TaxTMI 
TaxTMI 
2013 (5) TMI 633
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....the facts by allowing relief of Rs. 6,57,19,516/- being provision of warranty expenses without appreciating the facts mentioned by the Assessing Officer that the expenses were mere estimations and had not matured and it was a contingent liability rather than a ascertained liability. 3. Hence order of the Ld. Commissioner of Income Tax (A) may be set aside and the order of the Assessing Officer be restored. 3. Apropos ground no. 1 :- Transfer Pricing Issue :- 3.1 LG Electronics India Pvt. Ltd. (LGEIL) is a 100% subsidiary of LG Electronics Korea (LGEK). Its major international transactions undertaken by the assessee are as under:- S.No. International Transaction Method Value (in Rs.) 1. Import of raw material and components TNMM 55,45,42,940 2 Import of service spares TNMM 4,79,80,282 3 Export of raw materials and components Cost Plus 22,49,801 4 Import of finished goods TPM/TNMM 1,96,01,67,598 5 Export of manufactured goods CUP 31,11,29,843 6 Import of production equipment Cost Plus 53,67,67,978 7 Royalty CUP 15,33,91,187 8 Expenses towards overseas market development C....
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....s:- a) Sales Growth: Cricket is a very important game for India and has a lot of promotional value attached to it. Every International Cricket tournament where India is participating gives a boost to the Sales of all Consumer durables, more particularly Colour Televisions. Therefore, LGEIL expected that during Cricket World Cup 2003, the sales of LG products would grow due to greater visibility achieved by sponsoring the Cricket World Cup 2003. b) Brand Awareness growth :- LGEIL anticipated that the media coverage of the event would lead to greater brand awareness in India (expected to grow from 17.50% to 35.00%. c) Viewership :- There are 14 nations playing in 2003 World Cup of which three nations are new. The population table of these Countries is as given below:- S. No. Country Population (in crores) % 1 India 103.41 65% 2 Australia 1.97 3 New Zealand 0.39 4 England 6.00 5 South Africa 4.27 6 Srilanka 1.97 7 Bangladesh 13.56 8 Pakistan 14.76 35% 9 Kenya 3.16 10 Zimbabwe 1.25 11 C....
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....s it will get translated in higher sale benefit for appellant. However, in reality, level of enthusiasm is not the only factor for buying consumer which drives his first decision to buy or not to buy a consumer product. The appellant company has not considered that purchasing power of South Asian Sub-continent is comparatively very poor as compared to Western Continents. In fact media appliances and other consumer durables are considered as luxurious items in this part of the world whereas in developed nations these items have greater penetration. It is also demonstrated from the fact that consumer companies keep on adding new models and versions of products in more advanced countries to begin with having better per capita income and then these versions are brought to Asian Continent market. Therefore, while arriving at a conclusion that impact of level of enthusiasm only will bear fruits for appellant is not a correct assumption. 3.8 The TPO further commented that that cricketing events involving Indian team would benefit LGEIL also but if there is an additional sale of Rs. 100 of LG product in India it will add a profit of Rs. 5.85 to LGEIL (since as per transfer pricing docum....
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....ny country, the population of that country plays an important role and therefore fair basis of allocation of expenses could be nothing but the population viewer ship. The appellant contended that as per TPO's own order, in England, Soccer is most popular game whereas Australia has proved its supremacy in Hockey as well as along with Cricket. In Western Countries Tennis has a high popularity which is evident from Wimbledon matches and Australian open matches. Therefore, a lower proportion of population in these countries would be interested in watching cricket vis-a¬vis India. Hence, LGEIL would have benefitted significantly out of the sponsorship ..... " "....Vide its submission dated 11th December' 2008, the appellant further submitted extracts of an article which highlights the importance of cricket advertising in India, "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 per cent of the advertising revenue is expected to come from India." [Source http:/www.domain-b.com/industry/entertainment/20021221 cricket. html The appellant therefore sub....
