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Income Tax Appellate Tribunal, “B” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Shri Ravish Sood (JM)
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the revenue is directed against the order dated 12-10- 2015 passed by Ld CIT(A)-3, Thane and it relates to the assessment year 2011- 12. The revenue is aggrieved by the decision of Ld CIT(A) in granting relief to the assessee in respect of disallowance of claim of Provision for warranty expenses.
The facts relating to the issue are set out in brief. The assessee is a partnership firm and is carrying on the business of repairing, refurbishing, sale and installation of imported second hand medical equipments, i.e., the assessee is engaged in the business of selling refurbished imported second hand Medical Devices like imaging systems, X-ray machines, CT- Scans, Dopplers etc. These machines hold a warranty of two years during which period replacement/repair
2 M/s. Medirays Corporation expenses are borne by the assessee. Hence the assessee was following the practice of providing for Warranty and Guarantee claims every year. After the expiry of warranty period of two years, the unutilised amount of “Provision for warranty” was reversed and offered to tax.
During the year under consideration, the assessee made provision for warranties to the tune of Rs.1,15,35,985/-. The AO noticed that the provision so made works out to about 10% of the sale value of machineries. Further he noticed that the assessee has not fully used the provision amount in the earlier years, i.e., it has been reversing major portion of the provisions made in the earlier years after expiry of warranty period. Accordingly the AO took the view that the past year’s data did not support the quantum of provision made by the assessee, i.e., the assessee has been reversing about 62.82% of the amount of provision made in the earlier years. Accordingly the AO took the view that the assessee did not provide for warranty claims in accordance with best possible estimates as prescribed under Accounting Standard-29. Accordingly the AO took the view that the amount provided by the assessee for warranty claims is excessive and disproportionate to the actual present obligation as a result of past events. Even though the assessee placed reliance on the decisions rendered by Hon’ble Supreme Court in the cases of Bharat Earth Movers Vs. CIT (2000)(245 ITR 428) and Rotork Controls India OVT Ltd Vs. CIT (314 ITR 62), yet the AO took the view that these case laws are distinguishable with the facts of the assessee’s case, i.e., the above said companies had made provisions on the basis of their historical trends and further provided for only when the customers made the claim. With these observations, the AO disallowed entire claim of Rs.1,15,35,985/-.
3 M/s. Medirays Corporation
In the appellate proceedings, the Ld CIT(A) agreed with the contentions of the assessee and accordingly allowed the claim of the assessee. Aggrieved by the order passed by Ld CIT(A), the revenue has filed this appeal before us.
The Ld D.R submitted that the Provision for Warranty is normally made in the accounts when (a) Warranty clause is available, (b) the warranty may result in outflow of funds and (c) warranty claims can be quantified on the basis of part experiences/data on a scientific basis. The Ld D.R submitted that, in the instant case, the warranty clause is available and the warranty may result in outflow of funds. However, the assessee’s claim fails on “quantification aspect”, i.e., the past experiences/data of the assessee would show that the provision made by the assessee is excessive and disproportionate. Accordingly the Ld D.R submitted that the Ld CIT(A) was not justified in deleting the addition made by the AO.
On the contrary, the Ld A.R submitted that the assessee is engaged in the business of selling second hand machineries after refurbishing them. Those machineries carry a warranty period of about 2 years. He submitted that the probability of failures is more in respect of second hand machineries, which require frequent attendance and repairs. Hence the assessee has provided for “Warranty claims” year after year. He submitted that the said claim has been allowed in the past years. He submitted that the assessee has been making provisions on a scientific basis in order to meet out the expected amount of expenses in fulfilling the warranty. He submitted that the actual claim may vary every year and the unutilised amount of provision was duly offered to tax after the expiry of warranty period. He submitted that the assessee has spent about Rs.85.00 lakhs in the succeeding years out of the warranty of provision of Rs.115.35 lakhs provided for the year under consideration. He submitted that the assessee has been declaring income of Rs.50.00 lakhs and above every year
4 M/s. Medirays Corporation and hence there could not be any allegation of suppression of profits also. He submitted that the Ld CIT(A) has analysed the claim of the assessee in proper perspective and hence his decision does not call for any interference.
We have heard rival contentions and perused the record. There appears to be no dispute to the fact that the machineries sold by the assessee carries warranty promise and the assessee is required to repair/replace parts as per the terms and conditions of warranty given. The only concern of the assessing officer seems to be that the assessee is not actually incurring expenses in meeting out the warranty claims to the extent of the amount provided for. Accordingly he has taken the view that the amount provided for by the assessee is excessive and disproportionate. However, the AO has chosen to disallow the entire amount of provision made by the assessee instead of disallowing only that portion which was found excessive.
We notice that the Ld CIT(A) has deleted the addition with the following observations:- “ 8.0 Ground No. 5(a) & (b) is directed against the disallowance of Rs. 1,15,35,985/- of provision for warranty.
(i) I have carefully considered the submissions of the appellant, the observations of the AO in the assessment order, remand report of the Assessing Officer, Reply to remand report filed by the Authorized Representative, case laws relied upon by the appellant and the facts of the case, and therefore, I proceed to decide the appeal of the appellant.
