ACIT, Noida V. M/s. L.G. Electronics India Pvt. Ltd., Greater Noida

ITA 891/DEL/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69385 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-10-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 29-07-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 04-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; YOGESH KUMAR VERMA
• Assessee Lawyers: ABHISH; AJAY VOHRA SH NEERAJ JAIN S
• Keywords: Business income; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction
• Section: 92B; 92E; 37(1); 147; 154

Judgement Text

I.T.A. NO. 891/DEL/2010 IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I NEW DELHI) BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 891/DEL/2010 ASSESSMENT YEAR : 2004-05 ASSTT. COMMISSIONER OF INCOME TAX M/S LG ELECTRONICS INDIA CIRCLE, NOIDA. G-BLOCK, PVT. LTD., COMMERCIAL COMPLEX, SECTOR-20, VS. PLOT NO. 51, NOIDA UDYOG VIHAR, SURAJ PUR KASNA ROAD, GREATER NOIDA- 201 306 (UP) (APPELLANT) (RESPONDENT) PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO.AAACL 1745Q AAACL 1745Q AAACL 1745Q AAACL 1745Q APPELLANT BY : SH. PEEYUSH JAIN, C.I.T.(D.R.) & SH. YOGESH KUMAR VERMA, CIT(DR) RESPONDENT BY : SH. AJAY VOHRA, SH. NEERAJ JAIN, ADVOCATES AND SHRI ABHISHEK AGGARWAL, CA ORDER ORDER ORDER ORDER PER PER PER PER SHAMIM YAHYA, SHAMIM YAHYA, SHAMIM YAHYA, SHAMIM YAHYA, AM: AM: AM: AM: THIS IS AN APPEAL FILED BY THE REVENUE IS DIRECTED A GAINST THE ORDER OF LD CIT(A) DATED 30.12.2009 AND PERTAINS TO ASSESSMENT YEAR 2004-05. 2. THE GROUNDS OF APPEALS TAKEN BY THE REVENUE ARE AS UNDER:- 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACT S BY ALLOWING RELIEF OF RS. 4,17,63,786/- BY HOLDING THA T THE TRANSFER PRICING OFFICERS (TPO) ACTION OF DETERMININ G THE ARMS LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTION S REGARDING CONTRIBUTION TOWARDS ICC WORLD CUP CRICKET I.T.A. NO. 891/DEL/2010 2 TOURNAMENT OF THE ASSESSEE AT RS. 36,56,318/- AS INCORREC T WITH OUT APPRECIATING THE FACTS MENTIONED BY THE TPO . 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS BY ALLOWING RELIEF OF RS. 42,87,50,247/- BY HOLDING THAT THE TRA NSFER PRICING OFFICERS (TPO) ACTION OF DETERMINING ARMS LE NGTH PRICE OF THE REIMBURSEMENT OF ADVERTISEMENT EXPENSES RECEIVED BY THE ASSESSEE AT RS. 49,37,93,439/- AS INCORRE CT WITH OUT APPRECIATING THE FACTS MENTIONED BY THE TPO . 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS BY AL LOWING RELIEF OF RS. 4,61,52,287/- BEING PROVISIONS OF WARRAN TY 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 LIABILIT Y RATHER THAN AN ASCERTAINED LIABILITY. 4. HENCE ORDER OF THE LD. CIT(A) DESERVES TO BE SET ASI DE AND THE ORDER OF THE ASSESSING OFFICER BE RESTORED. 3. IN THIS CASE DURING THE ASSESSMENT PROCEEDINGS ASSESSING O FFICER NOTICED THAT THE FOLLOWING INTERNATIONAL TRANSACTION S WERE ENTERED BY THE ASSESSEE DURING THE FINANCIAL YEAR 2003-04 &REPORTE D IN FORM 3CEB. S.NO. S.NO. S.NO. S.NO. PARTICULARS PARTICULARS PARTICULARS PARTICULARS METHOD METHOD METHOD METHOD AMOUNT (RS.) AMOUNT (RS.) AMOUNT (RS.) AMOUNT (RS.) 1 IMPORT OF RAW MATERIAL AND COMPONENTS TNMM 5,40,02,59,772 2 IMPORT OF SERVICE SPARES TNMM 18,14,31,225 3 EXPORT OF RAW MATERIALS AND COMPONENTS TNMM 38,60,214 4 IMPORT OF FINISHED GOODS TNMM 1,81, 30,45,327 5 EXPORT OF MANUFACTURED GOODS TNMM/RPM 1,38,15,17,253 6 IMPORT OF PRODUCTION EQUIPMENT TNMM 30,13,38,286 7 ROYALTY TNMM 50,74,09,784 8 IT SOFTWARE AND TRAINING CHARGES TNMM 8,62,426 9 DESIGN AND DEVELOPMENT FEE TNMM 18,67,23,220 I.T.A. NO. 891/DEL/2010 3 10 RE CEIPT OF DA INTEREST TNMM 5,36,873 11 PAYMENT OF DA INTEREST CUP 2,28,09,489 12 TECHNICAL FEES TNMM 4,50,10,414 13 COSTS SHARING ICC SPONSORSHIP TNMM 5,74,24,522 14 COMMUNICATION LINK CHARGES TNMM 92,21,711 15 EDUCATION AND TRAINING CHARGES PAID TNMM 9,08,222 16 REIMBURSEMENT OF TRAVELING EXPENSES PAID TNMM 4,32,135 17 REIMBURSEMENT OF EXPENSES RECEIVED TNMM 34,39,31,063 3.1 AN ECONOMIC ANALYSIS WAS CARRIED OUT BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH I NCOME TAX RULES, 1962 FOR DETERMINATION OF THE ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSACTIONS. BASED ON THE ECONOMIC ANALYSIS SO CONDUCTE D BY THE ASSESSEE, IT WAS CONCLUDED THAT THE PRICING IN RESPECT OF THE ABOVE TRANSACTIONS IS AT ARMS LENGTH, AS PER SECTION 92(1) OF THE ACT. 3.2 A REFERENCE WAS MADE BY THE ASSESSING OFFICER U/S. 92 CA(1) OF THE I.T. ACT, TO THE TPO FOR COMPUTATION OF ALP (AR MS LENGTH PRICE) IN RESPECT OF THE ABOVE MENTIONED INTERNATIONAL TRANSACT IONS. THE TPO HOWEVER, DID NOT AGREE WITH THE ANALYSIS UNDERTAKEN B Y THE ASSESSEE FOR DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF THE FOLLOWING TWO TRANSACTIONS:- I) CONTRIBUTION TOWARDS GLOBAL SPONSORSHIP OF ICC WOR LD CUP CRICKET TOURNAMENT. II) REIMBURSEMENT OF ADVT. EXPENSES OF LG ELECTRONICS I NDIA LTD. (LGIL) BY AES 3.3 IN THE ABOVE BACKGROUND, WE PROCEED TO ADJUDICA TE THE ISSUE RAISED IN THIS APPEAL. I.T.A. NO. 891/DEL/2010 4 4. APROPOS ISSUE OF CONTRIBUTION TOWARDS GLOBAL SPONSO RSHIP OF ICC APROPOS ISSUE OF CONTRIBUTION TOWARDS GLOBAL SPONSORSHI P OF ICC APROPOS ISSUE OF CONTRIBUTION TOWARDS GLOBAL SPONSORSHI P OF ICC APROPOS ISSUE OF CONTRIBUTION TOWARDS GLOBAL SPONSORSHI P OF ICC WORLD CUP CRICKET TOURNAMENT WORLD CUP CRICKET TOURNAMENT WORLD CUP CRICKET TOURNAMENT WORLD CUP CRICKET TOURNAMENT ON THIS ISSUE THE TRANSFER PRICING OFFICER HAS DETERMI NED THE ARMS LENGTH PRICE REGARDING CONTRIBUTION TOWARDS G LOBAL SPONSORSHIP OF ICC WORLD CUP CRICKET TOURNAMENT AT RS. 41763786/ -. 5. UPON ASSESSEES APPEAL CIT(A) IN THIS REGARD REFERRED TO HIS APPELLATE ORDER FOR ASSESSMENT YEAR 2003-04. ACCORDING LY, 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 RE CORDS. BOTH THE COUNSEL FAIRLY AGREED THAT THE ISSUE INVOLVED IS CO VERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THIS TRIBUNAL IN I.T.A. N O. 3823/DEL/2009 FOR ASSESSMENT YEAR 2003-04 VIDE ORDER DA TED 17.5.2013. IN THE ABOVE APPEAL, THE TRIBUNAL HAS A DJUDICATED THE ISSUE AS UNDER:- 18. WE FIND THAT LGEIL ALONGWITH LGEK HAS ENTERED INTO AN AGREEMENT TO SPONSOR WORLD CUP CRICKET. TH E TOTAL COST IN THIS REGARD FOR THE ASSTT. YEAR 2003- 04 WAS RS. 40,73,98,255/-. THIS COST OF SPONSORSHIP W AS 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 VE RY IMPORTANT GAME FOR INDIA AND HAS A LOT OF PROMOTIONA L VALUE ATTACHED TO IT. EVERY INTERNATIONAL CRICKET TOURNAMENT WHERE INDIA IS PARTICIPATING GIVES A BOOS T TO THE SALES OF ALL CONSUMER DURABLES, MORE PARTICULARLY COLOUR TELEVISIONS. THEREFORE, ASSESS EE EXPECTED THAT DURING CRICKET WORLD CUP 2003, THE I.T.A. NO. 891/DEL/2010 5 SALES OF LG PRODUCTS WOULD GROW DUE TO GREATER VISIBILITY ACHIEVED BY SPONSORING TOURNAMENT. THE ASSESSEE FURTHER ANTICIPATED 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 O F 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 O THER APPLIANCE AND MEDIA DEVISES WAS IN INDIA, AMONGST A LL CRICKET PLAYING AND WATCHING COUNTRIES. HENCE, T HE 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 LE VEL OF ENTHUSIASM ABOUT CRICKET IN SOUTH ASIAN SUBCONTINENT AND THUS IT WILL GET TRANSLATED IN HIG HER SALE BENEFIT FOR ASSESSEE. HE OPINED IN REALITY, LEVEL OF ENTHUSIASM IS NOT THE ONLY FACTOR FOR BUYING CONSUMER DURABLES. THE ASSESSEE COMPANY HAS NOT CONSIDERED THAT PURCHASING POWER OF SOUTH ASIAN SUB - I.T.A. NO. 891/DEL/2010 6 CONTINENT IS COMPARATIVELY VERY POOR AS COMPARED TO WESTERN CONTINENTS. TPO FURTHER OBSERVED THAT CRICKET EVENTS INVOLVING INDIA WOULD BENEFIT LGEIL ALSO BUT AT THE SAME TIME, HE OBSERVED THAT THIS WILL AL SO RESULT IN ADDITIONAL PROFIT TO LGEK. APART FROM DIR ECT BENEFITS, IT FURTHER STRENGTHENS BRAND AWARENESS OF LG IN INDIA PROVIDING MORE BARGAIN POWER TO KOREA COMPANY WORLDWIDE. THE TPO FURTHER OBSERVED THAT THERE ARE LARGE NUMBER OF SUBSIDIARIES OF LGEK ALL O VER THE GLOBE. THAT THE CRICKET GAME INVOLVING OTHER NATIONS WOULD SIMILARLY BENEFIT ON ABOVE BASIS TO L GE KOREA ONLY FOR WHICH NO BENEFIT WOULD PASS TO INDIA N ENTITY. TPO HELD THAT PERCENTAGE OF PROFIT BETWEEN 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 REGION REGION REGION EXTERNAL EXTERNAL EXTERNAL EXTERNAL PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE CRICKET CRICKET CRICKET CRICKET PLAYING PLAYING PLAYING PLAYING SALES SALES SALES SALES SHARE SHARE SHARE SHARE REGIONS REGIONS REGIONS REGIONS KOREA 51,80,389 23% NO NORTH AMERICA 45,54,537 20% NO SOUTH 7,86,889 4% NO AMERICA I.T.A. NO. 891/DEL/2010 7 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 TOTAL TOTAL TOTAL 2,23,18,902 100% 2,23,18,902 100% 2,23,18,902 100% 2,23,18,902 100% 20. FROM THE ABOVE, IT IS EVIDENT THAT OUT OF LG GROUPS 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 C RICKET PLAYING NATIONS OR THOSE COUNTRIES WHERE CRICKET I S HAVING A SUBSTANTIAL AUDIENCE. HENCE, WE FIND THAT CONSIDERING THE SALES OF THE ENTIRE LG GROUP IS N OT AN APPROPRIATE BASIS TO APPORTION THE COST. WE CAN ALSO REFER TO THE FOLLOWING SALES DATA:- NAME OF COUNTRY NAME OF COUNTRY NAME OF COUNTRY NAME OF COUNTRY 2002 2002 2002 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- I.T.A. NO. 891/DEL/2010 8 PAKISTAN -DO- KENYA -DO- ZIMBABWE -DO- WEST INDIES -DO- NAMIBIA -DO- HOLLAND -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. HEN CE, 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. I.T.A. NO. 891/DEL/2010 9 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 HOUSEHOLD THE NUMBER OF COLOR TELEVISION IS 98.6 AS COMPARED TO INDIA WHERE FOR EVERY 100 HOUSEHOLDS ONLY 31.1 COLOR TELEVISION ARE AVAILABLE . AS PER DETAILS SUBMITTED BY THE ASSESSEE THE SALES INCREASED BY 35.04% DURING THE FINANCIAL YEAR 2002- 03. THIS SHOWS THAT BENEFITS IN TERMS OF INCREASE IN SALES WOULD BE MUCH HIGHER IN THE CASE OF LGEIL, AS COMPARED TO THE ADVANCED COUNTRIES. 23. WE FURTHER FIND THAT ASSESSEE HAS REFERRED TO A N ARTICLE IN THE MEDIA CASHING IN ON CRICKET. THIS ARTICLE MENTIONS THAT GLOBAL CRICKET CORPORATION (G CC), 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 PERCENT OF THE ADVERTISING REVENUE IS EXPECTED T O COME FROM INDIA. THIS SHOWS THAT THE LGEIL 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 A N OPPORTUNITY COST OF APPROXIMATELY RS. 95.20 CRORES I N THE FIRST YEAR ITSELF WHICH IS ROUGHLY 73% OF THE T OTAL ADVERTISEMENT VALUE, WHICH IS SPREAD OVER A 5 YEARS I.T.A. NO. 891/DEL/2010 10 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. 28,17,62,969 20,42,91,997 - 27.50% 6 HITACHI HOME AND LIFE SOLUTIONS (INDIA) LTD. 1,98,24,54,000 1,75,02,84,667 - 11.71% 7 GODREJ APPLIANCES LTD. 4,58,01,67,000 6,63,87,000 - 98.55% 8 CARRIER AIRCON LTD. 3 ,18,42,85,000 3,30,11,78,667 3.67% 9 WHIRLPOOL OF INDIA LTD. 9,86,74,97,000 8,76,76,83,200 - 11.15% AVERAGE INCREASE IN SALES OF THE COMPARABLES. - 15.40% TESTED PARTY LG ELECTRONICS INDIA 20,03,99,94,000 27,06,16,51,552 35.04% FROM THE ABOVE TABLE, IT IS SEEN THAT ASSESSEES 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 I.T.A. NO. 891/DEL/2010 11 GOT REDUCED BY 15.49%. THE ABOVE INDICATES THAT ASSESSEE DERIVED SIGNIFICANT BENEFIT DUE TO ITS ADVERTISEMENT EXPENSES. 26. WE FURTHER REFER TO THE TPOS 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. HENCE, THEY SHOULD ALSO CONTRIBUTE TO LGEILS AD SPEND. IN T HIS REGARD, LD. COMMISSIONER OF INCOME TAX (A) HAS REFERRED TO THE FINANCIAL INFORMATION OBTAINED FROM THE ASSESSEE WHICH SHOWED THAT ONLY 31.16% WAS PROCURED FROM ITS ASSOCIATED ENTERPRISES AND THE BALANCE WAS PURCHASED FROM LOCAL INDIAN VENDORS. HENCE, LD. COMMISSIONER OF INCOME TAX (A) OPINED THAT IN CASE OF LGEILS SALE BENEFIT BOTH THE A ES AND THIRD PARTY VENDORS AND APPLYING TPOS RATIONALE, EVEN LGEILS THIRD PARTY VENDORS SHOULD CONTRIBUTE TOWARDS ITS AD SPEND. SINCE UNDER ARMS 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 ASSESSEES 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 TH IS CASE STILL HERO HONDA HAS ALLOCATED RS. 120 CRORES FOR CRICKET SPONSORSHIP DURING THE SAME PERIOD. THIS COMPARES VERY FAVOURABLE WITH THE ASSESSEES SHARE I.T.A. NO. 891/DEL/2010 12 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 HIG HER 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 O F COST ALLOCATION AS PRESCRIBED BY THE OECD GUIDELINE S. IN THIS REGARD, OECD STATES THAT EACH PARTICIPANTS INTEREST IN THE RESULTS OF THE COST CONTRIBUTION ARRANGEMENT (CCA) ACTIVITY SHOULD BE ESTABLISHED FROM THE OUTSET. THE OECD ALSO STATES THAT THE GO AL IS TO ESTIMATE THE SHARES OF BENEFITS EXPECTED TO BE OBTAINED BY EACH PARTICIPANT AND TO ALLOCATE CONTRIBUTIONS IN SAME PROPORTIONS. HENCE, THE SAL ES / 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 CONSTAN T OVER THE PERIOD OF AGREEMENT. I.T.A. NO. 891/DEL/2010 13 29. IN THIS REGARD, WE ALSO REFER TO THE FOLLOWING EXPOSITIONS OF ITAT IN STAR INDIA PVT. LTD. VS. ADD L. 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 ASSES SEE. 31. IN THE BACKGROUND OF THE AFORESAID DISCUSSION, WE ARE IN AGREEMENT WITH THE LD. COMMISSIONER OF INCOME TAX (A) THAT THE TPOS ACTION OF APPORTIONMENT OF GC C CONTRIBUTION IN THE RATIO OF 5.40 : 94.60 BETWEEN L GEIL 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 I.T.A. NO. 891/DEL/2010 14 CONTRIBUTION. HENCE, WE HOLD THAT THE ADJUSTMENTS MADE BY THE ASSESSING OFFICER /TPO ON THIS ACCOUNT HAS RIGHTLY BEEN DELETED BY THE LD. COMMISSIONER OF INCOME TAX (A). 7.1 SINCE THE FACTS IN THE PRESENT CASE ARE IDENTIC AL. IN OUR CONSIDERED OPINION, THE RATIO FROM THE ABOVE SAID T RIBUNALS DECISION HAS TO BE FOLLOWED. ACCORDINGLY, RESPECT FULLY FOLLOWING THE PRECEDENT AS ABOVE, WE AFFIRM THE LD. COMMISSIONE R OF INCOME TAX (A)S VIEW THAT LGEIL HAS RECEIVED COMMEN SURATE BENEFIT OF ITS 40% SHARE CONTRIBUTION. HENCE, WE H OLD THAT THE ADJUSTMENTS MADE BY THE TPO/ ASSESSING OFFICER ON THI S ACCOUNT HAS RIGHTLY BEEN DELETED BY THE LD. COMMISSIONER OF INCOME TAX (A). 