TMI Blog2013 (11) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... lling on them it can not be said that a change of basis of disallowance/ adjustment is being sought. - matter remanded back. Warranty expenses - mere provision and not allowable - Held that:- tribunal in M/s LG Electronics India Pvt. Ltd. [2013 (5) TMI 633 - ITAT DELHI] has accepted the case of the assessee and allowed the deduction - Once the assessee is maintain his accounts on the mercantile system, a liability accrued, though to be discharge at a future date, would be a proper deduction while working out the profits and gains of his business. - Decided in favor of assessee. - I.T.A. No. 891/Del/2010 - - - Dated:- 11-10-2013 - Shri Rajpal Yadav And Shri Shamim Yahya,JJ. For the Appellant : Sh. Peeyush Jain, C.I.T.(D.R.) Sh. Yogesh Kumar Verma, CIT(DR) For the Respondent : Sh. Ajay Vohra, Sh. Neeraj Jain, Advocates and Shri Abhishek Aggarwal, CA ORDER Per Shamim Yahya, AM:- This is an appeal filed by the Revenue is directed against the order of Ld CIT(A) dated 30.12.2009 and pertains to assessment year 2004-05. 2. The grounds of appeals taken by the Revenue are as under:- 1. That the Ld. CIT(A) has erred in law and on facts by allowing relief of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C World Cup Cricket Tournament On this issue the Transfer Pricing Officer has determined the arm's length price regarding contribution towards global sponsorship of ICC World Cup Cricket Tournament at Rs. 41763786/-. 5. Upon assessee's appeal CIT(A) in this regard referred to his appellate order for assessment year 2003-04. Accordingly, he decided the issue in favour of the assessee. 6. Against the above order the Revenue is in appeal before us. 7. We have heard both the counsel and perused the records. Both the counsel fairly agreed that the issue involved is covered in favour of the assessee by the decision of this Tribunal in I.T.A. No. 3823/Del/2009 for assessment year 2003-04 vide order dated 17.5.2013. In the above appeal, the Tribunal has adjudicated the issue as under:- "18. We find that LGEIL alongwith LGEK has entered into an agreement to sponsor World Cup Cricket. The total cost in this regard for the Asstt. Year 2003-04 was Rs. 40,73,98,255/-. This cost of sponsorship was shared between the assessee LGEIL and its parent company LGEK in the ratio of 40:60. In arriving at the above said ratio of contribution assessee has considered sales growth potential. Cricke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit between LGEK and LGEIL as the most appropriate base to allocate the cost between the appellant and its AE. 19.1 We agree with the Ld. Commissioner of Income Tax (A) that considering the sales of the entire LG group is not an appropriate basis to apportion the benefits emerging from sponsorship of the World Cup and other events to the entities of the LG Group. In this regard, following break-up of Global sales of the LG Group may be considered:- Region Playing External Sales Percentage Share Cricket Regions Korea 51,80,389 23% No North America 45,54,537 20% No South 7,86,889 4% No America Central Asia 9,44,098 4% No China 24,82,193 11% No Europe 29,80,838 13% Yes (Partly) Asia 43,81,869 20% Yes (Partly) Others 10,07,279 5% Yes (Partly) Total 2,23,18,902 100% 20. From the above, it is evident that out of LG group's global sales, only 38% pertains to cricket playing continents. The benefits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. This shows that benefits in terms of increase in sales would be much higher in the case of LGEIL, as compared to the advanced countries. 23. We further find that assessee has referred to an Article in the media "Cashing in on Cricket". This article mentions that Global Cricket Corporation (GCC), the Newscorp Company, is said to have paid $ 550 million to buy the rights for two World Cup tournaments and then sold them to Sony TV. About 70 percent of the advertising revenue is expected to come from India. This shows that the LGEIL stood to gain substantially by the above sponsorship expenditure. 24. We further refer to the submission to the empirical study by ad agency 'LINTAS' which shows that the air time during which the LG logo was on display during the telecast of various matches had an opportunity cost of approximately Rs. 95.20 crores in the first year itself which is roughly 73% of the total advertisement value, which is spread over a 5 years period. This study clearly indicates that the agreement has led to significant cost saving to the assessee, which is much higher than the expense incurred. 25. We may further refer to the following table reflecting the increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / gross margin which is a post event measure and which does not coincide with the expected benefit is not the right allocation key because : a) It is a post match event which could not be determined at the time of signing of agreement. b) Moreover, the sales/profit figures are bound to vary from year to year and region to region, whereas the base chosen by the assessee company i.e population is expected to remain reasonably constant over the period of agreement. 29. In this regard, we also refer to the following expositions of ITAT in Star India Pvt. Ltd. vs. Addl. C.I.T. ".... The only relevant factor is whether incurring of expenditure was for the purpose of assessee's business. The assessee was carrying on its business activity exclusively for Star TV and, therefore, survival of its business depends on the success of programmes transmitted by Star TV Assessee was required to solicit the advertisements for Star TV channel. No person would give advertisement unless he is sure of large viewership of programmes on Star TV Therefore, if assessee incurs expenditure on advertisement with a view to increase the viewership of Star TV, in our opinion, such expenditure would be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned to be 20.3 : 79.7. The calculation of the same was a follows:- 8.3 Accordingly, the adjustments of Rs. 42,87,50,247/- was made to the taxable income of the assessee. 