DEPUTY COMMISSIONER OF INCOME-TAX vs. M/S. TRANTER INDIA PVT. LTD., PUNE

PER D. KARUNAKARA RAO, AM :

These are the cross appeals filed by Revenue as well as the Assessee in connection with the finding of the CIT(A) vide his order dated 22-12-2015 for the Assessment Year 2010-11.

2 ITA Nos.377 & 478/PUN/2016 M/s. Tranter India Pvt. Ltd..

assessee is engaged in the manufacturing and sale of various types of Heat

Exchangers. Assessee filed the return of income for the A.Y. 2010-11 declaring

total income of Rs.3.80 Crores (Rounded off). At the end of the assessment

proceedings u/s.143(3) of the Act, the assessed income was determined at Rs.5.16

Crores (Rounded off) after making certain additions/disallowances. The

disallowances on account of “Bad debts” and “Provision of warranty” are two of

them. In the First Appellate proceedings, the CIT(A) granted relief to the assessee

on the addition relating to the “provision of warranty”. Aggrieved with the same,

the Revenue is in appeal on this issue. Further, regarding the “Bad debts”, the

CIT(A) confirmed the addition and decided against the assessee. Aggrieved with

the said conclusion of the CIT(A), the Assessee is in appeal on this issue of Bad

debts.

paragraphs.

ITA No.377/PUN/2016 – (By Revenue)

“1. Whether on the facts and in the circumstances of case and in law, the Ld.CIT(A) was justified in allowing the provisions of warranty expenses of Rs.1,05,40,638/- as an allowable deduction u/s.37 of the Act?

of warranty. Assessee claimed expenses on this account amounting to

Rs.1,05,40,638/- u/s.37 of the Act. Out of the above, actual utilisation out of the

3 ITA Nos.377 & 478/PUN/2016 M/s. Tranter India Pvt. Ltd..

provision was only Rs.17,37,265/-. It is the case of AO, like in other years,

warranty provision created by the assessee does not match with the actual

utilisation towards the warranty claims of the customers. Therefore, AO questioned

the way the provision is created by the assessee. Eventually, after considering the

explanation of the assessee, AO disallowed the entire claim of the assessee. AO

did not allow even the actual expenditure of Rs.17,37,265/- in the assessment.

Relevant para/lines are extracted as follows :

“6. . . . . . . . . . . . . . . . . . .

Thus, on the above reasoning I am satisfied that in the present case, estimation for provision is not scientific and sensible and the liability created by way of provision becomes a contingent liability and the same is not allowable under the Income Tax Act. In view of that an amount of Rs.1,05,40,638/- is disallowed and added back to the total income of the assessee. . . . . . . “

elaborate submissions vide his letter dated 09-12-2015 and submitted that similar

issue was subject matter of adjudication before the First Appellate Authority for the

A.Y. 2008-09 and the CIT(A) in that case allowed the claim of the assessee relating

to the provision of warranty. In effect, the CIT(A) approved the method of arriving

the provision created by the assessee. There was detailed discussion by the CIT(A)

in the impugned order about the scientific method of accounting the provision of

warranty. He also discussed the facts relating to the write back of the excess

provision for the taxation in the subsequent year and commented about the

absence of any escapement of income on this account of provision of warranty. As

per the detailed discussion given in Para No.3.6 of the order of CIT(A), the relief

was granted and the provision for warranty was found allowable by the CIT(A).

Aggrieved with the same, the Revenue is in appeal with the above grounds. It is

the case of the Revenue that CIT(A) erred in allowing the entire claim of

4 ITA Nos.377 & 478/PUN/2016 M/s. Tranter India Pvt. Ltd..

Rs.1,05,40,638/-. Alternatively, CIT(A) erred in not restricting to the actual

expenditure of Rs.17,37,265/-.

