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Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S.SUNDER SINGH
आदेश / O R D E R
PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the Order dated 31.08.2016 of Commissioner of Income Tax (Appeals)-1, Coimbatore, in for the AY 2012-13 and raised the following grounds:
ITA No.3489/Mds/2016 :- 2 -:
The Order of the Commissioner of Income Tax (Appeals) [‘CIT(A)’] is contrary to law, facts and circumstances of the case.
Disallowance of provision for warranty 2.1 The CIT(A) erred in confirming the disallowance made by the assessing Officer for provision for warranties to the extent of Rs.50,00,000/- on the ground that the same is excessive and not backed by scientific data. 2.2 The CIT(A) erred in not considering the appellant’s submission on the rationale behind creation of provision for warranty that was necessary for the type of products manufactured and sold by the appellant. 2.3 The CIT(A) erred in not appreciating the fact that warranty provision was created based on the complexity of the project on a scientific basis as determined by the engineers who worked on the project based on past experience. 2.4 The CIT(A) erred in concluding that there was no material warranty claims made in the prior years without appreciating the fact that there has been significant sales from manufacturing only from AY 2011-12. 2.5 Without prejudice to the above grounds, the CIT(A) erred in considering an arbitrary amount of Rs.9,46,409/- as allowable warranty claim as against the claim made by the company of Rs.59,46,409/- Such an arbitrary estimate of allowance is contrary to facts of the case. 3. The Appellant craves leave to add, alter, amend, substitute, rescind, modify and/or withdraw in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.
2.0 All the grounds of the appeal are related to the disallowance of provisions for warranty. During the assessment proceedings, the Assessing Officer (in short ‘AO’) found that the assessee has debited a sum of Rs.59,46,409/- towards provision for warranty. The AO has asked for furnishing a report on actuarial valuation for ascertaining the warranty liability. The assessee failed to furnish the evidence regarding the ascertainment of liability on actuarial basis. Therefore, the AO distinguished the facts of the assessee’s case with that of the Hon’ble Supreme Court decision in the case of Rotork Controls India P. Ltd. vs. CIT, Chennai reported in 314 ITR 62(SC) and disallowed the amount of Rs.59,46,409/-.
ITA No.3489/Mds/2016 :- 3 -:
3.0 The assessee went on appeal before the Learned Commissioner of Income Tax(Appeals) (in short ‘Ld.CIT(A)’) and the Ld.CIT(A) partly allowed a relief of Rs.9,46,409/- as against the provisions of Rs.59.46 and confirmed the balance amount of Rs.50.00 lakhs.
4.0 Aggrieved by the Order of the Ld.CIT(A), the assessee is on appeal before this Tribunal.
Appearing for the assessee, the Learned Authorized Representative (in short ‘Ld.AR’) argued that the assessee is engaged in the manufacture of software designs and development service and Manufacturing of industrial robots. In this line of business, Original Equipment Manufacturers (OEMs) like Ford India, General Motor have Stringent Quality requirements.The assessee is liable for warranty of sale of goods and services. It involves lengthy process manufacturing and catering to the quality norms and small failure can lead to huge loss of Revenue.
Warranty extended by the assessee based on the projects awarded by OEMs vendor items also covered under warranty. They are legally obliged to provide its representatives to assess any damage identified to be caused by employees/materials installed by the assessee. Contractual obligation by the assessee to repair and replace the defective material.
Warranty provisions was made to meet which arise at customer site also.
Provision is made based on past experience depending on the projects handled. The Ld.AR further submitted that the Ld.CIT(A) while confirming the addition of Rs.50.00 lakhs has not made any scientific analysis. In ITA No.3489/Mds/2016 :- 4 -: view of the complexity of the work involved by the assessee company, the assessee company has rightly made the warranty provisions of Rs.59,46,409/-which should be allowed as deduction. The Ld.AR also argued that the case may be remitted back to the file of the AO for verification of the actuarial valuation. On the other hand, the Ld.DR argued that the assessee has not submitted actuarial valuation of the allowability and the expenditure is purely provisional and historical experience also shows that liability is around Rs.2.5 lakhs to Rs.9 lakhs for the last three years which is evident from the Ld.CIT(A) order. Therefore, the Ld.DR vehemently objected for remitting the matter back to the file of the AO.
