HUAWEI TELECOMMUNICATIONS (INDIA) COMPANY PVT. LTD.,GURGAON vs. ACIT, CIRCLE- 2(1), GURGAON

PER KULDIP SINGH, JUDICIAL MEMBER : Since common questions of facts and law have been raised

in the aforesaid inter-connected appeals, the same are being

2 ITA No.7509/Del./2017 ITA No.7510/Del./2017

disposed off by way of consolidated order to avoid repetition of

discussion.

Pvt. Ltd. (HTICL) (hereinafter referred to as the ‘taxpayer’) by

filing the present appeals sought to set aside the impugned order

both dated 03.10.2017 passed by the AO in consonance with the

orders passed by the ld. DRP/TPO under section 143 (3) read with

section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua

the assessment years 2012-13 & 2013-14 on the identical grounds

except difference in the amount of adjustments/additions/

disallowances and except one additional ground nos.2.6 to 2.6.5 for

benchmarking of “Project Management Services” in Assessment

Year 2012-13 value of which has been taken at Nil, inter alia that :-

“1. General 1.1. That on the facts and. in the circumstances of the case and in law, the Ld. AO erred in passing the impugned assessment order dated October 03, 2017 pursuant to the directions of the Hon'ble Dispute Resolution Panel (Hon'ble DRP) thereby computing the total income of the appellant at Rs.1,380,032,000 as against returned loss of Rs. 62,390,267; and

1.2. That the assessment order passed by the Ld. AO pursuant to the directions of Hon'ble DRP is based on surmises and conjectures, and, without considering the facts and arguments submitted by the appellant during the course of assessment proceedings.

3 ITA No.7509/Del./2017 ITA No.7510/Del./2017

2.1. That on facts and circumstances of the case and in law, the Ld. AO) Transfer Pricing Officer (,Ld. TPO')/ 'Hon'ble DRP' has erred in making transfer pricing adjustments to the extent of Rs.394,552,611 in respect of the international transactions, alleging that the same to be not at arm's length in terms of the provisions of sections 92C(1) and 92C(2) of the Act, read with Rule 10D of the Income-tax Rules,1962 (,Rules'); 2.2. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO/ Hon'ble DRP has erred by not satisfying any of the conditions prescribed under section 92C(3) of the Act while making transfer pricing adjustments and has erred by not accepting the transfer pricing documentation maintained by the Appellant in the manner as contemplated under the Act and Rules; 2.3. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO/ Hon'ble DRP has made substantial errors in the facts and conclusions as stated in the Transfer Pricing (‘TP') Order based on which the arm's length price of the international transaction has been determined; 2.4. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO has grossly erred in not providing the Appellant with an opportunity to show cause the proposed TP adjustments and thereby disregarding the principles of natural justice; 2.5. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO/ Hon'ble DRP has erred in making an adjustment to the extent of Rs. 39,138,666 in respect of international transaction pertaining to availing of Technical Services from its Associated Enterprise (‘AE') alleging the same to be not at arm's length. In doing so:

2.5.1. The Ld. Ld. AO / Ld. TPO/ Hon'ble DRP has erred in law and on facts, by determining the arm's length price for payment for availing Technical Services as 'Nil' and not acknowledging the fact that the services were actually received by the Appellant. 2.5.2. The Ld. AO / Ld. TPO/ Hon'ble DRP has erred in law and on facts by not appreciating the rationale, back-up information/ explanation as provided / submitted by the Appellant during the course of the assessment proceedings. 2.5.3. The Ld. AO / Ld. TPO/ Hon'ble DRP has erred in law and on facts by questioning the commercial expediency/wisdom of the Appellant for availing such services. 2.5.4. The Ld. TPO has erred in law and on facts by ignoring the provisions of Rule 10B while applying 'Other Method' in

