Income Tax Appellate Tribunal - Mumbai
Shoppers Stop Ltd, Mumbai vs Department Of Income Tax on 22 January, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, MUMBAI
BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER, AND
SHRI V. DURGA RAO, JUDICIAL MEMBER
ITA no. 1835/Mum./2010
(Assessment Year : 2003-04)
Asstt. Commissioner of Income Tax
Central Circle-29, Aayakar Bhavan
101, M.K. Road, Mumbai 400 020 ....................... Appellant
v/s
M/s. Shoppers Stop Ltd.
"B" Wing, Eureka Tower
Mind Space, Link Road
Malad (W), Mumbai 400 064
PAN - AABCS4383A ................... Respondent
Revenue by : Mr. C.G.K. Nair
Assessee by : Mr. Arvind Sonde
Date of Hearing - 13.12.2011 Date of Order - 25.01.2012
ORDER
PER J. SUDHAKAR REDDY, A.M.
This appeal preferred by the Revenue, is directed against the impugned order dated 22nd January 2009, passed by the Commissioner (Appeals)-XXXX, Mumbai, for assessment year 2003-04.
2. Brief facts of the case are that the assessee is a company and is engaged in the business of running retail stores through various outlets in Mumbai, Bangalore, Hyderabad, Jaipur, etc. The retail store sales various 2 M/s. Shoppers Stop Ltd.
ITA no.1835/M/2010 lifestyle products like readymade garment, watches, shoes, jewellery, etc. The facts relating to the sole issue that arises in this appeal are as follows:-
3. The assessee, as part of its business stretegy to sustain patronage by its customers and to encourage loyalty, introduced a sales promotion scheme under the name and style of "First Citizen". Under the scheme, the customers earned reward points for the purchases made by them at the stores of the assessee. The accumulated rewards point can be redeemed by the customers by way of rebate from the sale price while making additional purchases at the assessee's stores. The assessee recognised the liability in respect of reward point earned by the customers by debiting to the Profit & Loss account in the year in which the customers earns reward points. The liability is reversed in the subsequent year, either upon redemption on the reward point or on lapsing of reward points. The accounting policy is consistently followed by the assessee since inception of the "First Citizen"
scheme. The Assessing Officer, in the assessment order passed on 31st December 2008, for the assessment year 2003-04, in an order passed under section 143(3) r/w 147, held that the redemption of reward points can be accounted as expenditure, only when it is actually incurred and not prior to that. He disallowed the claim on the ground that the expenditure is an unascertained expenditure.
4. On appeal, the first appellate authority deleted the addition.
5. Before us, the learned Departmental Representative, Mr. C.G.K. Nair, representing the Revenue, submitted that the liability in question is wrongfully booked by the assessee as expenditure as and when reward points are given to the customer on purchase. He submitted that the expenditure or liability, if any, crystallized only in the year in which the customer avails its privilege of redemption. He submits that many a time, the reward points lapsed. He strongly disputed the findings of the Commissioner (Appeals) and submitted that the claim of the assessee that it follows a scientific basis is not substantiated. He disputed the percentage taken by the assessee and submitted that there is no basis for the same. He 3 M/s. Shoppers Stop Ltd.
ITA no.1835/M/2010 vehemently contended that the expenditure is contingent in nature and should not be allowed.
6. Learned Counsel, Mr. Arvind Sonde, representing the assessee, strongly relied on the order passed by the Commissioner (Appeals). He referred to the scheme and submitted that the customer is given certain rights by way of reward points as and when he purchases from the assessee's stores and this results in a liability accruing to the assessee. He referred to the scheme which is in the paper book submitted by the assessee and pointed out that the validity period for reward points was only two years. He submitted that the assessee is consistently following this method and based on past experience only, 50% of the reward points given is considered during the year. He further pointed out that out of 50%, the gross profit margin is removed and only the balance was claimed. He relied on the following case laws:-
Calcutta Co. Ltd. Vs CIT, [1959] 037 ITR 001 (SC); Jet Airways Pvt. Ltd., 2006-TIOL-26-ITAT-MUM; Taparia Tools Ltd. v/s JCIT, [2003] 260 ITR 0102 (Bom); and Rotork Control India Pvt. Ltd. v/s CIT, 108 Taxman 422 (SC)
7. The learned Counsel invoked Rule-27, and challenged the re-opening of assessments. He referred to the reasons for re-opening at page-37 of the paper book and submitted that the information was picked up from the notes to accounts for assessment year 2003-04 and from a letter submitted during the course of assessment proceedings. He pointed out that the Assessing Officer recorded that the claim is at variance with the accounting policy. Referring to the notice to the financial statements, which is at Page-12 of the paper book and he submitted that the note deals on revenue recognition and not with provisions. Thus, he submitted that the Assessing Officer was looking into the wrong notes to accounts. He submitted that the accounting policy does not discuss expenditure and deals only with revenue recognition. He pointed out that the assessee furnished direct marketing expenditure as Annexure-7(iii)(e) and the Assessing Officer examined the same and formed 4 M/s. Shoppers Stop Ltd.
