Nokia India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 5791/DEL/2015

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 5256 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 20-10-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Transfer pricing; Business expenditure; Double taxation relief; Principle of natural justice; Wholly owned subsidiary; Non-deduction of tax; Commercial expediency; Revenue expenditure; TDS; Set aside
• Section: 143(3); 10AA; 234B; 40(a)(ia); 37(1); 144C; 143(2); 192; 142(2A); 194J; 40a(ia); 13; 92CA; 2

Judgement Text

1 ITA NOS. 5791 & 5845/DEL/2015 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: E NEW DELHI BEFORE SH. G. S. PANNU, VICE PRESIDENT AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO. 5791/DEL/2015 ( ASSESSMENT YEAR 2010-11) NOKIA INDIA PVT. LTD., C/O. TEC, LEVEL 18, DLF CYBER CITY, PHASE-III, BUILDING NO.5, TOWER A, GURGAON. (PAN : AAACN 2170 R) (APPELLANT) VS DCIT CIRCLE - 10(2), NEW DELHI. (RESPONDENT) AND ITA NO. 5845/DEL/2015 ( ASSESSMENT YEAR 2010-11 ) DCIT CIRCLE - 10(2), NEW DELHI. (APPELLANT) VS NOKIA INDIA PVT. LTD., 1 ST & 2 ND FLOOR, TOWER-A, SP INFOCITY, INDL. AREA, PLOT NO.243, UDYOG VIHAR, PHASE-I, DUNDAHERA, GURGAON. (RESPONDENT) APP ELLANT BY SH. DEEPAK CHOPRA , ADV. RESPONDENT BY SH. ANKUL GOYAL, ADV. ORDER PER SUCHITRA KAMBLE, JM THESE TWO APPEALS ARE FILED BY THE ASSESSEE AND REV ENUE AGAINST THE ORDER DATED 28.08.2015 PASSED BY DCIT, CIRCLE-18(2) , NEW DELHI UNDER SECTION 143(3) R.W.S. 144C(13) FOR ASSESSMENT YEAR 2010-11. DATE OF HEARING 16.12.2019 DATE OF PRONOUNCEMENT 2 0 . 02 .20 20 2 ITA NOS. 5791 & 5845/DEL/2015 2. AT THE TIME OF HEARING THE LD. AR POINTED OUT AP PLICATION/LETTER DATED 23.02.2018 FOR PARTIAL WITHDRAWAL OF ORIGINAL GROUNDS OF APPEAL. FROM THE PERUSAL OF THAT VIDE APPLICATION/LETTER DA TED 23.02.2018 FILED BY THE ASSESSEE BEFORE US, WHEREIN IT IS STATED THAT I N ADDITION TO FILING THE INSTANT APPEAL, THE ASSESSEE ALSO FILED AN APPLICAT ION UNDER ARTICLE 24 OF THE INDIA FINLAND DOUBLE TAXATION AVOIDANCE AGREE MENT (DTAA) FOR INITIATION OF MUTUAL AGREEMENT PROCEDURE (MAP) BEFO RE THE INDIAN AND THE FINNISH COMPETENT AUTHORITIES (CA) ON THE FOLLOWING ISSUES: (A) DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT DUE TO ALLEGED FAILURE TO WITHHOLD TAX ON PAYMENTS MADE TO NOKIA CORP TOWA RDS: (I) PURCHASE OF END USER OPERATING SOFTWARE (II) PURCHASE OF FINISHED MOBILE PHONES (B) TRANSFER PRICING ADJUSTMENTS ON ACCOUNT OF: (I) CONTRACT R & D ACTIVITIES (II) AMP EXPENDITURE (III) EXCESSIVE SOFTWARE PURCHASE PRICE A RESOLUTION HAS BEEN ARRIVED BETWEEN THE INDIAN A ND FINNISH CAS ON ABOVEMENTIONED TAXATION ISSUES RAISED BEFORE THE TR IBUNAL IN THE INSTANT APPEAL. THE SAID RESOLUTION UNDER ARTICLE 24 OF THE INDIA-FINLAND DTAA HAS ALSO BEEN ACCEPTED BY THE ASSESSEE VIDE LETTER DATED 20.02.2018. AS PER RULE 44H OF THE INCOME TAX RULES, 1962 ORDERS G IVING EFFECT TO THE MAP RESOLUTION SHALL BE PASSED BY THE ASSESSING OFF ICER ONCE ALL APPEALS ARE WITHDRAWN BY THE APPELLANT ON THE ISSUES SO RES OLVED UNDER MAP. ACCORDINGLY, THE APPELLANT HEREIN I.E. ASSESSEE HAS WITHDRAWN GROUND NOS. 2 TO 10 AND GROUND NOS. 15 AND 18 IN INSTANT A PPEAL FOR A.Y. 2010- 11. THE ORIGINAL GROUNDS OF APPEAL ARE AS UNDER: NOKIA INDIA PRIVATE LIMITED (HEREINAFTER REFERRED TO AS 'APPELLANT) OBJECTS TO THE ORDER PASSED UNDER SECTION 143(3) R. W.S. I44C (13) OF THE 3 ITA NOS. 5791 & 5845/DEL/2015 INCOME TAX ACT, 1961 (HEREINAFTER REFERRED AS 'THE ACT') DATED .8 AUGUST 2015 (RECEIVED ON 29 AUGUST 2015) BY THE LEARNED DE PUTY COMMISSIONER OF INCOME TAX (HEREINAFTER REFERRED AS LD. AO') PURSUANT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL ( HEREINAFTER REFERRED AS 'LD. DRP') FOR THE ASSESSMENT YEAR 2010-11 ON THE F OLLOWING GROUNDS; 1. THE ORDER PASSED BY THE LD. AO UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT IS BAD IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IS LIABLE TO BE SET ASIDE. 2. THE LD. AO AND THE LD. DRP HAVE ERRED IN RELYING UP ON EVIDENCE COLLECTED IN ILLEGAL SURVEY AND SUMMONS PROCEEDINGS AND ERRED IN NOT RELYING UPON THE VTT REPORT AND SOFTWARE SUPPLY AGR EEMENT. 3. THE LD. AO AND THE LD. DRP HAVE ERRED IN DISALLOWIN G THE EXPENSES AMOUNTING TO INR 29,436,191,870 INCURRED BY THE APP ELLANT ON PURCHASE OF SOFTWARE FROM NOKIA CORPORATION (NOKIA CORP) UNDER SECTION 40(A)(I) OF THE ACT. 4. THE LD. AO AND THE LD. DRP HAVE ERRED IN DISALLOWIN G THE EXPENSES AMOUNTING TO INR 4360,45,22,887 INCURRED BY THE APP ELLANT ON PURCHASE OF MOBILE PHONES AND ACCESSORIES FROM NOKI A CORP UNDER SECTION 40(A)(I) OF THE ACT. 5. THE LD. TPO, LD. AO AND THE LD. DRP HAVE ERRED IN M AKING TRANSFER PRICING ADDITIONS AMOUNTING TO INR 470,84,65,081 TO THE INCOME OF THE APPELLANT ON ACCOUNT OF ADVERTISING AND MARKET PROM OTION EXPENSES INCURRED BY THE APPELLANT. 