DCIT 8(2), MUMBAI vs. MAQUET MEDICALS INDIA (P) LTD, MUMBAI

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ITA 5145/MUM/2011Status: DisposedITAT Mumbai26 August 2016AY 2006-074 pages

In favour of the assessee: the Revenue's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal upheld the CIT(A)'s decision to delete the disallowance. It found that the provision for warranty was necessary, integral to the sale of specialized medical equipment, and made based on a regularly followed accounting system.

What were the facts?

The assessee, engaged in trading and servicing medical equipment, debited a provision for warranty of Rs. 1,66,07,319/- in its P&L account. The Assessing Officer disallowed Rs. 1,24,46,994/- of this provision, considering it a contingent liability due to lack of substantiating evidence and potential violation of warranty terms.

What were the issues?

Whether the provision for warranty made by the assessee is a deductible business expense under the Income Tax Act, considering it as a contingent liability.

Which sections of the Income-tax Act were involved?

Section 37

AI-generated summary — verify with the full judgment below

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Income Tax Appellate Tribunal, MUMBAI “B” BENCH, MUMBAI

Before: SHRI SHAILENDRA KUMAR YADAV, JUDICIAL & SHRI RAJESH KUMAR.

Hearing: 16.08.2016Pronounced: 26.08.2016

This appeal has been filed by Revenue against the order of Commissioner of Income-Tax (Appeals)-17, Mumbai, dated 15th March, 2011 for A.Y. 2006-07 on following grounds:

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance related to provision of warranty of Rs.1,24,46,994/- without appreciating the facts of the case.

A.Y. 06-07 [DCIT vs. M/s. Maquet Medicals India Pvt. Ltd.) Page 2 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in applying the ratio of the decision in the case of M/s. Rotork Controls India Ltd. Vs. CIT (314 ITR 62)(SC), even though the facts of the assessee’s case are distinguishable from the facts of the above cited case.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that the assessee had failed to maintain systematic data in support of its claim for provision of warranty.”

2.

Assessee company is engaged in business of trading and servicing of medical equipments. Assessing Officer on perusal of Annexure F to tax audit report observed that assessee had debited an amount of Rs.1,66,07,319/ in P&L account as provisions of warranty. He noted that when warranty claimed by customers then assessee became liable to incur such expenses and if not there was no liability on assessee. Accounts were maintained on mercantile basis on the presumption of going concern. However, it was uncertain whether the same shall be claimed by customers in future. It was held that assessee had not provided substantiating evidence or basis for working of provision. In view of fact that warranty provided by assessee was not claimed by all these parties, being covered only on certain parts and that too if party had not violated terms and conditions of warranty and usage of equipments by the party. If there is any violation by party, the warranty becomes void. Assessing Officer observed that having made a provision for warranty of Rs.1,66,07,319/- a sum of Rs.41,60,325/- had been utilized. Thus, the provision was only a contingent liability. So, Assessing Officer made addition to the extent of Rs.1,24,46,994/-. A.Y. 06-07 [DCIT vs. M/s. Maquet Medicals India Pvt. Ltd.) Page 3 2.1 Matter was carried before the First Appellate Authority, wherein various contentions were raised on behalf of assessee and having considered the same, CIT(A) granted relief to assessee.

2.2 Same has been opposed before us on behalf of Revenue inter alia submitted that CIT(A) granted relief to assessee on disallowance related to provision of warranty of Rs. 1,24,46,994/- Accordingly, order of CIT(A) be set aside and that of Assessing Officer be restored. On the other hand, ld. Authorized Representative supported the order of CIT(A).

2.3 After going through rival submissions and perused the material on record, we find that such provision for warranty in the business of assessee of trading and servicing of specialized medical equipment. Assessee’s contention that such warranty was necessary and was part of contract of sale was rightly accepted. As per accounting system regularly followed by assessee, such provision was made @ 2% of sales and would written back if in excess at the expiry of warranty period. In this background, CIT(A) observed that assessee’s case is squarely covered by the decision of M/s. Rotork control India Pvt. Ltd. vs. CIT [2009] 314 ITR 62 (SC), wherein it was observed that 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 actuators being a sophisticated items, no customer was prepared to buy a valve actuator without a warranty. Therefore the warranty became an integral part of the sale A.Y. 06-07 [DCIT vs. M/s. Maquet Medicals India Pvt. Ltd.) Page 4 price; in words the warranty was attached to the sale price of the product. In this case the warranty provision had to be recognized because the assessee had a present obligation as a result of past event resulting in outflow of resources and 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 u/s 37 of the IT Act. Facts being similar, so, following same reasoning, CIT(A) was justified in granting relief to assessee. This reasoned factual finding of CIT(A) needs no interference from our side. We uphold the same.

3.

In the result, the appeal filed by Revenue is dismissed.

Pronounced in the open Court on this the 26th day of August, 2016.

Sd/- Sd/- (RAJESH KUMAR) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai: Dated 26/08/2016 True Copy S.K.SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाइल / Guard file. By order/आदेश से,

उप/सहायक पंजीकार, आयकर अपील�य अ�धकरण, मुंबई ।

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