Nokia India (P.) Ltd.
Additional Commissioner of Income-tax
K.D. Ranjan, Accountant Member
This appeal by the assessee for Assessment Years 2007-08 arises out of the order of the Assessing Officer passed under sec. 143(3) read with section 144C of the Income-tax Act, 1961 (the Act).
2. During the course of hearing the assessee filed additional ground which reads as under:-
“Without prejudice to our other grounds of appeal, the learned Transfer Pricing Officer (“TPO”) has erred in law in making transfer pricing adjustment in relation to advertisement, marketing and promotion expenditure incurred by the Appellant, on the basis of a show cause notice which was issued without jurisdiction.”
3. It has been submitted by the learned AR of the assessee that show cause notice proposing the Transfer Pricing Adjustment was issued by the Transfer Pricing Officer (TPO) on October 12, 2010 whereas he received reference from the AO to determine the Arm’s Length Price of the Advertisement, Marketing and Promotion Expenditure (AMP) only on 8.10.2010. Since the order passed by the learned TPO was based on the show-cause notice issued without jurisdiction, the said order is bad in law and consequently entire adjustment needs to be deleted. The learned AR of the assessee further submitted that the question of jurisdiction is a pure question of law and goes to the very root of the matter. He placed reliance on the decision of Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT 229 ITR 383.
4. We have heard both the parties and gone through the material available on record. Since the issue relating to jurisdiction is a pure question of law and goes to the very root of the matter, the additional ground raised by the assessee was admitted.
5. The assessee also filed additional evidence under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 in respect of Trade Protection Policy. It has been submitted that during the course of assessment proceedings the AO asked the assessee to submit a note and basis of price protection claimed by the assessee amounting to Rs. 1,56,00,00,000/-. The assessee submitted a note on 23rd November, 2010 along with copies of mail circulated to distributors specifying the basis of price protection. Thereafter no further questions were raised by the AO as to why the said expenditure should not be disallowed. It was only on the perusal of draft assessment order that the assessee came to know about the disallowance made by the AO. The AO made disallowance without providing any opportunity in support of explanation filed by the assessee. The assessee filed copy of Trade Protection Policy before Dispute Resolution Panel (DRP) along with confirmation from one of the biggest distributors i.e. HCL Infosystems Ltd. to whom price protection charges were paid by the assessee. Copy of ledger account of the assessee in the books of HCL Infosystems Ltd. was also filed. The DRP after considering the price protection policy and other documents allowed the deduction in respect of price protection charges paid to HCL Infosystems Ltd. However, remaining price protection incurred by the assessee amounting to Rs. 62,91,22,970/- was confirmed by the DRP. Subsequent to the order of the DRP the assessee made efforts to obtain similar evidence from other distributors which were not obtained at the time of assessment proceedings/DRP proceedings. The same has been filed as additional evidence. The learned AR of the assessee submitted that the above mentioned additional evidence from other distributors is necessary and imperative for examination in order to determine the deductibility of price protection charges paid by the assessee to other distributors, and since the addition has been confirmed by the DRP without giving proper opportunity to the assessee to produce evidence in respect of other distributors, the additional evidence should be admitted. The learned AR of the assessee relied on the decision of ITAT Delhi Bench in the case of UOP LLC v. Addl. DIT (International Taxation)  108 ITD 186 / 12 SOT 499 , wherein the principles relating to admissibility of additional evidence have been laid down. In view of these facts it has been submitted that additional evidence may be admitted.
6. We have heard both the parties and gone through the material available on record. The assessee filed additional evidence before DRP in respect of HCL Infosystems Ltd. However, the price protection money paid to other distributors was not supported by necessary evidence. The assessee has now received the evidence in respect of other distributors. We, therefore, are satisfied that this additional evidence is necessary to decide the issue before us. Accordingly, we admit the additional evidence which is necessary for disposal of ground of appeal taken by the assessee in respect of addition in relation to trade protection policy.
7. At the time of hearing the assessee has given written synopsis in respect of Corporate Tax as well as Transfer Pricing issue. First we will decide the corporate tax issue involved in the appeal.
