SONA BLW PRECISION FORGINGS LIMITED,GURGAON vs. COMMISSIONER OF INCOME-TAX (APPEALS), NFAC

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘E’, NEW DELHI BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER And SHRI NAVEEN CHANDRA, ACCOUNTANT MEMBER ITA Nos. 5349 & 5350/Del/2025 [Assessment Years: 2017-18 & 2018-19] Sona BLW Precision Vs CIT(A) Forgings Ltd. NFAC, Delhi – 110 002 Sona Enclave Village Begumpur Khatola, Sector – 35, Narsinghpur SO Narsinghpur, Gurgaon-122 004, Haryana PAN : AABCS 4786 P (ASSESSEE) (RESPONDENT) Assessee by Shri Siddhesh Chaugule, Adv. (through VC) and Ms. Vidhi Ahuja, C.A. Revenue by Ms. Ankush Kalra, Sr. D.R. Date of Hearing 12.05.2026 Date of Pronouncement 27.07.2026

ORDER PER NAVEEN CHANDRA [ACCOUNTANT MEMBER]:

The above captioned appeals are preferred by the assessee against the order dated 10.06.2025, passed by Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)/NFAC], under section 250 of the Income Tax Act, 1961 [hereinafter referred to as, ‘Act’] arising out of

ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) the separate assessment order dated 26.12.2019 passed by the Assessing Officer (hereinafter referred as ‘the AO’) u/s 143(3) of the Act for Assessment Year 2017-18 & assessment order dated 02.04.2021 passed by the AO u/s 143(3) r.w.s 143(A) & 143(3B) of the Act for Assessment Year 2018-19. 2. Since the above captioned appeals were heard together and the facts in issues are identical, both the appeals are being disposed of by this common order for the sake of convenience and brevity. 3. The grounds of appeal raised by the assessee in ITA No.5349/Del/2025 for AY 2017-18 are as under: 1. Based on the facts and circumstances of the case, Sona BLW Precision Forgings Limited (the Assessee) respectfully submits the present appeal before the Hon'ble Income Tax Appellate Tribunal (Hon'ble ITAT") under Section 253(1)(a) of the Income-tax Act. 1961 ('the Act"), against the order dated 10 June 2025 (hereinafter referred to as the 'impugned order), passed by Commissioner of Income-tax (Appeals), NFAC ('Ld. CIT(A)") under Section 250 of the Act, on the following grounds, which are without prejudice to each other: Disallowance of provision for warranty amounting to INR 1,40,00,000 1. Based on the facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in upholding the order passed by the Assistant Commissioner of Income-tax, Corporate Circle 1(2) Che ('Ld. AO') and confirming the disallowance of claim of deduction of provision for warranty amounting to INR 1,40,00,000. 1.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the provision for warranty is a liability allowable as deduction on accrual basis as held by Hon'ble Supreme Court in the Rotork Controls India (P) Ltd. (2009) 314 ITR 62 (SC). 1.2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the provision for warranty is based on scientific method keeping in view the past year trends and hence allowable as deduction. Disallowance of royalty amounting to INR 1,33,33,333

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) 2. Based on the facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in upholding the order passed by the Ld. AO and disallowing the amount of INR 1,33,33,333 being the tax deducted at source on gross-up basis on the amount of royalty amounting to INR 12,00,00,000. 2.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the TDS amount of INR 1,33,33,333 on gross-up basis on the amount of royalty is in the nature of royalty payment and the disallowance of same while the royalty paid has allowed as deduction, is grossly wrong and liable to be quashed. 2.2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred by ignoring the fact that the Hon'ble ITSC has accepted that the tax would be paid after grossing-up the payment for royalty and the payment of tax is made pursuant to the order issued by the Hon'ble ITSC. 2.3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has failed in appreciating the fact that TDS is part of the total royalty payment without which the Assessee could not have remitted the payment. Interest under Section 234C of the Act 3. Based on the facts and circumstances of the case and in law, the Ld. AO has erred in computing interest under Section 234C of the Act at INR 30,80,683. 3.1. On the facts and circumstances of the case and in law, Ld. AO has erred in computing interest under Section 234C of the Act amounting to INR 30,80,683 on the assessed income instead of returned income.” The Assessee prays for leave to add, alter, amend and/or modify any of the grounds of appeal at or before the hearing of the appeal.” 4. Brief facts are that Comstar Automotive Technologies Private Limited (Comstar'") has been amalgamated with the Assessee pursuant to the order of the Hon'ble National Company Law Tribunal ('NCLT') Chandigarh Bench dated 7 January 2022 with effect from 5 July 2019. Comstar was engaged in the business of manufacturing and assembly of starter motors, alternators, and starter kits forming part of the automobiles in the domestic and international market. Comstar

