2022 (6) TMI 1242 - AT - Income Tax

Allowability of Provision for Warranty - HELD THAT - As merely because the assessee had returned back the provisions in subsequent year cannot be a basis for disallowing the assessee s claim in the current year, particularly when the assessee had given specific basis for making warranty provisions. The Hon ble Apex Court in case of Rotork Controls India (P) Ltd. ( 2009 (5) TMI 16 - SUPREME COURT has given the criteria which are fulfilled by the assessee herein. Thus, issue is squarely covered in favour of the assessee.

Summary

Issues Involved:
1. Provisions for warranty charges.

Detailed Analysis:

Provisions for Warranty Charges:

The primary issue in this case revolves around the "provisions for warranty charges." The assessee company was assessed for the Assessment Year (AY) 2013-14, where an addition of Rs. 43,88,118/- was made to the Returned Income on account of “provisions for warranty charges.€� The assessee argued that no such additions were made in subsequent assessment years (2016-17, 2017-18, and 2018-19).

Assessment and Findings:

The assessee had debited Rs. 1,39,21,294/- as "Provision for Warranty" in the Profit & Loss Account for AY 2013-14. However, the Assessing Officer (AO) noted that only Rs. 95,33,176/- was actually incurred during the year for warranty obligations, treating the remaining Rs. 43,88,118/- as an unascertained liability and disallowing it.

Judicial Pronouncements and Supreme Court Guidelines:

The Tribunal examined relevant judicial pronouncements, notably the Supreme Court's decision in Rotork Controls India P. Ltd. 314 ITR 62, which laid down conditions for recognizing provisions:
- A present obligation due to a past event.
- A probable outflow of resources to settle the obligation.
- A reliable estimate of the obligation amount.

The Supreme Court emphasized that warranty provisions should be based on historical trends and sensible estimates, reassessed annually.

CIT(A) and DRP Findings:

The CIT(A) upheld the disallowance, referencing prior years where similar issues were decided against the assessee. The CIT(A) and DRP-1, Delhi, concluded that the three conditions laid down by the Supreme Court in Rotork Controls were not satisfied by the assessee, thus disallowing the provisional warranty expenses.

Scientific Basis and Consistency:

The Tribunal noted that the assessee consistently followed a policy of making provisions for warranty based on a scientific basis and past experience. The provision for warranty was computed as a percentage of sales, which had been accepted in regular scrutiny assessments for subsequent years.

Relevant Case Laws:

The Tribunal referred to several case laws reinforcing the principle that provisions for warranty, if based on a reasonable and scientific basis, should be allowed:
- Nokia India Pvt. Ltd. (2018): Highlighted that provisions for warranty should be allowed if based on a reasonable estimate and historical data.
- Humboldt Wedag India Pvt. Ltd. (2022): Confirmed that provisions for warranty based on past experience and actual expenses should be allowed.
- CPS Cash Processing Solutions Pvt. Ltd. (2018): Reiterated that warranty provisions are a business necessity and should be allowed if based on a reasonable estimate.

Conclusion:

The Tribunal concluded that the assessee's provision for warranty charges was based on a scientific method, consistent with past practices, and met the conditions specified in AS 29 and the Supreme Court's guidelines in Rotork Controls. Therefore, the provision for warranty charges amounting to Rs. 1,39,21,294/- was allowed. The appeal of the assessee was thus allowed, and the disallowance made by the AO and upheld by the CIT(A) was overturned.

Order Pronouncement:

The appeal of the assessee was allowed, and the order was pronounced in the open court on 27/06/2022.