Case Law Details
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.
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