6. WITHOUT PREJUDICE TO THE ABOVE, DESPITE THE SPECIFI C DIRECTIONS OF THE LD. DRP TO EXCLUDE SELLING AND DISTRIBUTION EXPENSES WH ILE COMPUTING THE QUANTUM OF ADJUSTMENT, THE LD. AO / TPO HAVE FAILED TO APPRECIATE THAT THE AMP EXPENDITURE INCURRED BY THE APPELLANT IS ES SENTIALLY IN THE NATURE OF SALES PROMOTION EXPENDITURE, AND HAVE ERR ED IN RE-CALCULATING THE ADJUSTMENT WITHOUT EXCLUDING SUCH EXPENDITURE. THE LD. AO / TPO HAVE FURTHER ERRED IN ERRONEOUSLY ENHANCING THE ADJ USTMENT (FROM RS. 252.43 CRORES TO RS. 470.84 CRORES). 7. THE LD. TPO, LD. AO AND THE LD. DRP HAVE ERRED IN M AKING TRANSFER PRICING ADDITIONS AMOUNTING TO RS. 97,65,63,440 ON ACCOUNT OF CONTRACT SOFTWARE DEVELOPMENT CARRIED OUT BY THE APPELLANT F OR ITS ASSOCIATED ENTERPRISES. 8. WITHOUT PREJUDICE TO THE ABOVE, THE LD. TPO, LD. AO AND THE HONBLE DRP HAVE ERRED IN FURTHER ENHANCING THE ADJUSTMENT BY RS. 17,53,680 (I.E. FROM RS. RS. 97,65,63,440 TO RS. 97,83,17,120 ), BY USING STATE BANK OF INDIAS PRIME LENDING RATE AS ON 30 TH JUNE OF THE RELEVANT FINANCIAL YEAR (I.E. JUNE 30, 2009) AS INTEREST RAT E, FOR MAKING WORKING CAPITAL ADJUSTMENT. 9. THE LD. TPO, LD. AO AND THE LD. DRP HAVE ERRED IN D ISALLOWING A PORTION OF THE EXPENSE INCURRED BY THE APPELLANT AM OUNTING TO INR 358,49,23,473 ON PURCHASE OF SOFTWARE FROM NOKIA CO RP BY TREATING IT TO BE EXCESSIVE UNDER TRANSFER PRICING REGULATIONS. 10. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO ERRED IN FURTHER ENHANCING THE ADJUSTMENT PROPOSED BY THE LD. TPO BY RS. 21,07,29,467/-. 4 ITA NOS. 5791 & 5845/DEL/2015 11. THE LD. AO AND THE LD. DRP HAVE ERRED MAKING A DISA LLOWANCE OF THE TRADE OFFERS AMOUNTING TO INR 834,92,63,976 PRO VIDED BY THE APPELLANT TO ITS DISTRIBUTORS (HCL INFOSYSTEMS LTD AS WELL AS OTHER DISTRIBUTORS) UNDER SECTION 40(A)(IA) OF THE ACT. 12. THE LD. AO AND THE LD. DRP HAVE ERRED IN MAKING A D ISALLOWANCE OF RS. 166,02,61,748 INCURRED BY THE APPELLANT ON A CCOUNT OF TRADE PRICE PROTECTION PAID TO DISTRIBUTORS AS COMPENSATI ON FOR REDUCTION IN PRICES OF HANDSETS, AND IN IGNORING ALL THE EVIDENC E (INCLUDING CONFIRMATIONS FROM DEALERS) SUBMITTED BY THE APPELL ANT IN THIS REGARD. 13. THE LD. AO AND THE LD. DRP HAVE ERRED IN DISALLOWIN G 25% OF THE TOTAL PROVISION MADE BY THE APPELLANT AMOUNTING TO INR 1,14,87,176 FOR OBSOLESCENCE OF INVENTORY. 14. THE LD. AO AND THE LD. DRP HAVE ERRED IN DISALLOWIN G MARKETING EXPENDITURE INCURRED BY THE APPELLANT AMOUNTING TO INR 58,56,03,845 BY WAY OF ISSUANCE OF HANDSETS ON A FREE OF COST (F OC) BASIS TO EMPLOYEES, DEALERS AND AFTER MARKETING SERVICE CENT RES (AMSCS) ON THE GROUND THAT THE SAME WOULD GIVE ENDURING BENEFIT AN D CANNOT BE CLAIMED AS REVENUE EXPENDITURE. 15. FURTHER, THE LD. AO AND THE LD. DRP HAVE ERRED IN D ISALLOWING EXPENDITURE INCURRED BY THE APPELLANT BY WAY OF ISS UANCE OF FOC HANDSETS WHEN THE LD. TPO HAS ALREADY MADE AN ADJUS TMENT ON ACCOUNT OF ALLEGED EXCESSIVE ADVERTISING AND MARK ET PROMOTION (AMP) EXPENSES WHICH INCLUDES THE HANDSETS ISSUED ON FOC BASIS AND THIS HAS RESULTED IN DOUBLE DISALLOWANCE OF THE SAME AMO UNT. 16. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO AND THE LD. DRP HAVE ERRED IN NOT ALLOWING CURRENT YEAR DEPRECIATION IN RESPECT OF THE FOC PHONES GIVEN TO AMSCS FOR WARRANTY PURPOSES AND TO DEALERS FOR PROMOTIONAL PURPOSES. THE LD. AO HAS ALSO ERRED IN NOT ALLOWING EARLIER YEARS DEPRECIATION IN RESPECT OF THE FOC PHONES DE SPITE THE DRPS DIRECTION IN THIS REGARD. 17. THE LD. AO AND THE LD. DRP HAVE ERRED IN MAKING AN ADDITION OF INR 19,52,02,050 TO THE INCOME OF THE APPELLANT ON ACCOUNT OF DIFFERENCE IN THE VALUE OF SALES APPEARING IN THE S ALES TAX RETURN AND THE AUDITED FINANCIALS OF THE APPELLANT. 18. THE LD. AO AND THE LD. DRP HAVE ERRED IN DISALLOWIN G THE ENTIRE EXPENSE INCURRED BY THE APPELLANT ON PURCHASE OF SO FTWARE UNDER SECTION 40(A)(I) OF THE ACT WHEN A PART OF SUCH EXP ENSE HAD ALREADY BEEN DISALLOWED BY THE LD. TPO AS BEING EXCESSIVE U NDER TRANSFER PRICING AND THIS HAS RESULTED IN DOUBLE DISALLOWANC E OF THE SAME AMOUNT. 19. THE LD. AO AND THE LD. DRP HAVE ERRED IN DENYING TH E BENEFIT OF DEDUCTION UNDER SECTION 10AA OF THE ACT TO THE APPE LLANT ON THE NON TRANSFER PRICING ADDITIONS / DISALLOWANCES MADE BY THEM. 20. THE LD. AO HAS ERRED IN NOT ALLOWING THE APPELLANT THE FULL CREDIT OF PRE-PAID TAXES. 21. THE LD. AO HAS ERRED IN INCORRECTLY COMPUTING THE I NTEREST UNDER SECTION 234B OF THE ACT. 22. THE LD. AO HAS ERRED IN LEVYING INTEREST UNDER SECT ION 234C OF THE ACT. 5 ITA NOS. 5791 & 5845/DEL/2015 23. THE LD. AO / TPO / DRP HAVE ERRED IN IGNORING THE J UDICIAL PRONOUNCEMENTS RELIED UPON BY THE APPELLANT. 24. THE ABOVE GROUNDS OF APPEALS ARE INDEPENDENT AND WI THOUT PREJUDICE TO ONE ANOTHER. 25. THE APPELLANT CRAVES LEAVE TO ADD / WITHDRAW OR AME ND ANY GROUND OF APPEAL AT THE TIME OF HEARING. 