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....ed that Hero Honda, an Indian Company has also entered into a similar agreement with GCC. No benefits are accruing to any foreign entity in this case still Hero Honda has allocated Rs. 120 crores for cricket sponsorship during the same period.[Source http://www.domain-b.com/industrv/entertainment/20021221 cricket.html]. On the other hand, the appellant's share amounted to Rs. 16.29 crores, which is 40% to the total global sponsorship contract for the year. On examining the above mentioned contentions, an inference can be drawn that an Indian entity, is incurring much higher expenses as is being jointly incurred by LGEK and LGEIL. Hence, Hero Honda must have anticipated much higher benefit than its 'expenditure out of advertising for the world cup. Since the appellant has contributed a mere 40% of such an expense, it cannot be regarded as excessive in the case. Allocation key adopted by the TPO is incorrect The allocation of cost on the basis of allocation key (percentage of profit/ sales between LGEK and LGEIL and its AEs) used by the TPO is not correct since:- It doesn't adhere to the mechanism of cost allocation as prescribed by the OECD guidelines. In this regard,....
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....icket. Further the appellant separately collated data pertaining to sales made by major cricket playing nations. The same is tabulated below:- Name of Country 2002 Australia $ 307,661,748 England $ 451,684,982 South Africa $ 130,097,693 Canada Not available New Zealand No subsidiary in this country In F.Y. 2002-03 Srilanka -do- Banladesh -do- Pakistan -do- Kenya -do- Zimbabwe -do- West Indies -do- Namibia -do- Holland -do- Total Sales in Major Cricket Playing Nations Other than India (in $) $ 889,444,423 Exchange rate 48.40 Total sales in Major Cricket Playing Nations Other than India (In Rs.) INR 43,044,662,852 Total sales of LGEIL (in Rs.) INR 30,317,261,932 Proportionate sales of LGEIL 41.33% It is evident from above that out of the total sales of these cricket playing nations, the sales of. LGEIL constitutes 41.33%. Hence, the 40% share of the total global sponsorship expense as borne by the Appellant should be considered to be at arm's length. Further, chances of incremental sales are very dim in Western Countries. For example, in United Kingdom for every ....
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....n our opinion, such expenditure would be in the interest of assessee's business though it may also benefit its principal ... " Further, reliance has been placed on the judgment of Delhi ITAT in the case of Nestle India wherein the facts were similar to that of the Appellant. The Tribunal held that the expenditure has been incurred to promote business in India. Therefore, these expenses were incurred wholly and exclusively for the purpose of business of the assessee. Further, payments for these expenses have been made to third parties in India, who are not in any way related to the parent entity of Nestle. Therefore, there is no justification on the part of the assessing officer to invoke the provisions of Section 92 of the Act. In light of the above mentioned facts, it may be unreasonable to conclude that indirect benefits accrue to AEs as in an uncontrolled scenario as well, no vendor remunerates an entity for its advertisement efforts. Hence, an adjustment on the basis of such long stretched indirect benefits to AEs cannot be sustained. Benefits of LGEK's advertisement expenses accrue to LGEIL as well. The appellant in its submission has submitted that LGEK for AY 200....
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....e to pay. Guidance on similar issue by the Australian Tax Office ("ATO") The appellant has submitted that the ATO in its guidance for marketing intangibles has laid down an identical example wherein the marketer/distributor bears the costs and risks of its marketing activities and has a royalty-free contractual arrangement (with exclusive right) with the owner of the brand. Under this example, the distributor (B) receives no reimbursement from brand owner (A) in respect of any expenditure it incurs or any other indirect or implied compensation from A and expects to earn its reward solely from the sales of branded watches to third party customers in the Australian market. The ATO agrees that if A was compensating B for its marketing activities, it would've charged higher for products sold to B and consequentially, the profit earned by B would have been lower than comparables who undertake their own marketing. Since in the example, the profits earned by B were same as that of comparable companies, it was concluded that benefits obtained by B result in profits similar to those made by independent marketers and distributors from similar marketing arid distribution agreements. ....
