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TMI Blog2018 (10) TMI 416X X X X Extracts X X X X X X X X Extracts X X X X ..... vision made for warranty cannot be said to be reliable. The AO, as confirmed by the ld.CIT(A) had rightly restricted the amount of allowable provision for warranty at the rate of 2.14% of sales. Therefore, we do not find any fallacy in the reasoning of the order of the ld.CIT(A). Accordingly, the grounds of appeal of the assessee are dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... only be allowed as provision for warranty. 8. The learned CIT(A) has erred in stating that 2.14 percentage of sales is optimal percentage, being the factual finding for AY 2003-04, to create division for warranty without appreciating the nature and size of the business of the Appellant in the current AY. 9. The learned CIT(A) failed to appreciate that the directions of the learned DRP for AY 2011-12 based on which the learned AO had frame the assessment for AY 2013-14 has been reversed by Honorable Income Tax Appellate Tribunal ["Hon'ble ITAT"] vide order dated 22 September 2017. 10. The learned CIT(A) erred in not following judicial discipline, by not following the order of the Hon'ble ITAT, for AY 2011-12 in Appellant's own case, inspite of there being no change in methodology adopted by the Appellant in creating provision for warranty. 11. The learned CIT(A) and learned AO failed to appreciate the fact that if only 2.14 percentage of sales is allowed as provision for warranty, then the Appellant will never get deduction for the amount actually utilized against the provision created. C. Facts of the Appellant and findings of the learned CIT(A) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Alternative claim 19. Notwithstanding and without prejudice to the above that entire provision for warranty is created on scientific basis and is allowable as deduction under section 37(1) of the Act, the learned CIT(A) and the learned AO has erred in granting deduction only to the extent of 2.14% of sale amounting to ₹ 64,84,00,000 as against actual expenditure incurred by the Appellant amounting to ₹ 85,31,18,651. The learned CIT(A) has erred in not adjudicating on the alternative plea of the Appellant i.e. allow actual utilization of ₹ 85,31,18,651. The Appellant craves for leave to add, to alter, to amend, to rescind or to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 5. Briefly, the facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of marketing and related services for software products of M/s. Apple Co. The return of income for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved that the closing balance of provision for warranty is increasing tremendously on account of non-utilization and therefore, he inferred that the provision for warranty was not created in a robust way and further the provision of warranty in terms of percentage of sale is not constant and varies from year to year which increased from 2% to 10%. Based on this analysis, the AO inferred that provision created based on ad-hoc basis and no scientific method was adopted nor based on the historical trends. Therefore, AO held that such ad-hoc provision should not be allowed as a deduction. Further AO noticed that the assessee-company had not reversed the excess provision created in earlier year after expiry of the warranty period. As a result, the provision for warranty gets accumulated and the assessee-company is deriving advantage of not offering excess provision to tax. The AO analyzed the data for the provisions for warranty and actual expenses incurred on warranty and keeping in view the order of Tribunal for the assessment year 2003-14 held that provision for warranty expenditure should be restricted to 2.14% of the sales and accordingly, the AO had allowed ₹ 64.84 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim in the previous quarter. It is further submitted that repair cost is also on scientific basis based on past experience. Based on annualized rate of return and the cost of repairs, amount of warranty provision to be maintained towards future warranty claim will be determined. In support of the methodology followed by the appellant it was stated that detailed working was provided to the AO which is as under: AY (1) Opening balance (2) Provision debited P&L a/c (3) Actual expenses incurred (4) Closing balance (5) Sales (6) * (3)/ (6) ** (5)/ (6) *** (4)/ (3) 07-08 23,846,557 89,935,376 80,826,871 32,955,062 1,399,351,676 6.43 2.36 89.87 08-09 32,955,062 82,570,227 83,379,038 32,146,251 2,189,722,707 3.77 1.47 100.98 09-10 32,146,251 144,019,057 124,267,639 51,897,669 4,436,970,700 3.25 1.17 86.29 10-11 51,897,669 177,589,409 127,897,272 101,589,806 4,565,293,882 3.89 2.23 72.02 11-12 101,589,806 187,441,965 182,220,342 106,811,429 5,939,913,233 3.16 1.80 97.21 12-13 106,811,429 423,393,372 316,073,825 214,130,976 19,640,764,088 2.16 1.09 74.65 13-14 214,130,976 1,474,008,630 853,118,651 835,020,955 30,090,106,35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess provision for warranty over and above the percentage of sales adopted in earlier year cannot be allowed as a deduction and accordingly restricted the claim to the extent of ₹ 2.14% of sales. Before us, learned senior counsel for assessee had drawn our attention to the table extracted at para.5 above to show that provision for warranty is based on global policy of the company, the provision was not made on ad-hoc basis but on scientific method of linear regression method. The Hon'ble Apex Court as well as the Accounting Standard 29 laid down the para-meters on which provision for warranty expenses can be allowed as a deduction: a) an enterprise has a present obligation as a result of a past event; b) it is probable that an outflow of resources will be required to settle the obligation; and c) a reliable estimate can be made of the ;amount of the obligation. If these conditions are not met, no provision can be recognized. 11. In the present case, there is no dispute as to the satisfaction of condition (a) and (b) above. The dispute is only with regard to whether provision made for warranty expenditure is reliable estimate of obligation to be settled. The Hon'ble Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apex Court in the case of Rotork Controls India (P.) Ltd.(supra). Nor was the working of the provision furnished demonstrating that the amount of provision worked out was in accordance with stated policy of the company for provision for warranty expenditure. 13. The Hon'ble Delhi High Court in the case of Ericssion Communications (P.) Ltd.(supra), relied upon by the appellant, nowhere laid down the proposition of law that when the methodology adopted by the assessee-company for the provision of warranty expenditure does not meet the parameters laid down by the Hon'ble Apex Court in the case of Rotork Controls India (P.) Ltd.(supra) and Accounting Standard 29, still it could be allowed as a deduction. The ratio laid down in the said case is not applicable to the present case on account of distinguishing facts. In the said case, there was no accumulation of provision for warranty expenditure disproportionate to the increase in turnover. The Hon'ble Delhi High Court made a clear observation that the increase in the provision is only on account of increase in turnover and also unutilized portion of the provision was offered to tax in subsequent years. In these given facts, the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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