2015 (6) TMI 1126 - AT - Income Tax

Disallowance made in respect of provision for warranty - Held that - The issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee s own case, no provision can be recognized. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. Addition made being 5% of the dealer concession and incentives - Held that - When the assessee claimed expenditure, it should be established that the expenditure was incurred for wholly and exclusively for the purpose of business. The assessee has to produce necessary bill and vouchers. In the present case, the assessee has failed to furnish details. The Assessing Officer having no option, disallowed 5% of the expenditure towards dealer concession and incentive. In our opinion, it is appropriate to specify the expenditure, which is not supported by bills and vouchers. Accordingly, we remit this issue back to the file of the AO with a direction to specify the disallowance in respect of expenditure, which is not supported by proper evidence. With this observation, this ground is allowed for statistical purposes. Addition on account of transfer pricing adjustment as per the order of the TPO - Held that - CIT(Appeals) remitted the issue back to the file of the AO with direction to give an opportunity the assessee to submit its explanation and decide the issue on merits towards upward adjustment of the value relating to transfer pricing. We do not find any infirmity in the finding of the CIT(A), since, the AO has not given adequate opportunity to the assessee to explain the revised estimate by the TPO.

Summary

Issues involved: Deletion of disallowance for provision for warranty, validity of reassessment proceedings, deletion of addition for dealer concession and incentives, and transfer pricing adjustment.

Deletion of disallowance for provision for warranty:
The appeals by the Revenue contested the deletion of disallowance made by the Assessing Officer regarding provision for warranty without a thorough examination of the facts. The assessee claimed product warranty expenses, justifying them as actual costs incurred rather than mere estimates. The Commissioner of Income-tax(Appeals) allowed the claim, citing relevant legal precedents. The Tribunal upheld the decision, emphasizing the criteria for recognizing provisions as liabilities. The judgment highlighted the need for a present obligation from past events and a reliable estimate of the obligation amount for provision recognition. The Tribunal dismissed the Revenue's appeal, aligning with the legal principles outlined.

Validity of reassessment proceedings:
In one of the appeals, the issue of the validity of reassessment proceedings arose. The contention was that if no addition was made on the reopened issue, the reassessment proceedings could be deemed invalid. However, since the deletion of warranty disallowance was upheld, rendering the reopening issue academic, the Tribunal dismissed this ground as infructuous.

Deletion of addition for dealer concession and incentives:
Another ground of appeal focused on the deletion of an addition made by the Assessing Officer concerning dealer concession and incentives. The AO disallowed a percentage of the expenditure due to lack of supporting details, which the CIT(A) overturned, stating that ad-hoc disallowance was not permissible. The Tribunal acknowledged the necessity for proper evidence to substantiate claimed expenditures, remitting the issue back to the AO to specify disallowances unsupported by adequate documentation.

Transfer pricing adjustment:
The final issue involved an addition made on account of transfer pricing adjustment, contested by the assessee due to inadequate opportunity to respond to the TPO's order. The AO made the addition without sufficient explanation from the assessee, prompting the CIT(A) to direct a reevaluation with proper opportunity for submission. The Tribunal upheld the CIT(A)'s decision, emphasizing the importance of providing the assessee with a fair chance to address and clarify the revised estimates by the TPO.

In conclusion, the Tribunal dismissed the Revenue's appeals in most instances, affirming the decisions favoring the assessee on the grounds of warranty provision disallowance, dealer concession and incentives, and transfer pricing adjustment. However, one appeal was partially allowed for statistical purposes, emphasizing the importance of providing adequate opportunities for explanation and merit-based decisions in tax matters.