2021 (2) TMI 803 - HC - Income Tax

Provision of warranty - utilization of the provision is ranging from as low as 22% to 72% which shows that the provision is not quantified on scientific basis - HELD THAT - The tribunal while dealing with the claim of the assessee for deduction on account of provision for warranty has placed reliance on the order passed in the assessee's own case for AY 2011-12 dated 21.10.2016 and has held that the assessee had taken over the business from IBM which had substantial experience in such business and if the assessee has relied on the methodology adopted by the IBM for working out the warranty provision, the same cannot be said to be incorrect. It has further been held that assessee had made provision for warranty based on machine months and the aforesaid method cannot be held to be not scientific. It has also been held that the assessee has fulfilled the three conditions set out by the Supreme Court in ROTORK CONTROLS INDIA (P) LTD. 2009 (5) TMI 16 - SUPREME COURT - Thus, on the aforesaid basis the tribunal has recorded a finding that the provision for warranty made by the assessee is on scientific basis and method and has allowed the claim for deduction on account of warranty. The aforesaid finding of fact has not been demonstrated to be perverse by the learned counsel for the revenue. Neither any averment has been made in the memo of appeal with regard to perversity of the finding recorded by the tribunal nor the same could be demonstrated at the time of hearing of the appeal. The tribunal has rightly relied on the decision rendered by the Supreme Court in ROTORK CONTROLS INDIA PVT. LTD. supra. Similar view has been taken by a division bench of this court in IBM LTD. 2013 (10) TMI 1225 - KARNATAKA HIGH COURT Therefore, the first and second substantial questions of law are answered against the revenue and in favour of the assessee. Deduction in respect of expenditure incurred under the head of marketing support fee and transaction support fee - HELD THAT - Tribunal has held that the services rendered by the IBM are for smooth carrying of business for a period of five years and it might give an enduring benefit to the assessee but every activity which gives an enduring benefit to the assessee would not get the character of capital in nature. It was further held that enduring benefit is not the only criteria to decide the nature and character of expenditure. The necessary test is whether it is for acquisition of any capital asset or for the purpose of carrying on the business deriving revenue from it. It has been held that the fees paid by the assessee for marketing support services rendered by IBM is revenue in nature and is allowable under Section 37 of the Act. - In has held that in order to ascertain whether the expenditure is revenue or capital in nature one has to look at the expenditure from commercial point of view and even saving in expenditure was held to be saving in revenue expenditure. In respect of the expenditure incurred by the assessee for getting marketing support services, the assessee cannot claim any depreciation. It has further been held in EMPIRE JUTE CO. LTD. 1980 (5) TMI 1 - SUPREME COURT that test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to particular facts and circumstances of a given case. Therefore, in the fact situation of the case, the tribunal has rightly allowed the expenditure incurred towards marketing support fee and transit support fee under Section 37(1) of the Act. - Decided in favour of assessee.

Summary

Issues:
1. Allowance of provision for warranty
2. Allowance of marketing support fee and transition support fee as expenditure under Section 37(1) of the Income Tax Act

Issue 1: Allowance of provision for warranty

The appeal concerned the assessment year 2007-08 where the assessee, engaged in the IT business, filed a revised return declaring a loss. The Assessing Officer disallowed the provision for warranty made by the assessee, citing it as a contingent liability. The Commissioner of Income Tax (Appeals) upheld this decision. However, the Tribunal allowed the provision for warranty, considering it to be based on a scientific basis. The Tribunal relied on the Supreme Court's decision in ROTORK CONTROLS INDIA PVT LTD, emphasizing the need for a reliable estimate. The Tribunal found that the provision made by the assessee was scientific and fulfilled the necessary conditions. The High Court, after considering the submissions, upheld the Tribunal's decision, stating that the finding was not demonstrated to be perverse, and the reliance on the Supreme Court's decision was appropriate.

Issue 2: Allowance of marketing support fee and transition support fee as expenditure under Section 37(1)

The second substantial question of law revolved around the claim for deduction of expenditure incurred on marketing support fee and transition support fee. The Tribunal, based on previous orders and agreements, found that the services provided by IBM were essential for the smooth running of the business, even though they might provide an enduring benefit. The Tribunal highlighted that not every activity providing an enduring benefit is capital in nature. It emphasized that the test should be whether the expenditure is for acquiring a capital asset or for carrying on the business to derive revenue. The High Court agreed with the Tribunal's reasoning, citing relevant case laws and stating that the fees paid for marketing support services were revenue in nature and allowable under Section 37(1) of the Act. The Court also emphasized that the test of enduring benefit is not conclusive and should be considered based on the specific facts and circumstances of each case.

In conclusion, the High Court dismissed the appeal, finding no merit in the revenue's arguments. The Court upheld the Tribunal's decisions regarding the allowance of the provision for warranty and the marketing support fee and transition support fee as revenue expenditure under Section 37(1) of the Income Tax Act for the assessment year 2007-08.