5.0 We heard the rival submissions and perused the material placed before us.
The Ld.CIT(A) has analyzed the expenditure incurred and provisions made by the assessee for the AYs 2013-14 & 2015-16 as under:
During the course of appeal proceedings, the assessee was directed to furnish the provisions made in the subsequent years and the warranty claim during the year. This is illustrated by the following chart:
Warrant movement FY 2013-14 to 2015-16: Particulars Amount (Rs.) Opening Balance as on 1st April 2013 1,59,49,246.00 ADD: Provision made during the year 75,03,704.00 Less: Warranty claim during the year 34,756.00 Provisions reversed during the year 20,00,000.00 20,34,756.00 Closing balance as on 31st March 2014. 2,14,18,195.00
ITA No.3489/Mds/2016 :- 5 -:
Particulars Amount (Rs.) Opening Balance as on 1st April 2014 2,14,18,195.00 ADD: Provision made during the year 62,09,740.00 Less: Warranty claim during the year 9,24,098.00
Provisions reversed during the year - 9,24,098.00 Closing balance as on 31st March 2014. 2,67,03,837.00
Particulars Amount (Rs.) Opening Balance as on 1st April 2015 2,67,03,837.00 ADD: Provision made during the year 55,43,949.00 Less: Warranty claim during the year 2,47,786.00
Provisions reversed during the year - 2,47,786.00 Closing balance as on 31st March 2014. 3,20,00,000.00
During the current year, the assessee has made huge provision of Rs.59,46,409/- towards warranty. Since the expenditure shows that warranty claim made by the assessee for each year is excessive which is not backed by any actual valuation or scientific data as stated by the Hon’ble Supreme Court in Rotork Controls Private Limited vs. CIT (314 ITR 62J(SC). However, considering that the assessee has provided warranty for various parts supplied to the customers for one year, two years and three years, some provisions for warranty claims need to be created.
6.0 From the above data, it is evident that the assessee has credited a sum of Rs.75,03,704/- for the FY 2013-14 against the actual warranty claim of Rs.34,756/-. For the FY 2014-15, the provision made was Rs.62,09,740/- and the warranty claim was Rs.9,24,098/- for the FY 2015-16, the provisions made was Rs.55,43,949/- and the warranty claim was only Rs.2,47,786/-. The accumulated balances of warranty claim for the year ending 31.03.2014 was Rs.3,20,00,000/-. The assessee company also not reversing the unutilized portion of the warranty provisions made in the earlier years. The assessee is reversing paltry amounts against the huge provisions made. For the FY 2013-14, the ITA No.3489/Mds/2016 :- 6 -: assessee reversed the amount of Rs.20.00 lakhs against the provisions of Rs.75.03 lakhs and for the FY 2014-15 Rs.9,24,098/- and for the FY 2015-16, it was Rs.2,47,786/- which clearly indicates that huge provisions are made for nominal amount of warranty claim during the year, thereby, substantially reducing the taxable income. During the Assessment Year under consideration, the assessee has not submitted the basis of making provisions of Rs.59,46,409/-. For a query from the Bench, for actuarial valuation of liability, the Ld.AR has replied negatively. The assessee could not establish that the provisions are made on the basis of expected liability. Historical experience also reveals that the assessee is making huge sums of provision without any basis. The submissions made by the Ld.AR are general in nature without any supporting documents. The assessee is not reversing the unutilized portion of the warranty. No systematic data has been provided by the assessee with regard to provisions made for warranty. Therefore, the decision of the Hon’ble Supreme Court relied upon by the assessee is not applicable in the assessee’s own case and we do not find any infirmity in the order of the Ld.CIT(A) and the same is confirmed.
ITA No.3489/Mds/2016 :- 7 -: 7.0 In the result, the appeal of the assessee is dismissed. Order pronounced in the Open Court on 12th April, 2017, at Chennai.