Issue

1. Applicability of TDS on Trade Discounts (Section 194C / 194J vs. Section 40(a)(ia)): Whether a uniform 30% discount granted via credit notes to distributors for defective products constitutes payment for repair/professional services subject to TDS under Section 194C or Section 194J, justifying disallowance under Section 40(a)(ia).
2. Disallowance of Delayed Employees’ PF/ESI Contributions (Section 36(1)(va)): Whether the disallowance of employees’ contributions to PF/ESI under Section 36(1)(va) read with Section 2(24)(x) can be sustained without verifying actual payment challans when errors in the tax audit report are alleged.

Facts

• Issue I (Refurbish and Rebate / TDS Applicability):
  • The assessee-company, engaged in trading and distributing laptops and smartphones, debited Rs. 1.02 crores under “refurbish and rebate” for defective products supplied to distributors.
  • Instead of physically receiving back or repairing the defective products, the assessee issued credit notes granting a flat 30% discount upon verification of the defect.
  • The Assessing Officer (AO) treated this discount as payment for repair or professional services subject to TDS under Sections 194C/194J and disallowed approximately Rs. 30.50 lakhs under Section 40(a)(ia).
  • The assessee contended that the 30% credit note was a uniform trade discount not contingent on actual repair work or expenditure incurred by distributors.
• Issue II (Employees’ PF/ESI Contribution):
  • The AO made a disallowance of around Rs. 0.90 lakhs under Section 36(1)(va) for delayed deposit of employees’ PF/ESI contributions beyond the statutory due dates.
  • The CIT(A) upheld the disallowance as the assessee failed to prove timely deposit before the first appellate authority.
  • Before the Tribunal, the assessee produced payment evidence and pointed out errors/discrepancies in the tax audit report regarding the recorded deposit dates.

Decision

• Issue I (Refurbish and Rebate / TDS): In favour of Assessee.
  • The character of a payment cannot be determined solely by its accounting nomenclature or on the assumption that discounts on defective goods represent fees for repair services.
  • Since the credit notes were issued at a uniform rate of 30% of the original price—regardless of actual repair costs or whether repairs were even undertaken—and distributors were not obligated to use the discount for repairs, no TDS liability under Section 194C or 194J arose.
  • The disallowance of Rs. 30.50 lakhs under Section 40(a)(ia) was directed to be deleted [Paras 21 and 25].
• Issue II (PF/ESI Deposit Timelines): Matter Remanded.
  • The issue is purely factual regarding whether the employees’ contributions were actually deposited within the statutory due dates under the respective welfare Acts.
  • Statutory disallowance under Section 36(1)(va) applies only after verifying the correct dates of payment from supporting documents.
  • The issue was restored to the file of the AO to verify actual payment dates using challans and evidence available on record [Para 27].

Key Takeaways

1. Substance Over Nomenclature for TDS: A flat trade discount given via credit note for defective goods cannot be recharacterized as payment for contract work (Section 194C) or professional/technical fees (Section 194J) unless there is a clear contractual obligation to perform repair services.
2. Fixed Discounts Are Not Service Payments: When a rebate is granted as a fixed percentage of the sale price without requiring proof of actual repair expenditure, it remains a commercial price adjustment outside the ambit of TDS.
3. Audit Report Discrepancies Call for Factual Verification: Disallowance under Section 36(1)(va) for PF/ESI contributions should not be made mechanically based on tax audit report entries if the assessee produces bank challans demonstrating actual timely deposit.

Vijay Mehta and Tarang Mehta, CAs for the Appellant. Manoj Kumar, CIT DR for the Respondent.

ORDER

Shri Anikesh Banerjee, Judicial Member.- This appeal by the assessee is directed against the order dated 13.03.2026 passed by the National Faceless Appeal Centre, Delhi [for brevity, “Ld. CIT(A)”], under section 250 of the Income-tax Act, 1961 (for brevity, “the Act”), for Assessment Year 2018-19, arising out of the assessment order dated 29.11.2024 passed by the Ld. DCIT, Circle 1(1)(1), Mumbai, (for brevity, the “Ld. AO”) under section 143(3) r.w.s. 254 of the Act. The impugned appellate order relates to A.Y. 2018-19.

2. The assessee has raised the following grounds:

“1. The Id. CIT(A) has erred in disallowing expenditure of INR 30,49,502/- (30% of INR 1,01,65,008/-) u/s. 40(a)(ia) r.w.s. 194C/194J of the Act in respect of ‘refurbish and rebate’ on defective products granted to the distributors.

