THE DCIT, CIRCLE-1,, AHMEDABAD vs. M/S. AMTECH ELECTRONICS (INDIA) LTD.,, GANDHINAGAR

These three appeals have been preferred by the Department against the order of the ld. CIT(A). Grounds are common in all the Assessment Years only

In ITA No. 629/Ahd/2015 for A.Y. 2010-11, Department has taken following grounds of appeal:

Thereafter assessee filed reply before the ld. A.O. citing several case laws that in the past also. There were warranty expenses were in assessment year 2007- 08, it was 1.87% of sales, in A.Y. 2008-09, it was 2.00%, in A.Y. 2009-10, it was 2.37% and in A.Y. 2010-11, it was 1.79% and in Assessment Year 2009-10, assessee expenses of warranty was 105% of the provisions made in the said assessment year whereas in assessment year 2010-11, assessee expenses on warranty was 80% of the total amount kept for provision for warranty. But ld. A.O. was not convinced with the reply and he made disallowance of provisions for warranty expenses of Rs. 1,25,25,450/-.

Now we come to ground relating to deleting the addition of Rs. 52,43,994/- made on account of disallowance of unutilized MODVAT/CENVAT credit.

The assessee followed exclusive method for accounting CENVAT as against inclusive method mandated under section 145A of the Act. The assessee vide order sheet entry dated 22/10/2012 requested to explain as to why unutilized CENVAT credit of Rs.52,43,994/- has not been offered for income.

In response to the notice of ld. A.O., assessee filed reply and gave several case laws in his favour and stated that Section 145A has not effect in income of an assesses. If excise duty payable finished goods lying in stock as on 31st march 2010 work t to Rs. 27,06,211 and said duty is payable only when roods are cleared for dispatch and sale. If duty is added on finished goods stock, there would be corresponding excise liability for payment of the same amount of Rs. 27,06,211/- for which provision has to be made and debited to P & L a/c. Hence, there will not be any ultimate impact on profitability.

Accounts-Valuation of closing stock-Excise duty-Excise duty is levied on goods manufactured by an assessee and it is not cost of goods purchased-lt is not a part of manufacturing cost-It can be termed as post-manufacturing cost- Unless and until it is entered on one side as an item of cost, it cannot be taken as a component of the value of the closing stock on the other side-Assessee

But ld. A.O. was not convinced with the reply of the appellant and made addition of Rs. 52,43,994/-.

Against the said order, assessee preferred first statutory appeal before the ld. CIT(A) who allowed the appeal of the assessee.

Now appellant is before us.

We have gone through the relevant record and impugned order. Assessee is engaged in the business manufacturing AC drives and soft starters. AO found

Hence, AO restricted deduction in respect of "Provision for warranty" to Rs.3,60,000/- (i.e. average of past four years) and disallowed balance sum of Rs. 1,25,25,450/- (i.e. Rs. 1,28,85,450 - Rs.3,60,000).

Prior to dealing with above objections, the following facts pertaining to the case of the assessee may kindly be appreciated.

Assessee sells AC drives, soft starters, etc. and provides warranty for free replacement of parts of machines for the prescribed period i.e. If during the warranty period, some problem arises in the parts of machines, then assessee shall have to replace the same. It a standard practice to provide warranty in this competitive word.

Based on the past experience, assessee has created "Provision for warranty", a substantial part of which has been disallowed by AO.

Since "travelling cost" and "salary of CSD Dept." is separately debited, the amount of "cost of material" debited under the head "warranty expenses" is very low. However, the actual warranty cost is summation of the above three expenses.

A chart showing details of “Provision for warranty” and “Actual Warranty expenses” ( all three expense) incurred by the assessee for AY. 09-10 & 10-11 was furnished along with supporting evidences before A.O. vide letter dated 18.03.2013.