(ii) The Assessing Officer has discussed in Paras 4.1 & 4.3 of the assessment order and the AO, further observed that the provisioning of 10% of sales is excessive, unrealistic, arbitrary and cannot be allowed as an expenses u/s.37(1) of the Act. No historical trends in the business of assessee for such provisioning and it is not in accordance prescribed under the AS-29 of the ICAI. The AO further stated that the case laws relied by the AR are in fact, are clearly distinguishable with facts of assessee's case. The said
5 M/s. Medirays Corporation companies are manufacturers and made the provisions for warranty in provided towards warranty based on their historical trends. In assessee's case all these factors are absent. --- (iii) On the other hand, the Authorized Representative (AR) of the appellant stated that the warranty expenses provided were on historical trends and also on the basis of past history and service engineers reports. The AR further stated that from A.Y.2005-06 onwards the appellant started purchasing Second Hand imported electronics machines and refurbishing etc and sell it with warranty of two years free maintenance. The current year warranty has to be spent for 3 A.Ys. i.e. 2011-12, 2012-13 & 2013-14 and during the year reversal amount of Rs.30,07,685/- has been offered as income. The AR furnished the details of customers in whose cases warranty were provided during the year along with copy of sale bills. The AR, in reply to the remand report has stated that the AO reiterates what has been discussed in the assessment order.
(iv) The appellant has also placed reliance on various court decisions a). CIT vs Maruti Suzuki India ltd. in - 2011(Delhi High Court);(b). CIT vs. Vinitec Corporation Pvt. Ltd. reported in 278 ITR 337 (Del); (c) Rotork Controls India Ltd. vs. CIT reported in 314 ITR 62(SC); (d) Bharat Earth Movers vs. CIT reported in 245 ITR 428(SC) and (e) CIT vs. Inductotherm (India) Pvt Ltd. reported in ITA No.2087 of 2010 dated 27.12.2011 wherein the provisions of warranty were upheld. (v) On going through the above, the claim of provision for warranty expenses is justified on the following grounds: a) The appellant is in the business of selling refurbished Medical devices such as imaging systems, X-ray machines, CT scans, Dopplers etc and these are purchased from hospitals or imports from abroad. These are refurbished/repaired/replaced of defective spare parts and sell them to customers with a warranty period of 2 years during which replacements/repairs are the responsibility of ( the appellant. Therefore, the appellant has provided for warranty and guarantee reserve. Whatever balance provision is pending, the same is written back over a period of next two financial years. This provision was written back over the next 2 assessment years. Hence, the same is revenue neutral. In this case, the unutilized provision is reversed back and the same is offered to tax in the subsequent year.
(b) The appellant has been claiming from A.Y.2005-06 and the AO has not doubted that the imported second sales after
6 M/s. Medirays Corporation refurbishing is along with the warranty for a period of 2 years. The appellant is following this method of accounting since long time, which has never been disallowed.
(c) The appellant is claiming provision for warranty expenses in the year in which sales have taken place and claimed 10% on the total sales because the risk of replacement or repairs are much higher in the case of imported second sales than the manufactured sales. (d). The Honible Supreme Court in the case of Rotork Controls (India) at page 71 states that " The warranty became an integral part of the sale price; in other words, the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income tax Act, 1961". (e) The amount of warranty provision has been scientifically and statistically followed for example, the current year provision for warranty is Rs.1,15,35,985/- and out of which, Rs.85,28,300/- has been utilized and the balance amount of Rs.30,07,685/- has been reversed and offered to tax in A.Y.2013-2014. In fact, the Assessing Officer should have verified the genuineness of the expenses claimed in A.Y.2011-12 of Rs.3,95,500/-; Rs.55,17,800/- in A.Y.2012-13 & Rs.26,15,000/- in A.Y.2013-14 out of utilized provision of warranty.
In view of the above stated facts, the appeal of the appellant on this ground is allowed and the disallowance of provision made by the AO is deleted.”
On a careful perusal of the order passed by Ld CIT(A), we notice that the first appellate authority has examined the claim of the assessee by following the principles laid down by Hon’ble Supreme Court in the case of Rotork Controls (India) Ltd (supra) and has further noticed that the assessee has spent a sum of Rs.85,28,300/- in the succeeding years out of the warranty amount provided for during the instant year. The Ld CIT(A) has also taken into account the fact that the machinery sold by the assessee are imported second hand machines and hence they may require frequent attendance/repairs. Since the assessee has 7 M/s. Medirays Corporation been declaring profits at a higher level year after year, the Ld CIT(A) has also observed that the creation of provision and reversal of the same are revenue neutral. In any case, a business man would provide for such warranty claims on estimated basis for possible claims only and it is not necessary that the provision so made should be fully spent. The actual expenditure would depend upon the warranty claims actually lodged by the customers, which may vary year after year. In the instant case, it is not the case of the AO that the assessee has provided for amount at an excessive figure in order to suppress the profits. Hence, in our considered view, the Ld CIT(A) has taken judicious view of the matter and the same does not call for any interference. Accordingly we uphold the order passed by Ld CIT(A) on this issue.
In the result, the appeal filed by the revenue is dismissed. Order has been pronounced in the Court on 22.3.2017.