Nokia India Sales P.Ltd, New Delhi V. Addl.CIT, Special Range-6, , New Delhi

ITA 7244/DEL/2017

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 2773 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 05-08-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 05-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Capital asset; Recovery proceedings; Business income; Depreciation; Transfer pricing; Business expenditure; International transaction; Additional evidence; Wholly owned subsidiary; Non-deduction of tax; Revenue expenditure; Capital expenditure; TDS
• Section: 271(1)(c); 92B; 234B; 40(a)(ia); 133(6); 37(1); 201(1); 201; 194J; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1, NEW DELHI BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER (THROUGH VIDEO CONFERENCING) ITA NO. 7244/DEL/2017 : ASSTT. YEAR : 2012-13 NOKIA INDIA SALES PVT. LTD., 807, NEW DELHI HOUSE, BARAKHAMBA ROAD, NEW DELHI-110001 VS ADDL. CIT, SPECIAL RANGE-6, NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. A A CCN9141L ASSESSEE BY : SH. NAGESHWAR RAO, ADV. REVENUE BY : SH. SURENDERPAL, CIT DR DATE OF HEAR ING: 29 . 0 7 .20 2 1 DATE OF PRONOUNCEMENT: 25 .10 .20 2 1 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 31.10.2017 PASSED BY THE AO U/S 143 (3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENU E: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS GROSSLY ERRED IN DETERMINING THE TAXABLE INCOME OF THE APPELLANT FOR THE SUBJECT ASSESSMENT YEAR AT RS. 323,10,98,940/-, AS AGAINST THE RETURNED INCOME OF RS. 96,62,41,210/ - ON THE BASIS OF ADDITIONS MADE IN THE CASE OF NOKIA INDIA PVT. LTD. (NEPL), PURPORTEDLY FOR THE REASO N THAT THE APPELLANT IS THE SUCCESSOR OF NLPL'S DISTRIBUTION BUSINESS OF MOBILE PHONES, AND IN ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 2 COMPLETE DISREGARD OF THE FACTUAL MATRIX OF THE BUSINESS MODEL OF THE APPELLANT AND NIPL. CORPORATE TAX GROUNDS 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN MAKING A DISALLOWANCE OF RS.155,05,28,276/- AND RS.58,31,18,115/- UNDER SECTION 40(A)(IA) OF THE AC T ON ACCOUNT OF ALLEGED NON-WITHHOLDING OF TAXES BY T HE APPELLANT UNDER SECTION 194H OF THE ACT ON TRADE OFFERS/ DISCOUNTS EXTENDED TO HCL INFOSYSTEMS LTD. (HCL) AND OTHER DISTRIBUTORS RESPECTIVELY. 2.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN ALLEGING THAT T HE TRADE OFFERS/ DISCOUNTS PROVIDED BY THE APPELLANT T O HCL AND OTHER DISTRIBUTORS ARE IN THE NATURE OF 'IN COME BY WAY OF COMMISSION' AND HENCE, LIABLE TO DEDUCTIO N OF TAX UNDER SECTION 194H OF THE ACT. 2.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO HAS ERRED IN NOT APPRECIATIN G THE FACT THAT THE RELATIONSHIP BETWEEN THE APPELLAN T AND HCL/ OTHER DISTRIBUTORS IS ON A 'PRINCIPAL TO PRINCIPAL' BASIS AND THAT THE TRADE OFFERS/ DISCOUN TS EXTENDED IN RESPECT OF THE APPELLANT'S TRADING TRANSACTION WITH HCL/ OTHER DISTRIBUTORS CANNOT BE CHARACTERIZED AS 'INCOME IN THE NATURE OF COMMISSIO N', LIABLE TO TAX DEDUCTION AT SOURCE UNDER SECTION 194 H OF THE ACT. 2.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO AND HONBLE DRP HAVE ERRED I N OBSERVING THAT THE AMOUNTS INCURRED BY THE APPELLAN T TOWARDS SUCH TRADE OFFERS/ DISCOUNTS EXTENDED TO HC L/ OTHER DISTRIBUTORS ALTERNATIVELY FALL WITHIN THE AM BIT OF 'FEES FOR TECHNICAL SERVICES AS DEFINED UNDER EXPLANATION 2 TO SECTION 9(1)(VII) OF THE ACT AND T HUS, ALLEGEDLY LIABLE TO TAX DEDUCTION AT SOURCE UNDER SECTION 194J OF THE ACT. 2.4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS FACTUALLY ERRED IN OBSER VING ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 3 THAT HCL IS ENGAGED IN PROVISION OF WARRANTY, MARKETING, AFTER SALES SERVICES AND REPAIRS ETC., O N BEHALF OF THE APPELLANT IN LIEU OF WHICH, TRADE OFF ERS/ DISCOUNTS ARE EXTENDED BY THE APPELLANT TO HCL/ OTH ER DISTRIBUTORS, IN COMPLETE DISREGARD OF THE FACT THA T THE APPELLANT AND HCL/ OTHER DISTRIBUTORS WORK ON PRINCIPAL-TO-PRINCIPAL BASIS AND UNDERTAKE ANY MARKETING OR PROMOTIONAL ACTIVITY TO PROMOTE THEIR OWN BUSINESS. 2.5 THAT WITHOUT PREJUDICE TO THE ABOVE, ON THE FAC TS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. A O HAS ALSO ERRED IN DENYING THE BENEFIT OF SECOND PRO VISO TO SECTION 40(A)(IA) OF THE ACT TO THE APPELLANT ME RELY ON THE PREMISE THAT THE DECLARATIONS PROVIDED BY TH E APPELLANT ARE NOT IN THE FORMAT PRESCRIBED UNDER TH E ACT (FORM 26A), IN TOTAL DISREGARD OF THE FACT THAT THE REQUIREMENT OF SUBMITTING THE CONFIRMATIONS IN FORM 26A WAS NEVER COMMUNICATED TO THE APPELLANT NEITHER BY THE HONBLE DRP IN ITS DIRECTIONS NOR BY THE LD. AO WHILE ISSUING THE REMAND REPORT AGAINST THE APPLICA TION FOR ADDITIONAL EVIDENCE FILED BY THE APPELLANT. 2.6 THAT WITHOUT PREJUDICE TO THE ABOVE, ON THE FAC TS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. A O HAS ERRED IN NOT APPRECIATING THE FACT THAT THE SEC OND PROVISO TO SECTION 40(A)(IA) OF THE ACT IS CURATIVE AND CLARIFICATORY IN NATURE, AND WAS INTRODUCED TO PROV IDE RELIEF TO THE PAYER-ASSESSEES IN CASES WHERE THE PA YEE HAS ALREADY CONSIDERED THE AMOUNT IN QUESTION IN IT S RETURN OF INCOME AND DISCHARGED THE TAX LIABILITY THEREON, WHICH FACT HAS BEEN CLEARLY BROUGHT OUT IN THE CONFIRMATIONS PROVIDED BY HCL AND OTHER DISTRIBUTOR S. 2.7 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ALSO ERRED IN NOT EXERCI SING THE DISCRETIONARY POWERS VESTED TO HIM UNDER SECTIO N 133(6) OF THE ACT AND CALLING FOR INFORMATION IN RE LATION TO TRADE OFFERS/ DISCOUNTS EXTENDED BY THE APPELLAN T DIRECTLY FROM HCL AND OTHER DISTRIBUTORS, EVEN THOU GH THE APPELLANT HAD DULY SUBMITTED PAN AND OTHER RELEVANT DETAILS OF HCL AND OTHER DISTRIBUTORS BEFO RE THE LD. AO. ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 4 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN DISALLOWING AN AMOU NT OF RS. 2,30,24,337/- BEING TRADE PRICE PROTECTION (TPP) GIVEN TO ITS DISTRIBUTORS. 3.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN NOT APPRECIATIN G THE FACT THAT THE TPP IS OFFERED BY THE APPELLANT T O ITS DISTRIBUTORS ON ACCOUNT OF REDUCTION IN PRICES OF T HE MOBILE HANDSETS LYING IN STOCK, WHICH IS SUPPORTED BY INDEPENDENT CONFIRMATIONS/ EVIDENCES AND THAT THE SAME IS STANDARD INDUSTRY PRACTICE FOR CARRYING OUT THE BUSINESS OF THE APPELLANT. 3.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS FACTUALLY ERRED IN OBSER VING THAT THE APPELLANT HAS FAILED TO FURNISH ANY AUTHENTICATED DOCUMENTARY EVIDENCE IN SUPPORT OF TH E CLAIM OF TPP OR PROVIDE THE PROCEDURE FOLLOWED FOR DETERMINATION OF THE AMOUNT OF TPP PROVIDED TO DISTRIBUTORS, WHEREAS ALL NECESSARY DOCUMENTATION A ND JUSTIFICATION FOR ALLOWABILITY OF SUCH CLAIM WAS FI LED BEFORE THE LD. AO IN THE COURSE OF ASSESSMENT PROCEEDINGS. 3.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, WHILE DISALLOWING THE CLAIM OF THE APPELLANT, THE LD. AO HAS ERRED IN OBSERVING THAT T HE APPELLANT HAS NOT BEEN ABLE TO PROVE AS TO HOW TPP GIVEN TO DISTRIBUTORS HAS BEEN PASSED ON TO THE ULTIMATE CUSTOMERS, WHEREAS SUCH PREMISE IS COMPLETELY IRRELEVANT IN DETERMINATION OF ALLOWABIL ITY OR GENUINENESS OF ANY EXPENSE TRANSACTION. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN DISALLOWING THE COS T INCURRED BY THE APPELLANT ON PHONES ISSUED TO EMPLOYEES, DEALERS AND CARE CENTERS, TREATING TO BE IN THE NATURE OF CAPITAL EXPENSE OR NOT ALLOWABLE AS A BUSINESS EXPENSE UNDER THE PROVISIONS OF SECTION 37(1) OF THE ACT. 4.