above, the Ld. AO has erred in not allowing tax depreciation on the cost of FOC phones particularly in relation to phones issued to dealers, despite making a specific reference to the same in the impugned order, thereby contradicting the aforesaid disallowance made.
4.3 That without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. AO has erred in not granting deduction of roll-over depreciation on the written down value of the FOC phones treated as capital assets in the case of NEPL in earlier AYs, where in the impugned assessment order, the Ld. AO has himself stated that the issues examined in the case of NEPL shall continue to be applicable in the Appellant’s case as well, purportedly being the successor of NEPL’s business.
Transfer Pricing Grounds
That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/ Ld. transfer pricing officer (“Ld. TPO”) erred in enhancing the income of the Appellant by Rs. 1,44,00,000/- by making a TP adjustment on account of AMP expenses incurred by the Appellant in the regular course of its business on the ground that it was excessive and should be compensated by the associated enterprises (“AE”).
5.1 That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO have erred in holding that the AMP expenditure incurred by the Appellant constitutes as an “international transaction” within the meaning of the term as contained in Section 92B of the Act. In this process, the Hon’ble DRP/ Ld. AO/ Ld. TPO erred in:
(a) Not appreciating that there are no machinery provisions in the Act to determine AMP as an international transaction or to make adjustment in relation to AMP expenses.
(b) Not appreciating that, in the absence of any understanding/ arrangement/ agreement between the Appellant and its AE (which owns the trademarks) for incurrence of extraordinary AMP expenditure by the Appellant for developing marketing intangibles for the AE, AMP expenditure incurred by the Applicant at its own behest could not be regarded as a ‘transaction’.
(c) Not appreciating that the AMP expenses were incurred by the Appellant as a ‘function’ as part of its role and responsibility as a limited risk distributer and not under a separate arrangement/ agreement with AE to promote brands owned by AE.
(d) Holding that the AMP expenditure incurred by the Appellant is an international transaction by relying upon the decision in Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT ([2015] 374 ITR 118) and without appreciating that unlike the facts of the case in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra), the Appellant had – (i) neither received any subsidy/ grant in connection with AMP expenses from its AE; and (ii) nor the Appellant had admitted to the existence of an international transaction.
5.2 That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO grossly erred in facts and in law by not appreciating that the AMP expense considered for AMP adjustment are primarily in the nature of routine selling and distribution expenses and are not in the nature of brand promotion expenses.
5.3 That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO erred in not appreciating that the AE of the Appellant did not derive any benefit from AMP expenditure incurred by the Appellant. Further, if any benefit arises to AE on account of AMP expenditure incurred by the Appellant is purely incidental in nature and does not require any compensation.
5.4 That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO erred in not appreciating that even if the incurrence of excessive AMP expenditure is considered as a separate international transaction, the same has been suitably benchmarked under application of Transaction Net Margin Method (“TNMM”) carried out by the Appellant. Moreover, the Appellant has already been suitably compensated through a royalty free distribution right and a fixed return for its distribution activities including incurrence of AMP expenditure.
5.5 That on the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/ Ld. TPO erred in not appreciating that since the Appellant has earned more than arm’s length return in its distribution segment, such excess remuneration should be set off with the proposed AMP adjustment.
5.6 That on the facts and circumstances of the case and in law, Hon’ble DRP / Ld. AO/ Ld. TPO while applying the segregated approach to determine the arm’s length price of the alleged AMP transaction, have accepted companies which are not engaged in market support services.
6. That on the facts and circumstances of the case, the Ld. AO erred in levying interest under Section 234B and 234D of the Act.
7. That on the facts and circumstances of the case, Ld. AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act.”
3. Nokia India Sales Pvt. Ltd. (NISPL) was incorporated as Nokia Sales Services Pvt. Ltd. in December 2008. The name of the company was changed to Nokia India Sales Pvt. Ltd. on March 18, 2011. The assessee company is an indirectly wholly owned subsidiary of Nokia Corporation Oy, Finland and is engaged in the business of marketing, distribution and sales of mobile phones including accessories and services. This business of the assessee was earlier handled by M/s Nokia India Pvt. Ltd. (NIPL), another subsidiary of Nokia Corporation Oy, till about end of December, 2012 and in that sense NIPL is business predecessor to the assessee.
