TaxTMI 
TaxTMI 
2013 (11) TMI 68
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....lding that the Transfer Pricing Officers (TPO) action of determining arms' length price of the reimbursement of advertisement expenses received by the assessee at Rs. 49,37,93,439/- as incorrect with out appreciating the facts mentioned by the TPO. 3. The Ld. CIT(A) has erred in law and on facts by allowing relief of Rs. 4,61,52,287/- being provisions of warranty expenses with out 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 an ascertained liability. 4. Hence order of the Ld. CIT(A) deserves to be set aside and the order of the Assessing Officer be restored. 3. In this case during the assessment proceedings Assessing Officer noticed that the following international transactions were entered by the assessee during the financial year 2003-04 &reported in Form 3CEB. 3.1 An economic analysis was carried out by the assessee in accordance with the provisions of the Act read with Income Tax Rules, 1962 for determination of the arm's length price of its international transactions. Based on the economic analysis so conducted by the assessee, it was concluded that the pr....
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....icipated that media coverage of the event would lead to greater brand awareness in India. This was expected to grow from 17.50% to 35.00%. Assessee further considered the population of these countries where Cricket is played. Out of the total population in these 14 nations 60% population is in India. Hence, it was assessed that level of enthusiasm regarding the game was much higher in the South Asian sub-continent. It was further considered that larger market for televisions and other appliance and media devises was in India, amongst all cricket playing and watching countries. Hence, the percentage of the population watching cricket is much higher than the other thirteen countries. In these circumstances, it was decided that assessee contribute 40% towards the total sponsorship. 19. However, TPO did not agree with the above cost contribution ratio. He held that Cricket is not the only dominating game in India. TPO further observed that it has been assumed that there is a higher level of enthusiasm about cricket in South Asian subcontinent and thus it will get translated in higher sale benefit for assessee. He opined in reality, level of enthusiasm is not the only factor for buying....
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....do- Total Sales in Major Cricket Playing Nations $ 889,444,423 Other than India (in $) 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% 21. From the above, we find that 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, we agree with the Ld. Commissioner of Income Tax (A) that considering the sale data of 14 of the Cricket Playing nations LGEIL contribution is reasonable. Further, 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, golf which are popular and played outside India but they enjoy significant viewership in India as well. 22. While considering the cost contribution, it is also necessary to bear in mind the penetration level of sales in advanced countries. For example in UK for every 100 hou....
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....nd third party vendors and applying TPO's rationale, even LGEIL's third party vendors should contribute towards its ad spend. Since under arm's length circumstances, no such payment was made by third parties, LGEK and its subsidiaries should also not be liable for any such contribution. 27. We may further refer to the assessee's submission that Hero Honda India Company has also entered into a similar agreement with GCC, and 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. This compares very favourable with the assessee's share which amounts to Rs. 16.29 crores which is 40% to the total global sponsorship contract for the year. It is evident that the Indian entity is incurring much higher expenses as is being jointly incurred by LGEK and LGEIL. Hence, in this view of the matter assessee's contribution of 40% of 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 ....
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....r of Income Tax (A)'s view that LGEIL has received commensurate benefit of its 40% share contribution. Hence, we hold that the adjustments made by the TPO/ Assessing Officer on this account has rightly been deleted by the Ld. Commissioner of Income Tax (A). 8. Apropos issue of reimbursement of of advt. expenses of LG LGEIL by AEs:- On this issue the TPO has determined the arm's length price in respect of components of apportionment of advt., publicity and sales promotion expenses between M/s LG Electronics India Ltd. and LGEK (LG Koreat) at Rs. 42,87,50,247/-. 8.1 The TPO observed that the transaction of reimbursement of advt. expenses was not at arm's length price as the amount of reimbursement received by the assessee was not sufficient. The main observation of the TPO were as under:- "LG brand image is being enhanced by the advt. and sales promotion expenses incurred in India, and hence benefit accrued to LGEK by way of strengthening the brand name. Sales made by LGEK to the appellant, royalty payments made by the appellant to LGEK etc. are 'benefits' derived by LGEK and which are directly attributable to advt. expenses. Proportion of advt. expenditure to total sales incur....