4 ITA No.7509/Del./2017 ITA No.7510/Del./2017

determining the arm's length price for receipt of Technical Services. 2.5.5. The Ld. TPO / Hon'ble DRP has erred in law and on facts by not sharing the relevant material / information relied upon to apply the 'Other Method' as most appropriate method for benchmarking the transaction of receipt of Technical Services. 2.5.6. The Ld. AO / TPO has erred in law and on facts by not appreciating the fact that the subject transaction has been benchmarked using Comparable Uncontrolled Price (‘CUP’) method; 2.6. That on the facts and circumstances of the case and in law, the Ld. AO/Ld.TPO/Hon’ble DRP has erred in making an adjustment of Rs.355,413,945 in respect of international transaction pertaining to availing of Project Management Services from its AE alleging that the same to be not at arm’s length. In doing so : 2.6.1. The Ld. AO / Ld. TPO / Hon’ble DRP has erred in law and on facts, by determining the arm’s length payment for availing Project Management Services as ‘Nil’ and no acknowledging the fact that the services were actually received by the Appellant. 2.6.2. The Ld. AO / Ld. TPO / Hon’ble DRP has erred in law and on facts by not appreciating the rationale, back-up documentary evidence/explanation as provided by the Appellate during the course of the assessment proceedings. 2.6.3. The Ld. AO / Ld. TPO / Hon’ble DRP has erred in law and on facts by questioning the commercial expediency/wisdom of the Appellant for availing such services and ignoring that these services were directly utilized for provision of services to third parties; 2.6.4. The Ld. AO / Ld. TPO/ Hon'ble DRP has erred in law and on facts by ignoring the provisions of Rule 10B while applying the 'Other Method' methodology in determining the arm's length price for availing Project Management Services; 2.6.5. The Ld. AO / Ld. TPO/ Hon'ble DRP has erred in law and on facts by not sharing the relevant material/ information relied upon to apply 'Other Method' as most appropriate method for benchmarking the transaction of availing of Project Management Services. Corporate Tax 3. Addition on account of advertisement expenses – Rs.28,479,838

5 ITA No.7509/Del./2017 ITA No.7510/Del./2017

3.1 The Ld. AO and the Hon'ble DRP has erred on facts and in law in confirming a disallowance of INR 28,479,838 on an adhoc basis being 30% of total advertisement expenses of Rs.94,932,796, without appreciating that the advertisement expenses have been incurred wholly and exclusively for the purpose of Appellant's business and it is irrespective of any benefit to any group company or to a third party; 3.2 The Ld. AO and the Hon'ble DRP erred on facts and in law in holding that the advertisement expenses have been incurred for creation of the brand of the group and thus is capital in nature; 3.3 Without prejudice to the above, the Ld. AO and the Hon'ble DRP erred in ignoring the fact that the advertisement expenses have already been recovered from the AEs at an agreed mark-up and therefore, based on the judgements of jurisdictional Tribunal, no disallowance of the advertisement expenses can be made; 3.4 Without prejudice to the above, the Ld. AO and Hon'ble DRP erred in not allowing depreciation at the rate of 25 percent of the advertisement expenses allegedly held as capital in nature. 4. Addition on account of provision for customer claims – Rs.1,010,856,249 4.1 The Ld. AO and the Hon'ble DRP erred on the facts and in law in confirming disallowance towards provision for customer claims of Rs 1,010,856,249 without appreciating that the amount provided by the Appellant is in relation to actual delays/defaults occurred as per the terms of the contract entered between the Appellant and its customers and thus, is an ascertained liability;

4.2 The Hon'ble DRP erred on the facts and in law in holding that such provision is an unliquidated damages made unilaterally on estimated basis and has not been computed on scientific basis, thereby completely ignoring the complete details furnished by the appellant providing details of customers, basis of calculation, period of delay, workings, copy of agreements, ;

4.3 Without prejudice to above, the Ld. AO and the Hon'ble DRP erred on the facts and in law in making disallowance of the provision under section 40(a)(ia) of the Act by holding that the provision for customer claims is compensation in the form of interest paid to customers and tax should have been deducted under section 194A of the Act;

6 ITA No.7509/Del./2017 ITA No.7510/Del./2017

5.1 The Ld. AO and the Hon'ble DRP erred on facts and in law in confirming the disallowance of advances written-off amounting to Rs 8,533,563 on surmises and conjectures without appreciating that the expenditure was incurred wholly and exclusively for the purpose of business; 5.2 The Hon'ble DRP has erred on facts and in law in holding that the advances in the nature of security deposit are a liability to be discharged by employees and thus, the amount borne by the Appellant should be part of perquisites taxable in the hands of employees on which tax should have been deducted at source; 5.3 The Hon'ble DRP erred in ignoring the details filed by the Appellant and in holding that the necessary details were not filed by the Appellant without appreciating that such details or explanations were never asked from the Appellant; 6. That on the facts and circumstances of the case and in law, the Ld. AO and the Hon'ble DRP erred in levying interest under section 234A, 234B and 234C of the Act. 7. That on the facts and circumstances of the case and in law, the Ld. AO and the Hon'ble DRP erred in initiating penalty proceedings under section 271(1)(c) of the Act.”

issue at hand are : Huawai Technologies Co. Ltd. (HTCL) is one

of the China’s largest private sector telecom company for the year

2012 established in 1988 with Headquarter at Shenzhen Special

Economic Zone in China for providing total solutions for mobile

telecoms products and networks. Its projects and solutions ranged

from complete telecoms solutions, network planning and design to

manufacturing and management. HTCL has also Research &

Development (R&D) support management across the world

including in the USA, Sweden and Russia as well as in China.