8. APROPOS ISSUE OF REIMBURSEMENT O APROPOS ISSUE OF REIMBURSEMENT O APROPOS ISSUE OF REIMBURSEMENT O APROPOS ISSUE OF REIMBURSEMENT OF ADVT. EXPENSES OF L F ADVT. EXPENSES OF L F ADVT. EXPENSES OF L F ADVT. EXPENSES OF LG GG GEIL EIL EIL EIL BY AES: BY AES: BY AES: BY AES:- -- - ON THIS ISSUE THE TPO HAS DETERMINED THE ARMS LENGT H PRICE IN RESPECT OF COMPONENTS OF APPORTIONMENT OF ADVT., PUBLICITY AND SALES PROMOTION EXPENSES BETWEEN M/S LG ELECTRONICS I NDIA LTD. AND LGEK (LG KOREAT) AT RS. 42,87,50,247/-. 8.1 THE TPO OBSERVED THAT THE TRANSACTION OF REIMBUR SEMENT OF ADVT. EXPENSES WAS NOT AT ARMS LENGTH PRICE AS THE AMOUNT OF REIMBURSEMENT RECEIVED BY THE ASSESSEE WAS NOT SUFFI CIENT. 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 HENC E I.T.A. NO. 891/DEL/2010 15 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 RED BY THE APPELLANT IS HIGHER THAN THE INDUSTRY NORMS . 8.2 THE TPO THEREFORE, ALLOCATED THE ADVT. EXPENSES OF THE ASSESSEE IN THE RATIO OF REVENUE OF LGEK FROM INDIA VIS-A-VIS REVENUE OF THE ASSESSEE. THE RATIO WAS DETERMINED TO BE 20.3 : 79.7. THE CALCULATION OF THE SAME WAS A FOLLOWS:- (A) NET SALES 40,49,30,14,000 (B) ADVT. & PUBLICITY & BUS PROM. 2,44,05,05,088 (C) ROYALTY (INCLUDING R&D CESS) 53,27,80,000 (D) DESIGNING 18,67,23,220 (E) FIN GOOD IMP 1,81,30,45,327 (F) IMPORT OF SERVICE SPARES 18,14,31,225 (G) RAW MATL, COMP AND SPARES IMP. 5,40,02,59,772 (H) IT SOFTWARE AND TRAINING CHARGES 8,62,426 (I) PAYMENT OF DA INTEREST 2,28,09,489 (J) PAYMENT OF TECHNICAL FEE 4,50,10,414 (K) COMMUNICATION LINK CHARGES PAID 92,21,711 (L) EDUCATION AND TRAINING CHARGES 9,08,222 (M) REVENUE OF LG KOREA (SUM OF C TO L) 8,19,30,51,8 06 (N) REVENUE OF LG INDIA (A M) 32,29,99,62,194 (O) RATIO OF REVENUE OF LG KOREA TO TOTAL REVENUE (M/A) 0.202332477 (P) RATIO OF REVENUE OF LG INDIA TO TOTAL REVENUE (N/A) 0.797667523 TOTAL 100% PERCENTAGE OF ADVT. COST TO BE SHARED SHARE OF LG KOREA IN ADV. EXPENSES ( O X B) 493,793,439 I.T.A. NO. 891/DEL/2010 16 SHARE ALREADY CONTRIBUTED 65,043,192 REIMBURSEMENT TO BE MADE AT ARMS LENGTH 428,750,247 SHARE OF LG INDIA IN ADV. EXPENSES (P X B) 1,946,711,649 8.3 ACCORDINGLY, THE ADJUSTMENTS OF RS. 42,87,50,247 /- WAS MADE TO THE TAXABLE INCOME OF THE ASSESSEE. 9. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOM E TAX (A) OBSERVED THAT FUNDAMENTALLY HE AGREED WITH THE TPOS ARGUMENTS THAT THERE IS DIRECT NEXUS BETWEEN THE A DVERTISING SPEND AND SALES. HE OBSERVED THAT HE FOUND STREN GTH IN THE ASSESSEES CONTENTION THAT THE ASSESSEE HAS DERIV ED SIGNIFICANT BENEFIT OUT OF THE ADVT. EXPENSES INCURRED BY THE ASSESSEE IN INDIA. AS PERCENTAGE INCREASED IN SALES WAS MUCH H IGHER THAN INCREASE IN ADVT. EXPENSES IN ALL YEARS FROM THE FI NANCIAL YEAR 2003-04 TO FINANCIAL YEAR 2005-06. 9.1 LD. COMMISSIONER OF INCOME TAX (A) FURTHER OBSERV ED THAT THE ADVT. EXPENSES INCURRED BY THE APPELLANT DURIN G 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 C OMPARABLES HAVE BEEN TO THE TUNE OF 9.05%. THUS, IT SUFFICIEN TLY DEPICTS THAT THE APPELLANT HAS BEEN ABLE TO DERIVE GREATER BENEF IT VIS-A-VIS THE COMPARABLE COMPANIES BY INCURRING EXPENDITURE ON ADVT . 9.2 LD. COMMISSIONER OF INCOME TAX (A) FURTHER OBSERV ED THAT LGEK WAS CONTRIBUTING TOWARDS 25% TO 30% OF THE TO TAL MATERIAL PURCHASES BY THE LGEIL. THAT IF THE TPOS PROPOSAL IS ACCEPTED THAT WITH INCREASE IN ADVT. EXPENSES BY LGEIL, LGE K IS I.T.A. NO. 891/DEL/2010 17 ALSO BEING BENEFITTED AND THEREFORE LGEK SHOULD MAK E MORE CONTRIBUTION TO THE ADVT. EXPENSES INCURRED BY LGEI L, THEN APPLYING THE SAME LOGIC, LGEIL SHOULD ALSO RECOVER S IMILAR CONTRIBUTION FROM INDEPENDENT THIRD PARTY VENDORS WHO ARE SUPPLYING AROUND 70% - 75% OF THE MATERIAL TO THE A SSESSEE. THAT THIS PROPOSITION, WAS NOT ACCEPTABLE IN COMMON BUSINESS PARLANCE. 9.3 LD. COMMISSIONER OF INCOME TAX (A) FURTHER OBSER VED REFERRED TO THE ITAT DECISION IN THE CASE OF STAR INDIA PVT. LTD. VS. ADDL. C.I.T. AND DELHI, ITAT DECISION IN THE CASE O F NESTLE INDIA. LD. COMMISSIONER OF INCOME TAX (A) FURTHER OBSERVED T HAT IN BOTH THE CASES IT HAS BEEN HELD THAT IT IS IMMATERIAL THAT A THIRD PARTY IS BEING BENEFITED BY THE ADVT. EXPENSES OF THE AS SESSEE, IF AN EXPENSE HAD BEEN INCURRED BY THE COMPANY FOR ITS OWN BENEFIT, THE SAME SHOULD BE ALLOWED TO THE COMPANY AS A BONAF IDE 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 O F SAME COROLLARY INCREASE IN LGEIL SALES HAS ALSO BEEN P OSSIBLE DUE TO THE INTERNATIONAL BRAND IMAGE LG BRAND AND AN INT ERNATIONAL 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 BENEFIT TED 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 T HEIR ADVT. SPEND BECAUSE AS PER THE PERUSAL OF THE TABLE IN I.T.A. NO. 891/DEL/2010 18 THE APPELLANTS 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 LGEK, SPECIFICALLY IN THE ABSE NCE OF ANY BRAND ROYALTY PAYMENT. ON THE CONTRARY, THE AE IS PROVIDING FURTHER SUPPORT TO LGEIL IN FORM OF REIMBURSEMENT OF ADVT. EXPENSES OF THE APPELLANT. IN VIEW OF THE ABOVE DISCUSSIONS AND AFTER CONSIDERING THE ARGUMENTS OF THE LD. AUTHORISED REPRESENTATIVE AND AFTER GOING THROUGH THE OBSERVATION OF THE ASSESSING OFFICER, I HOLD THAT T PO WAS NOT RIGHT IN DETERMINING ARMS LENGTH PRICE OF T HE REIMBURSEMENT RECEIVED BY THE APPELLANT AS RS. 42,87,50,247/- AS AGAINST RS. 6,50,43,192/- RECEIVE D BY THE APPELLANT. HENCE, THIS GROUND IS DECIDED IN FAVOR OF THE APPELLANT. 10. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEA L BEFORE US. 11. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. 11.1 IN THIS REGARD, IT WAS SUBMITTED BY THE LD. CIT (DR) THAT THE MATTER NEEDS TO BE RESTORED TO THE FILE OF THE TPO FOR RE- ADJUDICATION, IN LIGHT OF THE PRINCIPLES LAID DOWN B Y 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 OBJECTE D TO THE AFORESAID PROPOSITION. HE SUBMITTED THAT WHAT THE L D. DEPARTMENTAL REPRESENTATIVE HAS PROPOSED IS BEYOND TH E I.T.A. NO. 891/DEL/2010 19 JURISDICTION OF THE TPO. HE SUBMITTED THAT TPO ASSUME S JURISDICTION IN RESPECT OF THE INTERNATIONAL TRANSAC TION REFERRED TO HIM BY THE AO U/S. 92CA(1) OF THE ACT. THAT SUB-SE CTION 2A OF SECTION 92CA INSERTED BY THE FINANCE ACT, 2011 W.E.F 01.6.2011 PROVIDES THAT WHERE ANY OTHER INTERNATIONAL TRANSAC TION, OTHER THAN REFERRED INTERNATIONAL TRANSACTION, COMES TO T HE 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 COME S TO HIS NOTICE VIDE SUB-SECTION (2B) INSERTED IN SECTION 92 CA BY THE FINANCE ACT, 2012 W.E.F. 1.6.2012, IN A CASE WHERE T HE ASSESSEE HAS NOT SUBMITTED REPORT UNDER SECTION 92E OF THE AC T IN RESPECT OF SUCH TRANSACTION. IT HAS BEEN SUBMITTED BY THE L D. COUNSEL OF THE ASSESSEE THAT IN THE PRESENT CASE THE INTERNATI ONAL TRANSACTION OF REIMBURSEMENT OF ADVT. EXPENSES WAS REFERRED TO THE TPO BY THE AO U/S. 92CA(1) OF THE I.T. ACT. TH AT THE TPO COULD NOT INVOKE THE PROVISIONS OF SECTION 92CA(1) OF THE ACT TO BENCH MARK THE AMP EXPENSES IN VIEW OF THE FACT THAT THE SAID SUB-SECTION WAS INSERTED BY FINANCE ACT, 2011 W.E.F. 1.6.2011, WHEREAS THE ORDER WAS PASSED BY THE TPO ON 20.12.20 06. IT HAS FURTHER BEEN SUBMITTED THAT IT CAN ALSO NOT BE SAID THAT TPO HAS ASSUMED JURISDICTION UNDER SECTION 92CA(2B). THAT T PO HAS NOT BENCH MARKED THE AMP EXPENDITURE AS IS CLEAR FROM TH E TENOR OF THE ORDER PASSED BY THE TPO. THAT NO SHOW CAUSE N OTICE WAS ISSUED BY THE TPO TO THE ASSESSEE. TWO ITEMS INCL UDED UNDER OVERALL AMP EXPENSES, VIZ. ICC SPONSORSHIP AND REIMBU RSEMENT OF ADVERTISEMENT EXPENSES HAVE BEEN REFERRED BY T HE AO TO THE TPO WHICH HAD BEEN SEPARATELY BENCHMARKED BY THE TPO . I.T.A. NO. 891/DEL/2010 20 11.3 LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND SUBMITTED THAT IT IS THE ASSESSEES CLAIM THAT WHAT WAS REFERRED TO THE TPO WAS THE INTERNATIONAL TRANSACTION OF REIMB URSEMENT OF ADVT. EXPENSES AND THE TPO HAS EXAMINED THIS TRANSAC TION IN DIFFERENT MANNER. IN THIS REGARD, LD. DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT TPO HAS THE DUE POW ER FOR RE- CHARACTERIZING / APPROPRIATELY CHARACTERIZING AND B ENCH MARKING AN INTERNATIONAL TRANSACTION. IN THIS REGARD, HE P LACED RELIANCE PARA 9.12 OF THE L.G. SPECIAL BENCH IN THIS REGARD. AS REGARDS THE ASSESSEES CONTENTION THAT TPO COULD NOT HAVE BE NCH MARKED THE AMP TRANSACTION AS INTERNATIONAL TRANSACTION INV OKING THE PROVISIONS OF SECTION 92CA(1) AND TPO COULD NOT HAV E ASSUMED THE JURISDICTION U/S. 92CA(2B), THE LD. DEPARTMENT AL REPRESENTATIVE SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED BY PARA 7.23 OF THE L.G. SPECIAL BENCH. 11.4 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS. WE DO NOT AGREE WITH THE LD. COUNSEL OF THE ASSESSEE THAT TH E TPO HAS EXAMINED THE TRANSACTION IN A DIFFERENT MANNER THAN W HAT WAS REFERRED TO HIM. IN THIS REGARD, RELIANCE PLACED BY THE LD. DEPARTMENTAL REPRESENTATIVE OF PARA 9.12 OF THE LG SP ECIAL BENCH DECISION IS GERMANE. THE SPECIAL BENCH HAS NOT ED THAT LD. A.R. HAS VEHEMENTLY ARGUED THAT ASSESSEE HAS INCUR RED AMP EXPENSES FOR ITS BUSINESS PURPOSES AND RECORDED TH EM AS SUCH, THE REVENUE WENT WRONG IN RE-CHARACTERIZING THIS T RANSACTION BY SPLITTING IT INTO TWO PARTS VIZ. ONE TOWARDS ADVT. EXPENSES OF THE ASSESSEES BUSINESS AND SECOND TOWARDS THE BRAND BU ILDING BY THE FOREIGN AE. THE SPECIAL BENCH HAS FURTHER OB SERVED THAT THUS THE FORM OF SHOWING THE AMP EXPENSES COINCIDES W ITH THE I.T.A. NO. 891/DEL/2010 21 SUBSTANCE OF THE AMP EXPENSES. BUT THE ARRANGEMENT MA DE IN SUCH