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I.T.A No.829 of 2018 C/W I.T.A No.294 of 2018 I.T.A No.827 of 2018
IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 24TH DAY OF MARCH 2023 PRESENT THE HON’BLE MR. JUSTICE P.S.DINESH KUMAR AND THE HON’BLE MR. JUSTICE T.G.SHIVASHANKARE GOWDA I.T.A NO. 829 OF 2018 C/W I.T.A NO. 294 OF 2018 I.T.A NO. 827 OF 2018
IN I.T.A NO. 829 OF 2018
BETWEEN:
APPLE INDIA PRIVATE LIMITED 19TH FLOOR, CONCORDE TOWER 'C' UB CITY, NO.24 VITTAL MALLYA ROAD BENGALURU-560 001 PAN:AABCA 1906H REPRESENTED BY ITS DIRECTOR MR. GAURAV DUGGAL
.…APPELLANT
(BY SHRI. PERCY PARDIWALA, SENIOR ADVOCATE FOR MS. TANMAYEE RAJKUMAR, ADVOCATE)
AND:
THE DEPUTY COMMISSIONER
OF INCOME-TAX
CIRCLE-1(1)(1), BENGALURU
2ND FLOOR, BMTC BUILDING
80 FT ROAD, 6TH BLOCK
KORAMANGALA
BENGALURU-560 095
I.T.A No.829 of 2018 C/W I.T.A No.294 of 2018 I.T.A No.827 of 2018
THE PRINCIPAL COMMISSIONER
OF INCOME-TAX-I
BMTC BUILDING
80FT ROAD, 6TH BLOCK
KORAMANGALA
BENGALURU-560 095 …RESPONDENTS
(BY SHRI. K.V. ARAVIND, SENIOR STANDING COUNSEL)
THIS ITA IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED:10.10.2018 PASSED IN M.P.NOS.279 AND 280/BANG/2018 IN ITA NOS.422 AND 423/BANG/2018 (ANNEXURE-A), FOR THE ASSESSMENT YEAR: 2013-2014 AND 2014-2015, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW AS STATED THEREIN AND ETC.
IN I.T.A NO. 294 OF 2018
BETWEEN:
THE PR. COMMISSIONER
OF INCOME-TAX, CIT(A)
5TH FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560 095.
THE ASST. COMMISSIONER
OF INCOME-TAX
CIRCLE-1(1)(1), BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560 095. .…APPELLANTS
(BY SHRI. K.V. ARAVIND, SENIOR STANDING COUNSEL)
AND:
M/s. APPLE INDIA PVT. LTD 19TH FLOOR, CONCORDE TOWER C UB CITY, NO.24 VITTAL MALLYA ROAD BENGALURU-560 001. PAN:AABCA 1906H …RESPONDENT
(BY SHRI. PERCY PARDIWALA, SENIOR ADVOCATE FOR MS. TANMAYEE RAJKUMAR, ADVOCATE)
I.T.A No.829 of 2018 C/W I.T.A No.294 of 2018 I.T.A No.827 of 2018
THIS ITA IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED:22.09.2017 PASSED IN IT(TP)A NO.242/BANG/2016, FOR THE ASSESSMENT YEAR 2011-2012 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATE THEREIN AND ETC.
IN I.T.A NO. 827 OF 2018
BETWEEN:
APPLE INDIA PRIVATE LIMITED 19TH FLOOR CONCORDE TOWER 'C' UB CITY, NO.24 VITTAL MALLYA ROAD BENGALURU-560 001. PAN:AABCA 1906H REPRESENTED BY ITS DIRECTOR MR. GAURAV DUGGAL
.…APPELLANT
(BY SHRI. PERCY PARDIWALA, SENIOR ADVOCATE FOR MS. TANMAYEE RAJKUMAR, ADVOCATE)
AND:
THE DEPUTY COMMISSIONER
OF INCOME-TAX
CIRCLE-1(1)(1), BENGALURU
2ND FLOOR, BMTC BUILDING
80 FT ROAD, 6TH BLOCK
KORAMANGALA
BENGALURU-560 095
THE PRINCIPAL COMMISSIONER
OF INCOME-TAX-I
BMTC BUILDING
80 FT ROAD, 6TH BLOCK
KORAMANGALA
BENGALURU-560 095. …RESPONDENTS
(BY SHRI. K.V. ARAVIND, SENIOR STANDING COUNSEL)
I.T.A No.829 of 2018 C/W I.T.A No.294 of 2018 I.T.A No.827 of 2018
THIS ITA IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED:03.08.2018 PASSED IN ITA NOS.422 AND 423/BANG/2018 (ANNEXURE-A), FOR THE ASSESSMENT YEAR:2013-2014 AND 2014-2015, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW AS STATED THEREIN AND ETC.
