AVG Motors Ltd., Kottayam V. ACIT, Kottayam

ITA 979/COCH/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 4358 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 6 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-06-2010
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2004-2005
• Appeal Filed On: 27-11-2008
• Court: TRIBUNAL
• Department Lawyers: DR BABU JOSEPH
• Assessee Lawyers: SONY MATHEW
• Keywords: Business income; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE T RIBUNAL COCHIN BENCH, COC HIN BEFORE S/SHRI N.VIJAYAKUMARAN, JM AND SANJAY ARORA , AM I.T.A. NO. 977, 978 & 979/COCH/ 2008 ASSESSMENT YEARS : 2002-03 TO 2004-05 AVG MOTORS LTD., ANCHERIL BANK BUILDING, PO BOX NO. 1 BAKER JN., KOTTYAM-686 001. [PAN: AACCA 0187B] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1, KOTTAYAM (ASSESSEE-APPELLANT) (REVENUE- RESPONDENT) ASSESSEE BY SHRI SONY MATHEW, FCA REVENUE BY DR. BABU JOSEPH, SR. DR O R D E R PER SANJAY ARORA, AM: THESE ARE A SET OF THREE APPEALS BY THE ASSESSEE, I.E., FOR THREE CONSECUTIVE ASSESSMENT YEARS BEING AYS 2002-03 TO 2004-05, ARIS ING OUT OF THE ORDER BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-IV, KOCHI (CI T(A) FOR SHORT) DATED 11.8.2008. AS THE SAME RAISE IDENTICAL ISSUE(S), TH ESE WERE HEARD TOGETHER, AND ARE BEING DISPOSED OF VIDE A COMMON, CONSOLIDATED ORDER . 2. THE PRINCIPAL ISSUE ARISING FOR ADJUDICATION IN THE INSTANT CASES (PROJECTED PER THE DETAILED GROUNDS OF APPEAL) IS THE DEDUCTIBILIT Y OF THE PROVISION TOWARD EXPENDITURE ON THE FREE SERVICES OF THEIR VEHICLES ALLOWED BY T HE ASSESSEE TO ITS CUSTOMERS, PROVIDED FOR IN ITS ACCOUNTS FOR THE RELEVANT YEARS IN TERMS OF ITS CONSISTENT ACCOUNTING POLICY, IN THE COMPUTATION OF ITS BUSINESS INCOME F OR THOSE YEARS. 3. WE SHALL FIRST DELINEATE THE FACTS OF THE CASE. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DEALERS AND DISTRIBUTORS OF THE VEHICLES MANUFACTURED BY M/S. MARUTI UDYOG LTD., GURGAON (`MUL FOR SHORT) F OR KOTTAYAM AND PATHANAMTHITTA DISTRICTS OF KERALA. AS PER THE TERMS OF THE SALE O F VEHICLES (OF MUL), THE FIRST THREE ITA. NOS. 977,978 & 979/COCH./2008 2 SERVICE CHECK-UPS OF EACH VEHICLE, I.E., AFTER ITS SALE, IS NOT CHARGED FOR BY THE COMPANYS DEALERS. EACH CUSTOMER IS AS SUCH ENTITLE D TO THREE FREE SERVICES OF HIS VEHICLE. THE SAME MAY BE CARRIED OUT EITHER AT THE SERVICE-STATION OF THE CONCERNED DEALER, I.E., FROM WHOM THE VEHICLE STANDS PURCHASE D, OR AT ANY OTHER AUTHORISED SERVICE STATION IN INDIA. TOWARD THIS, THREE FREE SERVICE COUPONS ARE ISSUED TO THE PURCHASER AT THE TIME OF SALE (OF VEHICLE), WHICH A RE REQUIRED TO BE TENDERED BY HIM AT THE TIME OF `SERVICE, IN EVIDENCE OF HIS ENTITLEME NT TO THE FREE SERVICES, WHICH ARE REQUIRED TO BE