Disallowance u/s 40(a)(ia):
4. The Assessing Officer resorted to disallowance of Rs.155.05 Crores and Rs.58.31 Crores u/s 40(a)(ia) of the Income Tax Act, 1961 on account of non-withholding of taxes u/s 194H of the Act on the discount extended to HCL Infosystems Ltd.
5. The facts relevant to the adjudication of this issue are that the assessee entered into an agreement with HCL for obtaining the following services:
i. Purchase and sale of mobile phones from the assessee.
ii. Promotions and Advertisement of products using the assessee’s trademark “Nokia”.
iii. Discussion on market trends.
iv. Discussion on activities of assessee’s competitors
v. After sales matters discussion
vi. Marketing plan discussion
vii. Assistance in obtaining the type approval
viii. Performing warranty and/or after warranty services and repairs of the products for end-user customers.”
6. On going through the various clauses of the agreement, the Assessing Officer held that the payment made by the way of debit notes to HCL are not trade discounts but were payments for specific services which varied from consultancy to technical services in nature. Being consultancy and technical services in nature, the Assessing Officer held that the provision pertaining to TDS are attracted.
7. The ld. DRP during the proceedings called for a report from the AO which is reproduced as under:
“(a) The Assessee has submitted evidences on sample basis which are letters from various entities stating their business, confirming in some that the relationship between NISPL is on a principal to principal basis. A brief mention has been made in some letters to their ITR filed.
(b) The evidences have been considered. It is noted that the Assessing Officer on page 18 of their Draft Assessment Order dated 26.12.2016 has clearly stated that,
“27. The relationship between the assessee and the distributor (is that of principal to principal or of principal to agent) is of relevance in case sale of products is concerned. However, such relationship is not relevant as far as the incentive/ benefit given by the assessee is concerned as the incentive/ benefit is not accruing from the transaction of sale and purchase between the assessee and the distributor (HCL). Reliance in this regard can. be placed on the judgment of Hon’ble Mumbai Bench Tribunal in the matters of SKOL Breweries Ltd vs. Assistant Commissioner of Income Tax Range 8(3), Mumbai [2013] 29 taxmann.com 111.
28. Section 194H talks about the payment to a recipient which is the income by way of commission or brokerage and does not talk about the relationship between the payer and the payee to be necessarily that of a principal and agent. The explanation to section 194H elaborates the terms commission or brokerage. It is evident that commission and brokerage under section 194H is an inclusive definition and includes in its ambit any payment received or receivable, directly or indirectly for any services in the course of buying or selling of goods.
29. HCL has conducted promotional, marketing, advertising, discussion on market trades and situation from the point of expanding the sale quantities, activities of assessee’s competitors, after sales matters, marketing plan and assistance in obtaining the type approval HCL and the assessee have intention to meet together at approximately 3 months interval to exchange the information on the aforesaid aspects. HCL was not awarded any benefit for undertaking the said activities except the said incentives. It appears that and can be concluded that the benefit given under the scheme is indirectly for the services in course of buying or selling of goods which further depends on the achievement of percentage of targets, hence, is in the nature of commission, which is liable to TDS.
30. It can be said that the services provided by HCL to the assesses are of consultancy in nature and are squarely covered by the nature of technical services as defined under Explanation 2 to section 9(1)(vii) of the IT Act 1961. Payment for the technical services is liable to tax deduction at source under section 194J of the IT Act 1961. No one would provide such technical services free of cost H can be concluded that the benefit given under the scheme is for marketing, sales promotion and consideration of various aspects like market trends and situation from the point of expanding the sale quantities, activities of assessee’s competitors, after sales matters, Marketing plan of the products by the distributor which does not pass on to the retailer or to the end user of the products. Hence such incentives are in the nature of fees for professional or technical services, which is liable to TDS u/s 194J.
……………….
Thereafter on page 19 of the Draft Order, the Assessing Officer has stated the following in respect of distributors other than HFCL Infosystems Ltd:
23. During the year under consideration, the assessee has offered track incentives to distributors other them HCL lnfosystems Ltd. amounting to Rs 58,31,18,115/-. In the course of the assessment proceedings the assessee has been asked to furnish the nature of such trade offers with supporting documentary evidences and calculation/ computation for arriving at the said amount.
24. Assessee’s submission in this regard is an the same lines as that on trade offers to HCL Infosystems Ltd.
In respect of both, the AO has held that since the assessee has not deducted TDS on these payments, disallowance of provision of section 40(a)(ia) of the Income Tax Act 1961 is applicable.
As the AO has made a speaking order and given the reasons for disallowance of provision of section 40(a)(ia) of the Income Tax Act 1961, the aforesaid evidences submitted by the assessee do not change the nature of the payment being made and the findings of the Assessing Officer.
8. The ld. DRP further held that the assessee has submitted certificate from HCL Ltd. and from HCF Infotech Ltd. that they have filed their return of income and have disclosed the payments received from the assessee by way of discount in their return of income. Copy of the certificate was sent to the AO by the ld. DRP. The A.O. was directed to verify whether the assessee falls within the second proviso of section 40(i)(ia) or not. The ld. DRP held that the assessee is covered by the second proviso, no disallowance to the extent such income has been disclosed by HCL & HCL Infotech Ltd in their return and to the extent tax has been paid on Such income should be made.
9. Having received the directions from the ld. DRP, the AO disallowed the amount involved holding as under:
Analysis of the Assessing Officer
“30. The DRP has asked the AO to verify whether the assessee falls within the second proviso of section 40(i)(ia) of the Income Tax Act 1961 or not.
The second proviso to section 40(a)(ia) of the Income Tax Act 1961 reads as follows:
“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVll-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, fox the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the fax on such sum of the date of furnishing of return of income by the resident payee referred to in the said proviso.”
32. The first proviso of sub-section (1) of section 201 read as follows: Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident—
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in Such form as may be prescribed.
33. As per Rule 31ACB prescribes the form for furnishing certificate of accountant under the first proviso to sub section (1) of section 201 of the Income Tax Act 1961.
[Form for furnishing certificate of accountant under the first proviso to sub-section (1) of section 201.
31ACB. (1) The certificate from an accountant under the first proviso to sub-section (1) of section 201 shall be furnished in Form 26A to the Director General of income-tax (Systems) or the person authorized by the Director General of Income-tax (Systems) in accordance with the procedures, formats and standards specified under sub-rule (2), and verified in accordance with the procedures, formats and standards specified under sub-rule (2).
(2) The Director General of Income-tax (Systems) shall specify the procedures, formats and standards for the purposes of furnishing and verification of the Form 26A and be responsible for the day-to-day administration in relation to furnishing and verification of the Form 26A in the manner so specified.]
34. The prescribed Form 26A is placed at Annexure C. It can be seen that there is a specific certificate that needs to be placed before the Income Tax Authorities as per the requirements of the first proviso of sub-section (1) of section 201. The certificate needs to be given in the prescribed Form 26A from an accountant/ auditor after verification of all the particulars regarding the payer and payee.
35. The documents submitted by the Assessee before the DRP are placed at Annexure D. These same documents were submitted by the Assessee before the AO for verification in submissions dated 24.10.2017 following the DRP directions dated 4.9.2017.
36. The DRP has asked the AO to verify whether the assessee falls within the second proviso of section 40(i)(ia) or not.
37. It can be seen that these submissions given by the Assessee before DRP and before, the AO vide letter dated 24.10.2017 are in the form of letters “To whomsoever it may concern” from, the following company:
