Tata AutoComp Hendrickson Suspensions Pvt. Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 1416/PUN/2016

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 6978 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 23-01-2019
• Assessment Year: 2011-2012
• Appeal Filed On: 01-07-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJEEV GHEI
• Assessee Lawyers: P J PARDIWALA
• Section: 64

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUNE BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER & SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ./ ITA NO.1416/PUN/2016 ( / ASSESSMENT YEAR :2011-2012) TATA AUTOCOMP HENDRICKSON SUSPENSIONS PVT. LTD., GATE NO.431/1, MEDANKARWADI, CHAKAN-ALANDI ROAD, TAL:KHED, PUNE-410501 VS. DCIT, CIRCLE-7, PUNE ./PAN NO. : AACCT 4769 Q ( /APPELLANT ) .. ( / RESPONDENT ) /ASSESSEE BY : SHRI P.J.PARDIWALA, AR /REVENUE BY : SHRI SANJEEV GHEI, DR / DATE OF HEARING : 23/01/2019 /DATE OF PRONOUNCEMENT 01/03/2019 / O R D E R PER D. KARUNAKARA RAO, AM : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A)-5, PUNE, DATED 31.03.2016 FOR THE ASSESSMENT YEAR 2011-12. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER :- THE APPELLANT OBJECTS TO THE ORDER DATED MARCH 31, 2016 PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) - 5, PUNE ['CIT (APPEALS)'] FOR THE AFORESAID ASSESSMENT YEAR ON THE FOLLOWING AMONGST OTHER GROUNDS: 1. THE LEARNED CIT (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF PROVISION FOR WARRANTY PROVISION OF RS.3,96,03,899 ON THE BASIS THAT THE PROVISION FOR WARRANTY HAS NOT BEEN CREATED BY FOLLOWING A SCIENTIFIC METHOD. 2. THE LEARNED CIT (APPEALS) ERRED IN MAKING THE FOLLOWING OBSERVATIONS WHICH ARE CONTRARY TO THE FACTS OF THE CASE AND IN LAW: ' ... THOUGH, IN THE SUBMISSION THE APPELLANT HAS CLAIMED TO HAVE ITA NO.1416/PUN/2016 2 SUBMITTED A COPY OF THE AGREEMENT WITH TATA MOTORS LTD. (TML) AND MINUTES OF THE MEETING WITH THEM, NOWHERE IN THE SUBMISSION MADE DURING THE APPELLATE PROCEEDINGS OR BEFORE THE A D (THE APPELLANT WAS REQUIRED TO FURNISH THE SUBMISSIONS MADE BEFORE THE AD), HAS THE APPELLANT ANY AGREEMENT WITH ITS MAJOR PURCHASER TML REGARDING WARRANTY NOR THE APPELLANT SUBMITTED ANY PRODUCT VOUCHERS OR PURCHASE ORDERS TO SUBSTANTIATE ITS STAND THAT THE LIABILITY OF WARRANTY ARISES ALONGWITH THE SALES. ... THIS PROVISION CREATED BY THE APPELLANT, IS COMPLETELY AGAINST THE MATCHING PRINCIPLE AND THEREBY DOES NOT GIVE A TRUE PICTURE OF THE REAL INCOME OF THE APPELLANT FOR THIS PERIOD ... ... IT IS CLEAR THAT THERE IS NO REVERSAL OF EXCESS PROVISION IN CASE THE PROVISION IS FOUND TO BE EXCESSIVE IN ANY PARTICULAR YEAR. ' THE APPELLANT OBJECTS TO THE ABOVE OBSERVATIONS MADE BY THE LEARNED CIT (APPEALS). 3. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (APPEALS) ERRED IN NOT GIVING DIRECTIONS TO THE LEARNED ASSESSING OFFICER TO GRANT DEDUCTION OF WARRANTY EXPENSES IN THE YEAR OF ACTUAL INCURRENCE. 4. EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHOUT PREJUDICE TO THE OTHER. 3. BRIEFLY STATED THE RELEVANT FACTS INCLUDE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF SUPPLYING OF SUSPENSION SYSTEMS IN MOTOR INDUSTRY. ASSESSEE FILED RETURN OF INCOME ON 16.11.2011 DISCLOSING TOTAL INCOME OF RS.69,40,05,558/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY UNDER CASS AND THE ASSESSING OFFICER MADE THE ASSESSMENT COMPUTING THE TOTAL INCOME OF THE ASSESSEE AT RS.73,36,06,457/-. THE ASSESSING OFFICER MADE DISALLOWANCE OF RS.3,96,03,899/- ON ACCOUNT OF PROVISION FOR WARRANTY IN THE ASSESSMENT. IN APPEAL, THE CIT(A) CONFIRMED THE SAID ADDITION. AUTHORITIES HELD THAT THERE IS NO NEED FOR ASSESSEE TO INCUR SUCH AN EXPENDITURE IN THE ABSENCE OF ANY POLICY OR THE METHOD TO QUANTIFY THE EXPENDITURE. THE RELEVANT FINDINGS OF THE CIT(A) AGAINST THE ASSESSEE AS GIVEN IN PARA 5.3, 5.4 AND 5.5 OF HIS ORDER ARE EXTRACTED HEREUNDER :- ITA NO.1416/PUN/2016 3 5.3 ........... HOWEVER, IN THE APPELLANTS CASE, THE EXPENDITURE PROVIDED FOR IS BASED ONLY ON PAST AVERAGE AND HAS NO LINKING WITH THE SALES OF CURRENT YEAR. THIS ASPECT COMES FORTH FROM THE SUBMISSIONS MADE BY THE APPELLANT. NOWHERE, IN THE SUBMISSIONS MADE, HAS THIS BEEN CLARIFIED NOR ANY DETAILED WORKING GIVING DETAILS OF THE PROVISION MADE AND LINKING OF THE SAME TO THE CURRENT YEARS SALE HAS BEEN SUBMITTED. FURTHER, IT IS ALSO CLEAR FROM THE CHART GIVEN ON PAGE NO.62 OF THE SUBMISSION MADE OF SUBSEQUENT EXPENDITURE, THAT THE EXPENDITURE OF 2.66 CRORES IS INCURRED AGAINST PROVISION OF RS.3.96 CRORES. THIS AMPLY PROVES THAT, THE BASIS OF MAKING THE ABOVE PROVISION CANNOT BE SAID TO BE SCIENTIFIC AS IT IS NOT LINKED TO THE CURRENT YEAR SALES. 5.4 FROM THE DETAILS SUBMITTED BY THE APPELLANT, IT IS CLEAR THAT THERE IS NO REVERSAL OF EXCESS PROVISION IN CASE THE PROVISION IS FOUND TO BE EXCESSIVE IN ANY PARTICULAR YEAR. FURTHER, THE APPELLANT ITSELF HAS SUBMITTED THAT, THE EXCESS PROVISION IS CARRIED FORWARD. THE APPELLANT HAS SUBMITTED THAT, FRESH CLAIMS ARE ADJUSTED AGAINST SUCH PROVISION. IN VIEW OF THIS, THE APPELLANT IS NOT FOLLOWING THE CONCEPT OF ACCRUAL AND THE MATCHING CONCEPT SCIENTIFICALLY. THE APPELLANT, HENCE, FAILS TO FULFIL THE PARAMETER OF SCIENTIFIC METHOD OF ACCOUNTING AS LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD. (SUPRA). 5.5 IN VIEW OF DISCUSSIONS IN THE PRECEDING PARAGRAPHS, THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF PROVISION FOR WARRANTY IS CONFIRMED. GROUND NO.1 IS HENCE, DISMISSED. 