No disallowance of non-deduction of TDS for expenses incurred on trade offers provided to distributors: ITAT grants relief to Nokia [Read Order]

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The Income Tax Appellate Tribunal (ITAT), New Delhi Bench while granting relief to Nokia India held that no disallowance of non-deduction of TDS for expenses incurred on trade offers provided to distributors.

The Assessee, Nokia India is a wholly owned subsidiary of Nokia Corporation, Finland and is stated to be primarily engaged in the business of trading and manufacturing of mobile handsets, spare parts and accessories.

The assessee had also filed an application under Article24 of the India – Finland Double Taxation Avoidance Agreement (DTAA) for initiation of Mutual Agreement Procedure (MAP) before the Indian and the Finnish Competent Authorities (CA) on the issues relating to disallowance under section 40(a)(ia) of the Act due to alleged failure to withhold tax on payments made to Nokia Corporation towards purchase of end user operating software, purchase of hardware and finished goods and purchase of software embedded in finished goods.

It was noted by the AO that assessee had offered trade incentives to the distributors which included the amount offered to HCL Infosystems Ltd. The assessee was asked to show-cause as to why the amounts not be disallowed under section 40(a)(ia) on account of non-deduction tax at source.

The assessee made the detailed submissions inter alia contending that the provision of section 194H, 194C, 194J were not applicable to the case because the payment was not for any contractor of services or work, there was no relationship of agency. The submissions of the assessee were not found acceptable to AO.

AO accordingly disallowed Rs.130,37,78,222/-. As far as the payment to HCL Infosystems Ltd. is concerned, AO held that the amounts paid were in the nature of commission and therefore the assessee was liable to deduct tax under section 194H of the Act. Since assessee had not deducted TDS on the payment made to HCL Infosystem Ltd., provision of section 40(a)(ia) were attracted and he accordingly, disallowed the amount of Rs.61,36,65,228.

The two-member bench of Judicial Member Suchitra Kamble and Accountant Member, Anil Chaturvedi took into consideration the Coordinate Bench of Tribunal in assessee’s own case wherein it was held that “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.

Therefore, the tribunal held that disallowance under section 40(a)(ia) of the Act was not warranted in the present case and set aside the action of AO.

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