Income Tax Appellate Tribunal - Mumbai
Otis Elevator Company (India) Ltd., ... vs Dcit - 9(2), Mumbai on 22 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "I" MUMBAI
BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND
SHRI N.K. PRADHAN (ACCOUNTANT MEMBER)
ITA No. 3068/MUM/2015
Assessment Year: 2009-10
&
ITA No. 3067/MUM/2015
Assessment Year: 2010-11
Otis Elevator Company DCIT-9(2)
(India) Ltd. AayakarBhavan, M.K. Road
Magnus Towers, 9th floor, Vs. Mumbai-400020.
Mindspace, Link Road,
Malad
Mumbai-400064
PAN No. AAACO0481E
Assessee by : Mr. Firoze Andhyarujina, AR
Revenue by : Mr. B.C.S. Naik, DR
Date of Hearing : 25/05/2017
Date of pronouncement: 22/08/2017
ORDER
PER N.K. PRADHAN, A.M
These captioned appeals filed by the assessee for the AY 2009-10 & AY 2010-11 are directed against the order of the Commissioner of Income Tax (Appeals)-21, Mumbai and arise out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the 'Act'). As some common issues ITA No. 3067 & 3068/Mum/2015 2 are involved, we are proceeding to dispose the above by this consolidated order for the sake of convenience.
2. The grounds of appeal read as under: -
Assessment Year 2009-10
1. Ground No. 1: Disallowance of Provision towards recovery of cost of repairs - Rs.66,66,881/-
On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in upholding the disallowance made by the AO in respect of provision towards recovery of cost of repairs amounting to Rs.66,66,881/-.
2. Ground No. 2: Provision for Maintenance and Free Service / Warranty - Rs.4,54,08,269/- (Rs.1,29,59,645+ Rs.3,24,48,624) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in upholding the disallowance made by the AO in respect of provision for Maintenance and Free Service/Warranty of Rs.4,54,08,269/-.
3. Ground No. 3: Disallowance of expenditure under section 40(a)(ia) - Rs.5,44,27,004/-.
On the facts and in the circumstances of the case and in law, The Ld. CIT(A) erred in upholding the addition made by the AO in respect of disallowance of Rs.5,44,27,004/- under section 40(a)(ia) of the Act.
ITA No. 3067 & 3068/Mum/2015 3Assessment Year 2010-11
1. Ground No. 1: Disallowance of Provision towards recovery of cost of repairs - Rs.51,73,107/-
On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance made by the AO in respect of provision towards recovery of cost of repairs amounting to Rs.51,73,107/-.
3. The appellant Otis Elevator Company (India) Ltd. is engaged in the business of manufacturing, erection, installation and maintenance of lifts, escalators, elevators and travellators.
We begin with the 1st ground of appeal for the AY 2009-10 and AY 2010-11. The same relates to the disallowance made by the Assessing Officer (AO) of provision towards recovery of cost of repairs amounting to Rs.66,66,881/- in AY 2009-10 and Rs.51,73,107/- in AY 2010-11.
The AO during the course of assessment proceedings for the AY 2009-10 found that the assessee had debited Rs.3,36,09,208/- in the profit and loss account towards miscellaneous expenses. In response to a query raised by the AO, the assessee filed details thereof. On examination of it, the AO found that the assessee had included Rs.66,66,881/- towards provision for cost of repair bill. As the assessee failed to file any documentary evidence for making such provision and also the working of such provision, the AO made a disallowance of Rs.66,66,881/- in the AY 2009-10. In a similar way the AO made a disallowance of Rs.51,73,107/- in the AY 2010-11.
ITA No. 3067 & 3068/Mum/2015 43.1 Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) held that (i) as per the claim of the assessee such expenditure of Rs.66,66,881/- in AY 2009-10 and Rs.51,73,107/- in AY 2010-11 represent actual expenditure which is against the uncertainty of recovery of 'balance contract revenue' and therefore it means such provision has been made against the future income, (ii) the original bills and vouchers have never been produced before the AO.
Therefore, the Ld. CIT(A) sustained the additions made by the AO.
