2017 (3) TMI 1723 - AT - Income Tax

ITAT remands sales promotion provisions & TP adjustments for fresh adjudication by AO. Assessee's appeals partly allowed.

Molson Coors Cobra India Private Limited (erstwhile Cobra Indian Beer Pvt. Ltd.) Versus DCIT, Circle 3 (1), Mumbai

The ITAT restored the matter of disallowance of provisions for sales promotion, distribution, and scheme cost, and commitment charges to the AO for fresh ... Disallowance in respect of provision under the head sales promotion,distribution and scheme cost and commitment charges - Held that:- 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 (2009 (5) TMI 16 - SUPREME COURT OF INDIA) has laid down the principles about provisions - 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. - Decided in favour of assessee for statistical purposes. TP Adjustment - AMp expenses - Held that:- 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 Issues Involved:1. Disallowance of provisions for sales promotion, distribution and scheme cost, and commitment charges.2. Transfer Pricing (TP) adjustments.Detailed Analysis:1. Disallowance of Provisions for Sales Promotion, Distribution and Scheme Cost, and Commitment Charges:The assessee challenged the disallowance of provisions for sales promotion (Rs. 18.79 lakhs), distribution and scheme cost (Rs. 4.54 lakhs), and commitment charges (Rs. 98.54 lakhs). The Assessing Officer (AO) had directed the assessee to file details of provisions/contingencies debited to the P&L account. Despite the assessee's submission, the AO observed that many expenses remained unpaid as of 31.3.2009, and disallowed the provisions due to the inordinate delay in payments and lack of specific reasons for the delay.The First Appellate Authority (FAA) upheld the AO's decision, referencing the case of Bharat Earth Movers and stating that provisions could be allowed only if based on the happening of a future certain event. The FAA noted that the assessee admitted that supporting documents were pending on the last day of the FY and that many provisions were reversed in subsequent years.During the ITAT hearing, the assessee argued that the provisions were based on sales affected during the year and past expenses, and that delays were due to insufficient funds and delayed approval of debit notes. The assessee also referenced Accounting Standard-29 (AS-29) to justify the provisions. The ITAT noted the principles laid down by the Hon’ble Apex Court in Rotork Controls India (314 ITR 66), which defined a provision as a liability measured by estimation, requiring a present obligation from a past event, probable outflow of resources, and a reliable estimate of the obligation.The ITAT decided to restore the matter to the AO for fresh adjudication, directing the AO to afford a reasonable opportunity of hearing to the assessee and decide the matter in light of the Supreme Court judgment. Ground No.1 was decided in favor of the assessee, in part.2. Transfer Pricing (TP) Adjustments:The assessee also challenged the TP adjustments of Rs. 4.74 crores. The ITAT noted that in a previous case (ITA/7119/Mum/2012-AY 07-08), the Tribunal had restored a similar issue to the AO. The assessee, a subsidiary of Cobra Beer Ltd., UK, had recorded international transactions related to reimbursement of expenses (AMP expenses) incurred on behalf of Cobra Beer Ltd., UK. The TPO had benchmarked these transactions and suggested an addition, which the AO included in the assessment.The CIT (A) had rejected the assessee's claim regarding the bifurcation of marketing expenses and applied the Bright Line Test (BLT) for calculation. The ITAT noted that the CIT (A)'s order was passed prior to the judgments of the Hon’ble Delhi High Court in Sony Ericsson Mobile Communications India Pvt Ltd vs CIT and Maruti Suzuki India Limited vs. CIT, which impacted the benchmarking of AMP transactions.The ITAT decided to remand the issue to the AO/TPO for fresh adjudication, following the guidelines specified by the Delhi High Court and the ITAT in similar cases. The AO/TPO was directed to apply the principles laid down by the Delhi High Court in the remand proceedings. Ground No.2 was allowed for statistical purposes.Conclusion:For the AY 2008-09, the ITAT restored the matter of disallowance of provisions for sales promotion, distribution and scheme cost, and commitment charges to the AO for fresh adjudication. Similarly, the issue of TP adjustments was also remanded to the AO for fresh adjudication. The appeals filed by the assessee for both AYs were partly allowed.Order pronounced in the open court on 15th March 2017.