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) (hereinafter referred to as 'the Assessee) filed its income-tax return for AY 2017-18 on 23 November 2017 under section 139(1) of the Act declaring a total income of INR 1,44,97,74,420. Subsequently, the Assessee filed revised return on 23 August 2018 declaring a total income of INR 1,38,10,38,210. The case was selected for scrutiny assessment and accordingly notice under Section 143(2) of the Act was issued for AY 2017-18. 5. The Ld. AO completed the assessment vide order dated 26.12.2019 under Section 143(3) of the Act by making the following disallowances: Income as per Normal provisions of the Act Amount in INR Taxable income as per return of income 138,10,38,210 Add: Disallowance of provision for warranty 1,40,00,000 Add: Disallowance for Excess claim of Royalty 1,33,33,333 Total taxable income 140,83,71,543

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) balance is sufficient enough to meet such liabilities. Additionally, the Ld. CIT(A) held that the actual expenses on account of warranty as claimed by the Assessee itself which could have been met out from these opening balances itself warranting no fresh creation of provision. 8. The ld AR submitted that provisioning for warranty is an established and integral part of its business operations in the automotive industry. Warranty represents a contractual obligation to repair or replace defective products during the warranty period, and this liability arises at the time of sale itself. Such warranty is inextricably linked to each sales transaction entered into by the Assessee. The ld AR further stated that the Assessee's warranty provision has been created on a scientific, rational and consistently followed method based on past experience and historical trends which has not been questioned by the CIT(A). 9. The ld AR argued that the Warranty obligations are embedded in each sales contract and accrue on the date of sale. Since customers routinely avail warranty services, the liability is neither uncertain nor contingent. The estimated provision for warranty, being a normal trading expenditure, should be allowed under Section 37(1) of the Act. Since the Assessee has accrued revenue from contracts in respect of which warranty may be required, all related warranty costs has also

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) been recognized on an accrual basis in the same period under the accrual/matching concept. 10. In this regard, the Assessee submits that since the warranty obligations are inherent to each sale, giving rise to a present obligation with probable outflow, and are reliably estimated through a consistent methodology while ensuring proper matching under the mercantile system. Accordingly, the provision for warranty created by the Assessee on an accrual basis is purely scientific in nature and is well supported by the judgement of Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (2009) 314 ITR 62 (SC) and therefore, should be considered as a legitimate trading expense allowable under Section 37(1) of the Act. 11. The ld AR relied on the decision of coordinate bench of ITAT in the case of Marelli Um Electronic Systems (P.) Ltd. vs. DCIT/Assessment Unit, Income-tax Department [2025] 181 taxmann.com 660 (Delhi - Trib.) and on the decision of Karnataka High Court in the case of Apple India (P.) Ltd. Vs Deputy Commissioner of Income-tax [2023] 152 taxmann.com 102 (Karnataka). 12. With respect to Ground No. 2 the AR stated that the Assessee has entered into an Intellectual Property Transfer Agreement with its Parent Company in Mauritius during August 2009. Accordingly, the