3.2 Before us, the Ld. Counsel of the assessee submits that these are actual expenses already incurred. Further, the repair expenses relating to dormant contracts are like bad debts (generally, bad debts are debited to Profit and Loss A/c in respect of sales made in earlier years). Such expenses are debited to Profit and Loss A/c only when the team of the company headed by the Finance Controller concludes that further recovery in respect of dormant contracts is not possible. Thus, expenses on this issue, debited to profit and loss account were generally incurred in earlier years. Accordingly, there is no misrepresentation or twisting of facts. As regards such words used by the Ld. CIT(A), the assessee- company would like to press into service, the following observations made by the ITAT in the case of Richa Dubey vs. ITO 158 ITD 451 (Mum).
"We have seen that the authorities below have used the strong words like 'habitual tax evader' against the assessee which in our humble and respectful submissions are not correct observations of the authorities below and we direct that all such words used by the authorities below stand expunged from ITA No. 3067 & 3068/Mum/2015 5 the orders of the authorities below. The citizens and the tax-payers of this country are participant in the nation/building and also contributor to the exchequer and to use such harsh words against them are not warranted except in exceptional proven cases."
3.3 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). He further states that the said provisions are purely contingent in nature depending upon the happening or non-happening of any event. These cannot be considered to have crystallized during the year under consideration and therefore, cannot be allowed as expenditure for the year.
3.4 We have heard the rival submissions and perused the relevant material on record. We find from the annual report that as per the accounting policy of the assessee-company, the revenue for repair contracts is recognized only on completion of repairs. Thus, on completion of repair contracts, advance received from customers and other collections after completion of repair contracts are credited to 'income from services' in the profit and loss account and expenses incurred on repair contract and debited to Work In Progress (WIP) are transfer to the debit of profit and loss account. At the year-end, a review on progress of repair contracts is undertaken. During such an exercise, it is found that there are some contracts which are dormant in nature. These are the contracts, on which work was done long back and no further work is expected to be done. In such circumstances, expenses incurred on such dormant repair contracts and debited to WIP account are transferred to profit and loss account. Similarly, advances received ITA No. 3067 & 3068/Mum/2015 6 from customers in respect of such contracts and credited to advances from customers account are also transferred to profit and loss account. Both these amounts are transferred to 'miscellaneous expense' under the sub head 'provision for repair expense'.
Thus the above the word 'provision' is a misnomer as, in reality, it is not a provision but write off of actual repair expenses (net of recovery). In view of the above, the disallowances of Rs.66,66,881/- made by the AO in AY 2009-10 and Rs.51,73,107/- in AY 2010-11 are deleted. Thus the 1st ground of appeal for both the above years is allowed.
4. We now move to the 2nd ground of appeal for the AY 2009-10. It relates to the two disallowances made by the AO i.e. provision for maintenance and free service warranty of Rs.1,29,59,645/- and Rs.3,24,48,624/-.
The AO on perusal of Schedule 18 to profit and loss account found that the assessee had debited Rs.1,29,59,645/- towards provision for maintenance and free service/warranty. In reply to a query raised by the AO, the assessee submitted that it had adopted a scientific method for computing the provision to be created for warranty and hence allowable as deduction to the assessee on provision basis. The assessee relied on the judgement of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. vs. CIT 314 ITR 62 (SC). However, as the assessee failed to file any detail on the above provision, the AO made an addition of Rs.1,29,59,645/.
ITA No. 3067 & 3068/Mum/2015 7Also the AO noticed that in the revised computation of total income the assessee had claimed Rs.3,24,48,624/- towards 'provision for maintenance and service warranty' as deductable expenses, whereas this amount was not claimed in the original return of income. The AO on verification found that this amount was not reflected in the profit and loss account. Therefore, the AO rejected the above claim of the assessee in the revised computation of income and made an addition of Rs.3,24,48,624/-.
4.1 In appeal, the Ld. CIT(A) held that (i) there is no convincing basis of estimation of provision on page no. 159 because there is no corroborative basis of various estimation, (ii) the terms and conditions of warranty are such that the appellant has to perform routine inspection and maintenance after commencement of use of elevator or lift machine; this condition refers to future responsibility and not of immediate and current liability, (iii) there is no propriety to claim expenditure by way of making provision of future happening.
