TMI Blog2017 (3) TMI 1723X X X X Extracts X X X X X X X X Extracts X X X X ..... afford a reasonable opportunity of hearing to the assessee.Third Ground of appeal raised by the assessee is allowed in part - I.T.A. /7576/Mum/2013, I.T.A. /4306/Mum/2015 - - - Dated:- 15-3-2017 - Sh. Rajendra,Accountant Member and Pawan Singh, Judicial Member For The Revenue : Shri Saurabh Deshpande-DR For The Assessee : Shri Riaj Thingna and Ms.Vaishali Mane-AR PER RAJENDRA, AM 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. Assesseecompany 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation. If these conditions are not met, no provision can be recognized. 12. 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. 13. 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 could constitute a contingent liability not entitled to ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sisting 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 pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturer. 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 ₹ 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. 4. 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 appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ₹ 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, dated 11 th December, 2015 in the remand proceedings in the matters of the requirement of benchmarking the AMP transactions. 8. We also find that the judgments of the Hon ‟ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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