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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the orders dated 28.10.13 and 09.03.2015 of the CIT(A)-15 and 55,Mumbai respectively the assessee has filed the appeals for the above mentioned two AY.s. Assessee- company is engaged in the business of marketing and support services, trading in imported beer and wine etc. The details of filings of return, returned incomes ,assessed income can be summarised as under :- A.Y. ROI filed on Returned Income(Rs.) Assessment dt. Assessed Income (Rs.) 2008-09 28/09/2008 Rs.8.74 crores 30.01.2012 (-)Rs.2.71 crores 2009-10 30/09/2009 Rs.27.95 crores Nil (-)Rs.22.01 crores ITA/7576/Mum/2013,AY-08-09: 2.First Ground of appeal is about confirming he disallowance in respect of provision under the head sales promotion(Rs.18.79 lakhs),distribution and scheme cost Rs.4.54 lakhs and commitment charges(98.54 lakhs).During the assessment proceedings the AO directed the assessee to file details of provisions/contingencies debited to the P&L account.Vide its letter dtd.24/11/2011,it filed the necessary details.The AO called for further details in that regard. After considering same he observed that many of the expenses were unpaid as on 31.3.2009, that the assessee had not payment of such amt even after more than one year from the date when the provisions were created.Vide order sheet noting dated 02.12.2011 he directed the 7576/13 & 4306/15-Molson Coors Cobra India Pvt.Ltd. (08-09) & (09-10)
assessee to justify the claim made by it.With regard to provisions for sales promotion the assessee had contended that expenses were on account of free beer bottles under various schemes to its customers.The AO observed that there was no reason for the expenses to remain outstanding after more than one year, that the promotional schemes were for very short period that the corresponding pay outs/benefits had to be given immediately, that otherwise the very purpose of sales promotion would be defeated, that the assessee had not specifically pointed out any reason for inordinate delay, that it had only referred to certain disputes, finally he made a disallowance of Rs.18,79,711/- under the head provisions for sales promotion scheme.With regard to provision for distribution and scheme cost the assessee had contended that the expenses were on account of validation of excise permits, merchandise expenses etc. for distribution of products the AO observed that assessee had not explained the reasons for keeping the expenses outstanding for more than one year, that there was no proof of disputes as claimed by the assessee,that the assessee would not be able to carry on his business if excise particulars were not validated. He made a disallowance of Rs.4,54,288/- (Rs.1,50, 88,895-Rs.1,46,34,607).With regard to provision for commitment charges the assessee contended before the AO that negotiations were going on with the breweries for waiver of commitment charges.He held that the commitment charges had not crystallized during the year under appeal.That the amount to two of the breweries had not been paid till 31.3.2009. Finally,he made a disallowance of 98, 54,804/- and added it back to the income of the assessee. 3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA)and made elaborate submissions before him. After considering the submission of the assessee and the assessment order,the FAA held that the assessee had admitted that by the close of the FY.debit notes were not received and hence payment could not be made, that the AO had made disallowance to the provisions only to the extent of the amount which was not paid. He referred to the case of Bharat Earth Movers and held that the provisions made on the basis of happening of a future certain event only could be allowed, the assessee did not produce any document on the basis of which it had made the provisions, that it had admitted that supporting documents were pending on last day of FY, that in majority of the transaction the provisions had been reversed in the subsequent AY.s.Finally, he upheld the order of the AO. 4.During the course of hearing before us the Authorised Representative(AR)argued that it had sub contracted the brewery and sales operation to breweries,that the distributor would incur 7576/13 & 4306/15-Molson Coors Cobra India Pvt.Ltd. (08-09) & (09-10) sales promotion and distribution and scheme cost expenses, that it would reimburse the same as and when debit notes were received along with the necessary supporting evidences, it had created provisions for such sales promotions and distribution and scheme cost expenses based on the sales affected during the year and the past expenses, that in certain cases there had been delay in approval of the debit notes, that the assessee was following the same system since past several year, that assessee had incurred huge cash losses during the year and in the earlier years, that due to insufficient funds payments were delayed in certain cases, that the AO was not justified in disallowing the provisions on the ground that payments were not made immediately,that provisions created were reversed in subsequent years and were offered to taxes.It gave details of provisions that were reversed and that were unpaid till the filing of appeal.Similar contentions were made about the other two provisions.He also referr - ed to Accounting Standard -29(AS-29) and stated that revenue authorities were not justified in disallowing the provisions.The Departmental representative (DR) supported the order of the FAA. 5.We have heard the rival submissions and perused the material before us and find that the FAA had upheld the disallowance made by the AO on account of sales promotion, distribution and scheme cost and commitment charges, that the assessee had claimed that it was following the same method for last so many years and had complied with the provisions of AS-29.In our opinion provisions can be allowed/disallowed depending upon the facts of the case.The Hon’ble Apex Court in the court of Rotork Controls India (314ITR66) has laid down the principles about provisions.We would like to reproduce the relevant portion of the judgment and it reads as follows:- 11. What is a provision ? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event ; (b) it is probable that an outflow of resources will be required to settle the obligation ; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.
Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that are recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item, the provision for warranty 7576/13 & 4306/15-Molson Coors Cobra India Pvt.Ltd. (08-09) & (09-10)
could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling valve actuators. They are in the business from the assessment years 1983-84 onwards. Valve actuators are sophisticated goods. Over the years the appellant has been manufacturing valve actuators in a large numbers. The statistical data indicates that every year some of these manufactured actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. Therefore, the warranty became integral part of the sale price of the valve actuator(s). In other words, the warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, the warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all the three conditions for recognition of a provision are satisfied in this case.
In this case, we are concerned with product warranties. To give an example of product warranties, a company dealing in computers gives a warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred ; (b) it makes a provision for warranty only when the customer makes a claim ; and (c) it provides for warranty at 2 per cent. of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on the matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When valve actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is the most appropriate because it fulfils accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing the relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilised at the end of the period prescribed in the warranty. Therefore, the company should scrutinise the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at the year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant 4 7576/13 & 4306/15-Molson Coors Cobra India Pvt.Ltd. (08-09) & (09-10)
has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under section 37 of the 1961 Act. Therefore, all the three conditions for recognising a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are provisioning which relates to the present obligation, it arises out of obligating events, it involves outflow of resources and, lastly, it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case. XXXX 18. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation. As stated above, the case of Indian Molasses Co. [1959] 37 ITR 66 (SC) is different from the present case. As stated above, in the present case we are concerned with an army of items of sophisticated (specialised) goods manufactured and sold by the assessee whereas the case of Indian Molasses Co. [1959] 37 ITR 66 (SC) was restricted to an individual retiree. On the other hand, the case of Metal Box Company of India [1969] 73 ITR 53 (SC) pertained to an army of employees who were due to retire in future. In that case, the company had estimated its liability under two gratuity schemes and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out its estimated liability on actuarial valuation. It had made provision for such liability spread over to a number of years. In such a case it was held by this court that the provision made by the assessee-company for meeting the liability incurred by it under the gratuity scheme would be entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The same principle is laid down in the judgment of this court in the case of Bharat Earth Movers [2000] 245 ITR 428. In that case, the assessee-company had formulated leave encashment scheme. It was held, following the judgment in Metal Box Company of India [1969] 73 ITR 53 (SC), that the provision made by the assessee for meeting the liability incurred under the leave encashment scheme proportionate with the entitlement earned by the employees, was entitled to deduction out of gross receipts for the accounting year during which the provision is made for that liability. The principle which emerges from these decisions is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 of the 1961 Act. It would all depend on the data systematically maintained by the assessee.” We are of the opinion that in light of the above discussion the matter should be restored back to file of AO for fresh adjudication.He would afford a reasonable opportunity of hearing to the assessee and decide the matter in the light of above judgment of Hob’ble Apex Court. Ground No.1 is decided in favour of the assessee ,in part.
6.Ground No.2 is consequential to Ground No.1 and stands allowed for Statistical Purposes.
7.Third Ground of appeal deals with Transfer Pricing (TP) adjustments of Rs.4.74 crores. During the course of hearing before us,representatives of both the sides agreed that on the Tribunal,on 10.2.2016 (ITA/7119/Mum/2012-AY 07-08)on identical issue, had restored the matter to the file of the AO.We find that Grounds of appeal raised by assessee for the year under consideration are similar to the Ground filed by it for the earlier AY.We are reproducing para no.3-8 of the above order of the Tribunal and same read as under :- 5 7576/13 & 4306/15-Molson Coors Cobra India Pvt.Ltd. (08-09) & (09-10)
3. Briefly stated relevant facts of the case are that the assessee is a subsidiary of Cobra Beer Ltd., UK (Cobra UK) engaged as a marketing service for Cobra brand of products in India. Assessee received Rs. 5,96,76,996/- from Cobra-UK for the same. Cobra India brews beer in India through local contract manufacturer. Assessee recorded the international transactions and one of such transactions relates to the above „reimbursement of expenses (AMP expenses)‟ incurred on behalf of Cobra Beer Ltd, UK. Unsatisfied with the TP studies of the assessee, TPO benchmarked these transactions and suggested an addition of Rs. 1,59,54,395/- vide his order dated 22.10.2010. AO, vide order dated 2.2.2011, made the above addition as per para 7 of his order.
