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TMI Blog2022 (3) TMI 1072X X X X Extracts X X X X X X X X Extracts X X X X ..... to decide this issue afresh by allowing deduction of the MCP created during the year on the basis of number of packages sold as reduced by the reversal of the amount of provision on the expiry of three years period from the date of sale of package for non-availing the facility of medical check-ups. Needless to say, the assessee will place on record all the necessary details in this regard to facilitate the determination of the deductible amount. Deduction us.37(1) on account of Escrow Disbursement Provision ('EDP ) - HELD THAT:- 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration exceeds ₹ 1.99 crore, as disallowed by the AO in the assessment order, the disallowance will be restricted to such a level because the Tribunal has no power to order enhancement. We, therefore, set-aside the impugned order and remit the matter to the file of the AO for doing the exercise of allowing deduction of Escrow Incentive. Appeals are allowed for statistical purposes. - ITA Nos. 1470 And 1941/PUN/2017 - - - Dated:- 21-3-2022 - Shri R.S. Syal, Vice President And Shri S.S. Viswanethra Ravi, Judicial Member For the Assessee : Shri Nikhil Pathak For the Revenue : Shri Sardar Singh Meena, Shri Piyush Kumar Singh Yadav ORDER PER R.S.SYAL, VP : These two appeals by the Revenue relate to the assessment years 2013-14 and 2014-15. We are proceeding to dispose them off by this consolidated order for the sake of convenience because of some common issue. A.Y. 2013-14 : 2. The Revenue has filed revised grounds of appeal against which no objection has been raised by the ld. AR. The first issue in this appeal is against the deletion of addition of Medical Check-up Provision (hereinafter also called `the MCP ) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , who concurred with the assessee s point of view and deleted the addition. Aggrieved thereby, the Revenue has come up in appeal before the Tribunal. 3. Having heard both the sides and gone through the relevant material on record, it is seen that the assessee claimed to have created the MCP of ₹ 20.68 crore towards medical check-up charges payable to the empanelled hospitals. The assessee was having different types of packages, namely, Essential Care Health Checkup package worth ₹ 4995/-; Early Care Health Checkup package worth ₹ 7950/-; Indus Exclusive Health Checkup package worth ₹ 12,999/-; and Exclusive and Comprehensive Health Checkup package worth ₹ 16,999/-. This provision was stated by the ld. AR to have been created on the basis of the number of the four packages sold during the year multiplied with the rate of medical tests payable to the hospitals at ₹ 830/-, ₹ 2,000/-, ₹ 4,500/- and ₹ 6,400/- under each package respectively. The MCP was created at the time of sale of the package w.r.t. the costs involved for medical check-ups under it. The assessee further submitted that the amount of the MCP was debited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing well that such details were not available before the AO, we consider it expedient to set-aside the impugned order and remit the matter to the file of the AO. We order accordingly and direct him to decide this issue afresh by allowing deduction of the MCP created during the year on the basis of number of packages sold as reduced by the reversal of the amount of provision on the expiry of three years period from the date of sale of package for non-availing the facility of medical check-ups. Needless to say, the assessee will place on record all the necessary details in this regard to facilitate the determination of the deductible amount. 4. The next issue raised in this appeal is against allowing deduction of ₹ 18,82,70,667/- us.37(1) of the Income-tax Act, 1961 on account of Escrow Disbursement Provision (hereinafter also called `the EDP ). 5. On perusal of the return filed by the assessee, the Assessing Officer (AO) observed that the EDP was appearing in the balance sheet with closing balance at ₹ 18,82,80,667/-, having two components viz., Long Term Provision Escrow Disbursement at ₹ 16,38,72,155/- and Short Term Provision Escrow Disbursement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upline gets IVPs on sale of a package by any of the downlines. When B, C or D sells the packages, CD-A also gets IVPs depending upon the package sold. This has been set out in the order passed by the CIT(A) wherein the assessee contended that whenever sale is effected under the Network Marketing Binary plan, i.e. Left Wing and Right Wing, all the uplines get IVPs. In fact, the company credits IVPs on every sale of package to each of the uplines of the sponsored CDs. However, in order to get commission, the concerned CD must get package for self every year in addition to bringing in new CDs. It is only when the above conditions are fulfilled that a CD becomes entitled to Escrow Incentive payment depending upon the number of IVPs on his left wing and right wing, which get accordingly redeemed on payment. The assessee explained to the AO that on sale of each package, it was making a fair and reasonable estimate of the liability to be incurred towards IVPs and likely encashment and thus creating the EDP. It was further submitted that around 40% of its Revenue from the sale of packages goes in the EDP. In order to show that the amount of the EDP created by the assessee was reasonable, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anelled with the assessee. The major expenditure of the assessee against sale of each package is Escrow Disbursement incentive and Medical check-up charges payable to the hospitals against each package. The assessee has no medical check-up infrastructure of its own. We have discussed supra the MCP. Right now, we are concerned with the Escrow Disbursement Provision created by the assessee at ₹ 23.20 crore, for which deduction was claimed by taking it to the Profit and Loss account. The AO made disallowance of ₹ 18.82 crore out of such provision, which is the closing balance of the EDP. We have noted above that the Escrow Disbursement Provision is made on the basis of and simultaneously with the sale of the packages by the CDs. Each buyer of the package, in turn, also becomes a CD, eligible for Escrow Disbursement payment subject to the conditions discussed above. 