Section 194H – Discount offered for supply of mobiles is not commission

8. We have heard both the parties and perused all the 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. The discount which was offered to distributors is given for promotion of sales. This element cannot be treated as commission. There is absence of a principal-agent relationship and benefit extended to distributors cannot be treated as commission under Section 194H of the Act. As regards to applicability of Section 194J of the Income Tax Act, the Assessing Officer has not given any reasoning 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 194J without the actual basis for the same on part of the Assessing Officer is not just and proper. The Ld. DR’s contention that discounts were given by way of debit notes and the same were not adjusted or mentioned in the invoice generated upon original sales made by the assessee, does not seem tenable after going through the invoice and the debit notes. In fact, there is clear mentioned about the discount for sales promotion. Thus, on both the account the addition made by the Assessing Officer does not sustain. Ground No. 2 is allowed.

9. As regards to Ground No. 3 relating to disallowance on account of Trade Price Protection (TPP) extended to distributors for reduction in prices of handsets INR 166,02,61,748/-, the Ld. AR submitted that trade price protection offered to distributor is motivated by commercial expediency and hence allowable under Section 37(1). The Ld. AR submitted that Trade price protection is offered to counter the change in prices of handsets by competitors, life of the model, market demand of the model etc. Same is offered to protect distributors against the probable loss that they may suffer due to fall in the prices of handsets. Sample copies of detailed calculation, internal approval is submitted at page 565-586 of Paper book Volume II by the Ld. AR. The Ld. AR submitted that it is not relevant whether the expenditure incurred “wholly and exclusively” for the purposes of business has been incurred in discharge of a contractually liability or is backed by a contract. The Ld. AR relied upon the decision of Tupperware India (P.) Ltd. (supra) Copies of party wise details of Trade Price Protection and confirmations received from distributors were submitted before the Assessing Officer vide submission dated 10.03.2014 and the same have been reproduced at Page 301-390 of the Paper book Volume 1 by the Ld. AR. For Example:

Section 194H – Discount offered for supply of mobiles is not commission

• 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 confirmation is at Page

• G.R.SARDA & SONS break-up is at Pg. 204 and the confirmation is at Page 303.

• Fusion Voice Solutions break-up is at Pg. 204 and the confirmation is at Page 302.

• Fayam Enterprises break-up is at Pg. 204 and the confirmation is at Page 301.

The Ld. AR further submitted that TPP is offered to distributors on handsets which have not been subject to trade offers/discounts. This is evidenced by specific clause in the Trade Schemes filed before the Assessing Officer vide submission dated 10.03.2014 trade scheme copies at Page 208- 299 of the Paper book Volume 1. Expenditure is allowable as revenue expenditure under Section 37(1) of the Act since it has been incurred wholly and exclusively for business and same cannot be questioned by the Assessing Officer. The Ld. AR relied upon the decision 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 expediency of the expenditure. The basis of computation, methodology of determining the stock lying unsold with the dealers, details of dates/periods and model for which TPP is offered was not provided. The Ld. DR submitted that no policy pertaining to TPP was furnished. Confirmations are stereotyped confirmation which makes the same doubtful. Expense on account of TPP is not justified since it is in addition to trade offers being provided to the 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 mobile model, change in market demand of particular model which affects the sales, the distributor is protected by the Trade Price Protection. This is actually a commercial expediency in modern day technological changes which are very fast and vast. Besides, Trade Price Protection is offered to distributors on handsets which have not been subject to trade offers/discounts. This is evidenced by specific clause in the Trade Schemes filed before the Assessing Officer vide submission dated 10.03.2014 trade scheme. In-fact, it was pointed out during the course of hearing that in Assessment Year 2008-09, even the Assessing Officer has allowed the deduction for the instant like expenditure. In Assessment Year 2008-09, the matter was remanded back to the file of the Assessing Officer, who has allowed the deduction with respect to the expenditure, where confirmations have 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 requisite confirmations were filed before the Assessing Officer. Thus, this expenditure is allowable as revenue expenditure under Section 37(1) of the Act since it has been incurred wholly and exclusively for business and same cannot be questioned by the Assessing Officer. Ground No. 3 is allowed.