2. The Id. CIT(A) has erred in disallowing a sum of INR 89,574/- received from employees u/s 36(1)(va) of the Act.

3. The appellant craves leave to add to, amend, alter or delete all or any of the foregoing grounds of appeal.”

3. The assessee-company is engaged in the business of trading/distribution of laptops, smartphones, notebooks and accessories in India. For the year under consideration, the assessee filed its return declaring total income of Rs.11,39,06,370/- under the normal provisions and book profit of Rs.17,88,02,862/- under section 115JB of the Act. In the original assessment proceedings, the Ld. AO noticed that the assessee had debited Rs.1,01,65,008/-towards “refurbish and rebate” on defective products. The assessee explained that where products supplied to distributors were found defective, instead of taking back and repairing such products, a flat discount of 30% was granted to the concerned distributor. The Ld. AO treated the amount as payment towards repair/professional services liable for deduction of tax at source under sections 194C/194J and consequently disallowed Rs.30,49,502/-, being 30% of Rs.1,01,65,008/-, under section 40(a)(ia) of the Act.

4. In the first round of litigation, the Coordinate Bench in Asus India (P.) Ltd. v. Addl/Joint/Deputy/ACIT/ ITO [IT Appeal No. 2427 (Mum.) of 2022, dated 16-8-2023], granted relief on the other issues but restored the issue relating to “refurbish and rebate on defective products” to the file of the Ld. AO for fresh adjudication after considering the assessee’s contentions.

5. In the consequential proceedings, the Ld. AO again sustained the disallowance of Rs.30,49,502/-. The Ld. AO, inter alia, observed that the assessee had adopted a colourable device by describing what, according to him, was payment of repair cost as “refurbish and rebate”, and held the payment liable to TDS under sections 194C/194J. The assessee carried the matter before the Ld. CIT(A). The Ld. CIT(A) dismissed Ground No.1 relating to disallowance under section 40(a)(ia) and Ground No.2 relating to employees’ contribution of Rs. 89,574/- under section 36(1)(va). Hence, the assessee is in appeal before us.

6. The Ld. AR filed two sets of paper book comprising pages 1 to 251, which are placed on record. The Ld. AR also relied upon the orders of the Coordinate Benches in the assessee’s own cases, namely:

1.

Asus India (P.) Ltd. v. Asstt. CIT [IT Appeal Nos. 942 & 943 (Mum.) of 2020, dated 5-10-2020];

2.

Asus India (P.) Ltd. v. Asstt. CIT  (Mumbai – Trib.)/ITA No.7831/Mum/2019, order dated 22.02.2022; and

3.

ITA No.2427/Mum/2022, order dated 16.08.2023.

7. The Ld. AR submitted that the impugned amount is not payment for carrying out repair work. The assessee grants a flat 30% discount on the original price whenever damage or defect is reported and verified. The discount is not conditional upon the distributor actually repairing the product. The distributor may repair the product or may sell it at a discounted price. The assessee neither verifies whether repairs have actually been carried out nor ascertains the actual cost of such repairs. The Ld. AR submitted the process flow chart in case defect is noticed by the distributors, enclosed in APB page 211 to explain the entire process. The said chart is reproduced as below:-

8. The Ld. AR further submitted that the uniform rate of 30% itself demonstrates the character of the payment as a discount. Had it represented reimbursement of actual repair expenditure, the amount would necessarily vary with the nature and extent of repairs. The sample invoices and corresponding credit notes at APB pages 195 to 207 were relied upon to demonstrate that the credit note represents exactly 30% of the original cost of the product.

9. It was further submitted that declarations obtained from two key distributors, placed at paper-book pages 208 to 209, specifically confirm that the “refurbish and rebate” discount has no connection with repair of the defective product and that there is no obligation upon the distributor to utilise the discount for repairs.

10. The Ld. AR submitted that the decision dated 05.10.2020 for A.Ys. 2016-17 and 2017-18 had proceeded on the factual premise that the assessee asked the distributors to undertake repairs and granted 30% discount towards such repair cost. However, when additional and material facts were subsequently brought before the Coordinate Bench for A.Y. 2015-16 in ITA No.7831/Mum/2019 (supra), the Coordinate Bench specifically declined to mechanically follow the earlier view and restored the issue to the Ld. AO with a direction to examine all the contentions independently and uninfluenced by the earlier orders.

11. The Ld. AR further submitted that the same position was noticed by the Coordinate Bench while deciding the assessee’s appeal for the present A.Y. 2018-19 in ITA No.2427/Mum/2022 (supra). The Bench recorded, inter alia, that the assessee does not insist upon the distributor actually repairing the damaged product; repair, if undertaken, is an independent transaction of the distributor; and declarations of key distributors supported the assessee’s contention.

