NOKIA INDIA PVT. LTD.,GURGAON vs. ADDL. CIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘E’, NEW DELHI (Through Video Conferencing) BEFORE SHRI G.S. PANNU, VICE PRESIDENT AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA No.1883/Del/2017 (ASSESSMENT YEAR-2011-12) Nokia India Pvt. Ltd., Add. CIT, TEC, Level 18, DLF Special Range-6, Cyber City, Vs. New Delhi Phase-III, Building No.5, Tower A, Gurgaon-122 002 PAN:AAACN 2170R (Appellant) (Respondent)

Appellant By Sh. Deepak Chopra, Adv. Sh. Ankul Goel, Adv. Respondent by Ms. Paramita M. Biswas, CIT-DR Date of Hearing 02.07.2020 Date of Pronouncement 17.08.2020 ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: This appeal has been preferred by the assessee against the

final assessment order dated 28.08.2015 passed u/s 144C read

with section143(3) of the Income Tax Act, 1961 (hereinafter called

as ‘the Act’) for Assessment Year: 2011-12.

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2.0 The brief facts of the case are that the assessee company

was incorporated in 1995 and is a wholly owned subsidiary of Nokia

Corporation, Finland. The company is primarily engaged in the

business of trading and manufacturing of mobile handsets, spare

parts and accessories. In addition to this, the company also

undertakes contract software development for its associated

enterprises.

2.1 The return of income for the year under consideration

was filed declaring a total income of Rs. 6,94,99,29,995/-.

Subsequently, the return was revised due to assessee claiming

additional TDS credit. The case was selected for scrutiny and

during the course of assessment proceedings, the assessee was

directed vide order dated 28.03.2014 to get its account audited u/s

142(2A) of the Act (Special Audit). The assessee’s case was also

referred to the Transfer Pricing Officer (TPO) to determine the Arm’s

Length Price in respect of the international transactions entered

into by the assessee during the year under consideration. The draft

assessment order was passed wherein the assessee’s income was

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proposed to be assessed at Rs.97,87,82,85,371/- as against the

returned income of Rs.6,94,99,29,995/-. Against the draft

assessment order, the assessee filed objections before the Ld.

Disputes Resolution Panel (DRP) and subsequent to the directions

of the Ld. DRP the final assessment order was passed against which

the assessee is now in appeal before this Tribunal.

2.2 It is also to be noted that a survey u/s 133A of the Act

was conducted on the assessee at the Gurgaon Corporate Office and

the Chennai factory premises on 08.01.2013 and it was noted

during the course of survey that ever since the commencement of

operations at the manufacturing facility in Chennai i.e. in the

period from Assessment Year: 2007-08 to Assessment Year: 2010-

11, the assessee had been incurring expenditure on account of

software and had been making payments for the same to Nokia

Corporation, Finland totaling to USD 3,362,631,484/-

(approximately Rs.18,495 Crores) for use in manufacturing

operations. The Department was of the opinion that the payment

towards software was in the nature of royalty on which the assessee

was liable to deduct withholding tax as per the provisions of the

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Income Tax Act, 1961. On the basis of the survey report, the

jurisdictional TDS Assessing Officer passed an order u/s

201(1)/201(1A) of the Act holding that the software remittances

were in the nature to royalty and that the assessee was liable to

deduct tax at source at the time of remittance as per Sec.9 (i)(vi)

read with section 195 of the Act and India Finland Double Taxation

Avoidance Agreement (DTAA). The Assessing Officer, vide order

dated 31.03.32014, held the assesee to be Permanent

Establishment (PE) of the Nokia Corporation, Finland and further it

was held that remittance on account of software payments were

taxable in India as royalty income in the hands of Nokia

Corporation, Finland both u/s 9(i)(vi) of the Act and under Article

12(3) of the India Finland DTAA.

2.3 The Grounds raised by the assessee in the present appeal

are as under:

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5.1 The Ld. TPO / Ld. AO / Hon’ble DRP have erred in not accepting the arm’s length analysis carried out by the appellant, for the NMP Sales segment as a whole, by applying Transactional Net Margin Method (“TNMM”) and carrying out separate benchmarking in respect of AMP expenses.

5.2 The Ld. TPO / Ld. AO / Hon’ble DRP have erred in concluding that the AMP expenses incurred by the appellant amount to international transaction under Section 92B of the Act.

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5.3 The Ld. TPO / Ld. AO / Hon’ble DRP have erred in presuming the existence of an agreement between the appellant and its Associated Enterprise (“AE”), Nokia Corp, in respect of AMP expenditure incurred by the appellant. 5.4 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in re-characterizing the AMP expenditure incurred by the appellant for its own business as expenditure incurred for providing brand promotion services to its AE, Nokia Corp, thereby warranting separate compensation.

5.5 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in inferring the existence of an international transaction of brand promotion services by holding that the AMP expenses incurred by the appellant are “high”, without any valid basis. 5.6 The Ld. TPO / Ld. AO / Hon’ble DRP have erred in imputing a value to the alleged brand promotion services by arbitrarily classifying certain AMP expenses (amounting to INR 2,74,40,55,808/-), out of total AMP expenses of INR 4,166,867,176/- incurred by the appellant, as non-routine, without any basis. 5.7 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in not appreciating the fact that due to its compensation model, the appellant has already been reimbursed in respect of the alleged non-routine AMP expenses along with a mark-up of 3.77% and therefore the additions, if any, should be restricted to shortfall in actual return as compared to arm’s length return. 5.8 The Ld. TPO / Ld. AO / Hon’ble DRP have erred in not making any adjustment for royalty free use of brand by

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the appellant, while making adjustment on account of alleged brand promotion services.

5.9 The Ld. TPO / Ld. AO / Hon’ble DRP have erred in carrying out benchmarking of AMP expenses by using an unlawful approach which is not in accordance with any of the methods prescribed under Section 92C(1) of the Act.

5.10 The Ld. TPO / Ld. AO / Hon’ble DRP have erred in ignoring significant legal principles laid down in recent judicial decisions regarding AMP expenses, especially the decision of the Jurisdictional High Court of Delhi in the case of Maruti Suzuki India Ltd.1, Bausch and Laumb Eyecare (India) (P) Ltd.2 and Whirlpool of India Ltd. 5.11 The Hon’ble DRP has erred in rejecting the ‘alternate approach’ to benchmark AMP expenses by erroneously concluding that there is a lack of comparables for benchmarking AMP segment, despite making a detailed analysis in favour of such alternate approach.

5.12 The Ld. TPO / Ld. AO have erred in passing orders which are in violation of DRP directions such as directions with regard to not using bright line method, adopting alternate approach (i.e. carving out a separate AMP segment to benchmark AMP expenditure) and computation of mark-up.

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applying TNMM and in separately benchmarking the purchase price of software

6.2 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in not appreciating that due to its compensation model, the appellant has already been reimbursed in respect of the alleged excessive software expenses, if any, along with an arm’s length mark up.

6.3 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in making an adjustment on the basis of the assumption that software payments made by the appellant were a tool to shift profits outside India using information obtained by the tax authorities during survey proceedings which provided information / data pertaining to a different year i.e. Financial Year 2011-12.

6.4 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in determining the arm’s length price (“ALP”) in respect of software by adopting a method which is not prescribed under Section 92C(1) of the Act.

6.5 The Ld. TPO /Ld. AO / Hon’ble DRP have erred on facts and in law in making additions by selectively considering transaction of only those months where transaction value is higher than the ALP.

6.6. The Hon’ble DRP has erred in disposing off the various objections raised by the appellant in a summary manner, without providing any reasons.

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7.1 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in rejecting the economic analysis undertaken by the appellant in its transfer pricing documentation, to determine the ALP. 7.2 The Ld. TPO / Ld. AO / Hon’ble DRP have erred in rejecting certain quantitative filters adopted by the appellant while carrying out economic analysis in its transfer pricing documentation, to determine ALP. 7.3 The Ld. TPO / Ld. AO / Hon’ble DRP have erred in introducing certain inappropriate quantitative filters to carry out economic analysis, for determining ALP. 7.4 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in not rejecting comparables having turnover in excess of five times the turnover of the appellant, despite a ruling in favour of the appellant for AY 2002-03 by Hon’ble ITAT, which has also been confirmed by the Jurisdictional High Court of Delhi. 7.5 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in applying the quantitative filters proposed by the Ld. TPO over the final set of comparables chosen by the appellant instead of the initial set of potential comparables / full population of potential comparables. 7.6 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in resorting to ‘cherry picking’ of comparables by arbitrarily selecting comparables from the list of companies rejected by the appellant without analysing all the companies rejected by the appellant. 7.7 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in rejecting the comparables, chosen by the appellant, on the basis of incorrect reasons and

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introducing certain additional, inappropriate, comparables while determining the ALP.

7.8 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in accepting comparables engaged in diverse activities even though sufficient segmental information is not available.

7.9 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in not making an adjustment to account for differences between the risk profile of the appellant and comparables, while determining the ALP.

7.10 The Ld. TPO / Ld. AO / Hon’ble DRP have erred on facts and in law in not making an adjustment to account for difference in depreciation rates charged by the appellant vis-a-vis the comparables, while determining the ALP.

7.11 The Ld. TPO / Ld. AO / Hon’ble DRP have erred in treating 3 line items in the financials of comparables (i.e. foreign exchange gain and loss, provision for bad and doubtful debts and bank charges) as non-operating while computing operating margins of the comparables, for determining ALP.

7.12 Hon’ble DRP has erred in disposing off the various objections raised by the appellant in a summary manner, without providing any reasons.

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appellant on account of trade price protection paid to distributors (HCL Infosystems Ltd. as well as other distributors) as compensation for reduction in prices of the handsets, and in ignoring a the evidence (including confirmations from dealers) submitted by the appellant in this regard.

12 The Ld. AO and the Hon'ble DRP have erred in not allowing current year depreciation in respect of the FOC phones given to AMSC’s for warranty purposes and to dealers for promotional purposes even though these expenses were treated as capital expenses. The Ld. AO has also erred in not allowed earlier years’ depreciation in respect of the FOC phones, despite the Hon’ble DRP’s directions in this regard.

13 The Ld. AO, Ld. TPO and the Hon’ble DRP have erred in disallowing the part of the expense incurred by the appellant for purchase of software under transfer pricing regulations, and in simultaneously disallowing the entire expense under Section 40(a)(i), resulting in double disallowance of the same amount.

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14 The above grounds of appeals are independent and without prejudice to one another.

3.0 At the time of hearing, it was brought to notice of the

Bench by the Ld. AR that in addition to filing the appeal before

this Tribunal, the assessee had also filed an application under

Article-24 of the India Finland Double Taxation Avoidance

Agreement for initiation of Mutual Agreement Procedure (MAP)

before the Indian and Finnish Competent Authorities on the

following issues:

(i) Disallowance u/s 40(a)(i) of the Act on the issue of

withholding tax on payments made to Nokia Corporation

towards purchase of end user operating software and

purchase of finished Mobile Phones.

(ii) Transfer Pricing Adjustment on account of contract

research and development activities, advertising marketing

and promotion expenditure (AMP) and excessive software

purchase price.

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3.1 The Ld. AR submitted that a resolution has been

arrived at between Indian and Finnish Competent Authority on

these issues which were also before the Tribunal in the present

appeal. It was also submitted that the resolution under Article -

24 of India Finland DTAA has been accepted by the assessee

vide letter dated 28th February, 2018. It was also submitted by

the Ld. Authorized Representative that as per Rule-44H of the

Income Tax Rules, 1962 (the Rules), the order given effect to the

MAP resolution has to be passed by the Assessing Officer once

all appeals are withdrawn by the assessee on the issues so

resolved under MAP. The Ld. AR submitted that in line with the

condition precedent as prescribed under Rule-44H of the Rules,

the assessee seeks permission to withdraw ground Nos. 2, 3, 4,

5, 5.1 to 5.12, 6, 6.1 to 6.6, 7, 7.1 to 7.12, 11 & 13 in the

captioned appeal. The Ld. AR also submitted that revised Form-

36B has been filed.

4.0 The Ld. CIT-DR had no objection to the assessee in

withdrawing the above said grounds of appeal. Keeping in view

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the submissions of the Ld. AR, we permit the withdrawal of the

above mentioned grounds in the original Form-36B.

5.0 The remaining grounds now surviving before us, as

contained in the revised Form-36B, are as under:

“1. The order dated January 31, 2017, passed by the Learned Assessing Officer (“Ld. AO“) under Section 143(3) read with Section 144C of the Act pursuant to the directions of the Hon'ble DRP dated December 2,2016, is bad in law and on the facts and circumstances of the case and the same is liable to be set aside.

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employees, dealers and After Marketing Service Centres (“AMSC’s”) on the ground that the same would give enduring benefit and cannot be claimed as revenue expenditure.

6.0 Arguing for the surviving grounds after the MAP

proceedings, it was submitted by the Ld. AR that ground No.2

challenges the disallowance made u/s 40(a)(ia) of the Act on

account of trade offers amounting to Rs.7,16,24,39,495/-

provided to the distributors. The Ld. AR submitted that

Department had held these trade offers to be liable to the

provisions of withholding tax u/s 194H of the Act on the ground

that they were in the nature of commission. The Ld. AR

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submitted that, however, this disallowance was identical to the

disallowance made in Assessment Year: 2010-11 which has

since been deleted by the ITAT in assessee’s own case in ITA

No.5791/Del/2015 in order dated 20.02.2020. Our attention

was drawn to the relevant paragraphs of the said order placed

on record and it was submitted that in view of the ITAT ruling in

Assessment Year: 2010-11 in assessee’s own case in assessee’s

favour, on similar facts, this disallowance also deserves deletion.

6.1 Arguing for ground No.3 challenging the disallowance

on account of trade price protection extended to the distributors

against reduction in prices of handsets to the tune of

Rs.61,00,11,882/-, the Ld. AR submitted that this disallowance

had been made on the ground that the assessee had failed to

justify the commercial expediency of the expenditure. The Ld.

Further submitted that this disallowance has also been made on

the same ground as in assessment year 2010-11 which was also

deleted by the Tribunal in assessee’s own case vide order dated

20.02.2020 in ITA No.5791/Del/2015. Our attention was drawn

to the relevant paragraphs of the said order and it was prayed

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that on identical facts, this year’s disallowance also needs to be

deleted.

6.2 Coming to ground No.4 challenging the

disallowance of marketing expenditure incurred on account of

issuance of handsets on free of costs basis, the Ld. AR

submitted that this disallowance had been made on the ground

that handsets given as free costs were in the nature of capital

assets and the same could not be treated as Revenue

expenditure. The Ld. AR submitted that this disallowance has

also been deleted by the ITAT in assessee’s own case in the

immediately preceding assessment year 2010-11 vide order

dated 20.02.2020 in ITA No.5791/Del/2015 as aforesaid and it

was submitted that on identical facts the disallowance in this

year also required to be deleted.

6.3 The Ld. AR also submitted that ground No.5 of the

assessee’s appeal challenged the action of the Lower Authorities

in not allowing current year depreciation in respect of free of

costs phones given to the distributors and dealers even though

the expenditure was treated as capital expenditure. The Ld. AR

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submitted that if ground No.4 of the assessee’s appeal is

allowed, this ground will not survive.

7.0 Per contra, the Ld. CIT-DR placed extensive reliance

on the directions of the Ld. DRP and vehemently argued that the

Ld. DRP had give its directions after due consideration of all the

relevant facts and the law and, therefore, these direction could

not simply be brushed aside. The Ld. CIT-DR, however, could

not controvert the fact that these issues had been decided in

favour of the assessee and against the Revenue in the

immediately preceding assessment year 2010-11 by this

Tribunal.

8.0 We have heard both the parties and have also

perused the material on record. We have also perused the order

of the Tribunal in the immediately preceding year in the

assessee’s own case for Asst. Year: 2010-11 in ITA

No.5791/Del/2015 vide order 20.02.2020 and we are in

agreement with the contention of the Ld. AR that the issues are

squarely covered in favour of the assessee on the issues now

surviving before us by the said order of the Tribunal. With

19 ITA No.1883/Del/2017 Nokia India Pvt. Ltd. vs. ACIT

respect to ground No.2 relating to disallowance 40(a)(ia) on

account of trade offers amounting to Rs.7,16,24,39,495/-, we

find that this issue has been decided in favour of the assessee

vide paragraph 8 of the said order and the same is reproduced

herein under for a ready reference:

“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 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

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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.”

8.0.1 Respectfully following the order of the Co-ordinate

bench in assessee’s own case in the immediately preceding year,

on identical facts, we delete the impugned disallowance. Thus,

ground No.2 stands allowed.

8.1 Regarding ground No.3 relating to disallowance on account of trade price protection extended to distributors against reduction in prices of hands amounting to 61,00,11,882/-, we note this issue has also been decided in faouvr of the assessee in assessee’s own case for Asst. Year: 2010-11 by this Tribunal. The relevant observations of the Tribunal are contained in paragraph 11 of the said order which is reproduced herein under for a ready reference: “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

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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.”

8.1.1 Respectfully the following the Tribunal’s order for

Asst. Year: 2010-11 in assessee’s own case, we delete this

disallowance also.

8.2 Ground No.4 relates to the disallowance of marketing

expenditure incurred on account of issuance of handsets on

22 ITA No.1883/Del/2017 Nokia India Pvt. Ltd. vs. ACIT

free of cost basis and Ground No.5 relates to depreciation to be

allowed on such handsets as an alternate plea if the free of cost

handsets are held to be in the nature of capital expenditure.

This issue has also been decided in favour of the assessee by the

Tribunal in assessee’s own case for Asst. Year: 2010-11. The

relevant observations of the Tribunal are contained in

paragraphs 17 of the said order:

“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.” 8.2.1 On similar facts, respectfully following the order of the

Co-ordinate Bench in assessee’s own case as aforesaid, we direct

the deletion of this disallowance, thus ground No.4 stands

allowed.

23 ITA No.1883/Del/2017 Nokia India Pvt. Ltd. vs. ACIT

8.3 Since, we have allowed ground No.4 and have held

the impugned expenditure to be Revenue in nature, ground No.5

becomes in fructuous and is dismissed as such.

8.4 Ground Nos.1, 6 & 7 do not require any separate

adjudication.

9.0 In the final result, the appeal of the assessee stands

partly allowed.

Order pronounced on 17/08/2020.

Sd/- Sd/- (G.S.PANNU) (SUDHANSHU SRIVASTAVA) VICE PRESIDENT JUDICIAL MEMBER Dated: 17/08/2020 PK/Ps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT

ASSISTANT REGISTRAR ITAT NEW DELHI