CARRIED OUT WITHIN THE PRESCRIBED TI ME/DISTANCE LIMITS. THE COUPONS STAND THUS DISCHARGED BY THE `SERVICE, SIGNIFYING THE SATISFACTION OF THE OBLIGATION OF THE SELLING DEALER TO THE CUSTOMER. AS CAN ONLY BE EXPECTED, GENERALLY ALL THE PURCHASERS OF THE NEW VEHICLES ADHERE TO THE SERVIC E SCHEDULE, PARTICULARLY AS WARRANTY AND OTHER BENEFITS ASSOCIATED WITH THE VEHICLE DEPE ND ON THE TIMELY CARRYING OUT OF THE SERVICES OF THE VEHICLE. THE COST OF CARRYING OUT T HESE THREE SERVICES, AS PER THE DEALERSHIP AGREEMENT (WITH MUL), IS TO BE MET BY TH E SELLING DEALER OUT OF THE PROFIT MARGIN ALLOWED TO IT ON THE SALE OF THE VEHICLE. THE ISSUE 4.1 THE ASSESSEE-COMPANY CLAIMS ITS METHOD OF ACCOUNTING TO BE IN TERMS OF THE ACCOUNTING STANDARD FOR REVENUE RECOGNITION ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) (I.E., AS 9), DULY DISC LOSING THE SAID FACT IN THE NOTES TO ITS FINANCIAL STATEMENTS. THE SAME IS ALSO CONSISTE NT WITH THE ACCOUNTING STANDARD (AS 1) RELATING TO THE DISCLOSURE OF ACCOUNTING POL ICIES, NOTIFIED BY CBDT (218 ITR (STATUTES) 1), CLAUSE 4(I) OF WHICH ADVOCATES PRUDE NCE IN MAINTAINING ACCOUNTS IN-AS- MUCH AS ALL KNOWN LIABILITIES AND LOSSES ARE PROVID ED FOR, EVEN THOUGH THE AMOUNT THEREOF CANNOT BE DETERMINED WITH CERTAINTY AND (TH E PROVISION) REPRESENTS ONLY A BEST ESTIMATE IN THE LIGHT OF THE INFORMATION AVAILABLE. IN THE PRESENT CASE, THE COST OF CARRYING OUT THE FREE SERVICES IS EMBEDDED IN THE P ROFIT ON THE SALE OF THE VEHICLE AND, AS SUCH, THE PROVISION IN ITS RESPECT REPRESENTS AN ALLOWABLE DEDUCTION FOR DETERMINING THE REAL PROFIT ON ITS SALE. RELIANCE STANDS PLACED , IN SUPPORT OF ITS CLAIM, ON THE DECISIONS IN THE CASE OF BHARAT EARTH MOVERS VS. CIT , 245 ITR 428 (SC); CIT VS. ITA. NOS. 977,978 & 979/COCH./2008 3 VINITEC CORPORATION (P) LTD. , 278 ITR 337 (DEL.) AND R.C. GUPTA VS. CIT , 298 ITR 161 (DEL.). 4.2 THE REVENUES CASE, ON THE OTHER HAND, IS THAT THE LIABILITY TOWARDS THE FREE SERVICES, TO WHICH THE COMPANY IS NO DOUBT OBLIGED/ COMMITTED TO AT THE TIME OF SALE, ARISE ONLY ON THE PRESENTATION OF THE COUPONS FOR F REE SERVICES, AND DEDUCTIBLE ONLY ON THE RENDERING OF THE SERVICES THERE-AGAINST. THE P ROVISION THUS REPRESENTS NOT AN ACTUAL LIABILITY BUT A CONTINGENT ONE, WHICH WOULD ARISE O N THE SAID PRESENTATION - WHEREBY THE CUSTOMER CLAIMS ITS `RIGHT TO THE FREE SERVICE S - AND THE SERVICE IS ACTUALLY PERFORMED. UNTIL THIS EVENT OCCURS, HOWSOEVER LIKE LY IT MAY BE, THE LIABILITY IN PRAESENTI DOES NOT ARISE, AND IS ONLY CONTINGENT. IT CANNOT BE SAID AS TO HOW MANY CLAIMS WOULD ACTUALLY MATURE IN A PARTICULAR YEAR, OR EVEN IF AT ALL WILL. RELIANCE STANDS PLACED BY IT ON THE DECISION IN THE CASE OF INDIAN MOLASSES CO. LTD. VS. CIT , 37 ITR 66 (SC), WHEREIN