8. The first issue for consideration relates to disallowance of expenditure incurred on issue of mobile handsets on free of cost basis (FOC). The facts of the case relating to this ground are that the assessee claimed marketing expenses of Rs. 337,13,58,000/- in the profit & loss account. The AO while examining the case found that marketing expenditure included cost of mobile handsets issued free of cost to after marketing service centres, dealers and employees. The AO further noted that the cell phone and accessories given to service centres, dealers and employees free of cost could be said to be put to the business use of the assessee only. Moreover, the ownership of these handsets remains with the assessee company. The handsets were not part of trading activities of the assessee company and have not been shown as part of purchase in the profit & loss account but on account of these handsets, separate expenses under the head “Marketing expenses” have been claimed. Thus, handsets could only be considered as assets used for assessee’s own business on which the assessee could have claimed depreciation. In response to query, it was submitted by the assessee that issuance of free of cost cell phones was necessary incidence in the assessee’s business. The handsets issued to the dealers were necessary for various display and promotional purposes and were essentially in the nature of marketing expenses that were recurring in nature. If the addition on account of increase in the value of stock was made, then against increase in closing stock of such earlier year, a corresponding deduction by way of increase in the value of opening stock for the succeeding year to be allowed. The AO however observed that since ownership of these handsets remained with the assessee and they were not part of trading activities of the assessee, handsets could be considered as assets used for the purpose of assessee’s own business on which the assessee could have claimed depreciation. However, in no circumstances, the expenses on these handsets could be claimed as revenue expenditure. The AO accordingly disallowed the claim of the assessee as revenue expenditure. However, he allowed depreciation @ 15%.
9. Before us, the learned AR of the assessee submitted that this issue had been a subject matter of litigation in the earlier Assessment Years as well and was restored back by the Hon’ble Delhi High Court to the file of the Income-tax Appellate Tribunal vide its order dated 14.07.2009 for the Assessment Years 2000-01 and 2001-02. ITAT vide its order dated 22.09.2011 has remanded the matter back to the file of the AO for fresh consideration of facts. In view of these facts the learned AR of the assessee submitted that the matter may be restored back to the file of the AO to be decided afresh.
10. We have heard both the parties and gone through the material available on record. It has also been contended by the learned AR for the assessee that for Assessment Year 2006-07 ITAT has set aside the issue to the file of the AO for deciding the issue afresh. We have gone through the order of ITAT Delhi Bench ‘E’ dated 22.09.2011 for A.Y. 2000-01 & 2001-02 (ITA No.2781 & 5151/Del/2004 and 24.11.2011 in ITA No.551/Del/2011 in the assessee’s own case for Assessment Year 2006-07. ITAT in Para 9 of its order for Assessment Year 2006-07 has set aside the issue to the file of the AO with the directions to consider the issue afresh after affording a reasonable opportunity of being heard. The Tribunal has set aside the issue for A.Y. 2000-01 & 2001-02 also. Since on identical issue the ITAT has set aside the matter to the file of the AO vide order dated 24.11.2011 in ITA No.551/Del/2011 for Assessment Year 2006-07, we also set aside the issue for Assessment Year 2007-08 to the file of the AO with the directions to decide the issue afresh after affording the assessee a reasonable opportunity of being heard.
11. Next issue for consideration relates to depreciation on computer peripherals amounting to Rs. 1,38,62,903/-. The AO allowed depreciation @ 15% as against 60%. The learned AR of the assessee submitted that in Assessment Year 2006-07 the issue has been decided in favour of the assessee by ITAT vide order dated 24.11.2011.
12. We have heard both the parties and perused the material available on record. ITAT Delhi Bench ‘E’ in ITA No.551/Del/2011 for Assessment Year 2006-07 vide order dated 24.11.2011has held that the assessee was eligible for deprecation @ 60% on computer and peripherals in view of the decision of the Hon’ble Delhi High Court in the case of CIT v. BSES Yamuna Power Ltd. [IT Appeal No. 1267 of 2010, dated 31st August, 2010.] Since the issue is covered by the decision of ITAT in its own case for Assessment Year 2006-07, respectfully following the precedence it is held that the assessee will be eligible for depreciation @ 60% on UPS, WAN/LAN equipment, switches, network equipment etc. Accordingly, the AO is directed to allow depreciation @ 60% on computer and its peripherals.