9. Upon assessee's appeal Ld. Commissioner of Income Tax (A) observed that fundamentally he agreed with the TPO's arguments that there is direct nexus between the advertising spend and sales. He observed that he found strength in the assessee's contention that the assessee has derived significant benefit out of the advt. expenses incurred by the assessee in India. As percentage increased in sales was much higher than increase in advt. expenses in all years from the financial year 2003-04 to financial year 2005-06. 9.1 Ld. Commissioner of Income Tax (A) further observed that the advt. expenses incurred by the appellant during the year are 3.88% of sales and on the other and during the year the growth in sales have been to the tune of 31.2%. Whereas in the case of the comparables the average expenditure of advt. to sales have been 3.35% and the average growth in sales of the comparables have been to the tune of 9.05%. Thus, it sufficiently depicts that the appellant has been able to derive greater ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after considering the arguments of the Ld. Authorised Representative and after going through the observation of the Assessing Officer, I hold that TPO was not right in determining arm's length price of the reimbursement received by the appellant as Rs. 42,87,50,247/- as against Rs. 6,50,43,192/- received by the appellant. Hence, this ground is decided in favor of the appellant." 10. Against the above order the Revenue is in appeal before us. 11. We have heard both the counsel and perused the records. 11.1 In this regard, it was submitted by the Ld. CIT(DR) that the matter needs to be restored to the file of the TPO for re- adjudication, in light of the principles laid down by the Special Bench in the case of the assessee itself vide Order dated 23.1.2013 in I.T.A. No. 5140/Del/2011 for A.Y. 2007-08. 11.2 The ld. Counsel of the assessee however objected to the aforesaid proposition. He submitted that what the Ld. Departmental Representative has proposed is beyond the jurisdiction of the TPO. He submitted that TPO assumes jurisdiction in respect of the international transaction referred to him by the AO u/s. 92CA(1) of the Act. That sub-section 2A of Section 92CA inserted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L.G. Special Bench. 11.4 We have carefully considered the submissions. We do not agree with the Ld. Counsel of the assessee that the TPO has examined the transaction in a different manner than what was referred to him. In this regard, reliance placed by the Ld. Departmental Representative of para 9.12 of the LG Special Bench decision is germane. The Special Bench has noted that Ld. A.R. has vehemently argued that assessee has incurred AMP expenses for its business purposes and recorded them as such, the Revenue went wrong in re-characterizing this transaction by splitting it into two parts viz. one towards Advt. expenses of the assessee's business and second towards the brand building by the foreign AE. The Special Bench has further observed that thus the form of showing the AMP expenses coincides with the substance of the AMP expenses. But the arrangement made in such transaction, viewed in totality, differs from that which would have been adopted by independent enterprise behaving in a commercially rational manner. Though the AMP expenses were shown as such but the overt act of showing such expenses as its own is different from what is incurred by independent enterprises behavi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the year under appeal. He submitted that there is difference in nature of international transaction sought to be bench marked. He submitted that there is difference in the methodology adopted in the concerned years. He further pointed out that it was assessee's bench marking of special international transaction of reimbursement received from the AE and payment to GCC in Asstt. Year 2004-05 as against bench marking of overall AMP expenses in Asstt Year 2007-08. Ld. Counsel of the assessee further submitted that the issue involved is covered by the decision in the Asstt. Year 2003-04. 16. Ld. Departmental Representative submitted that TPO/Revenue is entitled to appropriately examine/ characterize the transaction. He further submitted that the issue cannot be said to be covered by the decision of the Tribunal for Asstt. Year 2003-04. 17. We have carefully considered the submissions and perused the records. We find that the thrust of argument of the Ld. Counsel of the assessee is as if by referring to the Special Bench decision, we are upholding the order of the TPO in the present year i.e. Asstt. Year 2004-05. However, we find that this is a mistaken notion. The Special Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ION OF TPO II. RULE 29 III. TRANSACTION IV. INTERNATIONAL TRANSACTION V. COST/ VALUE OF TRANSACTION VI. METHODS FOR DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION VII. MARUTI SUZUKI'S CASE" 7.2. In the wake of these criterias the Special Bench proceeded to decide various issues by a very lengthy order, which is conveniently reproduced for the sake of brevity. The issue of retrospective application, jurisdiction, AO/TPO's powers etc. etc. have been decided in favour of revenue and against the assessee in L.G. Electronics India Pvt. Ltd. by following observations: "7.19. Here it is relevant to note that the Finance Act, 2012 introduced sub- sec. (2C) along with sub-sec. (2B) of section 92CA. Whereas sub-section (2B) has been made retrospectively applicable from 1.6.2002, sub-section (2C) has been given effect from 1-7- 2012. The reason is obvious when we see the contents of both the provisions. Under sub-section (2C), the power of the AO to make assessment or reassessment U/S 147 or pass order U/S 154 to enhance the assessment completed before 1-7-2012, has been curtailed to the extent the subject matter is covered by sub- section (2B). It shows that abundant cauti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction is a necessary stipulation to assume power for determining ALP in respect of other transactions. 