ITA no.1835/M/2010 an opinion and, hence, it is a change of opinion. He relied on the judgment of Hon'ble Supreme Court in Kelvinator of India Ltd. v/s CIT, [2010] 320 ITR 0561 (SC), and submitted that the assessment should be held as bad-in-law.
8. In reply, the learned Counsel opposed the contentions and submitted that the Commissioner (Appeals) has dealt with the issue at Para-2.3, of his order and the same should be upheld.
9. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record, as well as the case laws cited before us, we hold as follows:-
10. The Commissioner (Appeals) has dealt with the issue of allowability of the claim of assessee on reward points from para-3.3 to 3.3.2 of his order, which is reproduced below for ready reference:-
"3.3 I have considered the assessment order and the submissions of the appellant. As I see, the Assessing Officer has disallowed the claim as an unascertained expenditure in view of the fact that the appellant is recognizing redemption of the FCC point only when gift vouchers or points are actually redeemed by a customer. The Assessing Officer has been Led to this view by the Auditor's Notes to Financial Statement reproduced by him in the assessment order. As against this, the main plank of appellant's defence is that the claim is being made in sync with the concept of matching revenue and costs and that in terms of the judicial decisions relied upon the claim is allowable. Weighing these two basic positions, I find that the issue begs the following questions:-
i) Whether or not the claim of the reward point is a cost attached to corresponding revenue?
ii) Whether or not the ascertainment of the claim is substantially accurate based on the consistent trend of redemption of rewards points ?
iii) Whether or not excess/shortage is accounted for after verification?
3.3.1 The answer to these questions lead me to agree with the appellant that the claim is allowable. To this end, in answer to the first question, I find that the FCC points claim have their genesis in the sales made and accordingly, when they are earned, incurred to earn the corresponding revenue. As I find, when a sale is made under the scheme, simultaneously and since the appellant has to bear the cost of the redemption, the points assume the character of cost in relation to the redemption entitled sale. The appellant's claim is thus, in full 5 M/s. Shoppers Stop Ltd.
ITA no.1835/M/2010 agreement with the concept of matching revenue and costs. In this respect, I find the appellant's reliance on the decision of the Hon'ble Supreme Court in the case Calcutta Co. Ltd. Vs. CIT (WB) 37 ITR 1 as apt and appropriate. In the case Calcutta Co. Ltd. Vs. CIT, the Hon'ble Supreme Court has, in the context of a future discharge of liability in connection with development of plots,! held that the liability on the assessee having been imported, the Liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. This view has been echoed by the Hon'ble Supreme Court again in their decision in the case Bharat Earth Movers Vs. CIT. Once the concept of matching revenue and costs is found established, the next natural question would be to see the quality and accuracy of the quantification of the cost to see whether on not the FCC points debited are based on scientific calculation and research. This brings us to the second question. In this respect, I find that the appellant recognizes the liability to the extent of 50% of the points on a conservative basis clued into its past experience suggesting that 50% of the reward points granted were redeemed by the customers. Further, I also note that since the value of reward points also includes gross profit margin for the purpose of quantification of liability, the appellant- reduces the estimated gross profit margin of 30%. I find this process of quantification scientific as it is based on past trends and further, I also find it reasonable since the final liability debited also takes into account the trend of redemption and the gross profit margins. In this view of the matter, the ascertainment of the FCC points is found to be based on sound and reasonable quantification. This being so, the claim cannot be disallowed on the ground that it is an unascertained expenditure. In this respect, the decision 9f1 the Hon'ble Supreme Court in the case Rotork Controls India (P) Ltd. Vs. CIT bears special mention. In this decision, in the context of allowability of provision for warranty on account of warranty claims likely to arise on the sales, the Hon'ble Supreme Court has held that if historical trend indicates that in past, large number of sophisticated goods were being manufactured and the defects existed in some of the items manufactured and sold, then provision made for warranty in respect of army of such sophisticated goods would be entitled to deduction from the gross receipts u/s.37(1), provided the data is systematically maintained by the assessee. In this decision, the Hon'ble Supreme Court has further held that a provision is recognized when : (a) an enterprise has a present obligation as a result of past event, (b) it is probable that an outflow of resources will be required to settle the obligation and (c) a reliable estimate can be made of the amount of the amount of the obligation. The FCC points claimed by the appellant passes these tests laid down by the Hon'ble Supreme Court. To this end, it may be noted that the claim here is attached to an obligation of redemption and carries on the liability of an outflow of resources when the points are redeemed. Further, as may be noted, the appellant quantifies the FCC liability at 50% of the actual reward points based on its past experience that a minimum 50% gross points granted were redeemed by the customers. Further, this is again reduced by gross profit margin of 30%. The appellant also maintains proper accounting entry in the FCC points redemption account and also runs a software on the redemption process. Premised on this, find that the tests of historical basis and systematic entry of data as laid down by the Supreme Court are fulfilled by the appellant's method of quantification and accounting of the FCC points. In this respect, I also note that the appellant's reliance on the decision of the Hon'ble ITAT, Mumbai Bench in the case ACIT. Circle 5(1), Mumbai and M/s. Jet Airways India P. Ltd. in TA No.3691/M/02 as very apt and appropriate. In this decision, vide its order dated 30.05.2006 while allowing the airline's claim on its scheme called "frequent flyer programme", a claim very similar to the 6 M/s. Shoppers Stop Ltd.
ITA no.1835/M/2010 FCC reward points in the appellant's case, the Hon'ble ITAT has held as under:-
"In our view, the claim of the assessee has been properly allowed by the CIT(A). The assessee has a scheme known as "frequent flyer programme", Whereby the passengers who frequently use the services of the assessee's airline are permitted to accumulate certain number of miles o their credit........ Any redemption of the accumulated mileage in the subsequent years is debited to the provision account. To track the miles earned by each member, a member is required to mention his "JP Membership Number at the time of making booking or at the time of checking in for a flight based on this information available in the system, the miles are then updated-in each members account. The total number of miles earned is ascertained in the above manner and a provision for the cost of tickets to be issued in future for the unutilized redeemable miles is made in the books of accounts as a liability. Such liability is claimed as revenue expenditure. In our view, the claim of the assessee is based on the liability it has undertaken under the frequent flyer programme. It is not the case of the revenue that the liability provided by he assessee is not in accordance with the scheme operated by the assessee. The liability provided is in respect of variable cost of flying the aircraft. That is also based on the minimum cost. In our view, these provisions are based on the experience of the airline and the actual miles accumulated by the passengers. If one were to go through the entire scheme it cannot be said that provision made by the assessee is in respect of a contingent liability. The principle laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers (supra), equally applies to the scheme in question and the claim of the assessee has been properly appreciated by the CIT(A) and his order is confirmed."
I now come to the third question. In this respect, I find that the accounting method followed by the appellant duly redresses the fallout of any excess/shortage as the appellant accounts for the excess/ shortage after verification of redemption for each customer. I further find that the revenue on account of sale is also accounted gross. These are safeguards against the possibility of double deduction of expenses.
3.3.2 In line with the foregoing, I find that in view of the concept of matching revenue and costs, the scientific and reasonable basis of the quantification of the FCC claim, the judicial decisions discussed above and adequate safeguards against the possibility of double deduction, the appellant's claim is allowable. Accordingly, the disallowance is deleted and the ground of appeal is allowed."
11. We fully agree with the aforesaid findings of the Commissioner (Appeals). The facts, issues and the findings are brought out nicely by the Commissioner (Appeals). As and when the customer of the assessee makes a particular purchase, the customer is given a monetary right, in the form of rebate in the cost of goods that he may purchase at a future date. Thus, as and when a right is given, the assessee incurs a liability which it has claimed 7 M/s. Shoppers Stop Ltd.
ITA no.1835/M/2010 as marketing expenditures. The assessee, based a historical data, in a scientific manner, has estimated that only 50% of the reward points given are likely to be encashed by the customers. Out of this, 50% gross profit margin is reduced and the balance is only claimed as expenditure. On a direction from the Bench, the assessee has also filed data from the assessment year 2005-06 to the assessment year 2010-11, which shows that the points lapsed was shown as income. The assessee has also proved that this is a consistent accounting policy being followed year after year. On this factual matrix, we uphold the findings of the Commissioner (Appeals). Consequently, the ground raised by the Revenue is dismissed. As we have upheld the order passed by the Commissioner (Appeals), we do not adjudicate the issue of re-opening raised under Rule-27, as it would be an academic exercise.
12. In the result, Revenue's appeal is dismissed.
Order pronounced in the open Court on 25th January 2012 Sd/- Sd/-
V. DURGA RAO J. SUDHAKAR REDDY
JUDICIAL MEMBER ACCOUNTANT MEMBER
MUMBAI, DATED: 25th January 2012
Copy to:
(1) The Assessee;
(2) The Respondent;
(3) The CIT(A), Mumbai, concerned;
(4) The CIT, Mumbai City concerned;
(5) The DR, "D" Bench, ITAT, Mumbai.
TRUE COPY
BY ORDER
Pradeep J. Chowdhury ASSISTANT REGISTRAR
Sr. Private Secretary ITAT, MUMBAI BENCHES, MUMBAI
8 M/s. Shoppers Stop Ltd.
ITA no.1835/M/2010
Date Initial
1. Draft dictated on 16.1.2012 Sr.PS
2. Draft placed before author 16.1.2012 Sr.PS
3. Draft proposed & placed before 17.1.2012 JM/AM
the second member
4. Draft discussed/approved by 17.1.2012 JM/AM
Second Member
5. Approved Draft comes to the 19.1.2012 Sr.PS
Sr.PS/PS
6. Date of pronouncement 25.1.2012 Sr.PS
7. File sent to the Bench Clerk 25.1.2012 Sr.PS
8. Date on which file goes to the
Head Clerk
9. Date of dispatch of Order