Income Tax Appellate Tribunal - Ahmedabad
The Dy. Commissioner Of Income Tax, ... vs Gmm Pfaoulder Ltd.,, Ahmedabad on 28 June, 2019
आयकर अपील य अ धकरण, अहमदाबाद यायपीठ 'D' अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER आयकर अपील सं./I.T.A. No. 2014/Ahd/2016 ( नधा रण वष / Assessment Year : 2005-06) The Deputy बनाम/ GMM Pfaulder Ltd.
Commissioner of Income Vs. 3 r d Floor, B-Jadhav Tax, Chambers, Ashram Road, Circle - 2(1)(1), Ahmedabad Ahmedabad
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AABCG0563A (अपीलाथ /Appellant) .. ( यथ / Respondent) अपीलाथ ओर से /Appellant by : Shri Rajesh Meena, Sr.D.R. यथ क ओर से / Shri Bandish Soparkar & Shri Respondent by :
Parin Shah, A.R. सन ु वाई क तार ख / Date of 27/06/2019 Hearing घोषणा क तार ख /Date of 28/06/2019 Pronouncement आदे श/O R D E R PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the Revenue against the order of the Commissioner of Income Tax (Appeals)-2, Ahmedabad ('CIT(A)' in short), dated 03.05.2016 arising in the assessment order dated 28.01.2015 passed by the Assessing I T A N o . 2 0 1 4 / Ah d / 1 6 [ D C I T v s . GM M P f a u l d e r Lt d . ] A. Y . 2 0 0 5 - 0 6 - 2 -
Officer (AO) under s. 143(3) r.w.s. 254 of the Income Tax Act, 1961 (the Act) concerning AY 2005-06.
2. The solitary grievance of the Revenue is towards deletion of disallowance of Rs.68,61,000/- towards provision for warranty expenses claimed as revenue expenditure by the assessee.
3. When the matter was called for hearing, the learned DR for the Revenue submitted that the grievance of the Revenue concerns disallowance of provision for warranty expenses. It was submitted on behalf of the Revenue that warranty expenses are not allowable being provisional in nature in the absence of any scientific basis for debiting an amount of Rs.68,61,000/- in the books of account on this score. It was submitted that mere provision of such expenses without showing crystallization of liability cannot be reckoned as an eligible expenditure under s.37(1) of the Act.
4. The Learned AR, on the other hand, submitted that the compan y has provided warranty to its customers in accordance with warrant y clause mentioned in the sales order and thus warranty is integral part of sale price. It was next submitted that provision for warranty has been made on a scientific basis for which the calculations were provided as reproduced by the CIT(A) in para 4.4 of its order. Similar warranty has been consistently provided year after year based on past experiences. In elaboration, it was submitted that the provision for warranty is not towards possible claim made by the customers alone but also include maintenance services to be provided during warrant y period. In order to provide warranty services, the company is required to incur material, salary, travelling and other expenses which require outflow of resources to settle the obligation. It was thereafter submitted that the issue is no longer res integra and provision for I T A N o . 2 0 1 4 / Ah d / 1 6 [ D C I T v s . GM M P f a u l d e r Lt d . ] A. Y . 2 0 0 5 - 0 6 - 3 -
warranty has been duly accepted as revenue expenditure by the Hon'ble Gujarat High Court in case of Pr.CIT vs. Hitachi Home & Life Solution (I) Ltd. Tax Appeal No. 1236 of 2018 judgment dated 09.10.2018. The provision for warranty expenses has been held to be allowable expenditure by the Hon'ble supreme Court in Rotork Controls India Pvt. Ltd. vs. CIT [2009] 314 ITR 62 [SC] as referred to and relied upon by the CIT(A).
