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TMI Blog2024 (7) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... framed the following questions for our consideration: - "2.1 Whether the Ld. ITAT erred in deleting the disallowance of Provision of Liquidated Damages of Rs. 8.98 crores without appreciating that the said amount was on account of unascertained liability for which there did not exist a probability of outflow of resources? 2.2 Whether a provision can be allowed only on the basis of a clause of liquidated damages contained in an agreement without actually quantifying the amount payable to the other party and without raising any bill on account of the said contract? 2.3 Whether the Ld. ITAT erred in allowing the claim of warranty of Rs. 7.06 crores by applying the ratio decidendi of the Hon'ble Apex Court in the case of Rotork Contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. CIT(A) and also relevant findings, we find that the assessee which is engaged in the business of manufacturing of cement plant technology equipment and for rendering services on such supply, had entered into written contract with the parties wherein there was specific clause agreed amongst the parties in relation to liquidated damages on account of delay in deliverables. The relevant clauses clearly point out that there is a contractual obligation to pay liquidated damages in respect of contract whenever there would be default in providing services on time to the customers and in terms of deliverables as agreed in the contract. Since time was the essence of the contract and any delay in delivery of the goods would have resulted in lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this score and accordingly, ground No.1 raised by the Revenue is dismissed." 3. As would be manifest from the above, there is a concurrent finding which has come to be recorded by both the Commissioner of Income Tax (Appeals) ["CIT(A)"] as well as the ITAT that the liquidated damages upon being waived were written off after the same had been waived in the subsequent year. 4. Similar is the position that we find in respect of provisioning for warranty. Dealing with this aspect, the ITAT has held as follows: - "14. 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the customer makes a claim; and (c) it provides for warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s passed by the Ld. TPO to give the correct effect to the Ld. DRPs order?" 7. Insofar as Question no. 2.7 is concerned, the ITAT has essentially taken into consideration, the undisputed fact that there was a failure on the part of the Transfer Pricing Officer ["TPO"] to provide an opportunity to the assessee of being heard before enhancing income. It has in this connection observed as follows : - "15. This appeal by the assessee challenges the rectification order passed by the TPO vide order dated 25.02.2016. It has been submitted that there was a failure to provide an opportunity to the assessee of being heard before enhancing the income and this violated the provisions of section 154(3) of the Act. It has also been argued that the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to do so. Therefore, it is obligatory under the statute to issue notice by the tax authority to give a reasonable opportunity of being heard to the Assessee. This is clearly set out u/s 154 of the Income Tax Act and it has to be followed by the tax authorities at the initial stages. If this procedure of issuing the notice and giving reasonable opportunity of being heard is not followed, any further exercise will be non est. Therefore, the order itself becomes void ab initio. In the circumstances, we have no other option to set aside the impugned rectification order as being void ab initio." We thus find no justification to take a view contrary to what was expressed by the ITAT. 8. Insofar as Question nos. 2.5 and 2.6 are concerned, Mr. K ..... X X X X Extracts X X X X X X X X Extracts X X X X
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