ASUS INDIA PVT LTD.,MUMBAI vs. ASST CIT CIRCLE- 9(1)(2), MUMBAI

The issues involved in the present appeal is basically related to disallowances made under section 40(a)(ia) of the Income Tax Act, 1961 (for short "the Act") on account of expenditure claimed by way of sales rebate / discount given to the dealers / distributors.

Brief facts are, the assessee, a resident company, is engaged in the business of importing and trading in electronic goods, such as, notebooks, tablets, pad–phones, mobile phones and accessories. For the impugned assessment year, the assessee filed its return of income on 30th November 2016, declaring total income of ` 17,90,29,340. In the course of assessment proceedings, the Assessing Officer while verifying the audited accounts of the assessee noticed that the assessee has claimed the following adjustment against the gross sales.

Insofar as the amount of sales return is concerned, the Assessing Officer accepted the claim. However, insofar as the sales rebate is concerned, the Assessing Officer called upon the assessee to furnish the break–up of such rebate granted to the dealers/distributors with

After calling upon the assessee to explain why such rebate/discount given to the dealers/distributors were not subjected to deduction of tax at source under section 194C/194J/194H of the Act and not being convinced with assessee’s submissions, disallowed 30% out of the aforesaid payment/expenditure aggregating to `21,31,27,003, under section 40(a)(ia) of the Act and added back to the income of the assessee. Being aggrieved with the said disallowances, though, the assessee preferred appeal before the first appellate authority, however, the disallowance was sustained. This is how the assessee is in appeal before the Tribunal.

Ground no.1, being a general ground does not require specific adjudication.

In ground no.2, the assessee has challenged the disallowance made under section 40(a)(ia) of the Act out of the expenditure on account of discount given to the dealers/distributors under the conditional discount scheme. As discussed earlier, during the assessment proceedings, on being called upon by the Assessing Officer to justify the discount/rebate given amounting to ` 42,13,01,780. It was submitted by the assessee that period wise and product wise scheme are floated to push sales for already launched models/slow moving items. He submitted, such benefit/rebate is based on dealers/distributors who ultimately sell the products in the market to the end users. Further explaining, it was submitted by the assessee that as per the discount scheme, the dealers/distributors sell the products at a special price which is below the maximum retail price (MRP). Therefore, the assessee gets a lesser margin on such sale. It was submitted, such special sales under project/tender, etc., the price quoted by the dealers/distributors are guided by special price set–ups. Therefore, to compensate the dealers/distributors for low margin, the assessee raises credit notes towards rebate/discount in favour of dealers/distributors. The Assessing Officer observed, the payment made by the assessee is out of contractual obligation or in the nature of commission. Therefore, such rebate/discount given to the dealers/distributors would get covered under section 194C/194H of the Act. The assessee having not deducted tax at the prescribed rate in

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

The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals) submitted, the contract between the parties are not conclusive, therefore, the true nature and character of the transaction has to be examined to find out whether it is a transaction of sale between two principals or there is a principal–agent relationship. In this context, he relied upon the decision of the Hon'ble Supreme Court in Durga Prasad More, 83 ITR 540 (SC). To emphasis upon the fact that the contract of sale does not end with the sale made to the dealers/distributors, the learned Departmental Representative drew our attention to certain clauses of the contract between the assessee and Flipkart. The learned Departmental Representative submitted, as

In rejoinder, the learned Authorised Representative submitted, the learned Counsel for the Revenue has misconceived the facts as the

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

Before we deal with the correctness of the aforesaid disallowance, it is necessary to briefly deal with certain crucial facts. It is evident from the material on record that during the year under consideration, the assessee had provided conditional rebate/discount of ` 42,13,01,780 to 29 distributors/dealers to whom various products, such as, notebooks, zenphones, tablets, zenpads, eeebooks, accessories, etc., were sold for a total amount of ` 1768,78,77,006. It is further relevant to observe, out of the 29 dealers/distributors to whom products were sold, the assessee had entered into a written contract only with Flipkart. On a perusal of the agreement with Flipkart, a copy of which is at Page–5 of the paper book, it is seen that as per the terms of the contract, the assessee is required to sell goods/products as per the purchase order to be placed by Flipkart. As per Para–(iii) of the agreement, the assessee is required to deliver the product to Flipkart in accordance with the specifications and prices as specified in the purchase order. Further, the terms of the agreement makes it clear that the total ownership to the products shall pass on to