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN ALLEGING THAT F OC ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 5 PHONES ISSUED TO CARE CENTERS IS IN THE NATURE OF WARRANTY EXPENSE AND DISALLOWING THE SAME FOR WANT OF RECONCILIATION OF THEIR COST WITH THE PROVISION FOR WARRANTY, WITHOUT APPRECIATING THE FACT THAT THE SA ID RECONCILIATION WAS NEVER SOUGHT FROM THE APPELLANT DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 4.2 WITHOUT PREJUDICE TO ABOVE, THE LD. AO HAS ERRE D IN NOT ALLOWING TAX DEPRECIATION ON THE COST OF FOC PHONES PARTICULARLY IN RELATION TO PHONES ISSUED TO DEALERS, DESPITE MAKING A SPECIFIC REFERENCE TO THE SAME IN THE IMPUGNED ORDER, THEREBY CONTRADICTING T HE AFORESAID DISALLOWANCE MADE. 4.3 THAT WITHOUT PREJUDICE TO THE ABOVE, ON THE FAC TS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. A O HAS ERRED IN NOT GRANTING DEDUCTION OF ROLL-OVER DEPRECIATION ON THE WRITTEN DOWN VALUE OF THE FOC PHONES TREATED AS CAPITAL ASSETS IN THE CASE OF NEP L IN EARLIER AYS, WHERE IN THE IMPUGNED ASSESSMENT ORDER , THE LD. AO HAS HIMSELF STATED THAT THE ISSUES EXAMI NED IN THE CASE OF NEPL SHALL CONTINUE TO BE APPLICABLE IN THE APPELLANTS CASE AS WELL, PURPORTEDLY BEING THE SUCCESSOR OF NEPLS BUSINESS. TRANSFER PRICING GROUNDS THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP/ LD. AO/ LD. TRANSFER PRICING OFFICER (LD. TPO) ERRED IN ENHANCING THE INCOME O F THE APPELLANT BY RS. 1,44,00,000/- BY MAKING A TP ADJUSTMENT ON ACCOUNT OF AMP EXPENSES INCURRED BY THE APPELLANT IN THE REGULAR COURSE OF ITS BUSINESS ON THE GROUND THAT IT WAS EXCESSIVE AND SHOULD BE COMPENSATED BY THE ASSOCIATED ENTERPRISES (AE). 5.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP/ LD. AO/ LD. TPO HAVE ERRED IN HOLDING THAT THE AMP EXPENDITURE INCURRED BY THE APPELLANT CONSTITUTES AS AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF T HE TERM AS CONTAINED IN SECTION 92B OF THE ACT. IN THI S PROCESS, THE HONBLE DRP/ LD. AO/ LD. TPO ERRED IN: ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 6 (A) NOT APPRECIATING THAT THERE ARE NO MACHINERY PROVISIONS IN THE ACT TO DETERMINE AMP AS AN INTERNATIONAL TRANSACTION OR TO MAKE ADJUSTMENT IN RELATION TO AMP EXPENSES. (B) NOT APPRECIATING THAT, IN THE ABSENCE OF ANY UNDERSTANDING/ ARRANGEMENT/ AGREEMENT BETWEEN THE APPELLANT AND ITS AE (WHICH OWNS THE TRADEMARKS) FOR INCURRENCE OF EXTRAORDINARY AMP EXPENDITURE BY THE APPELLANT FOR DEVELOPING MARKETING INTANGIBLES FOR THE AE, AMP EXPENDITURE INCURRED BY THE APPLICANT AT ITS OWN BEHEST COULD N OT BE REGARDED AS A 'TRANSACTION'. (C) NOT APPRECIATING THAT THE AMP EXPENSES WERE INCURRED BY THE APPELLANT AS A FUNCTION AS PART O F ITS ROLE AND RESPONSIBILITY AS A LIMITED RISK DISTR IBUTER AND NOT UNDER A SEPARATE ARRANGEMENT/ AGREEMENT WITH AE TO PROMOTE BRANDS OWNED BY AE. (D) HOLDING THAT THE AMP EXPENDITURE INCURRED BY THE APPELLANT IS AN INTERNATIONAL TRANSACTION BY RELYING UPON THE DECISION IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. VS. CIT ([2015] 374 ITR 118) AND WITHOUT APPRECIATING THAT UNLIKE THE FACTS OF THE CASE IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA), THE APPELLANT HAD - (I) NEITHER RECEIVED ANY SUBSIDY/ GRANT IN CONNECTION WITH AMP EXPENSES FROM ITS AE; AND (II) NOR THE APPELLANT HAD ADMITTED TO THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. 5.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP/ LD. AO/ LD. TPO GROSSL Y ERRED IN FACTS AND IN LAW BY NOT APPRECIATING THAT THE AMP EXPENSE CONSIDERED FOR AMP ADJUSTMENT ARE PRIMARILY IN THE NATURE OF ROUTINE SELLING AND DISTRIBUTION EXPENSES AND ARE NOT IN THE NATURE OF BRAND PROMOTION EXPENSES. 5.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP/ LD. AO/ LD. TPO ERRED IN NOT APPRECIATING THAT THE AE OF THE APPELLANT DID N OT DERIVE ANY BENEFIT FROM AMP EXPENDITURE INCURRED BY ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 7 THE APPELLANT. FURTHER, IF ANY BENEFIT ARISES TO AE ON ACCOUNT OF AMP EXPENDITURE INCURRED BY THE APPELLAN T IS PURELY INCIDENTAL IN NATURE AND DOES NOT REQUIRE ANY COMPENSATION. 5.4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP/ LD. AO/ LD. TPO ERRED IN NOT APPRECIATING THAT EVEN IF THE INCURRENCE OF EXCESSIVE AMP EXPENDITURE IS CONSIDERED AS A SEPARA TE INTERNATIONAL TRANSACTION, THE SAME HAS BEEN SUITAB LY BENCHMARKED UNDER APPLICATION OF TRANSACTION NET MARGIN METHOD (TNMM) CARRIED OUT BY THE APPELLANT . MOREOVER, THE APPELLANT HAS ALREADY BEEN SUITABLY COMPENSATED THROUGH A ROYALTY FREE DISTRIBUTION RIG HT AND A FIXED RETURN FOR ITS DISTRIBUTION ACTIVITIES INCLUDING INCURRENCE OF AMP EXPENDITURE. 5.5 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE DRP/ LD. AO/ LD. TPO ERRED IN NOT APPRECIATING THAT SINCE THE APPELLANT HAS EARNE D MORE THAN ARMS LENGTH RETURN IN ITS DISTRIBUTION SEGMENT, SUCH EXCESS REMUNERATION SHOULD BE SET OFF WITH THE PROPOSED AMP ADJUSTMENT. 5.6 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, HONBLE DRP / LD. AO/ LD. TPO WHILE APPLYING THE SEGREGATED APPROACH TO DETERMINE THE ARMS LENGTH PRICE OF THE ALLEGED AMP TRANSACTION, HAVE ACCEPTED COMPANIES WHICH ARE NOT ENGAGED IN MARKET SUPPORT SERVICES. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. AO ERRED IN LEVYING INTEREST UNDER SECTION 234B AND 234D OF THE ACT. 7. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, LD. AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 8 3. NOKIA INDIA SALES PVT. LTD. (NISPL) WAS INCORPOR ATED AS NOKIA SALES SERVICES PVT. LTD. IN DECEMBER 2008. TH E NAME OF THE COMPANY WAS CHANGED TO NOKIA INDIA SALES PVT. L TD. ON MARCH 18, 2011. THE ASSESSEE COMPANY IS AN INDIRECT LY WHOLLY OWNED SUBSIDIARY OF NOKIA CORPORATION OY, FINLAND A ND IS ENGAGED IN THE BUSINESS OF MARKETING, DISTRIBUTION AND SALES OF MOBILE PHONES INCLUDING ACCESSORIES AND SERVICES. T HIS BUSINESS OF THE ASSESSEE WAS EARLIER HANDLED BY M/S NOKIA IN DIA PVT. LTD. (NIPL), ANOTHER SUBSIDIARY OF NOKIA CORPORATION OY, TILL ABOUT END OF DECEMBER, 2012 AND IN THAT SENSE NIPL IS BUS INESS PREDECESSOR TO THE ASSESSEE. DISALLOWANCE U/S 40(A)(IA): 4. THE ASSESSING OFFICER RESORTED TO DISALLOWANCE O F RS.155.05 CRORES AND RS.58.31 CRORES U/S 40(A)(IA) OF THE INCOME TAX ACT, 1961 ON ACCOUNT OF NON-WITHHOLDING OF TAXES U/S 194H OF THE ACT ON THE DISCOUNT EXTENDED TO HCL INFOSYSTEMS LTD. 5. THE FACTS RELEVANT TO THE ADJUDICATION OF THIS I SSUE ARE THAT THE ASSESSEE ENTERED INTO AN AGREEMENT WITH HCL FOR OBTAINING THE FOLLOWING SERVICES: I. PURCHASE AND SALE OF MOBILE PHONES FROM THE ASSESSE E. II. PROMOTIONS AND ADVERTISEMENT OF PRODUCTS USING THE ASSESSEES TRADEMARK NOKIA. III. DISCUSSION ON MARKET TRENDS. IV. DISCUSSION ON ACTIVITIES OF ASSESSEES COMPETITORS V. AFTER SALES MATTERS DISCUSSION VI. MARKETING PLAN DISCUSSION VII. ASSISTANCE IN OBTAINING THE TYPE APPROVAL ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 9 VIII. PERFORMING WARRANTY AND/OR AFTER WARRANTY SERVICES AND REPAIRS OF THE PRODUCTS FOR END-USER CUSTOMERS. 6. ON GOING THROUGH THE VARIOUS CLAUSES OF THE AGRE EMENT, THE ASSESSING OFFICER HELD THAT THE PAYMENT MADE BY THE WAY OF DEBIT NOTES TO HCL ARE NOT TRADE DISCOUNTS BUT WERE PAYMENTS FOR SPECIFIC SERVICES WHICH VARIED FROM CONSULTANCY TO TECHNICAL SERVICES IN NATURE. BEING CONSULTANCY AND TECHNICAL SERVICES IN NATURE, THE ASSESSING OFFICER HELD THAT THE PROVISI ON PERTAINING TO TDS ARE ATTRACTED. 