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TMI Blog2017 (3) TMI 1723X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 X X X X Extracts X X X X X X X X Extracts X X X X ..... eal 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 contracted the brewery and sales operation to breweries,that the distributor would incur sales promotion and distribution and scheme cost expenses, that it would reimburse the same as and when debit notes were received along with the nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bodying 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 deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilised at the end of the period prescribed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icated (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. The same principle is laid down in the judgment of this court in the case of Bharat Earth Movers [2000] 245 ITR 428. In that case, the assessee-company had formulated leave encashment scheme. It was held, following the judgment in Metal Box Company of India [1969] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appeal before the Tribunal against the above conclusions and raised various arguments. 5. At the outset, Ld Counsel for the assessee submitted that the impugned order being dated 10.9.2012 by the CIT (A) was passed prior to the judgment of the Hon‟ble Delhi High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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‟ble Delhi High Court in the case of Sony Ericsson Mobile Communications Pvt Ltd (supra) and Maruti Suziki India Limited (supra) are also considered while remanding the above case (M/s. Jhonson and Jhonson) to the file of the AO for necessary adjudication. With similar directions, we remand Ground n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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