ASUS INDIA PVT LTD.,MUMBAI vs. THE LD. ADDL/JOINT/DEPUTY/ACIT/ ITO, DELHI

ITA number 2427/M/2022 is filed by the Asus India private limited for assessment year 2018 – 19 against the assessment order passed under section 143 (3) read with section 144C (13) read with section 144B of The Income Tax Act, 1961 [ the Act] dated 26 July 2022 passed by assessment unit of income tax department wherein the return of income filed by the assessee on 30/11/2018 declaring a total income of ₹ 113,906,370 under the normal provisions and book profit under section 115JB of the act at ₹ 178,802,862 was assessed at ₹ 495,365,000

In the assessment order the learned assessing officer made an addition/disallowance under section 40 (a) (ia) of ₹ 370,175,198 and further transfer pricing adjustment of ₹ 11,193,854.

Brief facts of the case shows that assessee is a company engaged in the business of trading of notebooks, tablets, pad phones and Accessories. It filed its return of income on 30/11/2018. ROI was picked up for scrutiny.

During the course of assessment proceedings the learned AO noted that assessee has adjusted Gross turnover with the sales returns and sales rebate. The sales return was of ₹ 593,789,320 and sales repairs was of ₹ 993,522,306/– .This was reduced from Gross sales. Assessee was asked to furnish the details of sales rebate granted by to its dealers and distributors during the year under consideration. Assessee submitted the details stating that :- a. it has granted conditional discount of ₹ 783,149,122 which comprises of period wise and product -wise schemes floated by the assessee to push sales for already launched models and slow moving items. The learned assessing officer held that the discount floated by the assessee is in fact in the nature of commission on which tax is required to be deducted under section 194H of the act. c. It has granted reimbursement of October and insurance on actual bases amounting to ₹ 76,735,520/–, includes reimbursement of octroi paid by the distributor on actual bases and further in case any insurance claim is made against any assessee’s product the same is received by the assessee and reimbursed to the distributor on actual bases. The learned AO held that it is the primary responsibility of the dealer to discharge the burden of octroi and insurance. However the assessee has incentivized the dealers by raising the credit notes. Therefore such credit not submitted but in the in form of commission on which tax under section 194 H of the act is required to be made. d. Refurbished and rebate on defective products was given of ₹ 10,165,008/– in case of goods sold to the distributors are defective and brought to the notice of the assessee, the assessee gives an additional 30% discount to the distributors, the learned assessing officer held that this is in fact the reimbursement of the repair cost which is essentially labour charge payment e. Provision for sales rebate of ₹ 111,832,390/– was made which is set-aside from the sales to be granted to the dealers. The learned AO held it to be a commission on which tax is required to be deducted under section 194H of the act.

Assessee denied that any of such payment can be considered to be are commission on which tax is required to be deducted under section 194H of the act or under section 194C of the act so far as the issue of repairs are concerned. The assessee further relied upon the decision of the honourable Bombay High Court in case of CIT versus Intervet India private limited [49 taxmann.com 14] wherein the sales promotion scheme for distributors and dealers and stockist through sales credit notes are claimed as discount was not held to be commission on which tax is required to be deducted under section 194H of the act.

However the learned assessing officer rejected the contention of the assessee and held that assessee has incurred these expenses in the garb of sales rebate which are nothing but commission or contractual payment where the assessee should have deducted tax at source under section 194C/194J and section 194H of the act. Accordingly he held that a sum of ₹ 370,175,198 being 30% of ₹ 1,233,917,327 was disallowed under section 40 (a) (ia) of the income tax act.

Assessee preferred an objection before the learned dispute resolution panel wherein the directions were passed on 15/6/2022. The learned DRP noted that the identical issue arose in the case of the assessee for assessment year 2015 – 16 before dispute resolution panel and for assessment year 2016 – 17 and 2017 – 18 before the learned CIT – A. The learned DRP relied upon the finding

The learned departmental representative supported the order of the learned dispute resolution panel and the learned assessing officer. However he objected to the fact that the issue with respect to the refurbish and rebate of defective products cannot be decided here and same is required to be sent back to the file of the learned assessing officer as has been made by the coordinate bench in earlier years.

