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Income Tax Appellate Tribunal - Bangalore

M/S Abs India Pvt. Limited , Bangalore vs Assessee on 12 June, 2012

           IN THE INCOME TAX APPELLATE TRIBUNAL
                    "C" BENCH : BANGALORE


         BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER
          AND SMT. P. MADHAVI DEVI, JUDICIAL MEMBER


                        ITA No.440/Bang/2011
                       Assessment year : 2006-07



 M/s. ABS India Pvt. Ltd.,           Vs. The Deputy Commissioner of
 # 49, 100 Feet Road,                    Income Tax,
 4th Block, Koramangala,                 Circle 11(1),
 Bangalore - 560 034.                    Bangalore.

 PAN : AABCA 8841P

          APPELLANT                               RESPONDENT


      Appellant by     :     Shri Raghavendra R. Chakravarthy, C.A.
      Respondent by    :     Dr. Pradeep Kumar, Jt. CIT(DR)


             Date of hearing            :   12.06.2012
             Date of Pronouncement      :   12.06.2012


                                  ORDER

Per N.K. Saini, Accountant Member

This is an appeal by the assessee against the order dated 15.01.2011 of the CIT(Appeals)-I, Bangalore.

2. Following grounds have been raised in this appeal:

"1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.

2. The learned CIT[A] is not justified in upholding the addition of Rs.15,38,000/- being the provision for warranty debited to the profit and loss account for the year under appeal under the facts and in the circumstances of the appellant's case.

2.1 The learned CIT[A] failed to appreciate that the extent of warranty provided by the appellant was based on scientific and rationale basis having regard to the past experience and therefore, the same was allowable having regard to the ratio of the decision of the Hon'ble Supreme Court in the case of ROTORK CONTROLS INDIA PVT.LTD reported in 314 ITR 62[SC].

3. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234 B of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled.

4. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs."

3. Ground Nos. 1 & 4 are general in nature, so do not require any comments on our part. The grievance of the assessee vide ground Nos. 2 and 2.1 relates to confirmation of addition of Q15,38,000 made by the AO on account of provision for warranty debited to the profit & loss account.

4. The facts of the case in brief are that the assessee filed the return of income on 27.11.2006 declaring an income of Q 7,81,41,070 which was processed u/s. 143(1) of the Income-tax Act, 1961 [hereinafter referred to as "the Act" in short"]. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee had claimed expenditure of Q 15,38,000 being the provision for warranty. He was of the view that the assessee was not following any scientific way ITA No.440/Bang/2011 Page 3 of 8 of debiting the expenditure towards warranty, accordingly the disallowance was made.

5. The assessee carried the matter to the ld. CIT(A) and submitted that the provision as on 01.04.2005 stood at Q66,81,000 and had increased to Q 82,19,000 on 31.03.2006 i.e., by Q 15,38,000, certain details were also furnished which has been mentioned by the ld. CIT(Appeals) in para 4 of the impugned order, for the cost of repetition, those are not being reproduced herein.

6. The ld. CIT(Appeals) after considering the submissions of the assessee, confirmed the action of the Assessing Officer by observing that the assessee though provided for warranty expenses for earlier years, had neither been able to provide it in that year or reversed it in subsequent year and had kept the same in the books under the head "Extended provision for warranty". Now the assessee is in appeal.

7. During the course of hearing, the ld. counsel for the assessee at the very outset stated that an identical issue having similar facts has already been decided in assessee's favour in assessee's own case in ITA No.586/Bang/2006 vide order dated 08.06.2007 by the ITAT Bangalore Bench "B", Bangalore for the A.Y. 2000-01, copy of the said order was furnished.

8. In his rival submissions, the ld. DR although supported the orders of the authorities below, but could not controvert the aforesaid contention of the ld. counsel for the assessee.

Page 4 of 8

9. We have considered the submissions of both the parties and gone through the material available on the record. It is noticed that an identical issue having similar facts had already been adjudicated in the aforesaid referred to order dated 08.06.2007 in assessee's own case, wherein the order passed by the ld. CIT(A) in deleting the similar addition has been upheld and the appeal of the revenue was dismissed. The relevant findings have been given in paras 7 to 7.6 of the said order dated 08.06.2007 passed in ITA No.586/Bang/2006 in assessee's own case for the A.Y. 2000-01 and read as under:-

"7. We have heard both the parties. This Bench in the case of Wipro GE Medical Systems Ltd. (supra) has considered the allowability of provision for warranty. In that case, provision was made as a fixed percentage of sales though such percentage varied for different products. The provision for warranty in the case of Wipro was made on scientific basis based on past experience. The Tribunal in that case held as under:-

"We have carefully considered the rival contentions and gone through the records. The Bombay Bench of the Tribunal in the case of Voltas Ltd. v Dy. CIT (supra) was concerned with an identical situation where the provision for trade guarantees during the warranty period in case of the assessee having scientifically worked out the anticipated the liabilities to be provided under mercantile system of accounting based on the past experience and in such a method of accounting based on the past experience and in such a method of accounting, no adhocism is involved The accounting method followed by the assessee ensures that the gaps between the provision and the actual expenditure are made good in subsequent years. In those circumstances, the disallowance was not held to be justified. Similarly, in the case of Jay Bee Industries v DCIT (supra), the Tribunal held therein that the provision for expenditure on replacement during the warranty period is based on an estimated cost of repairs at 2 per cent of transformers sold. The method of estimating the cost of repairs was held to be allowable on the ground that the liability to carry out repairs/replacement accrued on the date of sale agreement.

Such estimated liabilities are to be treated as trading expenses and must be allowed The revenue in this case should have accepted the assessee's claim as following the method of accounting and as shown the basis for making such claims. The assessee has provided a meager percentage of sales as provision for warranty claim during the period for which the assessee has produced the details of warranty claims. The claim shows that the warranty expenses claimed as deduction is not abnormally high and the gap between the warranty provisions and the warrant expenditure incurred have narrowed down over years and in fact, the detailed study of these expenses clearly shows that there is a perfect neutralization between the expenditure incurred and the warranty claims claimed as deduction. In our view, the warranty liabilities are inbuilt in the sale price since all sales are with warranty liabilities. The liability towards warranty liabilities is certain and has accrued on the date of sale and only the ascertainment could be said to be contingent which the assessee has estimated based on its past experience and in our opinion, the claims made by the assessee in this regard are most reasonable and are supported by some plausible material. In our view, the department is not justified in treating the liability as contingent. Following the principle laid down by several decisions of the Tribunal including that of the apex court in (1969) 73 ITR 53 (SC) (supra) we hold that the claim of the assessee is in order and should be accepted. The AO shall ensure that the assessee shall not claim the deduction again based on the expenditure in respect of warranty and after sales in the books of account maintained.

With these observations, the assessee's ground on this issue is to be treated as allowed".

7.1 The above referred issue has again been considered by this Bench in the case of IBM India Ltd. v CIT (290 ITR 183) (AT). In this case, the counsel appearing for the assessee placed reliance on the following decisions:-

- CIT v Beema Mfrs. (P) Ltd. (130 Taxman 400)(Mad.)

- CIT v Indian Transformers Ltd. (270 ITR 259)(Ker.)

- CIT v Vintec Corporation Ltd. (278 ITR 337) (Delhi)

- Voltas Ltd. v DCIT (64 ITD 232) (Mum.)

- ITO v Wanson (India) Ltd. (5 ITD 102)(Pune)

- Jay Be Industries v DCIT (66 ITD 530) (ASR.) ITA No.440/Bang/2011 Page 6 of 8 This Bench after considering the decisions quoted by the learned AR, held as under:-

"We have carefully considered the relevant facts and the arguments advanced. The only reason to disallow the sum is that the liability is a contingent liability and not an accrued liability. We are unable to accept the contention. The liability to pay for warranty claims arises no sooner the sales are effected. The appellant has provided for liability on the basis of sales made during the year. Though the exact amount cannot be quantified, however, the sum is based on the scientific approach and based on past experience. Various High Courts relied by learned counsel for assessee has held that the liability in respect of such warranty claims is not a contingent liability but an accrued liability. The ITAT, Bangalore in the case of Motor Industries Co. Ltd. in ITA Nos.396 to 399/Bang/98 dated 31.5.2004 and the decision in the case of Wipro-GE Medical Systems Ltd. in ITA No.322-328/8ang)2001 dated 8.7.2002 has held that the liability towards warranty is inbuilt in the sale price itself and so the liability is not contingent but an ascertained one and to be allowed in the year of sales. We accordingly delete the disallowance of Rs. 4,92,69,808/-".

7.2 Learned Punjab and Haryana High Court in the case of CIT v Majestic Auto Ltd. (206 CTR 358) had an occasion to consider the allowability of provision for warranty claims. The P&H High Court considered the decision of the Apex Court in the case of Bharat Earth Movers Ltd. v CIT. In that case, leave encashment allowability was considered as allowable though such allowability is to be quantified and discharged at a future date. The Apex Court held that there may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one. The learned P&H High Court took into account the decision of Delhi High Court in Vintec Corporation (Supra) and accordingly held that warranty liability is not a contingent liability. If the assessee is maintaining the accounts on mercantile system on liability accrued, though to be discharged at a future date, would be a proper deduction while working out the profit and accounts of the business.

7.3 The Delhi High Court in the case of CIT v Sony India (P) Ltd. (160 Taxman 397) has held that liability arising out of a warranty is an allowable deduction even when amount payable by assessee is quantified and discharged in future.

7.4 From the above judgements, it is clear that liability on account of warranty is not a contingent liability and in a mercantile ITA No.440/Bang/2011 Page 7 of 8 system of accounting, the same is to be provided, as such liability is incurred at the time of sale.

7.5 We have also noticed from the accounts that the assessee made a provision of Rs.65,44,404/- as provision for warranty on the basis of the sales. Since warranty period in respect of sales effected in the immediately preceding year expired, therefore, the excess has been written back and has been credited into P&L account. Such account written back is of Rs.41,24,882/-. Hence, the provision which is made in respect of sales for this year is Rs.24,20,522/-. Sales made during the year are of the order of Rs.1.90 crore. It cannot be accepted that there will be no warranty claim in respect of sales effected during the year, as the warranty period has not expired. It was explained to us that warranty given by the assessee varies from 12 months to 24 months. In respect of equipments provided to Defence. warranty is extended for 24 months. Looking to the quantum of sales effected during the year, the net provision of Rs.24,20,522/- debited in profit and loss account is not excessive. The assessee has submitted that it is in the business of selling the equipment since 1995 and the provision is being made on the basis of the past experience. Hence, we feel that learned CIT(A) was justified in deleting the addition. 7.6 It has been noticed by us that there is net credit of warranty in the asst. year 2002-03 to the extent of Rs.97.5 lakhs. In case the warranty provision of Rs.24.2 lakhs is disallowed then the same will have to be deducted from the net credit made in the asst. year 2002-03. The assessee has filed return for the asst. year 2002-03 and has paid the taxes on the basis of book profit. Thus, if the sum is added here, then the same will have to be excluded for the asst. year 2002-03. The Bombay High Court in the case of CIT v Nagri Mills Co. Ltd. (33 ITR

681) has held that if rate of tax is same, department should not fritter away its energy in fighting such matters. Hence we feel there will be no loss to revenue in case the order of the learned CIT(A) was to be accepted by the revenue."

10. So, respectfully following the aforesaid referred to order dated 08.06.2007 in assessee's own case in ITA No.586/Bang/2006 for the A.Y. 2000-01, we delete the impugned addition made by the AO and confirmed by the ld. CIT(A).

Page 8 of 8

11. In the result, the appeal is allowed.

Pronounced in the open court on this 12th day of June, 2012.

               Sd/-                                     Sd/-


( SMT. P. MADHAVI DEVI )                           ( N.K. SAINI )
       Judicial Member                           Accountant Member

Bangalore,
Dated, the 12th June, 2012.

Ds/-

Copy to:

1.      Appellant
2.      Respondent
3.      CIT
4.      CIT(A)
5.      DR, ITAT, Bangalore.
6.      Guard file



                                                 By order



                                         Senior Private Secretary
                                            ITAT, Bangalore.