13. Next issue for consideration relates to disallowance of Rs. 62,91,22,970/- on account of price protection expenses allowed to the distributors. During the course of hearing the assessee had filed additional evidence which has been admitted as discussed hereinabove. Since we have admitted additional evidence in respect of other distributors to whom trade price protection has been allowed, we set aside this issue to the file of the AO with the directions to examine the case of the assessee in the light of additional evidence filed before this Tribunal and decide the issue on merits. Needless to say the AO will provide the assessee a reasonable opportunity of being heard.
14. Now we will deal with the Transfer Pricing issues involved in the grounds of appeal.
15. The first issue for consideration relates to Transfer Pricing Adjustments amounting to Rs.21,07,34,539/- in relation to provision of software development services provided by the assessee to its associated enterprises. The relevant ground is ground No.4, which reads as under:-
“4. That, the learned AO erred in making transfer pricing adjustment amounting to Rs. 21,07,34,539 in relation to provision of software development services by the appellant to its AEs.”
16. During the course of hearing it was submitted by the learned AR of the assessee that the learned Dispute Resolution Penal (DRP) has relied on the information obtained from various third parties u/s 133(6) for selection of comparables without disclosing this information to the assessee during the course of DRP proceedings. The use of this information privately by the DRP came to the knowledge of the assessee for the first time when it received the DRP order under which some of the receipts of the comparable companies were annexed. Use of the said information obtained by the DRP without providing opportunity to the assessee of dealing with and rebutting the same is in gross violation of justice. In the light of these facts it has been submitted that the order passed by the AO in accordance with the directions of the DRP should be set aside for fresh adjudication after providing assessee a reasonable opportunity of rebutting the information obtained by the DRP. It was also submitted that the assessee has right to cross examine the information obtained by the DRP from various parties. The learned AR of the assessee placed reliance on the following decisions:-
(i) Kisinchand Chellaram v. CIT,  125 ITR 713/4 Taxman 29 (SC); &
(ii) State of Kerala v. KT Shaduli Yusuf AIR  SC 1627.
On the other hand Ld. CIT(DR) supported the order of DRP/AO vehemently.
17. We have heard both the parties. This is no dispute about the fact that the DRP had obtained information u/s 133(6) and had applied against assessee without opportunity of being heard. This is against the principles of natural justice. Since DRP has used information against assessee without confronting it, in our considered opinion, the assessment order needs to be set aside to the file of assessing officer who will refer the matter to D.R.P. for providing necessary opportunity of being heard. We order accordingly.
18. Next issue for consideration relates to not allowing the benefit of working capital adjustment to the assessee while computing the arm’s length price in respect of its international transaction pertaining to the provisions of software development services to its associated enterprises. The relevant ground of appeal is reproduced as under:-
“4.6 That on the facts and circumstances of the case and in law, the learned TPO/Hon’ble DRP has denied the working capital adjustment to the operating profit margins of the comparables stating that the correct working capital position of the appellant/comparables cannot be determined, thereby adopting a position completely inconsistent with the position adopted by learned predeceasing TPO in the past years and without appreciating the fact that there is no working capital requirement of the appellant in its relevant segment pertaining to provision of software development services to AEs.”
19. During the course of hearing the learned AR of the assessee submitted that DRP has failed to consider the decision of ITAT in the assessee’s own case for Assessment Year 2006-07 wherein it has been held that the benefit of working capital adjustment cannot be denied to the assessee. Since there is no change in the facts of the case, the benefit of working capital adjustment should be granted to the assessee for Assessment Year under consideration.
20. We have heard both the parties and gone through the material available on record. ITAT Delhi Bench ‘E’ in the case of assessee for Assessment Year 2006-07 in ITA No.551/Del/2010 dated 24.11.2011 after considering provisions of sec. 92C has held as under:-
“6. We have carefully considered the submissions in light of the material produced and precedent relied upon. It is an undisputed fact that on the same set of facts and in the same business model the assessee has been provided the working capital adjustments in the preceding assessment years. Under the circumstances, in our considered opinion, it was incumbent upon the TPO to consider the same in the current year.