TRANSACTION, VIEWED IN TOTALITY, DIFFERS FROM T HAT WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISE BEHAVIN G IN A COMMERCIALLY RATIONAL MANNER. THOUGH THE AMP EXPENSES WERE SHOWN AS SUCH BUT THE OVERT ACT OF SHOWING SUCH EXP ENSES AS ITS OWN IS DIFFERENT FROM WHAT IS INCURRED BY INDEPENDEN T ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER, WHICH UNE ARTHS THE COVERT ACT OF TREATING THE AMP EXPENSES INCURRED FOR THE BRAND BUILDING FOR AND ON BEHALF OF THE FOREIGN AE, AS A LSO ITS OWN. 11.5 FURTHERMORE, WE FIND THAT RELIANCE PLACED BY TH E LD. D.R. OF PARA 7.23 OF THE LG SPECIAL BENCH ORDER IS ALSO GER MANE. ON THIS ISSUE THE SPECIAL BENCH WAS CONSIDERING THE CONTENT IONS THAT HARMONIOUS INTERPRETING OF SUB-SECTION (2B) BY LIMITI NG ITS SCOPE ONLY TO SUCH TRANSACTION WHICH THE ASSESSEE PERCEIV ES AS INTERNATIONAL TRANSACTION BUT FAILS TO REPORT. HO WEVER, THE BENCH HELD THAT THEY WERE NOT CONVINCED WITH SUCH INTERP RETATION. AFTER ELABORATELY DISCUSSING THE ISSUE THE SPECI AL BENCH HAS HELD THAT THE CONTENTION OF THE LD. COUNSEL OF THE ASSESSEE IN THIS REGARD WAS SANS MERITS AND WAS HEREBY REJECTE D. 11.6 THUS, WE HOLD THAT THE ASSESSEES OBJECTION THA T TPO HAS NO JURISDICTION IS NOT SUSTAINABLE, IN LIGHT OF THE A FOREMENTIONED SPECIAL BENCH DECISION. 12. ANOTHER ISSUE CANVASSED 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 MA KING THE ADJUSTMENT CANNOT BE VARIED IN THE APPEAL FILED BY T HE REVENUE. I.T.A. NO. 891/DEL/2010 22 13. IN THIS REGARD, LD. D.R. SUBMITTED THAT IT IS THE WRONG CONTENTION THAT REVENUE IS SEEKING TO BUILD A NEW C ASE. HE POINTED OUT THAT REVENUE IS NOT PLEADING TO BUILD A NEW CASE. THAT REVENUE IS MERELY BUTTRESSING THE CASE OF THE T PO BY PLACING RELIANCE AMONG OTHER THINGS ON THE ORDER OF THE SPECIAL BENCH IN ASSESSEES OWN CASE FOR THE ASSTT. YEAR 20 07-08. HE SUBMITTED THAT IN THIS ORDER LAW HAS BEEN ELABORATE D AND THE ELABORATION IS GIVEN IN PARA 17.4 OF THE LG SPECIA L BENCH ORDER. 14. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AN D PERUSED THE RECORDS. IN OUR CONSIDERED OPINION BY ASKING FO R A REMAND OF THE ISSUE IN LIGHT OF THE SPECIAL BENCH DECISION, I T CANNOT BE SAID THAT REVENUE IS SEEKING TO CHANGE THE BASIS OF DISA LLOWANCE /ADJUSTMENT MADE BY THE TPO. THE SPECIAL BENCH HAS E XPOUNDED VARIOUS ISSUES WHICH HAVE TO BE CONSIDERED IN THIS REGARD. BY DWELLING ON THEM IT CAN NOT BE SAID THAT A CHANGE O F BASIS OF DISALLOWANCE/ ADJUSTMENT IS BEING SOUGHT. 15. ANOTHER ARGUMENT MADE IN THIS REGARD BY THE LD. C OUNSEL OF THE ASSESSEE IS THAT THE SPECIAL BENCH DECISION FOR THE ASSTT. YEAR 2007-08 IS NOT APPLICABLE TO THE YEAR UNDER APPEAL. HE SUBMITTED THAT THERE IS DIFFERENCE IN NATURE OF INTERNATIONAL TRANSACTION SOUGHT TO BE BENCH MARKED. HE SUBMITTED THAT THERE I S DIFFERENCE IN THE METHODOLOGY ADOPTED IN THE CONCERNED YEARS. HE FURTHER POINTED OUT THAT IT WAS ASSESSEES BENCH MARKING OF SPECIAL INTERNATIONAL TRANSACTION OF REIMBURSEMENT RECEIVED FROM THE AE AND PAYMENT TO GCC IN ASSTT. YEAR 2004-05 AS AGAINS T BENCH MARKING OF OVERALL AMP EXPENSES IN ASSTT YEAR 2007-08. LD. COUNSEL OF THE ASSESSEE FURTHER SUBMITTED THAT THE ISSUE INVOLVED IS COVERED BY THE DECISION IN THE ASSTT. YEAR 2003-04. I.T.A. NO. 891/DEL/2010 23 16. LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT TPO/REVENUE IS ENTITLED TO APPROPRIATELY EXAMINE/ CH ARACTERIZE 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 A ND PERUSED THE RECORDS. WE FIND THAT THE THRUST OF ARG UMENT OF THE LD. COUNSEL OF THE ASSESSEE IS AS IF BY REFERRING T O THE SPECIAL BENCH DECISION, WE ARE UPHOLDING THE ORDER OF THE T PO IN THE PRESENT YEAR I.E. ASSTT. YEAR 2004-05. HOWEVER, WE FIND THAT THIS IS A MISTAKEN NOTION. THE SPECIAL BENCH HAS EXPOUND ED VARIOUS FACTORS TO BE CONSIDERED IN THIS REGARD. BY REMITTI NG 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 IMA GINATION, IT CAN BE SAID THAT THE TPOS ORDER IN THIS YEAR IS BEI NG UPHELD. FURTHERMORE, WE ALSO DO NOT AGREE WITH THE CONTENTI ON OF THE LD. COUNSEL OF THE ASSESSEE THAT THE ISSUE IS COVERED B Y THE DECISION OF THE TRIBUNAL FOR THE ASSTT. YEAR 2003-04. WE FI ND THAT THE ISSUE UNDER CONSIDERATION FOR THE ASSTT. YEAR 2003-04 WAS TOTALLY DIFFERENT WHICH RELATED TO ALLOCATION OF EXPENDITUR E INCURRED IN RELATION TO THE CONTRIBUTION TO GCC. 18. HENCE, IN THE BACKGROUND OF THE AFORESAID DISCU SSIONS AND PRECEDENT FROM THE SPECIAL BENCH, ITAT, WE FIND THAT WE ARE IN AGREEMENT WITH THE LD. DEPARTMENTAL REPRESENTATIVE T HAT THE ISSUE NEEDS TO BE RESTORED TO THE FILE OF THE TPO FO R RE- ADJUDICATION, IN LIGHT OF THE PRINCIPLES LAID DOWN B Y THE SPECIAL BENCH. THE SAID SPECIAL BENCH