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....ns Other than India (in $) $ 889,444,423 Exchange rate 48.40 Total sales in Major Cricket Playing Nations INR Other than India (In Rs.) 43,044,662,852 Total sales of LGEIL (in Rs.) INR 30,317,261,932 Proportionate sales of LGEIL 41.33% 8. From the above, Ld. Commissioner of Income Tax (A) observed that sale of LGEIL constitute 41.33% of such sales. Ld. Commissioner of Income Tax (A) further observed that LGEK and its subsidiaries incur all kinds of sponsorship including motor sports, soccer, gold and other sports and similar events. That expenses of such sponsorship would have also contributed significantly to sales of these entities. Hence, Ld. Commissioner of Income Tax (A) drew a conclusion that LGEIL shares seem to be reasonable considering the sales data of 14 cricket playing nations. That LGEIL has not made any contribution towards the expenses of approximately Rs. 3441 crores incurred by LG Korea and other group companies in sponsoring and advertising in other sports events viz. motor sports, soccer, gold which are popular and played outside India but they enjoy significant viewership in India as well. 9. Ld. Commissioner of Income Tax (A) re....
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....come Tax (A) opined that this demonstrates that LGEIL shares may have closed to 70% according to market estimates. 12. Ld. Commissioner of Income Tax (A) further referred to the empirical study by ad agency 'LINTAS' which shows that the air time during 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 agreement value,which is spread over a 5 years period. Hence, Ld. Commissioner of Income Tax (A) observed that this Study clearly indicates that the agreement has led to a significant cost saving for the appellant,, which is much higher than the expenditure incurred by the appellant. 13. Ld. Commissioner of Income Tax (A) further referred to the following table which showed that assessee's sales had increased by 35.04% during the financial year 2002-03 whereas the sales of comparables companies reduced by 15.49%. That this clearly implies that the assessee derived significant benefit due to its advertisement expenses during the World Cup. S.No. Company Sales (for a period of 12 months) % increase in sales ....
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.... should be allowed to the company as bonafide expenses. 15. In view of the aforesaid discussion, Ld. Commissioner of Income Tax (A) held that the TPO's action of apportionment of GCC contribution in the rate of 5.40:94.60 between LGEIL and LGEK is not correct. He held that LGEIL has received commensurate benefit for its 40% share of the contribution. Hence, the adjustment made by the Assessing Officer /TPO on this account was deleted. 16. Against the above order Revenue is in appeal before us. 17. We have heard the rival contentions in light of the material produced and precedent relied upon. 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 very important game for India and has a lot of promotional value attached to it. Every International Cricket tournament where India is participating gives a boost to the Sales of al....
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....g 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 External Sales Percentage Share Cricket Playing Regions Korea 51,80,389 23% No North America 45,54,537 20% No South America 7,86,889 4% No 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 LG group is not an appropriate basis to apportion the cost. We can also refer to th....
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....ood 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:- S.No. Company Sales (for a period of 12 months) % increase in sales F.Y. 2001-02 F.Y. 2002-03 1 Videocon appliances Ltd. 9,35,47,67,773 9,54,80,65,335 2.07% 2 Videocon Communications Ltd. 5,38,40,05,415 6,43,37,53,460 19.50% 3 Video International Ltd. 31,02,82,43,093 33,60,03,62,011 8.29% 4 BS Refrigerators 78,68,55,420 60,43,09,913 -23.20% 5 Symphony Comfort Systems Ltd. 28,....
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....the expenditure cannot be regarded as excessive. 28. In this regard, we also refer to the mechanism of cost allocation as prescribed by the OECD guidelines. In this regard, OECD states that each participant's interest in the results of the Cost Contribution Arrangement (CCA) activity should be established from the outset. The OECD also states that the goal is to estimate the shares of benefits expected to be obtained by each participant and to allocate contributions in same proportions. Hence, the sales / 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 assess....
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....2-03, 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 liability provided. vis-a-vis the expenditure incurred. Th....
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....ed 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. ASSESSEE'S APPEAL 38. The grounds raised read as under:- "1. That on facts and in law the order's passed by the Commissioner of Income Tax (Appeals) is bad in laws in as much as he failed to appreciate the ....
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....hould be treated as revenue receipt as against the claim of the assessee that the same was capital receipt. Assessing Officer has summarized his observation as under:- "(i) The sales tax exemption was given after the assessee had already set up its business and commenced production. (ii) The subsidy was given not to set up the business but to carry out existing and an ongoing business.. (iii) This issue has already been dealt with in detail in the case of Sahney Steel 228 ITR 253. (iv) The citation given by the assessee does not apply in the case of the assessee as it has already collected the sales tax which it was not supposed to have collected. Once the amount has been collected and the liability to return the same to the State Govt. does not exist, such receipts can only be treated as income in the hands of the assessee." 40. Upon assessee's appeal Ld. Commissioner of Income Tax (A) considered the submissions of the assessee. He observed that this issue was decided against the assessee by the Ld. Commissioner of Income Tax (A) in his order in A.Y. 2002-03. He noted that there is no change in the facts and circumstances of the case. Hence, he agreed that the decis....
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....ed that the eligibility certificate to the assessee will be issued by the joint/additional director of concerned Development Authority and the same will be produced before the concerned assessing officer. The Addl. Director Industries, Greater Noida Industrial Development Authority, vide letter No. 1344 dated 23/06/1999 issued eligibility certificate to the assessee. As per this certificate fixed capital investment is of Rs.51,57,95,446/-. The date of commencement of production is 9/03/1998 and the first sale was affected on 27th March, 1998. The assessee applied for exemption from trade tax [sales tax] vide application dated 10/09/1998. The exemption from trade tax [sales tax] was provided from 27th March, 1998 to 26th March, 2013 for a period of 15 years or till the time the exemption of sales tax was availed of to the extent of 200 per cent of fixed capital investment i.e. Rs.1,02,75,90,892/- whichever was earlier. This certificate also provided the items i.e. Colour TV, Washing machine and Air-conditioners on which exemption from sales tax was provided. Another certificate was issued on 27th September, 2000 vide letter No. 1519 in respect of printed circuit voice for CTV number....
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....yer's account....... to be paid to the Orissa Government". The sales tax was not paid to the Orissa Government on the ground that the sales were inter-State sales. The Appellate Tribunal held that where a dealer collected sales tax under section 9-B(3) of the Orissa Sales Tax Act, 1947, as it then stood, the amount of the tax did not form part of the sale price and the dealer did not acquire any beneficial interest therein and that the sum of Rs.7,14,398/- collected by the appellant did not form part of its total income. On a reference, the High Court held that the sales tax collected was part of the trading receipt and was to be included in the appellant's total income since the money realised from the purchaser was employed by the appellant for the purpose of making profit and the appellant did not earmark the amount realised as sales tax and did not put it in a different account or deposit it with the Government in terms of section 9-B(3). On further appeal the Hon'ble Supreme Court held as under :- Held, affirming the decision of the High Court, (i) that, assuming that section 9-B(3) of the Orissa Sales Tax Act, 1947, was valid, the fact that the dealer was compelled t....
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....ase of CIT Vs. K. M. Sugar Mills Ltd. 164 Taxman 562 (All.) as discussed below. 12.1 In the case of CIT Vs. K. M. Sugar Mills Ltd. (supra) the assessee had paid purchase tax of Rs.20,12,046/- against which it had received a subsidy of Rs.20,11,000/-. The claim of the assessee was that the amount received on account of subsidy was a capital receipt and not liable to tax. This was negative by the assessing officer. In appeal, the ld. CIT (Appeals) observed that the nature of subsidy received by the assessee was different from the subsidy which was held to be a capital receipt by the Madhya Pradesh High Court in the case of CIT Vs. Dusadh Industries (1986) 162 ITR 784 because it was neither for encouragement of industries in the backward areas nor for setting up of industries. After referring to the relevant Notification and the fact that the purchase tax, when paid, was claimed as deduction, the ld. CIT (A) held that the refund of the same purchase tax received by the assessee as subsidy was taxable as a trading receipt. On further appeal the Tribunal upheld the findings of the ld. CIT (A) that the subsidy received by the assessee against the payment of purchase tax was a trading ....
