Huawei Telecommunications (India) Pvt. Ltd.Vs. DCIT (ITAT Delhi)
The taxpayer challenged disallowance/confirmation of Rs.1,010,856,249/- & Rs.128,611,894/- for Assessment Years 2012-13 & 2013-14 respectively on account of provision for customer claim on the ground that the amount provided by the taxpayer pertaining to actual delays/defaults occurred as per the terms of the contract entered between the taxpayer and its customers and as such is an “ascertained liability”. The taxpayer has raised specific objections before the ld. DRP, available at paves 256-274 and 217-234 for AYs 2012-13 & 2013-14 respectively, and also brought on record evidence in the form of credit-memo in relation to liquidated damages and details of liquidated damages, chart showing trend and utilization of provision of customer claims from AYs 2010-11 to 2014-15 and extract of audited financials for AYs 2010-11 to 2016-17 to show the details of provision of customer claims and extract of contract entered into between the taxpayer and customer claims from pages 6 to 26 of the convenience paper book.
AR for the taxpayer contended that AO/DRP have erred in making/confirming the disallowance towards provision of customer’s claim without appreciating the fact that amount provided by the taxpayer is in relation to the actual delays/defaults occurred as per the terms of the contract entered into between the taxpayer and its customers, thus is an ascertained liability and relied upon the decision of coordinate Bench of the Tribunal in DCIT vs. Nokia Siemens Networks India Pvt. Ltd. in ITA No.3202/Del/2014 order dated 31.01.2018.
So, following the decision rendered by the coordinate Bench of the Tribunal and proposition laid down by the Hon’ble Supreme Court, provision for customer claim is a liability which can be used only by using a substantial decree of estimation. When the taxpayer has brought on record ample evidence in the form of credit memo in relation to liquidated damages and details of liquidated damages, chart showing trend and utilization of provision of customer claims from AYs 2010-11 to 2014-15 and extract of audited financials for AYs 2010-11 to 2016-17, to show that the details of customer claims and extract of contract entered into between the taxpayer and the customer claims, available from pages 6 to 26 of the convenience paper book, this provision has to be measured by using substantial decree of estimation. Moreover, historical trend brought on record by the taxpayer also shows the actual use of provision for customer claim.
Hon’ble Supreme Court in case of Rotork Controls India Ltd. (supra) held that a provision is recognised :
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources will be required to settle the obligation, and
(c) a reliable estimate can be made of the amount of the obligation.
Evidence brought on record by the taxpayer shows that aforesaid conditions have been fulfilled and as such, provision made qua the amount provided by the taxpayer pertaining to actual delays and defaults occurred in terms of the contract entered into between the taxpayer and its customers is to be considered as “ascertained liability”. So, AO/DRP have erred in making disallowance on account of provision for customer claims. So, it is ordered to be deleted subject to verification of data brought on record by the taxpayer as discussed in the preceding paras. Consequently, grounds no.4 to 4.3 of ITA No.7509/DEL/2017 & 7510/DEL/2017 for Assessment Years 2012-13 & 2013-14 respectively are determined in favour of the taxpayer.
FULL TEXT OF THE ITAT JUDGEMENT
Since common questions of facts and law have been raised in the aforesaid inter-connected appeals, the same are being disposed off by way of consolidated order to avoid repetition of discussion.
2. Appellant, Huawei Telecommunications (India) Company Pvt. Ltd. (HTICL) (hereinafter referred to as the ‘taxpayer’) by filing the present appeals sought to set aside the impugned order both dated 03.10.2017 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment years 2012-13 & 2013-14 on the identical grounds except difference in the amount of adjustments/additions/ disallowances and except one additional ground nos.2.6 to 2.6.5 for benchmarking of “Project Management Services” in Assessment Year 2012-13 value of which has been taken at Nil, inter alia that :-
“1. General
1.1. That on the facts and. in the circumstances of the case and in law, the Id. AO erred in passing the impugned assessment order dated October 03, 2017 pursuant to the directions of the Hon ‘ble Dispute Resolution Panel (Hon ‘ble DRP) thereby computing the total income of the appellant at Rs.1,380,032,000 as against returned loss of Rs. 62,390,267; and
1.2. That the assessment order passed by the Id. AO pursuant to the directions of Hon’ble DRP is based on surmises and conjectures, and, without considering the facts and arguments submitted by the appellant during the course of assessment proceedings.
2. Transfer Pricing
2.1. That on facts and circumstances of the case and in law, the Ld. AO) Transfer Pricing Officer (,Ld. TPO’)/ ‘Hon’ble DRP’ has erred in making transfer pricing adjustments to the extent of Rs.394,552,611 in respect of the international transactions, alleging that the same to be not at arm’s length in terms of the provisions of sections 92C(1) and 92C(2) of the Act, read with Rule 10D of the Income-tax Rules,1962 (,Rules’);
2.2. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO/ Hon ‘ble DRP has erred by not satisfying any of the conditions prescribed under section 92C(3) of the Act while making transfer pricing adjustments and has erred by not accepting the transfer pricing documentation maintained by the Appellant in the manner as contemplated under the Act and Rules;
2.3. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO/ Hon’ble DRP has made substantial errors in the facts and conclusions as stated in the Transfer Pricing (‘TP’) Order based on which the arm’s length price of the international transaction has been determined;
2.4. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO has grossly erred in not providing the Appellant with an opportunity to show cause the proposed TP adjustments and thereby disregarding the principles of natural justice;
2.5. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO/ Hon’ble DRP has erred in making an adjustment to the extent of Rs. 39,138,666 in respect of international transaction pertaining to availing of Technical Services from its Associated Enterprise (‘AE’) alleging the same to be not at arm’s length. In doing so:
2.5.1. The Ld. Ld. AO / Ld. TPO/ Hon’ble DRP has erred in law and on facts, by determining the arm’s length price for payment for availing Technical Services as ‘Nil’ and not acknowledging the fact that the services were actually received by the Appellant.
2.5.2. The Ld. AO / Ld. TPO/ Hon’ble DRP has erred in law and on facts by not appreciating the rationale, back-up information/ explanation as provided / submitted by the Appellant during the course of the assessment proceedings.
2.5.3. The Ld. AO / Ld. TPO/ Hon’ble DRP has erred in law and on facts by questioning the commercial expediency/wisdom of the Appellant for availing such services.
2.5.4. The Ld. TPO has erred in law and on facts by ignoring the provisions of Rule 10B while applying ‘Other Method’ in determining the arm’s length price for receipt of Technical Services.
2.5.5. The Ld. TPO / Hon ‘ble DRP has erred in law and on facts by not sharing the relevant material / information relied upon to apply the ‘Other Method’ as most appropriate method for benchmarking the transaction of receipt of Technical Services.
2.5.6. The Ld. AO / TPO has erred in law and on facts by not appreciating the fact that the subject transaction has been benchmarked using Comparable Uncontrolled Price (‘CUP’) method;
2.6. That on the facts and circumstances of the case and in law, the Ld. AO/Ld.TPO/Hon’ble DRP has erred in making an adjustment of Rs.355,413,945 in respect of international transaction pertaining to availing of Project Management Services from its AE alleging that the same to be not at arm’s length. In doing so :
2.6.1. The Ld. AO / Ld. TPO / Hon’ble DRP has erred in law and on facts, by determining the arm’s length payment for availing Project Management Services as ‘Nil’ and no acknowledging the fact that the services were actually received by the Appellant.
2.6.2. The Ld. AO / Ld. TPO / Hon’ble DRP has erred in law and on facts by not appreciating the rationale, back-up documentary evidence/explanation as provided by the Appellate during the course of the assessment proceedings.
2.6.3. The Ld. AO / Ld. TPO / Hon’ble DRP has erred in law and on facts by questioning the commercial expediency/wisdom of the Appellant for availing such services and ignoring that these services were directly utilized for provision of services to third parties;
2.6.4. The Ld. AO / Ld. TPO/ Hon’ble DRP has erred in law and on facts by ignoring the provisions of Rule 10B while applying the ‘Other Method’ methodology in determining the arm’s length price for availing Project Management Services;
2.6.5. The Ld. AO / Ld. TPO/ Hon’ble DRP has erred in law and on facts by not sharing the relevant material/ information relied upon to apply ‘Other Method’ as most appropriate method for benchmarking the transaction of availing of Project Management Services.