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) payments were made to its Parent Company to the tune of INR 44.10 crore for use of the Patents during the AY 2010-11. The issue was contemplated before the Hon'ble Settlement Commission. The Commission upon hearing both the parties, has passed its order dated 30 June 2016, whereby the said payment to the parent Company has been allowed to be treated as Royalty to the extent of INR 12 Crore. 13. The ld AR stated that the Ld. CIT(A) wrongfully held that the Hon'ble Settlement Commission in their order has fixed the gross payments of royalty at Rs. 12 crores and thereby any excess payment as claimed by the assessee is to be treated as not allowable. The ld AR submitted that in accordance with the decision of the Hon'ble Settlement Commission, the Assessee has treated the sum of INR 12 crores as Royalty and the said sum has been subjected to withholding tax at the rate of 10% on the royalty payment (by grossing up the payment) along with the interest liability that was directed by the Hon'ble Settlement Commission to be made by the Assessee. 14. At the outset, the Assessee humbly submits that the taxes paid amounting to INR 1,33,33,333 by treating the amount of INR 12,00,00,000 as royalty payment made to the Parent Company, was only in discharge of the tax liability of the Parent Company which the Assessee had undertaken in terms of the IPR agreement entered into

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) between the Assessee and the Parent Company. Accordingly, the Assessee submits that the withholding tax liability of INR 1,33,33,333 thus forms part of the total royalty payment made by the Assessee to its Parent Company as per the order of the Hon'ble Settlement Commission. The ld AR states that had the Assessee not undertaken the liability to pay tax on behalf of the Parent Company, the royalty charged by the Parent Company would have been higher to cover the liability for withholding tax. In this regard, the Assessee places reliance on the decision of Hon'ble Madras High Court in the case of Commissioner of Income-Tax vs Standard Polygraph Machines Pvt. [2002] 124 taxmann 669 (Madras HC) and on the decision of Hon'ble High Court in the case of Tata Yadogawa Ltd. vs. Commissioner of Income-tax [2010] 8 taxmann.com 174 (Jharkhand HC). Reliance is also placed on the following decisions  DIT v. Italian Thai Development Co. Ltd. [2014] 45 taxmann.com 61 (Delhi HC)  Assistant Commissioner of Income-tax-2(1), Mumbai v. Bobcards Ltd. [2013] 29 taxmann.com 234 (Mumbai - Trib.)  Man Industries (India) Ltd. vs. Assistant Commissioner of Income-tax [2023] 147 taxmann.com 178 (Mumbai - Trib.))

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) would be increased by the amount of tax. In other words, the net amount is required to be grossed-up for the purpose of deduction of tax at source. In light of the above, the Assessee prays to your Honor to allow the claim for deduction of withholding tax amounting to INR 1,33,33,333 (paid on a gross-up basis on the royalty payment) as a business expenditure for the captioned year. The Assessee in this regard submits that, as per the ratio laid down by the above-mentioned judicial precedents and in accordance with the provisions of the Act, the amount of INR 1,33,33,333 forms an integral part of the royalty consideration payable to the Parent Company and thus deserves to be deducted as a business expense while computing the income chargeable to tax under the head "Profits and gains of Business or Profession". 16. Per contra the ld DR vehemently relied on the orders of AO and the CIT(A). 17. We have heard the rival submissions and have carefully perused the materials on record. We note that it is an admitted fact that Warranty represents a contractual obligation to repair or replace defective products during the warranty period, and this liability arises at the time of sale itself and is inherent to each sale. It is also not in dispute that the assessee’s estimation of warranty expense on accrual

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) basis are made through a consistent and scientific methodology while ensuring proper matching under the mercantile system. Accordingly, the judgement of Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd 314 ITR 62 (SC) is squarely applicable wherein the court held that the provision for meeting warranty claims on sales computed on accrual basis as per scientific method taking into account the past trends is allowable expenditure. The relevant observation is extracted as below: “12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under Section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to sending that obligation, Over the years assessee has been manufacturing Valve Actuators in large numbers. The statistical data indicates that every year some of these manufactured Actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. 13. In this case we are concerned with Product Warranties. To give an example of Product Warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply.

