HINDUSTAN COCA-COLA MARKETING COMPANY PVT. LTD.,GURGAON vs. DCIT, NEW DELHI

This appeal is filed by the assessee against the order of the ld CIT (A)-X, Delhi dated 29.09.2014 for the Assessment Year 2006-07, raising the only issue in the appeal that the ld CIT (A) has erred in restricting the disallowance on account of excess shortage/ breakage to 30% merely following appellants own case decided by the ld CIT (A) in subsequent years (AY 2008-09). The contention in the ground of appeal of the assessee is that ld CIT(A) has failed to appreciate that the expenditure incurred by the appellant due to pulling back of inventory from the market on account of expiry of product are normal business expenditure allowable as deduction in accordance with the provisions of the Act.

Brief facts of the case shows that the assessee is a company engaged in the business of trading of non-alcoholic beverages. It filed its return of income on 30.11.2006 declaring a loss of Rs. 25,80,27,830/-. The issue in this appeal is disallowance of write off excess shortage of the inventory by the assessee. The fact shows that during the year under consideration it was seen that as compared to the earlier year Assessee Company had claimed excess breakage and shortage. In its reply dt. 23/12/2008 the assessee company had given reasons for substantial increase in shortage. As per assessee, approximately 60000 cases were destroyed to floods in Mumbai and against the damages insurance amount of Rs. 1.12 crores were received and shown as other income. Approx. 100000 cases were pulled back by the assessee from market in view of exceptional quality issues. The assessee was asked to adduce evidence and explain nature of these exceptional quality issues. It was further asked as to whether any claim was launched before Hindustan Coca Cola Beverages Pvt. Ltd., the company that manufactures the good for raising the quality issue. In reply dt. 26/12/2008 the assessee changed its stand and claimed that the pulling back of inventory from the market was on account of expiry of the products i.e. best before date [BBD] and that no claim has been made because risk and rewards of the products are attached to the assessee company. Ld AO considered it and found to be unsatisfactory for the reason that firstly, the assessee company claimed that the products were removed from the market due to exceptional quality issue but when it was asked to produce the evidences, it changed its stand and claimed the loss on account of expiry date of the product. The fact of the matter is that in this type of business every year there would be products having expired shelf life. This is a normal shortage, which arises to all the companies engaged in this type of trade. The assessee company did not produce any evidence to show that the risk of stock was its own. It never produced any agreement with its distributors to show that it was obliged to even bear losses on account of sales already made to the distributors for best before date stock. In these circumstances and further with no evidence produced to actually Page | 2 substantiate the claim that these stocks were really called back from the market and in absence of any claim being made on the manufacturing company which is normal in such type of business, the ld AO held that the claim of exceptional inventory loss worth Rs. 20898501/- is not acceptable and addition of Rs. 2089501/- is made to the income of the assessee.

This issue was challenged before the ld CIT(A) who dealt with this issue as under:- “Ground No.5 of appeal is against the addition of Rs.2,08,98,501/- by by disallowing the deduction claimed on account of shortage in stock due to the pulling back of inventory from the market on account of the expiry of date of product. Before the A.O., the appellant has claimed that 60,000 cases were destroyed in floods in Bombay and against the damages, insurance amount of Rs.1.12 crores was received and shown as other income. Further, one lakh cases were pulled back by the appellant from the market in view of exceptional quality issues i.e. on account of expiry of the product (best before date) and no claim has been made because risk and rewards are attached to the appellant company. However, no evidences were produced before the A.O. in the shape of any agreement with the distributors and, therefore, exceptional inventory loss claimed by the appellant was disallowed by the A.O. During the appellate proceedings, the appellant submitted the same arguments which were forwarded by it before the A.O. However, it was argued that to maintain the brand value of the product, such action on the part of the appellant was necessary. Therefore, the claim was allowable. On considering the facts of the case, it was observed that the appellant had made similar claim in A.Y. 2008-09 wherein Ld.crr(A)-XV, New Delhi in the appellant's own case in A.No.386/10-11 dt. 27-01-2014 for A.Y. 2008-09 have given the following findings: "On careful consideration of the facts of the case, I find that keeping in view the nature of the products of the appellant company i.e. bottling and sale of various beverages of the Coca Cola brand, breakage of bottles in transit cannot be ruled out. Such breakage is also due to mishandling, and in terms of BDD policy of the company, certain products which have out-lived the prescribed expiry date, need to be destroyed. The appellant has furnished details of such losses incurred during the current year and informed that during the current year, the loss was 0.3% of the stock which is much lower than 0.5% of the stock as in the immediately preceding previous year. In respect of the breakage of the inventory losses, the appellant could only furnish the details in Page | 3