ACIT, CHENNAI vs. FL SMIDTH MINERALS PVT LTD., CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

ITA No.1918/Mds/2015 :- 2 -:

The Revenue has raised the following grounds of appeal:- 2.

‘’2.1 The ld. CIT(A) ought to have appreciated that as per the Apex Court decision relied on only provisions for warranty arrived at on a scientific basis is allowable and not any lumpsum provision (uncertain liability)

2.2 The ld. CIT(A) ought to have appreciated that the p provision made is not scientifically arrived figure.

2.3 The ld. CIT(A) ought to have appreciated that in order to apply the decision of the Hon’ble Apex Court in the case of Rotork Controls, the assessee should have satisfied the important aspects observed by the Hon’ble Supreme Court viz

(i) Provisioning which relates to present obligation. (ii) It arises out of obligating events. (iii) It involves outflow of resource and lastly. (iv) It involves reliable estimation of obligation.’’

The Brief facts of the case the assessee is in the business of 3. design, manufacture, supply and supervision of erection and commissioning of machinery and equipments for minerals industry.

The assessee company filed return of income on 31.10.2005 declaring total income of �16,05,36,225/- and the return was processed u/s.143(1) of the Act and the case was referred to TPO and ld. TPO completed the assessment accepting the arms length price (ALP) for the international transactions entered into by assessee company with its associated enterprises. The ld. Assessing Officer passed assessment u/s.143(3) of the Act on 31.12.2008 and determined the total income at �24,45,93,103/- by disallowing provision for warranty �7,50,41,484/- and other disallowance. The ld. Authorised

ITA No.1918/Mds/2015 :- 3 -:

Representative submitted that provision for contractual obligation represents estimated expenses for site rectification cost, provision for liquidated damages on account of delay in delivery and performance of the equipment supplied, as per the terms of contract with the customer and thus the entire amount is an ascertained liability to be allowed as deduction. But the ld. Assessing Officer relied on the decision of Apex Court in CIT Vs Rotork Controls India Ltd 293 ITR 311 for disallowance. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

In the Appellate proceedings, the ld. Commissioner of Income 4.

Tax (Appeals) considered the submissions and grounds raised by the assessee for provisions for warranty. The assessee has made provision for warranty �7,50,41,484/- in the Books of accounts and the AO objected that the provisions for warranty created without any scientific reasons and disallowed same. The contention of the assessee for provision being ascertained liability wereas the Revenue observed it as contingent liability. The ld. Commissioner of Income Tax (Appeals) has considered the findings of the Assessing Officer at page 2 and 3 of his order and the submissions of the assessee that warranty was created on scientific basis and allowable u/s.37(1) of the Act. The ld. Authorised Representative further contended that Jurisdictional High

ITA No.1918/Mds/2015 :- 4 -:

Court for the assessment year 2003-04 in assessee’s own case in TCA No.38 of 2010 dated 03.06.2013 allowed the provisions for warranty and ld. Commissioner of Income Tax (Appeals) observed at para 4.2 of his order and allowed the appeal as under:-

‘’4.1.2. I have considered the assessment order of the Assessing Officer, the contentions of the assessee carefully. The issue of provisions for warranty is a recurring issue. The Hon'ble Madras High Court, by relying on the decision of the Apex Court (in the case of Rotark Controls India Ltd v. CIT - 314 ITR 62), has held issue in favour of the assessee, vide TCA No.38 of 2010 dated 03.06.2013, in the assessee's own A.Y.2003- 04. Therefore, respectfully following the orders of the High Court in the assessee's own case, I am of the opinion that the provision for warranty in the current assessment year 2005-06 is also allowable. The Assessing Officer is directed to allow the assessee’s claim. The assessee succeeds in its appeals in this regard’’.

Aggrieved by the order of Commissioner of Income Tax (Appeals), the Revenue assailed an appeal before Tribunal.

Before us, the ld. Departmental Representative argued the 5. grounds and the findings of the Assessing Officer at page 3 of assessment order that warranty is purely an contingent liability and relied on the decision of Rotork Controls India Ltd (supra) were it was held that provision for warranty is a contingent liability and not an ascertained liability. The assessee could not be explained the crystallized of liability and there is no justification on treatment. The ld. Commissioner of Income Tax (Appeals) though concurred with the ITA No.1918/Mds/2015 :- 5 -: findings of the Assessing Officer on the method adopted does not have scientific basis and assessee should satisfy and explain whether the provisions related to present obligation involves outflow of resources and reliable estimation of obligation but allowed the deduction and the ld. Departmental Representative prayed for set aside of the Commissioner of Income Tax (Appeals) order.

ITA No.1918/Mds/2015 :- 6 -:

Tax (Appeals) has not brought on record the methodology of provision for warranty claims in the Books of accounts on any reasonable scientific method. Considering the apparent facts, we are of the opinion that the matter has to be re-examined on methodology adopted for creating provision and comply observations of Apex Court. Therefore, we set aside the order of the Commissioner of Income Tax (Appeals) and remit the disputed issue to the file of the Assessing Officer for re-examination and assessee shall be provided with adequate opportunity of hearing.

In the result, the appeal of the Department in ITA 8. No.1918/Mds/2015 is partly allowed for statistical purpose.

Order pronounced on Tuesday, the 19th day of April , 2016, at Chennai.