3. THUS, THE REVISED GROUNDS OF APPEAL ON ACCOUNT O F MAP SETTLEMENT ARE AS UNDER:- ITA NO. 5791/DEL/2015 (ASSESSEES APPEAL) NOKIA INDIA PRIVATE LIMITED (HEREINAFTER REFERRED TO AS 'APPELLANT) OBJECTS TO THE ORDER PASSED UNDER SECTION 143(3) R. W.S. I44C (13) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED AS 'THE ACT') DATED .8 AUGUST 2015 (RECEIVED ON 29 AUGUST 2015) BY THE LEARNED DE PUTY COMMISSIONER OF INCOME TAX (HEREINAFTER REFERRED AS LD. AO') PURSUANT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL ( HEREINAFTER REFERRED AS 'LD. DRP') FOR THE ASSESSMENT YEAR 2010-11 ON THE F OLLOWING GROUNDS; 1. THE ORDER PASSED BY THE LD. AO UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT IS BAD IN LAW AND ON THE FA CTS AND CIRCUMSTANCES OF THE CASE AND IS LIABLE TO BE SET A SIDE. 2. THE LD. AO AND THE LD. DRP HAVE ERRED MAKING A DISA LLOWANCE OF THE TRADE OFFERS AMOUNTING TO INR 834,92,63,976 PRO VIDED BY THE APPELLANT TO ITS DISTRIBUTORS (HCL INFO SYSTEMS LTD AS WELL AS OTHER DISTRIBUTORS) UNDER SECTION 40(A)(IA) OF THE ACT. 3. THE LD. AO AND THE LD. DRP HAVE ERRED IN MAKING A D ISALLOWANCE OF RS. 166,02,61,748 INCURRED BY THE APPELLANT ON A CCOUNT OF TRADE PRICE PROTECTION PAID TO DISTRIBUTORS AS COMPENSATI ON FOR REDUCTION IN PRICES OF HANDSETS, AND IN IGNORING ALL THE EVIDENC E (INCLUDING CONFIRMATIONS FROM DEALERS) SUBMITTED BY THE APPELL ANT IN THIS REGARD. 4. THE LD. AO AND THE LD. DRP HAVE ERRED IN DISALLOWIN G 25% OF THE TOTAL PROVISION MADE BY THE APPELLANT AMOUNTING TO INR 1,14,87,176 FOR OBSOLESCENCE OF INVENTORY. 5. THE LD. AO AND THE LD. DRP HAVE ERRED IN DISALLOWIN G MARKETING EXPENDITURE INCURRED BY THE) APPELLANT AMOUNTING TO INR 58,56,03,845 BY WAY OF ISSUANCE OF HANDSETS ON A FREE OF COST (' FOG') BASIS TO EMPLOYEES, DEALERS AND AFTER MARKETING SERVICE CENT RES ('AMSCS') ON THE GROUND THAT THE SAME WOULD GIVE ENDURING BENEFI T AND CANNOT BE CLAIMED AS REVENUE EXPENDITURE. 6. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO AND THE LD. DRP HAVE ERRED IN NOT ALLOWING CURRENT YEAR DEPRECIATION IN RESPECT OF THE FOC PHONES GIVEN TO AMSCS FOR WARRANTY PURPOSES AND TO DEALERS FOR PROMOTIONAL PURPOSES. THE LD. AO HAS ALSO ERRED IN NOT ALLOWING EARLIER YEARS' DEPRECIATION IN RESPECT OF THE FOC PHONES DE SPITE THE DRP'S DIRECTION IN THIS REGARD. 6 ITA NOS. 5791 & 5845/DEL/2015 7. THE LD. AO AND THE LD. DRP HAVE ERRED IN MAKING AN ADDITION OF INR 19,52,02,050 TO THE INCOME OF THE APPELLANT ON ACCOUNT OF DIFFERENCE IN THE VALUE OF SALES APPEARING IN THE S ALES TAX RETURN AND THE AUDITED FINANCIALS OF THE APPELLANT. 8. THE LD. AO AND THE LD. DRP HAVE ERRED IN DENYING TH E BENEFIT OF DEDUCTION UNDER SECTION 1OAA OF THE ACT TO THE APPE LLANT ON THE NON TRANSFER PRICING ADDITIONS / DISALLOWANCES MADE BY THEM. 9. THE LD. AO HAS ERRED IN NOT ALLOWING THE APPELLANT THE FULL CREDIT OF PRE-PAID TAXES. 10. THE LD AO HAS ERRED IN INCORRECTLY COMPUTING TH E INTEREST UNDER SECTION 234B OF THE ACT. 11. THE LD. AO HAS ERRED IN LEVYING INTEREST UNDE R SECTION 234C OF THE ACT. 12. THE LD AO / TPO/ DRP HAVE ERRED IN IGNORING THE JUDICIAL PRONOUNCEMENT RELIED UPON BY THE APPELLANT. 13. THE ABOVE GROUNDS OF APPEALS ARE INDEPENDENT A ND WITHOUT PREJUDICE TO ONE ANOTHER. ITA NO. 5845/DEL/2015 (REVENUES APPEAL) 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE EASE , THE DISPUTE RESOLUTION PANE, (DRP) IS LEGALLY JUSTIFIED IN ISSU ING DIRECTIONS TO GRANT DEPRECIATION ON THE MOBILE BAN SETS VALUED A, RS. 6 ,3,34,029/- IGNORING PROVISIONS OF SECTION 32(1) OF INCOME TAX ACT, 1961 (THE ACT) AND WITHOUT CONSIDERING A FACT THAT OWNERSHIP OF THESE MOBILE H ANDSETS WAS TRANSFERRED FROM THE ASSESSEE TO THE DEALERS? 2. WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE, THE DISPUTE RESOLUTION PANEL (DRP) IS LEGALLY JUSTIFIED IN ISSU ING DIRECTIONS TO GRANT DEPRECIATION ON THE MOBILE HANDSETS VALUE AT RS.51, 33,96,664/- ISSUED FREE OF COST DURING WARRANTY PERIOD TO AFTER MARKET ING SERVICE CENTRE (AMSCS) WITHOUT CONSIDERING THE FACT THAT VALUE OF RS. 51,33,96,664/- WAS DEBITED IN P&L ACCOUNT AS REVENUE EXPENDITURE A ND THE ASSESSING OFFICER (AO) HAD ACCEPTED THE CLAIM OF THE ASSESSEE THAT EXPENDITURE OF RS. 51,33,96,664/- WAS REVENUE IN NATURE? 3. WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE, THE DISPUTE RESOLUTION PANEL (DRP) IS LEGALLY JUSTIFIED IN ISSU ING DIRECTIONS TO GRANT DEPRECIATION ON THE MOBILE HANDSETS WITHOUT CONSIDE RING OWNERSHIP OF HANDSETS AND NATURE OF EXPENDITURE? 4. THAT THE APPELLANT CRAVES TO ADD, AMEND, ALTER OR M ODIFY ANY OF THE ABOVE GROUNDS OF APPEAL. 4. THE ASSESSEE COMPANY WAS INCORPORATED IN 1995 AN D IT IS A WHOLLY OWNED SUBSIDIARY OF NOKIA CORPORATION, FINLAND. THE COMPANY IS PRIMARILY ENGAGED IN THE BUSINESS OF TRADING AND MANUFACTURIN G OF MOBILE HANDSETS, SPARE PARTS AND ACCESSORIES. IN ADDITION TO THIS AC TIVITY, THE COMPANY ALSO 7 ITA NOS. 5791 & 5845/DEL/2015 UNDERTAKES CONTRACT SOFTWARE DEVELOPMENT FOR ITS AS SOCIATED ENTERPRISES. NOKIA INDIA HAS A MANUFACTURING UNIT LOCATED IN CHE NNAI FROM WHERE IT MANUFACTURES MOBILE PHONES FOR THE INDIAN MARKET AN D AS WELL AS FOR EXPORT PURPOSE. NOKIA CORPORATION AND ITS SEVERAL WORLDWID E AFFILIATES FORM A GROUP THAT OCCUPIES A LEADERSHIP POSITION IN THE GLOBAL T ELECOM INDUSTRY. IT IS THE WORLDS LEADING MANUFACTURER AND DISTRIBUTOR OF MOB ILE TELECOM INDUSTRY. THE ASSESSEE, M/S. NOKIA INDIA PVT. LTD. FILED ITS RETURN OF INCOME ON 14.10.2010 DECLARING A TOTAL INCOME OF RS.694.97 CR ORE. SUBSEQUENTLY, THE RETURN WAS REVISED ON 30.03.2012, AS THE ASSESSEE I NCREASED ITS TDS CREDIT TO RS.4,30,44,396/-. THE RETURN WAS PROCESSED U/S 1 43(1) OF THE INCOME TAX ACT, 1961. THE CASE WAS TAKEN UP FOR SCRUTINY A ND A NOTICE U/S 143(2) OF THE ACT DATED 29.08.2011 WAS ISSUED AND SERVED O N THE ASSESSEE. FURTHER NOTICE U/S 142(1)/143(2) ALONG WITH DETAILED QUESTI ONNAIRES WERE ISSUED AND SERVED ON THE ASSESSEE. ON BEHALF OF THE ASSESS EE, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME T O TIME. WRITTEN SUBMISSIONS WERE FILED BY THE ASSESSEE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS DIRECTED VIDE ORDER D ATED 28.03.2014 TO GET ITS ACCOUNTS AUDITED U/S 142(2A) OF THE ACT (SPECI AL AUDIT) AND FURTHER DIRECTED TO FURNISH THE REPORT WITHIN A PERIOD OF 1 20 DAYS FROM THE DATE ON WHICH THE ORDER WAS RECEIVED BY THE ASSESSEE. ON 25 .08.2014, THE ASSESSEE RECEIVED THE AUDIT REPORT AND SAME WAS SUBMITTED BE FORE THE ASSESSING OFFICER. THE ASSESSEES CASE FOR ASSESSMENT YEAR UN DER CONSIDERATION WAS REFERRED TO THE TRANSFER PRICING OFFICER TO DETERMI NE THE ARMS LENGTH PRICE U/S 92CA(3) OF THE INCOME TAX ACT IN RESPECT OF IN TERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE DURING THE PREVIOUS YE AR 2009-10. THE TPO PASSED AN ORDER DATED 30.01.2014. THE DRAFT ASSESSM ENT ORDER WAS PASSED U/S 143(3) R.W.S. 144C(1) ON 22.10.2014, WHEREIN TH E ASSESSEES INCOME WAS PROPOSED TO BE ASSESSED AT RS.9787,82,85,371/- AS AGAINST THE RETURNED INCOME DECLARED BY THE ASSESSEE AT RS.694, 99,29,995/-. AGAINST THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED OBJE CTIONS BEFORE THE DISPUTE RESOLUTION PANEL ON 21.11.2015. THE DRP ISSUED DIRE CTIONS U/S 144C(5) OF THE ACT ON 31.07.2015. ACCORDINGLY, THE FINAL ASSES SMENT ORDER DATED 28.08.2015 WAS PASSED IN ACCORDANCE WITH THE DIRECT IONS OF THE DRP. THE 8 ITA NOS. 5791 & 5845/DEL/2015 ASSESSING OFFICER MADE FOLLOWING ADDITIONS: PARA REF OF THE ORDER PARTICULARS AMOUNT (IN RS.) AMOUNT (IN RS.) RETURNED INCOME 694,99,29,995/- ADD : DISALLOWANCE DUE TO FAILURE TO DEDUCT TAX AT SOURCE (TDS) ON AMOUNTS CREDITED OR PAID TO NOKIA CORPORATION U/S 40A(I) OF THE ACT: 5 A) PAYMENT FOR PURCHASE OF SOFTWARE 2943,61,91,870/- 6 B) PURCHASE OF FINISHED GOODS FROM NOKIA CORP. 4360,45,22,887/- SUB-TOTAL 7304,07,14,757/- TRANSFER PRICING ORDER U/S 92CA OF THE ACT: 7 A) ADVERTISING, MARKETING AND PROMOTIONAL EXPENDITURE 470,84,65,081/- 8 B) SOFTWARE DEVELOPMENT SERVICES 97,83,17,120/- 9 C) PURCHASE OF SOFTWARE FROM NOKIA CORP. 358,49,23,473/- SUB TOTAL 927,17,05,674/- 10 DISALLOWANCE UNDER SECTION 40A(IA) OF THE ACT FOR FAILURE TO DEDUCT TAX AT SOURCE (TDS) : A) FOR TRADE OFFERS TO HCL INFORSYSTEM 562,15,92,920/- B) FOR TRADE OFFERS TO OTHERS THAN HCL INFOSYSTEM 272,76,71,056/- SUB TOTAL 834,92,63,976/- 11 DISALLOWANCE OF CLAIM OF TRADE PRICE PROTECTION 166,02,61,748/- 9 ITA NOS. 5791 & 5845/DEL/2015 EXPENDITURE 12 DISALLOWANCE OF CLAIM OF PROVISION FOR OBSOLESCENCE OF INVENTORY 114,87,176/- 13 DISALLOWANCE OF CLAIM OF MARKETING EXPENSES 58,56,03,845/- 14 UNEXPLAINED SALES REVERSAL 19,52,02,050/- GRAND TOTAL 10006,41,69,221/ - THUS, THE ASSESSEES TOTAL INCOME WAS ASSESSED AT R S.10006,41,69,221/-. 5. AS REGARDS GROUND NO.1, THE LD. AR SUBMITTED THA T THE SAME IS GENERAL IN NATURE, HENCE GROUND NO.1 IS DISMISSED. 6. AS REGARDS TO GROUND NO. 2 RELATING TO DISALLOW ANCE UNDER SECTION 40(A)(IA) ON ACCOUNT OF TRADE OFFERS OF RS. 834,92, 63,976/- PROVIDED TO DISTRIBUTORS, THE LD. AR SUBMITTED THAT SECTION 194 H IS NOT APPLICABLE AS AMOUNT DISALLOWED U/S 40 (A)(I) IS IN THE NATURE OF POST SALE DISCOUNT. THE LD. AR SUBMITTED THAT POST-SALE DISCOUNT IS AN ACCE PTED MODE OF PROVIDING A REDUCTION IN PURCHASE PRICE WHICH IS ALSO ACCEPTABL E UNDER THE INDIRECT TAX LAWS. FURTHER, IT HAS NOT BEEN BROUGHT OUT IN THE A SSESSMENT ORDERS AS TO HOW RAISING OF DEBIT NOTES IN THE CURRENT FACT PATT ERN TAKE AWAY THE NATURE OF THE AFORESAID AMOUNTS BEING DISCOUNTS. THUS, THE LD . AR SUBMITTED THAT THE MERE FACT THAT DISCOUNTS ARE EXTENDED THROUGH DEBIT NOTES WOULD NOT AUTOMATICALLY CONVERT THE UNDERLYING AMOUNT INVOLVE D AS A COMMISSION. THE MERE FACT THAT THE DISCOUNTS / TRADE OFFERS ARE NOT FORMING PART OF AGREEMENT BETWEEN HCL AND NIPL CANNOT BE A REASON FOR APPLICA BILITY OF WITHHOLDING TAX UNDER CHAPTER-XVII-B OF THE ACT ON THE UNDERLYI NG AMOUNT OF TRADE OFFERS, PARTICULARLY WHERE THE ASSESSING OFFICER HA S NOT DISPUTED THE GENUINENESS OF THE TRANSACTION. THE LD. AR RELIED U PON THE DECISION IN CASE OF TUPPERWARE INDIA (P.) LTD. VS. CIT (1960) 39 ITR 594 (BOM.). THE LD. AR SUBMITTED THAT THE TRADE SCHEME / OFFERS