TaxTMI 
TaxTMI 
2022 (3) TMI 1072
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....,289/-, which was debited to the Profit & loss account under the head 'Operating expenses'. The opening balance of the MCP was Rs. 16.49 crore. The assessee paid medical charges to the hospitals during the year amounting to Rs. 18.14 crore, leaving balance at Rs. 19.04 crore. Excess provision of Rs. 2.53 crore, created in earlier years, was reversed, giving the closing balance of the MCP at Rs. 16,51,23,783/-. The AO called upon the assessee to explain as to how the MCP was created for Rs. 20.68 crore. The assessee submitted that it had four different health packages for sale to customers during the year and there was a fixed cost involved for the medical check-ups under such packages, which was to be paid to the empanelled hospitals at the time of their performing the medical check-ups, which facility could be availed by its customers within three years from the date of sale of package. It was explained that for each Essential Care Health Checkup Package worth Rs. 4,995/-, the cost of medical check-up payable to hospitals was Rs. 830/-; for each Early Care Health Checkup Package worth Rs. 7,950/-, the cost of medical tests payable to the concerned hospitals was Rs. 2,000/-; for ea....
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....es a health package, he gets option to undergo the specified tests under the respective package from any of the hospitals empanelled with the assessee. Bill is raised by the concerned hospital on the assessee, when the customer undergoes medical check-ups. On making the payment, the assessee reverses the provision and debits the MCP. Buyer of the package has a choice to undergo medical check-ups either in that year itself or within next two years. In case the package is not availed by the customer within the stipulated period of three years, the assessee reverses the MCP at that time. The MCP of Rs. 20.68 crore was claimed to have been created by the assessee w.r.t. the number and type of packages sold during the year. The ld. AR explained that the actual medical check-up charges paid during the year amounted to Rs. 18.14 crore, which pertained not only to the packages sold during the year but also in prior two years. The MCP created at the time of sale of such packages, in respect of the customers who could not avail the medical check-ups within a period of three years of the purchase, was reversed during the year amounting to Rs. 2.53 crore and consequently offered to tax. Here, ....
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....enters into an arrangement with various delivery partners at different locations in India to help it deliver the abovementioned four types of packages through Multi Level Marketing Scheme. Under this scheme, the assessee company enters into agreement with Customer Distributors (CDs) who market its packages. The assessee pays Incentive to the CDs for selling its packages mainly under three types of business plans. The first is the Beginners plan with 100 IVPs (Indus Value Points) to whom incentive of Rs. 10,000 is paid, which gives rate of Rs. 100 per IVP. Once a Customer Distributor (CD) obtains 100 IVPs, he gets promoted to the Easy plan with 200 IVPs having Incentive payment of Rs. 15,000, which gives rate of Rs. 75 per IVP. Once a CD obtains 300 points, in total, he gets promoted to the next, viz., Leaders Plan with 400 IVPs and Incentive payment of Rs. 29,000, which gives rate of Rs. 50 per IVP. Once a CD enters into the Easy Plan by collecting 100 IVPs, he never goes back to the Beginners plan. On obtaining 300 IVPs under the second plan, the CD enters into the third plan, namely, Leaders Plan and never goes back to the earlier plans throughout his association with the assesse....
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....o in for selling the assessee's packages; the assessee did not give any acceptable and cogent reasons that on what basis and at what percentage the provision of incentive payment was made; the assessee did not provide particulars about the EDP for different packages; the calculation given by the assessee of IVPs for incentive payments had also some lapsed IVPs; and the Actuarial Valuation Report was not reliable as it was based on presumptions and figures provided by the assessee only. He, therefore, held that the Escrow Disbursement Provision made by the assessee was an unscientific calculation, not supported by any acceptable data. He also found some inconsistencies in the Actuarial Valuation Report, which was based primarily on probability factors and assumptions based on the data. The AO noticed that the assessee claimed deduction of the EDP for a sum of Rs. 23.20 crore by means of debit to its Profit and loss account as against the actual Escrow Disbursement Payment of Rs. 20.76 crore. Considering all these facts, he made an addition of Rs. 18,82,70,512/-, i.e. the closing balance of the Escrow Disbursement Provision, which was made up by the opening balance of the provision a....
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....P 10,678 4,995 5,33,36,610 2.50 650 1,625 1,73,51,750 ECP 4,760 7,950 3,78,42,000 5.00 650 3,250 1,54,70,000 EHC 701 12,999 91,12,299 9.00 650 5,850 41,00,850 ECHC 24,961 16,999 42,43,12,039 12.00 650 7,800 19,46,95,800 ECP(Come Back) 134 8,000 10,72,000 1.00 650 650 87,100 EsCP (Come Back) 253 8,000 20,24,000 2.00 650 1,300 3,28,900 a. Total Escrow Revenue 52,76,98,948 23,20,34,400 b. Non Escrow Revenue 36,94,57,327 c. Total Revenue (a +b) 89,71,56,275 d. Revenue as per Balance Sheet 89,71,56,275 e. Diff (c-d) -- 8. It can be seen from the above Table- I that the first column contains package name, next column is number of such packages sold during the F.Y. 2012-13. Next column is sale IVPs, namely, 2.5 IVPs for first pack....