12. Comparative Position of Coordinate Bench Orders

Sl. No.	ITA No. & date	Observation of the Bench
1	ITA Nos.942 & 943/Mum/2020, dated 05.10.2020	On the facts then presented, the Bench treated the additional 30% discount as compensation towards repair/refurbishment outsourced to dealers/distributors and held the payment within section 194C; consequently, the disallowance under section 40(a)(ia) was sustained. The same order, however, recognised generally that a sale simpliciter between the assessee and distributors is not contract for work and that ordinary rebate/discount does not attract section 194C.
2	ITA No.7831/Mum/2019, dated 22.02.2022	After noticing several fresh factual contentions which had not been argued earlier, the Bench did not apply the earlier decision mechanically. The issue of refurbish and rebate was restored for de novo adjudication with a specific direction to examine all contentions and take a reasoned view uninfluenced by the orders for A.Ys. 2016-17 and 2017-18.
3	ITA No.2427/Mum/2022, dated 16.08.2023 (A.Y. 2018-19)	The Coordinate Bench again noticed the fresh factual aspects, including the fixed 30% discount, absence of obligation upon distributors to undertake repairs, independent nature of any repair transaction, and declarations from distributors. Since the earlier consequential order had not returned categorical findings on these contentions, the matter was again restored to the Ld. AO for proper examination.

 

13. The Ld. AR accordingly contended that the later Coordinate Bench orders are material because they expressly recognised that the factual foundation on which the order dated 05.10.2020 proceeded required reconsideration in the light of the additional facts subsequently brought on record.

14. Without prejudice, the Ld. AR submitted that even if the amount were regarded as reimbursement towards repairs, the reimbursement component did not represent income in the hands of the distributor and, therefore, according to the assessee, no liability to deduct tax at source could arise on such reimbursement.

15. With respect to Ground No.2, the Ld. AR submitted that the disallowance under section 36(1)(va) arose from inadvertent errors in Form Nos.3CA/3CD. In respect of Rs. 32,567/-, the payment was actually made on 11.07.2017, before the statutory due date of 15.07.2017, whereas the tax audit report inadvertently recorded the payment date as 31.07.2017. Similarly, in respect of Rs. 26,224/-, payment was made on 12.01.2018 against the due date of 15.01.2018, whereas the tax audit report inadvertently mentioned the due date as 15.01.2017.

16. Per contra, the Ld. DR relied upon the orders of the Revenue authorities. The Ld. DR submitted that the issue of refurbish and rebate had earlier been decided against the assessee and that the Ld. AO, in the consequential proceedings, had examined the submissions in accordance with the directions of the Coordinate Bench. It was contended that the discount was intrinsically connected with defective products and represented compensation towards repair obligations, thereby attracting the provisions of sections 194C/194J.

17. In respect of Ground No.2, the Ld. DR relied upon the findings of the Ld. CIT(A) and submitted that employees’ contribution deposited beyond the due date prescribed under the respective welfare statute is governed by section 36(1)(va) read with section 2(24)(x) of the Act. The factual claim regarding the actual dates of payment was left for consideration on the basis of the material available on record.

18. The Ld. DR invited our attention in the relevant paragraph 6.0 of the impugned appellate order is reproduced below:

“6.0 The assessment order, grounds of appeal, written submissions of the appellant and the material available on record have been carefully considered. It is observed that the assessment in the present case has been framed under section 143(3) r.w.s. 254 pursuant to the directions of the Hon’ble ITAT. From the record it is seen that the Hon’ble ITAT had already granted relief to the appellant on all issues except the issue relating to refurbish and rebate on defective products, which was restored to the file of the Assessing Officer for fresh adjudication. Accordingly, the grounds raised by the appellant are adjudicated as under:

Ground No.1

Under this ground, the appellant has challenged the disallowance of 30,49,502 being 30% of refurbish and rebate expenditure allegedly liable for TDS under section 194C/194J.

The submissions of the appellant have been carefully considered. It is observed that this issue has a long history of litigation in appellant’s own case in earlier assessment years. It is noticed from the assessment records that the Hon’ble ITAT in appellant’s own case has consistently taken a view that payments in the nature of refurbish and rebate on defective products partake the character of payments towards repair obligations and therefore attract TDS provisions. The matter in the present year was also restored by the Hon’ble ITAT to the Assessing Officer only for factual verification and fresh adjudication.

Pursuant to the directions of the Hon’ble ITAT, the Assessing Officer has examined the submissions of the appellant and passed the impugned order. The appellant has not brought any new material evidence on record to demonstrate that the facts of the year under consideration are materially different from those considered in earlier years. The essential character of the payment remains linked to compensation towards defective products which has been held in earlier proceedings to attract TDS provisions.