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

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

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

It is relevant to observe, in course of hearing the learned Departmental Representative drawing our attention to Page–27 of the paper book had submitted that the assessee has not directly sold its products to Flipkart but has sold to end users as the invoice is raised in the name of end user. However, on a perusal of the facts on record, we find the aforesaid submission of the learned Departmental Representative factually incorrect. A reference to Page–27 of the paper book would reveal that it has nothing to do with any sale effected to

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

The leaned Counsel for the assessee submitted, volume discount is nothing but additional price support system provided to the dealers/distributors in respect of sale of certain specific products. The leaned Counsel submitted, in respect of such sale transactions, no third party is involved. Therefore, the provision of section 194H of the Act is not attracted. Further, he reiterated his submissions made in respect of ground no.2.

The learned Departmental Representative relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

Having considered rival submissions and perused the material on record, we are of the view that our reasoning while deleting the disallowance under section 40(a)(ia) of the Act in respect of ground no.2 would equally apply to this issue as well, since, the Revenue has failed to establish any principle–agent relationship between the assessee and the dealers/distributors to whom volume discount was

As could be seen from the facts on record, the assessee had reimbursed octroi paid on the products sold by the dealers/distributors as well as insurance claimed against ASUS products to the dealers/distributors on actual basis. The Assessing Officer was of the view that such reimbursement amounting to ` 4,13,94,071, is in the nature of commission as the liability to pay octroi and insurance claimed is solely on the dealers/distributors. Therefore, any reimbursement of octroi and insurance is in the nature of commission and will be covered under section 194C/194H of the Act. Accordingly, he disallowed an amount of ` 1,24,18,434, out of the expenditure claimed by invoking the provisions of section 40(a)(ia) of the Act.

The learned Commissioner (Appeals) also sustained the disallowance.

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

In ground no.5, the assessee has challenged the disallowance made under section 40(a)(ia) of the Act in respect of payment made to dealers/distributors on account of refurbishing and repair of defective products.

Brief facts are, during the year under consideration, the assessee had incurred expenditure of ` 6,76,00,752, towards additional discount given to dealers/distributors to get the defective product repaired at their end. According to the assessee, to avoid getting the products back from the dealers/distributors getting them repaired and again re– selling them, the assessee asks the dealers/distributors to repair the products at their end and makes good the cost of such repair by reimbursing at fixed rate of 30%. The Assessing Officer was of the view that had the dealers/distributors would not have repaired the products, the assessee would have hired the services of a professional to undertake repairs. Therefore, the assessee would have been liable to deduct tax at source while making payment for such repairs to the professional as it would be covered under section 194C/194J of the Act. The assessee having failed to deduct tax at source, the Assessing Officer disallowed 30% amounting to ` 2,02,80,226, under section 40(a)(ia) of the Act. The disallowance was also sustained by learned Commissioner (Appeals).

The leaned Counsel for the assessee reiterated the submissions made before the Departmental Authorities. While doing so, he brought to the notice of the Bench the invoices raised and Credit Notes issued for reimbursement.

The learned Departmental Representative relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

We have considered rival submissions and perused the material on record. As regards applicability of section 194J, no material has been brought on record by the revenue to show that the payment made comes within the purview of fees for professional services, or fees for technical services or any other payment under sub section (1) of section 194J of the Act. Therefore, in our view, such payment will not come within section 194J of the Act.

Now, we will examine applicability of section 194C of the Act. As could be seen from the facts on record, if any of the products sold by the assessee to the dealers/distributors is found to be defective requiring repair/refurbishing, as a matter of policy, instead of getting back such defective goods from the dealers/distributors and getting them repaired, the assessee asks the concerned dealer/distributor to repair at their end and sell. To compensate such repair cost, the

Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has created provision for an amount of ` 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 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 submitted, even if it is a provision still since the assessee has claimed it as deduction, TDS provision would be applicable. He submitted, mere mentioning of wrong provision by the Assessing Officer would not invalidate the

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

Ground no.7, being general in nature does not require adjudication.

In the result, appeal is partly allowed.

Grounds no.1 and 7, being general in nature do not require adjudication.

Grounds no.2 to 6 are corresponding to ground no.2 to 6, raised by the assessee in its appeal being ITA no.943/Mum./2020, decided by us in the earlier part of the order. Following our decision therein, we allow grounds no.2, 3, 4 and 6. Whereas, following our decision, therein, we dismiss ground no.5. 44. In the result, appeal is partly allowed.

To sum up, both the appeals are partly allowed. Order pronounced through notice board under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 on 05.10.2020