DECISION IS A VERY LENGTHY ORDER, I.T.A. NO. 891/DEL/2010 24 IT WILL NOT BE DESIRABLE TO REPRODUCE EXTENSIVELY AS THE ORDER CAN BE REFERRED TO INDEPENDENTLY. WE FIND THAT THIS TR IBUNAL IN I.T.A. NO. 4602/DEL/2010 IN THE CASE OF CANON INDIA PVT. L TD. VS. DCIT VIDE ORDER DATED 3.5.2013 TRIED TO CAPTURE THE GIST OF THE CONCLUSION AND OBSERVATION OF SPECIAL BENCH AS UN DER:- 7. WE HAVE HEARD RIVAL CONTENTIONS MADE ON BEHA LF 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 LEGAL AND FACTUAL ISSUES. IN SO FAR AS THE FIRST QUESTION IS CONCERNED, WE HAVE DIVIDED SUCH SUBMISSIONS INTO SEVEN BROADER PARTS FOR THE SAKE OF CONVENIENCE, WHICH WILL BE DEALT WITH ONE BY ONE. I.T.A. NO. 891/DEL/2010 25 I. JURISDICTION OF TPO II. RULE 29 III. TRANSACTION IV. INTERNATIONAL TRANSACTION V. COST/ VALUE OF TRANSACTION VI. METHODS FOR DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION VII. MARUTI SUZUKIS CASE 7.2. IN THE WAKE OF THESE CRITERIAS THE SPECIAL BENCH PROCEEDED TO DECIDE VARIOUS ISSUES BY A VERY LENGTHY ORDER, WHICH IS CONVENIENTLY REPRODUCED FOR THE SAKE OF BREVITY. THE ISSUE OF RETROSPECTIVE APPLICATION, JURISDICTION, AO/TPOS POWERS ETC. ETC. HAVE BEEN DECIDED IN FAVOUR OF REVENUE AND AGAINST THE ASSESSEE IN L.G. ELECTRONICS INDIA PVT. LTD. BY FOLLOWING OBSERVATIONS: 7.19. HERE IT IS RELEVANT 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), I.T.A. NO. 891/DEL/2010 26 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 ONE HAND AND ALSO NOT DISTURBING THE FINALITY OF ASSESSMENTS ALREADY. COMPLETED ON THE OTHER, HAS BEEN I.T.A. NO. 891/DEL/2010 27 PROPERLY ACHIEVED BY THE RESPECTIVE DATES FROM WHICH SUB-SECTIONS (2A), (2B) AND (2C) HAVE BEEN GIVEN EFFECT TO. 7.20. THE ID. COUNSEL FOR THE APPELLANT ALSO CONTENDED THAT IF SUB- SECTION (2B) IS CONSIDERED AS RETROSPECTIVE IN OPERATION, THEN ALL OTHER SUB-SECTIONS OF SEC. 92CA WILL LOOSE 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 I.T.A. NO. 891/DEL/2010 28 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 THAT ONE INTERNATIONAL TRANSACTION, ALSO COMES ACROSS CERTAIN. OTHER INTERNATIONAL TRANSACTIONS REQUIRING DETERMINATION OF ALP. THUS, REFERENCE BY THE AO TO THE TPO FOR AT LEAST ONE INTERNATIONAL TRANSACTION IS A NECESSARY STIPULATION TO ASSUME POWER FOR DETERMINING ALP IN RESPECT OF OTHER TRANSACTIONS. 7.21. ANOTHER POINT URGED BY THE LD. COUNSEL FOR THE APPELLANT WAS THAT SUB-SEC. (I) REQUIRES MAKING A REFERENCE BY THE AO WITH THE PREVIOUS APPROVAL OF THE COMMISSIONER. IT WAS CONTENDED THAT INSOFAR AS SUO MOTU EXERCISE OF POWER BY THE TPO ON OTHER INTERNATIONAL TRANSACTIONS IS CONCERNED, THE REQUIREMENT OF SEEKING APPROVAL FROM THE CIT WILL BE LACKING, RENDERING THE ASSUMPTION OF JURISDICTION BY THE TPO OVER I.T.A. NO. 891/DEL/2010 29 SUCH OTHER INTERNATIONAL TRANSACTIONS AS INVALID. HERE AGAIN WE FIND OURSELVES 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 I.T.A. NO. 891/DEL/2010 30 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 REPORT, VIZ., WHICH IS AN INTERNATIONAL TRANSACTION AS. PER ASSESSEE'S VERSION AND WHICH IS NOT SO, HAS NO STATUTORY SANCTION. THERE IS NO SUCH CUE, EVEN REMOTELY, IN THE LANGUAGE OF SUB-SEC. (2B). THE REFERENCE TO INTERNATIONAL TRANSACTION IN SUB-SEC. (2B), FOR WHICH THE ASSESSEE HAS NOT FURNISHED REPORT U/S 92E IS UNQUALIFIED. IF WE INTERPRET SUB-SEC. (2B) IN THE WAY SUGGESTED BY THE ID. AR, IT WOULD 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 I.T.A. NO. 891/DEL/2010 31 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 INTERNATIONAL TRANSACTION NOT REFERRED BY THE AO, WHEREAS SUB-SEC. (2B) IS A SPECIAL PROVISION LIMITED IN ITS SCOPE ONLY TO SUCH INTERNATIONAL TRANSACTIONS IN RESPECT OF WHICH THE ASSESSEE DID NOT FURNISH REPORT U/S 92E. WE HAVE THOROUGHLY DISCUSSED ELSEWHERE IN THIS ORDER THAT WHEN THERE IS SPECIAL PROVISION GOVERNING A PARTICULAR TYPES OF CASES, THEN SUCH CASES STAND EXCLUDED FROM THE GENERAL PROVISION GOVERNING ALL THE CASES. AS SUCH WE ARE OF THE CONSIDERED OPINION THAT THE SCOPE OF SUB-SEC. (2B) COVERS ALL TYPES OF I.T.A. NO. 891/DEL/2010 32 INTERNATIONAL TRANSACTIONS IN RESPECT OF WHICH THE ASSESSEE HAS NOT FURNISHED REPORT, WHETHER OR NOT THESE ARE INTERNATIONAL TRANSACTIONS AS PER THE ASSESSEE'S VERSION. THE CONTENTION OF THE LD. COUNSEL IN THIS REGARD IS THUS SANS MERITS AND IS HEREBY REJECTED. WE WANT TO CLARIFY THAT 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 I.T.A. NO. 891/DEL/2010 33 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 REIMBURSEM ENT OF ADVT. EXPENSES OF LGEIL BY THE AE TO THE FILE OF THE TPO. THE TPO SHALL EXAMINE THE SAME, IN LIGHT OF THE SPECIAL BENCH DECI SION AS REFERRED ABOVE. ACCORDINGLY, THE ISSUE STANDS REMI TTED TO THE FILE OF THE TPO. NEEDLESS TO ADD THAT THE ASSESSEE SHO ULD BE GRANTED ADEQUATE OPPORTUNITY OF BEING HEARD. 