WERE FLOAT ED BY ASSESSEE FOR DISTRIBUTORS UNDER SCHEMES TO MAXIMIZE SALES IN EAC H TERRITORY AND INCENTIVIZE HIGH-PERFORMING DISTRIBUTORS WHO ACHIEV E THEIR MONTHLY SALES TARGETS. THEREFORE, DISCOUNT IS GIVEN TO THE DISTRI BUTORS WHICH HAVE BEEN 10 ITA NOS. 5791 & 5845/DEL/2015 REFERRED BY THE ASSESSING OFFICER AS A BENEFIT. T HE DETAILS OF TRADE OFFERS WERE SUBMITTED AT PG. 199 TO 203 OF THE PAPER BOOK VOLUME I BY THE LD. AR. THE LD. AR FURTHER SUBMITTED THAT RELATIONSHIP BETW EEN THE ASSESSEE AND HCL IS THAT OF PRINCIPAL TO PRINCIPAL AND NOT THAT OF PRINCIPAL TO AGENT. THIS FACT IS EVIDENT FROM CLAUSE 2, 7, 8, 9, 14 AND 19 O F THE AGREEMENT FOR THE SUPPLY OF CELLULAR MOBILE PHONES BETWEEN HCL AND T HE ASSESSEE. IN THE ABSENCE OF A PRINCIPAL-AGENT RELATIONSHIP, SUCH BE NEFIT EXTENDED TO THE DISTRIBUTORS CANNOT PARTAKE THE CHARACTER OF COMMI SSION LIABLE FOR WITHHOLDING TAX UNDER SECTION 194H OF THE ACT. THE LD. AR RELIED UPON THE FOLLOWING CASE LAWS: AHMEDABAD STAMP VENDORS ASSOCIATION VS. UOI (2002) 257 ITR 202 (GUJ) CIT VS. AHMEDABAD STAMP VENDORS ASSOCIATION (2012) 348 ITR 378 (SC) (SLP DISMISSED AGAINST THE HC ORDER) CIT VS. JAI DRINKS (P) LTD. (2011) 336 ITR 238 (DEL .) CIT VS. INTERVET INDIA PVT. LTD. (2014) 364 ITR 238 (BOM) CIT VS. MOTHER DAIRY INDIA & ANR. (2013) 358 ITR 21 8 (DEL) CIT VS. UNITED BREWERIES LTD. (2016) 387 ITR 150 (A NDHRA PRADESH & TELANGANA) FOSTERS INDIA (P) LTD. VS ITO (2018) 117 TTJ 346 ( PUNE) THE LD. AR FURTHER SUBMITTED THAT NO PAYMENT HAS BE EN MADE BY THE ASSESSEE AND THUS THE PRIMARY CONDITION FOR INVOKIN G SECTION 194H REMAINS UNSATISFIED. IN THIS REGARD, THE LD. AR RELIED UPON THE FOLLOWING CASE LAWS: HINDUSTAN COCA COLA BEVERAGES (P.) LTD. VS. CIT (20 18) 402 ITR 539 (RAJ.) PR. CIT VS. GUJARAT NARMADA VALLEY FERTILIZER AND C HEMICALS LTD (2019) 266 TAXMAN 19 (GUJ.) THE LD. AR FURTHER SUBMITTED THAT SECTION 194J IS A LSO NOT APPLICABLE AS ACTIVITIES UNDERTAKEN BY DISTRIBUTORS WERE ON ITS O WN ACCOUNT AND NOT AS A 11 ITA NOS. 5791 & 5845/DEL/2015 SERVICE PROVIDER TO THE ASSESSEE. THE REQUIREMENT O F WITHHOLDING TAXES UNDER SECTION 194J OF THE ACT ALSO DOES NOT ARISE AS TAX UNDER THAT SECTION HAS TO BE WITHHELD ON THE SUM PAID TO A RESIDENT INTER A LIA FOR RENDERING OF PROFESSIONAL OR TECHNICAL SERVICES, AND THERE WAS N O PAYMENT IN THE INSTANT CASE, AS THE ASSESSEE HAS MERELY OFFERED A DISCOUNT TO ITS DISTRIBUTORS. IN THIS REGARD, THE LD. AR RELIED UPON FOLLOWING CASE LAWS: HINDUSTAN COCA COLA BEVERAGES (P.) LTD. VS. CIT (SU PRA) PR. CIT VS. GUJARAT NARMADA VALLEY FERTILIZER AND C HEMICALS LTD. (SUPRA) THE LD. AR FURTHER SUBMITTED THAT HCL DID NOT PROVI DE ANY PROFESSIONAL/ TECHNICAL SERVICE TO THE ASSESSEE. MARKETING ACTIVI TIES HAVE BEEN UNDERTAKEN BY HCL ON ITS OWN ACCOUNT TO ENSURE THAT THE PHONES (INSTRUMENTS) HCL BUYS FROM THE ASSESSEE ARE SOLD TO ITS CUSTOMERS, I .E. IN ORDER TO PROMOTE ITS OWN SALES. 7. THE LD. DR SUBMITTED THAT TRADE OFFERS ARE IN TH E NATURE OF COMMISSIONS AND ARE LIABLE TO BE WITHHOLD UNDER SEC TION 194H OF THE ACT. THE LD. DR SUBMITTED THAT DISCOUNTS WERE GIVEN BY W AY OF DEBIT NOTES WHICH WERE NOT ADJUSTED OR MENTIONED IN THE INVOICE GENERATED UPON ORIGINAL SALES MADE BY THE ASSESSEE. THERE IS NO PROVISION I N THE AGREEMENT BETWEEN HCL AND THE ASSESSEE FOR SUCH DISCOUNTS WHICH WAS O VER AND ABOVE THE PRE- AGREED INVOICE PRICE. THE LD. DR FURTHER SUBMITTED THAT HCL WOULD BE ENTITLED TO SPECIFIC INCENTIVES ON MEETING THE MON THLY TARGET VALUE AS PER THE APPROVED SCHEME AND THE PAY-OUT IS DEPENDEN T ON THE ACHIEVEMENT OF CERTAIN PERCENTAGE OF TARGETS GIVEN BY THE ASSES SEE TO HCL. THEREFORE, THE LD. DR SUBMITTED THAT RELATIONSHIP BETWEEN THE ASSE SSEE AND HCL IS THAT OF PRINCIPAL TO PRINCIPAL OR PRINCIPAL TO AGENT IS NOT RELEVANT. ALTERNATIVELY, THE LD. DR SUBMITTED THAT AS PAYMENTS FOR TECHNICAL SER VICE LIABLE FOR WITHHOLDING UNDER SECTION 194J OF THE ACT, A COMBIN ATION OF VARIOUS SERVICES HAS BEEN RENDERED BY HCL FOR WHICH NO CONSIDERATION WAS PAYABLE BY THE ASSESSEE. SERVICES BEING PROVIDED BY HCL ARE CONSUL TANCY IN NATURE AND COVERED BY THE NATURE OF TECHNICAL SERVICES DEFINED UNDER EXPLANATION 2 TO 12 ITA NOS. 5791 & 5845/DEL/2015 SECTION 9(1)(VII) OF THE ACT AND THEREBY SUBJECT TO WITHHOLDING PROVISIONS UNDER SECTION 194J OF THE ACT. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL T HE RELEVANT MATERIAL AVAILABLE ON RECORD. IT CAN BE SEEN FROM CLAUSE 2, 7, 8, 9, 14 AND 19 OF THE 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. TH E DISCOUNT WHICH WAS OFFERED TO DISTRIBUTORS IS GIVEN FOR PROMOTION OF S ALES. THIS ELEMENT CANNOT BE TREATED AS COMMISSION. THERE IS ABSENCE OF A PRI NCIPAL-AGENT RELATIONSHIP AND BENEFIT EXTENDED TO DISTRIBUTORS CANNOT BE TREA TED AS COMMISSION UNDER SECTION 194H OF THE ACT. AS REGARDS TO APPLICABILIT Y OF SECTION 194J OF THE ACT, THE ASSESSING OFFICER HAS NOT GIVEN ANY REASON ING OR FINDING TO THE EXTENT THAT THERE IS PAYMENT FOR TECHNICAL SERVICE LIABLE FOR WITHHOLDING UNDER SECTION 194J. MARKETING ACTIVITIES HAVE BEEN UNDERTAKEN BY HCL ON ITS OWN. MERELY MAKING AN ADDITION UNDER SECTION 19 4J WITHOUT THE ACTUAL BASIS FOR THE SAME ON PART OF THE ASSESSING OFFICER IS NOT JUST AND PROPER. THE LD. DRS CONTENTION THAT DISCOUNTS WERE GIVEN B Y WAY OF DEBIT NOTES AND THE SAME WERE NOT ADJUSTED OR MENTIONED IN THE INVO ICE GENERATED UPON ORIGINAL SALES MADE BY THE ASSESSEE, DOES NOT SEEM TENABLE AFTER GOING THROUGH THE INVOICE AND THE DEBIT NOTES. IN FACT, T HERE IS CLEAR MENTIONED ABOUT THE DISCOUNT FOR SALES PROMOTION. THUS, ON BO TH THE ACCOUNT THE ADDITION MADE BY THE ASSESSING OFFICER DOES NOT SUS TAIN. GROUND NO. 2 IS ALLOWED. 9. AS REGARDS TO GROUND NO. 3 RELATING TO DISALLOWA NCE ON ACCOUNT OF TRADE PRICE PROTECTION (TPP) EXTENDED TO DISTRIBUTO RS FOR REDUCTION IN PRICES OF HANDSETS INR 166,02,61,748/-, THE LD. AR SUBMITT ED THAT TRADE PRICE PROTECTION OFFERED TO DISTRIBUTOR IS MOTIVATED BY C OMMERCIAL EXPEDIENCY AND HENCE ALLOWABLE UNDER SECTION 37(1). THE LD. AR SUB MITTED THAT TRADE PRICE PROTECTION IS OFFERED TO COUNTER THE CHANGE IN PRIC ES OF HANDSETS BY COMPETITORS, LIFE OF THE MODEL, MARKET DEMAND OF TH E MODEL ETC. SAME IS OFFERED TO PROTECT DISTRIBUTORS AGAINST THE PROBABL E LOSS THAT THEY MAY SUFFER 13 ITA NOS. 5791 & 5845/DEL/2015 DUE TO FALL IN THE PRICES OF HANDSETS. SAMPLE COPIE S OF DETAILED CALCULATION, INTERNAL APPROVAL IS SUBMITTED AT PAGE 565-586 OF P APER BOOK VOLUME II BY THE LD. AR. THE LD. AR SUBMITTED THAT IT IS NOT REL EVANT WHETHER THE EXPENDITURE INCURRED 'WHOLLY AND EXCLUSIVELY FOR T HE PURPOSES OF BUSINESS HAS BEEN INCURRED IN DISCHARGE OF A CONTRACTUALLY L IABILITY OR IS BACKED BY A CONTRACT. THE LD. AR RELIED UPON THE DECISION OF TU PPERWARE INDIA (P.) LTD. (SUPRA) COPIES OF PARTY WISE DETAILS OF TRADE PRICE PROTECTION AND CONFIRMATIONS RECEIVED FROM DISTRIBUTORS WERE SUBMI TTED BEFORE THE ASSESSING OFFICER VIDE SUBMISSION DATED 10.03.2014 AND THE SAME HAVE BEEN REPRODUCED AT PAGE 301-390 OF THE PAPER BOOK V OLUME 1 BY THE LD. AR. FOR EXAMPLE: HCL INFOSYSTEMS LTD BREAK-UP IS AT PG. 204 AND THE CONFIRMATION IS AT PAGE 308. EASTERN ENTERPRISE BREAK-UP IS AT PG. 204 AND THE C ONFIRMATION IS AT PAGE G.R.SARDA & SONS BREAK-UP IS AT PG. 204 AND THE CON FIRMATION IS AT PAGE 303. FUSION VOICE SOLUTIONS BREAK-UP IS AT PG. 204 AND T HE CONFIRMATION IS AT PAGE 302. FAYAM ENTERPRISES BREAK-UP IS AT PG. 204 AND THE CO NFIRMATION IS AT PAGE 301. THE LD. AR FURTHER SUBMITTED THAT TPP IS OFFERED TO DISTRIBUTORS ON HANDSETS WHICH HAVE NOT BEEN SUBJECT TO TRADE OFFER S/DISCOUNTS. THIS IS EVIDENCED BY SPECIFIC CLAUSE IN THE TRADE SCHEMES F ILED BEFORE THE ASSESSING OFFICER VIDE SUBMISSION DATED 10.03.2014 TRADE SCHE ME COPIES AT PAGE 208- 299 OF THE PAPER BOOK VOLUME 1. EXPENDITURE IS ALLO WABLE AS REVENUE EXPENDITURE UNDER SECTION 37(1) OF THE ACT SINCE IT HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS AND SAME CANNOT BE QUE STIONED BY THE ASSESSING OFFICER. THE LD. AR RELIED UPON THE DECIS ION IN CASE OF CIT VS. DALMIA CEMENTS (B.) LTD. [2002] 254 ITR 377 (DEL). 10. THE LD. DR SUBMITTED THAT THE DISALLOWANCE MADE ON THE GROUND THAT THE ASSESSEE FAILED TO JUSTIFY THE COMMERCIAL EXPED IENCY OF THE EXPENDITURE. THE BASIS OF COMPUTATION, METHODOLOGY OF DETERMININ G THE STOCK LYING 14 ITA NOS. 5791 & 5845/DEL/2015 UNSOLD WITH THE DEALERS, DETAILS OF DATES/PERIODS A ND MODEL FOR WHICH TPP IS OFFERED WAS NOT PROVIDED. THE LD. DR SUBMITTED THAT NO POLICY PERTAINING TO TPP WAS FURNISHED. CONFIRMATIONS ARE STEREOTYPED CO NFIRMATION WHICH MAKES THE SAME DOUBTFUL. EXPENSE ON ACCOUNT OF TPP IS NOT JUSTIFIED SINCE IT IS IN ADDITION TO TRADE OFFERS BEING PROVIDED TO TH E DISTRIBUTORS AND RETAILERS. THE LD. DR SUBMITTED THAT TPP HAS NOT BEEN DEBITED AS AN EXPENSE BUT HAS BEEN DIRECTLY ADJUSTED FROM TOTAL SALES. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS MARKET PRACTICE THAT IF THERE IS ANY CHANGE IN PRICES OF HANDSETS BY COMPETITORS, CHANGE IN LIFE OF MOBIL E MODEL, CHANGE IN MARKET DEMAND OF PARTICULAR MODEL WHICH AFFECTS THE SALES, THE DISTRIBUTOR IS PROTECTED BY THE TRADE PRICE PROTECTION. THIS IS AC TUALLY A COMMERCIAL EXPEDIENCY IN MODERN DAY TECHNOLOGICAL CHANGES WHIC H ARE VERY FAST AND VAST. BESIDES, TRADE PRICE PROTECTION IS OFFERED TO DISTRIBUTORS ON HANDSETS WHICH HAVE NOT BEEN SUBJECT TO TRADE OFFERS/DISCOUN TS. THIS IS EVIDENCED BY SPECIFIC CLAUSE IN THE TRADE SCHEMES FILED BEFORE T HE ASSESSING OFFICER VIDE SUBMISSION DATED 10.03.2014 TRADE SCHEME. IN-FACT, IT WAS POINTED OUT DURING THE COURSE OF HEARING THAT IN ASSESSMENT YEA R 2008-09, EVEN THE ASSESSING OFFICER HAS ALLOWED THE DEDUCTION FOR T HE INSTANT LIKE EXPENDITURE. IN ASSESSMENT YEAR 2008-09, THE MATTE R WAS REMANDED BACK TO THE FILE OF THE ASSESSING OFFICER, WHO HAS ALLOW ED THE DEDUCTION WITH RESPECT TO THE EXPENDITURE, WHERE CONFIRMATIONS HAV E BEEN OBTAINED FROM THE RECIPIENTS. IN ANY CASE, SO FAR AS THE INSTANT YEAR IS CONCERNED, WE HAVE ALREADY NOTED IN THE EARLIER PARAGRAPH THAT THE REQ UISITE CONFIRMATIONS WERE FILED BEFORE THE ASSESSING OFFICER. THUS, THIS EXPE NDITURE IS ALLOWABLE AS REVENUE EXPENDITURE UNDER SECTION 37(1) OF THE ACT SINCE IT HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS AND SA ME CANNOT BE QUESTIONED BY THE ASSESSING OFFICER. GROUND NO. 3 IS ALLOWED. 