Further, the order passed under section 143(3) r.w.s. 254 is in consequence to the binding directions of the Hon’ble ITAT and therefore cannot be disturbed unless it is shown that the Assessing Officer has travelled beyond such directions or failed to comply with them. No such infirmity has been demonstrated. Accordingly, I find no reason to interfere with the action of the Assessing Officer.”

19. We have heard the rival submissions and perused the material available on record, including the two sets of paper book filed by the assessee and the orders of the Coordinate Benches referred to above. The controversy before us has to be examined in the light of the subsequent factual development recorded by the Coordinate Benches themselves. Undoubtedly, in the order dated 05.10.2020 relating to A.Ys. 2016-17 and 2017-18, the Bench proceeded on the factual understanding that the assessee required the dealers/distributors to repair the defective products and granted an additional 30% discount to compensate the cost of such repairs. However, while considering A.Y. 2015-16, the Coordinate Bench recorded that several fresh and material facts had not been placed before the earlier Bench. It therefore directed a de novo factual examination, specifically uninfluenced by the earlier view.

20. More importantly, in the assessee’s own case for the very same A.Y. 2018-19, the Coordinate Bench in ITA No.2427/Mum/2022 (supra) specifically recorded the assessee’s factual contentions that the discount was fixed at 30%; that the assessee did not insist upon actual repair; that repair, if undertaken, was an independent transaction of the distributor; and that declarations from key distributors. The matter was restored precisely because categorical findings on these contentions were required.

21. On examining the impugned orders in the light of these directions and the material placed before us, we find that the character of the payment cannot be determined merely by its nomenclature or on the assumption that every discount granted in consequence of a defective product represents consideration for repair work. The material relied upon by the assessee indicates that the credit note is issued at a uniform rate of 30% of the original price, irrespective of the actual cost of repair or even whether a repair is ultimately undertaken. The declarations of distributors also state that utilisation of such discount for repair is not obligatory.

22. The flow chart placed on above [APB pages 211] also indicates that on reporting transportation damage, the distributor furnishes the prescribed documents and photographs; the assessee verifies the damage application and, upon acceptance, issues a credit note towards “refurbish & rebate”. The chart does not depict any subsequent step requiring the distributor to carry out repair as a condition for issuance of the credit note.

23. In these circumstances, the essential ingredient of a payment for carrying out “work” cannot be inferred merely because the distributor may, at its own discretion, subsequently repair the defective product. The earlier Coordinate Bench has itself observed in the context of the assessee’s distribution arrangements that a transaction of sale simpliciter between the assessee and its distributors is not a contract for work within the meaning of section 194C.

24. We also find that the allegation of a “colourable device” has been drawn essentially from an inference regarding the nature of the 30% discount. The material presently available, particularly the uniformity of the discount irrespective of actual repair cost and the absence of an obligation upon the distributor to undertake repairs, does not support such inference merely on the basis that the discount arises upon identification of a defective product.

25. Accordingly, considering the factual matrix now available on record and the observations/directions of the Coordinate Benches in the assessee’s own cases, the disallowance of Rs.30,49,502/- under section 40(a)(ia) r.w.s. 194C/194J of the Act cannot be sustained. Ground No.1 is accordingly allowed.

26. Ground No.2 relates to disallowance of Rs. 89,574/- under section 36(1)(va). The Ld. CIT(A) dismissed the ground principally on the finding that the assessee had not demonstrated that the employees’ contributions were deposited within the due dates prescribed under the relevant statutes. Before us, however, the assessee has specifically referred to the underlying payment evidence and pointed out errors in the tax audit report. In particular, payment of Rs. 32,567/- is stated to have been made on 11.07.2017 against the due date of 15.07.2017 and payment of Rs.26,224/- on 12.01.2018 against the due date of 15.01.2018.

27. Thus, the controversy to this extent is factual—whether the respective employees’ contributions forming part of the impugned disallowance of Rs. 89,574/- were actually deposited within the due dates prescribed under the relevant statute. The statutory consequence under section 36(1)(va) would follow only after determination of the correct dates of payment.

28. We accordingly set aside the finding of the Ld. CIT(A) on this Ground No.2 and restore this limited issue to the file of the Ld. AO with a direction to verify the actual dates of payment from the challans and other supporting evidence forming part of the record. To the extent the respective amounts were deposited within the prescribed statutory due dates, the same shall be allowed in accordance with law. The assessee shall be afforded reasonable opportunity to substantiate the payment particulars. Accordingly, Ground No.2 is allowed for statistical purposes.

29. Ground No.3 is general in nature and does not require separate adjudication.

30. In the result, the appeal of the assessee bearing ITA No. 5852/Mum/2026 is partly allowed for statistical purposes.