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) The said company considers following options: (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2% of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the assessee has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfills accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company... ………… 17. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation. 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 in 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 assessee... 18. The decision of coordinate bench of ITAT in the case of Marelli Um Electronic Systems (P.) Ltd. vs. DCIT/Assessment Unit, Income-

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) tax Department (supra) also supports the assesse’s case wherein it was held that once the practice of providing provision of the nature of warrantee has worked out over the years then only for the reason of the opening balance being sufficient to discharge the events of satisfying the liability during the year cannot be a basis to dilute the warrantee claim and if the provisions were established to be on basis of experience and historical trend which had not been countered by any facts by the AO, then the deduction of the same should be allowed. The ITAT decision is reproduced as under: "14. We find that Id. tax authorities had considered addition on account of provision for warrantee primarily on the basis that when assessee already had an opening balance of provision of more than.5% sales of last 2 years then assessee had no need to increase provision by an amount of Rs.90,80,952/-, We are of the considered view that once the practice of providing provision of the nature of warrantee has worked out over the years then only for the reason of the opening balance being sufficient to discharge the events of satisfying the liability during the year cannot be a basis to dilute the warrantee claim. Provisions are established to be on the basis of experience and historical trend which have not been countered by any facts establishing that the working of the provision itself is faulty. There is no allegation that the nature of products and services do not give rise an obligating event so as to not create a provision. The year wise working of provision for warrantee provided to us and reproduced above show that the warrantee provision utilized during the year is Rs.58,05,616/- which is higher than 2013-14 and in the past 9 years warrantee provision were utilized and are consistent to policy. Thus, based on estimation of the obligation and outflow of resources the warrantee was made which need not be disturbed on assertion that opening balance would have been sufficient to discharge the possible liability during the year.

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) 15. In the group entities case by order dated 10.12.2024 (supra) provision for warrantee made on similar lines was held to be scientific basis taking into account past and in respect of claim of warrantee. 16. Thus, we are of the considered view that Id. tax authorities below have fallen in error in making the disallowance. Consequentially grounds are sustained. The appeal of the assessee is allowed with a direction to grant deduction provision for warrantee during the relevant year.” 19. We also find that the decision of Karnataka High Court in the case of Apple India (P.) Ltd. Vs Deputy Commissioner of Income-tax [2023] 152 taxmann.com 102 (Karnataka) wherein it has been held that where the estimate made by the assessee for the provision of warranty on a scientific method is reliable and robust, then the provision shall be allowed to be deducted as an expense while computing the business income of the assessee, supports the claim of the assessee. 20. In view of the above discussion and judicial precedents, we are of the considered view that the provision for warranty of Rs 1.40 crore is a legitimate trading expense and eligible for deduction under Section 37(1) of the Act. We direct the AO to delete the said disallowance. The ground is allowed in aforesaid terms. 21. With respect to disallowance for excess claim of Royalty, we are inclined to agree with the assessee that the CIT(A) misunderstood the issue of Royalty being fixed to Rs 12 crore by the Settlement Commission. The Assessee has entered into an Intellectual Property

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) Transfer Agreement with its Parent Company in Mauritius during August 2009 in accordance of which the assessee made payments of Rs 44.10 crore to its Parent Company for use of the Patents during the AY 2010- 22. The Settlement Commission allowed the said payment to the parent Company, to be treated as Royalty to the extent of Rs 12 Crore. 23. We find that the Settlement Commission, held as follows: "....8.5.2 During hearing on 24.6.2016, the applicant filed another letter stating that in the spirit of settlement and to put a quietus to all disputable issues, Rs. 12 crores may be allowed as royalty payable on the IPs. and the rest Rs. 32.10 crores treated as dividend paid u/s 115O to CML. The applicant has further undertaken to pay the with-holding taxes at 10% on the amount of royalty (Rs. 12 crores) by grossing up the payment together with the appropriate interest w/s.201 of the Act till the date of payment of with-holding taxes...... 8.5.3. Taking into consideration all the facts and circumstances of the case, it is held that a sum of Rs.12 cores be allowed as royalty to meet the ends of justice. The offer made by the applicant vide its letter dated 24.6.2016 is found to be reasonable and fair....." 24. We further find that the Settlement Commission did not adjudicate on the issue of the taxes paid amounting to Rs 1,33,33,333 on the said Royalty payment of Rs 12,00,00,000 made to the Parent Company, being allowable or not. We find that the taxes paid on Royalty payment was only in discharge of the tax liability of the Parent Company which the Assessee had undertaken in terms of the IPR agreement entered into between the Assessee and the Parent Company. We therefore agree with the assessee that the withholding

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) tax liability of Rs 1,33,33,333 thus forms part of the total royalty payment made by the assessee to its Parent Company. Such a view is supported by the decision of Hon'ble Madras High Court in the case of Commissioner of Income-Tax vs Standard Polygraph Machines Pvt. [2002] 124 taxmann 669 (Madras HC) wherein the Hon'ble Madras High Court has observed that the amount of tax paid by the assessee should be regarded as liability of the foreign collaborator which the assessee had undertaken to pay. The relevant extract of the decision is provided below: "The Tribunal had held that the amount paid by the assessee as income-tax on the amount paid to the foreign collaborator was only in discharge of the liability of the collaborator which the assessee had undertaken to pay as part of the agreement entered into with the foreign collaborator for receiving the technical know-how under the agreement. The amount so paid as tax had been held to be an amount payable by virtue of the terms of the agreement between the collaborator and the assessee. Had the collaborator not been assured of the assessee's undertaking the liability, the collaborator would have charged higher fee to cover the liability for taxes. It was only on the assurance of the assessee that the liability would be met by the assessee, that the collaborator had agreed to receive the sum specified in the agreement. Hence, the Tribunal was right in its view that the amount so paid by the assessee was only in discharge of a liability which it had undertaken in terms of the agreement entered into between the assessee and the collaborator and it, therefore, formed part of the consideration for the agreement relating to know-how."

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) Italian Thai Development Co. Ltd. [2014] 45 taxmann.com 61 (Delhi HC) wherein it was held that payment of taxes was an integral part of the consideration, as the obligation under the agreement extended not merely to remitting an amount for know-how but also included payment of the relevant taxes thereon. 26. In view of the above discussion and the judicial precedents, when, as in the instant case, the liability of withholding taxes is borne by the assessee, then the amount of withholding taxes is to be considered as having acquired the character of cost that forms an integral part of the entire consideration paid as royalty. We are therefore of the considered view that the claim for deduction of withholding tax amounting to Rs 1,33,33,333, paid on a gross-up basis on the royalty payment, as a business expenditure for the captioned year is an allowable expenditure. The disallowance made by the AO is accordingly deleted. The ground is allowed. 27. Ground 3 regarding levy of taxes u/s 234C is consequential in nature. 28. The grounds of appeal raised by the assessee in ITA No.5350/Del/2025 for AY 2018-19 are as under: “Based on the facts and circumstances of the case, Sona BLW Precision Forgings Limited ('the Assessee) respectfully submits the present appeal before the Hon'ble Income Tax Appellate Tribunal (Hon'ble ITAT) under Section 253(1)(a) of the Income-tax Act, 1961 ('the Act'), against the order