IT STANDS CLARIFIED THAT EXPEN DITURE WHICH IS DEDUCTIBLE FOR TAX PURPOSES IS ONE WHICH IS TOWARDS A LIABILITY ACTUAL LY EXISTING AT THE RELEVANT TIME. PUTTING ASIDE OF MONEY WHICH MAY BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT AN ACTUAL LIABILITY, BUT ONLY A LIABILITY DE FUTURO AND WHICH FOR THE TIME BEING IS ONLY CONTINGENT. IT IS ONLY THE FORMER, I.E., THE ACTUAL LIABILITY, WHICH IS DEDUCTIBLE. 5. BEFORE US, LIKE CONTENTIONS STOOD RAISED BY EITH ER SIDE; THE LD. AR SUBMITTING A COMPILATION CONTAINING ARGUMENT NOTES (AN); ARTICLE -X (OF THE SERVICE AGREEMENT), I.E., QUA THE RELEVANT CLAUSES OF THE DEALERSHIP AGREEMENT, AND SERVICE CIRCULAR SPECIFYING THE RATES OF THE THREE SERVICES, AS ANNE XURE-I AND ANNEXURE-II THERETO (AN). 6. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERI AL ON RECORD AS WELL AS THE CASE LAW CITED. 6.1 AT THE VERY OUTSET, WE OBSERVE THAT NO DISPU TE ATTENDS THE FACTUAL POSITION OF THE CASE. WE WOULD FIRST DWELL ON THE NATURE OF THE PR OVISION, WHICH, WHILE THE ASSESSEE- COMPANY CLAIMS TO BE IN ACCORDANCE WITH THE ACCOUNT ING PRINCIPLES, THE REVENUE ITA. NOS. 977,978 & 979/COCH./2008 4 CONTENDS TO BE NOT REPRESENTING AN EXISTING LIABILI TY BUT ONLY A LIABILITY DE FUTURO , SO THAT IT IS NOT DEDUCTIBLE. 6.2 WE ARE IN AGREEMENT WITH THE REVENUE ON THIS CO UNT. THE LIABILITY ARISES ONLY ON THE PRESENTATION AND THE CONCOMITANT ACCEPTANCE OF THE `FREE SERVICE COUPON EITHER TO THE SELLING DEALER OR ANY OTHER AUTHORISED SERVI CE STATION (SERVICE DEALER) TOWARD THE FREE SERVICING. THE ASSESSEES ARGUMENT THAT THE LI ABILITY ARISES ON THE SALE OF THE VEHICLE, AND STANDS DISCHARGED ON THE PRESENTATION OF THE SERVICE COUPONS, SO THAT ITS LIABILITY IS IN PRAESENTI BETWEEN THESE TWO POINTS OF TIME, IS INCORRECT. THE LIABILITY, IF IT CAN BE SAID SO, ORIGINATES ON THE ACCEPTANCE OF THE COUPON, AND GETS DISCHARGED ONLY BY THE ACTUAL RENDERING OF THE SERVICE BY THE DEALE R, WHERE LODGED WITH IT, OR ON PAYMENT TO ANOTHER DEALER, I.E., WHO ACCEPTS IT ON ITS BEHALF. IN OTHER WORDS, BY HONOURING THE FREE SERVICE COUPON ON ITS PRESENTATI ON THERETO, OR BY REIMBURSING ITS COST TO ANOTHER (SERVICE) DEALER, WHO SO HONOURS TH E SAME. THE SALE (OF THE VEHICLE) CREATES AN OBLIGATION TO THE CUSTOMER , AS PER THE COMPANY POLICY, WHICH THE ASSESSEE, AS ITS AUTHORISED DEALER, IS BOUND TO ACCEPT. THAT OBLIGATION, HOWEVER, IS FOR A LATER DATE, AND TRANSLATES INTO AN EXISTING LIABILITY ONL Y ON THE PRESENTATION OF THE COUPONS AND THE RENDERING OF THE SERVICE, I.E., THE `EVENT THAT THE HONBLE APEX COURT SPEAKS OF IN THE CASE OF INDIAN MOLASSES CO. LTD. (SUPRA). THAT THE COUPONS ARE GENERALLY PRESENTED IN DUE COURSE OF TIME IS AN ALTOGETHER DI FFERENT MATTER, ONLY INDICATING THE LIKELIHOOD