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....into the second or third plan respectively, he never reverts to the first or the second plan. The net effect of this is that on collecting 300 IVPs, a CD becomes entitled to the rate incentive of Rs. 50/- per package. One a CD enters into Leader's Plan, he will continue to remain there in all the years to come. We have noticed above the number of IVPs allotted to CDs on sale of each package at 2.5, 5, 9 and 12 respectively. We have further noticed above that whenever a downline CD procures an order for a package, equal number of IVPs are allotted to all the upline CDs also and this chain continues eternally, meaning thereby that if 50th person CD downline line procures an order, all the 49 persons above him will get equal number of IVPs at 2.5 or 5 or 9 or 12 respectively depending upon the package sold. The assessee was set up in the year 2000. Most of the CDs entering into 12th year, namely, the F.Y. 2012-13 relevant to the assessment year under consideration must have entered into Leader's Plan with incentive payment of Rs. 50/- per package. As against that, the assessee has taken the figure of Rs. 65 for claiming deduction of the Escrow Disbursement Provision by computing the w....
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....plines to whom incentive was actually paid was 10. It is this number of 10 which has been picked up by the assessee for the purpose of creation of the EDP. When we examine the data of ACTUAL figures given by the assessee to the Actuary for actuarial valuation at Table - V above, it turns out that the assessee actually paid 33.60 lakh IVPs as against allotted IVPs of 182.30 lakh, which gives 18.43% for the F.Y. 2012-13. If the figures from this Table for all the five years from the F.Yrs. 2008-09 to 2012-13 are added up, the actual figure which results is that the total IVPs were allotted at 857.20 lakh against which payment was made to 159 IVPs, which gives 18.64%. As against that, the assessee has taken the figure of IVP points allotted at 47 and IVP points paid at 10, giving 21.27%. On a comparison of the above figures, it emerges that the assessee created provision at 21.27% of the IVPs allotted vis-à-vis actual paid, whereas the ACTUAL data submitted to the Actuary gives 18.62%. These calculations could not be controverted on behalf of the assessee except for putting forth that the actual figures given to the Actuary were for 5 years only, namely, F. Yrs. 2008-09 to F.Y.....
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.... expenditure is created at Rs. 100/- for which deduction is claimed in year one and in the year two, the actual expenditure happens to be Rs. 105/-, the assessee can claim deduction of Rs. 5/- in the second year for the short provision created in the year one. Similarly, there may be a situation that actual amount of expenditure against the provision in the year two falls short to Rs. 95/-. In that scenario, the excess provision of Rs. 5/- created in the year one needs to be reversed in the year two. It cannot be a situation that the amount of a provision excess created in the year one for which deduction is also claimed, remains as such without any corresponding reversal in the later years on incurring less actual expenditure. While discussing the MCP above, we have noted that the provision is created by the assessee for the known liability of medical check-ups payable to the empanelled hospitals at the specified rate(s). If a customer does not avail the facility either in the same year or in next two years, he loses his right and the consequential unutilized MCP at the end of the third year is reversed by the assessee by offering such amount for taxation. That is the raison d'etr....
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....EDP by the assessee and claiming deduction for the full amount of provision without their being any corresponding reversal of the excess provision in the subsequent years is totally flawed and against the accounting norms. With this mechanism of creating the Escrow Disbursement Provision and not writing back the excess provision, the amount of outstanding provision at the end of each year is swelling like anything, as is rightly found from the following chart placed on record by the assessee showing year-wise details of turnover and the incentive provision: Table - VI Sr. No. F.Y. Sales Revenue Opening Balance Escrow Disbursement Provision (in Rs.) Escrow Disbursement Payment (in Rs.) Closing Balance Incremental Provision 7 2006-07 111,302,400 (1,521,592) 54,287,550 38,702,625 14,063,333 15,584,925 8 2007-08 163,517,900 14,063,333 74,209,500 51,910,677 36,362,156 22,298,823 1 2008-09 259,844,700 36,362,156 114,610,737 90,577,188 60,395,705 24,033,549 2 2009-10 462,793,175 60,395,705 205,168,955 168,162,414 97,402,246 37,006,541 3 2010-11 543,022,865 ....
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....s sold. In other words, whatever amount of Incentive is paid by the assessee during the year, notwithstanding the year of sale of package, would qualify for deduction. There is a caveat to it. The assessee has been allowed deduction at the time of creation of the Escrow Disbursement Provision up to the A.Y. 2012-13. Such deduction of the provision allowed in the earlier years includes the Incentive payable to CDs during the years to come. Once deduction has been allowed at the time of creation of the EDP, allowing another deduction at the time of payment in the regime of allowing deduction on payment basis, will amount to double deduction, which is impermissible. It has been brought to our notice that the assessee maintains a complete Incentive payment record for each year indicating the respective year of the sale of packages in respect of which the Incentive is paid during the year. Thus, the amount of deduction for Incentive payment to be allowed in the year under consideration will be determined by finding out the total payments made during the F.Y. 2012-13 on this score, as reduced by the payments made in respect of packages sold up to the F.Y. 2011-12. To put it simply, the A....