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) dated 10 June 2025 (hereinafter referred to as the 'impugned order"), passed by Commissioner of Income-tax (Appeals), NFAC ('Ld. CIT(A)') under Section 250 of the Act, on the following grounds, which are without prejudice to each other: Show-cause notice of proposed disallowances/additions, as required under the Faceless Assessment Scheme, was not provided. 1. Based on the facts and circumstances of the case and in law, the National e-Assessment Centre ('Ld. AO) erred in not issuing the show cause notice for the proposed disallowances / additions of INR 1,36,70,201 under Section 35(2AB) of the Act and amount of INR 90,00,000 for provision of warranty, as required under the Faceless Assessment Scheme, 2019, before passing the final assessment order and making the aforesaid disallowances, thereby depriving the assessee the opportunity to submit its objections against the proposed additions. Disallowance of provision for warranty amounting to INR 90,00,000 2. Based on the facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in upholding the order passed by the Ld. AO and confirming the disallowance of claim of deduction of provision for warranty amounting to INR 90,00,000. 2.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the provision for warranty is a liability allowable as deduction on accrual basis as held by Hon'ble Supreme Court in the Rotork Controls India (P) Ltd. (2009) 314 ITR 62 (SC). 2.2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the provision for warranty is based on scientific method keeping in view the past year trends and hence allowable as deduction. Disallowance of deduction of expenses u/s 35(2.4B) of the Act amounting to INR 1,36,70,201 3. Based on the facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in confirming the order of Ld. AO and disallowing the deduction of INR 1,36,70,201 in relation to the expenditure incurred on scientific research on in-house research and development facilities under Section 35(2AB) of the Act, while admittedly the in-house research and development facility has been approved by the Department of Scientific and Industrial Research (DSIR') vide their order dated 21 August 2017 in Form 3CM, fulfilling all the conditions required for deduction under Section 35(2AB) of the Act. 3.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the amount of deduction upto the amount stated in

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) Form 3CI., thereby disallowing part of in-house scientific research expenditure, amounting to INR 1,36,70,201, failing to appreciate that once the in-house research and development facility is approved by DSIR, all expenses incurred on scientific research is required to be allowed as deduction under Section 35(2AB) of the Act. Interest under Section 234C of the Act 4. Based on the facts and circumstances of the case and in law, the Ld. AO has erred in computing interest under Section 234C of the Act at INR 2,16,459. 4.1. On the facts and circumstances of the case and in law, Ld. AO has erred in computing interest under Section 234C of the Act amounting to INR 2,16,459 on the assessed income instead of returned income. The Assessee prays for leave to add, alter, amend and/or modify any of the grounds of appeal at or before the hearing of the appeal.” 29. Comstar (hereinafter referred to as 'the Assessee) filed its income-tax return for AY 2018-19 on 25 November 2018 under section 139(1) of the Act declaring a total income of INR 1,46,22,91,480 and claiming a refund of INR 87,13,150 therein. Subsequently, the case was selected for scrutiny assessment and accordingly notice under Section 143(2) of the Act was issued for AY 2018-19. TheNational e-Assessment Centre, Delhi (hereinafter referred as 'Ld. AO') completed the assessment vide order dated 2 April 2021 passed under Section 143(3) of the Act (enclosed at Page No. 29 to 38 of the PB) by making the following disallowances: Income as per Normal provisions of the Act Amount in INR Taxable income as per return of income 1,46,22,91,480 Add: Disallowance of excess deduction claimed 1,36,70,201 under section 35(2AB) of the Act Add: Disallowance of provision for warranty 90,00,000

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) Total taxable income 148,49,61,681

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) disallowed the balance amount of Rs 4,10,10,604, solely on the basis of variance with Form 3CL. Out of the said disallowance, revenue expenditure of INR 2,73,40,403 was allowed under Section 37(1) of the Act, and the remaining Rs 1,36,70,201 was disallowed. S. No. Nature of expense Amount of expense Amount of dedn reported under allowed by AO Form 3CL by DSIR (150% of A) (A) 1. Capital expenditure 5,79,25,492 8,68,88,238 2. Revenue expenditure 11,95,60,000 17,74,85,492 Total 17,93,40,000 26,62,28,238 Thereafter, the Ld. CIT(A) upheld the said disallowance 35. The ld counsel of the assessee submitted that section 35(2AB)(1) of the Act provides that it is only the in-house R&D facility that should be approved by DSIR and no approval from DSIR is required in respect of the expenditure eligible for weighted deduction. Further Section 35(2AB)(1) refers to 'any' expenditure, therefore, weighted deduction is to be allowed on expenditure 'so incurred'. The ld AR referred to Section 35(3) of the Act which provides that if any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, CBDT shall refer the question to DSIR, whose decision shall be final. Section 35(3) of the Act does not provide the scope for referring to DSIR for determining the amount of expenditure