The learned Authorised Representative submitted, the assessee imports electronic goods such as note books, tablets, pad-phones, mobile phones and accessories for re-selling in India. He submitted, technology relating to these products gets upgraded/developed very fast and within a short period of launch of a particular product, it becomes obsolete. Therefore, the company conceives various rebate/discount schemes to push sales of such obsolete/slow moving products. Drawing our attention to Note-17 of the Profit & Loss Account, a copy of which is at Page-3 of the paper book, the learned Authorised Representative submitted, major revenue during the year was generated from sale of notebooks, tablets, pad-phones, mobile phones and accessories, which have a fiercely competitive market. Due to quick technological advance, these products become out dated/obsolete within a very short span, therefore, have to be sold at a discounted price. The learned Authorised Representative submitted, the assessee does not have any principal-agent relationship with any of the dealers/distributors and once the assessee sells/delivers the goods to the dealers/distributors, sale is complete. The assessee does not enter into any sales with the end users. Therefore, the sale (i) Ahmedabad Stamp Vendor Association v. Union of India [2002] 257 ITR 202; (ii) CIT v. Ahmedabad Stamp Vendor Association [2012] 348 ITR 378; (iii) CIT v. United Breweries Ltd. , [2017] 387 ITR 150; and (iv) CIT v. Intervate India Pvt. Ltd., [2014] 364 ITR 238.

In rejoinder, the learned Authorised Representative submitted, the learned Counsel for the Revenue has misconceived the facts as the assessee has not sold any product directly to the end user. As regards the invoice placed at Page-27 of the paper book referred to

We have considered the rival submissions and perused the material on record. Admittedly, the assessee imports certain electronic goods such as notebooks, tablets, pad-phones, mobile phones and accessories and sells them in India through dealers/distributors who, in turn, sell them to end users. It is common knowledge that the products dealt by the assessee have fiercely competitive market and there is constant up- gradation/advancement in the technology concerning these products. As a result of such regular up- gradation /advancement in technology, the products become obsolete/outdated within a very short span of time and it becomes difficult to sell them in the market. Therefore, it is understandable that for pushing sale of such slow moving/outdated products, all the manufacturers dealing in such products provide rebate/discount schemes to sell their products at a rate below the MRP. Likewise, the assessee from time-to-time has formulated rebate/discount schemes for dealers/distributors towards sale of such products. Undisputedly, the rebate/discount given by the assessee to the dealers/distributors have been treated as payment coming within the ambit of section 194C/194H of the Act while making disallowance under section 40(a)(ia) of the Act.

So, from the aforesaid broad terms of the agreement, it is very much clear that it is a principal-to-principal sale contract and the contract of sale concludes once the goods/products are delivered to Flipkart at which point the ownership to the product passes on to Flipkart. Though, learned Departmental Representative drawing our attention to certain clauses of the contract, such as, requirement of the assessee to do the packaging of the goods products as well as the indemnity clause tried to impress upon the fact that it is not a principal-to-principal sale but is essentially a principal-agent relationship, however, we are unable to accept such contention. It is well settled legal principal that to ascertain the true intention of the parties, the contract has to be read as a whole and cannot be referred to in piecemeal manner. Therefore, simply relying upon certain clauses of the contract on a standalone basis, it cannot be said that it is a contract having principal-agent relationship. Insofar

Having dealt with the facts involving in the issue, now we will deal with the legal aspect. Undisputedly, the Assessing Officer has disallowed the rebate/discount given under section 40(a)(ia) of the Act on the reasoning that such payments come within the purview of section 194C/194H of the Act. A reading of section 194C of the Act would suggest that in respect of any payment made to a contractor/sub-contractor for carrying out any work, including supply of labour, would be subject to deduction of tax at source at the appropriate rate. In the facts of the present case, the assessee has entered into a sale contract, simpliciter, for sale of its products to dealers/distributors. Certainly, the transaction between the assessee and the dealers/distributors cannot be termed as a contract for work. The assessee simply sells its products to dealers/distributors who, in turn, sell them to the end users. Therefore, there is no element of work as defined under clause (iv) of Explanation to section 194C of the Act. Therefore, under no circumstances, section 194C of the Act would be applicable to the discount/rebate.

