AGAPPE DIAGNOSTICS LIMITED,MUMBAI vs. DCIT, CIRCLE 1(1)(1), MUMBAI

Ground no.1 is general in nature which does not need any adjudication.

With regard to ground no.2 to 4, brief facts of the case are that the assessee company is engaged in the manufacture and sale of highly sophisticated medical equipment and reagents used for medical diagnosis purposes in hospitals and pathological labs. As per the terms of sale of these equipments, the assessee is required to provide warranty for its equipment for a period from 12 to 36 months. If a complaint is reported within the warranty period for the equipment sold, either the Α.Υ. 2021-22 Agappe Diagnostics Limited, Mumbai repairing will be done by it at free of cost at the premises of the customer or at the specified warehouse after taking back the equipment by the company. Thus, every item of equipment sold will have a corresponding warranty obligation. The ld. Assessing Officer disallowed an amount of Rs.9,00,000/-, being the difference between provision of warranty of Rs 36,78,476/-created during the year and utilization of warranty charges already created Rs 27,78,476/-stating that the same is in the nature of provision only. The ld. CIT(A) upheld the action of the AO holding further that the facts of the assessee's case were different from the decision of hon'ble Apex Court in the case of Rotork Controls India Pvt Ltd (314 ITR 62).

Before us, none appeared for the assessee. However, a written submission dated 28.05.2025 received on 02.06.2025 by the Registry is one record which is being taken into consideration for deciding the only issue involved which pertains to disallowance of unused Provision for Warranty claims amounting to Rs.9 lakh by the AO, treating the same as contingent expenditure.Vide the written submission, it is contented by the assessee based on history of replacement (i.e. highest percentage of actual warranty expense incurred in the previous 3 financial years), systematically ascertained the repair cost of the equipment covered under warranty. The quantification of such liability is arrived at as a Α.Υ. 2021-22 Agappe Diagnostics Limited, Mumbai percentage of the cost of goods sold and the said cost is debited to the Profit and Loss as warranty claims expenses. In the case of new products range where no previous year data is available, the amount of warranty cost is ascertained at a slightly higher percentage. Thus, the warranty expense accounted and claimed is a realistically ascertained cost against sales made during the year. If the amount claimed as expenses in a year on the above basis exceeds the actual expenditure, the difference is reversed in the succeeding year and only net amount is claimed in the return of that succeeding year. In other words, in the subsequent year, additional amount of warranty claimed is debited to Profit and Loss is made is net of the excess amount relating to immediate previous year. This method has been followed consistently by the company. Hence, the warranty cost is an obligation/expense of the company in respect of the sales made and income offered to tax. The treatment is also in line with the Accounting Standards followed by it as required by the Companies Act 2013.

1 It is further submitted that the ld.AO/CIT(A) did not appreciate that the said amount has already been reversed in the succeeding year and offered to tax. They failed to appreciate the fact that provision for warranty for various goods sold by the assessee company has been made in a very systematic manner and is not in the nature of Α.Υ. 2021-22 Agappe Diagnostics Limited, Mumbai ad hoc provisions which are without basis. The said basis of provisioning is consistently applied by the assessee. It may be further noted that the company also reassesses these estimates every year to adjust for any changes based on past trends and industry averages. The ld.CIT(A) did not appreciate the facts of the case that the amount charged to Profit and Loss for the subsequent year is net of the excess amount of provision carried on from the previous year, as clearly spelt out in the table below. Hence, the assessee's case is identical to the decision of the Apex Court in the case of Rotork Controls India Pvt Ltd.(supra). Movement of warranty claim for the FY 2020-21 is as given below:

2 It is pleaded further that the assessee follows a consistent and reliable method in ascertaining the warranty expense for the year. The same is allowable u/s 37 of the Act and satisfies the accrual system of accounting and matching concept. If the company accounts for the warranty expense as and when it is incurred, it will defy the basic accounting principle of accrual concept which is not correct. The Α.Υ. 2021-22 Agappe Diagnostics Limited, Mumbai computation made by the assessee for ascertaining warranty amount for AY 2021-22 as submitted was also placed before the AO at the time of scrutiny assessment. There is no change in method of accounting or on facts during the year compared to previous year/s. As could be evidenced from the movement of warranty claims given below which is extracted from the financial statements of corresponding years that the entire amount of warranty claimed for the year ended 31st March 2021 had been utilized which strengthens the fact that the warranty expenses were not made on an ad-hoc basis:

3 Further, in the audited financial statements, it is clearly mentioned that the provision will be utilized within a period of one year. Α.Υ. 2021-22 Agappe Diagnostics Limited, Mumbai Relevant pages of Annual report for AY 2021-22 have been submitted in the paper book.