7. THE LD. DRP DURING THE PROCEEDINGS CALLED FOR A REPORT FROM THE AO WHICH IS REPRODUCED AS UNDER: (A) THE ASSESSEE HAS SUBMITTED EVIDENCES ON SAMPLE BASIS WHICH ARE LETTERS FROM VARIOUS ENTITIES STATING THEIR BUS INESS, CONFIRMING IN SOME THAT THE RELATIONSHIP BETWEEN NISPL IS ON A PR INCIPAL TO PRINCIPAL BASIS. A BRIEF MENTION HAS BEEN MADE IN S OME LETTERS TO THEIR ITR FILED. (B) THE EVIDENCES HAVE BEEN CONSIDERED. IT IS NOTED THAT THE ASSESSING OFFICER ON PAGE 18 OF THEIR DRAFT ASSESSM ENT ORDER DATED 26.12.2016 HAS CLEARLY STATED THAT, 27. THE RELATIONSHIP BETWEEN THE ASSESSEE AND THE DISTRIBUTOR (IS THAT OF PRINCIPAL TO PRINCIPAL OR OF PRINCIPAL TO A GENT) IS OF RELEVANCE IN CASE SALE OF PRODUCTS IS CONCERNED. HOWEVER, SUC H RELATIONSHIP IS NOT RELEVANT AS FAR AS THE INCENTIVE/ BENEFIT GIVEN BY THE ASSESSEE IS CONCERNED AS THE INCENTIVE/ BENEFIT IS NOT ACCRUING FROM THE TRANSACTION OF SALE AND PURCHASE BETWEEN THE ASSESS EE AND THE DISTRIBUTOR (HCL). RELIANCE IN THIS REGARD CAN. BE PLACED ON THE JUDGMENT OF HONBLE MUMBAI BENCH TRIBUNAL IN THE MA TTERS OF SKOL ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 10 BREWERIES LTD VS. ASSISTANT COMMISSIONER OF INCOME TAX RANGE 8(3), MUMBAI [2013] 29 TAXMANN.COM 111. 28. SECTION 194H TALKS ABOUT THE PAYMENT TO A RECI PIENT WHICH IS THE INCOME BY WAY OF COMMISSION OR BROKERAGE AND DO ES NOT TALK ABOUT THE RELATIONSHIP BETWEEN THE PAYER AND THE PA YEE TO BE NECESSARILY THAT OF A PRINCIPAL AND AGENT. THE EXPL ANATION TO SECTION 194H ELABORATES THE TERMS COMMISSION OR BROKERAGE. IT IS EVIDENT THAT COMMISSION AND BROKERAGE UNDER SECTION 194H IS AN INCLUSIVE DEFINITION AND INCLUDES IN ITS AMBIT ANY PAYMENT RE CEIVED OR RECEIVABLE, DIRECTLY OR INDIRECTLY FOR ANY SERVICES IN THE COURSE OF BUYING OR SELLING OF GOODS. 29. HCL HAS CONDUCTED PROMOTIONAL, MARKETING, ADVE RTISING, DISCUSSION ON MARKET TRADES AND SITUATION FROM THE POINT OF EXPANDING THE SALE QUANTITIES, ACTIVITIES OF ASSESS EE'S COMPETITORS, AFTER SALES MATTERS, MARKETING PLAN AND ASSISTANCE IN OBTAINING THE TYPE APPROVAL HCL AND THE ASSESSEE HAVE INTENTION T O MEET TOGETHER AT APPROXIMATELY 3 MONTHS INTERVAL TO EXCHANGE THE INFORMATION ON THE AFORESAID ASPECTS. HCL WAS NOT AWARDED ANY BENE FIT FOR UNDERTAKING THE SAID ACTIVITIES EXCEPT THE SAID INC ENTIVES. IT APPEARS THAT AND CAN BE CONCLUDED THAT THE BENEFIT GIVEN UN DER THE SCHEME IS INDIRECTLY FOR THE SERVICES IN COURSE OF BUYING OR SELLING OF GOODS WHICH FURTHER DEPENDS ON THE ACHIEVEMENT OF PERCENT AGE OF TARGETS, HENCE, IS IN THE NATURE OF COMMISSION, WHICH IS LIA BLE TO TDS. 30. IT CAN BE SAID THAT THE SERVICES PROVIDED BY HC L TO THE ASSESSES ARE OF CONSULTANCY IN NATURE AND ARE SQUAR ELY COVERED BY THE NATURE OF TECHNICAL SERVICES AS DEFINED UNDER E XPLANATION 2 TO SECTION 9(1)(VII) OF THE IT ACT 1961. PAYMENT FOR T HE TECHNICAL SERVICES IS LIABLE TO TAX DEDUCTION AT SOURCE UNDER SECTION 194J OF THE IT ACT 1961. NO ONE WOULD PROVIDE SUCH TECHNICAL SE RVICES FREE OF COST H CAN BE CONCLUDED THAT THE BENEFIT GIVEN UNDE R THE SCHEME IS FOR MARKETING, SALES PROMOTION AND CONSIDERATION OF VARIOUS ASPECTS ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 11 LIKE MARKET TRENDS AND SITUATION FROM THE POINT OF EXPANDING THE SALE QUANTITIES, ACTIVITIES OF ASSESSEE'S COMPETITORS, A FTER SALES MATTERS, MARKETING PLAN OF THE PRODUCTS BY THE DISTRIBUTOR W HICH DOES NOT PASS ON TO THE RETAILER OR TO THE END USER OF THE PRODUC TS. HENCE SUCH INCENTIVES ARE IN THE NATURE OF FEES FOR PROFESSION AL OR TECHNICAL SERVICES, WHICH IS LIABLE TO TDS U/S 194J. . THEREAFTER ON PAGE 19 OF THE DRAFT ORDER, THE ASSES SING OFFICER HAS STATED THE FOLLOWING IN RESPECT OF DISTRIBUTORS OTH ER THAN HFCL INFOSYSTEMS LTD: 23. DURING THE YEAR UNDER CONSIDERATION, THE ASSES SEE HAS OFFERED TRACK INCENTIVES TO DISTRIBUTORS OTHER THEM HCL LNF OSYSTEMS LTD. AMOUNTING TO RS 58,31,18,115/-. IN THE COURSE OF TH E ASSESSMENT PROCEEDINGS THE ASSESSEE HAS BEEN ASKED TO FURNISH THE NATURE OF SUCH TRADE OFFERS WITH SUPPORTING DOCUMENTARY EVIDE NCES AND CALCULATION/ COMPUTATION FOR ARRIVING AT THE SAID A MOUNT. 24. ASSESSEE'S SUBMISSION IN THIS REGARD IS AN THE SAME LINES AS THAT ON TRADE OFFERS TO HCL INFOSYSTEMS LTD. IN RESPECT OF BOTH, THE AO HAS HELD THAT SINCE THE ASSESSEE HAS NOT DEDUCTED TDS ON THESE PAYMENTS, DISALLOWANCE OF PRO VISION OF SECTION 40(A)(IA) OF THE INCOME TAX ACT 1961 IS APP LICABLE. AS THE AO HAS MADE A SPEAKING ORDER AND GIVEN THE R EASONS FOR DISALLOWANCE OF PROVISION OF SECTION 40(A)(IA) OF T HE INCOME TAX ACT 1961, THE AFORESAID EVIDENCES SUBMITTED BY THE ASSE SSEE DO NOT CHANGE THE NATURE OF THE PAYMENT BEING MADE AND THE FINDINGS OF THE ASSESSING OFFICER. 8. THE LD. DRP FURTHER HELD THAT THE ASSESSEE HAS S UBMITTED CERTIFICATE FROM HCL LTD. AND FROM HCF INFOTECH LTD . THAT THEY HAVE FILED THEIR RETURN OF INCOME AND HAVE DISCLOSE D THE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 12 PAYMENTS RECEIVED FROM THE ASSESSEE BY WAY OF DISCO UNT IN THEIR RETURN OF INCOME. COPY OF THE CERTIFICATE WAS SENT TO THE AO BY THE LD. DRP. THE A.O. WAS DIRECTED TO VERIFY WHETHER THE ASSESSEE FALLS WITHIN THE SECOND PROVISO OF SECTION 40(I)(IA) OR NOT. THE LD. DRP HELD THAT THE ASSESSEE IS COVERED BY THE SECOND PROVISO, NO DISALLOWANCE TO THE EXTENT SUCH INCOME HAS BEEN DISCLOSED BY HCL & HCL INFOTECH LTD IN THEIR R ETURN AND TO THE EXTENT TAX HAS BEEN PAID ON SUCH INCOME SHOULD BE MADE. 9. HAVING RECEIVED THE DIRECTIONS FROM THE LD. DRP, THE AO DISALLOWED THE AMOUNT INVOLVED HOLDING AS UNDER: ANALYSIS OF THE ASSESSING OFFICER 30. THE DRP HAS ASKED THE AO TO VERIFY WHETHER TH E ASSESSEE FALLS WITHIN THE SECOND PROVISO OF SECTION 40(I)(IA ) OF THE INCOME TAX ACT 1961 OR NOT. 31. THE SECOND PROVISO TO SECTION 40(A)(IA) OF THE INCOME TAX ACT 1961 READS AS FOLLOWS: 'PROVIDED FURTHER THAT WHERE AN ASSESSEE FAILS TO D EDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVLL-B ON ANY SUCH SUM BUT IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UNDER THE FIRST PROVISO TO SUB- SECTION (1) OF SECTION 201, THEN, FOX THE PURPOSE OF THIS SUB-CLAU SE, IT SHALL BE DEEMED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE FAX ON SUCH SUM OF THE DATE OF FURNISHING OF RETURN OF INC OME BY THE RESIDENT PAYEE REFERRED TO IN THE SAID PROVISO. 32. THE FIRST PROVISO OF SUB-SECTION (1) OF SECTIO N 201 READ AS FOLLOWS: ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 13 PROVIDED THAT ANY PERSON, INCLUDING THE PRINCIPAL O FFICER OF A COMPANY, WHO FAILS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF THIS CHAPTER ON T HE SUM PAID TO A RESIDENT OR ON THE SUM CREDITED TO THE ACCOUNT OF A RESIDENT SHALL NOT BE DEEMED TO BE AN ASSESSEE IN DEFAULT IN RESPECT OF SUCH TAX IF SUCH RESIDENT (I) HAS FURNISHED HIS RETURN OF INCOME UNDER SECTI ON 139; (II) HAS TAKEN INTO ACCOUNT SUCH SUM FOR COMPUTING INCOME IN SUCH RETURN OF INCOME; AND (III) HAS PAID THE TAX DUE ON THE INCOME DECLARED B Y HIM IN SUCH RETURN OF INCOME, AND THE PERSON FURNISHES A CERTIF ICATE TO THIS EFFECT FROM AN ACCOUNTANT IN SUCH FORM AS MAY BE PR ESCRIBED. 33. AS PER RULE 31ACB PRESCRIBES THE FORM FOR FURN ISHING CERTIFICATE OF ACCOUNTANT UNDER THE FIRST PROVISO T O SUB SECTION (1) OF SECTION 201 OF THE INCOME TAX ACT 1961. [FORM FOR FURNISHING CERTIFICATE OF ACCOUNTANT UNDE R THE FIRST PROVISO TO SUB-SECTION (1) OF SECTION 201. 31ACB. (1) THE CERTIFICATE FROM AN ACCOUNTANT UNDER THE FIRST PROVISO TO SUB-SECTION (1) OF SECTION 201 SHALL BE FURNISHED IN FORM 26A TO THE DIRECTOR GENERAL OF INCOME-TAX (SYS TEMS) OR THE PERSON AUTHORIZED BY THE DIRECTOR GENERAL OF IN COME-TAX (SYSTEMS) IN ACCORDANCE WITH THE PROCEDURES, FORMAT S AND STANDARDS SPECIFIED UNDER SUB-RULE (2), AND VERIFIE D IN ACCORDANCE WITH THE PROCEDURES, FORMATS AND STANDAR DS SPECIFIED UNDER SUB-RULE (2). ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 14 (2) THE DIRECTOR GENERAL OF INCOME-TAX (SYSTEMS) SH ALL SPECIFY THE PROCEDURES, FORMATS AND STANDARDS FOR THE PURPO SES OF FURNISHING AND VERIFICATION OF THE FORM 26A AND BE RESPONSIBLE FOR THE DAY-TO-DAY ADMINISTRATION IN RELATION TO FU RNISHING AND VERIFICATION OF THE FORM 26A IN THE MANNER SO SPECI FIED.] 34. THE PRESCRIBED FORM 26A IS PLACED AT ANNEXURE C. IT CAN BE SEEN THAT THERE IS A SPECIFIC CERTIFICATE THAT N EEDS TO BE PLACED BEFORE THE INCOME TAX AUTHORITIES AS PER THE REQUIREMENTS OF THE FIRST PROVISO OF SUB-SECTION (1 ) OF SECTION 201. THE CERTIFICATE NEEDS TO BE GIVEN IN THE PRESC RIBED FORM 26A FROM AN ACCOUNTANT/ AUDITOR AFTER VERIFICATION OF ALL THE PARTICULARS REGARDING THE PAYER AND PAYEE. 35. THE DOCUMENTS SUBMITTED BY THE ASSESSEE BEFORE THE DRP ARE PLACED AT ANNEXURE D. THESE SAME DOCUMENTS WERE SUBMITTED BY THE ASSESSEE BEFORE THE AO FOR VERIFIC ATION IN SUBMISSIONS DATED 24.10.2017 FOLLOWING THE DRP DIRE CTIONS DATED 4.9.2017. 36. THE DRP HAS ASKED THE AO TO VERIFY WHETHER THE ASSESSEE FALLS WITHIN THE SECOND PROVISO OF SECTION 40(I)(IA ) OR NOT. 37. IT CAN BE SEEN THAT THESE SUBMISSIONS GIVEN BY THE ASSESSEE BEFORE DRP AND BEFORE, THE AO VIDE LETTER DATED 24.10.2017 ARE IN THE FORM OF LETTERS TO WHOMSOEVE R IT MAY CONCERN' FROM, THE FOLLOWING COMPANY: LETTER DATED NAME OF COMPANY ANNEXURE D1 21.4.2017 HCL INFOSYSTEMS LTD. ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 15 38. THE DOCUMENTS SUBMITTED CANNOT BE CONSIDERED BY THE ASSESSING OFFICER FOR ASCERTAINING, WHETHER THE ASS ESSEE FALLS WITHIN THE SECOND PROVISO OF SECTION 40(I)(IA) AS: A. REQUIREMENTS OF THE FIRST PROVISO OF SUB-SECTION (1 ) OF SECTION 201 OF THE INCOME TAX ACT 1961 HAVE NOT BEE N FULFILLED, DUE TO LACK OF FURNISHING OF REQUIRED FO RM AND PRESCRIBED CERTIFICATE IN WHICH THE REQUISITE DETAI LS HAVE TO BE FURNISHED AS REQUIRED BY THE INCOME TAX ACT A ND RULES. B. THESE DETAILS ARE ALSO REQUIRED TO BE CERTIFIED BY AN ACCOUNTANT/ AUDITOR WHICH HAS NOT BEEN DONE IN THIS CASE. 39. AS THE REQUIREMENTS OF THE 'FIRST PROVISO OF S UB-SECTION (1) OF SECTION 201 OF THE INCOME TAX ACT 1961 HAVE NOT BEEN FULFILLED, THE ASSESSEE DOES NOT FALL WITHIN THE SE COND PROVISO OF SECTION 40(I)(IA) OF THE INCOME TAX ACT 1961 AND TH EREFORE, DISALLOWANCE OF RS.155,05,28,276/- IS BEING MADE. TRADE OFFERS TO DISTRIBUTORS OTHER THAN HCL INFOSYS TEMS LTD. 41. DURING THE YEAR UNDER CONSIDERATION, THE ASSESS EE HAS OFFERED TRADE INCENTIVES TO DISTRIBUTORS OTHER THAN HCL INFO SYSTEMS LTD. AMOUNTING TO RS. 58,31,18,115/- IN THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSEE HAS BEEN AS KED TO FURNISH THE NATURE OF SUCH TRADE OFFERS WITH SUPPOR TING DOCUMENTARY EVIDENCES AND CALCULATION/ COMPUTATION FOR ARRIVING AT THE SAID AMOUNT. 42. ASSESSEE'S SUBMISSION IN THIS REGARD IS ON THE SAME LINES AS THAT ON TRADE OFFERS TO HCL INFOSYSTEMS LTD. ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 16 43. AS DISCUSSED IN ABOVE PARAS THE TRADE OFFERS TO HCL ARE IN THE NATURE OF COMMISSION WHICH IS LIABLE FOR DEDUCT ION OF WITHHOLDING TAX UNDER SECTION 194H OF THE ACT. AS T HE TRADE OFFERS TO THE OTHER DISTRIBUTORS ARE ALSO OF THE SA ME NATURE, THEREFORE, ON SIMILAR GROUNDS AS DISCUSSED IN CASE OF HCL, THE SAME IS TREATED COMMISSION IN THE HANDS OF DISTRIBU TORS WHICH LIABLE FOR TDS UNDER SECTION 194H. SINCE, ASSESSEE HAS NOT DEDUCTED TDS ON THESE PAYMENTS, PROVISIONS OF SECTI ON 40(A)(IA) ARE TO BE INVOKED. AS PER PROVISIONS OF S ECTION 40(A)(IA) SUCH EXPENDITURE WOULD HAVE BEEN ALLOWED AS DEDUCTION IN THE HANDS OF ASSESSEE ONLY IF THEY HAV E DEDUCTED TDS ON THE SAID PAYMENTS. SINCE THERE WAS A FAILURE ON PART OF NISPL TO DEDUCT TDS DISALLOWANCE OF RS. 58,31,18,11 5/- UNDER SECTION 40(A)(IA) IS PROPOSED TO BE MADE. THEREFORE , THE AO PROPOSED TO DISALLOW THE EXPENDITURE OF RS. 58,31,1 8,115/- UNDER SECTION 40(A)(IA) OF THE ACT IN THE DRAFT ORD ER DATED 26.12.2016. 44. VIDE DIRECTIONS DATED 4.9.2017 THE DRP HAS GIV EN THE FOLLOWING DIRECTIONS: DURING THE COURSE OF DRP PROCEEDINGS THE ASSESSEE SUBMITTED CERTIFICATE FROM HCL LTD AND FROM HCF INFOTECH LTD. THAT THEY HAVE FILED THEIR RETURN OF INCOME AND HAVE DISCLOSE D THE PAYMENTS RECEIVED FROM THE ASSESSEE BY WAY OF DISCO UNT IN THEIR RETURN OF INCOME. COPY OF THE CERTIFICATE WAS SENT TO THE AO ALSO. THE AO IS DIRECTED TO, VERIFY WHETHER THE ASSESSEE FALLS WITHIN THE SECOND PROVISO OF SECTION 40(I)(IA) OR N OT IF THE ASSESSEE IS COVERED BY THE SECOND PROVISO, NO DISAL LOWANCE TO THE EXTENT SUCH INFORM HAS BEEN DISCLOSED BY HCL & HCL ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 17 INFOTECH LTD. IN THEIR RETURN AND TO THE EXTENT TAX HAS BEEN PAID ON SUCH INCOME SHOULD BE MADE. 45. THE ASSESSEE HAS ALSO GIVEN A. SUBMISSION DATED 24.10.2017 IN WHICH THEY HAVE STATED THAT: IN VIEW OF THE ABOVE, IT IS THE MOST HUMBLE SUBMISS ION OF THE ASSESSEE THAT IN ACCORDANCE WITH THE SECOND PROVISO TO SECTION 40(A)(IA) READ WITH FIRST PROVISO TO SECTION 201(1) OF THE ACT (INSERTED VIDE FINANCE ACT 2012), NO DISALLOWANCE U NDER SECTION 40(A)(IA), OF THE ACT SHALL TRIGGER IN THE FACTS OF THE PRESENT CASE, WHERE THE RECIPIENT PAYEE (I.E. THE DISTRIBUT ORS) HAS FURNISHED ITS RETURN OF INCOME DISCLOSING THE UNDER LYING INCOME IN ITS RETURN OF INCOME, AND HAS DULY PAID TAX THER EON. IN THIS REGARD, THE ASSESSEE WISHES TO HIGHLIGHT TH AT VIDE THE AFOREMENTIONED APPLICATION FOR ADDITIONAL EVIDENCE, THE ASSESSEE HAS SUBMITTED SAMPLE CONFIRMATIONS HAVE HC L INFOSYSTEMS LTD. AND OTHER DISTRIBUTORS TO WHOM SUC H TRADE OFFERS WERE EXTENDED BY THE ASSESSEE DURING THE FY 2012-13. FROM THE CONTENTS OF THE SAID LETTERS ISSUED BY THE DISTRIBUTORS, YOUR GOODSELF WOULD NOTE THAT THESE, PARTIES HAVE C ONFIRMED THAT THE AMOUNTS OF TRADE OFFERS/ DISCOUNTS RECEIVE D FROM THE ASSESSEE AND THE FACT THAT THE SAME HAS BEEN OFFERE D TO TAX IN THEIR RESPECTIVE RETURN OF INCOME ON WHICH TAX LIAB ILITY HAS BEEN DULY DISCHARGED. IN LIGHT OF THE ABOVE, THE ASSESSEE SUBMITS THAT TH E ASSESSEE CANNOT BE TREATED TO BE IN DEFAULT IN VIEW OF THE C URATIVE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT AND DISA LLOWANCE PROPOSED IN THE DRAFT ASSESSMENT ORDER OUGHT TO BE DELETED. IN ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 18 ACCORDANCE WITH THE DIRECTIONS DISUSED BY THE HON'B LE DRP, WE REQUEST YOUR GOOD SELF TO KINDLY VERIFY THE ATTACHE D DECLARATIONS AND PROVIDE NECESSARY RELIEF TO THE ASSESSEE. ANALYSIS OF THE ASSESSING OFFICER 46. THE DRP HAS ASKED THE AO TO VERIFY WHETHER THE ASSESSEE FAILS WITHIN THE SECOND PROVISO OF SECTION 40(I)(IA ) OR NOT. 47. THE SECOND PROVISO TO .SECTION 40(A)(IA) READS AS FOLLOWS: PROVIDED FURTHER THAT WHERE AN ASSESSEE FAILS TO D EDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII-B ON ANY SUCH SUM BUT IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UNDER THE FIRST PROVISO TO SUB- SECTION (1) OF SECTION 201, THEN, FOR THE PURPOSE OF THIS SUB-CLAU SE, IT SHALL BE DEEMED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE TAX ON SUCH SUM ON THE DATE OF FURNISHING OF RETURN OF INC OME BY THE RESIDENT PAYEE REFERRED TO IN THE SAID PROVISO. 