7 ITA No.7509/Del./2017 ITA No.7510/Del./2017

taxpayer was incorporated on 23.07.2002 under the Indian

Companies Act, 1956 being a subsidiary of Huawei Technologies

Cooperatief U.A. which holds 90.11% of the total equity

shareholding of the taxpayer. Huawei Tech Investment Co. Ltd.,

Hong Kong (HTICL) holds the balance 9.89% of the total

shareholding of the taxpayer. The taxpayer was into the business

of distribution of telecom equipment and provision of technical

services, such as, installation, commissioning, integration and other

services related to its customers in India. The taxpayer also

provided business support services to its Associated Enterprises

(AEs).

into international transactions with its AEs as under :-

S. Description of the transactions Amount (Rs.) Amount (Rs.) No. Paid/Payable Received/ Receivable 1 Provision of business support - 2,085,914,472.00 services 2 Import of telecommunication 483,717,622.00 - equipments 3 Purchase of fixed assets 267,802,270.00 - 4 Purchase of spare parts 205,640,341 5 Availing of technical services 39,138,666 - 6 Reimbursement of expenses - 80,886,384.00 7 Recovery of Operational loss - 529,610,988 8 Return of goods and spares parts - 70,417,186 9 Availing of Project Management 355,413,945 - Services

8 ITA No.7509/Del./2017 ITA No.7510/Del./2017

international transactions mentioned at Sl.Nos.5 & 9 qua availing

of technical services and availing of project management services

by AO/DRP/TPO by filing present appeals. Ld. TPO declining the

contentions raised by the taxpayer proceeded to benchmark the

transactions qua technical services and project management

services by applying the benefit test claimed to be an

internationally accepted method.

would pay fee for management and technical services only if the

use of technology will give him greater economic benefit but, in

the instant case, despite the use of intangibles, the margin of the

taxpayer is lower than the comparables which clearly shows that

the techniques or branding has not provided any benefits to the

services and thereby determined the Arm’s Length Price (ALP) of

this transaction at Nil as no independent person in similar

circumstances would pay any such charges.

towards public relation service, promotion activities, commercial

advertisement, sponsorship, print media, media monitoring and

analysis etc. by treating the same as capital expenditure to the tune

9 ITA No.7509/Del./2017 ITA No.7510/Del./2017 of Rs.2,84,79,838/- & Rs.90,74,855/- in AYs 2012-13 & 2013-14

respectively. AO also made disallowance of Rs.101,08,56,249/- &

Rs.12,86,11894/- in AYs 2012-13 & 2013-14 respectively on

account of provision made by the taxpayer for customer claim u/s

37 or 40(a)(ia) of the Act. AO also made addition of

Rs.85,33,563/- & Rs.61,60,172/- in AYs 2012-13 & 2013-14

respectively on account of advances written off.

Resolution Panel (DRP) by way of objections who has upheld the

order passed by the TPO/AO. Feeling aggrieved, the taxpayer has

come up before the Tribunal by way of filing the present appeals.

parties to the appeal, gone through the documents relied upon and

orders passed by the Revenue authorities below in the light of the

facts and circumstances of the case.

GROUND NO.1 OF ITA NO.7509/DEL/2017 (AY 2012-13) ITA NO.7510/DEL/2017 (AY 2013-14)

nature, hence needs no specific adjudication.

10 ITA No.7509/Del./2017 ITA No.7510/Del./2017 GROUNDS NO.2 TO 2.6.5 OF ITA NO.7509/DEL/2017 (AY 2012-13) GROUNDS NO.2 TO 2.5.6 OF ITA NO.7510/DEL/2017 (AY 2013-14) 12. The taxpayer in order to benchmark its international

transactions qua availing of technical services and availing of

project management services applied Comparable Uncontrolled

Price (CUP) method as Most Appropriate Method (MAM) which

has been rejected by the TPO/DRP who have applied the benefit

test and determined the arm’s length value of technical services

and project management services at nil, which is now under

challenge before the Tribunal.

length value of the international transactions qua receipt of

technical services and project management services since AY

2004-05 onwards and has not drawn any adverse inference therein.

