2012 (6) TMI 58 - HC - Income Tax

Additional provision for warranty Claim - dis-allowance - Tribunal allowed normal warranty, extended warranty, however denied additional provision for warranty on domestic sales claimed by assessee considering the increase in trend of settlement of actual warranty claims in the past - Held that - The observations record that an assessee is entitled to compute the warranty provision on the basis of estimate every year for future warranty expenses. Such estimates may be re-assessed every year but the re-assessment has to be on some scientific method of accounting which is to be adopted by the assessee. In the present case the Tribunal has noticed that the scientific method constantly adapted and followed by the assessee was on the basis of average of last three years. In the present case the warranty provision was increased from 0.28% to 0.39% of the turnover. The assessee wants to make an additional provision of Rs. 91.70 lakhs over and above Rs. 885.28 lakhs already made. This is an increase of more than 12% in the provision for warranty as per the formula regularly adopted. The said jump is quite substantial. hence, order of the Tribunal does not call for any interference - Decided in favor of Revenue

Issues Involved:

1. Allowability of provision for warranty based on scientific study and past history.
2. Justification of additional provision for warranty on domestic sales.
3. Application of the Supreme Court decision in Rotork Controls India P. Ltd. v. CIT.
4. Reference to the Delhi High Court judgment in CIT v. Whirlpool of India Ltd.

Detailed Analysis:

1. Allowability of provision for warranty based on scientific study and past history:

The Tribunal upheld that "provisions for warranty based on scientific study and calculated on the basis of actuarial and past history of case is allowable." It emphasized that the provision must be a present obligation resulting from past events, leading to an outflow of resources, and a reliable estimate of the obligation amount must be possible. The Tribunal found that the assessee had been granted part relief by the Commissioner of Income Tax (Appeals) [CIT (A)] for the provision based on past history. However, the additional warranty claim of Rs. 91.70 lakhs was deemed unjustified and contingent as it was not based on past history or scientific study.

2. Justification of additional provision for warranty on domestic sales:

The appellant-assessee had estimated and made a provision towards warranty claims of Rs. 1424.12 lakhs for the assessment year 2005-06. The dispute was specifically regarding the additional provision for warranty on domestic sales amounting to Rs. 91.70 lakhs. The Tribunal noted that the assessee had been computing the provision for warranty based on the average of warranty claims over the last three years. The Tribunal rejected the additional warranty claim, stating that the assessee had already been allowed a provision based on the average claims of the past three years, and any further provision without a reliable estimate was not justified.

3. Application of the Supreme Court decision in Rotork Controls India P. Ltd. v. CIT:

The appellant-assessee cited the Supreme Court decision in Rotork Controls India P. Ltd. v. CIT, which held that "an assessee is entitled to compute the warranty provision on the basis of estimate every year for future warranty expenses." The Supreme Court emphasized that such estimates must be reassessed every year based on a scientific method of accounting. The Tribunal observed that the assessee had consistently followed a scientific method based on the average of the last three years' warranty claims. The Tribunal found that the assessee's method was robust and did not warrant any additional provision beyond what was already calculated.

4. Reference to the Delhi High Court judgment in CIT v. Whirlpool of India Ltd.:

The appellant-assessee also relied on the Delhi High Court judgment in CIT v. Whirlpool of India Ltd., which supported the revision of warranty provisions based on scientific study and actuarial basis. The High Court in Whirlpool of India Ltd. held that "whenever there is a warranty clause in the bulk product sold by the company/assessee to its customers, warranty provision can be made and it would not be treated as contingent liability." However, the Tribunal noted that the closing balance under the head provision for warranty had substantially increased from Rs. 462.98 lakhs to Rs. 783.64 lakhs, indicating that the existing provision was sufficient to cover the warranty claims.

Conclusion:

The Tribunal concluded that the additional provision for warranty on domestic sales of Rs. 91.70 lakhs was not justified based on the scientific method and past history. The Tribunal upheld the CIT (A)'s decision and dismissed the appellant-assessee's appeal, stating that no substantial question of law arose. The appeal was dismissed, and the Tribunal's order was affirmed.

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