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TMI Blog2009 (9) TMI 710X X X X Extracts X X X X X X X X Extracts X X X X ..... e business of installation/erection and setting up/commissioning of various telecommunications projects. In these projects executed by the assessee, the contracts in question provide for warranty clauses in favour of the customers which is the normal industry practice. By virtue of the inclusion of the warranty clauses in the contract, the assessee-company sought to make a provision for the anticipated costs of the assessee-company' s liability under the warranties in respect of the projects executed by it. The amounts thereafter actually paid pursuant to the warranty clauses in the warranty period are subsequently met out of this provision. The assessee-company claimed that the expenses to be incurred by the assessee-comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided by the assessee-company then the warranty became the integral part of the sale price and consequently the warranty provisions had to be recognised because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate should be made of the amount of the obligation. The Supreme Court, therefore, held that the assessee incurs a liability for which it is entitled to deduction under section 37 of the Act. The Supreme Court, however, also noted the certain pre conditions which were required to be satisfied before allowing the making of such a provision. The relevant portions of the judgment are reproduced below (headnote) : " The present value of a contingent liability, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs higher amounts of claims towards warranty in fact took place. Counsel invited our attention to the assessment years 2004-05 and 2005-06 where provisions which were made during the year were Rs. 90,412,453 and Rs. 95,279,000, respectively, and against which the actual payments were Rs. 60,152,183 and Rs.64,711,000. Learned senior counsel contended that consequently in the subsequent years the claims of warranty, therefore, were a high percentage of the provision made. It was further contended that it is not as if a huge provision is made every year because there is a reversal in each subsequent year, i.e., although no doubt in each year provision is made as a percentage of turnover, in net effect, it is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e estimate has not been made. She referring to the chart further contended that the historical trend shows that the question of reversal in the subsequent years would not have arisen if the provision was made on a scientific basis. For the purpose of convenience, we reproduce the chart relied upon by the Revenue which is as under : Details of provision for warranty Assess- ment year Opening balance Actual war ranty expenses claimed during the year Balance Fresh provision made during the year Balance as on last date of accounting year 1998 _ 16,176 _ 65,01,000 65,01,000 1999 65,01,000 13,25,118 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that a " historical trend" emerges. It is not a matter of dispute that the respondent-assessee company is a multi-national company and carries out business throughout the world. The policy as prevalent for making a provision for warranty claims is universally applied by the assessee-company in various countries throughout the world where it carries on the business. Counsel for the respondent has placed reliance on its internal directives contained in its manual for the warranty provision. These policy directives with respect to the warranty provides in detail clauses and directions for warranties for supply contract ; for hardware ; spare parts and software and so on. The policy document further provides for warranty per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is lower. It is reiterated that the consistent application of the policy of provision which removes any issue of mala fides or dishonest intention on the part of the assessee-company for deferring its income because it could be that in particular year actual warranty claims may exceed the provision which is made. That the appellant-Revenue had sought framing of the following question of law : " Whether, on the facts and in the circumstances of the present case, the Tribunal was right in law in deleting the addition made on account of provision for warranty charges holding the same to be definite business liability allowable as deduction during the year under consideration ?" We frame this question of law and in view of abo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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