During the proceedings before the first appellate authority, the said adjustment was questioned vide ground nos. 1 to 6 of appeal before the CIT (A). Elaborate submissions were made in this regard which were extracted in the order of 3 the CIT (A). The summary of the same was provided in para 4.3 of his order. Eventually, CIT (A) rejected the assessee‟s claim in matter of bifurcation of marketing expenses into value addition and non-value added components or extraordinary / routine cost and made adjustment. CIT (A) also considered the Bright Line Test (BLT) on the royalty income and rent in calculating the deducion instead of considering the total sales of the assessee. Aggrieved with the above, the assessee is in appeal before the Tribunal against the above conclusions and raised various arguments. 5. At the outset, Ld Counsel for the assessee submitted that the impugned order being dated 10.9.2012 by the CIT (A) was passed prior to the judgment of the Hon‟ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT [374 ITR 118] and Maruti Suziki India Limited vs. CIT in 2014 and ITA 710/2015, dated 11th December, 2015 and the coordinate Bench decision of the ITAT in the case of M/s. Johnson & Johnson Limited vs. ADIT vide I.T.A. No.829/M/2014 (AY 2009-2010), dated 07.01.2016. Summarising the above, Ld Counsel for the assessee submitted that the Ground no.2 with its sub-grounds are required to be set aside and remanded to the file of the AO / TPO for fresh adjudication following the guidelines mentioned by the Hon‟ble Delhi High Court in the above referred cases. Otherwise, it is the case of the assessee that AMP expenses constitute 40% of the sales and the assessee received from the AEs only to the extent of 7% which was not accepted by the Revenue Authorities. He further submitted that the BLT is not the approved method for benchmarking the above mentioned international transactions. 6. On the other hand, Ld DR for the Revenue relied on the orders of the Revenue Authorities. 7. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. We have considered the submissions of the Ld Counsel that under the factual matrix of this case, the issue of benchmarking the AMP transactions was remanded in the case of M/s. Johnson & Johnson Limited (supra) and judgment of the Hon‟ble Delhi High Court in the case of Perfetti Van Melle India Pvt Ltd vs. DCIT in ITA 4 No.407/Del/2015 (AY 2010-2011), dated 2.6.2015. The undersigned is a party to the said decision of the Tribunal in the case of M/s. Johnson & Johnson Limited (supra). For the sake of completeness of this order, relevant paras from the said Tribunal‟s order dated 7.1.2016 is extracted and placed as under:- “6. We have heard both the parties on this issue of benchmarking the AMP expenses qua the brand development and find the AO / TPO relied heavily on the Special Bench decision of ITAT, Delhi in the case of L.G. Electronics India Pvt Ltd (supra) in making the adjustments and in applying the „BLT‟ in benchmarking the AMP expenditure. It is an undisputed fact that the Hon‟ble Delhi High Court has rendered a judgment in the case of Sony Ericsson Mobile Communications India Pvt Ltd (supra), reversing the said Special Bench decision in the case of L.G. Electronics (supra). As on today, the „BLT‟ is not to be applied in such benchmarking exercise of the AMP expenditure. AP / TPO is statutorily bound to apply the existing methods mentioned in the IT Act, 1961 / IT Rules, 1962. We, accordingly, remand the issue, that revolves around the TP adjustment of Rs. 133.02 (rounded of), to the file of the AO / TPO to benchmark these transactions, if necessary in the light of the guidelines specified in the precedents enunciated by the Delhi High Court (supra). Further, TPO is directed to apply all the principles laid down by the Hon’ble Delhi High Court in the case of Maruti Suziki India Limited vs. CIT in ITA No. 110/ 2014 and ITA 710/2015, 7576/13 & 4306/15-Molson Coors Cobra India Pvt.Ltd. (08-09) & (09-10) dated 11 th December, 2015 in the remand proceedings in the matters of the requirement of benchmarking the AMP transactions.”
We also find that the judgments of the Hon‟ble Delhi High Court in the case of Sony Ericsson Mobile Communications Pvt Ltd (supra) and Maruti Suziki India Limited (supra) are also considered while remanding the above case (M/s. Jhonson and Jhonson) to the file of the AO for necessary adjudication. With similar directions, we remand Ground no.2 with its sub- grounds of the present appeal to the file of the AO for benchmarking the relevant international transactions. Accordingly, Ground no.2 with its sub-grounds raised by the assessee are allowed for statistical purposes.” Respectfully following the same we are setting aside the issue to the file of the AO for fresh adjudication.He would afford a reasonable opportunity of hearing to the assessee.Third Ground of appeal raised by the assessee is allowed in part. ITA/4306/Mum/15-AY.09-10: The assessee has raised identical grounds of appeal for the year under appeal-the only difference is that provisions were made under two heads only i.e.sales promotion and distribu -tion and scheme cost.Besides the assessee has challenged the order of the FAA with regard to TP adjustment,of Rs.5.71 crores,on the identical grounds. Following our order for the last AY.,we restore back both the issues to the file of the AO for fresh adjudication,who would afford a reasonable opportunity of hearing to the assessee..