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Income Tax Appellate Tribunal, ‘ D’ BENCH : CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D. KARUNAKARA RAO]
आदेश / O R D E R
PER N.R.S.GANESAN, JUDICIAL MEMBER
This appeal of the assessee is directed against the order of the Assessing Officer consequent to the direction of the Dispute Resolution Panel (DRP) for the assessment year 2011-12.
ITA No551/16 :- 2 -:
Shri P.S. Prabhakar, ld. Representative for the assessee submitted that the only issue arises for consideration is disallowance of provision for warranty to the extent of ` 1,62,87,000/-.
According to the ld. Representative, the assessee for the first time entered into contract with M/s Phoenix Pulp & Paper, Thailand, in respect of the warranty obligation against proper design, materials and workmanship of the equipments supplied for a period of 18 months from the completion of commissioning or for 36months from the last CIF main shipment whichever comes first. The provision for warranty worked out 2.63% of the total contract value. The ld. Representative further submitted that the actual expenditure incurred out of the warranty provision was more than 83%. Therefore, the entire claim of the assessee has to be allowed. Placing reliance on the judgment of the Madras High Court in the case of CIT vs M/s Luk India P. Ltd., Tax Case (Appeal) Nos. 489 to 494 of 2010, dated 5.7.2010, the ld. Representative submitted that even though the provision had not been made on scientific basis, since the assessee has actually incurred more than 83% of the provision as expenditure, the claim of the assessee has to be allowed as deduction while computing the total income. Alternatively, the ld. Representative submitted that the assessee has incurred ` 1,35,53,652/- as expenditure for the year under consideration. Therefore, this actual
ITA No551/16 :- 3 -: expenditure has to be allowed in the light of the judgment of the Madras High Court in M/s Luk India P. Ltd. (supra). At the best, the authorities blow could restrict the disallowance only to the extent of ` 27,33,348/-.
On the contrary, Shri Joe Sebastian, ld. Departmental 4.
Representative submitted that the provision for warranty has to be worked out on scientific basis by taking into consideration of the past experience. This is what exactly held by the Apex Court in Rotork Controls India Pvt. Ltd vs CIT, 314 ITR 62. There cannot be any presumption that merely because the assessee has spent 83% of provision for warranty, the entire provision was spent for the purpose of executing the warranty. Referring to the alternative submission of the ld. Representative for the assessee, the ld. DR submitted that since admittedly the assessee incurred expenditure of ` 1,35,53,652/- the same can be allowed while computing the taxable income.
However, the entire amount of ` 1,62,87,000/- as claimed by the assessee cannot be allowed.
We have considered the rival submissions on either side and also perused the material available on record. The Apex Court in Rotork Controls India Pvt. Ltd.(supra) considered this issue and found that provision for warranty based upon past experience of the ITA No551/16 :- 4 -:
company shall be based on scientific method. When the provision for warranty was made on past experience and historical trend, the question of reversal in the subsequent years may not arise. Therefore, it is obvious that the assessee-company has to make provision for warranty based upon its past experience and historical trend. In the case before us, no such method was adopted. The assessee unilaterally earmarked a sum of ` 1,62,87,000/- as provision for warranty. In fact, no basis was adopted. The assessee claims that since 83% of the provision for warranty was incurred as expenditure, the entire claim has to be allowed. This Tribunal is unable to uphold the contention of the ld. Representative for the assessee. However, this Tribunal is of the considered opinion that there is some justification in the alternative submission of the ld. Representative. As rightly contended by the ld. Representative, the expenditure incurred to the extent of ` 1,35,53,652/- for carrying out the warranty needs to be allowed as expenditure. Therefore, this Tribunal is of the considered opinion that the claim of the assessee to the extent of ` 1,35,53,652/- has to be allowed. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow the actual expenditure of ` 1,35,53,652/- while computing the taxable income of the assessee as expenditure. The Assessing Officer shall restrict the disallowance to ` 27,33,348/-.
ITA No551/16 :- 5 -:
In the result, the appeal of the assessee is partly allowed.