6.1 In this regard we place reliance upon the decision of the Hon’ble Jurisdictional High Court in the case CIT v. Dalmia Promoters Developers (P) Ltd. 281 ITR 346 wherein it was held that for rejecting the view taken in earlier assessment years, there must be material change in the fact, situation or in law. In this case, clearly there is neither any change in the fact, situation or in law. Hence, on the anvil of the Hon’ble Jurisdictional High Court decision (Supra), the TPO should grant the assessee appropriate working capital adjustment. Accordingly, the matter is remitted to the file of the Assessing Officer. The Assessing Officer should remit the matter to the TPO to consider the same in light of the directions as above.”
21. The facts of the case are identical to the facts of Assessment Year 2006-07. Since DRP has not given the benefit of working capital adjustment while computing the arm’s length price in respect of international transaction, we set aside the matter to the file of the Assessing Officer with the direction to examine the case of the assessee and decide the issue afresh in accordance with the provisions of law. The AO will provide necessary opportunity to the assessee of being heard.
22. Next issue for consideration relates to transfer pricing adjustment pertaining to advertisement, marketing and promotion expenditure incurred by the assessee. The AO in order to determine the arm’s length price of international transaction with associated enterprise referred the matter to TPO u/s 93CA(3) of the act. The Transfer Pricing Officer, New Delhi after examination of the assessee’s transfer pricing documentation and making analysis contained therein passed an order dated 29.10.2010 u/s 92CA(3) of the Act, wherein he determined the arm’s length price on Advertisement, Marketing and Promotion (AMP) expenses amounting to Rs. 253,48,30,000/-and on software development services segment amounting to Rs. 21,81,44,277/-. During the course of assessment proceedings the assessee was issued show cause notice to explain as to why an addition amounting to Rs. 253,48,30,000/- on account of AMP should not be added. The Assessing Officer rejected the explanation offered by the assessee on the ground that the same has been considered by the TPO. However, the assessee challenged this addition before the DRP-II, New Delhi. DRP-II, New Delhi vide their order dated 9.8.2011 upheld the adjustment proposed by the TPO in respect of AMP in toto to the extent of Rs. 253,48,30,000/-. The AO passed final order incorporating the transfer pricing adjustment in respect of AMP expenses amounting to Rs. 253,48,30,000/-.
23. Before us the learned AR of the assessee submitted that order passed by the DRP is laconic and non-speaking and fails to consider factors of critical and fundamental importance while confirming the transfer pricing adjustment made by the learned TPO in relation to the AMP expenditure incurred by the assessee. It has further been submitted by the learned AR of the assessee that the learned DRP has failed to consider the global transfer pricing policy of the Nokia group, which was submitted before it on 22nd July, 2011. The global transfer policy which is a document of most critical importance clearly provides that Nokia India is a limited risk distributor and is guaranteed in effect reimbursement of all AMP and other expenses incurred by the assessee with a mark-up added thereto. Therefore, there was no question at all of Nokia India benefiting Nokia Corporation, Finland (Nokia Finland) by incurring such expenditure. No question therefore, arises of any taxable income being transferred away from India to a foreign jurisdiction which is the basic condition for invoking the transfer pricing provisions and making transfer pricing addition as laid down by CBDT Circular 14, 2001. It was further submitted that DRP has failed to consider the cost credit of Rs.144 crores received by the assessee during the current assessment year to achieve the targeted operating profit margin as profit margin as per the global TP policy. This cost credit covers the AMP expenses incurred by the assessee and also enable it to earn the targeted profit margin. Therefore, no transfer pricing adjustment was at all warranted. He further submitted that TPO has applied Brightline method for determination of arm’s length price. Brightline method is not a prescribed method u/s 92C of Indian Transfer Pricing Regulations. Further more, the Brightline principle was laid down under the US transfer pricing regulations which cannot be relied upon while adjudicating on the Indian TP regulations in the absence of specific legislation in India. It was also submitted that the TPO for the purpose of application of Brightline method included Bharti Teletech Ltd., Salora International Ltd. (Salora), Surana Telecom & Power Ltd. (Surana) and HCL Infosystems Ltd. (HCL). These companies are engaged not only in the sales of mobile phones but also on large scale other products such as IT equipments, telecom equipments, cables, etc. It was therefore, very difficult to ascertain the amount of AMP expenditure incurred by such companies on the sale of mobile phones as sold by the assessee. In the absence of such information there was no acceptable or tenable comparison. Further, Surana, Salora & HCL are second level distributors unlike Nokia India which is at the top of the distribution chain. In fact HCL is distributor of Nokia India only. Therefore, the AMP expenditure of such comparable could not be compared with the assessee.
