Income Tax Appellate Tribunal - Delhi
Hughes Network Systems India Ltd., New ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C': NEW DELHI
BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT
AND SHRI C.L. SETHI, JUDICIAL MEMBER
I.T. A. Nos.4611 & 4594/Del/2010
Assessment Years : 2004-05 & 2005-06
M/s. Hughes Network Systems Dy. Commissioner of Income-tax,
India Ltd., 1, Shivaji Marg, Vs. Circle 12(1), New Delhi.
Western Greens,
National Highway No.8,
New Delhi.
PAN: AAACH3025R.
I.T. A. Nos.4872 & 4873/Del/2010
Assessment Years : 2004-05 & 2005-06
Asstt. Director of Income-tax, M/s. Hughes Network Systems India Ltd.,
Circle 12(1), New Delhi. Vs. B-25, Second Floor, Nirlac Centre,
Qutab Institutional Area, New Delhi.
(Appellants) (Respondents)
Assessee by : Shri Ajay Vohra, Advocate,
Sh. Neeraj Jain & Miss Pinky Kapoor, CA.
Department by : Shri Salil Mishra, Sr. DR.
ORDER
PER BENCH:
These four appeals, filed by both the revenue and the assessee, are directed against two separate orders dated 9.08.2010 and 19.08.2010, passed by the learned Commissioner of Income-tax (Appeals), in the matter of an assessment made by the Assessing Officer under sec. 143(3) of the Income-2
tax Act, 1961 (the Act), for the Assessment Years 2004-05 & 2005-06 respectively.
2. Ground No.1 in revenue's appeals for both the Assessment Years is general in nature, which need no adjudication as no specific arguments were advanced in that regard.
3. Ground No.2 in the Assessment Year 2004-05 and ground No.3 in Assessment Year 2005-06 raised by the revenue are directed against the CIT(A)'s order in deleting the addition of Rs.18,19,034/- out of total addition of Rs.24,25,379/- made in the Assessment Year 2004-05, and in deleting the addition of Rs.2,60,412/- out of total addition of Rs.3,47,216/- made in the Assessment Year 2005-06, by the Assessing Officer on account of provision made for impairment of stock.
4. The only ground raised by the assessee in both the Assessment Years is against sustaining the part disallowance to the extent of 25% of total disallowance made by the Assessing Officer on account of provision for impairment of stock in both the years under appeal.
5. Since the issues with regard to the assessee's claim of provision for impairment of stock in both the Assessment Years raised by the revenue as well as by the assessee are identical and inter-connected, these grounds are taken together for our decision.
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6. Facts of the case giving rise to the aforesaid issues regarding assessee's claim of provision of impairment of stock as borne out from the orders of the authorities below and submissions of the assessee are set-out, in brief, below.
7. The assessee company is engaged in the business of market VSAT equipment and providing telecom related services in India. It filed its return of income on 30.10.2004 declaring total profit of Rs.6,20,66,910/- for the A.Y.2004-05. The return was selected for scrutiny and notice under sec. 143(2) was duly issued and served upon the assessee. During the course of assessment proceedings, the assessee produced and submitted requisite details, which were placed on record by the Assessing Officer. From the Schedule `G' of the balance-sheet, it was noticed by the Assessing Officer that the assessee has shown the value of inventories after adjustment of Rs.24,25,379/- on account of stock impairment during the year. The assessee was asked to submit the valuation of stock. From the details filed by the assessee, it was seen by the AO that the stock was claimed to have been valued at the realizable value. The assessee was thus asked to give the basis of the realizable value adopted by it and to explain as to why the inventory should not be valued on cost basis in absence of evidence of realizable value. The assessee submitted before the AO that the inventory 4 consists of old/used stock, which was categorized as defective but repairable stock, and demo stock. It was submitted by the assessee that repairable stock and demo stock were valued at their net realizable value. The defective but repairable stock was valued on the basis of estimate provided by the technical department while the demo stock was valued by making a small reduction in its value on account of its use from year to year. The assessee submitted details regarding some items giving realizable rate as on 31.03.2003 vis-à-vis 31.03.2004. The Assessing Officer has considered the submissions of the assessee but he was of the view that the assessee has not given any evidence in support of the realizable value taken by it. The AO further stated that the assessee could not submit even the policy adopted by it for valuation of the closing stock on the basis of period of use, but has made only a general statement that the value is reduced on the basis of use. The AO therefore, in the absence of any evidence in support of the contention of the assessee, disallowed the assessee's claim of adjustment of Rs.24,25,379/- to the value of stock inventory, and made the addition of the same to the total income of the assessee. Alternative reason was also given by the AO that the adjustment made by the assessee was only notional and without any basis, and in case the inventory is sold, the resulting loss and gain will automatically be accounted in that year and therefore, there was no 5 need to make any adjustment in that regard on provisional basis. By giving this reason also the claim of the assessee was rejected.
8. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).
9. After considering the submissions of the assessee and the AO's order, the learned CIT(A) restricted the disallowance to 25% of the total disallowance made by the AO after placing a reliance upon the decision of ITAT, Calcutta in the case of Joint Commissioner of Income-tax vs. I.T.C. Calcutta as reported in (2005) 299 ITR 341 (AT)(Cal.). The relevant operative portion of the CIT(A)'s order in A.Y. 2004-05 runs as under:-
"I have gone through the submission of the appellant. Even at the appellate stage the assessee could not furnish the details of the inventory on account of which it has debited on amount of Rs.24,25,379/-. However, it is acceptable that there can be some diminishing in the value of inventory but in the absence of complete details and the fact and even after being given reasonable amount of opportunity the appellant could not furnish any detail before the A.O. or at the appellate stage, therefore, the disallowance is restricted to 25% of the total disallowance made by the A.O. The appellant gets a relief of Rs.18,19,034/-. Reliance has been placed in the case of Joint Commissioner of Income Tax Vs. I.T.C. Calcutta as reported in 299 ITR 0341[2005]."
10. The department is in appeal against the CIT(A)'s order in granting a relief of Rs.18,19,034/- out of the total addition of Rs.24,25,379/- made by 6 the Assessing Officer while the assessee is in appeal in sustaining the disallowance to the extent of 25% of the total disallowance made by the AO.
11. In the Assessment Year 2005-06, the assessee had shown the value of inventories after making adjustment of Rs.3,47,216/- on account of stock impaired during the year. In the line of the reasons given by the A.O. in the A.Y. 2004-05, the assessee's claim on account of reduction in the value of inventories on account of impairment of stock to the extent of Rs.3,47,216/- has been disallowed. On an appeal, the learned CIT(A) reduced the disallowance to 25% of total disallowance of Rs.3,47,216/- made by the AO. Being aggrieved, both revenue and assessee are in appeal before us.
12. The learned DR has submitted that the assessee has failed to furnish the basis and evidence in support of the net realizable value adopted by the assessee for the purpose of valuing the inventories which are defective but repairable and which are used for demonstration to the customers. He further submitted that the assessee has not furnished any report from technical expert to support the net realizable rate of various items adopted by the assessee. He further pointed out that the assessee has applied ad hoc percentage of deduction to the cost price, which cannot be said to be a system recognized under the principles of law and accountancy for the purpose of valuing the inventories at net realizable value. He further 7 submitted that merely because the assessee's claim has been allowed in the Assessment Year 2003-04, that by itself cannot be a basis to allow the same in the years under consideration unless the net realizable value adopted by the assessee is supported by any evidences and material. He further pointed out that in some of the items, even the value has been taken at `Nil', which is not at all justifiable inasmuch as there must be some value of stock even if it is sold in the market as a scrap.
13. The learned counsel for the assessee on the other hand, submitted that the assessee as per the consistent method of valuation of stock, has valued the closing stock at cost or net realizable value, whichever is lower and in some items of inventories, the net realizable value has been taken at `Nil' because of the reason that these stocks could not be sold in the market and as such, the market price in the instant case would be `Nil'. He further submitted that the net realizable rate has been taken as per the assessment made by the person of technical division of the assessee company. He further submitted that the decision of Income-tax Appellate Tribunal, Special Bench in the case of JCIT vs. I.T.C. Calcutta reported in 299 ITR 0341 (AT) is not applicable to the present case inasmuch as in the present case, the assessee has furnished the details of inventories and the rate at which they were valued for the purpose of determining the value of closing 8 stock at the end of the year. In support of the assessee's case, the learned counsel for the assessee relied upon the various decisions, which will be referred to hereinafter by us while deciding the issue.