7.21. Another point urged by the ld. counsel for the appellant was that sub-sec. (I) requires making a reference by the AO with the previous approval of the Commissioner. It was contended that insofar as suo motu exercise of power by the TPO on other international transactions is concerned, the requirement of seeking approval from the CIT will be lacking, rendering the assumption of jurisdiction by the TPO over such other international transactions as invalid. Here again we find ourselves in respectful disagreement with the submission. What sub-sec. (1) requires is that the AO should seek previous approval of the Commissioner in respect of the transactions for which he is making reference to the TPO. There is no requirement of previous approval of the Commissioner in respect of the international transactions which come to the notice of the TPO during the course of proceedings before him. The prerequisite of seeking approval of the Commissioner is incorporated in sub-sec. (1) alone and the same cannot be read into sub-secs. (2A) and (2B) by the doctrine of incorporation. Our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh report u/s 92E. We have thoroughly discussed elsewhere in this order that when there is special provision governing a particular types of cases, then such cases stand excluded from the general provision governing all the cases. As such we are of the considered opinion that the scope of sub-sec. (2B) covers all types of international transactions in respect of which the assessee has not furnished report, whether or not these are international transactions as per the assessee's version. The contention of the ld. counsel in this regard is thus sans merits and is hereby rejected. We want to clarify that the above discussion has been made only to deal with the contention raised on behalf of some of the interveners. But for that, it is only academic in so far as we are concerned with the present appeal involving the A.Y. 2007-08, which is a period anterior to A.Y. 2012-13. The extant case is fully and directly covered under sub- section (2B) of section 92CA. In that view of the matter, it becomes evident that no fault can be found with the jurisdiction of the TPO to process the transaction under reference." .......... 14.21. Thus it is palpable that all the three necessary ingredi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat while adjudicating this issue reliance has been placed on Hon'ble Apex Court decision in the case Bharat Earth Movers vs. C.I.T. 245 ITR 428 and Delhi High Court decision in the case of C.I.T. vs. Vinitech Corporation Pvt. Ltd. 278 ITR 377 and accordingly, assessee's appeal has been allowed. Considering the above, Ld. Commissioner of Income Tax (A) allowed the assesseee's appeal in this regard. 34. Against the above order the Revenue is in appeal before us. 35. We have heard the rival contentions in light of the material produced and precedent relied upon. Both the counsel fairly agreed that the issue is covered in favour of the assessee. For assessment year 2002-03, the Ld. Commissioner of Income Tax (A) has considered the matter as under:- "After considering the rival submissions I find that the issue involved in the appeal is covered by the decision of jurisdictional Delhi High Court in the case of CIT vs. Vinitec Corporation Pvt. Ltd. (2005)-278 ITR 337 dated 5th May, 2005 wherein it was held that the warranty clause was part of the sale document and imposed a liability upon the assessee to discharge its obligation under that clause for the period of warranty. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is allowable as per the ratio laid down by the jurisdictional Delhi High Court in the case of CIT Vs. Vinitec Corporation Pvt. Ltd. (2005)278 ITR 337 (Delhi). The Observation made by the Assessing Officer that since these provisions have not been incurred wholly and exclusively for the purpose of business, they stand disallowed under section 37(1) of the Income Tax Act, 1961 and also they are based on the sales which are totally unpredictable to be determined have become irrelevant after the decision of the jurisdictional Delhi High Court in the case of Vinitec Corporation Pvt. Ltd. Appellant's appeal on this ground stand allowed." 36. Further, ITAT has affirmed the above order of the Ld. Commissioner of Income Tax (A) and concluded as under:- "In the case before us, we are concerned with regard to the assessee's claim of deduction towards warranty liability under a condition or stipulation made in the sale document imposing a liability upon the assessee to discharge its obligation under warranty clause for the period of warranty, and thus, in the light of the discussion made above, the liability so accrued, though to be discharged as a future date, would be a proper deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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