TMI Blog2018 (10) TMI 416X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(A). Accordingly, the grounds of appeal of the assessee are dismissed. - ITA Nos.422 And 423/Bang/2018 - - - Dated:- 3-8-2018 - SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Appellant : Shri Venkataraman, Senior Advocate. For The Respondent : Shri C.H.Sundar Rao, CIT(DR). ORDER Per INTURI RAMA RAO, AM : These are appeals filed by the assessee directed against different orders of the learned Commissioner of Income-tax (Appeals)-1 [CIT(A)], Bengaluru, dated 30/10/2017 for the assessment years 2013-14 and 2014-15. 2. Since identical issue is involved in both the appeals, we proceed to dispose of the same vide this common order. 3. For the sake of clarity and convenience, facts relevant to assessment year 2013-14 in IT(TP)A No.422/Bang/2017 are stated herein. 4. The assessee raised the following grounds of appeal: A. Denial of deduction - Provision for warranty 1. The order passed by the learned Assessing officer [ lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranty. 8. The learned CIT(A) has erred in stating that 2.14 percentage of sales is optimal percentage, being the factual finding for AY 2003-04, to create division for warranty without appreciating the nature and size of the business of the Appellant in the current AY. 9. The learned CIT(A) failed to appreciate that the directions of the learned DRP for AY 2011-12 based on which the learned AO had frame the assessment for AY 2013-14 has been reversed by Honorable Income Tax Appellate Tribunal [ Hon'ble ITAT ] vide order dated 22 September 2017. 10. The learned CIT(A) erred in not following judicial discipline, by not following the order of the Hon'ble ITAT, for AY 2011-12 in Appellant's own case, inspite of there being no change in methodology adopted by the Appellant in creating provision for warranty. 11. The learned CIT(A) and learned AO failed to appreciate the fact that if only 2.14 percentage of sales is allowed as provision for warranty, then the Appellant will never get deduction for the amount actually utilized against the provision created. C. Facts of the Appellant and findings of the learned CIT(A) and learned AO 12. The learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Notwithstanding and without prejudice to the above that entire provision for warranty is created on scientific basis and is allowable as deduction under section 37(1) of the Act, the learned CIT(A) and the learned AO has erred in granting deduction only to the extent of 2.14% of sale amounting to ₹ 64,84,00,000 as against actual expenditure incurred by the Appellant amounting to ₹ 85,31,18,651. The learned CIT(A) has erred in not adjudicating on the alternative plea of the Appellant i.e. allow actual utilization of ₹ 85,31,18,651. The Appellant craves for leave to add, to alter, to amend, to rescind or to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 5. Briefly, the facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of marketing and related services for software products of M/s. Apple Co. The return of income for the assessment year 2013-14 was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO observed that the closing balance of provision for warranty is increasing tremendously on account of non-utilization and therefore, he inferred that the provision for warranty was not created in a robust way and further the provision of warranty in terms of percentage of sale is not constant and varies from year to year which increased from 2% to 10%. Based on this analysis, the AO inferred that provision created based on ad-hoc basis and no scientific method was adopted nor based on the historical trends. Therefore, AO held that such ad-hoc provision should not be allowed as a deduction. Further AO noticed that the assessee-company had not reversed the excess provision created in earlier year after expiry of the warranty period. As a result, the provision for warranty gets accumulated and the assessee-company is deriving advantage of not offering excess provision to tax. The AO analyzed the data for the provisions for warranty and actual expenses incurred on warranty and keeping in view the order of Tribunal for the assessment year 2003-14 held that provision for warranty expenditure should be restricted to 2.14% of the sales and accordingly, the AO had allowed ₹ 64.84 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n warranty claim in the previous quarter. It is further submitted that repair cost is also on scientific basis based on past experience. Based on annualized rate of return and the cost of repairs, amount of warranty provision to be maintained towards future warranty claim will be determined. In support of the methodology followed by the appellant it was stated that detailed working was provided to the AO which is as under: AY (1) Opening balance (2) Provision debited P L a/c (3) Actual expenses incurred (4) Closing balance (5) Sales (6) * (3)/ (6) ** (5)/ (6) *** (4)/ (3) 07-08 23,846,557 89,935,376 80,826,871 32,955,062 1,399,351,676 6.43 2.36 89.87 08-09 32,955,062 82,570,227 83,379,038 32,146,251 2,189,722,707 3.77 1.47 100.98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany 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 the orders of the lower authorities and submitted that the policy adopted by the assessee-company is not robust ad-hoc provision as there was no system of evaluation of outstanding provisions and the system of reversal of the excess provision. 10. We heard rival submissions and perused the material on record. The only issue involved in the present appeal is whether the methodology of the assessee-company for computation of provision for warranty is ad hoc and not consonance with parameters laid down by the Hon ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. . . 12. In the present case, on perusal of chart showing provision for preceding as well as succeeding assessment years of the year under consideration, year-end provision is getting accumulated disproportionate to increase in turnover which goes to suggest that the system of accounting for provision for warranty is not robust/relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hi 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(A). Accordingly, the grounds of appeal of the assessee are dismissed. 15. The facts and circumstances and grounds of appeal for assessment year 2014-15 are similar to assessment year 2013-14. For parity of reasons given in the appeal for assessment year 2013- 14, the grounds of appeal for assessment year 2014-15 are also dismissed. 16. In the result, the appeals filed by the assessee for assessment years 2013-14 and 2014-15 are dismissed. Order pronounced in the open court on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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