It is also not in dispute that there is no change in the business

model/ function performed and risk assumed qua the transaction in

question by the taxpayer during the years under consideration.

qua intra-group services availed from AEs in respect of technical

services for AYs 2012-13 & 2013-14 and benchmarking of project

management services for AY 2012-13 considered both the

11 ITA No.7509/Del./2017 ITA No.7510/Del./2017 transactions jointly and proceeded to conclude that the taxpayer

has not established “cost benefit” analysis for availing the services

in respect of ex-pats vis-à-vis independent employees. At the same

time, as is evident from page 11 of the TP order under the heading

“Findings on the basis of above”, ld. TPO proposed to apply CUP

as the MAM but all of sudden in order to make adjustment applied

“other method” for benchmarking and re-determining the ALP of

the transaction as Nil, as is evident at page 16 of the TP order.

challenging the impugned order passed by the TPO which have

been disposed off.

has returned his finding without providing sufficient opportunity of

being heard qua both the transactions i.e. technical services and

project management services; that ld. DRP while confirming the

“benefit test” for availing technical services has not considered the

relevant evidence and no separate findings have been returned on

the issue of benchmarking of “project management services”; that

in the alternative, ld. DRP erred in holding that availing of

intra-group services are allowable u/s 37 of the Act without

appreciating that no such findings have been returned in the draft

12 ITA No.7509/Del./2017 ITA No.7510/Del./2017 order passed by the AO and no separate show-cause notice was

issued to the taxpayer to decide this issue.

prove that the ld. DRP passed the order without providing

opportunity of being heard to the taxpayer because when the

taxpayer has specifically raised the issue that initially TPO

proposed application of CUP method as MAM for benchmarking

the international transactions in question but abruptly applied other

method without providing opportunity of being heard and

determined the ALP of transaction in question at nil.

has not been considered by the TPO as well as ld. DRP qua

payment for technical services received on the basis of USD 1600

per man-month on actual time spent by the relevant personnel nor

the copy of technical services agreement between taxpayer and

HTCL has been examined.

management services is concerned, ld. DRP has not returned any

separate finding on this issue rather considered the same on the

basis of reasoning given qua intra-group services. When we

examine para 10.6.2 of objections raised before the ld. DRP by the

taxpayer available at running page 189 of the appeal set, the

13 ITA No.7509/Del./2017 ITA No.7510/Del./2017

taxpayer has specifically explained the international transactions as

under :-

“The facts of the international transaction are as follows : Huawei India had entered into a contract with a third party in Nepal for rendering specialized Network Services. However, Huawei India approached Huawei China for assistance since Huawei China already had working relationships in Nepal. Huawei China was already dealing with third party customers in Nepal and therefore, it had the relationship with third party sub-contractors in Nepal for rendering services to its customers. Thus, Huawei China assisted Huawei India by delivering services to the customer through the sub- contractors. To conclude, Huawei India sub-contracted the assignment to Huawei China and Huawei China ensured that the services were delivered through the sub-contractors in Nepal.”

prove that the contentions raised by the taxpayer has not been

taken into account rather issue has been decided on the basis of

surmises that no independent entity would pay for such services

without any cost benefit analysis and that the taxpayer has not

furnished any evidence as to the cost benefit analysis. These

contentions have not been taken into consideration by the ld. DRP

even. The taxpayer has also brought on record benefits derived by

the taxpayer from the receipt of such services. Even, the said

contract agreement between taxpayer and HTCL, which is

available at page 164 of the paper book, has not been considered.

14 ITA No.7509/Del./2017 ITA No.7510/Del./2017 21. Identical question as to applying “benefit test” and

commercial expediency by the ld. TPO/DRP/AO in benchmarking

of “technical services” and “project management services” at nil

has been decided by the coordinate Bench of the Tribunal in

Danisco India (P) Ltd. vs. DCIT (2020) 120 taxmann.com 224

(Delhi-Trib.) by following other cases decided by the Tribunal in

identical facts and circumstances of the case viz. Emerson

Climate Technologies (India) Ltd. vs. DCIT (2018) 90

taxmann.com 125 (Pune-Trib), Dresser Rand India (P) Ltd. vs.

Addl.CIT and also by relying upon the decision rendered by

Hon’ble Delhi High Court in case of Hive Communication Pvt. Ltd. in Income-tax Appeal 306/2011 and reached the conclusion

that in such like circumstances ld. TPO in order to benchmark the

transaction has to determine “whether the price paid by the

assessee for the services availed is what an independent enterprise

would have paid for the same services and the analysis done by the

TPO in the nature of services and the benefits arising to the

assessee on availing such services was beyond the scope of

transfer pricing provisions.”

