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TMI Blog2018 (10) TMI 416X X X X Extracts X X X X X X X X Extracts X X X X ..... bitrary, contrary to law and opposed to facts causing undue hardship on the Appellant and is liable to be quashed. 2. The learned CIT(A) and the learned AO has erred in law and facts in concluding that the conditions laid down by the Hon'ble Supreme Court in the case of M/s Rotork Control India Private Limited (314 ITR 62) with regard to provision for warranty are not satisfied in the present case. 3. The learned CIT(A) and the learned AO has erred in concluding that the methodology for creating provision for warranty followed by the Appellant is not scientific based on actual utilization in contrary to principle laid down by the Hon'ble Supreme Court in the case of Rotork Control India Private Limited (supra). 4. The learned CIT(A) has grossly misinterpreted the order of the Hon'ble Supreme Court in the case of Rotork Control India Private Limited (supra), and erred in not giving cognizance to the nature of industry or the nature of products sold by the Appellant. 5. The learned CIT(A) and the learned AO has grossly erred in disallowing provision for warranty for want of historical trend data without appreciating that new products were launched during the year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with respect to warranty like failure rates, cost of repair etc., are maintained at a global level by a specialized warranty team of the Appellant group. 13. The learned CIT(A) and the learned AO failed to consider the submission made by the Appellant that high percentage of provision was created due to sale of new variant of iPhone, which is launched only in quarter 3 of the financial year and hence the closing balance carried forward to next year was high compared to preceding years. 14. The learned CIT(A) and learned AO has erred in denying provision for warranty on incorrect analysis that the provision created during each year and closing balance of such provision is increasing year on year without appreciating the substantial increase in sales due to new products (iPhone), increase in cost of inflation, increase in exchange rate etc., 15. The learned CIT(A) and learned AO has grossly erred in adopting percentage comparison as a tool in concluding that the method followed by the Appellant is not scientific as against the linear regression model followed by the Appellant for creating provision based on past trend. 16. The learned AO has erred in adopting contradicting vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income-tax, [AO], Circle 1(1), Bengaluru, vide order dated 29/12/2016 at total income of Rs. 245,29,33,230/-. The disparity between the returned income and the assessed income is on account of disallowance of provisions for warranty expenses to the extent of Rs. 82,56,00,000/- alleging to be excessive not based on historical data/reliable. The AO noticed that the assessee-company claimed deduction of provision for warranty expenses of Rs. 147,40,08,630/-. This provision is in addition to opening provision for warranty expenses of Rs. 21,41,30,976/-. The AO agreed in principle on the allowability of the provision for warranty expenditure. The AO, in order to examine whether the provision created for the year is in line with guidelines laid down by the Hon'ble Apex Court in the case of Rotork Controls India (P.) Ltd. vs. CIT (314 ITR 62)(SC), called upon the assessee-company to furnish certain details vide his questionnaire dated 21/10/2016. AO called upon the assessee-company to furnish the following details vide the above questionnaire: "Based on the decision of the Hon'ble Supreme Court in the case M/s.Rotork Controls India Pvt. Ltd. vs. CIT, the following detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) who, vide impugned order, had confirmed the action of the AO after due analysis of provision created during the year and utilization in the earlier year as well as in the subsequent periods. 8. Being aggrieved, the assessee is in appeal before us in the present appeal. Learned senior counsel for assessee vehemently submitted that provision for warranty was based on global policy of the group companies for warranty provision. Global policy conforms to the principles of accrual and prudence. He further submitted that the provision for warranty is required to be made even in terms of para.14 of Accounting Standard 29. He further submitted that the provision for warranty is only tax neutral as it is only a timing difference. He also placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Ericssion Communications (P.) Ltd. (185 taxman.160) wherein the Hon'ble High Court held that the provision for warranty made following global policy was held to be allowable deduction. He submitted that there is no specific method laid down to arrive at the reliable estimate of the warranty expenditure and therefore, resort to any statistical tool which takes into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,658,326,177 4.45 5.49 76.00 16-17 3,495,262,741 5,133,588,995 3,631,642,487 4,997,209,249 98,493,090,748 5.21 5.07 70.74 17-18 4,997,209,249 3,803,480,000 4,375,210,000 4,425,479,249 114,032,380,000 3.34 3.88 115.03 This policy is being consistently followed and which is in conformity with the para-meters laid down by the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra). It is submitted that the order of the AO as well as the ld.CIT(A) is based on the finding that the appellant company did not reverse any excess provision before closure of the financial year so as to reduce excess provision created. However, it is submitted that this finding is contrary to the fact that the global team advises the amount of provision required to be made taking into consideration the actual number of items returned and the repair cost of such items. Thus, it was submitted that the policy adopted by the assessee-company is in consonance with the para-meters laid down by the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) and the same is allowable as deduction. 9. On the other hand, the ld.CIT(DR) placed heavy reliance on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further held as follows: "13. . . . . . . . . . . . . . . . .A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty 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. In our view, on the facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd allowed the deduction and held that when a company was following a global policy, the same cannot be termed as ad-hoc provision. Whereas in the present case, as observed by us supra, there was no system of reversal of provision created earlier and the percentage of sales adopted for computation of provision for warranty expenditure goes on increasing from year to year, thereby resulting in accumulation of provision for warranty expenditure. Thus, the ratio of the decision of the Hon'ble Delhi High Court in the case of Ericssion Communications (P.) Ltd.(supra) cannot be applied to the case on hand. 14. In the light of above factual situation, we are of the considered opinion that the assessee derived advantage by deferring its income to the extent of excess warranty provision to subsequent years. Therefore, such excess provision cannot be allowed as a deduction. Therefore, in our considered opinion, the provision made for warranty cannot be said to be reliable. The AO, as confirmed by the ld.CIT(A) had rightly restricted the amount of allowable provision for warranty at the rate of 2.14% of sales. Therefore, we do not find any fallacy in the reasoning of the order of the ld.CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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