12. AS REGARDS TO GROUND NO. 4 RELATING TO DISALLOW ANCE OF 25% OF PROVISION FOR OBSOLESCENCE OF INVENTORY, THE LD. AR SUBMITTED THAT THESE PROVISION IS IN ACCORDANCE WITH GLOBAL COMPANY POLI CY AND HAS BEEN 15 ITA NOS. 5791 & 5845/DEL/2015 CONSISTENTLY FOLLOWED. THE LD. AR SUBMITTED THAT IN FACT THE PROVISION MADE ON THE BASIS OF SCIENTIFIC FORMULA AND PAST EX PERIENCE. EXCESS STOCK = STOCK IN PLACE REQUIREMENT FOR NEXT 90 DAYS. T HE LD. AR SUBMITTED THAT OBSOLETE INVENTORY IS DEFINED AS INVENTORY WHI CH HAS NOT BEEN CONSUMED FOR LAST 90 DAYS AND WILL NOT BE REQUIRED FOR NEXT 90 DAYS. THE LD. AR SUBMITTED THAT PROVISION REPRESENTS 100% OF NON-MOVING INVENTORY OF SPARE PARTS/ACCESSORIES OF HANDSETS WHICH HAS BE EN PHASED OUT. THE LD. AR FURTHER SUBMITTED THAT AS THESE ACCESSORIES ARE PLASTIC OR METALLIC PARTS NET REALIZABLE VALUE IS ZERO. THE LD. AR SUBM ITTED THAT METHOD FOLLOWED IS THE AMOUNT OF PROVISION CREATED IN A YE AR IS DEBITED TO THE P&L AND ACTUAL OBSOLESCENCE IS CHARGED TO SUCH PROVISIO N. THE LD. AR SUBMITTED THAT EXCESS PROVISION IF ANY IS REVERSED AND OFFERED TO TAX IN YEAR OF REVERSAL. FURTHER, THE LD. AR SUBMITTED THA T DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PROVISION FOR O BSOLESCENCE OF INVENTORY HAS BEEN DELETED BY THE DRP IN AY 2011-12. 13. THE LD. DR SUBMITTED THAT NO EVIDENCE REGARDING COMPUTATION OF PROVISION OF OBSOLETE STOCK. THE LD. DR SUBMITTED T HAT PROVISION BEING IN THE NATURE OF UNASCERTAINED LIABILITY CANNOT BE ALL OWED. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT CAN BE SEEN THAT IN A.YS. 2 000-01, 2001-02, AND 2003-04, THIS ISSUE WAS REMANDED BACK BY THE TRIBUN AL TO THE FILE OF THE ASSESSING OFFICER WITH DIRECTION TO DETERMINE AND D ECIDE THE SAME AFRESH IN RESPECT OF THE COST OF OBSOLETE ITEMS WITH REFER ENCE TO NET REALIZABLE VALUE. FOR A.Y. 2003-04, THE HONBLE HIGH COURT UPH ELD THE FINDINGS OF THE TRIBUNAL. ONLY IN A.Y. 2011-12, THE DRP HAS TAKEN A DIFFERENT VIEW BY DELETING THE SAID ADDITIONS. IN THE INSTANT YEAR, THE ASSESSING OFFICER HAS NOT GIVEN ANY INDEPENDENT REASONING FOR MAKING AN A D-HOC DISALLOWANCE OF 25% OF THE TOTAL EXPENDITURE. CONSIDERING THE HIST ORY OF THE DISPUTE, THE MATTER IS REMANDED BACK TO THE FILE OF THE ASSESSIN G OFFICER TO DECIDE IN THE LIGHT OF THE PRECEDENTS, AND KEEPING IN MIND TH AT THE DIRECTION OF DRP 16 ITA NOS. 5791 & 5845/DEL/2015 IN ASSESSMENT YEAR 2011-12 HAS BEEN ACCEPTED BY THE DEPARTMENT (AS POINTED OUT BEFORE US THAT NO APPEAL WAS FILED BY R EVENUE IN ASSESSMENT YEAR 2011-12). NEEDLESS TO SAY, THE ASSESSEE BE GIV EN OPPORTUNITY OF HEARING BY FOLLOWING PRINCIPLES OF NATURAL JUSTICE IN THE REMANDED PROCEEDINGS. GROUND NO. 4 IS PARTLY ALLOWED FOR ST ATISTICAL PURPOSE. 15. AS REGARDS TO GROUND NO. 5 RELATING TO DISALLOW ANCE OF MARKETING EXPENDITURE INCURRED ON ACCOUNT OF ISSUANCE OF HAND SETS ON FREE OF COST (FOC) BASIS AND GROUND NO. 6 RELATING TO DEPRECIA TION TO BE ALLOWED IF THE AFORESAID EXPENDITURE IS HELD TO BE CAPITAL EXPENDI TURE, THE LD. AR SUBMITTED THAT HANDSETS WERE ISSUED TO AMSCS AS RE PLACEMENT FOR DEFECTIVE HANDSETS SUBMITTED BY CUSTOMER WITHIN THE 12 MONTHS WARRANTY PERIOD WHICH CANNOT BE REPAIRED. SINCE THE HANDSETS HAVE TO BE REPAIRED, THEY CANNOT BE ACCOUNTED FOR UNDER PROVISION OF WAR RANTY. ALSO, THE OWNERSHIP OF THE HANDSETS DOES NOT LAY WITH THE ASS ESSEE. HANDSETS WERE ISSUED TO DEALERS AS SAMPLE FOR DISPLAY AND PROMOTI ONAL PURPOSE ON CONCESSIONAL OR FOC BASIS. OWNERSHIP IN SUCH HANDSE TS DOES NOT REMAIN WITH ASSESSEE. HANDSETS WERE ISSUED TO EMPLOYEES FO R OFFICIAL USE AS MARKETING EMPLOYEES INTERACT WITH DEALERS AND OTHER SERVICE ORGANIZATIONS SUCH AS AMSCS, ETC.). HANDSETS WERE ALSO ISSUED TO OTHER EMPLOYEES FOR BUSINESS USE. THEREFORE, HANDSETS WERE ISSUED TO AM SCS, DEALERS AND EMPLOYEES ON FREE OF COST BASIS ENTIRELY FOR THE PU RPOSE OF ITS BUSINESS. THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESS EE IN AY 2003-04 BY THE ITAT ON THE GROUND THAT THE SAID EXPENDITURE IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE DE CISION HAS ALSO BEEN AFFIRMED BY THE HONBLE DELHI HIGH COURT. 16. THE LD. DR SUBMITTED THAT HANDSETS OF EMPLOYEES ARE CAPITAL ASSETS AS ASSESSEE WILL RECEIVE BUSINESS BENEFITS OVER A P ERIOD OF TIME. IF OWNERSHIP OF THE HANDSETS IS TRANSFERRED TO THE EMP LOYEES, THEN SAME SHOULD BE TREATED AS PERQUISITE ELIGIBLE TO WITHHOL DING UNDER SECTION 192 OF THE ACT. THE LD. DR SUBMITTED THAT HANDSETS ISSU ED TO AFTER MARKETING SERVICE CENTRES (AMSC) CANNOT BE CLAIMED UNDER M ARKETING EXPENDITURE 17 ITA NOS. 5791 & 5845/DEL/2015 AS THEY ARE WARRANTY EXPENSE AND CAN BE CLAIMED IF DOCUMENTARY EVIDENCE OF RECONCILIATION IS AVAILABLE. NO EVIDENCE THAT HA NDSETS HAVE BEEN ISSUED TO ULTIMATE CUSTOMERS. HANDSETS ISSUED TO DEALERS W ITH INTENTION TO DISPLAY SHOW THE INTENTION TO REAP BENEFIT OVER A T IME. THUS, ONLY DEPRECIATION COULD HAVE BEEN CLAIMED ON THE SAME. 17. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. IN THE PRESENT ASSESSMENT YEAR , THE ASSESSEE IS ENGAGED IN MANUFACTURE, IMPORT AND SALE OF MOBILE H ANDSETS. THE ASSESSEE HAS GIVEN MOBILE HANDSETS TO ITS EMPLOYEES, DEALERS , SALE PERSONNEL ETC. FOR FREE OF COST AND THUS NO LONGER OWNED THE SAID HAND SETS. THUS, THE SAID COST WAS RIGHTLY TAKEN AS BUSINESS EXPENDITURE BY T HE ASSESSEE AND WAS RIGHTLY REDUCED FROM THE INVENTORY. THIS ISSUE IS D ECIDED IN FAVOUR OF THE ASSESSEE FOR A.YS. 2003-04 BY THE TRIBUNAL IN ITA N O. 2445/DEL/2010 ORDER DATED 30.01.2018 WHICH WAS ALSO AFFIRMED BY T HE HONBLE HIGH COURT IN ITA NO. 955/2018 ORDER DATED 31.08.2018. T HUS, GROUND NO. 5 IS ALLOWED. SINCE WE HELD THAT IT IS BUSINESS EXPENDIT URE GROUND NO. 6 BECOMES INFRUCTUOUS, HENCE GROUND NO. 6 IS DISMISSE D. 18. AS REGARDS TO GROUND NO. 7 RELATING TO ADDITION ON ACCOUNT OF DIFFERENCE IN VALUE OF SALES APPEARING IN SALES TAX RETURN AND AUDITED FINANCIAL STATEMENTS, THE LD. AR SUBMITTED THAT DIF FERENCE FOR VARIOUS REASONS LIKE SALE REVERSALS, DEBIT NOTE RECEIVED FR OM CUSTOMER DUE TO WARRANTY. ASSESSEE REPORTED SALES OF INR 25000 CROR ES AND THUS NO REASON TO UNDERREPORT SALES OF INR 19.52 CRORES. 19. THE LD. DR SUBMITTED THAT DIFFERENCE BETWEEN SA LES AS PER SALES TAX RETURN AND AUDITED FINANCIAL STATEMENTS OF INR 19,5 2,02,050 WAS PROPERLY DISALLOWED BY THE ASSESSING OFFICER. 20. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE EXPLANATION GIVEN BY THE A SSESSEE WAS NOT JUSTIFIED THROUGH THE EVIDENCES AS TO WHAT EXTENT S ALE REVERSALS, DEBIT 18 ITA NOS. 5791 & 5845/DEL/2015 NOTES RECEIVED FROM THE CUSTOMER DUE TO WARRANTY PR EVENTED THE ASSESSEE TO GIVEN THE FINANCIAL STATEMENT WHICH IS LESS THAN THE SALES TAX RETURN. GROUND NO. 7 IS DISMISSED. 21. AS REGARDS TO GROUND NO. 8 RELATING TO DENYING BENEFIT OF DEDUCTION U/S 10AA ON NON TRANSFER PRICING ADDITIONS/DISALLOW ANCES, THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER IS DUTY BOUND TO RE-COMPUTE THE ELIGIBLE DEDUCTION UNDER SECTION 10A/10AA IN RESPEC T OF ADDITION/DISALLOWANCE MADE BY HIM. 22. THE LD. DR SUBMITTED THAT THE ASSESSEE COULD NO T SHOW THAT THE DISALLOWANCE PERTAINS TO THE ACTIVITIES UNDERTAKEN BY IT IN BUSINESS WHICH IS ELIGIBLE FOR SUCH DEDUCTION. 23. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE FAILED TO DEMONST RATE THE DEDUCTION CLAIMED UNDER SECTION 10A/10AA ON NON TRANSFER PRIC ING ADDITIONS. THERE WAS NO EVIDENCE PRODUCED BEFORE THE ASSESSING OFFIC ER AS TO HOW THE CLAIM IS TENABLE UNDER SECTION 10A/10AA. GROUND NO. 8 IS DISMISSED. 24. AS REGARDS TO GROUND NO. 9, THE LD. AR SUBMITTE D THAT THE ASSESSING OFFICER HAS NOT GIVEN FULL CREDIT OF PRE-PAID TAXES , SO THE ASSESSING OFFICER BE DIRECTED TO GIVE FULL CREDIT OF PRE-PAID TAXES. 25. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 26. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. FROM THE PERUSAL OF RECORDS, I T CAN BE SEEN THAT THE PROPER CREDIT OF PRE-PAID TAXES WERE NOT GIVEN BY T HE ASSESSING OFFICER WHILE CALCULATING THE TOTAL TAX. THEREFORE, WE DIRE CT THE ASSESSING OFFICER TO GIVE PROPER CREDIT OF PRE-PAID TAXES TO THE ASSESSE E AFTER VERIFYING THE SAME. NEEDLESS TO SAY THE ASSESSEE BE GIVEN OPPORTU NITY OF HEARING BY FOLLOWING PRINCIPLES OF NATURAL JUSTICE. GROUND NO. 9 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 19 ITA NOS. 5791 & 5845/DEL/2015 27. AS REGARDS TO GROUND NO. 10 AND GROUND NO. 11, THE SAME IS CONSEQUENTIAL, HENCE NEED NOT BE ADJUDICATED AT THI S STAGE. 28. AS REGARDS TO REVENUES APPEAL BEING ITA NO. 58 45/DEL/2015, THE ONLY ISSUE IS RELATING TO DEPRECIATION WHICH WAS AL READY DECIDED BY US WHILE GIVING FINDING TO GROUND NO. 5 AND 6 IN ASSES SEES APPEAL HEREINABOVE. WE HELD THAT THE SAID EXPENDITURE IS B USINESS EXPENDITURE; THEREFORE, QUESTION OF DEPRECIATION DOES NOT SURVIV E. HENCE, APPEAL OF THE REVENUE IS DISMISSED. 29. IN RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSE AND APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20TH FEBRUARY, 2020 . SD/- SD/- (G. S. PANNU) (SUCHITRA KAMBLE) VICE PRESIDENT JUDICI AL MEMBER DATED: 20/02/2020 PRITI YADAV, SR. PS*/R. N COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 20 ITA NOS. 5791 & 5845/DEL/2015 DATE OF DICTATION 16 .1 2 .2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 17.12.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 20.02.2020 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 2 0 . 0 2 . 2 0 2 0 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 20.0 2.2020 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK