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Income Tax Appellate Tribunal, “B’’ BENCH : BANGALORE
Before: SHRI B.R BASKARAN & SMT. BEENA PILLAI
O R D E R Per B.R Baskaran, Accountant Member :
These cross appeals are directed against the order passed by Ld CIT(A)-3, Bengaluru and they relate to the assessment year 2009-10.
2. The grounds of appeal urged by the assessee relate to the following two issues:- (a) Disallowance of Provision for Warranty (b) Disallowance of provision for stock obsolescence.
3. At the time of hearing, the Ld A.R submitted that both the issues cited above are covered by the decision rendered by the co- ordinate bench in the assessee’s own case relating to AY 2008-09 in dated 19-06-2015. On the contrary, the Ld D.R submitted that the assessee has not furnished the basis for working out the Provision in both the cases and hence the Ld CIT(A) has confirmed the disallowance.
4. We heard the parties on these two issues and perused the record. As submitted by Ld D.R, the Ld CIT(A) had confirmed both the disallowancea for want of details. In fact, the Ld CIT(A) had deleted the disallowances of identical nature in AY 2008-09 and hence the revenue was in appeal before the Tribunal in that year. However, in the year under consideration, the assessee is in appeal since the Ld CIT(A) has confirmed the disallowances.
For the sake of convenience, we extract below the operative portion of the order passed by the Tribunal in respect of above said two issues:- (A) Provision for Warranty:-
We have considered the rival submission and also perused the relevant material placed on record. As far as the provision of warranty is concerned, we find that the provision is made by the assessee on the basis of past/historical data and taking the average of the past three years. The assessee has furnished the details of past seven years and calculated the provision for warranty at 0.5% of the total turnover. Thus the provision is based on the average of the actual expenditure on this account during the past several years. We find that the provision baised on the previous data cannot be said that it is without any scientific basis. As it is evident from the records that the assessee is maintaining provision for warranty which is based on the technical evaluation and past experience, therefore, it has a sound basis of estimation. The Hon'ble Supreme Court in the case of Rotork Controls Jndia{PJ Ltd. (supra) has observed as under:-
"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. As stated above, the case of Indian. Molasses Co. Pvt. Ltd., (supra) is different from the present case. As stated above, in the present. case we are concerned with an army of items, of sophisticated (specialized) goods manufactured and sold by the assessee whereas the case of Indian Molasses Co. Ltd. (supra) was restricted to an individual retiree. On the other hand, the case of Metal Box Co. of India Ltd, (supra) pertained to an army of employees who were due to retire in future. In that case the company had estimated its liability under two gratuity schemes and the amount of liability was deducted from the grass receipts in the profit and loss account. The company had worked out its estimated liability on actuarial. valuation. It had made provision for such liability spread over to a number of years. In such a case it was held by this Court that the provision made by the assessee company for meeting the liability incurred by it under the gratuity scheme would be entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The same principle is laid down in the judgment of this Court in the case of Bharat Earth Movers (supra). In that case the assessee-company had formulated, leave encashment scheme. It was held, following the judgment in Metal Box Co. of India Ltd. 's case (supra), that the provision made by the assessee for meeting the liability incurred under leave encashment scheme proportionate with the entitlement earned by the employees, was entitled to deduction out of gross receipts for the accounting year during which the provision is made for that liability he principle which emerges from these decisions is that if the historical trend indicates that large number of sophisticated goods were being manufactured in the post: and in the past if the facts established show that defects existed iii 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. It may be noted that in all the impugned judgments before us the assessee(s) has succeeded except in the case of civil Appeal Nos. 3506-3524 of 2009 - Arising out of S.L.P.(G) Nos. 14178-14182 of 2007 - Rotork Controls India 'P.) Ltd. v. CIT, in which the Madras High Court has overruled the decision of the Tribunal allowing deduction under section 37 of the 1961 Act. However, the High court has failed to notice the "reversal'" which constituted part of the data systematically maintained by the assessee over last decade.
For the above reasons, we set aside the impugned judgment of the Madras High Court dated 5-22007 - Rotork Controls India (P.) Ltd.'s case (supra) and accordingly the civil appeals stand allowed in favour of the assessee with no order as to costs.”
