Nokia India Pvt. Ltd. Vs ACIT (ITAT Delhi)
Conclusion: In present facts of the case, the Hon’ble Tribunal observed trade incentive to distributor, trade discounts and issuance of handsets on Free of Cost as business expense.
Facts: The assessee company filed its return of income on 30.11.2013 declaring total income at Rs.5,35,77,93,880/-. Later, the return was revised and the income was declared at Rs.5,40,57,47,930/-. The case was selected for scrutiny through CASS and the assessment was framed vide order dated 30.08.2017 u/s 143(3) r.w.s 144C of the Act. 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 Officer during the course of assessment proceedings, asked the assessee to furnish the details for trade discounts including the policy of trade discounts. The assessee in response to the show cause notice, stated that it had incurred expenditure of Rs.16,07,03,454/- as Trade Price Protection discount. The Assessing Officer further observed that in this case, an amount of Rs.9,80,77,529/- pertains to HCL Infosystems Ltd. which has been considered by the DRP. Therefore, no benefit of trade price protection of Rs.6,26,25,925/- was allowable to the assessee hence, he made disallowance of Rs.6,26,25,925/-. Further, the Assessing Officer made disallowance of marketing expenses of Rs.25,45,40,035/- hence, the Assessing Officer assessed the income at Rs.18,86,02,07,744/- against the returned income of Rs. 5,40,57,47,930/-.
After taking submissions of both sides, on the issue of discounts the Hon’ble tribunal on the issue of disallowing expenses amounting to Rs.7,01,71,57,547/- on trade offers relied on the judgment of Co-ordinate Bench wherein it was observed that Agreement for the Supply of Cellular Mobile Phones” between HCL and the assessee that relationship between the assessee and HCL is that of principal to principal and not that of principal to agent. The discount which was offered to distributors is given for promotion of sales. This element cannot be treated as commission. There is absence of a principal agent relationship and benefit extended to distributors cannot be treated as commission under Section 194H of the Act.
On the issue of disallowance of Rs.6,26,25,925/- on account of trade price protection paid to distributors the Hon’ble tribunal relied on the Judgment of co-ordinate bench wherein it was observed that It is market practice that if there is any change in prices of handsets by competitors, change in life of mobile model, change in market demand of particular model which affects the sales, the distributor is protected by the Trade Price Protection. This is actually a commercial expediency in modern day technological changes which are very fast and vast.
Thus, 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.”
On the issue of disallowance of marketing expenditure of Rs.25,45,40,035/- incurred on account of issuance of handsets on Free of Cost (‘FOC’) basis it was again observed that this issue is also squarely covered in favour of the assesse, wherein it was observed that In the present assessment year, the assessee is engaged in manufacture, import and sale of mobile handsets. The assessee has given mobile handsets to its employees, dealers, sale personnel etc. for free of cost and thus no longer owned the said handsets. Thus, the said cost was rightly taken as business expenditure by the assessee and was rightly reduced from the inventory. This issue is decided in favour of the assessee for A.Ys. 2003-04 by the Tribunal in ITA No. 2445/Del/201O order dated 30.01.2018 which was also affirmed by the Hon’ble High Court in ITA No. 955/2018 order dated 31.08.2018. Thus, Ground No.5 is allowed.”
Accordingly, the Hon’ble Tribunal allowed these issues in the favour of the Appellants.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal filed by the assessee is against the order of Assessing Officer
passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (“the Act”), New Delhi dated 30.08.2017 for the Assessment year 2013-14. The assessee has raised following grounds of appeal:-
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 Ad pursuant to the directions of the Hon’ble DRP dated July 3, 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. AO and Hon’ble DRP have erred in relying upon evidence collected during illegal survey and summons proceedings; 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 in respect of AMP expenses.
5.2. The Ld. TPO/Ld. Assessing Officer/Hon’ble DRP have erred in concluding that the AMP expenses incurred by the appellant amount to international transaction under Section 928 of the Act.
5.3. The Ld. TPO/Ld. Assessing Officer/Hon’ble DRP have erred in presuming the existence of an agreement between the appellant and its Associated Enterprise (“AE”), Nokia Corp, in respect of AMP expenditure incurred by the appellant.
5.4. The Ld. TPO/ Ld. AO/Hon’ble DRP have erred on facts and in law in re-characterizing the AMP expenditure incurred by the appellant for its own business as expenditure incurred for providing brand promotion services to its AE, Nokia Corp, thereby warranting separate compensation.
5.5. The Ld. TPO/Ld. AO/ Hon’ble DRP have erred on facts and in law in inferring the existence or an international transaction or brand promotion services by holding that the AMP expenses incurred by the appellant are “huge”, without any valid basis.
5.6. The Ld. TPO/Ld. AO/Hon’ble DRP have erred in arbitrarily considering expenses in the nature of selling and distribution expenses as being incurred toward alleged brand promotion services.
5.7. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in not adjusting the excess profits earned by the appellant, in the NMP segment, vis-a-vis comparable companies while computing the transfer pricing adjustment on account of AMP expenses.
5.8. The Ld. TPO/ Ld. AO/ Hon’ble DRP have erred in not making any adjustment for royalty free use of brand by the appellant, while making adjustment on account of alleged brand promotion services.
5.9. The Ld. TPO / Ld. AO / Hon’ble DRP have erred in carrying out benchmarking of alleged excessive AMP expenses by using a flawed methodology which is not in accordance with any of the methods prescribed under Section 92C(1) of the Act.
5.10. The Ld. TPO /Ld. AO /Hon’ble DRP have erred in selecting comparables for benchmarking alleged market support services arbitrarily, without carrying out any comparable search.
5.11. The Ld. TPO / Ld, AO / Hon’ble DRP have erred in selecting inappropriate comparables for computation of arm’s length margin on alleged excessive AMP expenses.
5.12. The Ld. TPO / Ld. AO / Hon’ble 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 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 that software payments made by the appellant were a tool to shift profits outside India using information obtained by the tax authorities during survey proceedings which provided information / data pertaining to a different year i.e. Financial Year 2011-12.
6.4. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in determining the arm’s length price (“ALP”) in respect of software by adopting a method which is not prescribed under Section 92C(I) of the Act.
6.5. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in making additions by selectively considering transaction of only those months where transaction value is higher than the ALP. 6.6. The Hon’ble DRP has erred in disposing of the various objections raised by the appellant in a summary manner, without providing any reasons.
7. The Ld. TPO/ Ld. AO/ Hon’ble DRP have erred ill making transfer pricing adjustment amounting to INR 18,56,51,600/- in relation to provision of contract software development services by the appellant to its AE. The sub-grounds in this respect are as under:
7.1. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in rejecting the economic analysis undertaken by the appellant in its transfer pricing documentation, to determine the ALP.
7.2. 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 its transfer pricing documentation, to determine ALP.
7.3. The Ld. TPO / Ld. AO / Hon’ble DRP have erred in introducing certain inappropriate quantitative filters to carry out economic analysis, for determining ALP.
7.4. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in not rejecting comparables 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 ITATI, which has also been confirmed by the Jurisdictional High Court of Delhi.
7.5. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in resorting to ‘cherry picking’ of 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 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-operating while computing operating margins of the comparables, for determining ALP.
7.12. Hon’ble DRP has erred in disposing off the various objections raised by the appellant in a summary manner, without providing any reasons.
8. 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:
8.1. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in rejecting the economic analysis undertaken by the appellant in its transfer pricing documentation, to determine the ALP.
8.2. 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 its transfer pricing documentation, to determine ALP.
8.3. The Ld. TPO / Ld. AO / Hon’ble DRP have erred in introducing certain inappropriate quantitative filters to carry out economic analysis, for determining ALP.
8.4. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in not rejecting comparables 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 the Jurisdictional High Court of Delhi.
8.5. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in resorting to ‘cherry picking’ of comparables by arbitrarily selecting comparables from the list of companies rejected by the appellant without analysing all the companies rejected by the appellant.
8.6. The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in rejecting the comparables, chosen by the appellant, on the basis of incorrect reasons and introducing certain additional, inappropriate, comparables while determining the ALP.
8.7. 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.
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 6,26,25,925 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 provided to BCL Infosystems Ltd. has been allowed.
11. 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 Service Centres (“AMSC’s”) on the ground that the same would give enduring benefit and cannot be claimed as revenue expenditure.