4. IN THE PROCESS, THE CIT(A) ADJUSTED ASSESSEES METHOD ON THE BASIS OF CREATING THE PROVISIONS. OTHERWISE, THE ASSESSEE MAKES THE PROVISION BASED ON THE PAST EXPERIENCE I.E. EQUAL TO AVERAGE OF LAST FOUR QUARTERS. ACTUAL CLAIMS MULTIPLY BY 5 QUARTERS IN CASE OF PARALIFT AND 7 QUARTERS IN CASE OF 6 ROD PRODUCTS. THESE 5 QUARTERS AND 7 QUARTERS REPRESENT THE HALF OF WARRANTY PERIOD PLUS ONE QUARTER BASED ON THE WARRANTY POLITY ENTERED INTO WITH THE CUSTOMERS. THE DETAILS ARE PROVIDED IN TABLE GIVEN IN PARA 5 OF THE CIT(A)S ORDER. 5. AGGRIEVED WITH THE SAME, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US WITH THE ABOVE STATED GROUNDS OF APPEAL. 6. BEFORE US, LD. COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO VARIOUS PAGES OF PAPER BOOK TO DEMONSTRATE THAT THE ASSESSEE IS UNDER THE CONTRACTUAL OBLIGATION TO BEAR THE WARRANTY EXPENSES ON THE PRODUCTS ITA NO.1416/PUN/2016 4 MANUFACTURED AND SOLD BY THE ASSESSEE TO THE CUSTOMERS. AR SUBMITTED THAT THE CONTENTS OF PAGES NO.89, 90, 93, 95, 99, 36 & 49 OF THE PAPER BOOK ARE RELEVANT IN THIS REGARD. AS PER LD. AR, THESE EXISTS BOTH THE POLICY AND THE METHOD TO INCUR THE WARRANTY EXPENSES. ACCORDING TO HIM, PAGE NO.89 RELATES TO TANDEM BOGIE SUSPENSION SYSTEM; PAGE NO.90 RELATES TO RESPONSIBILITIES OF THE ASSESSEE VIS--VIS THE WARRANTY ASPECTS; PAGE NO.93 PROVIDES FOR CONDITIONS RELATING TO CLAIM OF WARRANTY ON STRUCTURAL COMPONENTS ON ONE SIDE AND CONSUMABLE/WEARING COMPONENTS ON OTHER. ON THE STRUCTURAL COMPONENTS, THE CONDITION FOR CLAIM OF WARRANTY IS THREE YEARS OR 3,00,000 KMS, WHICHEVER IS THE EARLIEST. FOR OTHER CONSUMABLE/WEARING COMPONENTS, THE CONDITION FOR WARRANTY IS ONE YEAR OR 100,000 KMS ONLY FOR TRACTOR TRAILER APPLICATION. HOWEVER, NO WARRANTY IS PROVIDED IN CASE OF THE TIPPERS. BRINGING OUR ATTENTION TO PAGE 95, LD. COUNSEL FOR THE ASSESSEE DEMONSTRATED THAT IT RELATES TO PARALIFT SUSPENSION SYSTEM FOR WHICH WARRANTY IS CLAIMABLE. REFERRING TO PAGE 99, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT DEALS WITH THE WARRANTY CONDITIONS QUA THE OTHER PRODUCTS. BY ALL THESE PAGES, LD. COUNSEL DEMONSTRATED THAT, UNLIKE THE FINDING OF THE CIT(A) IN THE MATTER, THE WARRANTY IS APPLICABLE TO THE PRODUCTS MANUFACTURED AND SOLD BY THE ASSESSEE. METHODOLOGY OF WARRANTY IS ALSO EXPLAINED IN PAGE 49 OF THE PAPER BOOK. WARRANTY PROVISIONS ARE APPLICABLE TO LIFT AXLE SUSPENSION (PARALIFT SUSPENSION SYSTEM FOR 8X2 TRUCKS) SYSTEM AND ROD TANDEM BOGIE SUSPENSIONS SYSTEMS. IGNORING ALL THESE ABOVE, THE DETAILS SUBMITTED BY THE ASSESSEE BOTH ON THE CLAIMABILITY OF THE WARRANTY BY THE CONSUMERS AND QUANTUM OF EXPENDITURE INCURRED BY THE ASSESSEE, THE CIT(A) AND THE ASSESSING OFFICER MADE ADDITION ON THIS ACCOUNT. ITA NO.1416/PUN/2016 5 7. ON THE OTHER HAND, LD. DR RELIED HEAVILY ON THE ORDER OF ASSESSING OFFICER AND CIT(A). 8. WE HEARD BOTH THE PARTIES ON THE ISSUE OF ALLOWABILITY OF PROVISIONS OF WARRANTY AND PERUSED THE ORDERS OF THE REVENUE ON ONE SIDE AND THE PAPER BOOK PLACED BEFORE US ALONG WITH THE VARIOUS DOCUMENTS REFERRED TO BY THE PARTIES BEFORE US. TO START WITH, WE EXAMINED THE CONTENTS OF PAGE 49 OF THE PAPER BOOK WHICH DEALS WITH THE POLICY FOR WARRANTY IN RESPECT OF BOTH THE SYSTEMS MENTIONED ABOVE. FOR THE SAKE OF COMPLETENESS, WE PROCEED TO EXTRACT THE RELEVANT PARA 1.3.15 AND 1.3.16 OF PAGE NO.49 OF THE PAPER BOOK, WHICH READS AS UNDER :- 1.3.15 THE COMPANY HAS FRAMED THE POLICY FOR WARRANTY WHEREIN WARRANTY' PERIOD AS FOLLOWS. LIFT AXLE SUSPENSION (PARALIFT SUSPENSION SYSTEM FOR 8X2 TRUCKS) SYSTEM A) STRUCTURAL COMPONENTS: WARRANTY IS 2 YEARS OR 200,000KM, WHICHEVER OCCURS FIRST. B) CONSUMABLE / WEARING COMPONENTS: AIR SPRINGS, STABILIZERS, BUSHES, FASTENERS & WEAR PADS (ONLY IN CASE WEAR PAD SEPARATES OUT FROM THE SYSTEM): 1 YEAR OR 100,000, WHICHEVER OCCURS FIRST. 6 ROD TANDEM BOGIE SUSPENSIONS SYSTEMS A) STRUCTURAL COMPONENTS: 3 YEARS OR 3,00,000KMS WHICHEVER IS THE EARLIEST. B) CONSUMABLE / WEARING COMPONENTS: RUBBER BUSHES AND BOLSTER SPRING, POLYMER BEARING, LEAF SPRING ASSEMBLY: 1 YEAR OR 100,000 KMS ONLY FOR TRACTOR TRAILER APPLICATION. THIS PERIOD IS COUNTED ONCE THE VEHICLE IS SOLD BY TML IN THE MARKET. THE ABOVE WARRANTY HAS BEEN MENTIONED IN THE SERVICE CIRCULARS ISSUED BY TATA MOTORS. 1.3.16 THE WARRANTY COST IS PROVIDED ON THE BASIS OF ACTUAL WARRANTY CLAIMS DEBITED BY TML FOR THE LAST ONE YEAR. THE PROVISION AMOUNT WOULD BE EQUAL TO AVERAGE OF LAST 4 QUARTERS ACTUAL CLAIMS ITA NO.1416/PUN/2016 6 MULTIPLIED BY 5 QUARTERS IN CASE OF 'PARALIFT' AND 7 QUARTERS IN CASE OF 6-ROD PRODUCTS. 5 QUARTERS AND 7 QUARTERS REPRESENT THE HALF OF WARRANTY PERIOD PLUS ONE QUARTER (ASSUMING THAT VEHICLE TO BE SOLD AFTER ONE MONTH AFTER BUILD UP). THE SAME IS BASED ON ABOVE WARRANTY POLICY. THE AMOUNT SO ARRIVED WOULD BE CARRIED FORWARD AND FRESH CLAIMS WOULD BE ADJUSTED AGAINST THE OPENING PROVISION. THE PROVISION AMOUNT WOULD BE CALCULATED AT THE END OF EVERY QUARTER. IN THIS REGARD, THE ACTUAL PROVISION WORKING FOR AY 2011-12 IS REPRODUCED BELOW FOR YOUR GOODSELFS READY REFERENCE: RS. IN INR PARTICULARS AMOUNT REFERENCE ACTUAL WARRANTY CLAIM RECEIVED FOR THE YEAR 2010-11 1,73,30,055 ANNEXURE-4 ADD:WARRANTY CLAIMS LIKELY TO BE ACCEPTED IN FUTURE 2,45,16,733 ANNEXURE-5 (SUBTOTAL) 4,18,46,788 REFER PAGE NO.30 TO 61 WARRANTY PROVISION AS PER P&L 3,96,03,899 9. FROM THE ABOVE, IT IS EVIDENT THAT THE WARRANTY IS CLAIMABLE BY THE CONSUMERS FOR WHICH THE CONDITIONS ARE SPECIFIED. THEREFORE, IN OUR VIEW, THE ASSESSEE HAS POLICY FOR PAYMENTS TOWARDS THE WARRANTY EXPENSES. THEREFORE, IN PRINCIPLE, WE DO NOT AGREE WITH THE FINDINGS OF THE CIT(A), WHO HELD THAT DEDUCTION FOR WARRANTY IS NOT ALLOWABLE. 