9. Raving regard to the facts and circumstances of the case, when the provision for warranty is based on the past experience as well as the actual data then, the judgment, of Hon'ble Supreme .Court in the case of Rotork Controls India (P.) Ltd. (supra) is fully applicable on the facts of the present case. Further, the A.O. has accepted the claim of provision for warranty based on three years. average sale while completing. the assessment for A.Y. 2010- 11, accordingly we do not find any error in the impugned order of the ld. CIT(A).
(B) Provision for Stock Obsolescence:-
“10. The neat point of dispute is the provision for stock obsolescence. We have heard the id. D.R. and Id. Counsel for the assessee and considered the relevant material placed on record. There is no 4uarrel on this point that as per the prudent accounting policy, inventory shall be valued at cost or net realizable value whichever is less. This principle is based on the premise that the value of the closing stock will be the value of the opening stock of the subsequent year and therefore it would mitigate the scope of any distortion of income due to adopting the conservative policy of accounting for valuation of inventory. This policy of accounting has been accepted and recognized under the accounting standards. In this case, the assesee instead of taking stock at the realization, value to the P&L account has made provision to debit Profit & Loss account which means the closing stock is taken to the P&L account without reducing the value due to obsolescence/ diminution in the value of the inventory. The only point is to be taken care of is to ensure that the opening stock of subsequent year shall be taken at the value after reducing the provision made for this year. Accordingly, except the above observation and fact to be verified that the value of opening stock of the subsequent year is to be correctly taken after reducing the provision made for this year from the c1osin stock, we do not find any reason to interfere with the order of the ld. CIT(A) qua the assessee.”
Thus, we notice that, in principle, the claim of the assessee is allowable as per the decision rendered by the co-ordinate bench.
The Ld CIT(A) was constrained to confirm the disallowances for want of details only. Hence, in the interest of natural justice, we are of the view that the assessee should be provided with one more opportunity to furnish the relevant details. Accordingly, we set aside the order passed by Ld CIT(A) in respect of both the above said issues and restore them to the file of the AO for examining them afresh by considering the details furnished by the assessee and for deciding both the issues in the light of decision rendered by the Tribunal in the assessee’s own case in AY 2008-09. The assessee is also directed to furnish the details in support of the claims made to the satisfaction of the assessing officer.
We shall now take up the appeal of the revenue. The only issue urged by revenue is whether the recovery of administrative expenses would form part of operating income for the purpose of computing operating profit margin.
8. The Ld A.R submitted that this issue is covered by the decision rendered by the co-ordinate bench in the assessee’s own case relating to AY 2010-11 in IT(TP)A No. 148/Bang/2015 dated 04-04- 2017. The Ld D.R did not controvert the same.
For the sake of convenience, we extract below the operative portion of the order passed by the co-ordinate bench in respect of above said issue:-
The revenue is in appeal challenging the direction of the DRP directing income from administrative
services as part of operating revenue. The revenue raised the following grounds of appeal:
The directions of the Dispute Resolution Panel are opposed to law and facts of the case.
On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the TPO/AO to exclude the income of Rs 2,33,97,997 received as Administrative Services, even when this is attributable to income from other sources which is not attributable to the business and cannot be considered as operating revenue.
For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed.
The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above. The finding of the DPO is as follows:
Having heard the objection, we perused the order of the TPO and it is noticed by us from paragraph 9.1.4 of the TPO's order that the TPO has not addressed the issue raised by the assessee, but simply observed that the nature of income is from other sources which is attributable to business but not derived from operating activity. To examine the correctness of the findings of the TPO, we examined the Annual Report and it is noticed by us from Schedule 13 to the P&L Account that the above amount has been shown as 'Administrative expenses recovered' which clearly indicates that the administrative expenses recovered are nothing but the reimbursement of the expenses incurred by the assessee for the above company and therefore, if such income is excluded from the operating revenue, corresponding expenses have to be excluded from the operating cost. Hence, we are in agreement with the submission of the assessee that the administrative expenses recovered to be considered as operating revenue, considering the fact that the TPO has not reduced corresponding expenses from the operating cost. The Assessing Officer is directed accordingly. The finding of the DRP is based on settled position of law and do not require any interference.”
We notice that the Ld CIT(A) has followed the decision rendered by the co-ordinate bench for AY 2010-11 (referred supra) in deciding this issue in favour of the assessee. Accordingly, we do not find any infirmity in the order passed by Ld CIT(A) on this issue.
In the result, the appeal of the assessee is treated as allowed and the appeal of the revenue is dismissed.
Order pronounced in the Open Court on 13th December, 2019.