Hive 22. Hon’ble High Court of Delhi in case of

Communication Pvt. Ltd. (supra) also held that, “legitimate

business needs of the company must be judged from the view point

15 ITA No.7509/Del./2017 ITA No.7510/Del./2017 of the company itself and must be viewed from the point of view of

a prudent businessman and it is not for the AO to dictate what the

business needs of the company should be.” Hon’ble High Court

also held that, “the term “benefit” to a company in relation to its

business has a very wide connotation and it was difficult to

accurately measure these benefits in terms of money separately.”

Wakefield India (P) Ltd. (2015) 60 taxmann.com 168 (Delhi)

judgment dated 07.05.2015 has held that, “the court first notes

that the authority of TPO is to conduct transfer pricing analysis to

determine the ALP and not to determine whether there is a service

or not from which the assessee benefits.”

Court and coordinate Bench of the Tribunal, as discussed in the

preceding paras, we are of the considered view that it is beyond the

jurisdiction of ld. TPO to determine the benchmarking of technical

services and project management services by applying the “benefit

test” and “commercial expediency test” rather his jurisdiction is

limited to determine the ALP of transactions with the standpoint of

a businessman and not by sitting on the chair of the businessman.

Moreover, in the instant case, assessee has brought on record

plethora of evidence for availing of the technical services and

16 ITA No.7509/Del./2017 ITA No.7510/Del./2017 payment made for technical services received on the basis of USD

1600 per man-month on actual time spent by the relevant

personnel, copy of technical services agreement between the

taxpayer and the Huawei, China and also brought on record

invoices filed on sample basis for availing technical services, but

all these documents have not been examined by the TPO/DRP rather

benchmarked the technical services/project management services

availed of by the taxpayer from its AE at nil by mechanically

dealing with the issue by applying the benefit test and commercial

expediency test and has not provided opportunity of being heard to

the taxpayer at the time of abruptly applying the other method.

view that this issue is liable to be remitted back to the TPO to

decide afresh by examining all the evidences brought on record by

the taxpayer and to decide the issue in the light of the decisions discussed in the preceding paras and by following the rule of

consistency as in the earlier years i.e. in AY 2004-05 onwards,

TPO himself has accepted availing of technical services at arm’s

length price as determined by the assessee. Needless to say that

TPO is to decide the issue afresh by providing an opportunity of

being heard to the taxpayer. Consequently, Grounds No.2 to

2.6.5 of ITA No.7509/DEL/2017 (AY 2012-13) and Grounds

17 ITA No.7509/Del./2017 ITA No.7510/Del./2017 No.2 to 2.5.6 of ITA NO.7510/DEL/2017 (AY 2013-14) are

determined in favour of the taxpayer for statistical purposes.

GROUNDS NO.3 TO 3.4 OF ITA NO.7509/DEL/2017 (AY 2012-13) ITA NO.7510/DEL/2017 (AY 2013-14)

Rs.28,479,838/- & Rs.90,74,855/- being 30% of the total

advertisement expenses of Rs.94,932,796/- & Rs.30,249,518/- for

AYs 2012-13 & 2013-14 respectively by declining its contentions

that these advertisement expenses have been incurred wholly and

exclusively for the purpose of taxpayer’s business and not for any

benefit to any group company or to a third party.

expenses on the grounds inter alia that AO has no jurisdiction to

examine commercial expediency; that expenses are not in the

nature of capital expenditure; that disallowance on ad hoc basis is

not sustainable. However, ld. DRP proceeded to confirm the

disallowance made by the AO on the ground that the taxpayer

operates in a segment where there are only 3 – 4 players at global

level and that there are only 3 – 4 customers in Indian market and

that the case of taxpayer is that of a limited suppliers and limited

buyers; that the activity of the taxpayer after sale of equipment i.e.

installation & commissioning, post commissioning maintenance

18 ITA No.7509/Del./2017 ITA No.7510/Del./2017 services, upgradation etc. are monopolistic which can only be done

by the taxpayer requiring any kind of advertisement/promotion etc.

Since equipment belongs to brand of AEs but, at the same time, it

can also not be presumed that all these expenses are only for the

benefit of business of the taxpayer.

prove that disallowances of advertisement expenses have been

made on the basis of guesswork/ad hoc basis merely on the basis of

assumptions and presumptions as ld. DRP itself recorded the

finding that, “However it can also not be presumed that all these

expenses are only for the benefit of business of the taxpayer”. So,

disallowance made by the AO and confirmed by the ld. DRP is not

sustainable.

bifurcation of the advertisement expenses at page 221 & 204 of the

paper book for AYs 2012-13 & 2013-14 respectively. It is the

settled principle of law that to examine the question whether an

expenditure was wholly and exclusively incurred for the purpose

of business, reasonableness of the same has to be examined from

the standpoint of the businessman and not of the Revenue

Department. Even otherwise, ad hoc disallowance of expenditure

on account of incidental third party benefit is not permissible.

19 ITA No.7509/Del./2017 ITA No.7510/Del./2017

Hon’ble Supreme Court in case of SA Builders Ltd. vs. 30.

CIT 289 ITR 26 (SC) has held that, “the expression “commercial

expediency” is an expression of wide import and includes such

expenditure as a prudent businessman incurred for the purpose of

business. Such expenditure may not have been incurred under

legal obligation, but yet it is allowable as business expenditure if it

was incurred on grounds of “commercial expediency”. So, we are

of the considered view that commercial expediency of an

expenditure incurred by a businessman has to be examined from

the perspective of business person and not from the perspective of

a tax authority.

Ltd. vs. CIT 124 ITR 1 (SC) lay down the principle for

determining whether an expenditure incurred is in the nature of

revenue or capital held as under :

“There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. What is material is to considered the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular fact and circumstances of a given case.”

Distribution Ltd. (2015) 229 taxman 400 (Delhi) decided the

20 ITA No.7509/Del./2017 ITA No.7510/Del./2017

issue as to whether advertisement expenses are capital or revenue

in nature in favour of the taxpayer by returning following

findings:-

“The Tribunal has rightly noticed and referred to the decision of the Delhi High Court in CIT v. Pepsico India Cold Drink Ltd. [2012J 207 Taxman 5/21 taxmann.com 165 wherein, the judgment of the Supreme Court in Madras Industrial Investment Corpn. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) was 'examined and it was observed that the Assessee is entitled to claim deferred revenue expenditure but the Assessing Officer cannot treat the revenue expenditure as deferred revenue expenditure. The reason is that the Act itself does not have any concept of deferred revenue expenditure. Even otherwise, there are a number of decisions that the advertisement expenditure normally is and should be treated as revenue in nature because advertisements do not have long lasting effect and once the advertisements stop, the effect thereof on the general public and customer diminishes and vanished soon thereafter. Advertisements do not leave a long lasting and permanent effect in the sense that the product or service has to be repeatedly advertised. Even otherwise advertisement expense is a day to day expense incurred for running the business and improving sales. It is noticeable that every year, the respondent-Assessee has been incurring substantial expenditure on advertisements. The Assessing Officer, in the assessment order, had referred to the fact that similar additions were also made in the Assessment Year 2008-09. Keeping in view the nature and character of the respondent-Assessee's business, every year expenditure has to be incurred to make and keep public informed, aware and remain in limelight. This requires continuous and repeated publicity and advertisements to remain in public eye, to do business by attracting customers. It is an expenditure of trading nature. The aforesaid aspect has been highlighted by the Delhi High Court in CIT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi) and CIT v. Casio India Ltd. [2011] 355 ITR 196 [2012] 20 taxinann.com 449(Del).”

ld. DRP that advertisement expenses incurred by the taxpayer will

increase the brand image of the group company of Huawei

Technology and disallowed the advertisement expenses to the tune

21 ITA No.7509/Del./2017 ITA No.7510/Del./2017

of 30% is also not sustainable. Hon’ble Supreme Court in case of

Sassoon J. David and Co. P. Ltd. vs. CIT 118 ITR 261 (SC)

held that, “the fact that somebody other than the assessee is also

benefited by the expenditure should not come in the way of an

expenditure being allowed by way of deduction under section

10(2)(xv) of the Act if it satisfied otherwise the tests laid down by

law.”

Enterprises vs. CIT 254 ITR 216 (SC) held the disallowance of

any expenditure on ad hoc basis not sustainable by returning

following findings :-

"In its principal order, the Tribunal had concluded that the addition was unsustainable because it had been made 'on the basis of pure guess work'. The revenue moved the High Court under section 256(2) of the Income-tax Act, 1961, and the High Court called for a reference on the basis that the question was a question of law. -We are unable to agree with the High Court. In the first place, the Tribunal has held that the addition had been made on the basis of pure guess work and this is a matter of fact in respect of which the Tribunal's conclusion is final. In the second place, there was no question of remanding the matter to the Assessing Officer for re-examination of the same question."

rendered by the Hon’ble Supreme Court and Hon’ble High Court

discussed in the preceding paras, we are of the considered view

that disallowance of 30% of the advertisement expenses by the AO

and confirming the same by the ld. DRP is not sustainable for the

22 ITA No.7509/Del./2017 ITA No.7510/Del./2017 reasons inter alia that commercial expediency of any expenditure

incurred by the taxpayer has to be examined with businessman

standpoint and not with the perspective of tax authority; that

advertisement expenses are revenue in nature; that merely because

of the fact that advertisement expenditure incurred by the taxpayer

has benefited the third party, the same cannot be disallowed; and

that disallowance of any expenditure on ad hoc basis is not

permissible in law, hence ordered to be deleted. Consequently,

grounds no.3 to 3.4 of ITA No.7509/DEL/2017 & 7510/DEL/2017

for AYs 2012-13 & 2013-14 respectively are determined in favour

of the taxpayer.

GROUNDS NO.4 TO 4.3 OF ITA NO.7509/DEL/2017 (AY 2012-13) ITA NO.7510/DEL/2017 (AY 2013-14)

Rs.1,010,856,249/- & Rs.128,611,894/- for Assessment Years

2012-13 & 2013-14 respectively on account of provision for

customer claim on the ground that the amount provided by the

taxpayer pertaining to actual delays/defaults occurred as per the

terms of the contract entered between the taxpayer and its

customers and as such is an “ascertained liability”. The taxpayer

has raised specific objections before the ld. DRP, available at

paves 256-274 and 217-234 for AYs 2012-13 & 2013-14

23 ITA No.7509/Del./2017 ITA No.7510/Del./2017

respectively, and also brought on record evidence in the form of

credit-memo in relation to liquidated damages and details of

liquidated damages, chart showing trend and utilization of

provision of customer claims from AYs 2010-11 to 2014-15 and

extract of audited financials for AYs 2010-11 to 2016-17 to show

the details of provision of customer claims and extract of contract

entered into between the taxpayer and customer claims from pages

6 to 26 of the convenience paper book.

in making/confirming the disallowance towards provision of

customer’s claim without appreciating the fact that amount

provided by the taxpayer is in relation to the actual delays/defaults

occurred as per the terms of the contract entered into between the

taxpayer and its customers, thus is an ascertained liability and

relied upon the decision of coordinate Bench of the Tribunal in

DCIT vs. Nokia Siemens Networks India Pvt. Ltd. in ITA

No.3202/Del/2014 order dated 31.01.2018.

Nokia Siemens Networks India Pvt. Ltd. (supra) wherein the

identical issue has been examined by returning following findings:-

“8. In the present case from page no. 136 of the assessee's paper book, it is noticed that total provision for liquidated damages was of Rs. 19,66,51,910/- out of which Rs. 2,04,52,238/- were utilized and credited / written back, the remaining amount of Rs. 17,61,99,672/-

24 ITA No.7509/Del./2017 ITA No.7510/Del./2017

was the actual amount of the damages which were accounted for in the profit and loss account. In the instant case, the learned CIT(A) categorically stated that when the payments were actually made, the accounts were adjusted with reference to any remission or waiver that the company may get in respect of damages payable for the late delivery and the same was brought to tax u/s 41 (1) of the Act by crediting the liquidated damages accounts. Therefore, the impugned amount was not only the provision but the actual amount of the liquidated damages pertaining to the period of delay falling within the previous year relating to the assessment year under consideration. The learned CIT(A) categorically stated that the assessee was following this method consistently. We, therefore, do not see any valid ground to interfere with the factual findings given by the learned CIT(A) and accordingly do not see any merit in the ground raised by the Department.”

P. Ltd. vs. CIT (2009) 314 ITR 62 (SC) decided the identical

issue as under :-

“Held, reversing the decision of the High Court, that the valve actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective; that valve actuator being a sophisticated item no customer was prepared to buy a valve actuator without a warranty. Therefore, the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income-tax Act, 1961. The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be

25 ITA No.7509/Del./2017 ITA No.7510/Del./2017

made of the amount of the obligation. If these conditions are not met, no provision can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37.”

of the Tribunal and proposition laid down by the Hon’ble Supreme

Court, provision for customer claim is a liability which can be used

only by using a substantial decree of estimation. When the

taxpayer has brought on record ample evidence in the form of

credit memo in relation to liquidated damages and details of

liquidated damages, chart showing trend and utilization of

provision of customer claims from AYs 2010-11 to 2014-15 and

extract of audited financials for AYs 2010-11 to 2016-17, to show

that the details of customer claims and extract of contract entered

into between the taxpayer and the customer claims, available from

pages 6 to 26 of the convenience paper book, this provision has to

be measured by using substantial decree of estimation. Moreover,

historical trend brought on record by the taxpayer also shows the

actual use of provision for customer claim.

Hon’ble Supreme Court in case of Rotork Controls India 41.

P. Ltd. (supra) held that a provision is recognised :

26 ITA No.7509/Del./2017 ITA No.7510/Del./2017

(a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation.

aforesaid conditions have been fulfilled and as such, provision

made qua the amount provided by the taxpayer pertaining to actual

delays and defaults occurred in terms of the contract entered into

between the taxpayer and its customers is to be considered as

“ascertained liability”. So, AO/DRP have erred in making

disallowance on account of provision for customer claims. So, it is

ordered to be deleted subject to verification of data brought on

record by the taxpayer as discussed in the preceding paras.

Consequently, grounds no.4 to 4.3 of ITA No.7509/DEL/2017 &

7510/DEL/2017 for Assessment Years 2012-13 & 2013-14

respectively are determined in favour of the taxpayer.

GROUNDS NO.5 TO 5.3 OF ITA NO.7509/DEL/2017 (AY 2012-13) ITA NO.7510/DEL/2017 (AY 2013-14)

advances written off to the tune of Rs.85,33,563/- &

27 ITA No.7509/Del./2017 ITA No.7510/Del./2017 Rs.61,60,172/- for AYs 2012-13 & 2013-14 by AO/DRP on the

ground that without appreciating the fact that expenditure was

incurred wholly and exclusively for the purpose of business. Ld.

DRP confirmed this disallowance made by the AO on the ground

that the companies generally held the salaries or allowances for

such kind of settlements when the employees leave the companies

and the company is under no obligation to pay the payments and if

any such payment has been made by the employees, then it must

form part of perquisite of the employees for claiming deduction by

the company. Since the taxpayer has not been able to provide

complete details of these amounts, the employees on whose behalf

these amounts have been paid, it cannot be considered as liability

of the employer.

taxpayer has failed to furnish any evidence to support the claim of

the expenditure. When we examine pages 30 to 47 & 48 to 75 for

AYs 2012-13 & 2013-14 respectively of the convenience paper

book, the taxpayer has given complete details of the advances

written off.

advance has been written off in the books of account, it is

sufficient to claim the deduction of the advances written off u/s 37

28 ITA No.7509/Del./2017 ITA No.7510/Del./2017 of the Act and taxpayer is not required to prove that the advances

written off is irrecoverable as per section 37(1) of the Act.

necessary for the assessee to establish that the debt, in fact, has

become irrecoverable. It is enough if the bad debt is written off as

irrecoverable in the accounts of the assessee.”

page 30 of the convenience paper book in tabulated form. So, in

view of the matter, we are of the considered view that let this issue

go back to AO to verify the facts if these advances were given for

business purposes and decide afresh in the light of findings

returned hereinbefore by providing opportunity of being heard to

the taxpayer. Consequently, grounds no.5 TO 5.3 of ITA

No.7509/DEL/2017 & 7510/DEL/2017 for Assessment Years

2012-13 & 2013-14 respectively are determined in favour of the

taxpayer for statistical purposes.

GROUND NO.6 OF ITA NO.7509/DEL/2017 (AY 2012-13) ITA NO.7510/DEL/2017 (AY 2013-14)

for AYs 2012-13 & 2013-14 respectively being consequential in

nature needs no specific findings.

29 ITA No.7509/Del./2017 ITA No.7510/Del./2017 GROUND NO.7 OF ITA NO.7509/DEL/2017 (AY 2012-13) ITA NO.7510/DEL/2017 (AY 2013-14)

for AYs 2012-13 & 2013-14 respectively being premature needs no

specific findings.

paras, written submissions filed by the ld. DR for the Revenue and

case laws relied upon, which have been made part of the judicial

file are not applicable to the facts and circumstances of the case.

appeals being ITA No.7509/DEL/2017 & 7510/DEL/2017 for AYs

2012-13 & 2013-14 respectively are allowed for statistical

purposes. Order pronounced in open court on this 24th day of February, 2021.

Sd/- sd/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated the 24th day of February, 2021 TS Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A). 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.