10. REGARDING THE QUANTUM ALSO , WE FIND THAT, BY THE END OF THIS YEAR, THE ASSESSEE CREATED PROVISIONS TO THE TUNE OF RS.97.5 CRORES OUT OF WHICH NEAR ABOUT RS.81.72 CROES WAS ALREADY INCURRED BY THE ASSESSEE. THE CONTENTS OF PARA 64 OF THE PAPER BOOK WITH THE DATA TILL FINANCIAL YEAR 2011-12 ARE EXTRACTED HEREINBELOW :- DETAILS OF PROVISION FOR WARRANTY AND ACTUAL WARRANTY CLAIMS VALUE IN RS. PARTICULARS FY 2008- 09 FY 2009-10 FY 2010-11 FY 2011-12 OPENING BALANCE - 16,09,000 22,44,196 2,45,18,157 ADD: PROVISIONS MADE DURING THE YEAR (NET OF REVERSAL) 22,41,000 41,52,506 3,96,03,899 5,15,90,363 ITA NO.1416/PUN/2016 7 LESS: UTILIZATION/ACTUAL WARRANTY CLAIMS (6,32,000) (35,17,310) (1,73,29,938) (3,11,08,622) CLOSING BALANCE 16,09,000 22,44,196 2,45,18,157 4,49,99,898 NET MOVEMENT IN PROVISION ACCOUNT DURING THE YEAR 16,09,000 6,35,196 2,22,73,961 2,04,81,741 BASIS FOR COMPUTING RS.3,96,03,899/- ACTUAL YTD MAR 11 AVG OF LAST 4 QUARTERS WARRANTY PROV. PERIOD PROV. FOR FUTURE CLAIMS TOTAL DEBIT TO P&L LIFT AXLE 1,16,21,727 29,05,432 5 1,45,27,159 2,61,48,885 26 T 6-ROD 57,08,328 14,27,082 7 99,89,574 1,56,97,902 TOTAL 1,73,30,055 43,32,514 2,45,16,733 4,18,46,788 OPENING BALANCE OF WARRANTY PROVISION 22,42,889 P&L IMPACT FOR MARCH 11 3,96,03,899 11. FROM THE ABOVE TABLES, IT IS EVIDENT THAT THE SUM OF RS.3,96,03,899/- WAS CALCULATED BASED ON THE POLICY ADOPTED BY THE COMPANY. THIS POLICY HAS NOT BEEN FOUND ERRONEOUS BY THE AUTHORITIES IN ANY FORUM. THEREFORE, IT IS WRONG INFER THAT THE ASSESSEE DOES NOT HAVE A POLICY AND THE CONTRACTUAL OBLIGATION TO MAKE THE PAYMENT IN PRINCIPLE AND THE QUANTIFICATION IS ALSO NOT FOUND ERRONEOUS AND UNSCIENTIFIC BY THE AUTHORITIES. IT IS ALSO SEEN THAT UNUTILIZED PROVISION IS CARRIED FORWARD TO THE SUBSEQUENT YEARS BY MAINTAINING THE OPENING AND CLOSING BALANCES. THEREFORE, WITHOUT BRINGING ANY EVIDENCE ON RECORD, THE ALLEGATION OF THE ASSESSING OFFICER AND THE CIT(A) THAT THE WARRANTY EXPENSES ARE NOT CLAIMABLE IS INCORRECT. WE ALSO FIND THE ASSESSEE HAS BEEN MAINTAINED THIS METHOD IN PRINCIPLE OVER THE YEARS AND THEY ARE NOT DISTURBED CONCLUSIVELY. THEREFORE, WE HOLD THAT THE PROVISIONS CREATED BY THE ASSESSEE ARE REQUIRED TO BE ALLOWED AS CLAIMED BY ITA NO.1416/PUN/2016 8 THE ASSESSEE. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE IN THIS APPEAL ARE ALLOWED. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 01/03/2019. SD/ - (SUSHMA CHOWLA) SD/ - ( D. KARUNAKARA RAO ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /PUNE ; DATED 01/03/2019 PKM SR.PS./SUJEET / COPY OF THE ORDER FORWARDED TO : //TRUE COPY// / BY ORDER, ( SR. PRIVATE SECRETARY ) , / ITAT, PUNE 1. / THE APPELLANT- 2. / THE RESPONDENT- 3. ( ) / THE CIT(A), PUNE 4. / CIT 5. , , / DR, ITAT, PUNE 6. / GUARD FILE. //TRUE COPY//