Corporate Tax
3. Addition on account of advertisement expenses – Rs.28,479,838
3.1 The Ld. AO and the Hon’ble DRP has erred on facts and in law in confirming a disallowance of INR 28,479,838 on an adhoc basis being 30% of total advertisement expenses of Rs.94,932,796, without appreciating that the advertisement expenses have been incurred wholly and exclusively for the purpose of Appellant’s business and it is irrespective of any benefit to any group company or to a third party;
3.2 The Ld. AO and the Hon’ble DRP erred on facts and in law in holding that the advertisement expenses have been incurred for creation of the brand of the group and thus is capital in nature;
3.3 Without prejudice to the above, the Ld. AO and the Hon ‘ble DRP erred in ignoring the fact that the advertisement expenses have already been recovered from the AEs at an agreed mark-up and therefore, based on the judgements of jurisdictional Tribunal, no disallowance of the advertisement expenses can be made;
3.4 Without prejudice to the above, the Ld. AO and Hon ‘ble DRP erred in not allowing depreciation at the rate of 25 percent of the advertisement expenses allegedly held as capital in nature.
4. Addition on account of provision for customer claims –RS. 1,010,856,249
4.1 The Ld. AO and the Hon ‘ble DRP erred on the facts and in law in confirming disallowance towards provision for customer claims of Rs 1,010,856,249 without appreciating that the amount provided by the Appellant is in relation to actual delays/defaults occurred as per the terms of the contract entered between the Appellant and its customers and thus, is an ascertained liability;
4.2 The Hon ‘ble DRP erred on the facts and in law in holding that such provision is an unliquidated damages made unilaterally on estimated basis and has not been computed on scientific basis, thereby completely ignoring the complete details furnished by the appellant providing details of customers, basis of calculation, period of delay, workings, copy of agreements, ;
4.3 Without prejudice to above, the Ld. AO and the Hon ‘ble DRP erred on the facts and in law in making disallowance of the provision under section 40(a)(ia) of the Act by holding that the provision for customer claims is compensation in the form of interest paid to customers and tax should have been deducted under section 194A of the Act;
5. Addition on account of advances written off – Rs. 8,533,563
5.1 The Ld. AO and the Hon’ble DRP erred on facts and in law in confirming the disallowance of advances written-off amounting to Rs 8,533,563 on surmises and conjectures without appreciating that the expenditure was incurred wholly and exclusively for the purpose of business;
5.2 The Hon ‘ble DRP has erred on facts and in law in holding that the advances in the nature of security deposit are a liability to be discharged by employees and thus, the amount borne by the Appellant should be part of perquisites taxable in the hands of employees on which tax should have been deducted at source;
5.3 The Hon ‘ble DRP erred in ignoring the details filed by the Appellant and in holding that the necessary details were not filed by the Appellant without appreciating that such details or explanations were never asked from the Appellant;
6. That on the facts and circumstances of the case and in law, the Ld. AO and the Hon’ble DRP erred in levying interest under section 234A, 234B and 234C of the Act.
7. That on the facts and circumstances of the case and in law, the Ld. AO and the Hon ‘ble DRP erred in initiating penalty proceedings under section 271(1)(c) of the Act.”
3. Briefly stated the facts necessary for adjudication of the issue at hand are : Huawai Technologies Co. Ltd. (HTCL) is one of the China’s largest private sector telecom company for the year 2012 established in 1988 with Headquarter at Shenzhen Special Economic Zone in China for providing total solutions for mobile telecoms products and networks. Its projects and solutions ranged from complete telecoms solutions, network planning and design to manufacturing and management. HTCL has also Research & Development (R&D) support management across the world including in the USA, Sweden and Russia as well as in China.
4. Huawei Telecommunications (India) Company Pvt. Ltd., the taxpayer was incorporated on 23.07.2002 under the Indian Companies Act, 1956 being a subsidiary of Huawei Technologies Cooperatief U.A. which holds 90.11% of the total equity shareholding of the taxpayer. Huawei Tech Investment Co. Ltd., Hong Kong (HTICL) holds the balance 9.89% of the total shareholding of the taxpayer. The taxpayer was into the business of distribution of telecom equipment and provision of technical services, such as, installation, commissioning, integration and other services related to its customers in India. The taxpayer also provided business support services to its Associated Enterprises (AEs).
5. During the year under consideration, the taxpayer entered into international transactions with its AEs as under :-