A perusal of the above reveals the following picture: Particulars A.Y. 2009-10 A.Y. 2010-11 Provisions for Warranty Rs. 67,73,290/- 1,28,85,450/- (A) Actual Warranty expenses Rs. 71, 27, 337/- Rs. 1,02,68,158/- (B) Difference (A-B) Rs. 3,54,047/- Rs. 26,17,292/- Ratio of Actual expenses 105% 80% as Compared to provisions

A comparative chart, as above, for last four years is placed at Pg.117 of P/B and the same reveals the following picture: Particulars A.Y. 07-08 A.Y. 08-09 A.Y. 09-10 AY 10-11 Sales (Rs) 15,01,07,740/- 19,08,74,577/- 30,10,35,118/- 57,26,86,678/- Provision % 2.5% 2.25% 2.25% 2.25% Provision (Rs) 37,52,694/- 42,94,678/- 67,73,290/- 1,28,85,450/- Actual exps. 28,00,692/- 38,09,867/- 71,27,337/- 1,02,68,158/- % of expenses a 75% 89% 105% 80% to provision % of expenses 1.87% 2.00% 2.37% 1.79% as to sales

From the above table, the followi9ng aspects become clear: > "Actual expenses" incurred as compared to the "provision of warranty" are in the range of 75-105%; > "Actual expenses" incurred as compared to "sales" are in the range of 1.79- 2.37% as against "provision" created @ 2.25-2.5% of sales;

Thus, actual warranty expenses incurred by the assessee are almost consistent as regards its proportion to sales of respective years. Also there is no major variation in "provision" as compared to "actual expenses".

Hence, it can be reasonably said that provision created by the assessee on the basis of past experience is a reliable and appropriate estimate.

As regards the first objection raised by AO, AO did not consider "travelling expenses" and "Salary cost CSD Department" while arriving at the "actual cost" and hence, the actual cost was found to be much less as compared to | "provision for warranty". As is evident from the above tables, ratio of "actual expenses" as to "provision" is in the range of 75-105% is last four years; Hence. AO's observation is erroneous and ill-founded;

As regards the second objection raised by AO, assessee has estimated provision for warranty based on past experience in the range of 2.25-2.5% of sales against which, actual expenses are in the range of 1.79-2.37% of sales. In fact, assessee had made provision (a, 2.5% in AY 2007-08 but thereafter, such provision has been reduced to 2,25% AY 2008-09 onwards on the basis of experience of the assessee. Thus, such estimation was based on past experience and there in not much difference in the actual expenses. Thus, in a way, approach adopted by assessee is scientific. Accordingly, AO was not correct in holding that provision was based on estimation and not backed by scientific method.

As regards the third objection raised by AO. assessee's estimate is absolutely reliable as there is not much variation in the actual expenses as compared to provision for warranty and also the actual expenses are in the range of 1.79-2.37% of sales i.e. very much near to the percentage of provision.

Thus, all the objections raised by AO are on account of not considering "travelling expenses" and "salary cost of CSD" as part of "actual warranty expenses". Had AO taken pains to consider details furnished by the assessee, he would not have reached the above conclusion.

Hon'ble Apex Court, in the case of "Rotork Controls Pvt. Ltd. vs. CIT - 314 ITR 62 (SC)", has held that "provision" recognized upon fulfillment of following conditions (which are in line with AS-29 on "Provisions, Contingent liabilities and Contingent Assets ") shall be allowable u/s 37: a) There is a present obligation as a result of past event; b) It is probable that an outflow of resource embodying economic benefits will be required to settle the obligation; c) A reliable estimate can be made of the amount of obligation;

AO did not dispute fulfillment of first two conditions. Rather, as per AO, only the third condition was not satisfied (Para 2.10, Pg.13 of Asst. Order). However, as discussed above, a reliable estimate of provision for warranty can be very well

Under such circumstances, "provision for warranty" created by assessee satisfies all the criteria laid by Hon'ble Apex Court in the case of Rotork Controls supra, as well as AS-29. Hence, the same is allowable as deduction u/s 37 of the Act.

In light of the above, CIT(A) has rightly deleted the impugned addition. The same be held so now.

The Hon’ble Apex Court in the matter of M/s. Excel Industries Ltd. (supra) it is held that in the absence of any material change justifying the Revenue to take a different view of the matter-and if there was not change it was in support of the assessee. : "We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

In the light of the above, in our considered opinion, ld. CIT(A) has rightly deleted the impugned addition and he has passed detailed and reasoned order and same does not require any kind of interference at our end.

Now we come to ground relating to deleting the addition of Rs. 52,43,994/-.

AO, upon finding that assessee follows "Exclusive method" of accounting, made addition of Rs.52,43,994/- u/s 145A in respect of "unutilized CENVAT credit" on the count that it must be added to "closing stock" of raw material.

AO failed to appreciate that the assessee has been consistently following "Exclusive method" of accounting for years.

If any adjustment w.r.t. CENVAT is made in the amount of "closing stock", then corresponding adjustments need to be made in the amounts of "opening balance", "purchases" and "sales" as well. Once all such adjustments are made, there would be no impact on profit and loss of the year by inclusion of excise duty or other credits to the value of closing stock.

The above fact is evident from Annexure "A" to Tax Audit Report placed at Pgs.ll8-133@128ofP/B.

It is mandatory for an assessee to follow "Exclusive method" of accounting for valuation of inventories in light of AS-2 on "Valuation of Inventories" issued by ICAI. However, as per S.145A, an assessee is to follow "Inclusive method" of accounting.

In any case, amount lying with the excise authorities could not have been claimed as refund by the assessee and hence, it cannot be treated as an income in the hands of the assessee.

In light of the above, impugned addition has been rightly deleted by CIT(A).

The Co-ordinate Bench in ITA No. 1122/Ahd/2015 in the matter of DCIT vs. M/s. AIA Engineering Ltd. has given relief to the assessee while dismissing the appeal of the department with following observation: "5. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The issue in the present case is with respect to the addition of unutilised CENVAT credit to the closing stock. We find that the Id.CIT(A) while deciding the issue in favour of assessee has given a finding that assessee is following exclusive method of accounting whereby the excise duty is not included in the valuation of stock and raw-materials as the excise duty paid and collected is not made pan and parcel of the Profit & Loss A/c. He has further given a finding that assessee has complied with the provisions of section 145A of the Act and the effect of including excise duty in valuation of closing stock does not affect the profit and is Revenue neutral. He has further relied on the decision of Hon'ble Gujarat High Court in the case of Narmada Chematur Petrochemicals Ltd.(supra). Before us, Revenue has neither controverted the finding of Id.CIT(A) nor has placed any contrary binding decision in its support. We further find that the Hon'ble Apex Court in the case of Indo Nippo Chemicals (2003) 261 ITR 375 has held that unavailed MODVAT credit cannot be construed as income

In the light of the above facts and circumstances and respectfully following the Co-ordinate Bench order, we dismiss this ground of appeal and in our considered opinion, ld. CIT(A) has rightly deleted the addition.

Now we come to in ITA No. 1124/Ahd/2015 for A.Y. 2011-12. The revenue has taken following grounds of appeal: (1) The Ld. CIT(A) has erred in directing the AO to delete the addition made on account of provision of warranty ofRs,l,13,04,286/-. (2) The Ld. CIT(A) has not appreciated the fact that the assessee has claimed provision for warranty expenses at Rs.1,13,04,286/- @ 2.25% of sales though actual utilization has consistently remained much lower (3) The Ld. CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above.

Since similar grounds have been decided against the department and we have confirmed the order of the ld. CIT(A) in immediate preceding year, therefore, we dismiss this appeal as well.

Now we come to in ITA No. 160/Ahd./2016 for A.Y. 2012-13. The revenue has taken following grounds of appeal:

Since already we have dismissed the appeal of the department in ITA No. 629/Ahd/2015, we following the same and dismiss this ground of appeal.

In the result, all three appeals filed by the Revenue are dismissed.