INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "D": NEW DELHI
BEFORE SHRI O.P. KANT, ACCOUNTANT MEMBER
AND
SHRI K.N. CHARY, JUDICIAL MEMBER
ITA No. 5624/Del/2015
Asstt. Year: 2000-01
Nokia India Pvt. Ltd., DCIT,
1st Floor, Tower A, SP Infocity, Circle 13 (1)
Industrial Plot No. 243, New Delhi
Udyog Vihar, Phase-1,
Dundahera, Gurgaon, Haryana Vs.
(Appellant) (Respondent)
Assessee by: Shri Sumit Mangal, Advocate
Department by : Smt. Naina Sain Kapil, Sr.DR
Date of Hearing 14/11/2018
Date of 06/12/2018
pronouncement
ORDER
PER O.P. KANT, A.M.
This appeal filed by the assessee is directed against order dated
22/07/2015 passed by the Ld. Commissioner of Income-tax (Appeals)-
6, Delhi [in short the Ld. CIT(A)] for assessment year 2000-01 raising
following grounds:
"l. The order passed by the Learned Commissioner of Income Tax
(Appeals) - 6 ("Ld.CIT(A)") under section 250 of the Income Tax Act,
1961 ("the Act") is bad in law and on the facts and circumstances
of the case.
2. That, the Ld. CIT(A) has erred in law and in the facts and
circumstances of the case by upholding disallowance of Rs
38,89,951 (total expenditure in respect of mobile handsets etc.
issued on FOC basis net of tax depreciation @ 25 percent) made
by the Learned Dy. Commissioner of Income Tax, Circle 13(1) ("Ld.
AO") on account of mobile handsets issued on free of cost basis to
after marketing service centres and dealers for marketing,
promotional purposes and meeting warranty obligations.
3. That, the Ld. CIT(A) has erred in law and in facts of the case by
upholding the disallowance of Rs. 8,93,357(disclosed as
'Commercial Gifts' under marketing expenses) made by the Ld. AO
on account of mobile handsets issued to employees (amounting to
Rs. 4,24,860) and dealers (amounting to Rs. 4,68,497) for purpose
of business of appellant.
4. That, the Ld. CIT(A) has erred in law and in facts and
circumstances of the case by ignoring the observations in the tax
audit report and insisting on additional evidence from the
appellant.
5. That, the Ld. CIT(A) has erred in law and in facts and
circumstances of the case in not appreciating the fact that it was
impossible for the appellant to adduce additional evidence after
the lapse of significant amount of time.
6. That, the Ld. CIT(A) has erred in law and on the facts and
circumstances of the case by upholding the interest levied by the
Ld. AO under section 234B, section 234D and section 244A(3) of
the Act.
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7. The above grounds of appeals are independent and without
prejudice to one another.
8. The appellant craves leave to add /withdraw or amend any
ground of appeal at the time of hearing. "
2. Briefly stated facts of the case as culled out from the order of the
lower authorities are that the assessee, a private limited company was
engaged in providing services in the nature of installation,
commissioning and erection of telecommunication equipment, selling
(trading) of mobile phones, networks and accessories etc. For the year
under consideration, the assessee filed return of income on
30/11/2000 declaring Nil income. The return was selected for
scrutiny and assessment under section 143(3) of the Income Tax Act,
1961 (in short the Act) was completed on 28/03/2003 wherein the
additions/disallowances of Rs. 5,12,72,562/-were made.
3. The disallowances made included following :
(i) amount of Rs. 8,93,357/-for expenses towards mobile
phones / accessories given to dealers / employees as gift
and
(ii) amount of Rs. 47,07,403/-out of total expenses of Rs.
62,76,537/- under the marketing expenses / mobile
handsets/accessories etc. given to dealers, employees and
service centres after allowing depreciation at the rate of
25%.
4. On further appeal, the Ld. Commissioner Income Tax (Appeals)
vide order dated 26/03/2004 sustained most of the additions /
disallowances including above two disallowances. On further appeal,
the Income Tax Appellate Tribunal (ITAT) in ITA No. 2781/Del/2004
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allowed the appeal partly, however the above two disallowances were
confirmed.
5. On further appeal, the Hon'ble High Court in ITA No. 841 of
2009, restored the matter on above two issues back to the Tribunal for
taking into consideration the arguments advanced by the assessee.
Post remand back by the Hon'ble High Court, the Tribunal in order
dated 22/09/2011 restored the issue in dispute involved in above two
disallowances back to the Assessing Officer for considering afresh
after providing an opportunity of being heard to the assessee. In
second round of proceedings, again the Assessing Officer upheld the
same additions in view of the non-compliance despite opportunity
given to the assessee. On further appeal, the Ld. CIT(A) upheld the
disallowances. Hence, the assessee is in appeal before the Tribunal
raising the grounds as reproduced above.
