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Income Tax Appellate Tribunal, MUMBAI-“H”BENCH
Before: S/Shri. D.T. Garasia & Ashwani Taneja
O R D E R PER BENCH:
1. 1. Both the appeals are filed by the department against the order of CIT(A) both dated 25.03.2014 for the assessment year 1996-97 and assessment year 2000-2001.
2. Following grounds are raised in the both appeals which are common grounds which read as under:-
“On the facts and in the circumstances of the case the Learned CIT(A) erred in deleting the disallowance of Rs.2,35,25,832/- for warranty and field services on the ground that the appellant is maintaining the provisions of warranty on a scientific basis based on its part expenses and are consistently maintained on a certain percentage on sales turnover”.
“On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in treating the assessee’s claim that it has created provision on historical basis, through it has only claimed that it is being claimed on consistent basis”.
ITA.NO.4012 &4013 M/s Hindustan Dorr Oliver Ltd.
3. “On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in deleting the aforesaid expense without appreciating the order of the Hon'ble ITAT for A.Y. 2004 – 05 dated 09.03.2010 in and ITA No.7324/Mum/2007”.
4. The appellant prays that the order of the CIT(A) on the above ground be set aside and that the A.O be restored.
5. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.
The short facts of the case are as under. Assessee has filed the return of income for the A.Y 1996-97 on 31.03.1997 declaring income of Rs.6,50,26,880/-. The return was accompanied with audited Balance Sheet, Profit and Loss account and Tax Audit under Section 44AB. The return was processed under Section 143(1)(a). The assessee has revised return on 16.03.1998 wherein it was revised the income of Rs.6,26,65,150/-. In the Profit and Loss account assessee has deducted the amount of Rs.1.96 lakhs on account of increase in the provisions. In the details of these provisions are as per schedule ‘Q’ to the Profit and Loss account which includes the provisions of Rs.108.15 on account of warranty and field services in respect of billings rendered. During the course of proceedings assessee was caused to furnish the figures of actual utilization of an amount out of the provisions made from warranty and field services and also to explain why the deduction may not be allowed on the actual figure. The assessee has submitted the details of warranty and field service details during the assessment proceedings. The assessee has asked to explain the reason for provisions of warranty and field services.
The assessee contended that, assessee is engaged in offering process engineering solutions, supply of capital goods and executing the Trunkey contracts. The business of HDO does not end with erection and installation of machinery and plant, but continues during the period of warranty in providing with the services as technical advice, providing maintenance and repair and replacing any part which are either not in accordance with the standard or which will have come for replacement during the period of warranty. Hence there is a continues liability to spend on such provisions of services and material supplied for a numbers of years specially during the years covered by the period of warranty. Even thereafter HDO has to continue to provide the services to maintain the business of valued
ITA.NO.4012 &4013 M/s Hindustan Dorr Oliver Ltd. clients, considering the large number of variable involved at the end of the each financial year a fresh assessment is made on each job, earlier provision written back, cost incurred during the year is absorbed and a fresh provision to the extent of liability ascertained in the manner explained above is made. Thereafter there is no loss to the revenue because any provision in case of actual expenditure is being written back. Further the provisions have been made and write-backs specified for each job done. Thus we are claiming only net increase in provisions for warranty and field services as deducted in our computation of income. The Assessing Officer after considering the reply, the Assessing officer was of view that in his initial years, assessee has been claiming the provisions with warranty of field services as expenses. However this treatment of account was not accepted by the department. The expenses were not allowed, the assessee itself started disallowing the provisions of warranty and field services under protest from A.Y.1988-89 onwards. In the AY.1995-96 assessee has further claimed the provisions of warranty and field services as allowable expenses. The department consistent stand that provision on account of warranty and field services is a liability only when it is actually utilized for the purpose of which is made, when it is a contingent liability it is not allowable. However the issue was in A.Y.1985-86 the appeal was allowed but it was not accepted by the department.