5. We have heard the rival submissions. We find that the CIT(A) has examined the issue threadbare and also took note of the basis of calculation of warranty provisions. The relevant operative para of the order of the CIT(A) is reproduced hereunder:
4.3. Decision:
1 have carefully cons idered the facts of the case, the assessment order and the written submission of the appellant. It is worth here to mention that the asses sment order has been passed by the AO in pursuance to the directions of the Hon'ble ITAT 'A' Bench, Ahmedabad in ITA No. 2923/2008 for the year under considerati on, whereby the issue under consideration has been directed to be decided afresh in light of the directions issued in I TA No. 12/ Ahd/2008 for A. Y. 2004-05 in appellant's own case. For ready reference, the directi ons given by the Hon' ble ITAT for the year under consideration is reproduced as under:-
"15.1. We have heard the rival submissions, perused the materi al available on record and gone through the order of the authorities below. We find that t he Hon'ble Tribunal i n ITA No. 12/Ahd/2008 for A. Y. 2004-05 (Revenue's appeal in ass essee's own case) vide order dated 11/12/2011 has restored the matter back to the file of AO by observing as under:-
"76. Ground No. 2 relates to deletion of a sun of Rs.6,43,000/- is provisions for warranty expenses. The assessee debited a sum of Rs.25,70,000/- in the P & L Account. The AO dis allowed warranty expenses for three months on proportionate basis an pertaining to the subsequent year. The ld. CTT(A) allowed the entire claim following the decision of ITAT, Bangalor e in the case of Wipro Ge Medical Sys tem Lid. vs . DCIT 81 TTJ 455.
........
79. We have heard the parties. The assess ee has to submit present value of war ranty expenses. It has to be pr operly ascertained and discounted on accrual basis. A proper I T A N o . 2 0 1 4 / Ah d / 1 6 [ D C I T v s . GM M P f a u l d e r Lt d . ] A. Y . 2 0 0 5 - 0 6 - 4 -
calculation of this issue will he submitted to the AO who will examine the s ame and allow the claim as per decision of Hon. Supreme Court in Rotork Controls India (P) Ltd. (supra) ax above, Thi s ground of Revenue is allowed but for statistical purposes. "
15.2. Since the facts are identical in this case also and the Revenue has not pointed out any change in the facts and circumstances of the case, therefore t aking a consistent vi ew, we accordingly s et aside the order of the ld. CIT(A) and restor e this issue back to the file AO for fresh adjudication. Thus, this ground of Revenue' s appeal is allowed but for statistical purposes."
4.4. On going through the facts of the case, it is seen that, these expenses were pertaining to the estimated liability on account of cost that may be incurred on product sold under warrant y. The cost to be i ncurred providing free service under warranty was determined based on past experience and are provided for in the year of sale. The company was following this system consistently. Every year, at the end of the year, how much pr ovision was r equired was calculated and it was compar ed with provisions of warrant y in books of accounts any short / excess provision as debited and credited to P & L Account . As per appellant, the claim of provision for warr anty expenses was debited only to the tune of Rs.21,74,000/- rather than the total disal lowance made by the AO at Rs.68,61,000/-. Thus, the AO has made the excess disallowance of Rs.46.87,000/- which was in fact the provis ion in the books of account as on 31/03/2004. The amount of the provision as on 31/03/2005 was at Rs.68,61,000/- with the provision made in the year under consider ation at Rs.21,74,000/-. The appellant further submitted that the provision has been made on the basis of the formula pr ovided as per the scientific method to estimate t he warranty expenses of which detailed working submitted is as under: -
Product Warranty Cal culation for the Financial Year 2004-05 Y ea r Net sa le s F ree Ex c i se Co st of F ree ( R s. ' 0 0 0 ) Rep la cem e nt Du ty 1 6 % se rv ice Rep la cem e nt Ba si c Va l ue T o ta l 2000-01 4 3 4 ,6 7 8 3 ,2 3 2 517 3,749 2001-02 4 1 0 ,5 9 0 2 ,8 4 6 455 3,301 2002-03 5 2 1 ,7 9 7 2 ,8 7 3 460 3,333 2003-04 5 9 0 ,5 2 1 1 2 ,7 0 9 2 ,0 3 3 1 ,9 0 8 16,650 2004-05 8 0 6 ,5 3 3 3 ,9 6 4 634 1 ,9 0 8 6,506 Provision for Warrant y Exp. 2004-05 Rs. '000 Net sale for the current year 1 2 months 806,533 Constant Factor 0.50 Historical Relation of Warranty exp. & Net s ales 1.70 Warranty Exp provisi on required for the year 2004-05 I T A N o . 2 0 1 4 / Ah d / 1 6 [ D C I T v s . GM M P f a u l d e r Lt d . ] A. Y . 2 0 0 5 - 0 6 - 5 -
Historical Relation
Rs. '000
Total Warr anty exp. 04-05 as above 6,506
Net Sales of 03-04 590,521 1.10 %
Total Warr anty exp. 03-04 as above 16,650
Net sales of 02-03 521,797 3.19 %
Total Warr anty exp 02-03 as above 3,333
Net Sales of 01-02 410,590 0.81 %
Average warranty exp. Last 3 years 1.70 %
Rs. '000
Prov. Required as on 31/03/2005 6,861
Amount of prov. In books as on 31.03.2004 4,687
Provision required / ( Written Back) for the year end 31/03/05 2,174
4.5. The appellant also submitted that against the original ass essment completed, the disallowance made by the AO, on appeal the ld.CIT(A)-
VIII, Ahmedabad in i ts order dated 05/05/ 2008 vide Par a No. 7.2 has deleted the disallowance with the following observations:-
"I have carefully consi dered the submissions of the AR. Considering the facts of the case, it Is found that the provision has been made by the appellant on scientific basis and it is an ascertained liability. Similar disallowance has not been made by the AO in earlier years up to A. Y. 2003-04, therefore, relying on the decision of 1TAT. Bangalore in the case of Wipr o Ge Medical Systems Limited vs. DCIT cited supra and other decis ions relied upon by the A. R., the disallowance made by the AO of Rs.21.74 lakhs is deleted. As regards the reversal of pr ovision of Rs.46.87,000/- the same is taxable u/s. 41(1) as the same has been allowed as expenditure in earlier year. However as the appellant has already offered the same as income no further addition or disallowance is required. Hence the addition of Rs.46.87.000/- is no more required and so the same is deleted. Thus the total addition on account of provision for warr anty of Rs.68.61 lakhs is deleted."
4.6. Thereafter, against the order of CIT(A) on the appeal of revenue, the Hon'ble ITAT, Ahmedabad has directed the AO la examine the cal culation of warranty expenses i n view of the judgment of Hon'ble Supreme Court in Rotork Controls India Pvt. Ltd. However, the disallowance was once again made by the AO stating that no scientific or other basis for provision has been adopted. Thus the expenditure was in the nature of contingent liability. The appellant submitted that the working of the provi sion has been made applying 0.5 % constant factors to the sales made in the current year and based on t he expense incurred in respect of sales made, the appellant has worked out the average of the expenditure during warranty period in last three years which have been reproduced in the preceding I T A N o . 2 0 1 4 / Ah d / 1 6 [ D C I T v s . GM M P f a u l d e r Lt d . ] A. Y . 2 0 0 5 - 0 6 - 6 -
paras. Similar disallowances have not been made by the AO in earlier years except A. Y. 2004-05 in which part pr ovision of Rs .6,43,000/- out of Rs.25,72,000/- was di sallowed. However , subsequently, the ld.CIT(A) - 2, Ahmedabad has deleted the entire disallowance on this issue vide appellate order No.CI T(A)-2/ ACIT/Cir .4/252/11-12 dated 14/05/2015. The relevant portion of the decision is reproduced hereunder:-
"3.3 Decision:
I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has disallowed warranty expenses of Rs. 6,43,000/- corresponding t o the provisions made f or last three month of the financial year as the period of warranty would foil in subsequent financial year. The issue was set aside by the honourable ITAT to the AO. The AO has again disallowed the same on the ground that the warranty period is not falling during t he current financial year.
The appellant has submitted that it had made warranty pr ovisions of Rs.25.72 lakh which has been worked out on scientific basis. The provision is made in respect of the sales made under the year of assessment. The appellant has debited only incremental amount t o the profit and loss account which show that the extent of opening balance of provision of warranty has been reduced from the total provision of warranty required os on the l ast day of the financi al year. Therefore, it has been submitted by the appellant that there is no separate entry of the provision written back, the appellant has provided for the warranty by applying .5 % constant factor lo the sales made in the cur rent year and based on the expenses incurr ed in respect of the sal es made. The appellant had incurred .76 % expenses in respect of F.Y. 2000- 2001, .81 % in respect of year 2002 - 03 and in relation to its sales of 2003 - 04, if was 3.19%. The appellant has, therefore, taken the lowest percentage of expenditure of all the three years and pr ovided for the warrant y expenditure of Rs. 25.72 lakh. Regarding t he full year warranty provision, it has been submitted that the warranty period is 18 months from the date of dispatch or 12 month from the date of commissioning of the working of glass lined vessels and since, the entire sale price is credited to sales account, the expenditure to be incurred during the entire warranty should be allowed as deduction on the principle of prudence and the matching concept as per Accounting Standard 29 of the ICAI.
On a careful consider ation of entire facts of the case, it is noted that the appellant has made the provisions on the scientific basis. It has provided for the expenditure by adopting percentage of .76 % which was the lowest in last three years. It has only made the incremental provision during the year and the balance lying in the provision to warrant y account has been adjusted against the provision of current year's warranty. Regar ding, the addition of the AO that the warranty for last three months of the year would be applicable in the next year, it is noted that the sale for last three months have been shown in the profit and loss account by the appellant and all the expenses related to those sales will have to be provided in the current year itself. This practice has been adopt ed I T A N o . 2 0 1 4 / Ah d / 1 6 [ D C I T v s . GM M P f a u l d e r Lt d . ] A. Y . 2 0 0 5 - 0 6 - 7 -
by the appellant in earlier years and it is noted that no disallowance on account of warranty provi sion has been made i n other years. The provision is also in accordance with the accounting standards prescribed by the I CAI. The clai m of t he appellant that on the basis of matching pri nciple of providing the expenditure corresponding to the income the provisions are to be allowed in the current year itself is acceptable.
In view of the above discussion, the disallowance made by the AO i s directed to be deleted as the provisions made by the appellant ar e in order and have been made by following a scientific and systematic method as held by the honourabl e Supreme Court in the case of Rotork Control s India Private Li mited.
The ground of appeal is accordingly allowed."
4.7. It has also been noticed that in appellant's own case in A. Y. 2006-07 to 2008-09, the ld.CIT(A) has allowed the appeal of the appellant or this issue. On the contrary in A. Y. 2009-10, the excess provision for warranty was credited in the P & L Account by t he appellant which has been accepted by the AO. Further, in A. Y. 2010- 11, the ld.CIT(A) has allowed the appeal on this issue and the disallowance made was deleted. As per appellant the said decision has been accepted by the department and no second appeal before t he Hon'ble ITAT, Ahmedabad has been preferred.
4.8. On going thr ough the details and submissions, it has been noticed that the appellant has taken the aver age warranty expenses of l ast three years which was 1.70% of the total sales and even taking the constant figure at 0.5 %, the total provision was arrived at Rs.68,61,000/- out of which Rs.46,87,000/- was the provision made till the immediately preceding year . Thus, in the year under cons ideration, the pr ovision of the incremental value of Rs.21,74,000/- was made. Thus, the disallowance made by the AO to t he extent of Rs.46,87,000/- was unwarranted as no such provision has been debited in the P & L Account of the year under consideration. Further, the provision for warranty debited in the books of account for the year under consideration at Rs.21,74,000/- is allowed tor the reason that the s ame is based on the sci entific method adopted by the appellant as per the consistency followed in the preceding years and on the basis of the immediately preceding three years expenditure incurred by the appellant. On the same basis, the ld. CIT(A) in appellant's own case in A. Y. 2004- 05 has also granted the provision made by the appellant. Thus, the di sallowance made by the AO of Rs.68,61,000/ - is not found correct and justified and is accordingly deleted. The ground of appeal is accordingly allowed.
6. We are of considered view, the CIT(A) has correctly appreciated the fact in perspective and complied the position of law properly as rendered by the Hon'ble Supreme Court in Rotork Controls India Pvt. Ltd. (supra) and Hon'ble Gujarat High Court in Hitachi Home & Life Solution (I) Ltd.(supra), without repeating the content of the order of I T A N o . 2 0 1 4 / Ah d / 1 6 [ D C I T v s . GM M P f a u l d e r Lt d . ] A. Y . 2 0 0 5 - 0 6 - 8 -
the CIT(A) reproduced hereinabove, we see no reason to take a different view in the matter. We thus decline to interfere with the order of the CIT(A).
7. In the result, the appeal of the Revenue is dismissed.
This Order pronounced in Open Court on 28/06/2019
Sd/- Sd/-
(RAJPAL YADAV) (PRADIP KUMAR KEDIA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad: Dated 28/06/2019
True Copy
S. K. SINHA
आदे श क त!ल"प अ#े"षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आवेदक / Assessee
3. संबं*धत आयकर आय,
ु त / Concerned CIT
4. आयकर आयु,त- अपील / CIT (A)
5. 0वभागीय 3त3न*ध, आयकर अपील य अ*धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड9 फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपील य अ*धकरण, अहमदाबाद ।