48. THE FIRST PROVISO OF SUB-SECTION (1) OF SECTIO N 201 READ AS FOLLOWS: PROVIDED THAT ANY PERSON, INCLUDING THE PRINCIPAL, OFFICER OF A COMPANY, WHO FALLS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF THIS CHAPTER ON T HE SUM PAID TO A RESIDENT OR ON THE SUM CREDITED TO THE ACCOUNT OF A RESIDENT SHALL NOT BE DEEMED TO BE AN ASSESSEE IN DEFAULT IN RESPECT OF SUCH TAX IF SUCH RESIDENT (I) HAS FURNISHED HIS RETURN OF INCOME UNDER SECTIO N 139; ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 19 (II) HAS TAKEN INTO ACCOUNT SUCH SUM FOR COMPUTING INCOME IN SUCH RETURN OF INCOME; AND (III) HAS PAID THE TAX DUE ON THE INCOME DECLARED B Y HIM IN SUCH RETURN OF INCOME, AND THE PERSON FURNISHES A CERTIF ICATE TO THIS EFFECT FROM AN ACCOUNTANT IN SUCH FORM AS MAY BE PR ESCRIBED. 49. AS PER RULE 31ACB PRESCRIBES THE FORM FOR FURNI SHING CERTIFICATE OF ACCOUNTANT UNDER THE FIRST PROVISO T O SUB SECTION (1) OF SECTION 201 OF THE INCOME TAX ACT 1961. [FORM FOR FURNISHING CERTIFICATE OF ACCOUNTANT UNDE R THE FIRST PROVISO TO SUB-SECTION (1) OF SECTION 201. 31ACB. (1) THE CERTIFICATE FROM AN ACCOUNTANT UNDER THE FIRST PROVISO TO SUB-SECTION (1) OF SECTION 201 SHALL BE FURNISHED IN FORM 26A TO THE DIRECTOR GENERAL OF INCOME-TAX (SYS TEMS) OR THE PERSON AUTHORIZED BY THE DIRECTOR GENERAL OF IN COME-TAX (SYSTEMS) IN ACCORDANCE WITH THE PROCEDURES, FORMAT S AND STANDARDS SPECIFIED UNDER SUB-RULE (2), AND VERIFIE D IN ACCORDANCE WITH THE PROCEDURES, FORMATS AND STANDAR DS SPECIFIED UNDER SUB-RULE (2). (2) THE DIRECTOR GENERAL OF INCOME-TAX (SYSTEMS) SH ALL SPECIFY THE PROCEDURES, FORMATS AND STANDARDS FOR THE PURPO SES OF FURNISHING AND VERIFICATION OF THE FORM 26A AND BE RESPONSIBLE FOR THE DAY-TO-DAY ADMINISTRATION IN RELATION TO FU RNISHING AND VERIFICATION OF THE FORM 26A IN THE MANNER SO SPECI FIED.] 50. THE PRESCRIBED FORM 26A IS PLACED AT ANNEXURE C . IT CAN BE SEEN THAT THERE IS A SPECIFIC CERTIFICATE THAT NEED S TO BE PLACED, BEFORE THE INCOME TAX AUTHORITIES AS PER THE REQUIR EMENTS OF THE FIRST PROVISO OF SUB-SECTION (1) OF SECTION 201 . THE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 20 CERTIFICATE NEEDS TO BE GIVEN IN THE PRESCRIBED FOR M 26A FROM AN ACCOUNTANT/ AUDITOR AFTER VERIFICATION OF ALL TH E PARTICULARS REGARDING THE PAYER AND PAYEE. 51. THE DOCUMENTS SUBMITTED BY THE ASSESSEE BEFORE THE DRP ARE PLACED AT ANNEXURE D. THESE SAME DOCUMENTS WERE SUBMITTED TO THE AO FOR VERIFICATION BY THE ASSESSE E IN SUBMISSIONS DATED 24.10.2017 FOLLOWING THE DRP DIRE CTIONS; 52. THE DRP HAS ASKED THE AO TO VERIFY WHETHER THE ASSESSEE FALIS WITHIN THE SECOND PROVISO OF SECTION 40(I)(IA ) OR NOT. 53.LT CAN BE SEEN THAT THE SUBMISSIONS GIVEN BY THE .ASSESSEE BEFORE DRP AND BEFORE THE AO VIDE LETTER DATED 24.1 0.2017 ARE IN THE FORM OF LETTERS TO WHOMSOEVER IT MAY CONCER N' FROM THE FOLLOWING COMPANIES: LETTER DATED NAME OF COMPANY ANNEXURE D2 15.4.2017 ANNAPOORNA AGENCIES PVT. LTD. ANNEXURE D3 20.4.2017 RK WORLDINFOCOM PVT. LTD. ANNEXURE D4 21.4.2017 ROCKY MARKETING CHENNAI) PVT. LTD. ANNEXURE D5 19.4.2017 SRK MARKETING PVT. LTD. ANNEXURE D6 18.4.2017 VISION CELL PVT. LTD. ANNEXURE D7 21.4.2017 SALASAR ASSOCIATES PVT. LTD. 54. THE DOCUMENTS SUBMITTED CANNOT BE CONSIDERED BY THE ASSESSING OFFICER FOR ASCERTAINING WHETHER THE ASSE SSEE FALLS WITHIN THE SECOND PROVISO OF SECTION 40(I)(IA) AS: A. REQUIREMENTS OF THE FIRST, PROVISO OF SUB-SECTION ( 1) OF SECTION 201 OF THE INCOME TAX ACT 1961 HAVE NOT BEE N FULFILLED DUE TO LACK OF FURNISHING OF REQUIRED FOR M AND PRESCRIBED CERTIFICATE IN WHICH, THE REQUISITE DETA ILS ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 21 HAVE TO BE FURNISHED AS REQUIRED BY THE INCOME TAX ACT AND RULES. B. THESE DETAILS ARE ALSO REQUIRED TO BE CERTIFIED BY AN ACCOUNTANT/ AUDITOR WHICH HAS NOT BEEN DONE IN THIS CASE. AS THE REQUIREMENTS OF THE FIRST PROVISO OF SUB-SEC TION (1) OF SECTION 201 OF THE INCOME TAX ACT 1961 HAVE NOT BEE N FULFILLED, THE ASSESSEE DOES NOT FALL WITHIN THE SECOND PROVIS O OF SECTION 40(I)(IA) OF THE INCOME TAX ACT 1961 AND THEREFORE, DISALLOWANCE OF RS 58,31,18,115.IS BEING MADE. (RE PETITION IN THE ORDER OF THE AO) 10. THIS LEADS TO THE QUESTION TO ADJUDICATE AS TO WHETHER THE ASSESSEE CAN BE HELD TO BE A DEFAULTER AS PER THE P ROVISIONS OF SECTION 201(1) EVEN WHEN THE RECIPIENT HAS OFFERED THE RECEIPTS TO TAX. 11. THE FACT IN THIS CASE IS THAT, PRIMA FACIE THE ASSESSEE HAS DEFAULTED IN DEDUCTING THE TAX AND AT THE SAME TIME , THE RECIPIENT HAS OFFERED THE AMOUNTS RECEIVED TO TAX W HICH IS NOT IN DISPUTE. CREATING A DEMAND FOR NON-DEDUCTION OF TAX WHILE THE RECIPIENT HAS PAID TAXES ON THE SAME AMOUNT WOU LD RESULT IN RECOVERY OF TAXES ON THE SAME AMOUNT TWICE. WE FIN D THAT THE LD. ASSESSING OFFICER HAS GONE STRICTLY BY THE LETT ER AND PROCEDURE OF THE ACT LEAVING ASIDE THE SPIRIT OF TH E LEGISLATION. 12. THE FAILURE TO ADHERE TO THE PROVISIONS OF TDS RESULT IN DELAY OF PAYMENTS TO THE EXCHEQUER OF THE STATE, IN ITIATION OF PENALTY PROVISION U/S 271C AND INTERVENTION IN RECO VERY PROVISIONS U/S 201(1). THE ASSESSING OFFICER HAS TO LOOK INTO ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 22 THESE PROVISIONS JOINTLY AND SEVERALLY AS TO WHETHE R THERE WAS A DEFAULT IN RECOVERY, WHETHER THERE WAS A DELAY IN R ECOVERY, WHETHER THERE WAS A INFARCTION OF THE PENAL PROVISI ONS OR NOT AND INVOKE THE APPROPRIATE PROVISIONS OF THE ACT TO DEAL WITH DIFFERENT SITUATIONS. 13. SINCE, THE ISSUE RAISED BEFORE US PERTAIN TO TH E DEFAULT OF THE RECOVERY OF TAXES, WE FIND THAT THE TAXES HAVE BEEN DULY RECEIVED BY THE STATE FROM THE RECIPIENT AND ANY FU RTHER ACTION TO RECOVER THE SAME FROM THE ASSESSEE WOULD AMOUNT TO DOUBLE TAXATION. HENCE THE APPEAL OF THE ASSESSEE ON THIS GROUND IS HEREBY ALLOWED. EXPENDITURE ON FREE MOBILE SETS GIVEN TO DEALERS U/ S 37(1): 14. THE ASSESSING OFFICER DISALLOWED THE AMOUNT CLA IMED BY THE ASSESSEE ON ACCOUNT OF FREE PHONES/MOBILE SETS GIVEN TO CARE CENTRES EMPLOYEES AND DEALERS. 15. DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESS EE CLAIMED AN AMOUNT OF RS. 9,47,59,095/- ON ACCOUNT OF FOC PH ONES UNDER THE HEAD MARKETING EXPENSES. ON PERUSAL OF THE PAST YEARS RECORDS, IT WAS OBSERVED THAT MARKETING EXPEN SE INCLUDES COST OF MOBILE HANDSETS, ISSUED FREE OF COST TO ' AFTER MARKETING SERVICE CENTRES' ('AMSC'S'), DEALERS AND EMPLOYEES. QUERY WAS RAISED IN THIS REGARD AGAINST THE ASSESSEE TO FURNI SH THE AMOUNT OF SUCH EXPENSES INCURRED DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2012-13 AND ALSO WHY THE SAME SHOUL D NOT BE CONSIDERED IN THE NATURE OF CAPITAL EXPENDITURE AND DISALLOWED SIMILARLY DURING THE CURRENT AY. ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 23 16. IN RESPONSE, THE ASSESSEE VIDE LETTER DATED 13. 