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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI PRADIP KUMAR KEDIA
आदेश/O R D E R
PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the Revenue against the order of the Commissioner of Income Tax (Appeals)-2, Ahmedabad (‘CIT(A)’ in short), dated 03.05.2016 arising in the assessment order dated 28.01.2015 passed by the Assessing [DCIT vs. GMM Pfaulder Ltd.] A.Y. 2005-06 - 2 - Officer (AO) under s. 143(3) r.w.s. 254 of the Income Tax Act, 1961 (the Act) concerning AY 2005-06.
The solitary grievance of the Revenue is towards deletion of disallowance of Rs.68,61,000/- towards provision for warranty expenses claimed as revenue expenditure by the assessee.
When the matter was called for hearing, the learned DR for the Revenue submitted that the grievance of the Revenue concerns disallowance of provision for warranty expenses. It was submitted on behalf of the Revenue that warranty expenses are not allowable being provisional in nature in the absence of any scientific basis for debiting an amount of Rs.68,61,000/- in the books of account on this score. It was submitted that mere provision of such expenses without showing crystallization of liability cannot be reckoned as an eligible expenditure under s.37(1) of the Act.
The Learned AR, on the other hand, submitted that the company has provided warranty to its customers in accordance with warranty clause mentioned in the sales order and thus warranty is integral part of sale price. It was next submitted that provision for warranty has been made on a scientific basis for which the calculations were provided as reproduced by the CIT(A) in para 4.4 of its order. Similar warranty has been consistently provided year after year based on past experiences. In elaboration, it was submitted that the provision for warranty is not towards possible claim made by the customers alone but also include maintenance services to be provided during warranty period. In order to provide warranty services, the company is required to incur material, salary, travelling and other expenses which require outflow of resources to settle the obligation. It was thereafter submitted that the issue is no longer res integra and provision for [DCIT vs. GMM Pfaulder Ltd.] A.Y. 2005-06 - 3 - warranty has been duly accepted as revenue expenditure by the Hon’ble Gujarat High Court in case of Pr.CIT vs. Hitachi Home & Life Solution (I) Ltd. Tax Appeal No. 1236 of 2018 judgment dated 09.10.2018. The provision for warranty expenses has been held to be allowable expenditure by the Hon’ble supreme Court in Rotork Controls India Pvt. Ltd. vs. CIT [2009] 314 ITR 62 [SC] as referred to and relied upon by the CIT(A).
We have heard the rival submissions. We find that the CIT(A) has examined the issue threadbare and also took note of the basis of calculation of warranty provisions. The relevant operative para of the order of the CIT(A) is reproduced hereunder:
4.3. Decision: 1 have carefully considered the facts of the case, the assessment order and the written submission of the appellant. It is worth here to mention that the assessment order has been passed by the AO in pursuance to the directions of the Hon'ble ITAT 'A' Bench, Ahmedabad in for the year under consideration, whereby the issue under consideration has been directed to be decided afresh in light of the directions issued in ITA No. 12/Ahd/2008 for A. Y. 2004-05 in appellant's own case. For ready reference, the directions given by the Hon'ble ITAT for the year under consideration is reproduced as under:- "15.1. We have heard the rival submissions, perused the material available on record and gone through the order of the authorities below. We find that the Hon'ble Tribunal in ITA No. 12/Ahd/2008 for A. Y. 2004-05 (Revenue's appeal in assessee's own case) vide order dated 11/12/2011 has restored the matter back to the file of AO by observing as under:-
"76. Ground No. 2 relates to deletion of a sun of Rs.6,43,000/- is provisions for warranty expenses. The assessee debited a sum of Rs.25,70,000/- in the P & L Account. The AO disallowed warranty expenses for three months on proportionate basis an pertaining to the subsequent year. The ld. CTT(A) allowed the entire claim following the decision of ITAT, Bangalore in the case of Wipro Ge Medical System Lid. vs. DCIT 81 TTJ 455. ……..
We have heard the parties. The assessee has to submit present value of warranty expenses. It has to be properly ascertained and discounted on accrual basis. A proper [DCIT vs. GMM Pfaulder Ltd.] A.Y. 2005-06 - 4 -
calculation of this issue will he submitted to the AO who will examine the same and allow the claim as per decision of Hon. Supreme Court in Rotork Controls India (P) Ltd. (supra) ax above, This ground of Revenue is allowed but for statistical purposes. "
15.2. Since the facts are identical in this case also and the Revenue has not pointed out any change in the facts and circumstances of the case, therefore taking a consistent view, we accordingly set aside the order of the ld. CIT(A) and restore this issue back to the file AO for fresh adjudication. Thus, this ground of Revenue's appeal is allowed but for statistical purposes."
4.4. On going through the facts of the case, it is seen that, these expenses were pertaining to the estimated liability on account of cost that may be incurred on product sold under warranty. The cost to be incurred providing free service under warranty was determined based on past experience and are provided for in the year of sale. The company was following this system consistently. Every year, at the end of the year, how much provision was required was calculated and it was compared with provisions of warranty in books of accounts any short / excess provision as debited and credited to P & L Account. As per appellant, the claim of provision for warranty expenses was debited only to the tune of Rs.21,74,000/- rather than the total disallowance made by the AO at Rs.68,61,000/-. Thus, the AO has made the excess disallowance of Rs.46.87,000/- which was in fact the provision in the books of account as on 31/03/2004. The amount of the provision as on 31/03/2005 was at Rs.68,61,000/- with the provision made in the year under consideration at Rs.21,74,000/-. The appellant further submitted that the provision has been made on the basis of the formula provided as per the scientific method to estimate the warranty expenses of which detailed working submitted is as under:-
Product Warranty Calculation for the Financial Year 2004-05 Year Net sales Free Excise Cost of Free (Rs. ‘000) Replacement Duty 16% service Replacement Basic Value Total 2000-01 434,678 3,232 517 3,749 2001-02 410,590 2,846 455 3,301 2002-03 521,797 2,873 460 3,333 2003-04 590,521 12,709 2,033 1,908 16,650 2004-05 806,533 3,964 634 1,908 6,506 Provision for Warranty Exp. 2004-05 Rs. ‘000 Net sale for the current year 1 2 months 806,533 Constant Factor 0.50 Historical Relation of Warranty exp. & Net sales 1.70 Warranty Exp provision required for the year 2004-05 [DCIT vs. GMM Pfaulder Ltd.] A.Y. 2005-06 - 5 - Historical Relation Rs. ‘000 Total Warranty exp. 04-05 as above 6,506 Net Sales of 03-04 590,521 1.10% Total Warranty exp. 03-04 as above 16,650 Net sales of 02-03 521,797 3.19% Total Warranty exp 02-03 as above 3,333 Net Sales of 01-02 410,590 0.81% Average warranty exp. Last 3 years 1.70%
Rs. '000 Prov. Required as on 31/03/2005 6,861 Amount of prov. In books as on 31.03.2004 4,687 Provision required / (Written Back) for the year end 31/03/05 2,174 4.5. The appellant also submitted that against the original assessment completed, the disallowance made by the AO, on appeal the ld.CIT(A)- VIII, Ahmedabad in its order dated 05/05/2008 vide Para No. 7.2 has deleted the disallowance with the following observations:-
"I have carefully considered the submissions of the AR. Considering the facts of the case, it Is found that the provision has been made by the appellant on scientific basis and it is an ascertained liability. Similar disallowance has not been made by the AO in earlier years up to A. Y. 2003-04, therefore, relying on the decision of 1TAT. Bangalore in the case of Wipro Ge Medical Systems Limited vs. DCIT cited supra and other decisions relied upon by the A. R., the disallowance made by the AO of Rs.21.74 lakhs is deleted. As regards the reversal of provision of Rs.46.87,000/- the same is taxable u/s. 41(1) as the same has been allowed as expenditure in earlier year. However as the appellant has already offered the same as income no further addition or disallowance is required. Hence the addition of Rs.46.87.000/- is no more required and so the same is deleted. Thus the total addition on account of provision for warranty of Rs.68.61 lakhs is deleted."
4.6. Thereafter, against the order of CIT(A) on the appeal of revenue, the Hon'ble ITAT, Ahmedabad has directed the AO la examine the calculation of warranty expenses in view of the judgment of Hon'ble Supreme Court in Rotork Controls India Pvt. Ltd. However, the disallowance was once again made by the AO stating that no scientific or other basis for provision has been adopted. Thus the expenditure was in the nature of contingent liability. The appellant submitted that the working of the provision has been made applying 0.5% constant factors to the sales made in the current year and based on the expense incurred in respect of sales made, the appellant has worked out the average of the expenditure during warranty period in last three years which have been reproduced in the preceding [DCIT vs. GMM Pfaulder Ltd.] A.Y. 2005-06 - 6 - paras. Similar disallowances have not been made by the AO in earlier years except A. Y. 2004-05 in which part provision of Rs.6,43,000/- out of Rs.25,72,000/- was disallowed. However, subsequently, the ld.CIT(A) - 2, Ahmedabad has deleted the entire disallowance on this issue vide appellate order No.CIT(A)-2/ACIT/Cir.4/252/11-12 dated 14/05/2015. The relevant portion of the decision is reproduced hereunder:-
"3.3 Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has disallowed warranty expenses of Rs. 6,43,000/- corresponding to the provisions made for last three month of the financial year as the period of warranty would foil in subsequent financial year. The issue was set aside by the honourable ITAT to the AO. The AO has again disallowed the same on the ground that the warranty period is not falling during the current financial year. The appellant has submitted that it had made warranty provisions of Rs.25.72 lakh which has been worked out on scientific basis. The provision is made in respect of the sales made under the year of assessment. The appellant has debited only incremental amount to the profit and loss account which show that the extent of opening balance of provision of warranty has been reduced from the total provision of warranty required os on the last day of the financial year. Therefore, it has been submitted by the appellant that there is no separate entry of the provision written back, the appellant has provided for the warranty by applying .5% constant factor lo the sales made in the current year and based on the expenses incurred in respect of the sales made. The appellant had incurred .76% expenses in respect of F.Y. 2000- 2001, .81% in respect of year 2002 - 03 and in relation to its sales of 2003 - 04, if was 3.19%. The appellant has, therefore, taken the lowest percentage of expenditure of all the three years and provided for the warranty expenditure of Rs. 25.72 lakh. Regarding the full year warranty provision, it has been submitted that the warranty period is 18 months from the date of dispatch or 12 month from the date of commissioning of the working of glass lined vessels and since, the entire sale price is credited to sales account, the expenditure to be incurred during the entire warranty should be allowed as deduction on the principle of prudence and the matching concept as per Accounting Standard 29 of the ICAI.