6. Before us, the Ld. Counsel of the assessee stated that ground
Nos. 1, 7 and 8 of the appeal are being general in nature and thus,
Tribunal is not required to adjudicate upon specifically. Accordingly,
we dismiss the same as infructuous.
7. In ground No. 2 issue of disallowance of amount related to
mobile phones provided free of cost (FOC) to dealers, employees and
service centres is involved. The ground No. 3 relates to disallowance of
Rs. 8,93,357/- for mobile handset given to employees/dealers as
commercial gifts under marketing expenses. The ground Nos. 4 and 5
of the appeal are also related to ground No. 2 and 3. Thus in ground
Nos. 2 to 5 , the two issues of disallowance of expenses in respect of
mobile handset /accessories given on FOC basis to
dealers/employees/service centres and mobile handsets given to
dealers/employees as gift are involved.
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8. On the first issue of mobile handset/accessories given on FOC
basis to dealers/employees/service centres is concerned, the Ld.
Counsel of the assessee submitted before us that the issue in dispute
is covered by the order of the Tribunal in the case of the assessee for
assessment year 2003-04, wherein the entire marketing expenditure
on account of FOC handset has been allowed.
9. On the contrary, the Ld. DR distinguished the facts that in the
instant case the assessee has failed to substantiate providing of the
handset to the recipient with evidences and therefore the expenses
cannot be allowed under section 37(1) of the Act and the Ld. CIT(A) is
justified in sustaining the disallowance made by the Assessing Officer
holding the expenditure as capital expenditure.
10. We have heard the rival submissions and perused the relevant
material on record. The assessee in its grounds of appeal has
mentioned the amount of disallowance at Rs. 38,89,951/-whereas in
the original assessment order dated 28/03/2003 the disallowance is
mentioned at Rs. 47,07,403/- out of the total expenses claimed of Rs.
62, 76,537/- after allowing 25% depreciation on the same. At this
point of time, without commenting on the amount of disallowance, we
may like to mention that before the lower authorities the assessee
claimed amount written off towards mobile handset/accessories given
to dealers ( Rs. 50,75,733/-) ; employees ( Rs. 10,89,935/-) and to
service centres ( Rs. 1,10,869 ) for business purposes like display,
promotional purposes , swap handsets etc, which were marketing
expenses and therefore it was a revenue expenditure. Whereas the
revenue authorities held the expenditure is capital expenditure as they
were the assets used for the purpose of the business of the assessee.
The relevant finding of the Ld. CIT(A) in order dated 26/03/2004 in
first round of the proceeding are reproduced as under :
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"6.9. As regards, the handsets given by the appellant to the
dealers, employees and AMCSs amounting to Rs. 51,86,602/- the
AO has allowed depreciation, stating that they were its assets
which were being used for the appellant's business purpose. I am
in agreement with the AO. These handsets cannot be allowed to
be written off in the present AY merely because the appellant has
given this treatment to them in its books of accounts. Two other
arguments given by the appellant are that the handsets were
given to AMSCs as `swap handsets' to be given by them to
customers whose defective handsets could not be repaired, and
further that sample cellular handsets are provided to dealers for
display and promotional purposes either on a `concessional' basis
or on a `free of charge' basis as this exercise enables the appellant
to increase its market share in India and also build the Nokia
brand in India. Both these arguments cannot be accepted. Firstly
for replacement of defective handsets the appellant co. has a
separate and huge provision and the amounts spent over and
above that provision are claimed as current repairs. Secondly, if it
is argued that the giving away of sample handsets for display
and promotional purposes increases its market share and
establishes its brand name, then they are certainly on capital
account, since increase in market presence and establishment of
brand name have long term benefits to the appellant company.
Hence, it has to be held that these are items of capital nature and
the appellant derives enduring benefit from the same. The AO was
therefore justified in disallowing the claim of Rs. 51,86,602 as
revenue expenditure, treating the same as capital in nature and
allowing depreciation on the same as applicable. His action in so
doing is upheld. Ground No. 6 therefore fails and is dismissed."
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11. Further , In second round of proceedings before the Ld. CIT(A),
the assessee filed a letter dated 21/07/2015 and submitted that in
spite of the assessee's best efforts, the recipient of the mobile handset
were not traceable. The Ld. CIT(A) has reproduced the contents of the
letter in his order. For ready reference same are reproduced as under:
"This is with reference to the captioned appeal.
