Nike India Pvt Ltd vs DCIT (ITAT Bangalore)
The AO noticed that the assessee has claimed deduction for ‘Provision for sales returns’. When enquired, the assessee submitted that it creates a provision for anticipated sales returns based on a percentage of the sales made each month. It was further submitted that the provision is created only towards the margin of the anticipated sales returns. It was explained that in the subsequent year, the actual sales returns are compared with the provision made in the books and the excess provision, if any, is reversed. The AO took the view that the provision so made is not towards an ascertained liability and hence it is contingent in nature. The AO also observed that the assessee is estimating the probable sales return on the basis of its own data. Accordingly, he held that the provision for sales return is not allowable as deduction u/s 37 of the Act. The Ld DRP also confirmed the same in both the years.
The Ld A.R submitted that the provision is created on the basis of reliable estimate made on scientific basis and hence it is allowable as deduction. In this regard, he placed his reliance on the decision rendered by Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd (2009)(180 taxmann 422) and the decision rendered by Hon’ble Karnataka High Court in the case of Apple India Private Ltd (ITA No.204/2008). He also relied upon the decision rendered by Hon’ble Karnataka High Court in the case of Wipro GE Medical Systems (ITA Nos. 438, 444/2002), wherein it was held that the provision for warranty is not a contingent liability and is allowable as deduction. He further submitted the assessee is required to provide for liability as per Accounting Standard 29 titled as “Provisions, Contingent liabilities and Contingent Assets”. He submitted that if the provision is estimated by using substantial degree of estimation, the same is allowable as deduction. He submitted that the assessee is estimating the provision for sales returns on a scientific basis and the provision is restricted to margin portion of the anticipated sales returns. The Ld A.R submitted that the assessee, while making sales, gives unlimited right of return. Hence it would be appropriate to make a suitable provision for returns based on previous experience. Accordingly he submitted that the provision for sales return is allowable as deduction u/s 37(1) of the Act.
We heard Ld D.R on this issue and perused the record. It is the submission of the assessee that it is providing for sales returns on a scientific basis on substantial degree of estimation. It has taken support of Accounting Standard 29 (AS 29) relating to “Provisions, Contingent Liabilities and Contingent assets”. AS 29 explains that a “provision” should be recognized when
– an enterprise has a present obligation as a result of past event.
– It is probable that an outflow of resources embodying economic benefit will be required to settle the obligation and
– A reliable estimate can be made of the amount of the obligation.
A careful perusal of the above said definition of “provision” given in AS 29 would show that there should exist a “present obligation” as a result of “Past event”. The question here is whether the “Provision for sales return” would satisfy above said requirement?
Whether “Provision for sales return” can fall under the category of “Present obligation as a result of past event”?. The present obligation as a result of past event contemplates that there has occurred some event in the past and the same would give rise to some obligation to the assessee and further the said obligation should exist as on the Balance Sheet date. The prudence principle in accounting concepts mandates that an assessee should provide for all known losses and expenses, even though the exact quantum of loss/expense is not known.
However, we notice that the facts available in the instant case are different. The assessee has effected sale of products and accordingly, recognized revenue arising on such sales. By making “provision for sales return”, what the assessee sought to do is to de-recognise the revenue so recognized by it earlier. There should not any dispute that the “past event” in the instant case is “Sales” and not “Sales return”. When there is no past event, the question of “present obligation out of such past event” does not arise. Hence, we are of the view that the provision for sales return does not represent present obligation arising as a result of past event. Rather, it is an expected obligation that may arise as a result of a future event. Accordingly, we are of the view that the ‘Provision for Sales return” would not fall under the category of “Present obligation as a result of past events”. Hence various case laws relied upon by the assessee and the Accounting Standard 29 would not support the case of the assessee. Accordingly, we are of the view that the assessing officer is justified in holding the “Provision for sales return” as contingent liability. Accordingly we confirm the disallowance made by the assessing officer on this issue in both the years referred above.
FULL TEXT OF THE ITAT JUDGEMENT
All the appeals have been filed by the assessee and they relate to the assessment years 2007-08, 2010-11, 2011-12, 2012-13 and 2014-15. All these appeals were heard together and are being disposed of by this common order, for the sake of convenience.
