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Facts
The assessee, Marelli Powertrain India Pvt. Ltd., engaged in manufacturing Engine Control Units (ECUs), provides a 2-year warranty to customers. For AY 2014-15, it maintained a provision of 0.5% of net sales for warranty claims, determined on a scientific basis using past trends. This provision was disallowed by the Assessing Officer and CIT(A), leading to the present appeal.
Held
The tribunal held that the provision for warranty was made on a scientific basis, supported by past trends and technically explained to the lower authorities without contradiction. Following the Supreme Court's decision in Rotork Controls India (P) Ltd, the tribunal directed the AO to grant the deduction for the warranty provision.
Key Issues
Whether the disallowance of provision for warranty, which was scientifically determined based on past trends for ECU products, was justified under the Income Tax Act.
Sections Cited
143(3) of the Income-tax Act, 1961
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “E”: NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI M. BALAGANESH
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in AY 2014-15, arises out of the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. NFAC’, in short] in Appeal No. ITBA/NFAC/S/250/2024-25/1065906647(1) dated 21.06.2024 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 20.01.2018 by the Assessing Officer, Addl. CIT, Special Range-6, New Delhi (hereinafter referred to as ‘ld. AO’).
Though the assessee has raised several grounds, the only effective issue to be decided in this appeal is as to whether the ld NFAC was justified in confirming the disallowance made on account of provision for warranty in the facts and circumstances of the instant case.
We have heard the rival submissions and perused the material available on record. The return of income for AY 2014-15 was filed electronically on 28.11.2014 declaring total income of Rs. 93,64,12,844/-. The assessee is engaged in the business of manufacturing, sale and services of engine control unit (ECU). (ECU or Engine Control Module ("ECM") is an electronic control unit of automobile, which controls a range of actuators and variety of sensors of an automobile engine. The basic purpose of ECU is to ensure the optimization of vehicle running in terms of fuel combustion and emission including safety features. Manufacturing of ECUS Involves continuous evolving technology. ECU receives a wide range of data (input) from all the sensors and actuators of the engine system, and then analyses the data inside the micro- processor (micro- computer) with the help of multidimensional performance maps and sends signals (output) for the adjustment of engine actuators accordingly. Output of ECU helps various actuators to optimize key parameters related to air-fuel mixture, ignition timing, idle speed and torque management, in such a way that the emission of automobile remains within the stipulated standards. Prior to the usage of ECUs, the functions of air-fuel mixture, Ignition timing and idle speed were controlled and managed by mechanical and pneumatic systems such as the carburettor.
Based on the above , the assessee submitted that the product manufactured by it is highly technical and complex in nature. It was submitted that the assessee is required to provide 2 years warranty to its customers for the product sold to them. The assessee has a policy to maintain a provision as on the end of every financial year, an amount equivalent to 0.5% of the sales (net of excise duty) made, which are still covered under the warranty period of two years. This percentage of 0.5% of the sales (net of excise duty) for the two years covered under the warranty is determined by the assessee on the scientific basis considering the risk involved in manufacturing and sale of ECUs. The assessee also submitted the rationale for maintaining the provision for warranty @0.5% net sales of the two years by duly considering and explaining the risk of components use; designing risk; critical manufacturing process; shorting / campaigning risk or penalty. The assessee also placed reliance on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd Vs. CIT (2009) 180 taxman 422 in support of its contentions, among others. The assessee explained the entire accounting entries made by it in the books in respect of provision made towards warranty during the year after taking into account the reversal of excess provision made in earlier years, if any. The ld AO however did not heed to the contentions of the assessee and proceeded to disallow the provision of warranty in the assessment, which stood confirmed by the ld CIT(A).
We find that the ld AR before us placed on record a table containing the entire basis of making the provision towards warranty as under:-
Incremental Warranty Percenta Provision provision made Opening provision Closing ge of Sales (Net of Two years required to be during the year AY Balance as on utilized Balance as on provisio excise duty) cumulative sales made as per - Expense 1- Apr during the 31-Mar n policy claimed in year utilized P&L 2009-10 42,29,54,932 42,29,54,932 21,14,775 _ 21,15,567 21,15,567 _ _ 2010-11 1,55,78,29,397 1,98,07,84,329 99,03,922 21,15,567 77,88,887 3,55,115 95,49,339 17% 2011-12 1,98,21,51,618 3,53,99,81,015 1,76,99,905 95,49,339 78,00,273 10,95,138 1,62,54,474 11% 2012-13 2,27,99,11,872 4,26,20,63,490 2,13,10,317 1,62,54,474 59,05,744 9,70,475 2,11,89,743 6% 2013-14 3,15,04,48,838 5,43,03,60,710 2,71,51,804 2,11,89,743 63,44,240 4,81,046 2,70,52,937 2% 2014-15 3,00,42,85,352 6,15,47,34,190 3,07,73,671 2,70,52,937 61,17,343 24,13,116 3,07,57,164 9% 2015-16 4,49,32,08,473 7,49,74,93,825 3,74,87,469 3,07,57,164 1,21,10,880 53,80,575 3,74,87,469 17% 2016-17 5,61,67,84,566 10,10,99,93,039 5,05,49,965 3,74,87,469 2,23,53,072 66,25,612 5,32,14,929 18% 2017-18 6,29,96,36,237 11,91,64,20,803 5,95,82,104 5,32,14,929 1,28,06,901 75,11,053 5,85,10,777 14% 2018-19 7,64,06,34,656 13,94,02,70,893 9,06,11,761 5,85,10,777 8,95,89,387 5,72,99,011 9,08,01,153 98% 2019-20 8,60,30,00,000 16,24,36,34,656 14,61,92,712 9,08,01,153 10,40,40,000 4,91,10,000 14,57,31,153 54% 2020-21 5,60,54,30,000 14,20,84,30,000 12,78,75,870 14,57,31,153 1,64,30,000 3,94,10,000 12,27,51,153 27%
It could not be seen from the aforesaid table there could be no dispute at all on the calculation made towards provision for warranty. The rationale and necessity for making provision for warranty vis-à-vis the products manufactured and sold by the assessee has already been explained technically by the assessee before the lower authorities, which stood uncontroverted. The accounting entries followed by the assessee for making provision towards warranty have been duly explained and we do not find any infirmity thereon. Hence, we hold that the provision for warranty has been made by the assessee on a scientific basis taking into account past trend in respect of claim of warranty. Respectfully following the decision of Hon'ble Supreme Court referred supra, we direct the ld AO to grant deduction towards provision for warranty. Accordingly, grounds raised
by the assessee are hereby allowed.