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.... it is immaterial that a third party is being benefited by the advt. expenses of the assessee, if an expense had been incurred by the Company for its own benefit, the same should be allowed to the company as a bonafide expenses. 9.4 The Ld. CIT(A) further observed that if the TPO's contention is accepted that by increase in advt. expenses LGEK has been benefitted in terms of enhanced brand, then by way of same corollary increase in LGEIL sales has also been possible due to the international brand image "LG Brand" and an international platform for all the group companies (including LGEIL) created by LGEK. Ld. Commissioner of Income Tax (A) concluded as under:- "Hence, the advt. efforts of LGEK have also benefitted the appellant and inspite of such support, the appellant has not been paying any brand royalty to the AE for this non LGEIL is contributing towards their advt. spend because as per the perusal of the table in the appellant's submission (comparative analysis of advt. expenses incurred by LGEIL and LGEK), advt. spend by LGEK is higher than that of the appellant. Infact, as contended by the appellant, LGEIL should have ideally contributed to the global advertising spend by ....
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....ereas the order was passed by the TPO on 20.12.2006. It has further been submitted that it can also not be said that TPO has assumed jurisdiction under section 92CA(2B). That TPO has not bench marked the AMP expenditure as is clear from the tenor of the order passed by the TPO. That no show cause notice was issued by the TPO to the assessee. Two items included under overall AMP expenses, viz. ICC sponsorship and reimbursement of advertisement expenses have been referred by the AO to the TPO which had been separately benchmarked by the TPO. 11.3 Ld. Departmental Representative on the other hand submitted that it is the assessee's claim that what was referred to the TPO was the international transaction of reimbursement of advt. expenses and the TPO has examined this transaction in different manner. In this regard, Ld. Departmental Representative has submitted that TPO has the due power for re- characterizing / appropriately characterizing and bench marking an international transaction. In this regard, he placed reliance Para 9.12 of the L.G. Special Bench in this regard. As regards the assessee's contention that TPO could not have bench marked the AMP transaction as international t....
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....ed in this regard by the Ld. Counsel of the assessee is that the Revenue is seeking to change the basis of disallowance/ adjustment made by the TPO. It was submitted that the approach adopted by the TPO for making the adjustment cannot be varied in the appeal filed by the Revenue. 13. In this regard, Ld. D.R. submitted that it is the wrong contention that Revenue is seeking to build a new case. He pointed out that Revenue is not pleading to build a new case. That Revenue is merely buttressing the case of the TPO by placing reliance among other things on the order of the Special Bench in assessee's own case for the Asstt. Year 2007-08. He submitted that in this order law has been elaborated and the elaboration is given in para 17.4 of the LG Special Bench order. 14. We have carefully considered the submissions and perused the records. In our considered 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....
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.... down by the Special Bench. The said Special Bench decision is a very lengthy order, it will not be desirable to reproduce extensively as the order can be referred to independently. We find that this Tribunal in I.T.A. No. 4602/Del/2010 in the case of Canon India Pvt. Ltd. vs. DCIT vide order dated 3.5.2013 tried to capture the gist of the conclusion and observation of Special Bench as under:- "7. We have heard rival contentions made on behalf of the parties and gone through the relevant material available on record. 7.1. First of all we will take up the legal issues as raised in the grounds of appeal regarding the retrospective applicability of sec. 92CA(2B) to the years in question in the case of the assessee as also the powers of assessing officer to make such reference and the powers of TPO to furnish report in this behalf and all other related issues. The Special Bench in the case of LG Electronics India (supra) adjudicated such issues as is evident in para 6 of the order: "6. Though both the questions referred to this special bench are inter-linked, still we are taking up question no. 1 first. The ld. Counsel for the assessee ahs assailed the impugned order on various lega....
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....se the worth of their existence. This argument was developed to contend that if the TPO is to be permitted to determine ALP in respect of any transaction, then sub- sec. (1) requiring reference to him by the AO, will be rendered useless. In our considered opinion, this contention misses the wood from the tree. The jurisdiction of the TPO is activate only when the AO makes reference to him under sub-section (1) for determining ALP in respect of certain transactions. Sub-sees, (2A) and (2B) come into play only when sub-sec. (1) has already been set into motion. Thus, it is only when the AO makes a reference to the TPO in terms of sub-sec. (1) for determination of ALP in respect of the referred international .transactions, that the TPO gets power under sub-sections (2A) and (2B) to determine ALP in respect of non-referred international transactions as well. In the absence of any such reference under sub-section (1), the TPO cannot suo motu undertake the determination of ALP in respect of other international transactions not referred to him. It is a different matter that the reference by the AO may be for one international transaction and the TPO while determining . ALP in respect of t....
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.... amount to doing violence to the unambiguous language of the provision by importing certain words in it, which is obviously impermissible; The primary rule is that of strict or literal interpretation, as per which a provision should be read as it is unless manifestly absurd results follow from such interpretation. 7.23. We are equally conscious of the rule of harmonious construction as reiterated in Sultana Begum (supra). Principle 3 in para 15 of the judgment is that "it is to be borne in mind by all the courts all the times that when there are two conflicting provisions in an Act which cannot be reconciled with each other, it should be interpreted as if possible, effect should be given to both". In our considered opinion, the rule of harmonious construction can be applied instantly by excluding the cases in which the assessee has not furnished report in respect of international transactions, whether or not it is an international transaction as per the assessee's view point, from the ambit of sub-sec. (2A) and including them in sub-section (2B) of section 92CA. It is relevant to note that sub-sec. (2A) is a general provision on the issue of the TPO suo motu taking up an internati....
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....sion made on account of service warranty amounting to Rs. 46,152,287/-, wherein the Assessing Officer has held that the computation of the provision is hypothetical and not matured. 20. Upon assessee's appeal Ld. Commissioner of Income Tax (A) referred to the appellate order of the assessee for the assessment year 2003-04. He further observed that since there was no change in the facts of the instant year as compared to the earlier years, in light of the earlier years appellate order and respectfully following the decision of the ITAT in assessee's own case he deleted the adjustments made by the Assessing Officer in this regard. 21. Against this order the Revenue is in appeal before us. 22. We have heard both the counsel and perused the records. 23. We find that the identical issue was considered by the Tribunal in assessee's own case in I.T.A. No. 3823/Del/2009 A.Y. 2003-04. The Tribunal has adjudicated the issue vide order dated 17.5.2013 as under:- "On this issue Assessing Officer observed that the assessee has made a provision of Rs. 6,57,19,516/- for service of warranty. Assessing Officer observed that the same was a provision and was not allowable. 33. Upon assessee's A....
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....ar and deduction claimed as business expenditure was unduly excessive and was intended to evade taxation. Following the ratio laid down by the jurisdictional Delhi High Court the claim of the assessee company has been examined. It has been noticed that the assessee company had made the warranty provisions right from the first year of the commencement of the business i.e assessment year 1998-99. These provisions were made after working out the factor based on the actual expenses divided by the average sales of the earlier years. The factor value so worked out was applied as a multiplying factor on the sale of the year resulting into expenses including provisions. The difference in the expenses including provisions and actual expenses was considered for providing the additional provisions. This method was followed by the assessee company uniformly right from the first year of the commencement of the production. Although the claim of the provisions as a revenue expense was made first time in the year under consideration based on the decision of Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd., Vs. CIT (2000)245 ITR 428 and many other courts' citations submitted by the app....