24. The learned AR of the assessee further submitted that AMP expenditure incurred by the assessee does not represent international transactions between the two associated enterprises within the meaning of sec. 92B read with sec. 92F(v) of the Act. The transactions between unrelated parties can be held to be international transactions only if conditions u/s 92B(2) are fulfilled. In the case of assessee the DRP had failed to establish that there is any prior arrangement between Nokia Finland and Indian third party vendors for AMP expenses. Accordingly, the provisions of sec. 92B(2) cannot be applied and AMP expenditure incurred by the Nokia India cannot be held to constitute an international transaction. It is also of vital importance to know that the show cause notice issued by the TPO to the assessee did not contain any allegation of such prior agreement/arrangement. The learned AR of the assessee also submitted that AMP expenditure incurred by the assessee is product centric and not brand centric. Such AMP expenditure promotes sales of Nokia India only and any benefit derived by overseas group companies is incidental. It was further submitted that the benefit of AMP expenditure incurred by the assessee has gone to the assessee. The sales turnover of the assessee has increased from Rs. 9,755 crores to 15,660 crores and profit has increased from Rs. 271 crores to Rs. 1033 crores. Therefore, under no circumstances, the AMP expenditure incurred by the assessee can be attributed to Nokia Finland. The learned AR of the assessee further submitted that the assessee had incurred expenditure on AMP u/s 37(1) of the Act. The expenditure incurred by the assessee on advertisement, marketing and promotional expenses has been incurred wholly and exclusively for the purpose of business which is allowable in view of various decision. The learned AR of the assessee referring to OECD Guidelines submitted that no compensation is required for any incidental benefits derived by group companies. Accordingly, even if certain incidental benefits is derived by the overseas group companies on account of AMP expenses incurred by Nokia India, the same does not require reimbursement to Nokia India. He therefore, submitted that no transfer pricing adjustment was required to be made.
25. On the other hand, the learned CIT-DR submitted that Finance Bill 2012 has proposed amendment in sec. 92B of the Act with effect from 1.04.2002 according to which AMP expenses will fall under international transactions. Finance Bill has inserted Explanation after sub-sec.(2) of sec. 92B, clarifying the scope of expression “International transactions and intangible assets”. He therefore, submitted that the issue will be covered by the amendment which is proposed by the Finance Bill, 2012.
26. During the course of hearing the learned AR of the assessee however, submitted that in view of the amendment proposed by Finance Act, 2012, the mater should go back to the AO with the directions to decide the issue in line with the proposed amendment.
27. We have heard both the parties and gone through the material available on record. There is no dispute about the fact that Finance Act, 2012 has proposed amendment in the provisions of sec. 92B by insertion of Explanation clarifying the term “International transactions”. Since both the parties agreed for setting aside the issue and decide the same in the light of the amended provisions of sec. 92B by the Finance Act, 2012, we set aside the matter to the file of the AO with the directions to decide the issue afresh after affording the assessee a reasonable opportunity of being heard.
28. The last issue for consideration relates to the additional ground of appeal raised by the assessee with regard to the power of the TPO for determination of arm’s length price in respect of international transaction which were not referred to him by the AO. We find that Finance Act, 2012 has amended the provisions of sec. 92CA of the Act retrospectively to empower the TPO to determine the arm’s length price of international transactions noticed by him in the course of proceedings before him, even if said transaction was not reported by the assessing officer. Since the amendment was made with retrospective effect from 1.04.2002, the ground of appeal raised by the assessee in view of the amended provisions of law (which has been passed by the Parliament), this ground of appeal raised by the assessee becomes academic in nature and is dismissed as such.
29. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.