TMI Blog2012 (7) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... f the provision remained unpaid even after more than two years since the date of sale. Provision was made for the service charges based on past obligation - Held that:- If really the provision made was otherwise based on past experience, certainly, the figures would not have stayed as having a correlation to the sales, or for that matter, as the Commissioner of Income Tax (Appeals) observed, more than 60% of the provision would not have remained unpaid even after more than two years from the date of sale - setting aside the order of the Tribunal thereby restoring the order of the AO as Tribunal committed a serious error in law in holding that such ad hoc provision would nevertheless qualify for deduction - in favour of Revenue. - Tax Case (Appeal) Nos.148 to 155 of 2005 - - - Dated:- 9-7-2012 - MRS.JUSTICE CHITRA VENKATARAMAN, MR.JUSTICE K.RAVICHANDRABAABU, JJ. For appellant in all these T.Cs. : Mr.T.Ravikumar Standing Counsel for Income Tax For respondent in all these T.Cs.: Dr.Anita Sumanth JUDGMENT CHITRA VENKATARAMAN, J. These Tax Cases arise out of the common order of the Income Tax Appellate Tribunal, relating to the assessment years 1990-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice charges payable to the service dealers as and when any claim was made by them. Thus the obligation could not be treated as a contingent liability. 3. The Assessing Authority pointed out that the service dealers became eligible for the service charges only when a claim was preferred by them. In the absence of any claim made or even a belated claim made, the provision made could only be treated as a contingent liability and not deductable. It is also seen from the orders placed that apart from selling the machines through their various service dealers, the assessee also sold directly through their Branches. However, as far as the servicing of the machines were concerned, they were done through the service dealers only. 4. The assessee, in the course of the assessment proceedings, pointed out that the service dealers appointed all over India claimed service charges as and when they offered the service and many a times, these claims were made after prolonged deliberations with the customers. The assessee also pointed out in the course of the assessment proceedings that on the number of machines sold, the service charges were calculated at the rate of Rs.82/- per machine and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rose only at the time of doing the actual service by the dealers and the claim preferred by the service dealers after incurring the expenditure, and it was not certain in all the cases. 8. The Tribunal further pointed out that many a times, the claims were made subsequently after prolonged deliberations with the customers, but the liabilities got crystallised as soon as the machine was sold. 9. Thus pointing out that the assessee, hence, had made a provision towards the unascertained liability, the Tribunal referred to the decision reported in [1959] 37 ITR 1 (Calcutta Co. Ltd. Vs. CIT) as well as (2003) 130 Taxman 400 (Mad) (CIT Vs. Beema Manufacturers (P) Ltd.) and ultimately came to the conclusion that the orders of the lower authorities merited to be set aside. Aggrieved by this, the present appeals have been filed by the Revenue. 10. Learned Standing Counsel appearing for the Revenue pointed out that the assessee had admittedly not made any provision in its accounts for the service charges based on any scientific basis. Admittedly, the provision for service charges was made only on the sale effected for that particular year and this method went on without any chang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidering the claim on a provision made for warranty claim, the Apex Court held that "a provision is recognised 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. " 15. The Apex Court pointed out that a liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. The case before the Apex Court related to a provision made for covering the warranty in respect of sales of valve actuators. Valve Actuators are sophisticated equipments and that every item of sale was covered by the warranty scheme and no purchaser was ready and willing to buy Valve Actuators without warranty. The provision was made by the assessee on account of warranty claims likely to arise on the sale effected by the assessee. Consistently, the claim of the assessee on the provisions thus made was allowed. The Apex Court pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. " 16. Thus the Apex Court pointed out that the provision has to be made based on reliable estimation of the obligations. Unless the three conditions recognising the liability are satisfied, the claim could not be automatically allowed as a provision made on a historical trend. Satisfied of the assessee's claim therein answering the requirements, the Apex Court granted the relief to the assessee therein. 17. As far as the decision of the Delhi High Court reported in [2009] 318 ITR 340 (CIT Vs. Ericsson Communications (P) Ltd.), relied on by the assessee is concerned, the Delhi High Court pointed out, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 19. Learned counsel for the assessee submitted that the assessee may be given a chance to produce the agreement and the materials to show that the provision was made for the service charges based on past obligation. We do not find any justification to grant the plea, since the facts pleaded by the assessee are very clear in this case. Further, the claim that the provision was made on historical trend is a new line of argument taken before this Court apparently inspired by the law laid down by the Apex Court reported in [2009] 314 ITR 62 (SC) (Rotork Controls India P. Ltd. Vs. CIT). The facts pleaded before the authorities clearly point out that the provision for service charges was made as and when a sale was effected during that particular year. It cannot be denied as a matter of fact that in the course of none of these assessments before the authorities, a claim was made by the assessee that the provision was made based on historical analysis of the facts relating to sales and service charges payable during the warranty period and the past events resulting in an outflow of resources. 20. As already pointed out in the preceding paragraphs, the decision of the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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