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TMI Blog2013 (11) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Cricket is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een 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 of advertisement in the Cricket World Cup would accrue only to those entities of LG that have their presence in the cricket playing nations or those countries where cricket is having a substantial audience. Hence, we find that considering the sales of the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in sales in comparable companies:- From the above table, it is seen that assessee's sales had increased by 35.04% during the financial year 2002-03 pursuant to the sponsorship of cricket event whereas the sales of comparables companies got reduced by 15.49%. The above indicates that assessee derived significant benefit due to its advertisement expenses. 26. We further refer to the TPO's contention that the benefit of LGEIL sales would accrue to the associated enterprises since they are earning from LGEIL by way of imports, royalty etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia 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 the interest of assessee's business though it may also benefit its principal ... " 30. Hence, we find that the above also justifies the portion of cost contribution allocated to the assessee. 31. In the background of the aforesaid discussion, we are in agreement with the Ld. Commissioner of Income Tax (A) that the TPO's action of apportionment of GCC contribution in the ratio of 5.40 : 94.60 between LGEIL and LGEK is not correct. We affirm the Ld. Commissioner of Income Tax (A)'s view that LGEIL has received commensurate befits of its 40% share co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 benefit vis-a-vis the comparable companies by incurring expenditure on advt. 9.2 Ld. Commissioner of Income Tax (A) further observed that LGEK was contributing towards 25% to 30% of the total material purchases by the LGEIL. That if the TPO's proposal is accepted that with increase in advt. expenses by LGEIL, LGEK is also being benefitted and therefore LGEK should make more contribution to the advt. expenses incurred by LGEIL, then applying the same logic, LGEIL should also recover similar contribution from independent third party vendors who are supplying around 70% - 75% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Finance Act, 2011 w.e.f 01.6.2011 provides that where any other international transaction, other than referred international transaction, comes to the notice of the TPO, the TPO may proceed to determine the ALP of such international transaction. That in addition, the TPO can suo motu adjudicate on any international transaction that comes to his notice vide sub-section (2B) inserted in Section 92CA by the Finance Act, 2012 w.e.f. 1.6.2012, in a case where the assessee has not submitted report under section 92E of the Act in respect of such transaction. It has been submitted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 behaving in a commercially rational manner, which unearths the covert act of treating the AMP expenses incurred for the brand building for and on behalf of the foreign AE, as also its own. 11.5 Furthermore, we find that reliance placed by the Ld. D.R. of para 7.23 of the LG Special Bench order is also germane. On this issue the Special Bench was considering the contentions that harmonious interpreting of sub-section (2B) by limiting its scope only to such transaction which the assessee perceives as international transaction but fails to report. However, the Bench held that they were not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 has expounded various factors to be considered in this regard. By remitting the matter to the TPO, in light of the Special Bench decision, the TPO will have to consider the issue afresh, in light of the guidelines pointed by the Special Bench. By no stretch of imagination, it can be said that the TPO's order in this year is being upheld. Furthermore, we also do not agree with the contention of the Ld. Counsel of the assessee that the issue is covered by the decision of the Tribunal for the Asstt. year 2003-04. We find that the issue under consideration for the Asstt. Year 2003-04 was total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant 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 caution has been taken by the legislature in not disturbing the finality of the assessment due to retrospective operation of sub- section (2B) in cases set out in sub- section (2C). The acceptance of the contention of the ld. AR to consider sub-section (2B) as prospective, would not only make sub-section (2B) but sub-section (2C) also as dormant and non-existent. Obviously an interpretation which makes a valid piece of legislation as redundant, does not merit acceptance. The purpose intended to be achieved in validating the jurisdiction of the TPO on the earlier transactions not referred to him by the AO on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 view is fortified by the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Pawan Kumar Laddha [(2010) 324ITR 324 (SC)). 7.22. Now we take up the contention raised by the Id. counsel for some of the interveners on harmoniously interpreting sub-section (2B) by limiting its scope only to such transactions which the assessee perceives as international transactions but fails to report. We are not convinced with such interpretation. A line of distinction sought to be drawn by. the ld. counsel between two types of international transactions for which the assessee has not furnished audit repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 ingredients as culled out from a bare reading of section 92B are fully satisfied in the present case. There is a transaction of creating and improving marketing intangibles by the assessee for and on behalf of its foreign AE; the foreign AE is non-resident; such transaction is in the nature of provision of service. Resultantly, we hold that the Revenue authorities were fully justified in treating the transaction of brand building an international transaction in the facts and circumstances of the present case." 18.1 Accordingly, we remit the issue of reimbursement of advt. expenses of LGEIL by the AE to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 a liability which was capable of being construed in definite terms, which had arisen in the accounting year, although its actual quantification and discharge might be deferred to a future date. 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. Regard being had to the accepted principles of commercial practice and accountancy. To substantiate its claim for the relevant assessment year the assessee had given the figures of last five years of warranty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 deduction while working out the profits and gains of assessee's business from sale of the commodity in question. The assessee had made the provision of warranty liability having regard to the past factor of actual expenses incurred by the assessee towards warranty liability. 37. In the background of the aforesaid discussions and precedents, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (A). Accordingly, we uphold the same." 24. Since the issue involved is covered in favor of the assesse by the ITAT decision in assessee's own case as above, we do not find any infirmity in the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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