TMI Blog2022 (6) TMI 1242X X X X Extracts X X X X X X X X Extracts X X X X ..... ee against the order of the ld. CIT(A)-34, New Delhi, dated 28.03.2018, relating to AY 2013-14. Provisions for warrantee charges. 2. At the outset it was argued that no addition has been made on this account in the orders passed u/s 143(3) for the Assessment Years 2016-17, 2017-18 and 2018-19. The assessee company had been assessed to Income Tax Act u/s 143(3) for the Asstt Year 2013-14, wherein addition of Rs.43,88,118/- had been made to the Returned Income on account of provisions for Warrantee Charges . The details of the warrantee charges, the additions, utilization/reversal over the period of eight years are as under:- Assessment Years 2001-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Opening Balance of provision of (A) 6,311,000.00 5,482,508.0 0 12,418,817.00 16,806,935.00 13,342,559.00 16,172,962.00 23,630,497.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re generally reversed if they remained unutilized at the end or 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 of 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. 6. Perusal of the said judgement of Hon ble Supreme Court shows that Hon'ble Supreme Court has laid down conditions which are required to be satisfied for making claim with respect to warranty cost. These are, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain percentage of quantum of sales made during the year. Even in following this methodology, appellant has not been consistent. In F. Y. 2010-11, it was created at 34.97% of sales turnover of finished goods, while in F.Y. 2011-12 it was created at 43.2% of sales turnover of finished goods and in F.Y. 2012-13 it was created at 39.34% of sales turnover of finished goods. It is on record that appellant had failed to provide any scientific working of the provisions created. Not only any such working could be provided before AO but even during the course of appellate proceedings, no such working could be provided. AO has correctly observed that working of warranty expenses based on units sold, price I per unit, percentage of expenses allocated to warranty expenses which are provisional in nature etc, could provide some scientific basis for creating such provisional expenses hut no such working could be made available. DRP has observed that it appellant s explanation that it may be verified that the amount of warranty provision made during the year, represents the present/current ascertained liability of warranty obligation to be met in subsequent year, as period of warranty has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred during the Financial Year 2012-13. That against the provision of Rs. 1,39,21,294/- and provision brought forward from last year Rs. 1,24,18,817/-, the assesse company had already incurred expenditure of Rs. 95,33,176/-, thereby leaving the balance of Rs. 1,68,06,935/- outstanding as on 31.03.2013 which is further being bifurcated into Long Term ShortTerm Provision. Both AO and CIT(A) has not made any comment over the details filed by the assessee regarding the provision made during the year. Neither of them has brought on record any instance which shows that the provisions made by the assessee is an unascertained liability. It is not disputed by the AO as well as CIT(A) that the assessee is not dealing with these Electrical Items. The Electrical items are generally sold under the warranty clauses. The policy of warranty was also not disputed by both AO and CIT(A). The disallowance has been made arbitrarily grossly ignoring the contentions and submissions made by the assessee that the provision was made on scientific basis and therefore the judgement of Hon ble Supreme Court in the case of Rotork Controls India Private Limited is squarely applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al standards. Also matching of warranty costs as against their goods being sold is the most appropriate way of accounting because it fulfills accrual concept as well as the matching concept. Detailed product wise computation of provision of warranty and warranty expenses utilized/reversed during the year is placed ( PB Pg 26 to 67) before us. It is also pertinent to invite the attention to the fact that assessee has claimed the similar expenditure with the same accounting policy in following assessment years and the same have been accepted in the regular scrutiny assessments. Assessment year Amount of provision for warranty claimed Section under which the assessment order was passed Date of assessment order AY 2015-16 89,44,861/- 143(3) 28.11.2017 AY 2016-17 1,45,04,795/- 143(3) 19.12.2019 AY 2017-18 3,10,02,349/- 143(3) 24.04.2021 AY 2018-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. So far as the issue relating to disallowance of 'provision for warranty', it is an admitted fact that under the terms of agreement, assessee has provided warranty for the period ranging from 12 to 36 months to which assessee is contractually obliged to pay warranty on its own case in case of any breach in supply and services, in case if there is any demand from the purchaser. The terms of agreement clearly provides that assessee has to take effective steps; for rejection or modify or replace or remove the defect or deficiency or in case of damage of equipment; assessee shall do the needful and for this purpose it has been making provision for making such guarantee. The Id. CIT(A) has also taken note of the actual expenses incurred on warranty by the assessee in earlier years and also calculated the percentage of such expenditure (as noted by us herein above). If based on such actual expenditure incurred on warranty, assessee has made the provision for warranty, then ostensibly it can be held that, not only assessee has made the provision as per past experience but there was a certain degree of certainty while making such estimate. The ratio laid down by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g given by Ld. CIT(A) for which he has given reasons in his order, enumerated above. Merely because the assessee had written back the provision in subsequent year cannot be a basis for disallowing the assessee s claim in the current year, particularly when assessee had given specific basis for making this warranty provision. Assessee s claim is fortified by the decision relied upon by Ld. CIT(A). Accordingly, we see no reason to interfere ill the order of Ld. CIT(A) on the issue in question. Accordingly, order of Id. CIT(A) is upheld. After looking to the order of the ITAT for Assessment Year 200708, the ITAT have dismissed appeal of the Revenues by holding that merely because the assessee had returned back the provisions in subsequent year cannot be a basis for disallowing the assessee s claim in the current year, particularly when the assessee had given specific basis for making warranty provisions. The Hon ble Apex Court in case of Rotork Controls India (P) Ltd. (supra) has given the criteria which are fulfilled by the assessee herein. Thus, issue is squarely covered in favour of the assessee and, therefore, Ground No. 1 and 1.1 of the assessee s appeal is allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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