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....nt of sales tax for a period of 10 years commencing from the date of production for the first time in the State of Punjab, subject to condition that total sales tax exemption shall not exceed 300 per cent of their fixed capital investment; (ii) Group of industries which are set up in B category area on or after the 1st day of October, 1992 shall be exempt from the payment of sales tax for a period of 7 years from the date of production for the first time in the State of Punjab, subject to the condition that the total sales tax exemption shall not exceed 150 per cent of their fixed capital investment. " 12.4 Hon'ble Punjab & Haryana High Court after examining the contention of the assessee and also various decisions at page 25 observed as under :- " .............. In the present case, all that is claimed and is put on record by the assessee is that the sales tax subsidy is being received by it from the State. It is not disputed that the same is being received on recurring basis after the unit came into production. There is no document or material placed on record by the assessee to substantiate its plea that subsidy of the kind under consideration was to enable it to acq....
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....d. Vs. ACIT (supra) the collection of sales tax as part of dealer's price would be a trading receipt in the hands of the assessee even if it is assumed that the assessee was authorised to collect and retain with it the sales tax as part of dealer's price. Moreover, there is nothing on record to suggest that sales tax exemption was granted for acquiring of capital assets. Similar view has been taken in the case of U. P. State Handloom Corporation Vs. DCIT 42 I.T.D. 436 (All). In this case the assessee received subsidy amount from Govt. under a specified scheme called "Janta Cloth Scheme" in the capacity of trader and it was compensation for loss of profit or for loss on cost of production. It was held that subsidy received by trader under "Janta Cloth Scheme" to compensate trader for loss on cost of production was a revenue receipt. 13.1 In the case of Sahney Steel & Press Works Ltd. & Others (supra) a notification was issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings, which commenced production on or after 1st January, 1969 with investment capital (excluding working capital) not exceeding Rs.5 c....
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....as not obliged to spend the money for a particular purpose. The subsidies had not been granted for production of, or bringing into existence any new asset. The subsidies were granted year after year, only after the setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. The subsidies were of revenue nature and would have to be taxed accordingly." 13.2 The principle laid down in the case of Sahney Steel and Press Works (supra) is that if the purpose of subsidy is to help the assessee to set up its business or complete a project, the moneys must be treated as having been received for capital purposes. But if moneys are given to the assessee for assessing him in carrying out the business operations and the moneys are given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. The facts of the case before us are similar to the facts of Sahney Steel and Press Works (supra). The purpose of notification issued by Uttar Pradesh Government was to provide sales tax exemption to al....
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....e been capital receipt in the hands of the assessee, this, in our view, is not correct. We have already discussed that that even the refund of sales tax will be chargeable tax as the same was collected in the course of carrying out the business by the assessee. Hence the alternate submission of assessee deserves to be rejected. 15.2 In view of the above discussion, in our considered opinion, the ld. CIT (Appeals) was justified in treating the sales tax collected by the assessee as trading receipt and hence no interference is called for." 43. In view of the above, Ld. Departmental Representative claimed that the issue is squarely covered in favour of the Revenue. However, ld. Counsel of the assessee submitted that the Tribunal has not considered the matter properly. He submitted that the appeal against the tribunal order is pending in the Hon'ble High Court of Delhi. However, upon careful consideration, we find that there is no proper justification to deviate from the decision of the ITAT in assessee's own case. The appeal against the Tribunal order is still pending in Hon'ble High Court. Under the circumstances, the judicial propriety mandates that we adhere to the decision o....
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....oner of Income Tax (A)'s reliance on Apex Courts' ruling in IPCA is not applicable on the facts of this case. Ld. Counsel of the assessee in this regard further submitted that there are case laws both in favour of the assessee as well as against the assessee on this issue. He referred to case laws as under:- (i) 254 ITR 656 (C.I.T. vs. Rathore Brothers) In this case it was held that the assessee was maintaining separate trading receipts and profit and loss account for exports sales and domestic sales, clause (b) of sub-section (3) of Section 80HHC could not be invoked & the assessee was entitled to relief u/s. 80HHC in respect of the entire export net profits. (ii) 257 ITR 60 (C.I.T. vs. Madras Motors). In this case it was held that the total turnover in section 80HHC(3) (b) refers to total turnover of the exportable goods and does not include turnover from the business of sale of goods, which are not at all exported by the assessee. (iii) The Hon'ble Delhi High Court in I.T.A. No. 1265 vide order dated 14.9.2011 has followed the view as expounded in the above case laws. However, ld. Counsel of the assessee further conceded that there are decisions against the assess....