2. The assessee is engaged is carrying on wholesale business in footwear, apparel and support equipments of Nike Brand in India. The assessee is a wholly owned subsidiary of Nike holding BV, Netherlands, which in turn is held by M/s. Nike Inc., USA.
3. We shall first take up the appeal filed by the assessee for the assessment year 2007-08, wherein the assessee is challenging the validity of reopening of assessment. Facts relating to this issue are stated in brief. The original assessment in the hands of the assessee for assessment year 2007-08 was completed u/s 143(3) r.w.s. 144C of the Act on 10.10.2011. Subsequently, the A.O. reopened the assessment by issuing notice u/s 148 of the Act on 26.3.2014 i.e. after expiry of 4 years from the end of the assessment year. In response to the same, the assessee requested the A.O. to treat the return originally filed u/s 139 of the Act on 31.10.2007 as the return filed in response to the notice issued u/s 148 of the Act. The assessee also requested the A.O. to furnish the reasons recorded for issue of notice u/s 148 of the Act. In response to the same, the A.O. furnished reasons to the assessee, which are extracted below:
“The assessee company M/s. Nike India Pvt. Ltd., is engaged in the business of importing footwear, Apparel, Sports Equipment & accessories for wholesale trading in India. The assessee has filed return of income declaring a loss of Rs.24,70,79,533/-. During the scrutiny assessment, after adding the ALP adjustment of Rs.10,39,95,254/- the loss was assessed at Rs.14,30,84,279/-.
The Hon’ble ITAT, in the case of the assessee, for AYs 2005-06 & 2006-07, upheld the adjustment which the TPO has made in these two years, towards reimbursement of expenses without mark-up by the assessee to its AE. The Hon’ble ITAT has confirmed the TPO’s findings that these expenditures are in fact the expenditures to be incurred by Nike Inc. US and not by the Nike India Pvt. Ltd., Nike India should not have reimbursed the same. These expenditures which were on travel, accommodation and conveyance, salary payment to employees of Nike Inc., US and cost of samples etc. are in fact the liabilities of Nike Inc., US and in view of the fact that, the nature of these expenses are such that they cannot be attributed to have been solely and exclusively incurred for the distribution business of the assessee company and that the assessee has not derived any tangible benefit from these expenses. In view of the above, these expenditures should not be debited to the P&L account by the assessee.
For A.Y. 2007-08 also the assessee company has reimbursed such expenditure amounting to Rs.4,75,49,193/- to its AE M/s. Nike Inc, USA. Therefore, I have reason to believe that the income chargeable to tax to the extent of Rs.4,75,49,193/- has
escaped assessment within the meaning of sec.147 of the I.T Act.”
4. It can be noticed that the reasons for reopening was related to the “reimbursement of expenditure” made by the assessee to its Associated Enterprises. In the original assessment proceedings, the AO/TPO had held that the expenses reimbursed were incurred for the purposes of business of the assessee only. It was accepted to be at arms length. Hence no transfer pricing adjustment was made during the course of original assessment proceedings. However, the AO has reopened the assessment of AY 2007-08 on noticing a subsequent decision rendered by Tribunal for another year, wherein T.P adjustment made in respect of identical reimbursement of expenses was upheld by the Tribunal.
5. The assessee objected to the reopening of the assessment, which was rejected by the AO. Thereafter, the A.O. completed the assessment on 14.12.2016 u/s 143(3) r.w.s.147 r.w.s. 144C(1) of the Act. It is pertinent to note that the ld. DRP did not accept the contentions of the assessee that there was change of opinion and accordingly confirmed the validity of the reopening of the assessment.