Insofar as applicability of section 194H is concerned, a reading of the said section would make it clear that while making any payment which is in the nature of commission/brokerage other than insurance commission, would be subject to deduction of tax at the appropriate rate. Explanation to the aforesaid provision defines commission or brokerage to include any payment received or receivable directly or indirectly by a person acting on behalf of another person for services rendered or for any service in the course of buying or selling of goods. Thus, the primary conditions for qualifying as commission or brokerage are, the person receiving such payment must be acting on behalf of the payer and must be rendering some services in the course of buying or selling of goods. Undisputedly, in the facts of the present case, the dealers/distributors are not providing any service to the assessee in the course of buying or selling of goods. The

In ground no. 3, the assessee has challenged the disallowance under section 40(a)(ia) of the Act amounting to Rs. 3,99,46,787, being 30% of the volume discount given of Rs. 13,31,55,945.

In the course of assessment proceedings, the assessee had submitted that the volume discount is given to dealers/distributors once the quarterly targets allotted to distributors are fulfilled. However, the Assessing Officer held that volume discount is nothing but in the nature of commission as it is essentially a reward given by the principal to its agent for achieving the target set for sales. Thus, he held that the payment has to be treated as commission as per section 194H of the Act and proceeded to compute disallowance under section 40(a)(ia) of the Act.

In ground no. 4, the assessee has challenged the disallowance under section 40(a)(ia) of the Act made by the Assessing Officer in respect of reimbursement of octroi and insurance to dealers/distributors.

The leaned Counsel for the assessee reiterating the submissions made in respect of other disallowances made by the Assessing Officer, as contested in the earlier grounds, submitted that though the payment of octroi and insurance claimed are the liabilities of the dealers/distributors, however, the reimbursement of such payments on actual basis cannot be termed as commission or contract for work as provided under section 194C and 194H of the Act. He submitted, such payments were made purely keeping in view the business expediency. Thus, he submitted, no disallowance should be made.

The learned Departmental Representative submitted, the liability to pay octroi and insurance claimed is completely the burden of the dealers/distributors. Therefore, the reimbursement of such expenditure even on actual basis would be in the nature of commission.

We have considered rival submissions and perused the material on record. There cannot be any dispute that the payment of octroi and insurance claimed is the liability of the dealers/distributors. Just to incentivize the dealers/distributors, the assessee has reimbursed the payment made towards octroi/insurance claimed to the dealers/distributors on actual basis. However, in the facts of the present case, we are not called upon to decide the allowability of such expenditure at the hands of the assessee as business expenditure. The Assessing Officer himself has not disputed that the expenditure is allowable. The part disallowance made by him is only on account of alleged non- deduction of tax at source while making such payment. According to the Assessing Officer, the reimbursement of octroi and insurance claimed is covered under the provision of section 194C and 194H of the Act. As discussed in detail while dealing with ground no. 2 (supra), we have held that neither there is any contract for work between the assessee and the dealers/distributors as provided under section 194C of the Act, nor there is any principal-agent relationship between the assessee and the dealers/distributors to treat the payment made as commission in terms of section 194H r/w its Explanation. Therefore, we are of the

In ground no. 6, the assessee has challenged the disallowance of Rs. 1,40,91,023, being the provision for sales rebate under section 40(a)(ia) of the Act.

Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has created provision for an amount of Rs. 4,69,70,076, towards sales rebate on the basis of ratio of percentage of sales rebate to sales of past years. Justifying such claim, the assessee has submitted before the Assessing Officer that the quantum of provision is computed after reversing the preceding years provision. The Assessing Officer, however, was not convinced with these submissions. He observed, the provision is nothing but a commission to incentivize the dealers/distributors. He observed, such working of provision does not consider any aspect of sales promotion done by the dealers/distributors during the current year. Thus, treating the provision made as commission under 194H of the Act, the Assessing Officer made the disputed disallowance under section 40(a)(ia) of the Act for the alleged failure on the part of the assessee to deduct tax at source. The learned Commissioner (Appeals) also upheld the disallowance.

The leaned Counsel for the assessee submitted, there being no principal agent relationship between the assessee and the dealer/distributor, the provision for sales rebate cannot be treated as commission under section 194H of the Act.