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) eligible for deduction. Thus, Section 35(2AB)(1) of the Act, gives authority to DSIR to approve the research facility on which the Assessee intends to claim the weighted deduction. 36. The ld AR referred to CBDT circular explaining the amendments to Finance Act 1997 on Section 35(2AB) of the Act vide Circular No. 763 dated 18 February 1998. The ld AR also referred to Rule 6(4) of the Income-tax Rules, 1962 ('the Rules') which provides for an application in Form No. 3CK is required to be filed with DSIR, wherein details of past 3 years expenditure on scientific research are furnished solely to enable verification of the genuineness of scientific research activities. Part B of Form 3CK (the Agreement) unequivocally provides that the prescribed authority is empowered to grant approval only in respect of the in-house R&D facility and not the expenditure incurred thereon. Notably, even after the Income-tax (Tenth Amendment) Rules, 2016, no power has been conferred upon DSIR to approve or quantify eligible expenditure. This position is further reinforced by Rule 6(5A) of the Rules which mandates issuance of approval in Form 3CM, a form that sanctions only the R&D facility and not any specific amount of expenditure. Thus, the statutory scheme of Section 35(2AB) of the Act clearly reflects that the intent is to approve eligible R&D facilities

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) upon fulfilment of prescribed conditions, and not to determine or restrict the quantum of eligible expenditure. 37. The ld AR placed reliance on the decision of Hon'ble Delhi High Court in case of Nagravision India (P.) Ltd. vs. Secretary, Department of Scientific and Industrial Research [2024] 159 taxmann.com 558 (Delhi HC), for the proposition that section 35(2AB) of the Act does not link the expenditure incurred to the approval of R&D facility by DSIR. Further, reliance is placed on the following decisions wherein it has been held that Section 35(2AB) of the Act refers to 'any expenditure' and hence the entire R&D expenditure should be permissible for weighted deduction, though DSIR certified lesser amount of deduction:  CIT v. Claris Lifesciences Ltd. [2008] 174 Taxman 113 (Gujarat HC) (Refer Page No. 450 to 453 of the PB)  Sandhar Technologies Ltd. vs. Deputy Commissioner of Income-tax [2024] 160 taxmann.com 1208 (Delhi-Trib.) (Refer Page No. 454 to 460 of the PB)  Banco Products (India) Ltd. vs. DCIT [2018] 95 taxmann.com 132 (Gujarat HC) (Refer Page No. 480 to 487 of the PB)  USV Ltd. vs. DCIT [2012] 24 taxmann.com 218 (Mumbai Trib.) (Refer Page No. 488 to 502 of the PB)

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) rendered herein above for AY 2017-18 applies mutatis mutandis to the facts of the case for AY 2018-19. The ground is therefore allowed. 40. To adjudicate the issue in ground 3, it would be pertinent to extract the relevant provision of law u/s 35(2AB). "(2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred:”

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) of land and building, are eligible for weighted deduction under the section 35(2AB) of the Act. 42. We further find that the issue has been settled in favour of the assessee by the hon’ble Delhi High Court in case of Nagravision India (P.) Ltd. vs. Secretary, Department of Scientific and Industrial Research [2024] 159 taxmann.com 558 (Delhi HC), wherein it was held that section 35(2AB) of the Act does not link the expenditure incurred to the approval of R&D facility by DSIR and therefore, it does not prescribe that it is only such expenditure that gets incurred post approval of the facility which would qualify for deduction. Further, it was observed by the Hon'ble Delhi High Court that quantification of expenditure under Rule 6(7A) is only a preparatory step or a pre- condition for the consideration of weighted deduction of expenditure under Section 35(2AB) of the Act and the only condition which the DSIR Guidelines impose for availing the benefits of Section 35(2AB) is that the R&D center must be "subsequently recognized by DSIR". The relevant extract of the judgement has been reproduced below: "19................. While the approval of the indigenous R & D facility may be a precondition for further consideration of a claim for deductions under section 35(2AB), the eligible expenditure incurred in the creation of such a facility clearly does not appear to be restricted to a date anterior to the grant of approval under Rule 6(5A). Approval under Rule 6(5A) and the certification of expenditure incurred in accordance with Rule 6(7A) are preparatory steps and a pre-condition for the ultimate consideration of deductions under section 35(2AB).