6. Before us, the Ld. A.R. submitted that the A.O. has reopened the assessment after expiry of 4 years from the end of the assessment year without mentioning that there is failure on the part of the assessee to disclose truly and correctly all material facts necessary for assessment. Further, in the reasons recorded for reopening, the A.O has clearly mentioned that the reopening was necessitated on account of the decision rendered by Income Tax Appellate Tribunal in the case of assessee for assessment years 2005-06 & 2006-07. The Ld. A.R. submitted that the assessee has submitted all the details relating to ‘reimbursement of expenses” before the A.O/TPO during the course of assessment proceedings and the same has been accepted to be at arms length. However, the A.O. has reopened the assessment only on account of a subsequent decision rendered by the Tribunal, meaning thereby, the AO has changed his opinion on the issue of reimbursement of expenses and accordingly reopened the assessment. However, there was no failure on the part of the assessee to disclose all material facts during the course of original assessment proceedings. He submitted that the subsequent order of a court cannot be taken into consideration to come to the conclusion that there was failure on the part of the assessee to disclose all material facts necessary for assessment, as held by Hon’ble Bombay High Court in the case of Sesagoa Ltd. Vs JCIT(2008) 294 ITR 101. The Ld. A.R. further submitted that it is imperative on the part of the A.O. to mention in the reasons for reopening that there was failure on the part of the assessee to disclose truly and fully all material facts, when the reopening is done after expiry of 4 years from the end of the relevant assessment year, as held by Hon’ble Madras High Court in the case of Shri Shakti Textiles Ltd. Vs. JCIT (2010) 193 Taxmann
216. Failure to record so will vitiate the reassessment proceedings. He submitted that the assessee had furnished all the relevant details to the AO during the course of original assessment proceedings and hence, there is no failure as contemplated in the proviso to sec. 147 of the Act. The Ld. A.R. further submitted that the Hon’ble Karnataka High Court has held in the case of CIT Vs. Karnataka Bank (2014) 52 Tamann.com 526 that when there is no case of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment and further where the assessing authority applied its mind and being satisfied with the claim had allowed the case of the assessee, the assessing authority could not have initiated proceedings u/s 147 of the Act, after the end of 4 years. He submitted that an identical view has been expressed by coordinate bench in the case of DCIT Vs. N.N. Dastur & Company Pvt. Ltd. (ITA No.300/Bang/2014).
7. The Ld. A.R. further submitted that the TPO has sought all details in relation to reimbursement of expenses during the course of original assessment proceedings and the assessee also furnished the same, vide its letter dated 12th April, 2020. After perusing the details so furnished the TPO/AO came to the conclusion that the ‘cost to cost’ reimbursement of expenses incurred by the assessee was for its own business purposes and accordingly, the transaction was considered to be at arm’s length. The Ld. A.R. submitted that the TPO/AO had taken a conscious view on the matter of reimbursement of expenses during the course of original assessment proceedings. However, the AO has reopened the assessment for considering the very same issue, in view of the subsequent decision rendered by the Tribunal against the assessee in assessment year 2005-06 and 2006-07. Hence, it is a clear case of change of opinion and reopening is not permissible as held by Hon’ble Supreme Court in the case of Kelvinator India Ltd. (2010) 320 ITR 561. Accordingly, the Ld. A.R. submitted that the reopening is bad in law and accordingly, the impugned assessment order is liable to be quashed.
8. On the contrary, the ld. D.R. submitted that the reopening was done by the A.O. on account of fresh facts coming to his notice as a result of order passed by the Tribunal against the assessee in assessment year 2005-06 & 2006-07. The Ld. D.R. submitted that the TPO has held the reimbursement of expenses to be at arm’s length in the original assessment proceedings based on the explanations given by the assessee that these expenses are related to the business of the assessee. However, in assessment years 2005-06 & 2006-07, the TPO had noticed that these expenses are not related to the business activities of the assessee. The view of the TPO was upheld by the Tribunal by holding that the nature of these expenses is such that they cannot be attributed to have been solely and exclusively incurred for the distribution business of the assessee. The Ld. D.R. submitted that the order so passed by the TPO/ITAT has brought fresh facts, which were not earlier considered in the original assessment proceedings. These fresh facts have led to the AO to believe that there was escapement of assessment. Accordingly, the Ld. D.R. submitted that the reopening is valid.