In this regard, we under the instructions of and behalf of our client
MIs Nokia India Private Limited ("the appellant') would like to
submit that the additional evidence i.e.the relevant documents to
prove that the mobile handsets distributed on a free of cost basis,
could not be obtained by the appellant due to substantial efflux of
time. As your office would appreciate, these details relate to a
period from 15 years ago. The employees who received-these
handsets have left the employment of the Appellant and are
untraceable. Similarly, the distributors, dealers and repair centres
who received these handsets are no longer under any contractual
arrangement with the Appellant and due to their internal
reorganization the relevant employees who dealt with the
Appellant are no longer traceable. In spite of the Appellant's best
efforts, the Appellant could only obtain-the necessary documents
to prove that the appellant issues such handsets free of cost from
AY 2005-06 onwards.
However, the Appellant would still like to contend that based on
the facts not in dispute and the legal arguments forwarded by the
Appellant, the expenses incurred on free of cost handsets should
be allowed as revenue expenditure.
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Without prejudice to the above; it is humbly requested, that the
depreciation allowance (25% of expenses) granted by the
Assessing Officer should be retained in case your office decides to
not treat this expenditure as revenue expenditure due to lack of
factual evidence.
The Appellant would like to reiterate that the aforementioned
factual evidence is available from AY 2005 - 06 onwards and
hence, orders passed in the captioned appeal should not act as a
precedent for the years where the Appellant is able to provide
factual evidence and supporting documents necessary to prove
that these handsets were actually provided free of cost to the
respective employees, distributors / dealers and repair centres.
In case you need any clarifications we would be happy to provide
the same.
Thanking you and assuring you of our full cooperation at all
times."
12. On this issue, the Ld. Counsel of the assessee has relied on the
order of the Tribunal in the case of the assessee itself for assessment
year 2003-04 in ITA No. 2445/Del/2010 wherein the Tribunal has
observed as under:
"9.8 We have perused the submissions advanced by both the
sides and the light of the records placed before us and the orders
of this Tribunal in assessee's own case relied upon by both the
sides. Ld. AR while contesting the issue had categorically
submitted that assessee do not have bills of having been issued to
its employees/dealers etc. free of cost. He thus submitted that
setting aside the issue back to Ld. AO for verification would not
serve any purpose.
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9.9. Under such circumstances in our considered opinion we find
it fit and proper to decide the issue in the light of the records
placed before us, orders passed by authorities below as well as
the submissions advanced by both the sides.
9.10 It is observed that assesee has shown marketing expenses
to the tune of Rs. 53,31,919/- on account of mobile phone
handsets issued to AM SC, dealers and employees etc. Ld. AR has
sub mitted in his written submission dated 4.12.2017 that the
handset given on free of cost basis to AM SC, dealers and
employees are no longer owned by assessee. He it has been
submitted that the title in the mobile phones is also transferred.
Undisputedly assessee is a company which is engaged in import
and sale of mobile handsets. It has a wide team of dealers and
sales personnel. Assessee has given free of cost Mobile to all these
persons for communication amongst themselves for the business
of assessee. Assessee has therefore debited the cost of these
phones as marketing expenses and reduced it from its inventory.
Apparently assessee do not own these phones and it has been
reduced from the stock as no bill is required to b e prepared.
Apparently the mobile phones will not be returned to assessee as
they would be used by the recipients effective useful life.
Therefore naturally the expenditure of giving phones to sales team
is an expenditure incurred by assessee wholly and exclusively for
the purpose of business of assessee. Assessee has also not
capitalised these phones for the obvious reasons that phones are
not owned by depreciation thereon. In our view as expenditure is
revenue in nature, assessee is eligible for deduction under section
37(1) only. Hence the ground raised by assessee stands allowed."
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13. In the above decision of the Tribunal , though the Tribunal has
mentioned that the assessee did not have bills of having been issued
handset to its employees/dealers etc free of cost , however there is no
reference as to failure of the assessee to produce evidence in support
of claim of providing the handset to dealers/employees/service
centres. In the aforementioned order , The Tribunal has noted factual
finding that assessee has given those handset free of cost to all these
persons for communication amongst themselves for the business of
the assessee. But in the instant case before us the assessee has failed
even to establish that those handsets were given to those persons. The
assessee has not provided any list of those persons along with name
and address either before us or the lower authorities, even for
verification on test check basis. The assessee has also not provided
any details according to the claim that the handset were swaped
under the warranty. The facts of the present case are different from
the case relied upon by the Ld. Counsel of the assessee. In the case
relied upon by the assessee the Tribunal has decided the matter on
the premise of the fact that those mobile handset were provided to the
persons, whereas in the instant case there is no evidence on record
that those handset were provided to those persons. In the instant
case, the assessee has simply written off the amount of handset and
claimed the expenses as marketing expenses without any
documentary evidence in support of its claim. For claim of any
expenditure as revenue expenditure, it is primary requirement to
adduce the evidence that it has been incurred for the purpose of
running of the business. It was responsibility of the assessee to keep
the voucher or other documents in support of its claim as matter was
under litigation and the assessee cannot take plea that it is impossible
to produce those documents / evidence after lapse of significant
amount of time. Thus, in the instant case assessee has failed to
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substantiate its claim of revenue expenditure. In view of the above
facts and circumstances, the Ld. CIT(A) allowed the alternative claim
of the assessee to retain the depreciation allowance granted by the
Assessing Officer.