The learned Departmental Representative submitted, firstly the expenditure claimed by the assessee is merely a provision. Therefore, it cannot be allowed as expenditure. Further, he Pavankumar M. Sanghvi v. ITO, [2017] 81 taxmann.com 208 (Ahmedabad - Trib.).

In rejoinder, the learned Counsel submitted, neither the Assessing Officer nor learned Commissioner (Appeals) had any doubt with regard to the genuineness or allowability of expenditure. A part disallowance under section 40(a)(ia) was made only because the assessee had not deducted tax at source. Therefore, the Revenue cannot raise a completely new plea at this stage regarding the allowability of expenditure.

We have considered rival submissions and perused the material on record. No doubt, the Assessing Officer has disallowed a part of the provision made towards sales rebate under section 40(a)(ia) of the Act by treating it as commission under section 194H of the Act. The learned Commissioner (Appeals) has also confirmed the aforesaid decision of the Assessing Officer. Therefore, the precise issue arising before us is the validity of disallowance made under section 40(a)(ia) of the Act by treating the expenditure claimed as payment towards commission. As discussed earlier, while dealing with the issue raised in other grounds which are more or less identical to the issue raised in this ground, we have held that as per the facts on record, a principal-agent relationship between the assessee and the dealers/distributors is not discernible. Therefore, the rebate/discount given cannot be treated as commission under section 194H of the Act. Our aforesaid reasoning rendered in context of ground no. 2, would equally apply to this ground as well. Therefore, the disallowance made under section 40(a)(ia) deserves to be deleted. As regards the contention of the learned Departmental 3.3 We find that the facts prevailing in A.Y. 2016-17 with regard to the aforesaid four items are exactly identical with the facts prevailing in the year under consideration. Hence, the decision rendered by this Tribunal for A.Y. 2016-17 shall apply mutatis mutandis to this assessment year also except with variance in figures. Accordingly, Ground Nos. 2,3,4 & 6 raised by the assessee are allowed.”

Accordingly we direct the learned assessing officer to delete the disallowance on conditional discount, volume discount reimbursement of octroi and insurance expenses and provision for sales rebate.

We completely agree with the argument of the assessee that in the assessment order passed by the learned assessing officer in pursuance to the direction of the coordinate bench on 27/4/2023, none of these issues were discussed and deliberated. The learned assessing officer has merely confirmed the disallowance. However we are afraid that without the learned assessing officer giving a categorical finding on each of the arguments of the assessee, the coordinate bench can decide on all those arguments here itself for this assessment year wherein coordinate bench in earlier years thought it fit to set-aside to the file of the learned AO. If the issued have been so simple, the coordinate bench for assessment year 2015 – 16 would also have decided the issue here itself only, but in their own wisdom they did not thought it fit. Therefore in the interest of justice, we set-aside the issue for

Accordingly ground number 2 of the appeal of the assessee is allowed with above directions.

Ground number 3 of the appeal is with respect to the addition of ₹ 11,193,854/– on account of transfer pricing adjustment by determining the arm’s-length price of the market supports fees received from the associated enterprise separately instead of adopting the aggregation approach of the assessee. The coordinate bench in the assessee’s own case for assessment year 2015 – 16 has decided this issue in favour of the assessee. We find that for assessment year 2015 – 16 as per paragraph number 5 of the order these controversies dealt with. As per paragraph number 5.7 of the order the learned authorised representative categorically objected that the marketing support services and distribution functions are to be “5.6 As could be seen from the business of the assessee, as stated supra, while undertaking distribution activity, the assessee also provides Marketing Support Services to its AE for which the assessee is compensated at cost plus mark-up. For the purpose of benchmarking, the assessee aggregated Marketing Support Services transactions with the transactions of distribution business. The ld. TPO benchmarked Marketing Support Services transactions separately and made the addition after selecting 3 comparable companies.

Ground number 4 is against the comparability analysis. As we have already decided ground number 3 in favour of the assessee deleting the adjustment made by the learned assessing officer on the arm’s-length price of the marketing support fees segregating it from the other services, we do not find any reason to adjudicate ground number 4 is the addition of transfer pricing does not survive. Thus ground number 4 of the appeal is dismissed.

In the result, appeal of the assessee is partly allowed.