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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI D. KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER
PER D. KARUNAKARA RAO, AM :
This is the appeal filed by Revenue against the order of CIT(Appeals)- 4, Pune, dated 19.01.2016 for the Assessment year 2010-11.
The grounds raised by the Revenue read as under: “1. Whether on facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the disallowance made by the AO on account of Provision of warranty and After Sales Cost.
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For this and such other reasons as may be urged at the time of hearing, the order of Ld. CIT(A) may be vacated and that of the Assessing Officer be restored. 3. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of appellate proceedings before the Hon'ble Tribunal.”
From the above, it is evident that the issue raised before us for
adjudication is whether the Provision of warranty and After Sales Cost
constitute an allowable deduction or not.
Briefly stated relevant facts include that the assessee is engaged in
the business of manufacture and sale of petroleum refining and distillation
equipment and filed return of income on 09.10.2010 declaring total income
at Rs.36,35,46,570/- after deducting sum of Rs.3,95,09,000/- as allowable
deduction on account of “provision of After Sales Cost” and another sum of
Rs.1,53,30,352/- on account of “provision of Warranty expenses”. During
scrutiny assessment proceedings, the assessee submitted before the
Assessing Officer that the said calculation was done based on scientific
valuation of expenditure. As a matter of normal business expediency, the
assessee-company needs to provide for the expenditure on warranty or after
sales services ranging from 1 year to 18 months on the products sold by it.
Assessee also stated that as per the provision of warranty, the same is in
the range of ± 20% of the actual. The Assessing Officer did not accept the
submissions of the assessee by holding as under:
“The contention is not acceptable on following grounds. No obligation was ever cast on the date of the sale and consequently there was no accrued liability. The liability had not crystallized on the date of the sale and, therefore, appellant is not entitled to deduction in respect of the provision made for warranty charges. The amount which is provided for or kept apart cannot be held to be expenditure, actually incurred and consequently deduction is not admissible. Hence, merely because the assessee is maintaining its account on mercantile basis, it cannot claim that the provision made towards warranty is an accrued liability.
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A reference is invited to Indian Molasses Co. (P.) Ltd. Vs. CIT (SC) 37 ITR 66, wherein it was held that expenditure, is, what is paid out or away and is something which is gone irretrievable. The assessee has not paid out the money but simply made the provision and debited it to P & L A/c., which cannot be termed as payment within the meaning to section 37 of the I.T.Act. Section 37 of the 1961 Act does not refer to “making of provision” it only refers to “deduction permissible on account of actual expenditure incurred”. Further, the assessee has not given any scientific method of calculation to arrive at such liability. It is thus clear that the provision for warranty debited is contingent liability. The same is not allowable and amount of Rs.1,53,30,352/- and Rs.3,95,09,000/- added back to the total income. Penalty proceedings u/s. 271 (1)(c) is initiated separately.”
Aggrieved with the order of Assessing Officer, Assessee filed appeal
before the CIT(A). During First Appellate proceedings, apart from giving the
calculation on the basis of internal evaluation, the assessee relied heavily on
the Judgment of the Hon'ble Supreme Court of India in the case of Rotork
Controls India Ltd. reported as 314 ITR 62 wherein it was held that “the
present value of a contingent liability, like warranty expense, if properly
ascertained and discounted on actuarial basis, can be an item of deduction
u/s.37 of the I.T.Act.” He also referred to the ratio laid down by the Hon'ble
Apex Court in the case of Indian Molasses Co.(P.) Ltd. Vs. CIT (SC) reported
as 37 ITR 66 in favour of the Revenue. The CIT(A) extracted the written
submissions of the assessee, extracted the operative paragraphs from the
Hon'ble Apex Court judgment in the case of Rotork Controls India ltd.
(supra.), tabulated data relating to the matter of deciding this issue in the
assessee’s own case since assessment year 1998-99 onwards in Para 4 of
his order and granted relief to the assessee. The CIT(A) also relied on the
decisions of the Tribunals as well as judgments of Hon'ble Jurisdictional
High Court in assessee’s own case etc. and held as under :
“5. I have carefully considered the submissions of the appellant in the light of the factual matrix of the case and the legal position on the subject. On the issue of provisions for warranty and provision for After Sales Cost, I am of the view that in sum and substances, they are one and the same. In this regard, I also place reliance on the judgment rendered by the Hon'ble ITAT “E” Bench, Mumbai in ITA Nos. 3677 & 8219/MUM/2004, wherein, it has been held that
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“5. We have considered the rival submission and perused the material available on record. We find that the contention of the Assessing Officer that the assessee company can debit the expenditure relating to the sales warranty directly to the P & L account is not acceptable when the assessee is estimating the warranty liabilityes on the basis of some scientific method and the same system is following since several years. The Assessing Officer is not justified to add the provisions made during the year under dispute. It is further observed that the assessee is crediting excess provision to the profit and loss account as and when the provisions are existed than the required. Under these circumstances, we find no infirmity in the order of the Ld.CIT(A) which is in accordance with the various Tribunal decisions. This ground of the Revenue therefore, fails.” In this regard, I also place reliance on the judgment rendered by the Hon'ble Supreme Court in the case of Rotork Controls India Ltd.(supra.), wherein it has been held that a liability determined on a scientific basis cannot be regarded as a contingent liability and the provision made for warranty in respect of goods should be allowed u/s. 37(1) of the Act. Respectfully, following the decisions of Hon'ble ITAT “E” Bench, Mumbai in ITA Nos. 3677 & 8219/Mum/2004, Hon'ble Supreme Court in the case of Rotork Controls India Limited and the Apex Court in the case of Indian Molasses Co. (P.) Ltd., I have no hesitation in deleting the disallowance made by the AO on account of provision for warranty of Rs.1,53,30,352/- and After Sales Cost of Rs.3,95,09,000/-. Hence, ground No.1 stands adjudicated.”
Aggrieved with the relief granted by the CIT(A) to assessee, the
Revenue is in appeal before us with the grounds extracted above.
Before us, the Ld. DR for the Revenue heavily relied on the order of
Assessing Officer and submitted that Assessee has not furnished proper
calculation and details of the expenditure incurred on account of said
provisions i.e. provision of warranty and After Sales Cost.
On the other hand, the Ld. Counsel for the assessee described the
manner in which the Assessing Officer made addition without considering
the submissions of the assessee in right perspective. Relying heavily on the
order of CIT(A), Ld. Counsel submitted that, on similar facts, the claim of
the assessee was allowed in previous assessment years in assessee’s own
case. He cited the list of cases in which relief was granted by the Tribunal
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and the Hon'ble High Court relying heavily on the data tabulated in CIT(A)’s
order in Para 4 ( Page-7). He also relied on the Apex Court judgment in the
case of Rotork Controls India Ltd. (supra.). He further submitted that upto
80% of the actual provision was finally utilized in the next to next year (12
to 18 months of the warranty period.)
We have heard both the parties on this limited issue of allowability of
provision of warranty and After Sales Costs. This issue is perennially being
raised by the Revenue since assessment year 1998-99 onwards. The details
of the same are extracted as under:
A.Y. ITA No./ Relevant Releva Remarks CIT(A) No. Para nt Pg. No./Pg. No. of PB of the order 1998-99 2790/M/03 Para No appeal filed by 5/Page the Department No.2 against the said 1999-00 5047/M/04 Para 2/ disallowance Page No.1 before the Hon'ble Bombay High 2000-01 3677/M/04 Para Court. 21/Page No.6 2001-02 8219/M/04 Para 36/Page No.10 2002-03 N.A N.A Allowed by AO in Assessment. 2003-04 2871/M/07 Para 11/ No appeal filed by Page No.4 Department against the said 2004-05 6135/M/07 Para disallowance 12/Page before the Hon'ble No.11 Bombay High 2005-06 3366/M/10 Para Court. 14/Page No.13 2006-07 4435/M/11 Para 2/ page No.2 2007-08 6740/M/11 Para 3/ Page No.2 2008-09 IT- Para 1.2/ No appeal filed 205/2011- Page 4 before the Hon'ble 12 ITAT by the
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2009-10 U/s. 143 (3) Paper Book Department of the IT 111 against the relief Act. granted by the Hon'ble CIT(A)/AO.
From the table extracted above, it is evident that the claim of the
assessee in principle is allowed by the Hon’ble Jurisdictional High Court in
assessee’s own case in many assessment years i.e. 1998-99 to 2009-10. It
is also evident from the above table that the Assessing Officer himself
allowed claimed of the assessee in assessment year 2002-03 and 2009-10.
In same assessment year, the Department accepted the said decision of the
Tribunal and never filed appeal before the Hon'ble Bombay High Court. As
such, decision of CIT (A) is, in principle, as per judgment laid down by the
Hon'ble Apex Court in the case of Rotork Controls India Ltd. (supra.). It is a
settled legal principle that in any case where estimation is done based on
scientific method and calculated properly, the provision made for warranty
in respect of goods should be allowed u/s. 37 (1) of the Act. Therefore, we
are of the opinion that the order of the CIT(A) is fair and reasonable and the
same does not require any interference. Accordingly, grounds raised by the
Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.
Order pronounced on this 25th day of September, 2018.
Sd/- Sd/- (�वकास अव�थी /VIKAS AWASTHY) (डी. क�णाकरा राव/D. KARUNAKARA RAO) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER
पुणे / Pune; �दनांक / Dated : 25th September, 2018. SB
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आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to :
अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT (Appeals)-4, Pune 4. The Pr. CIT-3, Pune. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “ए” ब�च, 5. पुणे / DR, ITAT, “A” Bench, Pune. गाड� फ़ाइल / Guard File. 6.
// True Copy // आदेशानुसार / BY ORDER,
�नजी स�चव /Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune.