Asstt.CIT,Cir.-1, Aurangabad, Aurangabad V. M/s. Endurance Technologies Pvt.Ltd., Aurangabad

ITA 152/PUN/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9990 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 7 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 31-08-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 03-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ANN KAPTHUAMA
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO. 152/PN/2011 (ASSTT. YEAR: 2006- 07) ASSTT. CIT CIR. 1, AURANGABAD APPELLANT VS. ENDURANCE TECHNOLOGIES PVT. LTD., K-228 MIDC WALUJ, AURANGABAD PAN AAACE 7066 P . RESPONDENT ITA NO. 153/PN/2011 (ASSTT. YEAR: 2006- 07) ASSTT. CIT CIR. 1, AURANGABAD APPELLANT VS. ENDURANCE SYSTEMS (INDIA) PVT. LTD., E-92 MIDC WALUJ, AURANGABAD PAN AAACE 08190 Q . RESPONDENT APPELLANTS BY : SHRI ABHAY AVCHAT RESPONDENT BY : MS. ANN KAPTHUAMA DATE OF HEARING : 31-08-2012 DATE OF PRONOUNCEMENT : 24 -9-2012 ORDER PER G.S. PANNU, A.M .: THESE APPEALS FILED BY THE REVENUE IN RESPECT OF TW O DIFFERENT ASSESSEES ARE DIRECTED AGAINST SEPARATE ORDERS OF T HE COMMISSIONER OF INCOME-TAX (APPEALS) AURANGABAD DATED 16-11-2010 WH ICH, IN TURN, HAVE ARISEN FROM SEPARATE ORDERS PASSED BY THE ASSTT. CI T RANGE I, AURANGABAD UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (I N SHORT THE ACT), DATED 26-12-2008 PERTAINING TO THE ASSESSMENT YEAR 2006-0 7. 2. IT WAS A COMMON GROUND BETWEEN THE PARTIES THAT THE FACTS AND CIRCUMSTANCES IN BOTH THE APPEALS STAND ON AN IDENT ICAL FOOTING AND THEREFORE, THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. IN ORDER TO FACILITATE THE APPRECIATION OF FACTS , WE MAY TAKE UP FOR DISCUSSION THE APPEAL IN THE CASE OF ENDURANCE TECH NOLOGIES P. LTD. IN ITA NO. 152/PN/2011 AS FOLLOWS. IN THIS CASE, THE RESP ONDENT ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF PRODUCTS FOR AUTOMOTIVE INDUSTRIES. THE ASSESSING OFFICER NOTICED THAT DURI NG THE YEAR UNDER CONSIDERATION, ASSESSEE HAD DEBITED A SUM OF RS. 49 ,57,000/- IN ITS PROFIT AND LOSS ACCOUNT WHICH REPRESENTED PROVISION FOR WARRA NTY CLAIMS. THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUN D THAT IT WAS A MERE PROVISION WHICH WAS AN UNASCERTAINED LIABILITY. AG AINST SUCH A DISALLOWANCE, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CI T(A). IN APPEAL, ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE ASSESSIN G OFFICER WHICH WERE ON THE FOLLOWING LINES. AS PER THE ASSESSEE, THE PROD UCTS SOLD BY IT TO THE CUSTOMERS CONTAINED A STIPULATION TO PROVIDE WARRAN TY AND THAT IN TERMS OF THE SAME, ASSESSEE IS REQUIRED TO UNDERTAKE REPAIRS/REP LACEMENT IN CASE OF ANY PROBLEM OF QUALITY DEFECT ETC. THE ASSESSEE POINTE D OUT THAT SINCE THE ENTIRE REVENUE BY WAY OF SALES IS ACCOUNTED FOR IN THE YEA R OF SALE ITSELF, THE CORRESPONDING RELATED EXPENSE ON WARRANTY CLAIM WHI CH WOULD ARISE IN FUTURE, WAS ALSO REQUIRED TO BE ACCOUNTED FOR ON PRINCIPLES OF ACCRUAL AND MATCHING CONCEPT. THE ASSESSEE FURTHER POINTED OUT THAT THE PROVISION FOR WARRANTY DEBITED TO P & L A/C WAS BASED ON PAST EXPERIENCE/R ECORDS AND IT WAS COMPUTED AT AN AVERAGE PERCENTAGE OF ACTUAL WARRANT Y CLAIM TO THE PRODUCT SOLD IN THE LAST THREE YEARS. IN THIS BACKGROUND, CIT(A) HAS DELETED THE ADDITION AND IN COMING TO SUCH A CONCLUSION HE HAS RELIED ON THE FOLLOWING DECISIONS OF THE TRIBUNAL: (A) THERMAX SURFACE COATING LTD. VS. JT. CIT (2007) 106 TTJ 728 (PUNE) 104 ITD 199 (PUNE (B) HONDA SEIL CARS INDIA LTD. VS. ACIT 111 TTJ 630 (DEL) 109 ITE 1 (DEL). AND ALSO THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD. VS. CIT 314 ITR 62 (S C). FOLLOWING DISCUSSION IN THE ORDER OF THE CIT(A) IS RELEVANT. I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDER O F THE AO, THE SUBMISSIONS OF THE APPELLANT AND THE DECISIONS RELI ED ON BY THE ASSESSEE. ON PERUSAL OF THE SAME, IT IS NOTICED THA T THE APPELLANT HAS SOLD THE PRODUCTS MANUFACTURED BY IT WITH WARRA NTY. IN THE PAST, THE APPELLANT HAS PAID WARRANTY CLAIMS TO ITS CUSTOMERS AND CLAIMED THE EXPENDITURE ON ACTUAL BASIS. THE ACCOU NTING STANDARD 29 HAS BEEN INTRODUCED WITH EFFECT FROM F. Y. 2004-05 BY ICAI ESTABLISHED BY THE GOVERNMENT OF INDIA AS P ER CHARTERED ACCOUNTANTS ACT, 1949. THE APPELLANT COMPANY HAS T HEREFORE CHANGED ITS METHOD OF RECOGNIZING EXPENDITURE OF WA RRANTY CLAIMS FROM ACTUAL BASIS TO ACCRUAL BASIS. THE APP ELLANT COMPANY HAS MADE PROVISION OF WARRANTY CLAIMS ON TH E BASIS OF PAST EXPERIENCE/RECORDS I.E. AT AVERAGE PERCENTAGE OF ACTUAL WARRANTY CLAIMS TO PRODUCTS SOLD IN THE LAST 3 YEAR S. THIS METHOD IS FOLLOWED BY THE APPELLANT COMPANY AS SUGGESTED B Y THE CIT(A) WHILE DECIDING APPEAL FOR THE EARLIER YEAR. THE ME THOD OF WORKING OUT PROVISION OF WARRANTY CLAIM APPEARS TO ME TO BE REASONABLE AND PROPER. THE LIABILITY OF WARRANTY A CCRUES ON THE DATE OF SALE OF PRODUCT THOUGH THE ACTUAL QUANTIFIC ATION AND PAYMENT OF THE SAME IS MADE ON SUBSEQUENT DATES. T HEREFORE, THE LIABILITY IS NOT UNASCERTAINED LIABILITY DISALL OWABLE UNDER THE PROVISIONS OF INCOME-TAX ACT AS CLAIMED BY THE AO. THE CLAIM OF THE APPELLANT THAT THE PROVISION OF WA RRANTY CLAIMS IS ACCRUED AND ASCERTAINED LIABILITY AND IS ALLOWABLE EXPENDITURE IS SUPPORTED BY THE DECISION OF HONBLE ITAT PUNE IN T HE CASE OF THERMAX SURFACE COATING LTD., VS. JT. CIGT (2007) 1 06 TTJ 728 (PUNE) 104 ITD 199 (PUNE). . IT HAS BEEN FURTHER NOTICED THAT THE APPELLANTS CL AIM IN RESPECT OF PROVISION OF WARRANTY CLAIMS IS ALLOWABLE IN VIEW O F THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ROTORK CONT ROLS INDIA P. LTD. VS. CIT 314 ITR 62, WHEREIN THE HONBLE APEX C OURT HELD REVERSING THE DECISION OF THE HONBLE HIGH COURT TH AT THE VALUE ACTUATORS, MANUFACTURED BY THE ASSESSEE, WERE SOPHI STICATED GOODS AND STATISTICAL DATA INDICATED THAT EVERY YEA R SOME OF THESE WERE FOUND DEFECTIVE; THAT VALUE ACTUATOR BEI NG A SOPHISTICATED ITEM NO CUSTOMER WAS PREPARED TO BUY A VALUE ACTUATOR WITHOUT A WARRANTY. THEREFORE, THE WARRAN TY BECAME AN INTEGRAL PART OF THE SALE PRICE; IN OTHER WORDS, TH E WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. IN THIS CASE, THE WARRANTY PROVISIONS HAD TO BE RECOGNISED BECAUSE TH E ASSESSEE HAD A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF THE OBLIGATION. THEREFORE, THE ASSES SEE HAD INCURRED A LIABILITY DURING THE ASSESSMENT YEAR WHI CH WAS ENTITLED TO DEDUCTION U/S 37 OF THE ACT. IN VIEW OF THE ABOVE DISCUSSION AND RESPECTFULLY FO LLOWING THE RATIO LAID DOWN BY THE DECISIONS IN THE CASE OF THE RMAX SURFACE COATING LTD. VS. JT. CIT (2007) 106 TTJ 728 (PUNE) 104 ITD 199 (PUNE); HONDA SEIL CARS INDIA LTD. VS. ACIT 111 TT J 630 (DEL) 109 ITE 1 (DEL); CIT VS. HIMALAY MACHINERY P. LTD. (2010) 42 DTR 1421 (GUJ) AND ROTORK CONTROLS INDIA P. LTD. VS . CIT (200) 314 ITR 62 (SC), I AM OF THE CONSIDERED VIEW THAT T HE PROVISION FOR WARRANTY CLAIMS OF RS. 49,57,000/- IS AN ALLOWA BLE EXPENDITURE. THE ADDITION OF RS. 49,57,000/- ON AC COUNT OF DISALLOWANCE OF PROVISION FOR WARRANTY CLAIMS IS TH EREFORE DELETED. GROUND NOS. 1,2,3 AND 4 STAND ALLOWED. 4. AGAINST THE AFORESAID, DEPARTMENT IS IN APPEAL B EFORE US. BEFORE US, THE LEARNED DR APPEARING FOR THE REVENUE HAS SUBMIT TED THAT THE LIABILITY TO PROVIDE WARRANTY CLAIM IN FUTURE WAS BASED ON A PRO VISION AND NOT AN ASCERTAINED LIABILITY AND THEREFORE, THE ASSESSING OFFICER WAS JUSTIFIED IN MAKING THE DISALLOWANCE. SO HOWEVER, IT IS NOT CON TROVERTED BY THE LEARNED DR THAT THE DECISION OF HONBLE SUPREME COURT IN TH E CASE ROTORK CONTROLS INDIA P. LTD. (SUPRA) IS CLEARLY APPLICABLE TO THE ISSUE IN QUESTION. 5. ON THE OTHER HAND, THE LEARNED REPRESENTATIVE AP PEARING FOR THE RESPONDENT ASSESSEE HAS DEFENDED THE ORDER OF THE C IT(A) BY POINTING OUT THAT THE PRODUCTS SOLD BY THE ASSESSEE CARRY WITH IT A CLAUSE FOR WARRANTY IN TERMS OF WHICH THE ASSESSEE HAS TO MAKE GOOD ANY DE FECTS IN QUALITY REPORTED BY THE CUSTOMERS IN FUTURE. THE LEARNED REPRESENTA TIVE FURTHER POINTED OUT THAT THE PROVISION HAS BEEN COMPUTED ON A SCIENTIFIC BAS IS BY CONSIDERING THE ACTUAL WARRANTY CLAIMS INCURRED BY THE ASSESSEE IN LAST THREE YEARS AND SUCH A METHOD OF ESTIMATING THE PROVISION HAS BEEN JUSTIFI ABLY AFFIRMED BY THE CIT(A). 6. IN THIS BACKGROUND IT CLEARLY EMERGES THAT THE R ATIO OF THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDIA P. LTD. (SUPRA) COVERS THE CONTROVERSY BEFORE US. IN THE CASE BEF ORE THE HONBLE SUPREME COURT, THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE OF VALVE ACTUATORS AND AT THE TIME OF SALE, ASSESSEE PROVIDED STANDARD WAR RANTY WHEREBY IN THE EVENT OF ANY ACTUATOR OR A PART THEREOF BECOMING DEFECTIV E WITHIN THE STIPULATED PERIOD, THE ASSESSEE UNDERTOOK TO RECTIFY THE DEFEC TIVE PARTS FREE OF CHARGE. FOR THE ASSESSMENT YEAR BEFORE THE HONBLE COURT, T HE ASSESSEE HAD MADE A PROVISION FOR WARRANTY AT A SPECIFIED RATE OF TURNO VER. SUCH A PROVISION WAS DISALLOWED BY THE REVENUE ON THE GROUND THAT IT WAS CONTINGENT LIABILITY WHICH WAS TO BE INCURRED ONLY IN FUTURE. THE HONBLE SUP REME COURT HOWEVER, NEGATED THE CLAIM OF THE REVENUE BY NOTICING THAT T HE WARRANTY BECAME INTEGRAL PART OF THE SALE PRICE INASMUCH AS IT STOO D ATTACHED TO THE SALE PRICE OF THE PRODUCTS SOLD BY THE ASSESSEE. THEREFORE, ACCO RDING TO THE HONBLE APEX COURT, WARRANTY PROVISION HAD TO BE RECOGNISED BECA USE THE ASSESSEE HAD A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESUL TING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF SUCH OBLIGATION. FOLLOWING DISCUSSION IN THE HEAD-NOTE IS QUITE RELEVANT. THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE THE WARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDUCTION U/S 37. THE PRINCIPLE O F ESTIMATION OF THE CONTINGENT LIABILITY IS NOT THE NORMAL RULE. IT WOULD DEPEND ON THE NATURE OF THE BUSINESS, THE NATURE OF SALES, TH E NATURE OF PRODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC ME THOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WOULD ALSO D EPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF ARTICLE S PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ON LY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS R ECOGNISED WHEN : (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A R ESULT OF PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOUR CES WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND (C) A RELIAB LE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNISED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDIC ATES THAT A LARGE NUMBER OF SOPHISTICATED GOOD ERE BEING MANUFACTURED IN THE PAST AND THE FACTS SHOW THAT DEFECTS EXISTED IN SOM E OF THE ITEMS MANUFACTURED AND SOLD, THEN PROVISION MADE FOR WARR ANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITL ED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37, . 7. APPLYING THE AFORESAID PARITY OF REASONING TO TH E PRESENT CASE, WE FIND THAT THERE IS NO FACTUAL CONTROVERSION TO THE FINDI NG OF THE CIT(A) THAT THE ASSESSEE HAD SOLD THE PRODUCTS MANUFACTURED BY IT W ITH WARRANTY. IT IS ALSO OBSERVED BY THE CIT(A) THAT IN THE PAST I.E. PRIOR TO FINANCIAL YEAR 2004-05 THE ASSESSEE HAD PAID WARRANTY CLAIM TO ITS CUSTOMERS A ND CLAIMED SUCH EXPENDITURE ON ACTUAL BASIS, AND ONLY THEREAFTER IT HAS CHANGED ITS METHOD OF RECOGNIZING EXPENDITURE ON WARRANTY CLAIMS FROM AC TUAL BASIS TO ACCRUAL BASIS AS IS THE CASE FOR THE YEAR UNDER CONSIDERATION BEF ORE US. IT IS ALSO NOTICED BY THE CIT(A) THAT THE PROVISION HAS BEEN COMPUTED ON THE BASIS OF PAST EXPERIENCE/RECORDS I.E. AT AN AVERAGE PERCENTAGE OF ACTUAL WARRANTY CLAIMS TO PRODUCT SOLD DURING LAST THREE YEARS. 8. IN THIS BACKGROUND AFTER CONSIDERING THE REASONI NG LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDIA P. LTD. (SUPRA), WE FIND THAT THE CIT(A) MADE NO MISTAKE IN HOLDING THAT THE PROVISION FOR WARRANTY IN QUESTION CANNOT BE CONSIDERED AS AN UNA SCERTAINED LIABILITY, SO AS TO BE DISALLOWED. THE LIABILITY IN QUESTION IS ATT ACHED TO THE SALE PRICE OF THE PRODUCTS AND FURTHER IN OUR VIEW, THE CIT(A) HAS CO RRECTLY INFERRED THAT THE METHOD OF WORKING OUT THE PROVISION IS ALSO REASONA BLE AND PROPER, WHICH IS BASED ON THE PAST EXPERIENCE. FOLLOWING THE AFORES AID DISCUSSIONS, WE THEREFORE, AFFIRM THE ORDER OF THE CIT(A) AND ACCOR DINGLY THE GRIEVANCE RAISED BY THE REVENUE IS FOUND TO BE UNTENABLE. 9. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE A RE DISMISSED. DECISION IS PRONOUNCED IN THE OPEN COURT ON 24 TH SEPTEMBER 2012. . SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTAN T MEMBER PUNE, DATED THIS DAY OF 24 TH SEPTEMBER 2012. ANKAM COPY TO:- 1) ASSESSEE, 2) DEPARTMENT 3) THE CIT(A) AURANGABAD 4) CIT, AURANGABAD 5) DR, A BENCH, I.T.A.T., PUNE. 6) GUARD FILE TRUE COPY BY ORDER SR. PS, ITAT PUNE