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TMI Blog2012 (7) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment years 1990-91 and 1991-92 are reassessment and the assessment for the other years are under Section 143(3). 2. The assessee herein is engaged in the business of trading in various office equipment and appliances like typewriters, duplicator papers, shredding machines, etc. It is stated that the assessee offered one year warranty and free service during this period. The installation and service are done by various dealers appointed by the company. It is stated that on the sale of the electronic typewriters, the service dealers were eligible for receiving installation charges as well as service charges. While on the installation of every typewriter, the dealer was entitled to the installation charges, he however was entitled to service charges only, on such a claim made by the service dealer. Thus a sum of Rs.96/- was given to the service dealer, out of which, Rs.14/- was given immediately on installation as representing installation charges. On the sum of Rs.82/- representing service charges for four quarters in the warranty period, on the sales effected, the assessee created provision in its accounts in respect of the service charges payable to the service dealers. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the free service of machines was guaranteed for one year during the year of sale and the service was to be done for four quarters. The Commissioner of Income Tax (Appeals) also pointed out that even though the assessee assured free four quarterly services during the period of one year warranty, some purchasers had not availed of the services provided by the assessee or had availed only a portion of the services. 6. On a perusal of the accounts, the Commissioner of Income Tax (Appeals) pointed out that more than 60% of the provision made towards the service charges remained unpaid even after more than two years from the date of sale. Thus the Commissioner of Income Tax (Appeals) came to a factual finding that the assessee had not made the provision after taking stock of the situation properly. The assessee had made provision even for those cases of sale where it did not have to depend on the service dealers who had to be paid. Thus the Commissioner of Income Tax (Appeals) held that the assessee had had the bulk of the provision unpaid even at the end of two years, and on a totality of the facts, the Commissioner of Income Tax (Appeals) held that the provision was made to rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax (Appeals) as well as by the Tribunal based on the submissions made by the assessee, the claim of the assessee ought not to have been allowed by the Tribunal and that the provision made, pure and simple, is of a contingent liability. 12. Per contra, learned counsel appearing for the assessee placed reliance on the decision of the Apex Court reported in [2009] 314 ITR 62 (SC) (Rotork Controls India P. Ltd. Vs. CIT) and pointed out that considering the fact that the assessee had been making a consistent practice of providing for service charges in all earlier years and the Department had accepted the said method even in the subsequent years, consistently for the method of accounting could not be faulted with for the year under consideration. Thus, in the absence of any material to reject the accounts maintained by the assessee, their claim could not be negatived. 13. Learned counsel also placed reliance on the decision of the Delhi High Court reported in [2009] 318 ITR 340 (CIT Vs. Ericsson Communications (P) Ltd.), wherein, the Delhi High Court had followed the Supreme Court decision reported in [2009] 314 ITR 62 (SC) (Rotork Controls India P. Ltd. Vs. CIT) th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulting in an outflow of resources. Thus a reliable estimate had to be made on the amount of obligation. Thus the Apex Court pointed out that all the three conditions which were necessary for the recognition of the provision, namely, the past obligation resulting in the outflow of resources, the insistence of the purchasers for a warranty considering the past events indicating defective actuators likely to enter into the market and thirdly, the warranty clause, becoming part of the sale price of the valve actuators leading to a reliable estimate to be made of the amount of the obligation therein, stood satisfied in that case. The Apex Court further pointed out that the assessee in the said case provided for warranty on historical trend. Thus the Apex Court pointed out that the appropriate method in respect of considering the provision made towards warranty is a historical trend, since it specified the actual concept and the matching concept to determine the historical trend. Thus, the Apex Court pointed out: " For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce that the provision for the service charges payable by the assessee by way of warranty provision is not made on any scientific data. Admittedly, the provision made was only on ad hoc basis, a fact which is recorded by the Tribunal. The said fact is further strengthened by the fact that even though the warranty period is for one year and the assessee has to make payment to the service provider as and when a demand is made, normally such payment claim has to come during the period of warranty or within a reasonable time. Even though the agreement that the assessee had with the service provider is not placed before this Court, nor was it placed before the authorities below, nevertheless, a reading of the Commissioner's order relating to the assessment year 1992-93 makes the facts clear by reason of the fact that more than 60% of the provision remained unpaid even after more than two years since the date of sale. This aspect persuaded the Commissioner of Income Tax (Appeals) to come to the conclusion that the assessee had not made the provision after taking stock of the situation properly. The assessee pleaded before the Officer that the service charges were made immediately on the ..... 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