THESE ITAs, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 13.12.2022 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S. DINESH KUMAR J., PRONOUNCED THE FOLLOWING:-
JUDGMENT
ITA No. 827-828/2018 and ITA No. 829-830/2018 by the assessee directed against the orders dated August 03, 2018 in ITA No. 422 & 423/Bang/2018 and October 10, 2018 in Misc.Petn. Nos. 279&280/Bang/2018 respectively, have been admitted to consider the following question of law: “Whether the Tribunal was justified in not allowing the provision for warranty in excess of 2.14 percent of sales without considering the orders passed by its co-ordinate Benches in the appellant’s own case for the asst. year 2003- 2004, 2005-2006, 2007-2008, for deduction of provision for warranty created by the appellant, without there being any change in the facts and circumstances in asst. year 2013-2014 and asst. year 2014-2015?”
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ITA No. 294/2018 by the Revenue, directed against the order dated September 22, 2017 in IT(TP)A No. 242/Bang/2016 passed by the ITAT has been admitted to consider the following questions of law: 1. Whether, on the facts and circumstances of the case and in law, the Tribunal is right in allowing the provisions for warranty even though the disallowance had been relying on the decision of Apex court in the case of Rotark Controls India Pvt. Ltd?
Whether on the facts and in the circumstances of the case, the Tribunal is right in allowing the provision for warranty even thought the assessee had not made the provision on a scientific basis as laid down by the Apex Court in the case of Rotark Controls India Pvt. Ltd?
Whether on the facts and in the circumstances of the case, the Tribunal had erred in law in not following the decision of the Apex Court in the case of Rotark Controls India Pvt. Ltd., and instead relying on the non-speaking order of the Apex Court dismissing SLP in assessee’s case for earlier years?” These appeals are disposed of by this common order.
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Heard Shri. Percy Pardiwala, learned Senior Advocate for the Assessee and Shri. K V. Aravind, learned Senior Standing Counsel for the Revenue.
Briefly stated the facts of the case are, assessee company1 is engaged in trading Apple products in India. It also provides post-sale support services, marketing and related support services for Apple products. Assessee filed returns for the A.Y.2 2013-14 and 2014-15 declaring total income of Rs.162,73,33,230/- and Rs.212,12,89,800/- respectively. The AO3 vide order dated December 29, 2016, disallowed the claim of warranty provisions and concluded that the assessee has not followed the guidelines laid down by the Hon’ble Supreme Court in M/s Rotork Controls India
(P) Ltd Vs. CIT4 (hereinafter referred to as the ‘Rotork Case’) and that the method followed to create the provision was not scientific.
1 Incorporated under the Companies Act, 1956 2 Assessment Year 3 Assessment Officer 4 [2009] 180 Taxman 422 (SC)
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On appeal, CIT(A)5 and ITAT have confirmed the order passed by the AO. Hence, these appeal. [ 6. Shri. Percy Pardiwala, for the Assessee, praying to allow the appeals, submitted that: the Tribunal erred in not following the orders passed by its co-ordinate Benches in the appellant’s own case for the A.Y. 2003-2004, 2005-2006, 2007-2008, for deduction of provision for warranty; the Tribunal erred in not taking into consideration the order passed by this Court in assessee’s own case for A.Y.2003-04 in ITA No.204/2008, holding that the provision for warranty created by the assessee was reasonable and it was treated as an allowable deduction;
5 Commissioner of Income Tax (Appeal)
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assessee’s global policy lays down the practice of re-assessment in the creation of provision for warranty; the Tribunal has erred in observing that assessee does not have a system of reversal of provision of warranty without considering the quarterly accrual sheets; a scientific formula has been followed for creating the provision for warranty and this Court has upheld the formula adopted by the assessee and the same has been consistently followed; the Tribunal has erred in observing that there is a huge difference in the provision made and actual utilisation without appreciating the evidence filed by the assessee; if only 2.14% of sale is allowed as provision for warranty, then the assessee will not get deduction for the amount actually utilised against the
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provision created which will lead to permanent disallowance. 7. Opposing the appeal, Shri. K V. Aravind, for the Revenue, submitted that: the Apex Court in Rotork Case has laid down the guidelines to determine the provisions for warranty, and the same has not been followed by assessee; the provision for warranty has not been calculated in a scientific method; the policy adopted by the assessee is not robust because the settled system of evaluation of outstanding provisions and system of reversal of the excess provisions has not been followed; the actual utilization is less than the provision made.
With these submissions, Shri. K.V. Aravind prayed for dismissal of these appeals.
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We have carefully considered rival contentions and perused the records. 9. In assessee’s own case in ITA No. 204/2008 (Commissioner of Income Tax Vs. M/s. Apple Computers International Pvt. Ltd), this court has answered the question of law in assessee’s favour. In the said appeal, Revenue had challenged the Tribunal’s order6 which had held that the warranty estimated at 2.14% was arrived based on assessee’s past experience in the Indian International market and the post sales support rendered based on the technical evaluation.
In Rotork Case, it is held that a provision is a liability, which can be measured only by using a substantial degree of estimation and it is recognized when: a) an enterprise has a present obligation as a result of past event;
6 ITA No. 930/Bang/06 for A.Y. 2003-04
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b) it is probable and an outflow of resources will be required to settle the obligation; and
c) A reliable estimate can be made of the amount of obligation.
It was argued by Shri. Percy Pardiwala that Assessment Order in this case is based on DRP’s direction for A.Y. 2011-12 and contended that the AO’s Order based on the said DRP’s directions has been set aside by the Tribunal7. Therefore, the very foundation of the order does not survive.
Shri. Pardiwala has filed a statement showing the provisions made for A.Y.s 2007-08 to 2016-17. The total provision for the said period was Rs.1493,97,36,553/- whereas the total utilization for corresponding A.Y.s 2008-09 to 2017-18 was Rs.1426,07,56,990/-. The relevant portion of the statement reads thus:
7 Order dated 22.09.2017
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Assessm ent Year
(1) Opening balance
(2) Provision debited to P/L account (3) Actual expenses incurred
(4) Closing Balance
(5) Sales
(6) *3/ 6 **4/6 2007-08 2,38,46,557 8,99,35,376 8,08,26,871 3,29,55,062 1,39,93,51,676 6.43
2008-09 3,29,55,062 8,25,70,227 8,33,79,038 3,21,46,251 2,18,97,22,707 3.77 5.96 2009-10 3,21,46,251 14,40,19,057 12,42,67,639 5,18,97,669 4,43,69,70,700 3.25 5.68 2010-11 5,18,97,669 17,75,89,409 12,78,97,272 10,15,89,806 4,56,52,93,882 3.89 2.88 2011-12 10,15,89,806 18,74,41,965 18,22,20,342 10,68,11,429 5,93,99,13,233 3.16 3.99 2012-13 10,68,11,429 42,33,93,372 31,60,73,825 21,41,30,976 19,64,07,64,088 2.16 5.32 2013-14 21,41,30,976
1,47,40,08,630 85,31,18,651, 83,50,20,955 30,09,01,06,354 4.9 4.34 2014-15 83,50,20,955 4,39,48,76,926 2,41,07,43,055 2,81,91,54,826 44,41,82,65,721 9.89 8.01 2015-16 2,81,91,54,826 2,83,23,12,596 2,15,62,04,681 3,49,52,62,741 63,65,833,26,177 4.45 4.85 2016-17 3,49,52,62,741 5,13,35,88,995 3,63,16,42,487 4,99,72,09,249 98,49,30,90,748 5.21 5.7 2017-18 4,99,72,09,249 3,80,34,80,000 4,37,52,10,000 4,42,54,79,249 1,14,03,23,80,000 3.34 4.44 Total 1874,32,16,553/- 1434,15,83,857 38886,41,85,286
Total provision for AYs 2007-08 to 2016-17 = Rs.1493,97,36,553/- Total utilization for AYs 2008-09 to 2017-18 = Rs.1426,07,56,990/- (95.5% of total provision for AYs 2007-08 to 2016-17) ** percentage of actual expenses over sales is the comparison of the utilization in the subsequent year towards the sales in the previous year Adverting to the above statement, he urged that assessee had utilized about 95.5% of the total provision made between A.Y. 2007-08 and 2016-17.
