AGAPPE DIAGNOSTICS LIMITED,MUMBAI vs. DCIT, CIRCLE 1(1)(1), MUMBAI
IN THE INCOME-TAX APPELLATE TRIBUNAL “A” BENCH,
MUMBAI
BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER
&
SHRI PRABHASH SHANKAR, ACCOUNTANT MEMBER
Agappe Diagnostics Limited,
401, 402, Jaisingh Business
Centre, Sahar Road, Andheri
East, Sahar P&T Colony, S.O.,
Mumbai- 400099, Maharashtra v/s.
बनाम
Deputy
Commissioner of Income
Tax,
Circle
–
1(1)(1),
Aayakar
Bhawan,
Mumbai
-
400020,
Maharashtra
स्थायी लेखा सं./जीआइआर सं./PAN/GIR No: AACCA3940Q
Appellant/अपीलार्थी
..
Respondent/प्रतिवादी
Appellant by :
None. Written submission received by post on 02.06.2025
Respondent by :
Shri Aditya Rai, (Sr. DR)
Date of Hearing
02.06.2025
Date of Pronouncement
04.06.2025
आदेश / O R D E R
PER PRABHASH SHANKAR [A.M.] :-
The present appeal arising from the appellate order dated
19.02.2025 is filed by the assessee against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless
Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) of the Income-tax Act, 1961
[hereinafter referred to as “Act”] dated 27.12.2022 for the Assessment
Year [A.Y.] 2021-22. P a g e | 2
A.Y. 2021-22
Agappe Diagnostics Limited, Mumbai
The grounds of appeal are as under:- 1. Whether the Order passed by the Learned CIT (A) to the extent appealed against is against law, equity and justice? 2. Whether the Learned CIT(A) erred both in facts and in law in disallowing a portion of the systematically ascertained expenditure, stating it to be a provision? The Ld. CIT(A) did not appreciate that warranty costs is an obligation/expense of the appellant and therefore qualifies as an allowable business expenditure u/s. 37(1). 3. Whether the Learned CIT(A) erred in not taking into consideration the binding decision of the Hon'ble Supreme Court in the case of Rotork Controls India Private Limited v. CIT (314 ITR 62), by incorrectly distinguishing it on facts. 4. Whether the Learned CIT(A) erred in stating that the appellant has not offered the excess of provision either in the current year or in the succeeding year. The Learned CIT(A) ought to have noted that if the amount claimed as expenses in a year exceeds the actual expenditure, the difference is reversed in the succeeding year and only net expenses is claimed in the return of that succeeding year. 5. Without prejudice to the above grounds, if for any reason the above claim made by the appellant towards warranty is not allowed in AY 2021-22, the said claim may be allowed as expenses in the AY 2022-23 in which the amount is utilized, to avoid double disallowance of legitimate business expenditure. 3. Ground no.1 is general in nature which does not need any adjudication. 4. 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 P a g e | 3 A.Y. 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).
5. 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 P a g e | 4
A.Y. 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. 5.1 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 P a g e | 5
A.Y. 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:
Particulars
Amount (Rs.)
Amount (Rs.)
Opening balance of provision
54,00,000 (A)
Less: Amount utilized against provision
(27,78,476) (B)
Less: Reversal of unutilized provision included in opening balance
(26,21,524) (C)
Add: Additional provision created during the year
63,00,000 (D)
36,78,476 (C+D)
Closing Provision(A+B+C+D)
63,00,000
5.2 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 P a g e | 6
A.Y. 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:
Particulars
FY 2018-19
AY
2019-
20
FY 2019-20
AY
2020-
21
FY 2020-21
AY 2021-22
FY 2021-22
AY
2022-
23
Opening Balance
4,50,000
4,90,000
54,00,000
63,00,000
Provision utilized/reversed
(29,89,088)
(22,94,525)
(27,78,476)
(69,33,983)
Additional amount of provision made during the year(balancing figure)
33,89,088
27,94,525
36,78,476
1,17,30,854
Net debit to P&L
4,00,000
5,00,000
9,00,000
47,96,871
Closing Balance(retained as ascertained by the Company on systematic basis)
4,90,000
54,00,000
63,00,000
1,10,96,871
5.3 Further, in the audited financial statements, it is clearly mentioned that the provision will be utilized within a period of one year.
P a g e | 7
A.Y. 2021-22
Agappe Diagnostics Limited, Mumbai
Relevant pages of Annual report for AY 2021-22 have been submitted in the paper book.
5.4 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 warranty arises out of sale of equipment which is the operating income of company and it is not a personal expense. The expense is wholly for the purpose of business and hence, all the conditions of section 37 is complied with and can be claimed as an expense.
5.5 The assessee has also place reliance on certain judicial decisions in this regard i.e. Rotork Controls India Private Limited Vs
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).
P a g e | 8
A.Y. 2021-22
Agappe Diagnostics Limited, Mumbai
Before us, the ld.DR has relied on the orders of authorities below inter alia stating that provision of warranty was rightly disallowed by the AO. 7. We have carefully considered all the relevant facts of the case. The assessee has made a detailed submission which goes to show that working of the impugned provision is being made consistently over several years on certain percentage of sale turnover. Considering the nature of business of the assessee manufacturing certain medical implements, providing for warranty is nothing unusual in any manner. The authorities below have not tried to examine the whole issue in a correct perspective but have merely gone on the prejudiced view that any item classified as provisions is contingent in nature. Nothing has been brought on record to demonstrate that the provision figures worked out by the assessee are whimsical and ad hoc and have nothing to do with the business structure of the assessee but a ploy to reduce its tax liability. We may examine the case of the assessee in the light of ratio decidendi laid down in the landmark judgment in the case of Rotork Controla India (P) Ltd vs Commnr. Of Income Tax(supra) in 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
P a g e | 9
A.Y. 2021-22
Agappe Diagnostics Limited, Mumbai and is not arbitrarily made for. The Hon’ble Supreme Court explained as to what a provision on the following lines is:
“A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when:
(a) an enterprise has a present obligation as a result of a 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 obligation.
The Hon’ble Supreme Court went on to examine as to what are the types of product warranties, a company would give and held that there were three options, namely, (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 certain percentage of turnover of the company based on past experience (historical trend).
Among these three options, it was held that 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.
The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized. 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.
The third option is the most appropriate because it fulfils accrual concept as well as the matching concept.
Further, the Hon’ble Supreme Court pointed out the four important aspects of provisioning namely, provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly, it involves reliable estimation of obligation. Through this judgment, the Honourable Supreme
Court settled the questions of law raised in such disputes.”
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
P a g e | 10
A.Y. 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.
P a g e | 11
A.Y. 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.
P a g e | 12
A.Y. 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. 8. 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. 9. 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
P a g e | 13
A.Y. 2021-22
Agappe Diagnostics Limited, Mumbai in favour of the assessee, this ground being inconsequential does not need any adjudication.
10. In the result, the appeal is allowed.
Order pronounced in the open court on 04.06.2025. SANDEEP GOSAIN
PRABHASH SHANKAR
(न्याययक सदस्य /JUDICIAL MEMBER)
(लेखाकार सदस्य/ACCOUNTANT MEMBER)
Place: म ुंबई/Mumbai
ददनाुंक /Date 04.06.2025
Lubhna Shaikh / Steno
आदेश की प्रयियलयि अग्रेयिि/Copy of the Order forwarded to :
1. अपीलार्थी / The Appellant
2. प्रत्यर्थी / The Respondent.
3. आयकर आयुक्त / CIT
4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT,
Mumbai
5. गार्ड फाईल / Guard file.
सत्यावपि प्रवि ////
आदेशानुसार/ BY ORDER,
उि/सहायक िंजीकार (Dy./Asstt.