12. As regards to Ground No. 4 relating to disallowance of 25% of provision for obsolescence of inventory, the Ld. AR submitted that these provision is in accordance with Global company policy and has been consistently followed. The Ld. AR submitted that in fact the provision made on the basis of scientific formula and past experience. “Excess stock
= Stock in place – Requirement for next 90 days”. The Ld. AR submitted that obsolete inventory is defined as inventory which 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 been phased out. The Ld. AR further submitted that as these accessories are plastic or metallic parts net realizable value is zero. The Ld. AR submitted that method followed is the amount of provision created in a year is debited to the P&L and actual obsolescence is charged to such provision. The Ld. AR submitted that excess provision if any is reversed and offered to tax in year of reversal. Further, the Ld. AR submitted that disallowance made by the Assessing Officer on account of provision for obsolescence 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 that provision being in the nature of unascertained liability cannot be allowed. 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. 2000-01, 2001-02, and 2003-04, this issue was remanded back by the Tribunal to the file of the Assessing Officer with direction to determine and decide the same afresh in respect of the cost of obsolete items with reference to net realizable value. For A.Y. 2003-04, the Hon’ble High Court upheld 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 ad-hoc disallowance of 25% of the total expenditure. Considering the history of the dispute, the matter is remanded back to the file of the Assessing Officer to decide in the light of the precedents, and keeping in mind that the direction of DRP in Assessment Year 2011-12 has been accepted by the Department (as pointed out before us that no appeal was filed by Revenue in Assessment Year 2011-12). Needless to say, the assessee be given opportunity of hearing by following principles of natural justice in the remanded proceedings. Ground No. 4 is partly allowed for statistical purpose.

15. As regards to Ground No. 5 relating to disallowance of marketing expenditure incurred on account of issuance of handsets on Free of Cost (‘FOC’) basis and Ground No. 6 relating to depreciation to be allowed if the aforesaid expenditure is held to be capital expenditure, the Ld. AR submitted that handsets were issued to AMSC’s as replacement 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 warranty. Also, the ownership of the handsets does not lay with the assessee. Handsets were issued to Dealers as sample for display and promotional purpose on concessional or FOC basis. Ownership in such handsets does not remain with assessee. Handsets were issued to employees for official use as marketing employees interact with dealers and other service organizations such as AMSC’s, etc.). Handsets were also issued to other employees for business use. Therefore, handsets were issued to AMSC’s, Dealers and employees on free of cost basis entirely for the purpose of its business. This issue has been decided in favour of the assessee 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 decision has also been affirmed by the Hon’ble Delhi High Court.

16. The Ld. DR submitted that handsets of employees are capital assets as assessee will receive business benefits over a period of time. If ownership of the handsets is transferred to the employees, then same should be treated as perquisite eligible to withholding under section 192 of the Act. The Ld. DR submitted that handsets issued to After Marketing Service Centre’s (‘AMSC’) cannot be claimed under marketing expenditure as they are warranty expense and can be claimed if documentary evidence of reconciliation is available. No evidence that handsets have been issued to ultimate customers. Handsets issued to dealers with intention to display show the intention to reap benefit over a time. 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 handsets. The assessee has given mobile handsets to its employees, dealers, sale personnel etc. for free of cost and thus no longer owned the said handsets. Thus, the said cost was rightly taken as business expenditure by the assessee and was rightly reduced from the inventory. This issue is decided in favour of the assessee for A.Ys. 2003-04 by the Tribunal in ITA No. 2445/Del/2010 order dated 30.01.2018 which was also affirmed by the Hon’ble High Court in ITA No. 955/2018 order dated 31.08.2018. Thus, Ground No. 5 is allowed. Since we held that it is business expenditure Ground No. 6 becomes infructuous, hence Ground No. 6 is dismissed.

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 difference for various reasons like sale reversals, debit note received from customer due to warranty. Assessee reported sales of INR 25000 crores and thus no reason to underreport sales of INR 19.52 crores.

19. The Ld. DR submitted that difference between sales as per sales tax return and audited financial statements of INR 19,52,02,050 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 assessee was not justified through the evidences as to what extent sale reversals, debit notes received from the customer due to warranty prevented 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/disallowances, the Ld. AR submitted that the Assessing Officer is duty bound to re-compute the eligible deduction under section 10A/10AA in respect of addition/disallowance made by him.

22. The Ld. DR submitted that the assessee could not 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 demonstrate the deduction claimed under Section 10A/10AA on non transfer pricing additions. There was no evidence produced before the Assessing Officer 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 submitted 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, it can be seen that the proper credit of pre-paid taxes were not given by the Assessing Officer while calculating the total tax. Therefore, we direct the Assessing Officer to give proper credit of pre-paid taxes to the assessee after verifying the same. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 9 is partly allowed for statistical purpose.

27. As regards to Ground No. 10 and Ground No. 11, the same is consequential, hence need not be adjudicated at this stage.

28. As regards to Revenue’s appeal being ITA No. 5845/DEL/2015, the only issue is relating to depreciation which was already decided by us while giving finding to Ground No. 5 and 6 in assessee’s appeal hereinabove. We held that the said expenditure is business expenditure; therefore, question of depreciation does not survive. Hence, appeal of the Revenue is dismissed.

29. In result, appeal of the assessee is partly allowed for statistical purpose and appeal of the Revenue is dismissed.
Order pronounced in the Open Court on 20th FEBRUARY, 2020.

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