9. We heard the rival contentions and perused the record. A perusal of reasons for reopening recorded by the A.O., which is extracted above, would show that the A.O. has reopened the assessment as a result of order passed by the Tribunal in the assessee’s own case for assessment years 2005-06 & 2006-07, wherein the Tribunal has upheld the transfer pricing adjustment made in respect of reimbursement of expenses. It is a fact that during the year under consideration, the TPO had held in the original assessment proceedings that the reimbursement of expenses is related to the business activities of the assessee and hence are at arm’s length. Be that as it may, the undisputed fact is that reopening has been done after expiry of 4 years from the end of the assessment year, in which case the conditions prescribed in proviso to section 147 of the Act has to be satisfied by the AO before reopening of assessment. The proviso to section 147 reads as under:
“Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.”
10. Hence, it is imperative on the part of the A.O. to show that there was failure on the part of the assessee to disclose fully and truly all material facts relating to the assessment. Admittedly, no such allegation has been made by the A.O. in the reasons for reopening. The Hon’ble Madras High Court has held in the case of Shri Shakti Textiles Ltd. (supra) that the A.O. should have recorded in the reasons for reopening that there was failure on the part of the assessee to make true and full disclosure. The A.O. has not recorded that there was failure on the part of the assessee in the reasons for reopening. When there is no failure on the part of the assessee, the reopening after expiry of four years is bad in law as held by Hon’ble jurisdictional Karnataka High Court in the case of Karnataka Bank (supra).
11. In any case, we notice that the TPO/AO has taken a conscious decision on this issue on the basis of explanations furnished by the assessee. Having taken a conscious decision, it is not permissible for the AO to take a different view on the basis of subsequent decision of the Tribunal, after expiry of four years from the end of the relevant assessment year. The decision rendered by Hon’ble Bombay High Court in the case of Sesa Goa Ltd (supra) supports the case of the assessee.
12. Accordingly, we find merit in the contentions of the assessee that the reopening is bad in law for more than one reason and hence the assessment order is liable to be quashed. Accordingly, we allow the legal ground urged by the assessee and accordingly the impugned assessment order is liable to be quashed. We order accordingly.
13. We shall now take up the appeals filed for assessment year 2010-11 to 2012-13 & 2014-15.The Ld A.R advanced his arguments on issue wise, since identical additions have been made in more than one year. The Ld D.R also followed the same sequence. Accordingly, we proceed to dispose of the appeals issue-wise.
14. The first common issue relates to the T.P adjustment made in respect of Advertisement and Market Promotion (AMP) expenses other than that paid to BCCI for advertisement. This issue is being contested in AY 2010-11, 2011-12, 2012-13 and 2014-15.
14.1 The TPO took the view that the assessee is spending huge amount towards selling and marketing expenses. He also noticed that the assessee was incurring losses and further noticed that the losses have arisen mainly due to incurring of huge AMP expenses. The TPO further noticed that the average AMP expenses incurred by comparable companies was 0.76% of the sales. Accordingly, the TPO determined the above said indicator of 0.76% as the bright line. The AMP expenses incurred by the assessee included the expenses incurred in accordance with advertisement agreement entered by the assessee with “Board of Control for Cricket of India” (BCCI). In respect of the said expenditure, the assessee had also received a share from its Associated Enterprises (AE). Since the AMP expenses incurred by the assessee was far in excess of the industry average, the TPO treated the excess expenditure over and above the industry average as “non-routine expenses”.
14.2 The TPO further noticed that the assessee is sourcing its products from local manufacturers only and was using brand name NIKE, belonging its AE. Accordingly, he took the view that the non-routine AMP expenses have been incurred by the assessee for the purposes of promoting the brand name of its AE. Accordingly, he took the view that the assessee should have received reimbursement of non-routine AMP expenses from its AE with a mark-up. The TPO computed the average margin declared by some comparable companies and took the same as the “markup” margin. Accordingly he added the mark-up to the non-routine expenses and computed the amount that should have been received by the assessee from its AE. From the amount so arrived at, he reduced the reimbursement received from AE and made T.P adjustment of remaining amount.
14.3 The workings made by the TPO in various years have been extracted below:-