12.2016 SUBMITTED ITS REPLY. THE RELEVANT PORTION OF WHICH IS REPRODUCED HEREUNDER: .THAT THE EXPENSES IN THE NATURE ADVERTISEMENT & PUBLICITY, CONSUMER EVENTS & PROMOTIONS AND MARKETI NG EXPENSES, INCURRED BY THE ASSESSEE DURING THE PREVI OUS YEAR RELEVANT TO THE SUBJECT AY HAVE ALREADY BEEN A NALYZED IN DETAIL BY THE LEARNED TRANSFER PRICING OFFICER D URING THE COURSE OF TP ASSESSMENT PROCEEDINGS FOR THE SUBJECT AY, IT IS SUBMITTED THAT EXPENSES INCURRED BY THE ASSESSEE ON FOC PHONES (CLUBBED IN THE AFORESAID EXPENSES) REPR ESENTS REVENUE EXPENDITURE COMPLETELY ALLOWABLE UNDER THE PROVISIONS OF THE ACT, AS DISCUSSED BELOW. IN ACCORDANCE WITH THE STANDARD INDUSTRY PRACTICE A ND ALSO IN ITS ENDEAVOUR TO MAINTAIN CUSTOMER SATISFACTION AND BUILD BRAND LOYALTY, THE ASSESSEE WAS REQUIRED TO P ROVIDE WARRANTY ON ITS PHONES AND REPLACE DEFECTIVE PHONES IN CASE THEY COULD NOT BE REPAIRED, DURING, THE WARRAN TY PERIOD. ACCORDINGLY, THE ASSESSEE, DURING THE PREVIOUS YEAR RELEVANT TO THE SUBJECT AY HAS INCURRED EXPENDITURE AMOUNTING TO RS. 9.48 CRORES ON A TOTAL OF 158,223 (NUMBER OF HANDSETS) ISSUED FREE OF COST (FOG') TO CARE CENTERS, DISTRIBUTORS AND EMPLOYEES. ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 24 A DETAILED BREAKUP, OF WHICH IS PROVIDED AS UNDER: PARTICULARS PURPOSE QUANTITY AMOUNT (IN INR) FOC PHONES GIVEN UNDER WARRANTY TO CARE CENTERS REPLACEMENT PHONES. GIVEN DURING WARRANTY PERIOD 1,45,659 7,56,02,438 FOC PHONES ISSUED TO DISTRIBUTORS DISPLAY AND PROMOTIONAL PHONES TO THE DISTRIBUTORS 8,610 1,26,78,721 FOC PHONES ISSUED TO EMPLOYEES PHONES TO EMPLOYEES FOR INTERACTION WITH DISTRIBUTORS AND OTHER SERVICE ORGANIZATIONS AND ALSO FOR INDIRECT MARKETING OF THE PRODUCTS. 3,954 64,77,937 TOTAL 1,58,223 9,47,59,095 17. THE ASSESSEE HAS DISCUSSED IN DETAIL THE REASON FOR ISSUANCE, OF SUCH FOC PHONES TO CARE CENTERS, EMPLO YEES AND DISTRIBUTORS AND WHY THE SAME SHOULD BE ALLOWABLE A S A DEDUCTION UNDER SECTION 37(1) OF THE ACT: MOBILE HANDSETS ISSUED TO CARE CENTERS DURING THE PREVIOUS YEAR RELEVANT TO SUBJECT AY, TH E ASSESSEE PROVIDED QUALITY REPAIR SERVICES THROUGH I TS IDENTIFIED SERVICE PARTNERS. SUCH REPAIR, SERVICES WERE PROVIDED THROUGH CARE CENTERS LOCATED ALL ACROSS IN DIA. THESE CARE CENTERS WERE OPERATED BY ASSESSEES SERV ICE PARTNERS WHO USED TO ISSUE NEW HANDSETS TO CUSTOMER S AS 'SWAP HAND-SETS' I.E. NEW HANDSETS/WERE ISSUED TO CUSTOMERS IN THE EVENT THE HANDSET SOLD TO THE CUST OMER WERE FOUND TO BE DEFECTIVE AND COULD NOT BE REPAIRE D DURING THE WARRANTY PERIOD. ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 25 SINCE THE CUSTOMERS WERE PROVIDED WITH A 12 MONTH WARRANTY ON CELLULAR HANDSETS, THE ASSESSEE WAS REQ UIRED TO PROVIDE NEW CELLULAR HANDSETS TO THE CARE CENTER S IN THE EVENT THE CUSTOMERS APPROACHED THEM WITH DEFECTIVE NOKIA CELLULAR HANDSETS, WHICH COULD NOT BE REPAIRED DURI NG THE WARRANTY PERIOD. IT IS RE-ITERATED THAT FOC PHONES WERE PROVIDED TO CARE CENTERS IN LIEU OF PHONES WHICH CO ULD NOT BE REPAIRED DURING THE WARRANTY PERIOD AND THEREFOR E COULD NOT BE ACCOUNTED FOR UNDER THE PROVISION FOR WARRAN TY . SAMPLE CELLULAR HANDSETS WERE PROVIDED TO SUCH DIST RIBUTORS/ RETAILERS FOR DISPLAY AND PROMOTIONAL PURPOSES EITH ER ON A, 'CONCESSIONAL' BASIS OR ON A 'FREE OF CHARGE' BASIS . PROVISION OF SUCH HANDSETS TO THE DISTRIBUTORS/ RETAILERS WAS RE QUIRED TO ENABLE SUCH DISTRIBUTORS/ RETAILERS TO DISPLAY VARI OUS CELLULAR PHONES AND DEMONSTRATE THE FUNCTIONS OF THE HANDSET S TO THE INDIAN CUSTOMERS. ACCORDINGLY, THE SAID EXPENSES HA VE BEEN INCURRED BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OF THE ASSESSEE. FURTHER, AS THE OWNERSHIP IN SUCH HANDSETS DID NOT REMAIN WITH THE ASSESSEE AND HAVING REGARD TO THE MANNER IN WHI CH THE ASSESSEE'S BUSINESS WAS ORGANIZED IN INDIA, THE NUM BER OF DISTRIBUTORS SELLING NOKIA CELLULAR HANDSETS AND TH E COMMERCIAL REASONS FOR WHICH SUCH EXPENSES WERE INCURRED BY TH E ASSESSEE, SUCH EXPENDITURE UNDOUBTEDLY REPRESENTS A REVENUE EXPENDITURE, WHICH HAS BEEN INCURRED FOR THE PURPOS E OF THE BUSINESS OF THE ASSESSEE. THUS THE SAME SHOULD BE A LLOWABLE AS A BUSINESS EXPENSE UNDER THE PROVISIONS OF SECTION 37(1) OF THE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 26 ACT AND DISALLOWANCE IN THIS REGARD IS HOT WARRANTE D IN THE CASE OF THE ASSESSEE. MOBILE HANDSETS ISSUED TO EMPLOYEES THE ASSESSEE ISSUED CELLULAR PHONES TO ITS EMPLOYEE S FOR OFFICIAL USE. GIVEN THE BUSINESS MODEL OF THE ASSESSEE IN IN DIA (TRADING IN CELLULAR HANDSETS IN INDIA) IT WAS IMPERATIVE FO R ITS MARKETING EMPLOYEES TO CONSTANTLY INTERACT WITH ITS DISTRIBUT ORS AND OTHER SERVICE ORGANIZATIONS (LIKE CARE CENTERS ETC.) FOR SALE OR SERVICING OF CELLULAR HANDSETS IN INDIA. CELLULAR H ANDSETS WERE ALSO ISSUED TO OTHER EMPLOYEES FOR BUSINESS USE. FU RTHER THE PHONES ISSUED TO THE EMPLOYEES ALSO ACTED AS A PASSIVE/DEMONSTRATIVE ADVERTISEMENT STRATEGY FOR RE ACHING OUT TO MASSES AT LARGE. IN ORDER TO FACILITATE THE AFORESAID, FREE OF COST CELLULAR HANDSETS WERE PROVIDED BY THE ASSESSEE TO ITS EMPLOYEES, ENT IRELY FOR THE PURPOSE OF ITS BUSINESS AND ACCORDINGLY, THE SAME S HOULD BE ALLOWABLE AS A TAX-DEDUCTIBLE EXPENDITURE UNDER THE PROVISIONS OF SECTION 37(1) OF THE ACT. FURTHER, THE ASSESSEE FOLLOWED A SPECIFIC PROCESS F OR ISSUANCE OF FOC PHONES TO ITS EMPLOYEES AND WITH SUBSTANTIAL CH ECKS AND BALANCES IN PLACE TO CONTROL THEIR USAGE FOR BUSINE SS PURPOSE. THE PROCESS OF ISSUANCE OF MOBILE PHONES FOR ANY OF THE AFOREMENTIONED PURPOSES WAS INITIATED WITH A APPROP RIATELY FILLED IN STOCK REQUISITION FORM SUBMITTED BY A DUL Y AUTHORIZED PERSON IN THIS BEHALF, WHICH,, INTER ALIA DETAILED THE NUMBER AND MODEL OF HANDSETS REQUIRED ALONG WITH THE PURPOSE F OR WHICH THE SAME SHALL BE USED. SUCH REQUISITION FORMS (ON A SAMPLE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 27 BASIS) HAVE BEEN ENCLOSED AS ANNEXURE 2 FOR YOUR RE ADY REFERENCE. 18. THE LD. AR RELIED ON THE ORDERS OF VARIOUS JUDG MENTS AND THE LD. DR RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 19. FROM THE ABOVE, WE FIND THAT THE REPLACEMENT PH ONES GIVEN DURING THE WARRANTY PERIOD IS OF RS.7.56 CROR ES AND PHONES ISSUED TO EMPLOYEES AND FOR PROMOTION IS OF RS.1.90 CRORES. WITH REGARD TO THE FOC PHONES OF WORTH OF R S.1.90 CRORES, WE FIND NO DISPUTE IN ALLOWING THE SAME AS BUSINESS EXPENDITURE. THERE ARE NO CALMS ABOUT THIS ISSUE. WITH REGARD TO THE PHONES GIVEN AS REPLACEMENT, THE SAME NEEDS TO BE EXAMINED AGAINST THE WARRANTY EXPENSES CLAIMED BY T HE ASSESSEE. THE WARRANTY INCLUDES MAINTENANCE OF QUAL ITY, PERFORMANCE OF THE PHONES, REPAIRS AND REPLACEMENTS . THE WARRANTY PROVISION CLAIMED IN P&L ACCOUNT ARE ALLOW ED AS REVENUE EXPENDITURE ON YEAR TO YEAR BASIS. HENCE, T HE REPLACEMENT OF THE HANDSETS TO CUSTOMERS IN LIEU OF THE NON- REPAIRABLE SETS IS ALREADY EMBEDDED ON A FORECAST B ASIS IN THE PROVISIONS FOR WARRANTY. HENCE, THE AO IS DIRECTED TO EXAMINE THE COST OF REPLACED PHONES WITH THAT OF WARRANTIES ALREADY CLAIMED. WITH REGARD TO THE HANDSETS GIVEN TO THE E MPLOYEES, DEALERS, STORES FOR PROMOTIONAL AND DEMONSTRATION P URPOSES, THE SAME IS TO BE ALLOWED AS BUSINESS EXPENDITURE U/S 3 7(1) OF THE ACT. ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 28 DEDUCTION ON ACCOUNT OF TRADE PRICE PROTECTION: 20. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AS SESSEE WAS ASKED BY THE AO TO FURNISH THE DETAILS FOR TRA DE DISCOUNT INCLUDING THE POLICY OF TRADE DISCOUNT, NATURE OF T HE TRADE DISCOUNT, ACCOUNTING TREATMENT OF TRADE DISCOUNT IN THE BOOKS OF ACCOUNT AND DETAILS OF THE PARTIES TO WHOM TRADE, D ISCOUNT HAVE BEEN GIVEN ALONG WITH THE AMOUNT OF DISCOUNT. 21. THE ASSESSEE HAS SUBMITTED THAT IT HAS INCURRED EXPENDITURE OF RS. 2,30,24,337/- AS TRADE PRICE PR OTECTION DISCOUNT. THE ASSESSEE HAS ALSO PROVIDED SOME CONF IRMATIONS FROM DISTRIBUTORS, CONFIRMING THE AMOUNT OF PRICE P ROTECTION AVAILABLE TO THEM ON SAMPLE BASIS. 22. REGARDING THE NATURE OF THE EXPENSE, THE ASSESS EE HAS SUBMITTED THE FOLLOWING EXPLANATION: THE ASSESSEE WAS OPERATING IN A HIGHLY COMPETITIVE AND PRICE SENSITIVE MARKET WITH RAPIDLY EVOLVING PRODUC TS AND HIGH TECHNOLOGICAL OBSOLESCENCE, WHEREIN THE SALES OF HANDSETS OFFERED BY THE ASSESSEE AND ITS MARKET SHA RE TO A LARGE EXTENT DEPENDED UPON THE VARIETY AND PRICES O F THE HANDSETS OFFERED BY THE ASSESSEE AND ITS COMPETITOR S. OWING TO VARIOUS FACTORS SUCH AS CHANGE IN HANDSET PRICES BY THE COMPETITORS, LIFE OF THE MODEL OF THE HANDSE T, NEW / SIMILAR HANDSETS LAUNCHED BY THE COMPETITORS, MARKE T DEMAND OF THE HANDSET MODEL, THE PRICES OF HANDSETS OFFERED BY THE ASSESSEE WAS REQUIRED TO BE VARIED/ REDUCED ON A TIME TO TIME BASIS. SUCH REDUCTION IN THE PRIC E OF THE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 29 HANDSET RESULTED IN LOSS TO THE DISTRIBUTORS, IN RE SPECT OF STOCK LYING WITH THEM AS THEY WOULD BE REQUIRED TO SELL THE HANDSETS AT A PRICE LOWER THAN THE PRICE AT WHICH T HE SAME WERE PURCHASED BY THEM FROM THE ASSESSEE. ACCORDINGLY, AS A STANDARD TRADE PRACTICE AND ALSO AS A PART OF ITS SALES STRATEGY, THE ASSESSEE PROVIDED P ROTECTION TO ITS DISTRIBUTORS AGAINST THE LOSS SUFFERED BY TH E DISTRIBUTORS ON ACCOUNT OF SUCH REDUCTION/FALL IN T HE PRICES OF HANDSETS WHICH IS KNOWN AS 'TRADE PRICE PROTECT ION' (TPP). THE TPP EXPENSE REPRESENTS AMOUNT INCURRED WHOLLY A ND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS CARRIE D ON BY THE ASSESSEE AND ACCORDINGLY REPRESENTS COMPLETELY ALLOWABLE REVENUE EXPENDITURE UNDER THE PROVISIONS OF SECTION 37(1) OF THE ACT. THE SAID EXPENSES HAVE BEEN REDUCED FROM, THE SALES MADE BY THE ASSESSEE. PARTY WISE DETAILS OF TPP EXPENSES INCURRED BY THE ASSESSEE HAVE BEEN ENCLOSED AS ANNE XURE 1 FOR YOUR READY REFERENCE. AS THE TPP EXPENSES HAVE BEEN INCURRED BY THE ASSES SEE FOR COMPENSATING THE DISTRIBUTORS FOR LOSS SUFFERED BY THEM DUE TO FALL / REDUCTION IN PRICES OF THE STOCK OF M OBILE PHONES LYING WITH THEM AND SUCH REDUCTION IN PRICE IS GENERALLY MADE WITH AN OBJECTIVE OF MAINTAINING / INCREASING THE MARKET SHARE OF THE ASSESSEE AND INC REASING THE SALE OF PRODUCTS, SUCH EXPENSES SHALL BE CONSID ERED TO BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS OF THE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 30 ASSESSEE END HENCE COMPLETELY ALLOWABLE AS A DEDUCT ION UNDER SECTION 37(1) OF THE ACT. 23. THE LD. DRP IN THEIR ORDER DATED 4.9.2017 HAS G IVEN THE FOLLOWING DIRECTIONS: THE ASSESSEE HAS BEEN EMPHASIZING THE ALLOWABILITY OF THE EXPENDITURE U/S 37(1). THERE IS NO DISPUTE THAT IF THE EXPENDITURE HAS BEEN INCURRED WHOLLY, AND EXCLUSIVELY FOR THE P URPOSE OF BUSINESS, IT MUST BE ALLOWED AS AN EXPENDITURE. WHA T WAS EXPECTED OUT OF THE ASSESSEE WAS TO EXPLAIN THE BASIS OF THE EXPENDITURE I.E. HOW THE PRICE PROTECTION WAS WORKED OUT AND TO GIVE WORKING OF SUCH EXPENDITURE PARTY WISE. THE ASSESSEE FAILED TO DO S O. FURTHER THE EXPENDITURE HAS TO BE REASONABLE AS PER THE FACTS A ND CIRCUMSTANCES OF THE CASE. THE AO HAS MENTIONED THAT SINCE THE PR ICE PROTECTION WAS DIRECTLY DEBITED TO THE SALES HENCE IT WAS NOT POSSIBLE FOR HIM TO VERIFY IT. IN VIEW OF THE FACTS, MENTIONED BY THE AO, THE PANE L IS UNABLE TO INTERFERE WITH THE FINDINGS OF THE AO. THE OBJECTIO N IS THEREFORE REJECTED. 24. THUS, THE LD. DRP HAS CONFIRMED THE ADDITION OF RS.2,30,24,337/- MADE ON ACCOUNT OF TRADE PRICE PRO TECTION. WE FIND THAT THE LD. DRP IN PRINCIPLE HAS NOT DISPUTED THE ALLOWABILITY OF THE CLAIM BUT ONLY DIFFERED BASED O N THE CONFIRMATIONS WHICH HAVE BEEN INCOMPLETE AND ON THE METHODOLOGY OF QUANTIFYING THE DEDUCTION. WE FIND T HAT THE ASSESSEE HAS PROVIDED CONFIRMATIONS TO THE TUNE OF RS.74,28,167/- (AS PER THE PB). WE, AFTER CONSIDERI NG THE ENTIRE ISSUE AND SUBSEQUENT ORDERS OF THE REVENUE, HEREBY HOLD THAT THE CLAIM OF THE ASSESSEE ON TRADE PRICE PROTECTION IS ALLOWABLE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 31 AND DIRECT THE ASSESSEE TO FILE THE CONFIRMATIONS F ROM DEALERS AND DISCHARGE HIS ONUS SO AS TO CLAIM THE ENTIRE EX PENDITURE. THE APPEAL OF THE ASSESSEE ON THIS GROUND IS TREATE D AS ALLOWED. AMP EXPENDITURE: 25. THE ASSESSEE IS A SUBSIDIARY OF NOKIA CORPORATI ON WHICH HOLDS MORE THAN 99% SHARES AND THE REMAINING ARE HE LD BY ANOTHER SUBSIDIARY OF NOKIA CORPORATION. 26. THE ONLY DISPUTE WITH REGARD TO THE COMPARABLES IS THE WRONG SELECTION OF KILLICK AGENCY AND MARKETING LT D. BY TPO AS CONFIRMED BY THE LD. DRP. THE SAID COMPARABLE WA S SELECTED FROM THE BASIS OF BROAD FAR WHEREAS THE CONTENTION OF THE ASSESSEE WAS THAT THE SAID COMPARABLE ACTS AS AN AG ENT FOR COMMISSIONING OF EQUIPMENT TO ITS PRINCIPLES AND BO OK REVENUE ON THE BASIS OF COMPLETION OF PARTICULAR PROJECTS WHERE AS THE ASSESSEE IS INVOLVED IN MARKETING DISTRIBUTION AND SALE OF MOBILE PHONES AND SERVICES IN INDIA. 27. WE HAVE GONE THROUGH THE ANNUAL REPORT OF KILL ICK AGENCY AND MARKETING LTD. WITH SPECIFIC REFERENCE TO THE FAR AND REVENUE OF THE COMPANY. COMPANYS EARNINGS DURING THE CURRENT YEAR WERE HI GHER DUE TO COMMISSION INCOME FROM DREDGE SALES TO GOVERNMENT O F MAHARASHTRA AND J&K. THE RECESSION IN THE SHIPPING INDUSTRY IN THE WORLD HAS SHOWN SOME SIGNS OF RECEDING. HOWEVER, THE INDIAN SHIPPING INDUSTRY HAS NOT SHOWN ANY SUCH SIGNS. THE ESTABLISHED SHIPYARDS LIKE BHARATI AND ABG ARE FACING FINANCIAL DIFFICULTIES AND ARE STILL TO EXECUTE ORDERS RECEIV ED BY THEM IN EARLIER ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 32 YEARS. THE NEW SHIPYARDS LIKE PIPAVAV AND LARSEN & TOUBRO HAVE SECURED SOME ORDERS AT VERY LOW PRICES; DUE TO WHIC H THE MARINE EQUIPMENT PURCHASED BY THEM ARE ALSO AT VERY LOW PR ICES, WHICH OUR PRINCIPALS ARE NOT ABLE TO MEET. THE DREDGES SUPPLIED TO BOTH MAHARASHTRA MARITIME B OARD (MMB) AND IRRIGATION & FLOOD CONTROL DEPARTMENT, GOVERNMENT O F JAMMU & KASHMIR WERE FINALLY COMMISSIONED AND HAVE BEEN PUT TO GOOD USE. THERE HAVE BEEN A NUMBER OF OTHER DREDGE ENQUIRIES, BUT NONE OF THE ENQUIRIES HAVE PROGRESSED TOWARDS A NEW ORDER. THE DEFENCE SECTOR HAS NOT SEEN ANY MAJOR PURCHASES OF COMMUNICATION EQUIPMENT AND THUS ALL THE DEFENCE SU PPLIERS LIKE BHARAT ELECTRONICS LTD., TATA POWER LTD. AND LARSEN & TOUBRO LTD. HAVE NOT RECEIVED ANY MAJOR ORDERS REQUIRING RACAL HEADSETS/HANDSETS. THE RHINO PANTHER PROGRAMME WHIC H NEEDS A GOOD QUANTITY OF HEADSETS IS YET UNDECIDED. DURING THIS YEAR THE SHIP-LIGHTING BUSINESS FROM GL AMOX HAS DONE WELL AS SHIP LIGHTS ARE GENERALLY PURCHASED LAST. EFFORTS CONTINUE TO BE PUT INTO N.E.I., THE NEWLY A CQUIRED BALLAST WATER TREATMENT SYSTEMS AGENCY. THE INTERNATIONAL R ATIFICATION FOR THESE SYSTEMS IS TAKING TIME AND DUE TO WHICH THE R EQUIREMENTS OF THIS EQUIPMENT ARE STILL NOT ON A REGULAR BASIS. HO WEVER, WE ARE HOPEFUL THAT THE FUTURE PROSPECTS FOR THIS AGENCY A RE GOOD. THE COMPANY SIGNED AN AGENCY AGREEMENT WITH MARITIM E PARTNER AS, NORWAY FOR FAST RESCUE/PATROL BOATS. WE HAVE STARTE D PUTTING EFFORTS INTO THIS AGENCY AND ARE HOPEFUL OF BUSINESS IN NEA R FUTURE. THE SERVICE DEPARTMENT IS REGULARLY SERVICING AND C OMMISSIONING THE SCHOTTEL EQUIPMENT SUPPLIED IN THE COUNTRY. THEIR E FFORTS ARE APPRECIATED BY THE PRINCIPALS AND ARE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 33 ALSO CONTRIBUTING TO COMPANYS REVENUE. WE HAVE PLA NS TO INCREASE THE NUMBER OF SERVICE PERSONNEL. IN BEGINNING SEPTEMBER 2012, SMM AT HAMBURG WAS ATT ENDED, AS ALSO THERE WERE VISITS FROM OUR PRINCIPALS TO INDIA FOR LOCAL BUSINESS PROMOTION. WE ARE HOPING THAT THE REVIVAL OF INDIAN SHIPBUILDI NG INDUSTRY WILL COMMENCE SOON. ALSO, WE ARE HOPEFUL THAT THE DEFENC E SECTOR WILL RESUME PURCHASE OF COMMUNICATION EQUIPMENT. 