Nokia India Sales Pvt. Ltd. Vs Add. CIT (ITAT Delhi)
Conclusion: Since there was no separate payment made for the purchase of software embedded in mobile phones, therefore, no TDS to be deducted under Section 195 for software embedded in mobile phones imported by assessee during the previous year.
Held: Assessee-company had paid an amount to Nokia Corporation Finland (‘Nokia Corp’) towards consideration for purchase of finished mobile phones. AO based on the assessment of NIPL for preceding years, proceeded with artificial splitting of the price of imported mobile phones into the price of embedded software and price of component in the ratio of 40:60. Thereafter, alleging that the artificial cost of embedded software such arrived was taxable as ‘royalty’ in India (both under the provisions of the Act and as well as India-Finland Tax Treaty), AO proceeded with making disallowance u/s 40(a)(i) of the impugned price of embedded software on the grounds that assessee was liable to withhold tax at source thereon. The software embedded in the hardware (which was not supplied separately) was a standard operating software that could be used to activate and operate/ run the specific mobile handset supplied by Nokia Corp and was incapable of being traded by the assessee on a standalone basis. It was held that CIT(A) had given a detailed finding as relates to non-deduction of tax at source under Section 195 for software embedded in mobile phones imported by the assessee during the previous year. The fact remains that the finished mobile phones were imported by assessee from Nokia Corp for the purposes of sale against a lump-sum consideration and there was no separate payment made by assessee towards the purchase of any software. Revenue could not point out the distinguishing fact that there was a separate payment made for the purchase of software embedded in mobile phones.
FULL TEXT OF THE ORDER OF ITAT DELHI
These two appeals are filed by the assessee and the Revenue against the order dated 22/2/2018 passed by CIT(A) -19, New Delhi For Assessment Year 2014-15.
2. The grounds of appeal are as under:-
I.T.A. No. 2527/DEL/2018 (Assessee’s appeal)
“Appeal against the order passed under Section 250 of the Income Tax Act, 1961 (‘the Act’) dated February 22, 2018 for the Assessment Year 2014-15 by the learned Commissioner of Income Tax (Appeals)- XIX, New Delhi [‘CIT(A)’]
1. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in disallowing the cost incurred by the Appellant on phones issued to employees, dealers and Care centers on free of cost (“FOC”) basis, purportedly on the ground that the Appellant did not file details in support of its claim for such phones, even though the Appellant has placed stock withdrawal requisition forms and delivery related documents on sample basis for issuance of FOC phones before the AO.
1.1. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding the order of the learned AO, in light of the fact that the learned AO treated the cost incurred by the Appellant on phones issued to employees, dealers and Care centers either as a capital expense or not allowable as a business expense under the provisions of Section 37(1) of the Act.
1.2. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating that the cost of FOC phones issued to Care centers is in the nature of expenses incurred against defective phones and thus, allowable as business expense under the provisions of Section 37(1) of the Act.
1.3. That without prejudice to above, on the facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating the fact that the learned AO has not allowed tax depreciation on the cost of FOC phones issued to dealers, despite making a specific reference to the same in the assessment order dated December 26, 2016, thereby contradicting the aforesaid disallowance made by him.
1.4. That without prejudice to above, the learned CIT(A) has erred in not granting deduction of roll-over depreciation on the written down value of the FOC phones issued to dealers and employees, which were treated as capital assets by the learned AO in the hands of NISPL in AY 2013-14.
2. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of appeal either before or during the hearing before the Hon’ble Tribunal. Further, the aforesaid grounds are mutually exclusive and without prejudice to each other.
The above grounds are without prejudice to each other.”
I.T.A. No. 4425/DEL/2018 (Revenue’s appeal)
1. “Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting disallowance of Rs. 1422,26,42,726/- u/s 40(a)(i) on account of non-deduction of tax on payment for embedded software/royalty when the amount is even taxable under India-Finland DTAA?
2. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting disallowance of Rs. 669,23,96,959/- u/s 40(a)(ia) on account of Trade Offers to HCL Infosystems Ltd. when the payment are in the nature of commission or services provided by HCL Infosystems Ltd. are in the nature of commission or- services provided by HCL Infosystems Ltd are in the nature of consultancy?
3. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting disallowance of Rs. 584,86,39,994/- u/s 40(a)(ia) on account of Trade offers to other distributors?
4. Whether on facts and in circumstances of the case, the ld. CIT(A) is legally justified in deleting disallowance of Rs. 19,52,32,441/- on account of Trade Price Protection where the assessee failed to adduce any cogent evidence to show that it is related to business of assessee company?
5. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting disallowance of Rs. 2,35,00,000/- on account of obsolescence of inventory when the assessee has no evidence to support the contention of provision of obsolete stock?
6. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting disallowance of Rs. S4,57,72,946/- on account of Advertisement & Publicity expenses even though such expenses are incurred for benefits of endorsing nature?”
3. Nokia India Sales Private Limited (NISPL) was incorporated as Nokia Sales Services Private Ltd in December 2008. The name of the company was changed to Nokia India Sales Private Limited 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. The assessee filed e-return declaring total income of Rs.286,06,91,570/- on 30/11/2014 and revised return declaring Rs. 296,66,91,570/- on 8/2/2014. The Assessing Officer assessed total income of the assessee and computed the same after addition and disallowance as under:-