The assessing officer found that in A.Y.1995-96 the provisions of warranty and field services for the past five assessment years, the provisions were made much more than actual utilization. Further found that provision is made as 2.25% of the sales and the actual utilization was of only 0.28% in A.Y.1996-97. The assessing officer was of a view that the assessee adopted the device to postpone the payment of tax on liability created year after year and it is incorrect to say that the liability starts as soon as the sales is made. The Assessing Officer has relied on the decision of Hon'ble Bombay High Court in the case of Standard Mills Co.Ltd. v. CIT, 229 ITR 366 and the Assessing Officer has not accepted the contention of the Assessee and the Assessing Officer was of a view that in assessment year 1985-86 the appeal was allowed but it was not accepted by the department and same cannot be accepted as each assessment year is an independent unit for assessment and the principle of sub-judice does not apply to the income tax proceedings. Therefore, Assessing Officer has allowed the amount of actually used during the year and entire provisions was added back to the income of the assessee.
Order carried to CIT(A) and CIT(A) has allowed the claim by observing as under: -
ITA.NO.4012 &4013 M/s Hindustan Dorr Oliver Ltd.
“ I find that the second issue to be looked into is the reasonableness of utilization of the warranty expenses claimed by the appellant on year to year basis so as to maintain the consistency in the decision as held by the Tribunal in the appellant's own case. It is also a matter of fact that the appellant consistently claimed expenses on warranty provision starting from Assessment Year 1985-86 to 2005-06 and thereafter the appellant had not made any provision for warranty. The present order giving effect to IT AT's order was passed by the Id. AO on 20.08.2011 i.e. much later than the Assessment Year 2005-06. The entire details of the expenses claimed by the appellant and its percentage of utilization is there before the Ld. AO, as return of income was filed by the appellant from time to time and entire case records starting from Assessment Year 1985-86 to 2005-06 are before the Ld. AO in set aside proceedings. Therefore, to say the appellant has not submitted the requisite details is not a correct statement of fact. During the course of the appellate proceedings, I find that the appellant has submitted the details of utilisation of warranty expenses culling out the details from the Audited copies of accounts which was filed by the appellant in its return of income. All these were subject matter of scrutiny assessment and subsequent appellate proceedings. The appellant filed an application for admission of additional evidences by calling these details as additional evidence. My Id. Predecessor has duly forwarded the same to the Ld. AO for her comments, however, till date no comments have been received. I strongly feel that these are not the additional evidences which require admission, as these were very much before the Ld. AO who inadvertently failed to consider the same . It was also ironical that the ld.AO has made the addition of the same amount without looking or the details filed by the appellant during the assessment proceedings or which were available before the appellate authorities. A bare perusal of the details revealed that the appellant had created a provision of Rs. 2,35,25,832/- for the year under consideration and added back to its opening balance of Rs. 1,72,64,730/-. It is also a matter of fact that the appellant had also written back the provisions for excess warranty expense which could not be utilised in respect of the warranties given in the earlier year amounting to Rs.98,33,164/ -. It is also a matter of fact that the actual amount of expenditure incurred was Rs. 30,47,714/ - .in the year under consideration. It was categorically submitted by the appellant that normally the provisions created are 1 % of the sales affected for the year under consideration the actual utilisation was 0.39% of the entire sales turnover. I have examined the provisions created by the appellant since Assessment Year 1985-86 to 1995-96 and I 4
ITA.NO.4012 &4013 M/s Hindustan Dorr Oliver Ltd. find that on an average the appellant is creating a provision of less than 1 % except in the current assessment year i.e. Assessment Year 1996-97 wherein the appellant has created a provision of 2.25% in the year under consideration. The entire year to year warranty provisions and its utilisation has been perused by the undersigned and is placed on record. It is also discernible from the record that the appellant is writing the excess provisions back and offering the same for the income tax purposes on the expiry of warranty period. The provisions written back every year are also quite substantial and in fact the entire excess provisions were written back in the Assessment Year 2006- 07. It is also a matter of fact that the Hon'ble ITAT in the appellant's own case for Assessment Year 2001-02 has allowed the claim of the appellant following its own order in the Assessment Year 1988- 89. Therefore, the entire issue appears to be covered by the decision of the Hon'ble ITAT in the appellant's own case. First the Hon'ble IT AT has decided that the provision of warranty are not contingent liability but are substantive liabilities which are to be allowed and secondly Hon'ble ITAT in the appellant's own case has allowed the expenses in the Assessment Year 2001-02 holding that the appellant is claiming the warrant provision on a scientific- basis. Looking to the entire conspectus of the appellant's case, it can be said that the appellant is maintaining the provisions of warranty on a scientific basis based on its part expenses and are consistently maintained on a certain percentage on sales turnover. The appellant also explained that 1 % is more or less adhered to however as there are two kinds of items sold by the appellant, in one item the warranty is of 18 months and in the other item the warranty is for 12 months, depending upon the sales turnover of the items the provision of warranty is created. I do not find any infirmity in the method adopted by the appellant. Moreover, the entire warranty provisions are either written back or is utilised and offered to tax on year to year basis. I find that the addition made by the ld.AO on this count is not based on the correct appraisal of the facts of the case, the same is accordingly deleted. These grounds of appeal are thus allowed.”
The Ld. DR submitted that department contention is that the assessee is making the provisions to 2.25% of the sales whereas the actual utilization of warranty and field services amount is only of 0.28% to the total sales and write back during the year is 0.93% of the total sales thus actual figures indicates the provisions made on account of WFS is far in excess of actual utilization, therefore method of accounting adopted by the assessee is not accepted by the department. The department stand is that the provisions on account of warranty and field
ITA.NO.4012 &4013 M/s Hindustan Dorr Oliver Ltd. services is liable only when it is actually utilized for the purpose which is made and when it is a contingent liability is not liable.
The Ld.A.R submitted that the assessee claiming the warranty expenses on warrant provision starting from A.Y.1985-86 to 2005-06 thereafter assessee has not made any provisions of warranty. The assessee has filed entire details of expenses claiming by the assessee and percentage of utilization before Assessing Officer. The assessee has made the provisions of less than 1% except in the year 1996-97 wherein he has created provision to 2.25%. Assessee is writing the excess provision back and offering the same for income tax expiry of warranty period. In A.Y.2000-01 the claim was allowed, allowing the order of 1998-89. The ITAT has decided that warranty are not contingent liability but substantitive liability which are allowed except in assessment year 2001-02, the tribunal has hold that it is a scientific process. The assessee claimed two items wherein warranty for 18 months and other warranty is for 12 months depending on the sales turnover the item of provisions of warranty is created.
The ld.A.R has drawn our attention to the order of ITAT for the Assessment year 2001-02; wherein the tribunal has allowed the deduction of provision of warranty as revenue expenses and the appeal was allowed by the Tribunal and the department has accepted the decision of ITAT in Assessment year 2001-02 and 2002-03 the claim was allowed but it was restored to the file of the Assessing officer for quantization of the amount. The tribunal has first time in assessment year 2004-05 the order is placed on page 20 of the paper book wherein the claim of the assessee was dismissed by the Tribunal for the assessment year 2004-05 for which the assessee went before the Hon’ble Bombay High Court and the Hon’ble Bombay High Court has restored this file to the fresh decision in accordance with the law which is on page 36 of the paper book. The Ld.A.R submitted that the Tribunal has allowed the claim in all the assessment years except in the assessment year 2004-05 which is also restored to the Tribunal. The Ld.Dr submitted that while the claim of the assessee is allowed in assessment year 2001-02 and when it is accepted by the department there is no reason to divert from the order of the Tribunal. Therefore CIT(A) is justified in his action therefore departmental appeal deserved to be dismissed.
We have heard the rival contentions of both the parties. Looking to the facts of the case we find that the assessee is engaged in offering process engineering solutions, supply of capital goods and executing the Trunkey contracts. The business of HDO does not end with 6
ITA.NO.4012 &4013 M/s Hindustan Dorr Oliver Ltd. erection and installation of machinery and plant, but continues during the period of warranty in providing with the services as technical advice, providing maintenance and repair and replacing any part which are either not in accordance with the standard or which will have come for replacement during the period of warranty. There is continuous liability to spend such provisions for services and material supplied over a numbers of years especially during the year covered by period of warranty. Assessee has to provide services to maintain business of valued clients. We find that the assessee was claiming these voluntary expenses as revenue expenses and it was claiming since the A.Y.1985-86 and which was allowed at ITAT to Assessment Years 1985-86 to 1997-98. We also find that in Assessment Year under consideration of CIT(A) has held that the assessee is making the provisions of warranty expenses, a provision is less than 1% of the sales except in assessment year 1996-97 assessee has created a provisions of 2.25%. The assessee has also placed on record that assessee is writing excess provisions back and offering the same for income tax purpose on expiry of warranty period. We also find that the assessee has made a provisions of warranty as a scientific method. We also gets the support from the decision of the Hon’ble Supreme Court in case of Rotork Controls India (P) Ltd v. CIT(2009) 223 CTR (SC) 425 wherein it is held that a provision has a liability which cannot be measured only by using substantial degree of estimation. The provision has recognized that (a) an enterprises has a present obligation as a result of post event; (b) it is probable than an outflow of the resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. The liability defined as a present obligation arising from the past events, the settlements of which is expected to result an outflow from enterprise of resources embodying economic benefits. The Supreme Court further held as under:- “Over the years appellant has been manufacturing valve actuators in large numbers. The statistical data indicates that every year some of these. manufactured actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. Therefore, warranty became integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision n needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow
ITA.NO.4012 &4013 M/s Hindustan Dorr Oliver Ltd. of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. To give an example of product warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options: (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs have to be fully provided for. When valve actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfills accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should based on past experience of the company. On the facts and circumstances of this case, provision for warranty is rightly made by the appellant enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and .circumstances of this case, during the relevant assessment year which was entitled to deduction under s.
Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are – provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources 8
ITA.NO.4012 &4013 M/s Hindustan Dorr Oliver Ltd. and lastly it involves reliable estimation of obligation. The principle which emerges from various decisions is that if the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under s.
37. It would all depend on the data systematically maintained by the assessee. The High Court, while reversing the decision of the Tribunal allowing deduction, has failed to notice the "reversal" which constituted part of the data systematically maintained by the assessee over last decade.”
We respectfully following the judgment of Hon'ble Supreme Court we find that in the case, assessee is maintaining provisions of warranty of scientific basis based on his past expenses and are constantly maintaining on a certain percentage of sales turnover. The assessee is selling two kinds of items in one item the warranty is 18 months and in other item warranty is 12 months depending upon the sales turnover of the items provision of warranty is created. Moreover entire warranty provisions are either written back or utilized and offer to tax on a year to year basis. Therefore we are of the view that CIT(A) has justified in allowing the claim of the assessee. Therefore our interference is not required. Moreover we found that the department has accepted the claim of the assessee in assessment year 2001- 02 and we find that the issue is covered by the decision of assessee’s own case for A.Y 1985 – 86 to 1995 – 96. During the course of the hearing the Ld. DR could not produce any material or the judgment of High Court wherein the facts are different. Therefore as a rule of consistency in income tax the Tribunal is bound to follow the Judgment of earlier orders. During the hearing learned A.R has not pressed for C.O hence it is dismissed. Therefore we dismiss the departments appeal.
Order pronounced in the open court on 25th January, 2017.