28. THE ASSESSEE BEFORE US IS INVOLVED IN MARKETING & DISTRIBUTION AND SALES OF MOBILE PHONES (INCLUDING ACCESSORIES) AND SERVICES IN INDIA. NOKIA SALES FUNCTIONS AS A L IMITED RISK DISTRIBUTOR ENTITY & IS ASSURED OF AN ARMS LENGTH RETURN ON THE TOTAL SALES MADE IN INDIA INCLUDING SALES OF MOBILE PHONES & ACCESSORIES PURCHASED FROM NOKIA INDIA. NOKIA SALES PURCHASES HIGH-END MOBILE PHONES AND ACCESSORIES FROM NOKIA C ORP. AND OTHER GROUP COMPANIES FOR SELLING IN THE LOCAL MARK ET. AS A PART OF ITS ARRANGEMENT WITH ITS AES, THE ASSESSEE IS RE QUIRED TO UNDERTAKE THE FOLLOWING FUNCTIONS AS PART OF ITS DI STRIBUTION ACTIVITIES IN INDIA. WAREHOUSING/STOCKING OF IMPORTED GOODS MARKETING WARRANTY CORPORATE, FINANCE, ACCOUNTING, TREASURY AND LEGAL SERVICES PERSONNEL RESOURCES / HR MANAGEMENT FUNCTION 29. THE ASSESSEE ALSO UNDERTAKES SIMILAR FUNCTIONS IN ORDER TO SELL ITS GOODS AND EARN PROFITS ON THE SAME. ACCORD INGLY, THE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 34 ABOVE FUNCTIONS HAVE BEEN DOCUMENTED WHILE PERFORMI NG FUNCTIONAL ANALYSIS OF THE ASSESSEE'S IMPORT TRANSA CTION, IN THE ASSESSEE'S TP DOCUMENTATION FOR THE YEAR. THE ASSES SEE ALSO PROVIDES THE FOLLOWING SERVICES TO ITS AE IN ADDITI ON TO ADVERTISING AND MARKETING SERVICES: COLLATION OF MARKET INFORMATION SALE SUPPORT SERVICES DISTRIBUTION CHANNEL MANAGEMENT SERVICES WARRANTY SERVICES 30. FUNCTIONS PERFORMED BY THE ASSESSEE: IN THIS CONNECTION, THE TP REPORT, HAS BEEN EXAMINE D. SOME RELEVANT PORTIONS ARE CITED BELOW. 'NOKIA SALES HAS EMPLOYED A TEAM OF PERSONNEL FOR C ARRYING OUT THE DOMESTIC MARKETING AND LOCAL BRAND BUILDING ACT IVITIES. THE MARKETING TEAM IS ENGAGED IN THE LOCAL BRAND PROMOT ION AND MARKETING OF THE NOKIA MOBILE PHONES IN INDIA IN AC CORDANCE WITH THE GLOBAL GUIDELINES RECEIVED FROM NOKIA CORP . THE GLOBAL PRESENCE OF NOKIA' BRAND NAME PROVIDES BRAND EQUIT Y IN INDIA AS WELL AS OVERSEAS WHICH SUPPORTS NOKIA SALES MARK ETING EFFORTS. STRATEGIC MANAGEMENT FUNCTIONS NOKIA CORP IS RESPONSIBLE FOR STRATEGIC PLANNING, M ONITORING, MANAGEMENT AND CONTROL OF THE OPERATIONS OF NOKIA G ROUP ENTITLES WORLDWIDE. WITH RESPECT TO TRADING OPERATI ONS IN INDIA, NOKIA CORP RECEIVES STRATEGIC INPUTS FROM NOKIA SAL ES & BASIS SUCH INPUTS & GROUP STRATEGIES IS RESPONSIBLE FOR D EVELOPING THE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 35 SALES & GROWTH STRATEGY IN INDIA. HOWEVER, GENERALL Y, ALL LOCAL POLICIES WITHIN NOKIA SALES ARE DETERMINED BY ITS O WN MANAGEMENT WHO CONTINUOUSLY MONITOR THE ECONOMIC ENVIRONMENT SURROUNDING THE COMPANY, ASSESS ITS STR ATEGIC POSITION WITHIN THE INDUSTRY AND TARGET TO ACHIEVE THE BROAD GROUP OBJECTIVES. PRODUCT, DESIGN AND DEVELOPMENT (R&D FUNCTION) NOKIA CORP IS RESPONSIBLE FOR GENERATING AND DEVELO PING NEW PRODUCTS. & DESIGNING AND DEVELOPING NEW TECHNOLOGI ES FOR MOBILE COMMUNICATION. THE CONSTANT DEVELOPMENT OF N EW PRODUCTS AND TECHNOLOGIES PROVIDE THE GROUP WITH TH E NECESSARY ADVANTAGE OVER ITS COMPETITORS IN THE GLOBAL MOBILE HANDSET MARKET. NOKIA INDIA DOES NOT PLAY ANY ROLE IN R&D F UNCTIONS.' THE PORTIONS OF THE TP STUDY REPORT THAT HAVE BEEN CITED ABOVE, SHOW CLEARLY THAT THE ASSESSEE IS OPERATING UNDER T HE DIRECTIONS AND FOR THE BENEFIT OF THE AE. REMUNERATION MODEL OF THE ASSESSEE: FROM THE TRANSFER PRICING REPORT IT IS SEEN THAT AS PER THE GROUP TRANSFER PRICING POLICY, THE PRICING OF PRODUCTS BE TWEEN THE ASSESSEE AND ITS AE IS REGULATED IN A MANNER THAT E NSURES THAT THE ASSESSEE EARNS AN ARMS LENGTH RETURN WITH RESP ECT, TO ITS DISTRIBUTION ACTIVITY. THEREFORE, BASED ON THE PRIC E LEVEL DEVELOPMENT IN THE MARKET AND COMPETITIVE PRICING P RESSURES, IF AT THE YEAR END, THE ASSESSEE IS NOT ABLE TO ACHIEV E ARM'S LENGTH RETURN WITH RESPECT TO ITS DISTRIBUTION ACTI VITY, THEN AS PER THE GLOBAL POLICY, IT RECEIVES CREDIT NOTES FRO M ITS AE TO ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 36 ACHIEVE AN ARM'S LENGTH RETURN ON SALES, THEREBY EN ABLING THE ASSESSEE TO ACHIEVE AN ARM'S LENGTH MARGIN AFTER CO NSIDERING ALL OPERATING COST INCLUDING AMP COST. THE RELEVANT TEX T OF THE GLOBAL POLICY OF NOKIA CORP SUBSTANTIATING THE REMU NERATION POLICY OF THE ASSESSEE IS AS BELOW: DISTRIBUTION IN RESPECT OF SALES OF THE PHYSICAL & DIGITAL PRODU CTS, NOKIA SUBSIDIARIES HAVE A RISK FREE DISTRIBUTOR STATUS, I .E. THEY BEAR PRACTICALLY NO RISK IN TERMS OF R&D, MANUFACTURING, MARKET, INVENTORY, CURRENCY, OR CREDIT EXPOSURES. THE ONLY RISK FACED BY DISTRIBUTION FUNCTION IN NOKIA SUBSIDIARIES IS THE VOLUME RISK (I.E. REDUCTION OR TERMINATION OF LOCAL OPERATIONS) . TRANSFER PRICES CHARGED TO SUBSIDIARIES ARE CALCULA TED SO THAT THEY GIVE THE SALES COMPANY AN ARM'S LENGTH COMPENS ATION FOR THE FUNCTION PERFORMED, VALUE ADDED, RISKS CARRIED, AND ASSETS EMPLOYED BY THE SALES SUBSIDIARY. THE SALES SUBSIDI ARIES PURCHASE THE PRODUCTS AT RESALE MINUS TRANSFER PRIC E. THE PRICE IS ADJUSTED ACCORDING TO THE PRICE LEVEL DEVELOPMEN T IN THE MARKET, AND OPERATING COST CHANGES IN THE SALES SUB SIDIARY. THUS, THE PRICE RISK IS BORNE BY NOKIA CORPORATION WHO SELLS THE PRODUCTS TO THE SALES SUBSIDIARY. FOR TAX PURPOSES, THE OUTCOME OF THE TRANSFER PRICES IS BENCHMARKED AT OPERATING PROFIT LEVEL OF THE DISTRIBUTION FUNCTION OF EACH SALES SUBSIDIARY. ' 31. ON GOING THROUGH THE REVENUE MODELING AS WELL A S THE FAR OF BOTH THE ENTITIES, WE FIND THAT WHILE THE ASSESS EE IS DEALING WITH SALE, DISTRIBUTION, PRODUCT DESIGN DEVELOPMENT AND OTHER ALLIED ACTIVITIES WITH RELATION TO SALE OF MOBILE H ANDSETS, THE ITA NO. 7244/DEL/2017 NOKIA INDIA SALES PVT. LTD. 37 COMPARABLE IS INTO EARNING OF COMMISSION BY THE WAY OF SUPPLY OF MARKETS MARINE EQUIPMENT LIKE SPECIALIZED PROPUL SION SYSTEMS, MARINE ENGINES, INDUSTRIAL & MARINE GEAR B OXES, BALLAST WATER TREATMENT SYSTEM, SPECIAL PURPOSE SEA GOING VESSELS, INDUSTRIAL & MARINE EXHAUST SYSTEM, SHIP L IGHTING & NAVIGATION LIGHTING SYSTEMS, DREDGES AND DREDGE EQU IPMENT, SHIP BUILDING PRESSES, RESCUE BOATS AND SPECIALISED DAVITS, REVERSE OSMOSIS WATER SYSTEMS AND SPECIAL ACOUSTIC COMMUNICATION EQUIPMENT FOR DEFENSE. HENCE, WE DIRE CT THAT COMPARABLE NAMELY M/S. KILLICK AGENCY AND MARKETING LTD. BE DELETED FROM THE LIST OF THE COMPARABLES. 32. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED ORDER PRONOUNCED IN THE OPEN COURT ON 25/10/2021. SD/- SD/- (AMIT SHUKLA) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACC OUNTANT MEMBER DATED: 25/10/2021 *SUBODH KUMAR, SR. PS* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR