Income Tax Appellate Tribunal - Mumbai
Kunkel Wagner (Inida) P. Ltd, Mumbai vs Assessee on 29 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "A",
MUMBAI
BEFORE SHRI B.R. MITTAL, J.M. AND SHRI RAJENDRA SINGH, A.M.
ITA No.6993/Mum/2010
Assessment Year : 2007-08
M/s. Kunkel Wagner (India) Dy. Commissioner of Income
Pvt. Ltd. tax -9(2)
Piroja Court, 9, Meera Baug, 2nd Floor, Aayakar Bhavan
Santacruz(W) M.K. Road
Vs.
Mumbai-400 054. Mumbai-400 020.
PAN No. AAACK 9554 C
(Appellant) (Respondent)
Appellant by : Ms. Aarti Vissanji
Respondent by : Shri P.K.B. Menon
Date of hearing : 29.5.2012
Date of Pronouncement : 13.6.2012
ORDER
PER RAJENDRA SINGH, AM:
This appeal by the assessee is directed against the order dated 13.8.2010 of CIT(A) for the assessment year 2007-08. The only dispute raised in this appeal is regarding addition of Rs.22,79,776/- on account of provision of warranty claim.
2. The facts in brief are that the AO during the assessment proceedings noted that the assessee had made claim of 2 ITA No.6993/M/10 A.Y.07-08 Rs.22,79,776/- on account of provision of warranty claim. Assessee submitted that provision for warranty claim was allowable in view of judgment of Hon'ble Supreme Court in case of Rotork Controls India (P) Ltd. vs. CIT (314 ITR 62). The AO however did not accept the contention raised. It was observed by him that the assessee was following mercantile system of accounting under which the claim could be allowed only when the liability had been incurred during the year. In this case, as per AO, liability had not crystallized and was a mere provision. The AO therefore, disallowed the claim. 2.1 In appeal, the assessee again reiterated the submission that the claim was allowable in view of the judgment of Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. vs. CIT(supra). CIT(A) however did not accept the claim of the assessee. It was observed by him that the judgment of Hon'ble Supreme Court (supra) was distinguishable. It was also observed by him that, in that case, statistical data over the years had indicated that equipment being a sophisticated item, no customer was prepared to buy the item without warranty. Therefore warranty became an integral part of the sale price of the item. The Apex Court therefore held that provision for warranty had been rightly made by the assessee because it had incurred a present obligation as a result of past events. CIT(A) further observed 3 ITA No.6993/M/10 A.Y.07-08 that, in the present case, foundry moulding plants and sand preparation plants which were supplied by the assessee were manufactured in Germany by the parent company. The assessee manufactured and supplied only conveying and handling equipment used in their manufacture. CIT(A) also observed that the assessee had not explained the nature or justification for warranty. The assessee had not cited any past event of defects being detected so as to make warranty as integral part of sale price. CIT(A), therefore, agreed with the AO that the claim was not allowable and accordingly confirmed the disallowance aggrieved by which, the assessee is in appeal before the Tribunal.
3. Before us, the ld. AR for the assessee argued that it was not correct to say that the assessee had not given necessary details regarding warranty obligation. The assessee had given a detailed note, a copy of which has been placed at page-3 of the paper book in which details regarding warranty had been given which was available before both the authorities below. In the said note, the assessee had clearly mentioned that all equipments sold and supplied were under warranty and warranty period ranged from 12-14 months from commissioning of the equipments sold and supplied. The period of warranty commenced from the date of commissioning of the equipment. The assessee had also mentioned in the note that it was making provision 4 ITA No.6993/M/10 A.Y.07-08 of warranty claim @ 2% and in case the same was found to be excessive compared to actual value in future, excess was offered as income. The assessee had also filed detailed calculation of warranty claim giving particulars such as name of customer, order amount, net sales, warranty amount etc. to the authorities below a copy of which has been placed at page-4 of the paper book . The assessee had also filed copies of the contract which is placed in the paper book at pages 13-25 and at pages 34-45. In the said contracts, at pages 24 and 45 respectively, guarantee period was clearly mentioned in clause (6) of the contract which was 12 months from the date of installation, approval and acceptance of the total plant by the party. It was also mentioned that any repaired/replaced component will be guaranteed for fresh 12 months after date of repair/replacement. It was accordingly submitted that the assessee had given full details /particulars and provision for warranty claim was allowable in view of the judgment of Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. vs. CIT (supra), and therefore, disallowance was not justified. The ld. Departmental Representative on the other hand supported the orders of authorities below and placed reliance on the findings given in the respective orders. It was also submitted that there was no basis given for making the provision @ 2% of sales. 5 ITA No.6993/M/10
A.Y.07-08
4. We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of claim of deduction of Rs.22,79,776/- on account of warranty claim. The assessee was manufacturing and supplying conveying and handling equipments used in the manufacture of foundry moulding plants and sand preparation plants. The assessee under the provisions of contract with the buyers of the equipments had made provisions for warranty in the year of sale of equipments. The AO has not allowed the claim on the ground that the assessee was following the mercantile system of accounting in which only those claims could be allowed in respect of which liability had been incurred by the assessee during the year. In this case the liability would arise in future when the defects are found in the equipments and therefore, it was of the nature of contingent liability. CIT(A) has confirmed the order of AO. The assessee had placed reliance on the judgment of Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra), in support of the claim which has not been followed by the authorities below on the ground that the same was distinguishable.
4.1 In our view, the decision of the authorities below to disallow the claim cannot be upheld. The assessee had filed copy of contracts with the buyers in which there was specific clause regarding warranty. 6 ITA No.6993/M/10
A.Y.07-08 Therefore, as soon as the sale is made, the assessee incurs the liability on account of warranty claim even though the expenditure may be actually incurred in subsequent years. Therefore, the claim of deduction on account of provision for warranty claim is allowable as deduction in mercantile system of accounting and this view is also supported by the judgment of Hon'ble Supreme Court in case of Rotork Controls India (P) Ltd. (supra). The assessee had given full details/particulars of the provisions of warranty claim and assessee had also given copies of the contracts with the parties in which there was specific provision for warranty. As regards quantum of claim the assessee had been consistently making claim @ 2% of sales and, in case, in the subsequent year, the provision made is found to be excessive, balance amount is offered for income and, in case, expenditure actually incurred is found to be more, further deduction is claimed in subsequent year. Even in the case of Rotork Controls India (P) Ltd. (supra), warranty provision @ 1.5% of sales have not found allowable. Warranty percentage will depend upon facts and circumstances of each case. The assessee has consistently followed the system and adjustments have been made in future. The ld. AR has filed copy of profit and loss account for assessment year 2010-11 to demonstrate that excess provision has been offered as income. We, therefore, see no reason to interfere with the system being 7 ITA No.6993/M/10 A.Y.07-08 consistently followed by the assessee. In our view, the order of CIT(A) confirming the disallowance cannot be upheld . We accordingly set aside the order of CIT(A) and allow the claim of the assessee.
5. In the result, appeal of assessee is allowed.
Order pronounced in the open court on 13.6.2012.
Sd/- Sd/-
(B.R. MITTAL ) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 13.6.2012.
Jv.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " " Bench
True Copy
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.