14. In our opinion, the finding of the Ld. CIT(A) on the issue in
dispute is well reasoned and we do not find any error, accordingly we
uphold the same.
15. On the issue of disallowance of Rs. 8,93,357/-of mobile handsets
given to dealers ( Rs. 4,68,497/-) and employees ( Rs. 4,24,860/-), the
Ld. Counsel submitted that same may also be allowed in view of the
decision of the Tribunal (supra).
16. The Ld. DR on the other hand submitted that items given as gift
is different from the items given for the purpose of business and same
cannot be treated at par and this issue is not specifically dealt by the
Tribunal and thus may not be considered as covered by the order of
the Tribunal (supra).
17. We have heard submission of both the parties on the issue in
dispute. In the original assessment under section 143(3) dated
28/03/2003 the assessee failed to file evidence in support of claim of
commercial gifts given to employees and dealers and therefore this
sum was disallowed by the Assessing Officer. The Ld. CIT(A) in first
round of proceedings also upheld the action of the Assessing Officer in
view of the absence of documentary evidence in support of the claim of
commercial gifts. The finding of the Ld. CIT(A) is reproduced as under:
"6.8 I have gone through the rival submissions. As regards the
handsets given as gifts, as agitated in grounds of appeal no. 4
and 5, I am in agreement with the AO that the same cannot be
allowed in the absence of full and proper evidence regarding the
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same. As the Appellant has not submitted sufficient evidence
regarding the same. As the appellant has not submitted sufficient
evidences before the AO as repeatedly mentioned by him in the
order as well as in the remand report, I am unable to now accept
the same. Even otherwise once the appellant states that it has
given 'gifts' to employees and dealers, it cannot say that these
were for official use. A gift is given without any expectation of
return from the receiver. Thus a gift given for official use is itself
contradictory. Besides there is no way of ensuring that the 'gifts'
are used for official use of the company so as to say that the
expenditure on the same was for business expediency and hence
allowable u/s 37(1). The disallowance of Rs 8,93,357 is therefore
confirmed. As regards the appellant's alternate plea, taken in
ground No. 5 that depreciation on the same be allowed also. I am
unable to agree since the gifts given by the appellant no longer
remain its assets and would have in any case been used for their
own personal use rather than that of the company. Thus both the
pleas cannot be accepted. Grounds of appeal no. 4 and 5 are
therefore decided against the appellant and are dismissed."
18. In second round of the proceeding before the Ld. CIT(A) also the
assessee expressed its inability to furnish evidence with regard to this
claim and thus Ld. CIT(A) dismissed the claim of the assessee.
19. Before us the Ld. Counsel of the assessee submitted that the
issue in dispute is also covered by the finding of the Tribunal (supra)
for assessment year 2003-04 on the issue of handset provided on FOC
basis to dealers/employees. On the perusal of the order of the
Tribunal, relevant part of which we have also reproduced in earlier
paragraphs no. 12 , we do not agree with the contention of the Ld.
Counsel. This issue of providing gifts to dealers/employees was not
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before the Tribunal (supra) and thus cannot be treated as covered by
the above decision of the Tribunal. The contention of the Ld. Counsel
that it was impossible for the assessee to adduce evidence after the
lapse of significant amount of time, is also not correct because the
assessee failed to produce those evidences before the Ld. Assessing
Officer or the Ld. CIT(A) in even first round of the proceedings. In our
opinion, the assessee has failed to discharge its onus to produce the
evidence in support of its claim of gifts given to dealers/employees and
therefore, the Ld. CIT(A) is justified in rejecting the claim of the
expenses. Accordingly, we do not find any error in the order of the Ld.
CIT(A) and uphold the same.
20. The ground Nos. 2 to 5 of the appeal are accordingly dismissed.
21. The ground No. 6 is consequential and thus accordingly we're
not required to adjudicate upon.
22. In the result, the appeal of the assessee is dismissed.
This decision was pronounced in the Open Court on 6 th December,
2018.
sd/- sd/-
(K.N. CHARY) (O.P. KANT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 06 /12/2018
Veena /Dragon
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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