2013 (11) TMI 68 - AT - Income Tax

Determining the Arm's Length Price (ALP) - international transactions - contribution towards ICC World Cup Cricket Tournament - reimbursement of advertisement expenses received by the assessee - provisions of warranty expenses - Held that - the issue are covered by the decision of the tribunal in M/s LG Electronics India Pvt. Ltd. 2013 (5) TMI 633 - ITAT DELHI - LGEIL has received commensurate benefit of its 40% share contribution. - the adjustments made by the TPO/ Assessing Officer on this account has rightly been deleted by the CIT(A). Reimbursement of of advt. expenses - Held that - the assessee's objection that TPO has no jurisdiction is not sustainable in view of M/s LG Electronics India Pvt. Ltd. 2013 (5) TMI 633 - ITAT DELHI - opinion by asking for a remand of the issue in light of the Special Bench decision, it cannot be said that revenue is seeking to change the basis of disallowance /adjustment made by the TPO. The Special Bench has expounded various issues which have to be considered in this regard. By dwelling 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.

Summary

Issues Involved:

1. Determination of Arm's Length Price (ALP) for the contribution towards ICC World Cup Cricket Tournament sponsorship.
2. Determination of ALP for the reimbursement of advertisement expenses.
3. Allowability of provision for warranty expenses.

Detailed Analysis:

1. Determination of ALP for ICC World Cup Cricket Tournament Sponsorship:

The Transfer Pricing Officer (TPO) determined the arm's length price for the assessee's contribution towards the ICC World Cup Cricket Tournament at Rs. 41,763,786. The CIT(A) allowed relief to the assessee, referring to the appellate order for the assessment year 2003-04, which was in favor of the assessee. The Tribunal noted that the issue was covered by its previous decision for the assessment year 2003-04, where the cost-sharing ratio between the assessee and its parent company was justified based on the sales growth potential and promotional value of cricket in India. The Tribunal affirmed that the assessee received commensurate benefits from its 40% contribution and upheld the CIT(A)'s deletion of adjustments made by the TPO.

2. Determination of ALP for Reimbursement of Advertisement Expenses:

The TPO determined the arm's length price for the reimbursement of advertisement expenses at Rs. 42,875,024, asserting that the reimbursement received by the assessee was insufficient and that the advertisement expenses benefited the parent company (LGEK) by enhancing the brand image. The CIT(A) disagreed, noting that the assessee derived significant benefits from the advertisement expenses, as evidenced by higher sales growth compared to the industry norm. The CIT(A) also referenced the ITAT decisions in similar cases, emphasizing that expenses incurred for the company's benefit should be allowed, even if third parties also benefit. The Tribunal, however, decided to remit the issue back to the TPO for re-adjudication in light of the principles laid down by the Special Bench in the assessee's own case for the assessment year 2007-08.

3. Allowability of Provision for Warranty Expenses:

The Assessing Officer disallowed the provision for warranty expenses, considering it hypothetical and not matured. The CIT(A) allowed the provision, referencing the appellate order for the assessment year 2003-04 and the ITAT decision in the assessee's own case, which relied on the Supreme Court's decision in Bharat Earth Movers vs. CIT and the Delhi High Court's decision in CIT vs. Vinitec Corporation Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by its previous decision for the assessment year 2003-04, where the provision for warranty expenses was deemed allowable based on past actual expenses and commercial practice.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on the issues of ICC World Cup Cricket Tournament sponsorship and provision for warranty expenses, affirming that the assessee received commensurate benefits and that the provision was allowable based on past practice and judicial precedents. However, it remitted the issue of reimbursement of advertisement expenses back to the TPO for re-adjudication in light of the Special Bench's principles. The appeal by the Revenue was partly allowed for statistical purposes.