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Shri. Pardiwala has also made available a copy of the order8 passed by the Tribunal for A.Y. 2011-12. We have carefully perused the same. In that case, AO had disallowed Rs.5,10,83,253/- being the provision for warranty. The Tribunal held that the said issue was covered in the favour of assessee by various orders passed by the Tribunal in assessee’s own case for A.Y.s 2003-04, 2005-06, 2006-07, and 2007-08 and that for A.Y. 2003-04, the matter was taken to this Court also and ultimately assessee’s stand has been upheld. He submitted that para No. 4.9 in the Assessment Order for A.Y. 2013-14 and para 3.9 in the Assessment order for A.Y. 2014-15 show that the AO has based his order on DRP’s directions for A.Y. 2011-12. As recorded herein, the Assessment order based on the said direction by the DRP has been set-aside by the Tribunal vide order dated September 22, 2017 in IT(TP)A No.242/Bang/2016.
Therefore, Shri. Pardiwala is right in his submission that the very foundation of AO’s order did not survive as the AO’s orders
8 dated 22.09.2017 in IT(TP)A No. 242/Bang/2016
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under challenge in these appeals are based on DRP’S directions for A.Y. 2011-12 has been already set aside.
We have also carefully perused the tabular column furnished by Shri. Pardiwala extracted above showing the provisions made between A.Y. 2007-08 and 2017-18. He is right in his submission that the total utilization for the corresponding A.Y.s 2008-09 to 2017-18 is 95.5% of the total provision. Therefore, as held in Rotork Case, the estimate made by assessee is reliable and robust.
In view of the above, the orders passed by the AO and confirmed by CIT(A) and the Tribunal are unsustainable in law and these appeals by the assessee merit consideration.
So far as the connected appeal9 by Revenue is concerned, we may record that it is not in dispute that assessee has utilized 95.5% of the total provision for A.Y. 2007-08 to 2016-17. The percentage of utilization depends
9 ITA No. 294/2018
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upon the warranty claims made during the corresponding year. The tabular column submitted by assessee shows that the warranty claim is varied between 2.16% to 9.89%. But what is relevant is the utilization of the provision and as noticed by us, the utilization is 95.5%. Thus, the estimate made by the assessee is robust and therefore, the impugned order does not call for any interference. 18. In view of above discussion, the following: ORDER 1. ITA No. 827-828/2018 and ITA No.829- 830/2018 are allowed. 2. Order dated August 03, 2018 in ITA No. 422 & 423/Bang/2018 and order dated October 10, 2018 in Misc.Petn. Nos.279&280/Bang/2018 passed by the Tribunal are set-aside. 3. ITA No.294/2018 is dismissed. 4. Order in IT(TP)A No. 242/Bang/2016 dated 22.09.2017 passed by the Tribunal is confirmed.
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The questions of law are answered in favour of the assessee and against the Revenue.
Sd/- JUDGE
Sd/- JUDGE
SPS