On a careful consideration of entire facts of the case, it is noted that the appellant has made the provisions on the scientific basis. It has provided for the expenditure by adopting percentage of .76% which was the lowest in last three years. It has only made the incremental provision during the year and the balance lying in the provision to warranty account has been adjusted against the provision of current year's warranty. Regarding, the addition of the AO that the warranty for last three months of the year would be applicable in the next year, it is noted that the sale for last three months have been shown in the profit and loss account by the appellant and all the expenses related to those sales will have to be provided in the current year itself. This practice has been adopted [DCIT vs. GMM Pfaulder Ltd.] A.Y. 2005-06 - 7 - by the appellant in earlier years and it is noted that no disallowance on account of warranty provision has been made in other years. The provision is also in accordance with the accounting standards prescribed by the ICAI. The claim of the appellant that on the basis of matching principle of providing the expenditure corresponding to the income the provisions are to be allowed in the current year itself is acceptable. In view of the above discussion, the disallowance made by the AO is directed to be deleted as the provisions made by the appellant are in order and have been made by following a scientific and systematic method as held by the honourable Supreme Court in the case of Rotork Controls India Private Limited. The ground of appeal is accordingly allowed."
4.7. It has also been noticed that in appellant's own case in A. Y. 2006-07 to 2008-09, the ld.CIT(A) has allowed the appeal of the appellant or this issue. On the contrary in A. Y. 2009-10, the excess provision for warranty was credited in the P & L Account by the appellant which has been accepted by the AO. Further, in A. Y. 2010-11, the ld.CIT(A) has allowed the appeal on this issue and the disallowance made was deleted. As per appellant the said decision has been accepted by the department and no second appeal before the Hon'ble ITAT, Ahmedabad has been preferred.
4.8. On going through the details and submissions, it has been noticed that the appellant has taken the average warranty expenses of last three years which was 1.70% of the total sales and even taking the constant figure at 0.5%, the total provision was arrived at Rs.68,61,000/- out of which Rs.46,87,000/- was the provision made till the immediately preceding year. Thus, in the year under consideration, the provision of the incremental value of Rs.21,74,000/- was made. Thus, the disallowance made by the AO to the extent of Rs.46,87,000/- was unwarranted as no such provision has been debited in the P & L Account of the year under consideration. Further, the provision for warranty debited in the books of account for the year under consideration at Rs.21,74,000/- is allowed tor the reason that the same is based on the scientific method adopted by the appellant as per the consistency followed in the preceding years and on the basis of the immediately preceding three years expenditure incurred by the appellant. On the same basis, the ld. CIT(A) in appellant's own case in A. Y. 2004-05 has also granted the provision made by the appellant. Thus, the disallowance made by the AO of Rs.68,61,000/- is not found correct and justified and is accordingly deleted. The ground of appeal is accordingly allowed.
6. We are of considered view, the CIT(A) has correctly appreciated the fact in perspective and complied the position of law properly as rendered by the Hon’ble Supreme Court in Rotork Controls India Pvt. Ltd. (supra) and Hon’ble Gujarat High Court in Hitachi Home & Life Solution (I) Ltd.(supra), without repeating the content of the order of [DCIT vs. GMM Pfaulder Ltd.] A.Y. 2005-06 - 8 - the CIT(A) reproduced hereinabove, we see no reason to take a different view in the matter. We thus decline to interfere with the order of the CIT(A).
In the result, the appeal of the Revenue is dismissed.
This Order pronounced in Open Court on 28/06/2019
Sd/- Sd/- (RAJPAL YADAV) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: Dated 28/06/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।