GALDERMA INDIA P.LTD,MUMBAI vs. ACIT 8(1), MUMBAI

At the outset, the Ld. Counsel submitted that the issue of disallowance of provision for damaged / expired goods is covered in favour of the assessee by the Tribunal orders for the earlier years in assessee’s own case. In support, he filed the copy of the ITAT order dated 11.04.2013 passed in and 6504/Mum/2010 for the assessment years 2006-07 & 2007-08 and also the copy of order dated 16.09.2014 in ITA No. 4856/Mum/2012 for the assessment year 2009-10.

The brief fact qua the issue in the impugned appeal is that, assessee company is engaged in the business of marketing and trading of ‘dermatology products’. During the year, the assessee has claimed provision of Rs.36,77,034/- for damaged/expired goods. The AO based on the precedence of the earlier years required the assessee to show cause as to why such a provision should not be disallowed. In response, the assessee has filed detailed submission dated 10.11.2012, however, the AO rejected the said contention on the ground that, already this issue has been decided after giving detailed reasoning in the assessment orders in the assessment years 2006-07 to 2008-09, wherein this issue has been decided against the assessee and also upheld by the CIT(A).

From the perusal of the order for the assessment year 2009- 10 by the Tribunal, we find that the Tribunal has discussed this issue in the following manner : 5. The case of the assessee before learned CIT(A) was that on the basis of historic data available, a quantum of expired/damaged goods is worked out which is based on certain percentage of sale. It was also submitted that it has become industry-wise practice on the principle of match all revenue with expenses and the entire pharma industry follows the same methodology to arrive at the true profits, under mercantile system of accounting. Assessee company has also provided details of provisions made and actual 3 Galderma India Pvt Ltd F.Y. 2000 onwards and relied upon the decision of Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. Vs. CIT (314 ITR 62) wherein, Hon'ble Apex court observed that any provision which can be measured by using in substantial degree of estimation, such liability cannot be said to be provision for contingent liability and it should be treated on par with ascertained liability.

Further aggrieved, the assessee is in appeal before us.

Learned counsel appearing on behalf of the assessee placed before us a copy of the order passed by ITAT "G" Bench, Mumbai in assessee's own case for A.Y. 2006- 07 to 2008-09 (ITA Nos. 6503 86 6504/Mum/2010 86 7633/Mum/2011 dated 11.4.2014) wherein, the Bench observed that in the case of medicines estimation is done on the basis of empirical data and it cannot be termed as contingent liability. Thus the Bench allowed the claim of the assessee by observing as under :- We have carefully perused the orders of the lower authorities and have considered the rival submissions in the light of the material evidences brought on record before us. It is not in dispute that in this line of trade, the medicines come with expiry date and many a times the medicines get expired while remaining in the shelves. It is also an undisputed fact that such medicines have to be replaced free of cost. Therefore, any provision made for these expired medicine's cannot be said to be a contingent liability Meaning thereby that every medicines sold has a corresponding obligation of replacement, such obligation is attached with the sale of medicines itself Therefore, an provision made on account of replacement/ damaged medicines cannot be termed as a contingent liability as the replacement is 4 Galderma India Pvt Ltd bound to occur. Thus, considering the nature of business of the assessee, we hold that the provision for expired / damaged goods is not a contingent liability Now the only thing remains to be decided is the quantification of such provision. In our considered view, the entries by which such provision was created have not been verified/examined by the AO at the assessment stage. We, therefore, restore this issue back to the files of the AO. The assessee is directed to substantiate its claim by explaining the necessary entries passed in its books of account. The AO is directed to verify these entries in the light of the observation of the DR that such entries amount to double deduction of the same amount if satisfied with the quantification of the provision, the Assessing Officer is directed to allow the same. Needless to mention, the Assessing Officer is expected to give a reasonable opportunity of being heard to the assessee before deciding the issue afresh in the light of our direction given hereinabove."

Learned counsel submitted that in the light of the decision cited supra, the first issue in the appeal before us deserves to be set aside and the second issue being consequential, the same would also need to be set aside to the file of the Assessing Officer for adjudication afresh. Learned Departmental Representative, on the other hand, fairly admitted that the issues stand covered by the aforecited decision.

Having regard to the circumstances of the case, we respectfully follow the decision of the ITAT, cited supra, and restore the issue to the file of the Assessing Officer with a direction to decide the issues afresh, in the light of the directions given in the case (cited supra) accordingly appeal filed by the assessee is treated as allowed for statistical purpose”.

So far as issue raised vide ground no. 2 & 4, the same relates to calculation of book profit on account of provision of damages of expired goods. As admitted by both the parties, this issue is purely consequential and will have the effect on the book profit after quantification of the amount as directed above. Thus, ground no. 2 & 4 raised by the assessee are allowed for statistical purposes.

In the result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 16th November, 2015.