However, he has nothing to comment on the finding of the CIT(A) on the same

issue in the A.Y. 2008-09.

attention to the above-mentioned facts. He also relied on the Revenue’s divergent

stand on this issue in different years. He brought our attention to the fact relating

to the relief granted by the CIT(A) in the A.Y. 2008-09 on this issue which became

final now. During the second appeal on this issue for the said assessment year, it is

a fact that Pune Bench of the Tribunal dismissed the appeal filed by the Revenue on

technical ground vide ITA No.339/PN/2015 order dated 30-12-2015. However, the

fact is that the issue of provision for warranty for that year has become final and

allowable as claimed u/s.37 of the Act. Ld. Counsel for the assessee read out the

contents of Para No.3.6 of the order of CIT(A) for the A.Y. 2008-09 where the

provision created is Rs.18,68,049/- and utilised Rs.18,01,403/-. The same is found

relevant for extraction and the same is reproduced here as under :

“3.6 Based on the tests laid down by the Hon’ble Supreme Court (in case of Rotork Controls India Pvt. Ltd.) as discussed in Para 3.4 supra, the facts of the present case vis-a-vis the above figures were analyzed. It has been submitted that the provision created during the year is based on 0.4 % of the sale price of equipment) based on the experience on the Tranter Group since this is only the second year of commercial operations. The appellant has also utilized Rs.18, 01,403/- during the impugned year in order to provide the repairs and replacement to its customers. This amount has been credited to the profit & loss account. . . . . . . . . . . . . . . .. . . . . . . . . . .The appellant has also consistently in the current year as well as subsequent FY reversed the amount utilized to the provision for warranty's account, as the aforestated table would show. On the other hand, the ratio adopted by the A.O. to arrive at the finding that the provisioning has been made on an arbitrary and non-scientific basis does not appear to be very appropriate as is seen have been completed on the total sales, whereas the appellant does not provide warranty on sales made to group companies. The comparison by the assessing officer is also inappropriate as the ratio have been arrived on the basis of total outstanding warranty liability at the end of the

5 ITA Nos.377 & 478/PUN/2016 M/s. Tranter India Pvt. Ltd..

year instead of the warranty provided during the year. Accordingly, based on the aforestated discussion, it would be said that the warranty provisioning by the appellant has been made on scientific and reasonable basis and would represent liability in praesenti and not contingent liability and is therefore allowable deduction u/s.37 of the Income Tax Act. Ground No.1 stands allowed.”

the provision of warranty created and utilised over the years since the A.Y. 2007-08

onwards till the A.Y. 2013-14. The data is available in Para 6 of the assessment

order. For the sake of completeness, we extract the relevant date here as under :

Particular FY 2012-13 FY 2011-12 FY 2010-11 FY 2009-10 FY 2008-09 FY 2007-08 FY 2006-07 Net sales on 828,218,504 874,449,544 862,073,067 705,622,938 627,253,865 459,763,396 272,291856 which warranty is provided Actual warranty 8,365,657 13,129,972 4,137,073 1,737,265 836,093 1,801,403 -- utilised during the year towards customer claims Warranty 13,386,605 3,855,948 8,063,724 10,540,538 836,093 1,868,049 2,397,676 provision made during the year

Explaining the above data, Ld. Counsel submitted that the assessee did not utilise

any of the provision created in the assessment year 2007-08. Further, the

provision created and the utilised amount are more or less the same for the A.Yrs.

2008-09 and 2009-10. Referring to the data available relevant for the A.Y. 2012-

13, Ld. Counsel submitted that the provision created is only Rs.38,55,948/- against

the utilised amount of Rs.1.31 crores. Bringing our attention to the current years

data, assessee had to create a provision of Rs.1,05,40,638/- against the utilised

amount of Rs.17,37,268/-. Ld. Counsel for the assessee submitted that the excess

provision made was credited to the profit and loss account in the subsequent

assessment year thereby no loss of revenue is caused by the assessee. Further, he

mentioned that creation of provision of warranty in any assessment year constitutes

a business decision of the assessee which need not be disturbed by the Revenue so

long as the estimation has a reliable basis and the excess provision is offered to tax

in the subsequent assessment year. Bringing our attention to the above data, Ld.

6 ITA Nos.377 & 478/PUN/2016 M/s. Tranter India Pvt. Ltd..

Counsel submitted that the assessee has been consistently following the principle of

estimation based on 0.4% of the sales price of the equipment based on the

experience of the Tranter group. He also mentioned that the warranty becomes

payable although the sales pertain to the earlier assessment years. Thus, he

pleaded for confirming the order of CIT(A).

well as the data placed before us for a decision in the light of the Apex Court

judgment in the case of Rotork Controls India Pvt. Ltd. Vs. CIT 314 ITR 62. On

perusal of the said judgment, we find the Apex Court explained the conditions

relating to the allowability of the expenses of provision for warranty. Relevant lines

from the Held portion is extracted as under :

“HELD. . . . . . . . . . . . . . . . . .

The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced.

A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.”

provision can be allowed an a allowable deduction subject to the conditions. It is a

decided issue, in principle, the provision for warranty is an allowable expenditure

subject to the reliable estimations linked to the assessee’s obligation to discharge

the warranties guaranteed by the assessee at the time of the product sales. In

principle, the reliable estimation is also a matter of estimations. Such estimation

7 ITA Nos.377 & 478/PUN/2016 M/s. Tranter India Pvt. Ltd..

may be more in a year or less in other year. In the present case, the assessee

estimated the provision at Rs.1,05,40,638/- and the basis of the said estimation is

not found erroneous by the AO. The case of the Revenue is that the claim is not

allowable as the same is only a provision of warranty. Infact, the Revenue did not

even allow the actual expenditure of Rs.17,37,265/- surprisingly. Revenue raised

an alternative ground on this part of the decision of the CIT(A). From this point of

view, when there is no error noted by the AO in the consistency principle of

estimation of 0.4% of the sales price adopted by the assessee together with the

fact that the assessee writes back the excess provision as income of the assessee in

the subsequent years, we find no reason to allow the grounds raised by the

Revenue. Therefore, we are of the view that the decision of CIT(A) is fair and

reasonable and it does not call for any interference. Consequently, the Ground No.1

raised by the Revenue is dismissed. Ground No.2 being an alternative Ground is

dismissed as academic.

ITA No.478/PUN/2016 – (By Assessee)

bad debts amounting to Rs.10,08,993/-.

“1. Disallowance of bad debts :

The Ld.CIT(A) erred in confirming the disallowance of an amount of Rs.10,08,993/- in respect of amounts written off by the Appellant as Bad debts, on the ground that the Appellant has failed to establish that during the year the debts in question have become bad. The Appellant prays that the aforesaid disallowance of Rs.10,08,993/- should be deleted and such amount should be allowed as a deduction in computing the total income of the Appellant.”

8 ITA Nos.377 & 478/PUN/2016 M/s. Tranter India Pvt. Ltd..

claimed Rs.20,29,627/- in the return of income. On scrutiny of the accounts

u/s.143(3) of the Act, AO noticed that five of the Debtors namely, Gujarat State

Electricity Board, Controller of Stores, Dy. Chief Material Manager, South Central

Railways, Fertilisers and Chemicals Travancore Ltd., constitute Governmental

bodies/Public Sector undertakings. The total debts receivable by the assessee from

these Government bodies works out to Rs.10,08,993/-. Relying on the judgment of

Hon’ble Madras High Court in the case of South India Surgical Company Ltd. Vs.

ACIT 287 ITR 62, which is relevant for the proposition that the Government cannot

be a bad debtor, the AO distinguished the Supreme Court judgment in the case of

TRF Ltd. Vs. CIT 190 taxmann 391 (SC) and proceeded to make disallowance by

giving the following finding (Para No. 7 of the AO) :

“The Hon’ble Supreme Court held in the above case that it is enough if the Bad Debts is written off as irrecoverable in the accounts of the assessee. The decision of the Hon’ble Supreme Court supports the view that it is only the bad debts which can be as irrecoverable in the books of accounts and not only debts. The decision of the Hon’ble Supreme Court fortifies the stand of the revenue that it is only bad debts that can be written off even after the amendment to section 36(1)(vii).

In view of that an amount of Rs.1,00,89,936/- added back to the total income of the assessee. Penalty proceedings u/s.271(1)(c) are initiated separately for concealment and furnishing inaccurate particulars of income.”

submissions and relied heavily on the Apex Court judgment in the case of TRF Ltd.

(supra). It is relevant for the legal proposition that it is not necessary for the

assessee to establish the debt infact has become irrecoverable and it is enough that

the bad debt is written off as irrecoverable in the books of account of the assessee.

Thus, the assessee demonstrated before the CIT(A) about the facts relating to the

write off in the books of account of the assessee as irrecoverable. Regarding the

judgment of Madras High Court in the case of South India Surgical Company Ltd.

9 ITA Nos.377 & 478/PUN/2016 M/s. Tranter India Pvt. Ltd..

(supra), assessee submitted the same is distinguishable on facts. Further, assessee

submitted that the order of Mumbai Bench of the Tribunal in the case of Hindustan

Thompson Associates Pvt. Ltd. Vs. CIT (2012) 25 taxmann.com 243 is relevant and

favourable to the facts of the present case. In the said case, the Tribunal rejected

the contention of the Revenue and held that the write off of the short payments as

irrecoverable from the customers against the bills raised based on the commercial

consideration, constitutes an allowable deduction. The CIT(A) considered the

above submissions of the assessee and the case laws and confirmed the addition

made by the AO. However, there is no dispute on the fact that the debts in

question relate to the short payments on the sale price raised on the debtors and

not the entire sale value. He also did not consider the fact that the balance

amounts were never to be paid to the assessee as they relate to the reductions in

sale price due to delay in supply of material, the quality thereof etc. He also did

not mention about how the decision of the Mumbai Bench of the Tribunal in the

case of Hindustan Thompson Associates Pvt. Ltd. Vs. CIT (supra) is inapplicable in

facts of the present case.

with the grounds extracted above.

that the decision of the CIT(A) is not legally sustainable. The CIT(A) held

erroneously that the assessee needs to establish that the debt in question has

become bad. There is no dispute about the fact of write off of the said debt as

irrecoverable in the books of account of the assessee. Mentioning the facts, Ld.

Counsel for the assessee submitted that the debt amounts in question, i.e.

Rs.5,10,946/-, Rs.55,473/-, Rs.3,67,846/-, Rs.12,848/-, Rs.61,880/- (Para 7 of the

AO’s order) and they reflect the balance of amounts receivable from the

10 ITA Nos.377 & 478/PUN/2016 M/s. Tranter India Pvt. Ltd..

Governmental bodies and the same are relatable to the reductions made by the

debtors due to bad delivery/delay in delivery of the goods to the Government

bodies. From this point of view, it is the argument of Ld. Counsel for the assessee,

strictly speaking, these are not bad debts. They are a kind of discounts demanded

by the debtors out of the sale price for not complying with the delivery schedules.

Since the assessee has already complied with the legal requirement of writing off in

the books of the accounts as irrecoverable, it is good enough for applying the ratio

laid down by the Hon’ble Apex Court in the case of TRF Ltd. (supra). Thus, the Ld.

Counsel prayed for reversing the order of the AO/CIT(A) on this issue and allow the

ground raised by the assessee.

the CIT(A) dutifully. He also relied on the judgment of Hon’ble Madras High Court

in the case of South India Surgical Company Ltd. (supra). However, he has not

controverted the facts relating to the nature of debts which are basically discounts

or reduced/adjusted sale price due to delay in deliveries of the material by the

assessee to the said Governmental bodies/Public Sector undertakings.

perused the orders of the Revenue as well as the Paper book filed before us. There

is no dispute on the facts that the parties involved are the Governmental bodies

(Ministry of Railways/State Electricity Board/Public Sector undertakings). Further,

we find that the debts in question directly related to the reduced sales price. It is

also an undisputed fact that the balance amounts receivable by the assessee are

never to be received as they relate to the discounted sales price owing to delay in

delivery of the material to the said Governmental bodies. Further, we also noticed

that assessee has actually written off these debt amounts as irrecoverable in the

books of account of the assessee. Considering all these facts, in our opinion, these

11 ITA Nos.377 & 478/PUN/2016 M/s. Tranter India Pvt. Ltd..

facts are not comparable to the facts discussed in the judgment of Hon’ble Madras

High Court in the case of South India Surgical Company Ltd. (supra).

Consequently, the ratio of the Hon’ble Apex Court judgment in the case of TRF Ltd.

(supra) becomes applicable to the facts of the present case. From this point of

view, we are of the opinion that the order of CIT(A)/AO are required to be

reversed. Accordingly, the solitary ground raised by the assessee is allowed.

Assessee is allowed.

Order pronounced on this 09th day of February, 2018.

Sd/- Sd/- (SUSHMA CHOWLA) (D.KARUNAKARA RAO) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER पुणे / Pune; �दनांक Dated : 09th February, 2018. Satish

आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to : अ�ेिषत

अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु�(अपील) / The CIT(A)-5, Pune 3. आयकर आयु� / The CIT-5, Pune 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “बी 5. बी बी” / DR ‘B’, बी ITAT, Pune; गाड� फाईल / Guard file. 6.

आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार

स�यािपत �ित //True Copy// //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune