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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”: HYDERABAD
Before: SHRI SATBEER SINGH GODARA & SHRI LAXMI PRASAD SAHU
O R D E R PER L.P. SAHU, A.M.: This appeal filed by the Revenue is directed against CIT(A) – 2, Hyderabad’s order dated 27/08/2019 for AY 2016-17 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act”, on the following grounds of appeal:
1. Whether on the facts and circumstances of the case, the CIT(A) was justified in allowing the excess provision of warranty which is not all incurred as an expenditure relying upon the decision of Apex Court in the case of :- 2 -: M/s Tecumseh Products India Pvt. Ltd., Hyd.
Rotork Control India (P) Ltd. Vs. CIT which is not squarely applicable in the present case. The above said decision was regarding the income calculated under MAT provision which is distinguishable on the facts.
2. Whether on facts and circumstances of the case, the ld. CIT was justified to allow excess provision for warranty which was not crystalized during the year under consideration and the same was not reversed after the expiry of warranty period.
Whether on the facts and circumstances of the case, the ld. CIT was justified to allow excess provision for warranty wherein the assessee company had no scientific basis for making such a huge provision for warranty and derived advantage by deferring its income to extant of excess warranty provision to subsequent years.
Any other ground that may be urged at the time of hearing.”
None appeared on behalf of the respondent-assessee at the time of hearing of this appeal. Therefore, we proceed to dispose of the appeal after hearing the ld. DR and the facts available on record.
3. Brief the facts of the case are that the assessee a company dealing in the business of manufacturing of electric motors, generators and transformers, e-filed its return on 29-11-2016 declaring NIL income for the AY 2016-17. The case was selected for Scrutiny under CASS and assessment was completed u/ s 143(3) of the Act on 26.12.2018 by disallowing unutilized portion of the :- 3 -: M/s Tecumseh Products India Pvt. Ltd., Hyd. provision for warranty amounting to Rs. 2,24,05,264/ - and disallowing Loss on derivatives of Rs.29, 11,705/ - debited to P&L account under "Other Expenses".
4. The assessee preferred an appeal against the order of AO before the CIT(A) and before the CIT(A) filed written submissions, which were extracted by the CIT(A) at pages 5 to 13 in his order. After considering the submissions of the assessee, the CIT(A) directed the AO to delete the addition made on account of unutilized portion of provision for warranty, by observing as under: “The AO made an addition of Rs. 2,24,05,264/- on account of the amount being unutilized portion of the provision for warranty debited to the P&L account during the FY 2015-16. The AO also contended that the could not provide any substantiation for the goods manufactured being "sophisticated goods". The appellant submitted that the provision for warranty was made on consistent basis, based on the historic trends of sales made and corresponding return of defective goods. !he relevant workings have also been submitted. The appellant also submitted that such claim of expenditure towards provision for warranty was accepted during the assessment proceedings of the previous years. On perusal of the workings, it is seen that the provision for warranty was provided for on rational basis which the appellant had been following consistently. Reliance is placed on the decision of Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd, v. CIT (2009) 314 ITR 62 (SC) wherein it was observed that where the statistical data indicates that every year some of these manufactured goods are found to be :- 4 -: M/s Tecumseh Products India Pvt. Ltd., Hyd.
defective, being sophisticated items, no customer is prepared to buy such goods without a warranty. Hence it was observed that warranty forms an integral part of the sale and warranty stood attached to the sale price of the product. The relevant extract of the decision on allowability of the provision u/s 37 of the Act is reproduced as under: "the principle which emerges. from these decisions is that if the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty tit respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 of the 1961 Act. It would all depend on the data systematically maintained by the assesses. " The AO has allowed the warranty provision in the earlier year from F.Y . 2010-11 to A.Y. 2014-15 as per the submission made by the appellant 29.05.2019. The method of calculation has been consistently followed by the appellant and also allowed by the AO. There is no change in the policy by the appellant in this regard. Therefore there is no basis to disallow the claim of the appellant. The AO has also used the contention that the appellant does not make sophisticated goods as a remark. It is the onus of the AO to justify the same, if it holds that the goods are not sophisticated and as to how from the earlier years, the goods have turned from sophisticated to non sophisticated this year. There is no definition in the act for sophisticated goods as such, the only implication is that it means an assured quality product and if anyone assures a quality product it can only be sold with an assurance of warranty. The appellant has been giving warranty and that is how the :- 5 -: M/s Tecumseh Products India Pvt. Ltd., Hyd. head of such expenses generate in the P & L account and the expenses thereof. Further the reversal and utilization is based on the earlier year provision and expenses with regard to those expenses and for the current year, the same are not likely to arise unless the goods sold during the year and its warranty expires in this year itself. It is seen that the period of warranty is between 18 to 30 months, therefore the warranty of the goods sold in the present year cannot, by any stretch of imagination, expire in this year. The methodology followed by the AO of the concept of reversal utilization to be deducted from warranty expenses and then disallowed is a factually wrong method. However, the same effectively is of no consequence as the warranty provided is on a consistent and methodical basis. In view of the above discussion and respectfully following the decision of the Hon'ble Apex Court in the aforesaid judgment, the AO is directed to delete the addition made on account of unutilized portion of provision for warranty.”
Aggrieved by the order of CIT(A), the revenue is in appeal before the ITAT.
We have heard the ld. DR and perused the material on record. Before deleting the addition made on account of unutilized portion of provision for warranty, the CIT(A) observed that the AO has allowed the warranty provision in the earlier year from FY 2010-11 to AY 2014-15 and the method of calculation has been consistently followed by the assessee and also allowed by the AO. He further observed :- 6 -: M/s Tecumseh Products India Pvt. Ltd., Hyd. that since there is no change in the policy by the assessee in this regard, there is no basis to disallow the claim of the assessee. He also observed that the decision of the Hon’ble Supreme Court relied on by the assessee before him in the case of Rotork Controls India (P) Ltd., Vs. CIT [2009] 314 ITR 62 (SC) supports the case of the assessee. Therefore, we find no infirmity in the order of the CIT(A) in directing the AO to delete the addition made on this count and upholding the order of CIT(A), we dismiss the grounds raised
by the revenue on this issue.
7. In the result, appeal of the revenue is dismissed. Pronounced in the open court on 19th July, 2021.
Sd/- Sd/- (S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 19th July, 2021. kv Copy to : 1 DCIT, Circle – 2(2), Room No. 513, 5th Floor, Signature Towers, Opp. Botanical Garden, Kondapur, Hyderabad – 500 084 2 M/s Tecumseh Products India Pvt. Ltd., Balanagar township, Hyderabad – 500 -037 3 CIT(A) – 2, Hyderabad. Pr. CIT - 2, Hyderabad 4 ITAT, DR, Hyderabad. 5 6 Guard File.
:- 7 -: M/s Tecumseh Products India Pvt. Ltd., Hyd.
S.No. Details Date 1 Draft dictated on 2 Draft placed before author Draft proposed & placed before the Second 3 Member 4 Draft discussed/approved by Second Member 5 Approved Draft comes to the Sr. PS/PS 6 Kept for pronouncement 7 File sent to Bench Clerk 8 Date on which the file goes to Head Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order