OF SUCH AN EVENT. HOWEVER, THAT WOULD NO T MAKE THE LIABILITY AN EXISTING ONE, BUT ONLY AN IMMINENT ONE, EVEN AS THE DEGREE O F CERTAINTY OF IT MATURING IN FUTURE IS NOT A RELEVANT CONSIDERATION AND, THUS, OF NO MO MENT. THE OBLIGATION, IT IS TO BE APPRECIATED, IS ONLY TO HONOUR THE COUPON IN FUTURE , AND THERE IS NO EXISTING DEBT TO THE CUSTOMER, WHICH WOULD ARISE ONLY ON ITS PRESENTATIO N. IT IS ONLY WHEN THE EXPENDITURE STANDS INCURRED BY RENDITION OF THE SERVICE AT A COST, OR BY ACKNOWLEDGING OF THE DEBT IN ITS RESPEC T TO ANOTHER DEALER WHO ACTUALLY PERFORMS THE SAME, THAT THE LIABILITY IN ITS RESPEC T, EVEN IF IT IS TO BE DISCHARGED AT A LATER DATE, STANDS ACCURED, AND A PROVISION MADE TH EREFOR BECOMES VALID. A LIABILITY, IN OTHER WORDS, CAN ARISE ONLY ON THE INCURRING OF THE RELEVANT EXPENDITURE. EVEN IF THE ITA. NOS. 977,978 & 979/COCH./2008 5 SAME CANNOT BE QUANTIFIED PRECISELY, AS WHERE SOME VARIABLE IN RELATION THERETO IS SUBJECT TO DETERMINATION, A BEST ESTIMATE, BASED ON THE AVAILABLE INFORMATION, WOULD BE IN ORDER. THIS IS AS THE SAME IS OF AN EXISTING LI ABILITY, AND ITS QUANTIFICATION ONLY A MATTER OF ASSESSMENT, BASED ON THE UNDERLYING INFOR MATION, WHICH WOULD NOT IMPACT ITS ESSENTIAL CHARACTER AS A LIABILITY. THE ESTIMAT ION COULD BE REVISED EITHER WAY, BASED ON INFLOW OF INFORMATION, AND WHICH, AGAIN, WOULD B E FOR THAT REASON EQUALLY VALID. RELIANCE FOR THE PURPOSE IS PLACED, APART FROM THE DECISION IN THE CASE OF INDIAN MOLASSES CO. LTD. (SUPRA), ALSO ON THE DECISION IN THE CASE OF RAJALAKSHMI MILLS LTD. V. ITO , 121 ITD 343, 351 (CHENNAI) (SB), WHEREIN THE PROV ISION TOWARD CONTRIBUTION TO AN APPROVED GRATUITY FUND WAS HELD AS NOT ALLOWABLE IN THE ABSENCE OF ANY INCREMENTAL LIABILITY ACCRUING FOR THE YEAR. THE DECISION IN TH E CASE OF BHARAT EARTH MOVERS (SUPRA), AND THAT BY THE HONBLE DELHI HIGH COURT I N THE CASE OF VINITEC CORPORATION (P) LTD. (SUPRA) AND R.C.GUPTA (SUPRA) ARE ALSO ON THESE LINES. 6.3 IT WOULD NEVERTHELESS BE RELEVANT TO DISCUSS IN THIS CONTEXT THE SAID DECISIONS. IN THE CASE OF BHARAT EARTH MOVERS (SUPRA), THE LIABILITY INVOLVED WAS QUA LEAVE ENCASHMENT. THE ASSESSEE WAS HELD AS ENTITLED THERE TO AS THE EXPENDITURE UNDER REFERENCE FORMED A PART OF THE REMUNERATION PACKAGE OF THE CONCERNED EMPLOYEES IN RESPECT OF THE SERVICES ALREADY RENDERED AND, THUS, EXPENDITURE INCURRED. WITH REGARD TO WARRANTY CLAIM, PROVISION FOR WHICH STANDS CLAIM ED AS DEDUCTION, AND WHICH FORMS THE SUBJECT MATTER OF THE OTHER DECISIONS; THE SAME IS ONLY IN RESPECT OF AN EQUIPMENT OR GOOD SOLD (EARLIER) WHERE IT IS (LATER) FOUND TO BE DEFECTIVE OR BELOW PAR, AND ONLY SERVES TO OBVIATE THE TIMING DIFFERENCE. THE LIABIL ITY IN ITS RESPECT (WARRANTY) IS ATTACHED TO THE PRODUCT, AND CRYSTALLIZES IN FAVOUR OF THE CUSTOMER ON ITS SALE, THOUGH DETERMINED LATER ON THE DISCOVERY OF THE DEFECT OR THE BELOW PAR PERFORMANCE OF THE PRODUCT ON ITS USER. THE (SUBSEQUENT) LODGING OF TH E CLAIM ONLY ENABLES THE IDENTIFICATION OF THE INDIVIDUAL PRODUCT WHICH STAN DS SOLD IN A `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`PRODUCT ACTUALLY SOLD, BY INCURRING EXPENDITURE IN ITS RESP ECT, ONLY AT A FUTURE DATE. THE CLUBBING OF THE TWO IS CLEARLY A MARKETING TOOL TO BOOST BOTH THE SALE OF THE VEHICLES, AS WELL AS TO FAMILARIZE THE CUSTOMERS WITH THE ASSESS EES SERVICE FACILITIES, SO THAT THET PREFER THE PRINCIPALS AUTHORIZED SERVICE STATIONS FOR FUTURE SERVICING OF THEIR VEHICLES. THE DECISION BY THE HONBLE GUJARAT HIGH COURT IN T HE CASE OF CIT VS. MEHASANA DISTRICT CO-OPERATIVE MILK PRODUCERS UNION LTD . (2006) 282 ITR 24 (GUJ.), ALSO RELIED UPON BY THE ASSESSEE, IS ALSO IN OUR VIEW NO T APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. IN THAT CASE THE ISSUE WAS WITH REGARD TO WHETHER THE ADDITIONAL AMOUNT REMITTED BY THE ASSESSEE, A SECONDARY SOCIETY, TO ITS MEMBER SOCIETIES, OSTENSIBLY TOWARD PURCHASE PRICE OF MILK , WAS ALLOWABLE AS SUCH, OR WAS ONLY AN APPROPRIATION OF PROFIT, I.E., UNDER THE GU ISE OF THE PURCHASE PRICE. WHAT WAS AT STAKE, AND HAD BEEN IMPUGNED BY THE REVENUE, WAS TH E GENUINENESS OF THE CLAIM. 6.4 SO HOWEVER, WE CONSIDER THE ASSESSEES CLAIM AS MAINTAINABLE AND LEGALLY VALID. THIS IS FOR THE SIMPLE REASON THAT THE IMPUGNED PRO VISION DOES NOT REPRESENT A LIABILITY TOWARD ANY EXPENDITURE, BUT ONLY AN INCOME THAT HAS SINCE NOT ACCRUED OR ARISEN THERETO. THE MOOT QUESTION IN THIS REGARD TO BE ASKED IS WHE THER THE INCOME CAN BE SAID TO HAVE ACCRUED OR ARISEN WITHOUT UNDERTAKING THE SERVICES, IT IS PURPORTEDLY TOWARD? ALTERNATIVELY, WOULD IT BE CORRECT TO SAY THAT THER E IS NO COST TO THE SERVICES, OR THE ASSESSEE IS NOT ENTITLED TO ANY COMPENSATION IN ITS RESPECT, SO AS TO INFER THE ENTIRE REVENUE AS ARISING FROM, OR ATTRIBUTABLE ONL Y TO, THE SALE OF THE VEHICLE? THE ANSWER TO THESE QUESTIONS CAN ONLY BE IN THE NEGATI VE, AND EMPHATICALLY SO. THE FIRST PROPOSITION IS AGAINST ALL THE CANONS OF ACCRUAL TO INCOME AS WELL AS THE SETTLED AND ACCEPTED ACCOUNTING PRINCIPLES. THE SECOND GOES AGA INST THE ADMITTED AND UNDISPUTED ITA. NOS. 977,978 & 979/COCH./2008 7 FACTS OF THE CASE. THE DEALER INCURS THE COST OF TH ESE SERVICES AS MUCH AS THEY DO FOR ANY OTHER. THE MANUFACTURER-PRINCIPAL ITSELF HAS IT SELF PROVIDED A NORMATIVE BASIS THEREFOR, AND WHICH ALSO GOVERNS INTER-DEALER TRANS ACTIONS. THE ISSUE AT HEART IS SIMPLE, AND IS RESOLVED WITH REFERENCE TO THESE QUESTIONS. THE PROVISION UNDER REFERENCE IS NOT TOWARD EXPENDITURE BUT ONLY AGAINST INCOME