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TMI Blog2021 (4) TMI 808X X X X Extracts X X X X X X X X Extracts X X X X ..... negative figure. Therefore, it clearly establishes that assessee had not been stick in making the provision for warranty at the end of financial year under consideration when it had all the available facts relating to warranty claim made and historical trend of available claim as laid down in the case of Rotork Controls India Pvt. Ltd[ 2009 (5) TMI 16 - SUPREME COURT] The assessee s warranty provision equally lack in the proper accounting / calculating factors and, therefore, the claim of the assessee is not sustainable. The CIT (Appeals) has rightly rejected the set off of actual warranty expenses on payment basis as well as warranty expenses on payment basis. - Decided against assessee. - ITA. No. 2228/Del/2017 - - - Dated:- 16-4-2021 - Ms. Suchitra Kamble, Judicial Member And Shri B.R.R. Kumar, Accountant Member For the Assessee : Shri Vishal Kalra, Adv.; Ms. Rajnandni Shukla; Ms. Sumisha, A.R.; For the Department : Shri Prakash Dubey, Sr. D.R.; ORDER PER SUCHITRA KAMBLE, JM : This appeal is filed by the assessee against the order dated 10.01.2017 passed by the Commissioner of Income Tax (Appeals) 8, New Delhi, for Assessment Year 2012-13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee filed return of income on 29.11.2011 for Assessment Year 2012-13 declaring total income of ₹ 8,10,30,030/-. The case was taken up for scrutiny and assessment under Section 143(3) of the Act was passed on 6.02.2015 determining total income at ₹ 8,17,67,180/- by making disallowance of ₹ 7,37,150/- being provision made for warranty expenses. 4. Being aggrieved by the assessment order the assessee filed appeal before the CIT (Appeals). The CIT (Appeals) dismissed the appeal of the assessee. 5. The Ld. AR submitted that during the relevant assessment year the assessee made provision for warranty expenses amounting to ₹ 7,37,150/- while the actual warranty expenses incurred during the year amounting to ₹ 10,74,034/-. During the year under consideration the assessee sold products to various original manufacturers of equipment in India with the three year warranty period and was, therefore, under a legal obligation to carry out the parts manufactured by it and supplied to the manufacturers of the original equipment in case of any manufacturing defect within a period of three years from the sale of such parts. The ld. AR further submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48,27,77,110 Warranty provision utilised 18,15,848 2,19,991 38,36,940 10,33,722 % Warranty expense /sales 0.3% 0.05% 1% 0.21 Average of last 4 years percentage 0.39% 6. In view of the above table, the Ld. AR pointed out that the provision for warranty for the subject year was computed considering the percentage of warranty expenses / sales of immediately preceding assessment year and further the average of warranty expenses / sales of last four years. Thus, the provision for warranty for the subject assessment year was computed on scientific basis and accordingly should be allowed as deduction. The Ld. AR relied upon the decision of the apex court in the case of Rotork Controls India Pvt. Ltd. Vs. CIT (2009) 314 ITR 62 (SC). Thus, the Ld. AR submitted that since all the conditions such as existence of present obligation as a result of the past event as well as its resources probable will be to settle and reliable estimate can be made of the accounts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anty as the assessee while adopting the continuous dues provision for warranty account in past years during 2004-05 to 2007-08 had to make reversal of warranty expenses during assessment years 2006-07, 2007-08 and 2008-09, which was pointed out by the CIT (Appeals) in para 4.1.2 of the order of the CIT (Appeals). In assessment years 2008-09 and 2009-10, the assessee made provision for warranty at 0.75% of the sale / turnover made which was subsequently made at 0.5% of sales / turnover during assessment year 2010-11 and assessment year 2011-12. In assessment year 2009-10 utilization of provision of warranty was more than brought forward balance of provision for warranty, but in rest of the years for assessment years 2007-08 to 2011-12 the overall utilization of provisions of warranty was less than the provision carried forward from earlier years. Because of the abnormal situation in assessment year 2009-10 during assessment years 2010-11 and 2011-12, the assessee reduced the provision of warranty at 0.5% of sales / turnover and subsequently to 0.3% in assessment year 2012-13, instead of provision of warranty at 0.75% of turnover as was made in its books of earlier two assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been taken into account was not properly demonstrated before the Assessing Officer as well as before the CIT (Appeals). The decisions relied upon by the assessee especially that of Hon ble Apex court decision in the case of Rotork Controls India Pvt. Ltd. Vs. CIT (supra) the conditions whether fulfilled by the assessee should be first looked into. The Hon ble Apex Court held as under: 10. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (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. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 12. A past event that leads to a present obligation is called as an obligating event. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is case. 13. In this case we are concerned with Product Warranties. To give an example of Product Warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2% of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are - provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case. .............. 17. ............................ The principle which emerges from these decisions is that if the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under Section 37 of the 1961 Act. It would all depend on the data systematically maintained by the assessee. It may be noted that in al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed by the assessee for creating provision for warranty. Following are the charts showing warranty expenses for the period A.Ys. 2004-05 to 2015-16): Chart showing tally of warranty expenses (A.Y. 2004-05 to 2009-10) Particulars Assessment Year 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Sales turnover without excise duty 38,56,67,864 53,48,73,462 63,21,82,048 57,00,89,083 49,06,46,844 43,09,78,209 %for provision of warranty creation on sales /turnover 0.5 0.5 - - - % for maintaining provision of warranty (Liability Account) closing balance on sales/turnover of last three assessment years (Including current A.Y 03 0.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Sales turnover without excise duty 27,41,35,481 35,78,28,16 36,26,25,471 49,21,85,590 48,27,77,110 37,86,12,373 %for provision of warranty creation on sales /turnover - 0.75 0.75 % for maintaining provision of warranty (Liability Account) closing balance on sales/turnover of last three assessment years (Including current A.Y Opening balance of provision of warranty A 3,84,941 24,26,639 10,94,022 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty claimed. The assessee itself has admitted that due to up-gradation of technology, the defects in components were minimized and, therefore, warranty claim were substantially reduced. But in subsequent assessment year 2013-14, the assessee reversed the provision keeping in mind the quantum of brought forward of provision of warranty amount and which reduced the actual claim during the year. In assessment year 2013-14 the utilization of provision during the year from opening provision, balance figure also became a negative figure. Therefore, it clearly establishes that assessee had not been stick in making the provision for warranty at the end of financial year under consideration when it had all the available facts relating to warranty claim made and historical trend of available claim as laid down by the Hon ble Apex court in the case of Rotork Controls India Pvt. Ltd. Vs. CIT (supra). The assessee s warranty provision equally lack in the proper accounting / calculating factors and, therefore, the claim of the assessee is not sustainable. The CIT (Appeals) has rightly rejected the set off of actual warranty expenses on payment basis as well as warranty expenses on payment basis. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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