19. APROPOS APROPOS APROPOS APROPOS ISSUE OF PROVISION FOR WARRANTY EXPENSES AMOUNTING ISSUE OF PROVISION FOR WARRANTY EXPENSES AMOUNTING ISSUE OF PROVISION FOR WARRANTY EXPENSES AMOUNTING ISSUE OF PROVISION FOR WARRANTY EXPENSES AMOUNTING TO RS. 46,152,287/ TO RS. 46,152,287/ TO RS. 46,152,287/ TO RS. 46,152,287/- -- - ON THIS ISSUE ASSESSING OFFICER MADE DISALLOWANCE OF PROVISION MADE ON ACCOUNT OF SERVICE WARRANTY AMOUNT ING TO RS. 46,152,287/-, WHEREIN THE ASSESSING OFFICER HAS HE LD THAT THE COMPUTATION OF THE PROVISION IS HYPOTHETICAL AND NO T MATURED. 20. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCO ME 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 C OMPARED TO THE EARLIER YEARS, IN LIGHT OF THE EARLIER YEARS APPE LLATE ORDER AND RESPECTFULLY FOLLOWING THE DECISION OF THE ITAT IN ASSESSEES OWN CASE HE DELETED THE ADJUSTMENTS MADE BY THE ASSESSING OFFICER IN THIS REGARD. I.T.A. NO. 891/DEL/2010 34 21. AGAINST THIS ORDER THE REVENUE IS IN APPEAL BEF ORE 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 ASSESSEES OWN CASE IN I.T.A. NO. 3823/ DEL/2009 A.Y. 2003-04. THE TRIBUNAL HAS ADJUDICATED THE ISSUE VID E 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 OBSE RVED THAT THE SAME WAS A PROVISION AND WAS NOT ALLOWAB LE. 33. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOME TAX (A) CONSIDERED THE LD. COMMISSIONER OF INCOME TAX (A)S ORDER AS WELL AS ITAT ORDER IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03. HE NOTED THAT WHILE ADJUDICATING THIS ISSUE RELIANCE H AS BEEN PLACED ON HONBLE APEX COURT DECISION IN THE CASE BHARAT EARTH MOVERS VS. C.I.T. 245 ITR 428 AN D DELHI HIGH COURT DECISION IN THE CASE OF C.I.T. VS. VINITECH CORPORATION PVT. LTD. 278 ITR 377 AND ACCORDINGLY, ASSESSEES APPEAL HAS BEEN ALLOWED. CONSIDERING THE ABOVE, LD. COMMISSIONER OF INCOME TAX (A) ALLOWED THE ASSESSEEES APPEAL IN THIS REGA RD. 34. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEA L BEFORE US. I.T.A. NO. 891/DEL/2010 35 35. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT O F THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. BOTH THE COUNSEL FAIRLY AGREED THAT THE ISSUE IS 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 I.T.A. NO. 891/DEL/2010 36 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. THESE FIGURES CLEARLY EXHIBITED THAT THE ASSESSEE HAD INCURRED EXPENDITURE RESULTING FROM THE WARRANTY CLAUSE TO THE EXTENT OF MORE THAN 2% OF ITS TOTAL SALES IN THE PREVIOUS YEAR. THERE WAS NOTHING ON THE RECORD WHICH COULD SUGGEST THAT THE CHANGE IN THE ACCOUNTANCY WAS MOTIVATED OR WAS IMPROPER OR THAT THE PROVISION MADE IN THE ACCOUNTING YEAR 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 I.T.A. NO. 891/DEL/2010 37 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 APPELLANT COMPANY IN ITS SUBMISSION IN THE COURSE OF ASSESSMENT PROCEEDINGS AND ALSO IN THE COURSE OF APPELLATE PROCEEDINGS BUT I FIND THAT ITS TIME CLAIM IN THE YEAR UNDER CONSIDERATION IS ALLOWABLE AS PER THE RATIO LAID DOWN BY THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF CIT VS. VINITEC CORPORATION PVT. LTD. (2005)278 ITR 337 (DELHI). THE OBSERVATION MADE BY THE ASSESSING OFFICER THAT SINCE THESE PROVISIONS HAVE NOT BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, THEY STAND DISALLOWED UNDER SECTION 37(1) OF THE INCOME TAX ACT, 1961 AND ALSO THEY ARE BASED ON THE SALES WHICH ARE TOTALLY UNPREDICTABLE TO BE DETERMINED HAVE BECOME IRRELEVANT AFTER THE DECISION OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF VINITEC CORPORATION PVT. LTD .. I.T.A. NO. 891/DEL/2010 38 APPELLANT'S APPEAL ON THIS 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 ASSESSEES 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 ASSESSEES 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 I.T.A. NO. 891/DEL/2010 39 (A). ACCORDINGLY, WE UPHOLD THE SAME. 24. SINCE THE ISSUE INVOLVED IS COVERED IN FAVOR OF THE ASSESSEE BY THE ITAT DECISION IN ASSESSEES OWN CASE AS ABO VE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. COMMISSION ER OF INCOME TAX (A). ACCORDINGLY, WE UPHOLD THE SAME. 25. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11/10/2013. SD/- SD/- [ [[ [RAJPAL YADAV] RAJPAL YADAV] RAJPAL YADAV] RAJPAL YADAV] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL JUDICIAL JUDICIAL JUDICIAL MEMBER MEMBER MEMBER MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 11/10/2013 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES I.T.A. NO. 891/DEL/2010 40