WHICH, T HOUGH REALIZED, STANDS NOT YET ACCRUED, JUST AS IS THE CASE OF RENT OR INTEREST OR INSURANCE PREMIUM RECEIVED IN ADVANCE. ONLY, IN THIS CASE, THE `AMOUNT THEREOF, BEING CLUBBED WITH THE SALE OF THE VEHICLE, IS NOT SEPARATELY DELINEATED, BEING OFFERE D AS A FREE BEE TO THE CUSTOMER. THIS IS ALSO BORNE OUT BY THE ACCOUNTS IN-AS-MUCH AS THE SAME STAND NOT DEBITED FOR THE COST OF THE SERVICES, WHICH WOULD REQUIRE MEASUREMENT OF THE ACTUAL COST (OF SERVICE), BUT ONLY WITH THE STANDARD VALUE PLACED ON THE SERVICES , ON THEIR BEING RENDERED, AND THUS, TRANSFERRING THE PROVISION TO THE CREDIT SIDE OF TH E INCOME STATEMENT, ALONG WITH THAT IN RESPECT OF SERVICE COUPONS WHERE THE SAME (SERVICE) IS NO LONGER REQUIRED TO BE RENDERED; THE SERVICE COUPONS HAVING EXPIRED OR LAP SED WITH TIME. IN THIS REGARD, WE CANNOT HELP BUT NOT E THAT THE CONTROVERSY IN THE PRESENT CASE IS VERY SIMILAR, IF NOT IDENTICAL, TO THAT IN RELAT ION TO THE PROVISION AGAINST BAD AND DOUBTFUL DEBTS, WHICH STOOD DISALLOWED IN THE COMPU TATION OF BOOK PROFIT UNDER SECTIONS 115JA/JB OF THE ACT AS A CONTINGENT LIABIL ITY, REJECTING THE ASSESSEES CLAIM OF THE SAME, IN FACT, REPRESENTING NOT A LIABILITY, BU T A PROVISION AGAINST AN ASSET, MADE IN ANTICIPATION OF THE SHORTFALL ON ITS REALIZATION, B ASED ON ITS QUALITATIVE ASSESSMENT. THE ISSUE STOOD RESOLVED AT THE LEVEL OF THE TRIBUNAL B Y THE DECISION BY ITS SPECIAL BENCH IN THE CASE OF JT. CIT V. USHA MARTIN INDUSTRIES LTD ., 288 ITR (AT) 63 (KOL.)(SB), TO SUBSEQUENT CONFIRMATION BY THE HIGHER COURTS OF LAW . 6.5 THE ASSESSEE-COMPANY HAS RIGHTLY PLACED REL IANCE ON AS-1 BY THE CBDT WHICH IS PARA MATERIA WITH AS-1 BY THE ICAI, AND ALSO AS-9 THEREBY. THE OBLIGATION, AS ALSO NOTED EARLIER, TO HONOUR THE SERVICE COUPONS ON PRE SENTATION BY THE PURCHASER OF THE VEHICLE OR ANY OTHER CLAIMING THROUGH HIM, ARISES O UT OF THE SALE CONTRACT OR THE TERMS OF THE SALE. AS NOTHING FURTHER IS TO BE CHARGED T O THE CUSTOMER FOR THE VEHICLE PLUS THE THREE SERVICE CHECK-UPS, THE AMOUNT CHARGED THERE-F ROM IS A COMPOSITE SUM TOWARD ITA. NOS. 977,978 & 979/COCH./2008 8 THE SAME. AS SUCH, EVEN IF IT IS NOT CLEAR AS TO WH AT PROPORTION OF THE TOTAL PRICE, WHICH AGAIN IS NOT BE DEPENDENT ON THE SALE PRICE OF THE VEHICLE, CAN BE ATTRIBUTED TO THE SERVICES, SOME VALUE HAS NECESSARILY TO BE ASCRIBED THERETO. UNDER THE CIRCUMSTANCES, THE VALUE ATTACHED THERETO BY THE MANUFACTURER, AND WHICH ALSO SERVES TO ADJUST THE LIABILITY ARISING TO ANOTHER DEALER, WHO MAY HAPPEN TO UNDERTAKE THE FREE SERVICES AGAINST THE COUPONS, REPRESENTS THE BEST ESTIMATE O F THE SAID VALUE. IT COULD BE ARGUED THAT THE PRICE CHARGED TO THE CUSTOMER BEING A COMP OSITE SUM, NOTHING IN FACT STANDS CHARGED THERETO FOR THE `FREE SERVICES, FOR