4 It is argued that the impugned sum is eligible for deduction u/s 37 of the Act as warranty expense is not capital expenditure as the Ventures (P) Ltd Vs Income Tax Officer Ward-1(2), Pune (102 taxmann.com 374-2019), Grundfos Pumpas India Ltd. Vs Deputy Commissioner of Income Tax, Company Circle II(2) Chennai (98 taxmann.com 396). Α.Υ. 2021-22 which the Hon'ble Supreme Court gave the judgment in favor of the assessee and allowed deduction of the provision of warranty provided that the provision has been developed through a scientific methodology and is not arbitrarily made for. The Hon'ble Supreme Court explained as to what a provision on the following lines is:

1 We find that in the case under consideration the provision for warranty for various goods sold by the company has been made in a very Α.Υ. 2021-22 Agappe Diagnostics Limited, Mumbai systematic manner and is not in the nature of ad hoc provisions which are without basis. The said basis of provisioning is consistently applied by the assessee. It may be further noted that the company also reassesses these estimates every year to adjust for any changes based on past trends and industry averages. It is noticed from Annexure-3 of the accounts (page-7 of paper book submitted)that the assessee has been making similar provision consistently varying from 0.42% to 0.71% of the sales turnover for various years. Further, as per notes to account para 2.45(page-12 of PB) filed by the assessee, such provision is made based on technical evaluation and past experience and is made for estimated liability in respect of warranty costs in the year of sale of goods. The provision is expected to be utilized within a year. The assessee has clearly demonstrated in the preceding paras that the amount charged to the Profit and Loss for the subsequent year is net of the excess amount of provision carried on from the previous year.We further note that this provision being an ascertained liability is allowable deduction u/s 37 of the Act and also satisfies the accrual system of accounting and matching concept. The treatment is also in line with the Accounting Standards followed by the company as required by the Companies Act 2013. There is no change in method of accounting or on facts during the year compared to previous year/s. Α.Υ. 2021-22 Agappe Diagnostics Limited, Mumbai

2 We further note from various judicial decisions referred above that an important point common to all of these court judgements is that the provision of warranty should be decided using a scientifically devised method based on past experience depending on factors like turnover of the company of previous years and provision for expenses on repairs during the warranty period. As warranty is a future liability and the actual expenses cannot be ascertained, the provision must be made on a scientific basis and not on ad hoc basis. Nothing is brought out by either of the lower authorities that in the light of the direction by the judgment of the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT (supra), the warranty provision was not based on the said historical/empirical data or not. The hon'ble Court has recognised the right to deduction of warranty provision holding that the provision is not against a contingent liability, if the present value is ascertained properly and discounted on accrual basis. It is deductible under section 37 of the Act. The provision will depend upon the nature of business, nature of sales, nature of product manufactured and sold and the scientific method of accounting adopted by the assessee, besides the historical trend in the quantum of articles produced and sold. The Court also held that the fact that it would involve a substantial degree of estimation should make no difference to the character of the provision. Α.Υ. 2021-22 Agappe Diagnostics Limited, Mumbai

3 In view of the above discussion, we are of the considered view that the impugned warranty provision cannot not be considered as contingent in nature. Provision for meeting warranty liability, estimated on the basis of relevant data and found to be reasonable with reference to such materials, cannot be disallowed. Accordingly, we hold that the ld.CIT(A) has erred in affirming the disallowance of provision for warranty which is held to be allowable under section 37 of the Act. The appellate order is accordingly set aside. The AO is further directed to delete the addition made. Thus, ground nos.2 to 4 in this regard are allowed.

Ground no. 5 pertains to taxing income twice. It is contented that the ld AO/CIT(A) erred in not appreciating the fact that the amount added to income has already been offered to tax by the assessee in the subsequent year. Hence, the disallowance now sustained will result in taxing an income twice. Notwithstanding the ground that the claim of warranty expenses shall be allowed, it was submitted that, if for any reason the above claim made by the assessee towards warranty expenses is not allowed in the A.Y 2021-22, the said claim may be allowed as expenses in the A.Y 2022-23 in which the amount is utilized.

As the claim of deduction of provision for warranty discussed in the precedings paras w.r.f. ground no.2 to 4, has already been allowed in favour of the assessee, this ground being inconsequential does not need any adjudication.

In the result, the appeal is allowed.