14. We have heard both the parties and carefully perused the orders of the authorities below.
15. From the order of the Assessing Officer, we find that the assessee had submitted the details of inventory consisted of old/used stock, which is categorized as defective but repairable stock, and demo stock. It was submitted by the assessee before the AO that the stocks were valued at their net realizable value. The assessee submitted the details giving realizable rate as on 31.03.2003 and as on 31.03.2004. In the course of assessment proceedings for the A.Y. 2004-05, the assessee submitted its reply dated 27.12.2006 enclosing therewith the workings for valuation of closing stock of inventory which are placed at pages 26 to 33 of the Paper Book filed by the assessee. It is, therefore, not correct to say that the assessee has not produced the valuation of stock for defective items as well as demo stock. No defect has been pointed out by the AO. The rate at which the stock has been valued has been given in details filed. On perusal of the details of valuation of stock, we find that the assessee has taken `Nil' value in respect of certain items both under the head "demo stock as well as impaired stock". 9 From the perusal of the details of inventory valuation as on March 31, 2004 furnished by the assessee before the AO, a copy of which is placed at Page 27 of the Paper Book filed by the assessee before us for the Assessment Year 2004-05, we find that the gross value of used stock was taken at Rs.2,08,58,066/- and the net realizable value has been taken at Rs.1,23,94,911/-. In this way, the assessee has devalued the value of used stock by Rs.84,63,155/- i.e. Rs.2,08,58,066/- - Rs.1,23,94,911/-. Out of the aforesaid devaluation to the extent of Rs.84,63.155/-, an amount of Rs.60,37,776/- has already been booked in the preceding year ended on March 31, 2003 and the balance amount of devaluation occurred during this year amounting to Rs.24,25,379/- has been claimed in the year under consideration on account of devaluation due to wear and tear of equipments as well as defective equipments. The assessee has furnished the comparative chart of realizable rate as on 31.03.2003 vis-à-vis as on 31.03.2004 in respect of certain items. For instance, in respect of item SAT-ANT-REFL- KU-1.2M-PROD, the assessee has taken a realizable rate at Rs.4,000/- per piece as against Rs.6000/- being realizable rate as on 31.03.2003. On an average, the realizable rate as on 31-03-2004 has been adopted by giving a discount from 10% to 30% on the net realizable rate taken as on 31.03.2003. In the immediate preceding Assessment Year ended on 31st March, 2003, the 10 assessee had valued the used material at normal value of Rs.2,30,29,825/- and net realizable value of the same has been taken at Rs.1,69,93,049/-, thereby giving a reduction to the extent of Rs.60,36,776/- to the normal value on account of wear and tear to the equipments, and the aforesaid sum of Rs.60,36,776/- was claimed as devaluation in the value of inventories in that year, which has been allowed by the AO. No such devaluation seems to have been claimed in the year ended on March 31, 2002 as is evident from the inventory valuation as on March 31, 2003, a copy of which is placed at page 31 of the Paper Book. The assessee has also furnished the valuation of stock used for demonstration to customers as on 31st March, 2004 and details of the item-wise net realizable value as compared to the cost price has been furnished, a copy of which is placed at pages 32 to 33 of the Paper Book filed by the assessee in the Assessment Year 2004-05. The assessee has also given the details of impairment of stock which are defective and repairable by giving the details of cost vis-à-vis the net realizable value as on 31.03.2004 and how a sum of Rs.84,63,155/- has been arrived at. All these details were available before the AO. The same method was adopted by the assessee in the immediate preceding Assessment Year 2003-04, where value on account of impairment was reduced by Rs.60,37,776/- which was claimed and allowed in the Assessment Year 2003-04. The AO has not been able to 11 point out any item where the net realizable rate taken by the assessee was not reasonable but has been adopted to reduce the profit of the assessee to avoid the payment of taxes.
16. Similarly, on perusal of the various documents placed in the Paper Book for the Assessment Year 2005-06 filed by the assessee, we find that the assessee vide letter dated 18th December, 2007 has furnished before the Assessing Officer the details about the note on allowability of impairment of stock and the basis of valuation of closing stock adopted by the assessee. Note on allowability of impairment of stock was annexed as Annexure-4 to the aforesaid letter of the assessee dated December 18, 2007, where it was submitted that the assessee as per the consistent method of valuation of stock, valued the closing stock at cost or net realizable value, whichever is lower. It was further submitted that the stock, which could not be sold in the market at all, had been valued at net realizable value of Rs. `Nil' and in respect of some other stock, the value was taken at net realizable value at which the stock could be sold. In that year i.e. Assessment Year 2005-06, the assessee has claimed impairment of stock to the extent of Rs.3,47,216/- only, which has been disallowed by the AO. The assessee has submitted the details of valuation of stock along with related computation of its value, a 12 copy of which is placed at Pages 93 to 97 of the Paper Book filed by the assessee.
