2013 (5) TMI 633 - AT - Income Tax

Tribunal Decision: Transfer Pricing, Warranty Expenses Upheld; Sales Tax Subsidy, Section 80HHC Profit Inclusion Favored

The Tribunal upheld the Ld. Commissioner of Income Tax (A)'s decisions on the transfer pricing issue and the provision for warranty expenses. It favored ... Transfer pricing adjustment - apportionment of Global Cricket Council contribution in the ratio of 5.40:94.60 between LG Electronics India Pvt. Ltd. (LGEIL) and L.G. Electronics Korea (LGEK) - LGEIL is a 100% subsidiary of LGEK entered into an agreement to sponsor World Cup Cricket - Held that:- Agree with the CIT (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. Considering the break-up of Global sales of the LG Group 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 LG group is not an appropriate basis to apportion the cost. Sale of LGEIL constitute 41.33% of total sales. LGEK and its subsidiaries incur all kinds of sponsorship expense. The expenses of such sponsorship also contribute significantly to the sales by these entities. Hence, agreeing with the CIT(A) that considering the sale data of 14 of the Cricket Playing nations LGEIL contribution is reasonable. TPO's action of apportionment of GCC contribution in the ratio of 5.40 : 94.60 between LGEIL and LGEK is not correct affirming the CIT(A)'s view that LGEIL has received commensurate befits of its 40% share contribution. Hence holding that the adjustments made by the AO /TPO on this account has rightly been deleted by the CIT(A). Provision for warranty expenses - Held that:- The issue involved in the appeal is covered by the decision of CIT vs. Vinitec Corporation Pvt. Ltd. (2005 (5) TMI 54 - DELHI High Court) - 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. In favour of assessee. Sales tax subsidy - capital subsidy v/s revenue in nature - Held that:- When the assessee is not permitted to collect the sales tax under the notification issued by the State Govt. the collection of sales tax as a part of dealers' price is nothing but constitutes a trading receipt. - against the assessee. Inclusion of profit of I&C Division while calculating the assessee's claim u/s. 80HHC - Held that:- There are decisions in favour of the assessee as well as against the assessee on this issue. In this view of the matter relying upon the decision of Vegetable Products (1973 (1) TMI 1 - SUPREME Court), that if two views are possible, one in favour of the assessee and one against the assessee, the view in favour of the assessee should be adopted. Hence, respectfully following the decision from the case laws of Madras Motors (2002 (3) TMI 10 - MADRAS High Court) and Rathore Brothers (2001 (10) TMI 72 - MADRAS High Court) this issue is decided in favour of the assessee. Issues Involved:1. Transfer Pricing Issue2. Provision for Warranty Expenses3. Treatment of Sales Tax Subsidy4. Inclusion of Profit of I&C Division for Section 80HHC5. Levy of Interest under Section 234DDetailed Analysis:1. Transfer Pricing Issue:The primary issue revolved around the apportionment of the Global Cricket Council contribution between LG Electronics India Pvt. Ltd. (LGEIL) and LG Electronics Korea (LGEK). The Transfer Pricing Officer (TPO) had determined a ratio of 5.40:94.60 based on the global profits of LGEK and LGEIL, leading to an adjustment of Rs. 13,58,98,217 to LGEIL's taxable income. However, the Ld. Commissioner of Income Tax (A) and the Tribunal found this basis inappropriate, emphasizing that the benefits of the sponsorship would primarily accrue to entities in cricket-playing nations. The Tribunal upheld the Ld. Commissioner of Income Tax (A)'s view that LGEIL's 40% contribution was reasonable, given the significant benefits derived, such as increased sales and brand awareness in India, and thus deleted the adjustment made by the TPO.2. Provision for Warranty Expenses:The Assessing Officer had disallowed a provision of Rs. 6,57,19,516 for warranty expenses, considering it a contingent liability. However, the Ld. Commissioner of Income Tax (A) allowed the provision, referencing the Supreme Court decision in Bharat Earth Movers vs. C.I.T. and the Delhi High Court decision in C.I.T. vs. Vinitech Corporation Pvt. Ltd., which recognized such provisions as deductible if based on past experience and reasonably estimated. The Tribunal affirmed this decision, noting that the issue was covered in favor of the assessee based on previous rulings.3. Treatment of Sales Tax Subsidy:The Assessing Officer treated the sales tax exemption of Rs. 33,32,95,517 as a revenue receipt, contrary to the assessee's claim of it being a capital receipt. The Ld. Commissioner of Income Tax (A) upheld this view, referencing the ITAT's decision in the assessee's own case for the previous year, which found that the subsidy was not for setting up the business but for carrying out existing operations. The Tribunal affirmed this position, noting that the sales tax collected as part of the dealer's price constituted trading receipts and should be taxed accordingly.4. Inclusion of Profit of I&C Division for Section 80HHC:The Assessing Officer included the profits of the I&C Division in the calculation of the deduction under Section 80HHC. The Ld. Commissioner of Income Tax (A) upheld this inclusion, citing the Supreme Court's ruling in IPCA Laboratories Ltd. vs. DCIT, which mandated considering both profits and losses for deductions under Chapter VIA. However, the Tribunal sided with the assessee, noting that there were conflicting judicial views on this matter and, following the principle of favoring the assessee in case of doubt, ruled that the profits of the I&C Division should not be included in the Section 80HHC calculation.5. Levy of Interest under Section 234D:The assessee did not press this ground, leading to its dismissal by the Tribunal.Conclusion:The Tribunal's judgment provided a detailed analysis of each issue, upholding the Ld. Commissioner of Income Tax (A)'s decisions on the transfer pricing issue and the provision for warranty expenses while siding with the assessee on the treatment of sales tax subsidy and the inclusion of I&C Division profits for Section 80HHC. The levy of interest under Section 234D was dismissed as not pressed.