Therefore, the Ld. CIT(A) sustained the disallowance of expenditure of Rs.4,54,08,269/- made by the AO.
4.2 Before us, the Ld. Counsel of the assessee submits that the company gives one-year warranty in respect of elevators sold by it. The period of one year starts from the date of completion of installation of the elevator. During the period of warranty, the company is under obligation to provide certain services and maintenance free of cost as per the agreements entered into with the customers. He drew our attention to sample copy of the agreement placed at page no. 52 to 151 of the Paper ITA No. 3067 & 3068/Mum/2015 8 Book (P/B). The Ld. Counsel also referred to the disclosure at page 36 of the financial statements.
It is further submitted by him that till AY 2008-09, the company was disallowing expenses on account of warranty provisions and was claiming deduction in respect of warranty provision utilized/reversed. However, soon after the close of the financial year under appeal, the company had the benefit of the judgment of the Hon'ble Supreme Court in Rotork Controls India (P) Ltd. (supra).
Therefore, from AY 2009-10, the company decided to claim the deduction of warranty expenses in the year in which the provision for such expenses is made, i.e. the year in which the elevator is sold. Accordingly, the company claimed the deduction of Rs.1,29,59,645/- being the difference between the provision of Rs.8,97,94,010/- made during the year and utilisation/reversal of Rs.7,68,34,365. As the company was claiming the deduction on the basis of utilisation/reversal till AY 2008-09 the opening balance of Rs.3,24,48,624/- was not allowed as deduction till AY 2008-09. As the utilisation/reversal of Rs.7,68,34,365/- also consist of opening balance of Rs.3,24,48,624/- which was disallowed in 2008-09, the company also claimed deduction of Rs.3,24,48,624/-, in the revised return of income. Else, the deduction of Rs.3,24,48,624/- would never be allowed to the company. Thus the total deduction claimed on this issue is Rs.4,54,08,269/- (Rs.1,29,59,645+Rs.3,24,48,624).
ITA No. 3067 & 3068/Mum/2015 94.3 On the other hand, the Ld. DR supports the order of the Ld. CIT(A). He submits that there is no convincing basis of estimation of provision because of lack of corroborative evidence. Also it is stated by him that there is no propriety to claim expenditure by way of making provision for future happening.
4.4 We have heard the rival submissions and perused the relevant materials on record. We mention below an extract from sample agreement depicting the assessee-company's obligation during the warranty period.
"Our quotations include for twelve months free maintenance. The period of this free maintenance will be deemed to commence on the date the installation is completed and offered for inspection. Maintenance will consist of regular examinations and any necessary adjustment lubrication of the equipment by competent employees under our direction and supervision. The required supplies and parts will be furnished except such parts as may be needed because of negligence, misuse or accident not caused by us."
4.4.1 We find that as the expenses relating to warranty are the expenses for the year in which the elevator is sold, in accordance with the concept of matching revenue with cost, the assessee-company is making provision for the cost of warranty in the year in which the elevator are sold.
4.4.2. At this juncture we refer to the disclosure at page 36 of the Financial Statements and locate that the following was the position with regard to warranty provisions made and utilized/reversed during the year:
ITA No. 3067 & 3068/Mum/2015 10 Particulars Amount (Rs.)
Opening balance 3,24,48,624
New warranty provision made during the year 8,97,94,010
(i.e. in respect of elevators sold and installed during the year) Utilization/Reversal of warranty provision (7,68,34,365) during the year Closing balance 4,54,08,269 We further find that out of new warranty provision of Rs.8,97,94,010/- made during the year, a sum of Rs.4,43,85,741/- has either been utilized or reversed during the year. Therefore, the closing balance in respect of new warranty provision made during the year is Rs.4,54,08,269/- (Rs.8,97,94,010 -Rs.4,43,85,741). Accordingly, the breakup of utilisation/reversal of warranty provision during the year is as under:
Particulars Amount (Rs.)
Utilization/reversal of opening balance of 3,24,48,624
warranty provision
Utilization/reversal of new warranty 4,43,85,741
provisions made during the year
Total 7,68,34,365
In Rotork Controls India (P) Ltd. (supra), it has been held that (i) for a provision to qualify for recognition, there must be a present obligation arising from past events, settlement of which is expected to result in an out flow of resources and in respect of which reliable estimate of amount of obligation is possible and (ii) if historical trend indicates that in past large number of sophisticated goods were being manufactured and ITA No. 3067 & 3068/Mum/2015 11 defects existed in some of items manufactured and sold, then provision made for warranty in respect of army of such sophisticated goods would be entitled from gross receipts u/s 37(1), provided data is systematically maintained by the assessee.
Having gone through the documents, we find that the ratio laid down in the above case applies to the instant appeal. In view of the factual matrix narrated above, we delete the disallowance of Rs.4,54,08,269/- made by the AO. Thus the 2nd ground of appeal is allowed.
5. Finally we come to the 3rd ground of appeal. Briefly stated, the facts are that in the original return of income, the assessee-company had disallowed Rs.21,85,76,599/- u/s 40(a) on the basis of tax audit report. Subsequently, it realised that a sum of Rs.5,44,27,004/- was erroneously considered for disallowance. The assessee-company explained the same to the tax auditors and obtained a letter to this effect from them. Based on the letter from the tax auditors, the assessee-company reduced the disallowance to the extent of Rs.5,44,27,004/- in the revised return of income. It explained the above fact to the AO during the assessment proceedings. However, the AO was not convinced with the same as the assessee-company failed to file documentary evidence to substantiate its stand. The AO also found that Annexure 7 filed by the assessee was a general letter issued by Pricewaterhouse without giving any reason and details of disallowances mentioned in the tax audit report. Therefore, the AO made a disallowance of Rs.5,44,27,004/-. In appeal, the above disallowance was confirmed by the Ld. CIT(A) on the same reason as given by the AO.
ITA No. 3067 & 3068/Mum/2015 125.1 Before us, the Ld. Counsel of the assessee relies on the certificate issued by the tax auditor. On the other hand, the Ld. DR relies on the order of the Ld. CIT(A).
5.2 We have heard the rival submissions and perused the relevant materials on record. We find that as per Annexure 7 filed before the AO, the tax auditors have issued the following clarification "While making the Tax Audit Report for the P.Y. 2008-09 (AY 2009-10) under the lead of disallowance under section 40(a)(ia) of the I.T. Act, 1961, sub- contractor charges amounting to Rs.5,44,27,004/- were disallowed on account of payment made to sub-contractor (under the head unallocated cost in progress). Based on subsequent review of records and as per information and explanation given to us by the management, such expenses were not incurred towards sub-contractor but they were towards payment made to employees of Otis Elevator Company (India) Ltd."
5.2.1 Definitely the above letter issued by the tax auditors does not substantiate the claim of the assessee-company. We have gone through the relevant record and found that documents relating to the above claim were not filed by the assessee-company before the AO or the Ld. CIT(A). Therefore, we set aside the order of the Ld. CIT(A) on the 3rd ground of appeal for the AY 2009-10 and restore the same to the file of the AO to make a fresh assessment after verifying the documents and giving reasonable opportunity of being heard to the assessee. We direct the ITA No. 3067 & 3068/Mum/2015 13 assessee to file the concerned documents before the AO. So the 3rd ground of appeal is allowed for statistical purposes.
6. In the result, the appeal for the AY 2009-10 is partly allowed whereas the appeal for AY 2010-11 is fully allowed.
Order pronounced in the open Court on 22/08/2017.
Sd/- Sd/-
(MAHAVIR SINGH) (N.K. PRADHAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai;
Dated: 22/08/2017
Rahul Sharma, Sr. P.S.
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. The CIT(A)-
4. CIT
5. DR, ITAT, Mumbai
6. Guard file.
BY ORDER,
//True Copy//
(Dy./Asstt. Registrar)
ITAT, Mumbai