17. It is not in dispute that as per the settled law laid down by various courts from time to time, the assessee is entitled to value closing stock at cost or market price, whichever is lower. In other words, the method of valuing the closing stock at cost or net realizable value, whichever is lower, by the assessee cannot be said to be unacceptable. The assessee has relied upon the decisions of the Hon'ble Supreme Court in the cases of Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC) & CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC), where it has been held that it is a well recognized principle of commercial accounting to enter in the profit and loss account the value of the stock and trade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower. The assessee also made a reference to the decision of Hon'ble Delhi High Court in the case of CIT vs. Bharat Commerce and Industries Ltd. (1999) 240 ITR 256 (Del), where it was held that the assessee may value slow moving stock at the net realizable value. Reference was also made to some other decisions reiterating the same principle that the assessee is entitled to value the goods at a lower cost or market price, and if there is no demand for the goods in the 13 market, the assessee is entitled to value goods at `Nil'. In this regard, following some more decisions have been relied upon by the assessee:-
(i) K. Mohammad Adam Sahib vs. CIT, 56 ITR 360 (Mad.).
(ii) India Motor Parts and Accessories (P) Ltd. Vs. CIT, 60 ITR 531 (Mad.).
(iii) CIT vs. Dalmia Cement (Bharat) Ltd., 215 ITR 441 (Del).
(iv) IAC vs. Consolidated Pneumatic Tool Co. (India) Ltd., 14 ITD 564 (Bom.).
18. In the present case, as discussed above, the assessee has been following the consistent method of valuing the closing stock at cost or market price, whichever is lower, and this system adopted by the assessee is a principle accepted by the various Courts as noted above. The assessee has furnished the details of inventory with their respective net realizable value as at the end of the year. Same method was adopted in the Assessment Year 2003-04 where the assessee's claim has been accepted. The Assessing Officer has not pointed out any defect or irregularity in the details of rate adopted by the assessee for valuing the stock at net realizable value by making any enquiry or by undertaking an exercise to ascertain the net realizable value as at the end of the respective years. We further find that the AO has failed to point out any specific item in respect of which, the net realizable value adopted by the assessee was found to be not justified or excessive having regard to the nature of the item and the cost incurred by the 14 assessee. The learned CIT(A) has restricted the disallowance to 25% on ad hoc basis by observing that the assessee could not furnish the details of inventories on account of which, it has devalued the stock by Rs.24,25,379/-. In this respect, the learned CIT(A) has failed to examine and verify the various details filed by the assessee before the AO and has simply disallowed the assessee's claim to the extent to 25% of the total claim made by the assessee. Since the devaluation of stock to the extent of Rs.60,37,776/- claimed in the Assessment Year 2003-04 has been accepted by the revenue, we do not find any reason to disallow the assessee's claim in the year under consideration when the assessee has followed the same system of valuing the stock at net realizable value which has been determined by the assessee having regard to the nature of the inventories and the defect or impairment embedded therein. It is pertinent to note that in the Assessment Year 2005-06, the assessee has merely claimed the devaluation in the stock to the extent of Rs.3,47,216/- only against Rs.24,25,379/- claimed in the immediate preceding Assessment Year 2004-05 and Rs.60,37,776/- claimed in the Assessment Year 2003-04 inasmuch as the stocks were mostly became defective by 31-03-2003 and 31-03-2004 and slightly became more defective in the Assessment Year 2005-06. Thus, it is not a case where the assessee has adopted a practice to devalue the stock at 15 its own will and desire without having any regard to the net realizable value of the asset at a particular date. In this view of the matter, we therefore, delete the disallowance of assessee's claim to the extent of 25% sustained by the learned CIT(A) and allow the assessee's total claim made in the return of income in both the Assessment Years.
19. In the result, this ground raised by the revenue in both the Assessment Years is rejected and that of the assessee is allowed.
20. Ground No.3 raised by the revenue in A.Y. 2004-05 is with regard to the addition of Rs.7,93,503/- on account of Custom Duty deposited with Special Valuation Branch (SVB) loading, which has been deleted by the learned CIT(A).
21. The assessee's claim of deduction of Rs.7,93,503/- loading with Customs department has been disallowed by the A.O. by giving a reason that the assessee in its letter dated 31-10-2006, has stated that it has not deposited any amount as SVB loading during the relevant year.
22. On an appeal, the learned CIT(A) directed to verify whether any actual payment has been made to the custom authorities or not, and if the payment has been made for this year, then that amount may be allowed u/s 43B and, however, liability would be limited to the actual payment that is relevant to the assessment year under consideration.
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23. We have heard both the parties. We find that the A.O. has disallowed the assessee's claim of payment of Rs.7,93,503/- on the ground that no such payment was made by the assessee to the custom authority in the relevant year though the assessee has claimed before the learned CIT(A) that such payment was made at the time of obtaining the possession of the imported goods from the customs authorities and as per provisional demand raised by the customs authorities. In this situation, the learned CIT(A) has directed the A.O. to verify the position and if found that the payment has been made for this year, the deduction shall be allowed to the extent of liability that is relevant to the year under appeal. From the order of the learned CIT(A), it is seen that objection raised by the A.O that no such payment has been made in the relevant year, has been duly considered by him by directing the A.O. to verify whether the payment has been made or not, if no payment is made, the question of allowing deduction would not arise. In these circumstances, we do not find any fault with the learned CIT(A)'s order on this count, which is accordingly upheld. At this stage, we may note that identical issue had come before the Hon'ble Delhi High Court in the case of CIT vs. Hughes Escorts Communications Ltd. (2008) 170 Taxman 570 (Delhi), where the Hon'ble High Court has held as under:-
"5. We find from a perusal of the order passed by the Tribunal that the assessee really had no option but to make the 17 payment as per the demand notice issued by the Customs authorities. At the time of making the payment it was not known whether the demand would fall short of the actual liability or in excess of the actual liability. Taking this into consideration, the Tribunal felt that it would not be appropriate to limit the claim of the assessee only to the extent of the actual liability. It was found that there is no error in directing the Assessing Officer to make a verification with regard to the excess payment, if any and to tax the amount if it has not already been taxed. The Tribunal also limited the liability of the actual amount to the assessment year under consideration.
6. We cannot find any fault in the view taken by the Tribunal primarily because the liability was required to be discharged by the assessee on demand and the assessee had no option but to make the payment. This clearly falls within section 43B(a) of the Act.
7. Learned counsel for the revenue contended that the amount deposited by the assessee is not customs duty at all. No such argument was canvassed before the Tribunal and we cannot permit learned counsel to raise such an argument at this stage."
24. Identical ground has also been raised by the revenue, vide ground No.2, in A.Y. 2005-06, regarding assessee's claim of deduction of Rs.45,556/- on account of custom duty deposited with Special Valuation Branch (SVB) Loading, which has been disallowed by the A.O. for the reason that it was merely a payment in advance and can not be construed to be a sum payable by the assessee during the year under consideration. On an appeal, the CIT(A) directed the A.O. to verify the amount which pertain to the relevant year under consideration and allow the same as deduction. It is 18 the claim of the assessee that the assessee had to pay the sum of Rs.45,556/- on account of provisional custom duty at the time of obtaining possession of the imported goods from the customs authorities and as per demand notice issued by the customs authorities. In the light of the facts of the present case and in view of the decision of Hon'ble Delhi High Court in the above referred case of CIT vs. Hughes Escorts Communication Ltd. (supra), we find no fault with the learned CIT(A)'s order on this point in this A.Y. 2005-
06. The order of the learned CIT(A) is thus upheld.
25. To sum up, ground No.3 and ground No.2 raised by the Revenue on the issue of assessee's claim of deduction on account of payment of custom duty are rejected, and the order of the learned CIT(A) is upheld in both the Assessment Years 2004-05 and 2005-06 respectively.
26. Ground No.4 in both the Assessment Years 2004-05 and 2005-06 is regarding assessee's claim of deduction on account of provision for warranty made in the profit & loss account.
27. The assessee's claim for provision of warranty expenses of Rs.1,04,48,758/- in A.Y. 2004-05 has been disallowed by the A.O. by observing as under:-
"7. Assessee has made claim of warranty expenses of Rs.10448758/-, which is an estimate of expenses likely to be incurred on supply of telecom equipment. AR further contends that without provision for warranty the accounts will not reflect 19 true and fair view of the financial result. Contentions of AR though meritorious over looked the fact that computation of income chargeable to tax is a procedure different from that of computing fair accounting view based on conservatism. Despite great mathematical accuracy used in computation of would be expense on warranty it still remains the fact that the expense has still not been incurred. The provision is based on estimation of probability of such expense being incurred in future. For computation of income chargeable to tax for this Assessment Year 2004-05 the provision cannot be allowed as deduction and is hence added back to the declared income."
28. Similarly, the claim of warranty expenses amounting to Rs.87,41,759/- in A.Y. 2005-06 has been disallowed by the A.O. for the reason that the assessee has failed to furnish any evidences to prove that this liability of warranty has actually been ascertained and incurred by the assessee.
29. On an appeal, the learned CIT(A) allowed the assessee's claim after following the decision of the Tribunal in A.Y. 2003-04 in the assessee's own case.
30. We have heard both the parties and perused the material on records.
31. The assessee had entered into an agreement dated 18.02.2002 with Hughes Escorts Co. Ltd. (HECL) whereunder HECL had ensured warranty support to the assessee in respect of sale of certain hardware equipments together with providing certain services with respect to providing logistic support for sale of certain hardware equipments. The warranty support was required to be provided for a period of one year from the date of 20 delivery/installation of the equipment, and it would include replacement repairing and providing onsite support as and when required, and in consideration of which, the assessee was required to pay an amount upto 2% of the equipment sales to HECL. The assessee thus made a provision of warranty liability, in the light of the said agreement. The Tribunal in A.Y. 2003-04 vide order dated 20.03.2008 in ITA No.1333/Del/2007 along with ITA No.174(Del)/2007 has accepted the assessee's claim of deduction for warranty expenses by observing and holding as under:-
"57. We have carefully considered the rival submissions in the light of materials placed before us. A finding of fact has been recorded by the CIT(A) that warranty cost for the year under appeal to the assessee is a sum of Rs.85,05,516/- which is 1.51% turn over as compared to similar warranty expenses of 1.48% of the turn over for the immediate preceding year. This finding of ld. CIT(A) has not been controverted by the revenue. The law that whether the business liability is contingent or ascertained is well settled by the decision of Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. (supra) wherein it was observed that if a business liability is definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in presenti though it will be discharged at future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. The observations of their Lordships from the said decision are reproduced below for the sake of convenience:-21
"The law is settled: if a business liability is definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in presenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain."
58. Considering the claim of the assessee in view of the above mentioned observations of their Lordships, we find that the ld. CIT(A) has rightly held that such claim of the assessee is allowable. Therefore, we decline to interfere and the departmental appeal is dismissed."
32. In this connection, reliance may be placed upon the decision of Hon'ble Supreme Court in the case of Rotork Control India P. Ltd. vs. CIT and some other related cases (2009) 314 ITR 62 (SC), where it has been held that when warranty is an integral part of the sale price, it stood attached to the sale price of the product and in that case, the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources, and a reliable estimate could be made of the amount of the obligation, and, therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under sec. 37 of the Act. In the present case, the assessee has sold 22 certain hardware equipments together with warranty provisions, and outsourced the warranty provision to HECL, whereunder HECL was required to provide warranty support for a period of one year from the date of delivery/installation of the equipment, which would include replacement, repairing and providing on site support as and when required, and in consideration of which, the assessee was required to pay to HECL an amount of 2% of the equipments sales. It is, thus, clear that payment of warranty expenses to the extent of 2% of the equipment sales was integral part of the sale price of various equipments sold by the assessee to its customers and, therefore, the assessee had incurred a liability of warranty expenses during the year under consideration as and when the goods were sold to customers, which is entitled to deduction under sec. 37 of the Act.
33. Respectfully following the Tribunal's order passed in A.Y. 2003-04, we upheld the order of the learned CIT(A) in deleting the disallowance of assessee's claim for provision of warranty expenses.
34. Thus, the ground No.4 in both Assessment Years 2004-05 and 2005- 06 raised by the revenue is rejected.
35. The ground raised by the assessee regarding chargeability of interest under sec. 234B is consequential in nature and the Assessing Officer shall 23 recompute the interest chargeable under sec. 234B on the income finally determined in the present case.
36. In the result, the appeals filed by the assessee in both the Assessment Years are allowed and that of the revenue are dismissed.
37. This decision is pronounced in the Open Court on 26th December, 2011.
Sd/- Sd/-
(G.D. AGRAWAL) (C.L. SETHI)
VICE PRESIDENT JUDICIAL MEMBER
Dated: 26th December, 2011
Copy of the order forwarded to:
1. Appellant.
2. Respondent.
3. CIT
4. CIT(A)
5. DR
By Order
*mg Deputy Registrar, ITAT.