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) 20. Interpreting Section 35(2AB) and Rule 6 in the manner suggested by the respondent would also appear to be wholly illogical when one bears in mind the indubitable fact that Section 35(2AB) is aimed at according deductions in respect of expenditure already incurred. This is manifest from the provision using the expression "expenditure so incurred." If the expenditure which could form the subject of Section 35(2AB) were to be restricted only to that which is incurred post the grant of approval to the center in terms of Rule 6(5A), there would hardly be any incentive for the creation of such a facility. The irrationality of that stand further comes to the fore when one bears in mind the fact that if the facility were not existing, there would be no occasion for the DSIR to either inspect the same or enter into a collaborative arrangement. 22. Both Section 35(2AB) and Rule 6 speak of expenditure which has already been incurred and therefore it would be wholly incorrect to read those provisions as envisaging benefits being extended only to such expenditure that may have been sustained after the facility has been accorded approval. We also find ourselves in agreement with the view expressed by the Gujarat High Court in Claris Lifesciences Ltd. (supra) 23. The conditions which have come to be incorporated by the respondent in the impugned communications and which are impugned before us are rendered unsustainable even when one evaluates them on the basis of the Guidelines framed by the DSIR and more particularly clause 5(v) thereof. As is evident from a reading of clause 5(v), it clearly contemplates a situation where an applicant may have moved an application for approval under the Rules in respect of an in-house facility which is yet to be accorded recognition by the DSIR. Clause 5(v) while dealing with such a scenario in unambiguous terms speaks of expenditure "incurred from the commencement of said preceding year". It also employs the phrase "capital investments on R & D ...... in the financial year preceding the year in which the firm applied to the prescribed authority for the approval". It is thus manifest that a centre which is yet to be accorded recognition by the DSIR is not prevented from claiming benefits contemplated under section 35(2AB) of the Act. The only condition which the Guidelines impose for the extension of Section 35(2AB) benefits in such a situation is of the center being "subsequently recognized by DSIR" 43. In view of the above discussion and judicial precedents, we hold that the amount certified by DSIR is not the basis for claiming the

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) weighted deduction and the expenditure which is eligible as per the provisions of Section 35(2AB) of the Act. Once the expenditure incurred for R&D facility, approved by the DSIR, is not in dispute, the same cannot be restricted. The disallowance made is deleted. The ground is allowed. 44. Ground No. 4 related to interest u/s 234C is consequential. 45. The assessee had taken an additional ground in both the AYs, with regard to format of Notice u/s 143(2) being not in prescribed format as per CBDT Instruction dated 23.06.2017 is dismissed in view of the decision of the hon’ble Delhi High Court in the case of Bharat Bansal v. NFAC (order dated 17.2.2026) and the decision of the Special Bench of ITAT in the case of MD Sons in ITA 1413/Bang/2025 dated 13/07/2026. 46. In the result, both the appeals of the assessee in ITA Nos.5349 & 5350/Del/2025 are partly allowed.

Order was pronounced in the open court on 27.07.2026

Sd/- Sd/- (SATBEER SINGH GODARA) (NAVEEN CHANDRA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 27.07.2026 Priti Yadav, Sr. PS*

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ITA Nos.5349 & 5350/Del/2025 Sona BLW Precision Forgings Ltd. vs CIT (A.Ys 2017-18 & 2018-19) Copy forwarded to: 1. Assessee 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi

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