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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order of CIT(A)-5,Mumbai the assessee had filed the above mentioned appeal for the two mentioned AY.s.As the issue involved are common for both the years we are adjudicating the matter by passing a single consolidated order for the sake of convenience. 2.Assessee-company is engaged in the business of manufacturing and sale of earth moving equipments.The details of dates of filing of returns, returned income, assessed income etc. can be summarised as under :- A.Y. ROI filed on Returned Assessment dt. Assessed Dt. of orders of Income(Rs.) Income(Rs.) CIT(A) 2007-08 29.10.2007 19,29,28,538/- 24.11.2010 19,59,99,753/- 21.07.2011 2008-09 24.09.2008 58,95,39,693/- 05.12.2011 60,70,81,000/- 22.02.2013 7020/M/11 (2007-08) : 1
3669/M/13-New Holland Construction Equipment (India) Pvt. Ltd.
3.Effective Ground of appeal is about disallowance of Rs.91.18 lakhs claimed on account of provision of warranty.During the assessment proceedings,the AO found that the assessee had debited Rs.91,18,120/- under the head provision for product warranty, that it had claimed that provision was made with regard to a liability that had been quantified based on a scientific and accepted method of valuation.By a letter dt. 16.11.2011 the assessee stated that provision was work -ed out based on warranty cost incurred in the earlier years, that the warranty was part of condition of sales, that it was legally bound for warranty claim and claim was made in conformity with AS-29. However, the AO held that liability had not crystallized during the year,that whatever be the method for ascertaining the liability it did not change the nature of the expenditure.He referred to the case of Bharat Earth Movers and held that liability towards product warranty was not a certainty in the case under consideration,that it could not be said with any degree of certainty that free replacement would become necessary in the case of any particular customer/s,that to equate product related warranty with liability arising in relation to employees was misplaced, that the warranty provision was contingent in nature,that warranty provision was created on certain percentage to basic sales value, that it was debiting warranty expenses as and when incurred. Finally, he held that claim of assessee made under the head warranty provision( Rs.91.18 lakhs)was not allowable.
4.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was argued that the assessee was manufacturing earth moving equipments,that it would provide warranty to its customers as per the terms and conditions of the warranty,the warranty was given on the sales of the finished goods of the customers, that it was integral part of sales price,that the terms and conditions provided to the customer were mentioned in the operating manual of goods delivered to the customers,that it would approve warranty cost upon sales,product warranty cost was based on 3669/M/13-New Holland Construction Equipment (India) Pvt. Ltd. calculation made by it keeping in view expenditure incurred on service warranty cost in the past adjusted for current trend, the actual claims passed during the year were debited to warranty account, that for the current year sales provision for warranty were based on percentage derived technically based on past trend, that it followed a scientific method for making warranty which was continu - ously under review,that there was no ad hoc amount provided in the books for warranty claimed, that for AY 2007-08 warranty provision was made at Rs.91. 18 lakhs as against total warranty expenses incurred Rs.1.15crores,that it already utilised entire warranty provision for 2007-08 in 2008-09, that it had incurred Rs.97.81 lakhs as warranty expenses upto 31.3.07on its sales pertaining to the FY.2005-06,that the said expenses were 0.59% of total sales of 2005-06, that based on past trend and corrective actions taken by it warranty was estimated @0.43% of the sales for 2007-08 as compared to 0.59% for the earlier year. After considering the submission of the assessee and assessment order,the FAA held that the provision were not made on any scientific rational and were purely ad hoc in nature, that in order to claim deduction for expenditure what should be certain was incurrence of liability, that it failed to prove actual incurrence of liability under warranty clause, that in absence of any details of acceptance of claim made on percentage basis could not be allowed, that percentage was derived on estimation rather than scientific basis, that the product sold by assessee would suffer from same type of defect/s. He placed reliance on the case of Indian Molasses Co.(P) Ltd.(37ITR66) and held that it had created the provision on adhoc basis, that the estimation made by the assessee was arbitrary that it was not entitled to any deduction.
5.Before us the Authorised Representative (AR)stated that product warranty cost was based on estimate made by the company keeping in view the expenditure incurred on service warranty cost in the past, that similar expendi - 3
3669/M/13-New Holland Construction Equipment (India) Pvt. Ltd. ture was allowed by the AO in the earlier and subsequent years while passing the orders u/s. 143(3) of the Act, that except for two AY.s the AO had accepted the method followed by it. He referred to the case of Rotork Controls India P. Ltd.(314ITR62); Woodward Governor India Ltd. (321 ITR 147); Sony India P. Ltd.(160 taxman 397); Haden International Group India P.Ltd. (20 SOT 305) and Simpson & Co. Ltd. (10 ITR (Trib.) 283) and also referred to pg no. 25-26 of the PB. The Departmental Representative (DR) supported the order of the FAA and stated that the assessee was not following any scientific method, that it was a contingent liability.He relied upon the case of Indian Molasses Co. (P) Ltd. (supra).
6.We have heard the rival submissions and perused the material before us. We find that the assessee had made provisions for warranty for the year under consi -deration,that in the earlier years also it was making such provisions,that after finalisation of accounts in subsequent year necessary entries were made in the books of accounts about warranty,that it was following the said method and the AO had accepted the method in subsequent and earlier years while completing the assessment u/s.143(3)of the Act.Pages 25 and 26 give the details of working of warranty i.e.provision for warranty and actual expenditure incurred by the assessee for the FY.s.2000-01to 2009-10.Thus,the assessee was following a set method for last many a years and had followed in the subsequent years also.Except for one year the actual expenditure was always more than the provisions.Provision was based on total sales.In our opinion,it cannot be said that the method adopted by the assessee was not in accordance with historical trend. 6.1.We would like to refer to the case of Rotork Controls India P.Ltd. (supra).In that matter the Hon’ble Apex Court has dealt the identical issue.Facts of the case were that the assessee used to sell valve actuators. At the time of sale it 4
3669/M/13-New Holland Construction Equipment (India) Pvt. Ltd. provided a standard warranty whereby in the event of any actuator or part thereof becoming defective within 12 months from the date of commissioning or 18 months from the date of dispatch, whichever was earlier, it undertook to rectify or replace the defective part free of charge. Right from the AY.1983-84 the claim for allowance of this warranty had been allowed. For the AY. 1991- 92, it had made a provision for warranty of Rs.10,18,800/- at the rate of 1.5 % of the turnover.Since this provision exceeded the actual expenditure, the assessee reversed Rs. 5,00,246/- as reversal of excess provision, and claimed deduction of the net provision of Rs.5,18,554/-.But,the AO disallowed the claim on the ground that it was merely a contingent liability. The High Court on appeal held that no obligation was cast on the date of sale and consequently there was no accrued liability.Deciding the appeal in favour of the assessee,the Hon’ble Apex Court held as under: “………the valve actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective ; that valve actuator being a sophisticated item no customer was prepared to buy a valve actuator without a warranty. Therefore, the warranty became an integral part of the sale price ; in other words, the warranty stood attached to the sale price of the product. In this case 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 the 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. 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.
3669/M/13-New Holland Construction Equipment (India) Pvt. Ltd.
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. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 .” 6.2.In our opinion,the assessee had made a right claim and the AO.s.in the earlier and subsequent years have rightly accepted it.Nothing has been brought on record to prove that orders u/s.147 or 154 or 263 were passed for the earlier or subsequent years on account of allowing the warranty expenditure.Thus,the department has accepted the claim made by the assessee and the method adopted by it.It is true that principles of res judicata do not apply to the income tax proceedings.But,it is also true that rule of consistency applies to such proceedings.It is said that the consistency expected on the part of the Revenue in taxation matters is not unknown,but rather is expected so as to make the assessee aware about the taxable liability. If the legal position is changed or there is cogent material available, the Revenue can take a different stand or make a valid departure but at the same time,in the absence of any such circumstances, namely, any material leading to a different conclusion or change in the legal position,the consistency on the part of the Revenue should be adhered to.In the case of Galileo Nederland BV,(367ITR319),the Hon’ble Delhi High Court has held as under: “…….decision on an issue or question though not binding, should be followed and not ignored unless there are good and sufficient reasons to take a different view. Thus, it is possible for the Assessing Officer to depart from the finding or a decision in one year as it is final and conclusive only in relation to the particular year for which it is made but when a fundamental aspect pervading through different assessment years has been found as a fact in one way or the other, it would 6
3669/M/13-New Holland Construction Equipment (India) Pvt. Ltd. inappropriate to allow the position to be changed in a subsequent year particularly when the finding has been accepted. The principle is also based upon the rules of certainty and consistency that a decision taken after due application of mind should be followed consistently as this leads to certainty, unless there are valid and good reasons for deviating and not accepting the earlier decision.” In the matter of Aroni Commercials Ltd.(362 ITR 403)the Hon’ble Bombay High Court has held that though the principle of res judicata is not applicable to tax matters as each year is separate and distinct,nevertheless where facts are identical from year to year,there has to be uniformity and consistency in treatment.
6.3.We find that the AO or the FAA has not brought on record as to how the facts of earlier years were different from the facts of year under consideration or as to how the legal position has changed.In short,there is nothing to prove that facts of the case for the year are different.So,there was no justification for disturbing the method followed by the assessee in earlier years.Reversing the order of the FAA,we decide the effective ground of appeal in favour of the assessee.
ITA/3669/Mum/2013 AY : 2008-09 : 7.As the facts and circumstances for the year under appeal are almost identical to the facts of the AY.2007-08,so,following the order for that AY.,we decide the effective ground in favour of the assessee.
As a result,appeals filed by the assessee for both the AY.s. stand allowed. फलतः िनधा�रती �ारा दािखल क� गई दोन� िन.व.क� अपील� मंजूर क� जाती ह� . Order pronounced in the open court on 21st September, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 21 िसतंबर 2016 को क� गई । Sd/- Sd/- (सी. एन. �साद / C.N. Prasad ) (राजे�� / Rajendra) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य मुंबई Mumbai; �दनांकDated : 21.09.2016. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ 2. Respondent /!"यथ 7
3669/M/13-New Holland Construction Equipment (India) Pvt. Ltd.