Income Tax Appellate Tribunal - Bangalore
Aditya Auto Products & Engg.(I) Pvt. ... vs Department Of Income Tax on 17 March, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE 'A' BENCH, BANGALORE
BEFORE SHRI K.P.T.THANGAL, VICE PRESIDENT
AND
SHRI N.L.KALRA, AM
ITA No.612(Bang.)/2009
(Assessment year : 2005-06)
The Deputy Commissioner of Income-tax,
Circle-11(1),
Bangalore Appellant
Vs
M/s Aditya Auto Products & Engg(I) Pvt.Ltd.,
Plot No.13E, KIADB Industrial Area,
Doddaballapur,
Bangalore-560 203 Respondent
C.O.No.43(B)/2009
(In ITA No.612(B)/2009)
(Assessment year : 2005-06)
M/s Aditya Auto Products & Engg (I) Pvt. Ltd.,
Plot No.13E, KIADB Industrial Area,
Doddaballapur,
Bangalore-560 203 Cross Objector
Vs
The Deputy Commissioner of Income-tax (TDS),
Circle-11(1),
Bangalore Respondent
Revenue by Shri Jason P Boaz
Assessee by : Smt. Kavitha
ORDER
PER SHRI N.L.KALRA, AM;
The revenue has filed an appeal against the order of learned CIT(A)-I, Bangalore dated 17-03-2009, while the assessee has filed 2 ITA No.612 & CO No.43(B)/09 cross objection. The assessee has claimed a sum of Rs.74,65,692/- towards warranty and the same was disallowed in respect of warranty provision made by the assessee. The learned CIT(A) held that the provision for warranty is allowable. However, learned CIT(A) held that the quantum of warranty provision made by the assessee is excessive. The learned CIT(A) allowed the warranty provision to the extent of Rs.46,66,057/-. The revenue is aggrieved against the allowability of warranty provisions while the assessee in its cross objection is aggrieved in respect of the finding of learned CIT(A) in restricting the warranty provisions to the extent of Rs.46,66,057/- as compared to Rs.74,65,692/- made by the assessee.
The Hon'ble Apex Court in the case of Rotork Controls India (P) Ltd. Vs CIT reported in 223 CTR 425 (2009) had an occasion to consider as to whether the provision of warranty is allowable as deduction u/s 37 of the IT Act. The Hon'ble Apex Court vide para 13 of the order held as under;
" In this case, we are concerned with product warranties. To give an example of product warranties a company dealing in computers gives warranty for a period of 376 months from the date of supply. The said company considers following options; (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for 3 ITA No.612 & CO No.43(B)/09 warranty only when the customer makes a claim; and
(c) it provides for warranty at 2 percent of turn over of the company based on past experience(historical trend) The fist option is unsustainable since it would tantamount to accounting for warrant 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 u 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 matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs have to be fully provided for. When valve actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate because it fulfills accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the 4 ITA No.612 & CO No.43(B)/09 sales, the warrant provisions made and the accrual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. 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 n 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 5 ITA No.612 & CO No.43(B)/09 appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction u/s 37 of the Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are provisioning which relates to preset obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in min all the four aspects, we are f the view that the High Court should not to have interfered with the decision of the Tribunal in this case".
3. In view of the decision of the Hon'ble Apex Court, it is held that the provision for warranty is allowable provided the provision is made on certain scientific basis, considering the past history. In the instant case, the assessee has made warranty provision for the first time. The provision for warranty created in subsequent years has been noticed by the learned CIT(A) and the chart as mentioned by the learned CIT(A is reproduced as under;
6 ITA No.612 & CO No.43(B)/09
FY Opening Actual warranty Provision for Closing balance
Balnace claim the year
2004-05 1,29,63,101 74,65,692 74,65,692
2005-06 74,65,692 54,21,110 27,85,418 48,30,000
2006-07 48,30,000 43,98,957 18,68,957 23,00,000
2007-08 23,00,000 15,24,976 13,00,000 20,75,024
4. During the year under reference, the assessee has estimated weighted average @ 8%. The learned CIT(A) at page-8 of his order has noticed the weighted average of total claims in the subsequent years which varied from 4.44% to 1.44% from the AY: 2006-07 to 2008-09. The learned CIT(A) further mentioned that the assessee has not filed any evidence to substantiate about the breakage of a plastic part was a reason for making warranty of weighted average in the year under reference as compared to 4.44% to 1.44% in the succeeding years. It is true that claim on warranty may be more in the first year, because after getting the feed back certain improvement in the quality is done. In the instance case, the difference of weighted average in the year under reference is much more than the weighted average in the subsequent years. The onus was on the assessee to have adduced evidence with in the first year, the weighted average of warranty claim was taken at 8% due to some specific reasons. However, some reasons were given in respect of some plastic part but no evidence was filed to support such claim. An argument cannot be a substitute for 7 ITA No.612 & CO No.43(B)/09 an evidence. The learned AR vide written submission has furnished actual warranty claim received by the assessee against the sales made during the FY: 2004-05. As per the details, the assessee received actual warranty claim for the product sold in the FY: 2004-05 to the extent of Rs.54,21,110/- in the FY: 2005-06 and Rs.20,44,582/- in the FY: 2006-07. The warranty provision is allowable even if the quantification is made in the subsequent years and such quantification is reasonable as per the provisions made. All the details as per the annexure-II before us were not filed before the learned AO. The details given in annexure-II is reproduced as under for ready reference;
Aditya Auto Products and Engineering (I) Private Ltd. Movement in provision for warranty Financial Opening Provision Actual warranty Total Actual Closing year Balance of Created during claim received claims (Rs. Balance of Provision(Rs. the year (Rs.) against the provision Provision (Rs.) ) 2004-05 7,465,692 FY : Amount 7,465,692 (Rs.) 2005-6 7,465,692 2,785,418 2004-05 5,421,110 5,421,110 4,830,000 2006-07 4,830,00 1,868,957 2004-05 2,044,582 2005-06 2,354,375 4,398,957 2,300,00 2007-08 2,300,000 1,300,000 2005-06 431,043 1,524,976 2,075,024 2006-07 1,093,933 8 ITA No.612 & CO No.43(B)/09 The AO will verify the actual warranty claims in respect of products sold in the FY: 2004-05 and satisfied that the warranty claims settled in subsequent years to the customers in respect of sales of FY: 2004-05. In case the verification shows that the warranty claims in subsequent yeas related to the product sold during the FY 2004-05 then the provision to that extent will be allowed. Hence, to this extent the issue is restored back to the file of Assessing Officer.
5. In the result, the appeals of the revenue as well as the CO by the assessee are partly allowed.
Order pronounced in the open court on
(K.P.T.THANGAL (N.L.KALRA)
VICE PRESIDENT ACCOUNTANT MEMBER
Place: Bangalore
Dated:
am*
Copy to :
1. The Assessee
2. The Revenue
3. CIT(A)
4. CIT
5. DR
6. GF(B'lore)
7. GF(Delhi)
By Order
AR, ITAT, BANGALORE