12. The Ld. AO and the Hon’ble 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” AMP expenses, which includes the handsets issued on FOC basis and this has resulted in double disallowance of the same amount.
13. The Ld. AO and the 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.
14. The Ld. AO and the Ld. TPO have erred in disallowing the part of the expense incurred by the appellant for purchase of software under transfer pricing regulations, and in simultaneously disallowing the entire expense under Section 40(a)(i), resulting in double disallowance of the same amount, in complete disregard of the directions of the Hon’ble DRP in this regard.
15. The above grounds of appeals are independent and without prejudice to one another.
16. The appellant craves leave to add / withdraw or amend any ground of appeal at the time of hearing.”
2. In this case, the original file was misplaced. The file was subsequently re-constructed. On the basis of re-constructed file, the present appeal is being adjudicated.
3. Vide letter dated 19.07.2019, the assessee had sought withdrawal 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 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 of Delhi.
2.5 The Ld. TPO/ Ld. AO/Hon’ble DRP have erred on facts and in law in resorting to ‘cherry picking’ of comparables by arbitrarily selecting comparables from the list of companies rejected by the appellant without analyzing all the companies rejected by the appellant.
2.6 The Ld. TPO/ Ld. AO/Hon’ble DRP have erred on facts and in law in rejecting the comparables, chosen by the appellant, on the basis of incorrect reasons and introducing certain additional, inappropriate, comparables while determining the ALP.
2.7 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.
2.8 he 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 comparables while determining the ALP.
2.9 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 comparables for determining the ALP.
2.10 Hon’ble DRP has erred in disposing off the various objections raised by the appellant in a summary manner, without giving any reasons.
3. 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 it’s distributors (HCL Infosystems Ltd. as well as other distributors) under section 40(a)(ia) of the Act.
4. 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 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 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. erred in not granting the deduction of the amount of ‘cess’ paid by the Appellant while computing the total income of the Appellant.
7.2. That the Ld.AO erred in not appreciating that ‘cess’ does not fall within the meaning of term ‘tax’ under section 40(a)(ii) of the Act.
7.3. That the Ld.AO erred in completely ignoring the taxation principles outlines by the Panaji Bench of Hon’ble High Court of Bombay in the case of Sesa Goa 423 ITR 426.”
6. Facts in brief are that the assessee company filed its return of income on 30.11.2013 declaring total income at Rs.5,35,77,93,880/-. Later, the return was revised and the income was declared at Rs.5,40,57,47,930/-. The case was selected for scrutiny through CASS and the assessment was framed vide order dated 30.08.2017 u/s 143(3) r.w.s 144C of the Act. The Assessing Officer during the course of assessment proceedings, referred the issue related to international transaction to the TPO to determine the Arm’s Length Price (“ALP”) u/s 93CA(3) of the Act. Thereafter, the TPO after examining the transfer pricing documentation and economic analysis proposed transfer pricing adjustment of Rs.45,42,10,970/-. The Assessing Officer passed a draft assessment order dated 27.12.2016 against which the assessee had filed its objections before the Dispute Resolution Panel (“DRP”) who after considering the objections of the assessee revised transfer pricing adjustment amounting to Rs. 46,47,41,570/-. The Assessing Officer therefore, made adjustment of Rs. 46,47,41,570/-. In respect of non-transfer pricing issues, the Assessing Officer recorded that a survey operation u/s 133A of the Act, was conducted on the premises of the assessee. During the course of survey, it was found that certain payments without deducting the tax 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 201213), 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 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 Officer during the course of assessment proceedings, asked the assessee to furnish the details for trade discounts including the policy of trade discounts. The assessee in response to the show cause notice, stated that it had incurred expenditure of Rs.16,07,03,454/- as Trade Price Protection discount. The Assessing Officer further observed that in this case, an amount of Rs.9,80,77,529/- pertains to HCL Infosystems Ltd. which has been considered by the DRP. Therefore, no benefit of trade price protection of Rs.6,26,25,925/- was allowable to the assessee hence, he made disallowance of Rs.6,26,25,925/-. Further, the Assessing Officer made disallowance of marketing expenses of Rs.25,45,40,035/- hence, the Assessing Officer assessed the income at Rs.18,86,02,07,744/- against the returned income of Rs. 5,40,57,47,930/-.
8. Aggrieved against this, the assessee preferred this appeal.
9. Ground No.1 is general in nature, needs no separate adjudication.
10. Ground No.2 is against the making of transfer pricing adjustment amounting to Rs.2,92,30,300/- in relation to provision of business support services by the appellant to its Associated Enterprises (“AE”).
11. The assessee has also raised sub-ground from the Ground No.2.1 to 2.10 in support of the Ground No.2. These grounds being argumentative and are in support of ground no.2 are being disposed of along with ground no.2 for the sake of brevity.
12. The ld. counsel for the assessee submitted that the authorities below grossly erred in making transfer pricing adjustment amounting to Rs.2,92,30,300/- in relation to provision of business support services by the appellant to its AE. He submitted that the authorities below grossly erred in rejecting the economic analysis undertaken by the appellant 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 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 charges as non-operating while computing the operating margins of the comparables. He further contended that the DRP had disposed off the various objections raised by the assessee in a summary manner and without giving any valid reason. He further submitted that in respect of Axis Integrated Systems Limited, the submissions were made before the TPO and the objection was also raised before the DRP. He contended that the reason for rejection by the TPO that the liaisoning services rendered by the assessee in the nature of business support services and thus the company is a valid comparable. He submitted that as per Note 17 at page 504 of the paper book revenue from operations comprises of sale, liaisoning services and reimbursement of expense. Thus, the entity level profitability taken by the TPO is incorrect. It was further contended that in view of lack of segmental information, this was not a valid comparable. It was pointed out that the companies treated reimbursement of expenses of Rs.1.73 crores as income, which if reduced from net profit of Rs.1.29 crores will result in a loss and the profit liable indicator will be 8.7%. Further, it was submitted that the financials of the company do not provide a detailed description of the business operations of the company. The assessee placed reliance on the website extracts placed at pgs 470 to 473 of the paper book filed before the TPO. As per the website extracts, Axis Integrated Systems Limited is engaged in providing consultancy with regards Directorate General of Foreign Trade, customs/Excise & Service Tax related services. Their area of expertise includes foreign trade policy related matters and excise benefits related matters and thus are incomparable to business support services rendered by the 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 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 further submitted that such facts is also evident from the annual report of the company which provides that Killick acts as an agent for various foreign principals for sale of dredgers, dredging equipment, steerable rudder, propellers, maritime and aviation lighting, acoustic communication equipment etc and offers after sales services. Apart from this, Killick Agencies and Marketing Limited is also engaged in exports of micro switches, engineering items, acoustics items & headsets. It was further submitted that different revenue stream as per annual report of the company for Financial Year 2012-13, Killick earned more than 99% of its revenue from commission income, which is accounted for when the equipment/machinery is installed/at the customers designated place. 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, to buttress the contention that the company was pioneer in bringing new products and technologies to India starting with kerosene lamp and various other products like toaster, pressure cookers, slotted angles etc and their successful promotion, therefore, how this company was functionally similar to to the support service segment of the assessee, the Ld. counsel for the assessee placed reliance on decision of co-ordinate Bench of the Tribunal in the case of Hyundai Rotem Company in ITA No.7569/Del/2019 and Veolia India Private Limited in ITA No.6770/Del/2015. He submitted that in view of these decisions and the fact that the comparable was functionally different dissimilar to the assessee. This comparable ought not to have been included by the TPO.
14. Further, he contended that in case of Just Dial Limited, submissions were made before 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 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 make transfer pricing adjustments.
15. On the contrary, the Ld. DR vehemently opposed the submission and supported the orders of the authorities below. The ld. DR submitted that TPO has rightly included the Axis Integrated Systems Limited, Killick Agencies and Marketing Limited and Just Dial Limited as comparable for determining the Arm’s Length Price. He placed heavy reliance on the decision of the TPO, and the reasoning of the TPO for inclusion of these comparables.
16. We have heard the rival submissions and perused the material available on record. We find that the TPO had proposed adjustment in the transfer pricing related to business support services. The TPO in his order observed as under:-
“25. DETERMINATION OF ARM’S LENGTH PRICE
25.1 In the light of discussion made above, the comparables that shall be finally selected for benchmarking the international transactions relating to provision of business support services are as follows:-