ITS VA LUE TO BE ESTIMATED AND SET ASIDE AS NOT ACCRUED. THE ARGUMENT IS FLAWED IN MORE THAN ONE RE SPECT. FIRSTLY, IT WOULD NOT BE FAIR TO SAY SO, I.E., AS A FACT. ONCE A COMPOSITE S UM IS CHARGED FOR THE IDENTIFIABLE COMPONENTS OF A SALE, IT WOULD NOT BE CORRECT TO PL ACE NIL VALUE ON ONE, PARTICULARLY WHEN THERE IS A COST ATTACHED THERETO. IN FACT, IF IT INDEED HAD NO VALUE, THE WORD `FREE WOULD BE RENDERED SUPERFLUOUS OR A MISNOMER, AND TH E SCHEME DEVOID OF ANY COMPETITIVE OR INTRINSIC VALUE, AS WHAT IS BEING OF FERED AS FREE HAS ACTUALLY NO OR NIL VALUE. CONTINUING FURTHER, THAT THE COST HAS NOT BE EN INCURRED, OR NO SERVICE ACTUALLY RENDERED, ONLY IMPLIES THAT NOTHING IN FACT IS ACTU ALLY `SOLD, BUT ONLY UNDERTAKEN TO BE SOLD . RATHER, THE VERY FACT OF THE SERVICES HAVING NOT BEEN ACTUALLY RENDERED PROVES THE ASSESSEES CASE, AS NO REVENUE IN ITS RESPECT CAN T HEREFORE BE RECOGNIZED OR SAID TO HAVE INURED TO IT. RATHER, IT IS THIS NON-RENDERING OF SERVICES THAT IS PRECISELY THE REASON WHY WE FOUND THE REVENUES OBJECTION QUA THE LIABILITY TOWARD SERVICES HAVING NOT ARISEN, AS DISCUSSED AT PARA 6.2 OF ITS ORDER, AS VALID. THE TWO QUESTIONS POSED AT PARA 6.4 CAPTURE THE ISSUE AT LARGE IN ITS ENTIRETY . AS-9 DEFINES `REVENUE AS GROSS INFLOW OF CASH, RECEIVABLES OR OTHER CONSIDERATION ARISING IN THE COURSE OF THE ORDINARY ACTIVITIES OF THE ENTERPRISE FROM THE SALE OF GOODS, FROM RENDERING OF SERVICES , AND FROM USE BY OTHERS OF THE ENTERPRISE RESOURCES YIELDING INTEREST, ROYALTIES, DIVIDENDS. IT IS MEASURED BY THE CHARGES MADE TO THE CUSTOMERS OR CLIENTS FOR GOODS SUPPLIED AND SER VICES RENDERED TO THEM AND THE CHARGES AND REWARDS ARISING FROM THE USE OF RESOURC ES BY THEM. THE SAID ACCOUNTING DEFINITION, IT WOULD BE NOTICED, ACCORDS WITH THE G ENERAL UNDERSTANDING OF THE TERM, I.E., AS UNDERSTOOD BY MEN OF COMMERCE. IN FACT, WE NEED NOT EVEN ADVERT TO AS-9; THE ITA. NOS. 977,978 & 979/COCH./2008 9 ISSUE BEING SO BASIC, WITH THERE BEING NO BASIS FOR THE CHARGE FOR ANY REVENUE TO BE RECOGNIZED; THE SAME - THE RENDERING OF THE SERVICE S - BEING ONLY TO BE AT A FUTURE POINT OF TIME. AS WE HAVE SEEN, AND WHICH WE CONSIDER TO BE RESPONSIBLE FOR THE CONTROVERSY, IS THAT NO SEPARATE CHARGE STANDS MADE FOR THE SERVICES WHICH THE DEALER IS OBLIGED TO RENDER WITHOUT ADDITIONAL COST TO THE CU STOMER. IT IS FOR THIS REASON THAT WE FIND THE VALUE ASCRIBED THERETO BY THE MANUFACTURER AS A GOOD SURROGATE MEASURE FOR THE SAME AND, THUS, ACCEPTABLE. 