7. Having seen the modus operandi in which the multi-level marketing scheme operates, let us examine the manner in which the assessee created the Escrow Disbursement Provision for the year amounting to ₹ 23.20 crore and claimed deduction for the same. The assessee explained that EDP of ₹ 23. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 package, 5.00 IVPs for second package, 9.00 IVPs for third package and 12.00 IVPs for fourth package. A uniform rate of ₹ 650/- per IVP has been applied to all the packages for working out the amount of provision of ₹ 23.20 crore. The key figure of ₹ 650/- (₹ 65 into 10) in the calculation of the EDP, being, rate per IVP has been computed as demonstrated on page 57 of the impugned order with reference to the two Tables. 9. The first table computes average va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against 47 average IVPs allocated, the payment was made only in respect of 10 IVPs. 13. We espouse the calculation of average value per IVP at ₹ 65, which is computed vide Table-II, by taking weighted average of incentives of ₹ 100 ₹ 75 and ₹ 50 given under the Beginners Plan, Easy Plan and Leaders Plan respectively. The assessee, in its submission before the ld. CIT(A), as recorded on page 56 of the impugned order, stated that a CD shifts to the Easy Plan on collecting 100 IVPs and then to the Leader Plan on collecting 200 more IVPs. Once a CD enters 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 ₹ 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 eter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012-13 182.3 74.6 33.6 14. On going through the Table-IV, it can be seen that the assessee paid incentive of ₹ 19.22 crore during the F.Y. 2012-13 under consideration and ₹ 24.06 crore for the F.Y. 2011-12. In this way, total Escrow Incentive payment for the five years in the Table comes to ₹ 92.08 crores, which gives the figure of average IVP payment at ₹ 57.20. The ld. DR submitted the detailed calculation of the average value of IVPs at ₹ 57.20 on extrapolation of the figures, whose correctness has not been disputed by the ld. AR. As against the ACTUAL figure of IVP payment at ₹ 57.20 given by the assessee to the Actuary, it created the Escrow Disbursement Provision by taking average value per IVP at ₹ 65/-. This shows that the assessee created excess provision per IVP amounting to ₹ 7.80 (₹ 65 minus ₹ 57.20). 15. The second component of the key figure of the average value of ₹ 650/- per IVP is the average number of uplines to whom the incentive was actually paid by the assessee. The assessee, for creating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 10 gets substituted with 8.76 giving rate per IVP at ₹ 505 (₹ 57.62 x 8.76) instead of ₹ 650 (₹ 65x10) taken by the assessee for computing the amount of the Escrow Disbursement Provision. On this score alone, the amount of excess provision claimed as deduction turns out to be ₹ 5.18 crore, being the difference between the EDP created at ₹ 23.20 crore minus ₹ 18.20 crore (the amount derived on the basis of the actual data given to the Actuary). 17. It is further relevant to note that for creating the EDP, the assessee took the `Number of sales count for the Financial year 2012-13 at 40844 as per the Table III above. However, while calculating the actual amount of the EDP, the assessee adopted the higher figure of 41487, which is sum total of the `Sale Count as per column A of Table- I above. Thus, it is evident that the assessee created excess EDP for the year by taking higher figure of `Sale count . 18. It will be seen now that the manner of creating the Escrow Disbursement Provision by the assessee and its further adjustment/non-adjustment/partial-adjustment in the later year(s) belies the basic concept of provisioning. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for payment to such CD at the time of sale of package. On a specific query, as to how the EDP has been reversed in the same or later years on a CD not qualifying for the Incentive payment on non-fulfillment of the requisite condition(s), the ld. AR candidly admitted that the EDP once created by the assessee is never reversed due to non-utilization. Even though he harped on the fact that the provision is created for a limited number of IVPs for payment as against full IVPs allotted, but there is no denial that some CDs lose their Incentive payment despite the creation of EDP for them. This shows that the EDP once created, for which deduction is also claimed in the Profit and Loss account, will continue to remain as such even in the case of the CD(s) not qualifying for the payment, which implies that the excess deduction allowed at the time of creation of the EDP will never be reversed. Unlike a 3 years cut-off period in the MCP, there is no cut-off period when a CD will lose his right to the Incentive under the EDP against the allotted IVPs if the requisite conditions are not fulfilled. How such a mechanism can be misutilized may be understood with the help of a simple example. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 2011-12 638,802,331 126,451,938 287,148,074 249,727,857 163,872,155 37,420,217 5 2012-13 527,697,108 163,872,155 232,033,756 207,635,244 188,270,667 24,398,512 6 2013-14 393,575,393 188,270,667 163,409,427 143,492,415 208,187,679 19,917,012 G. Total 3,100,555,872 685,296,608 1,372,366,923 1,162,657,652 895,005,879 209,709,271 19. On a perusal of the Table-VI above, it can be seen that the closing balance of the EDP for the F.Y. 2006-07 was ₹ 1.40 crore, which increased in the next year to ₹ 3.63 crore and gradually, it has come up to ₹ 18.82 crore as the end of the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 AO will bifurcate total Escrow Disbursement payment of ₹ 20,76,35,244/- made during the year into the amount of Escrow Incentive in respect of packages sold during the year itself and incentive for the packages sold in earlier years. Deduction of Escrow incentive for the year will be allowed only in respect of the packages sold during the year because for the packages sold in earlier years, the assessee has already availed deduction at the time of creation of the EDP in such earlier years. We, therefore, set-aside the impugned order on this count and remit the matter to the file of the AO for re-determining the amount of deduction accordingly, of course, after allowing opportunity of hearing to the assessee. A.Y. 2014-15: 21. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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