6.6 THE ISSUE IS ONE OF FACT AND NOT OF LAW, I.E., WHETHER UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE REVENUE GENERATED ON THE SALE OF THE VEHICLES, TO THE EXTENT SET ASIDE BY THE ASSESSEE-COMPANY, COULD BE SAID TO HAVE ACCRUED THERETO IN VIEW OF THE OBLIGATION FOR RENDERING FREE SERVICES ASSOCIATED THEREWITH. IT IS TRITE THAT LAW ACCORDS RESPECT TO THE NORMAL PRINCIPLES OF COM MERCIAL ACCOUNTING. THE ACCOUNTING STANDARDS ISSUED BY CBDT ARE ALSO IN CON FORMITY THEREWITH. AS SUCH, WE FIND NO REASON FOR REJECTION OF THE ASSESSEES CLAI M. HOWEVER, ONE ASPECT OF THE MATTER NEEDS TO BE BROUGHT FORTH. AS ALSO CLARIFIED DURING THE HEARING, ON A QUERY BY THE BENCH, THE PROVISION QUA THE SERVICE COUPONS THAT ARE NOT PRESENTED WITHIN TIME, AND THUS LAPSE, IS REVERSED IN THE YEAR OF EXPIRY T HEREOF. THE SAME IS INTEGRAL TO THE ASSESSEES CLAIM. HOWEVER, NO SUCH REVERSAL, IT STO OD CLARIFIED BY THE LD. AR, OBTAINS FOR THE YEARS UNDER REFERENCE. WHILE IT MAY WELL BE CORRECT, THERE IS NO FINDING BY THE AUTHORITIES BELOW ON THIS POINT, WHO HAVE PROCEEDED TO BRING THE ENTIRE AMOUNT OF PROVISION TO TAX ON THE GROUND OF IT REPRESENTING A CONTINGENT LIABILITY, EVEN AS DOING SO ALSO ENTAILED SOME DUPLICATION IN ADDITION. AS S UCH, EVEN AS WE ARE IN AGREEMENT WITH THE ASSESSEES STAND, AND ALLOW ITS CLAIM IN P RINCIPLE, UNDER THE CIRCUMSTANCES, WE CONSIDER IT ONLY PROPER TO RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER (A.O.) TO ALLOW OPPORTUNITY TO THE ASSESSEE TO SUBS TANTIATE ITS CLAIM ON THIS COUNT, I.E., WITH REGARD TO THE REVERSAL OF THE PROVISION QUA THE EXPIRED COUPONS OR OF ALL THE COUPONS HAVING BEEN IN FACT HONOURED BY RENDERING O F FREE SERVICES IN THEIR RESPECT FOR EACH OF THE RELEVANT YEARS. THIS IS AS TO THE EXTEN T PROVISION QUA THE EXPIRED COUPONS IS INCLUDED IN THE PROVISION FOR ANY THE YEARS UNDE R CONSIDERATION, THE SAME IS ITA. NOS. 977,978 & 979/COCH./2008 10 UNWARRANTED, EVEN BY THE ASSESSEES OWN ADMISSION A ND ACCOUNTING PRACTICE, AND SHALL FORM A PART OF ITS INCOME FOR THE YEAR OF EXPIRY, A ND THUS ADDED WHERE NOT SO DONE BY IT. THE AO SHALL, WHILE UNDERTAKING THE SAID VERIFI CATION, ALSO ENSURE THAT THERE IS NO DOUBLE ADDITION OF THE SAME SUM, AS CONTENDED BY TH E ASSESSEE BEFORE US WITH MERIT. SUBJECT TO THE SAID FACTUAL DETERMINATION AND CONSE QUENT FINDING, WHICH SHALL BE PER A SPEAKING ORDER, WE ALLOW THE ASSESSEES CLAIM FOR A LL THESE YEARS IN TOTO . WE DECIDE ACCORDINGLY. 7. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE A RE ALLOWED ON THE AFORESAID TERMS. SD/- SD/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 23RD JUNE, 2010 GJ COPY TO: 1. AVG MOTORS LTD., ANCHERIL BANK BUILDINGS, PO BOX NO. 1, BAKER JN., KOTTAYAM-1. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1, KOTTAYAM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-IV, KOC HI . 4. THE COMMISSIONER OF INCOME-TAX, KOTTAYAM. 5. D.R./I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REG ISTRAR) ITA. NOS. 977,978 & 979/COCH./2008 11