Dy. Commissioner of Income-tax, Pune V. ATS Conveyors India Pvt. Ltd., Pune

ITA 1771/PUN/2013

• Counselvise Citation: 177124514 RSA 2013
• Duration Of Justice: 1 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 30-12-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 23-09-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASEEM SHARMA
• Assessee Lawyers: SANTOSH RANAWAE
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.1771/PN/2013 (ASSESSMENT YEAR: 2009-10) THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 8, PUNE . APPELLANT VS. ATS CONVEYORS INDIA PVT. LTD., PLOT NO.E-3/3/A, MIDC, CHAKAN, PHASE III, KURULI VILLAGE, KHED, PUNE 410501 PAN: AAFCA4457P . RESPONDENT APPELLANT BY : SHRI ASEEM SHARMA RESPONDENT BY : SHRI SANTOSH RANAWAE DATE OF HEARING : 30-12-2014 DATE OF PRONOUNCEMENT : 31-12-2014 ORDER PER SUSHMA CHOWLA, JM: THIS APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER OF CI T(A)-V, PUNE DATED 10.06.2013 RELATING TO ASSESSMENT YEAR 2009- 10 AGAINST ORDER PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- I) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION ON A CCOUNT OF WARRANTY PROVISIONS OF RS.84,23,386/- PLACING RELIANCE O N THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF ROT ORK CONTROLS LTD [314 ITR 62] WHEN SCIENTIFIC BASIS OF THE PROVI SION OF WARRANTY IS NOT CONCLUSIVELY ESTABLISHED? II) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION ON ACCOUNT OF WARRANTY PROVISIONS OF RS.84,23,386/-, WHEN IN FACT THE ASSESSEE HAS NEITHER ANY PROVEN BASIS OF MAKING THE SAID PROV ISION NOR BACKED BY PROVEN PAST RECORD REGARDING THE PROVISIO N VIS-A-VIS THE ACTUAL EXPENSES IS CONCERNED. (III)THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTER ANY OF THE ABOVE GROUNDS OF APPEAL. ITA NO.1771/PN/2013 ATS CONVEYORS INDIA PVT. LTD. 2 3. THE ADJOURNMENT APPLICATION MOVED BY THE ASSESSEE W AS REJECTED AFTER HEARING THE LEARNED DEPARTMENTAL REPRESE NTATIVE FOR THE REVENUE AS THE ISSUE ARISING IN THE PRESENT APPEAL IS COV ERED BY THE ISSUE SETTLED BY THE HONBLE SUPREME COURT. 4. THE ONLY ISSUE RAISED IN THE PRESENT APPEAL IS AGAINST THE DELETION OF ADDITION MADE ON ACCOUNT OF WARRANTY PROVISIONS AMOUNTING TO RS.84,23,386/-. 5. THE BRIEF FACTS OF THE CASE ARE THAT, DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD DEBITED A SUM OF RS.84,23 ,386/- TO ITS PROFIT & LOSS ACCOUNT ON ACCOUNT OF WARRANTY PROVISION. THE PLEA OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT THE S AID WARRANTY PROVISION WAS MADE IN THE BOOKS OF ACCOUNT ON THE BASIS OF EXPERIENCE OF ATS GROUP INTERNATIONALLY. THE SAID PROVISION WAS MADE @ 10% OF PROJECT COST WHICH IN TURN, INCLUDED NEXT TWO YEARS ESTIM ATED WARRANTY COST. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE COM PANY HAD MADE WARRANTY PROVISION OF RS.98,15,584/- AS ON 31.03.2008 WHICH WAS REVERSED ON 01.04.2008. FURTHER, THE ASSESSEE DUR ING THE YEAR UNDER CONSIDERATION, HAD MADE A PROVISION OF RS.1,82,38,970/ - AS ON 31.03.2009 AND THE BALANCING FIGURE OF BOTH THE ENTRIES AM OUNTING TO RS.84,23,386/- WAS DEBITED TO THE PROFIT & LOSS ACCOUNT. THE EXPLANATION OF THE ASSESSEE IN THIS REGARD WAS THAT WHEN IT REALIZED THAT THE PROVISIONS WERE MADE EXCESSIVELY, THEN, IN SUBSE QUENT YEAR, LESS PROVISION WAS MADE THAT WAS @ 1% OF THE PROJECT CO ST. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE WAS N OT FOLLOWING ANY SCIENTIFIC BASIS FOR MAKING THE PROVISION AND IN THE ABS ENCE OF ANY DETAILS OF ACTUAL COST HAVING BEEN INCURRED, THE PROVISION M ADE ON ITA NO.1771/PN/2013 ATS CONVEYORS INDIA PVT. LTD. 3 ACCOUNT OF WARRANTY WAS ADDED BACK TO THE INCOME OF T HE ASSESSEE RESULTING IN ADDITION OF RS.84,23,386/-. 6. BEFORE THE CIT(A), THE ASSESSEE FURNISHED WRITTEN SUBMIS SIONS WHICH ARE INCORPORATED UNDER PARA 12 AT PAGES 7 TO 10 OF THE APPELLATE ORDER, WHICH ARE NOT BEING REPRODUCED FOR THE SAKE OF BR EVITY. THE CIT(A) AFTER CONSIDERING THE PLEA OF THE ASSESSEE THAT THE ISSUE OF WARRANTY PROVISION IS SQUARELY COVERED BY THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN ROTORK CONTROLS INDIA P. LTD V. CIT (2009) 314 ITR 62 (SC), ASKED THE ASSESSEE TO FURNISH ITS SUBMISS IONS IN VIEW THEREOF. THE ASSESSEE IN REPLY, FURNISHED THE TABULATED C HART IN RESPECT OF THE OBSERVATIONS OF THE HONBLE SUPREME COUR T IN ROTORK CONTROLS INDIA P. LTD V. CIT (SUPRA) AND THE FACTS OF THE ASSESSEE. THE SAID TABULATED DETAILS ARE FURNISHED AT PAGES 10 TO 16 O F THE APPELLATE ORDER. THE ASSESSEE THEREAFTER, AGGREGATED THE PROVISIO N MADE AND ACTUAL EXPENSES INCURRED OVER PERIOD OF THREE YEARS WH ICH IS REPRODUCED UNDER PARA 14 OF THE APPELLATE ORDER. THE C IT(A) VIDE PARA 15 OBSERVED AS UNDER:- 15. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AS WELL AS REPLY OF THE APPELLANT. PROVISION FOR WARRANTY IS AN ALL OWABLE EXPENDITURE, PROVIDED IT IS CLAIMED ON SCIENTIFIC BASIS AS HELD BY HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA(P) LTD.( SUPRA). FROM THE PERUSAL OF THE DOCUMENTS FILED BY THE APPELLANT IT IS SEEN THAT WARRANTY PERIOD OF TWO YEARS IS SHOWN IN CASE OF HYUNDAI MOT OR INDIA LTD., WHILE IN THE CASE OF TATA MOTORS LTD. WARRANTY PERIOD IS 12 MONTHS. IN THE CASE OF MERCEDES BENZ INDIA PVT. LTD. WARRANTY PERI OD IS 24 MONTHS AS IN THE CASE OF MAHINDRA & MAHINDRA LTD., WHERE IT I S ALSO 24 MONTHS. THIS BEING SO, PROVISION FOR WARRANTY IS A NECESSAR Y EXERCISE. INITIALLY PROVISION WAS CREATED BY THE APPELLANT @ 10% OF PRO JECT COST WHICH WAS REDUCED TO 1% IN SUBSEQUENT YEARS. THUS, THE APPELL ANT HAS FOLLOWED A METHOD OF WORKING OUT PROVISION. SINCE, IT WAS ON H IGHER SIDE, THE SAME WAS REVISED TO 1% BASED UPON EXPERIENCES OF THE APP ELLANT. FURTHER, THE EXCESS PROVISION IS REVERSED IN THE VERY NEXT YEAR BY THE APPELLANT. THE APPELLANT HAS ALSO PROVIDED THE DETAILS OF UTILIZAT ION WHICH SHOWS THE UTILISATION OF 99.24% FOR THE THREE YEARS. AS FAR AS THE PRESENT ASSTT YEAR IS CONCERNED, IT IS SEEN THAT AS AGAINST THE P ROVISION OF RS.84,23,386/- ACTUAL EXPENSE AGAINST SUCH PROVISIO N IS RS.84,41,225/-. THIS BEING SO, THE PROVISION IS QU ITE REALISTIC AND THERE IS NO BASIS FOR DISALLOWANCE OF THE PROVISION AS SU CH. ACCORDINGLY, THE ITA NO.1771/PN/2013 ATS CONVEYORS INDIA PVT. LTD. 4 ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITIO N OF RS.84,23,888/-. THUS, THE GROUND IS ALLOWED. 7. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A) IN DELETING THE ADDITION OF RS.84,23,386/-. 8. ON THE PERUSAL OF THE RECORD, WE FIND THAT THE CLAIM O F ASSESSEE WAS WITH REGARD TO THE WARRANTY PROVISION MADE IN ITS BO OKS OF ACCOUNT. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF M ANUFACTURING OF ALL TYPES CONVEYORS, ELECTRIC MONORAIL SYSTEMS, POWER & F REE OVERHEAD CONVEYORS, MONORAIL CONVEYORS, FLOOR MOUNTED CO NVEYORS, CHASIS INVERSION SYSTEMS. THE PRODUCTS BEING MANUFACTUR ED WERE HIGHLY TECHNICAL IN NATURE. THE ASSESSEE WAS PROVIDING AFT ER SALES SERVICES TO ITS CUSTOMERS AND WAS ALSO REQUIRED TO GIVE WARRANTY OF CONVEYORS UP TO 2-3 YEARS. AS PER THE WARRANTY COST CLAUSE, ASSESSEE WAS REQUIRED TO SEND ITS EXPERT ENGINEER AT CUSTOMER P LACE ONCE / TWICE IN EVERY QUARTER AND ASSESSEE WAS RESPONSIBLE FOR ANY DAMAGE OF CONVEYORS, REPLACEMENT OF SPARES ETC., I.E. SPARES LIKE ROLL ING CHAIN, ELECTRIC MOTORS SHOULD BE REPLACED. SINCE THERE WAS NEE D TO PROVIDE SERVICES TO CUSTOMERS IN TERMS OF WARRANTY CLAUSE, PROVIS ION WAS MADE IN THE BOOKS OF ACCOUNT ON A SCIENTIFIC BASIS WHICH WAS BEIN G FOLLOWED FROM YEAR TO YEAR. FOR THE YEAR UNDER CONSIDERATION, TH E ASSESSEE CLAIMED WARRANTY OF RS.84,23,386/- AND PROVISION TO THAT E XTENT WAS MADE IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. 9. THE HONBLE SUPREME COURT IN ROTORK CONTROLS INDIA P . LTD V. CIT (SUPRA) HAD HELD AS UNDER:- THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE THE WARRANTY EXPENSES, IF PROPERLY ASCERTAINED AND DISCOUNTED ON A CCRUAL BASIS CAN BE AN ITEM OF DEDUCTION UNDER SECTION 37. THE PRI NCIPLE OF ESTIMATION OF THE CONTINGENT LIABILITY IS NOT THE NORM AL RULE. IT WOULD DEPEND ON THE NATURE OF THE BUSINESS, THE NATUR E OF SALES, ITA NO.1771/PN/2013 ATS CONVEYORS INDIA PVT. LTD. 5 THE NATURE OF THE PRODUCT MANUFACTURED AND SOLD AND THE S CIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WO ULD ALSO DEPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF ARTICLES PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOG NIZED WHEN : (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESU LT OF A PAST EVEN; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES W ILL BE REQUIRED TO SETTLE THE OBLIGATION, AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE COND ITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDICAT ES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING MANUFACTUR ED IN THE PAST AND THE FACTS SHOW THAT DEFECTS EXISTED IN SOME OF THE ITEMS MANUFACTURED AND SOLD, THEN PROVISION MADE FOR WARRAN TY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37. 10. THE ASSESSEE BEFORE THE CIT(A) HAS FURNISHED THE TA BULATED DETAILS AS TO THE POINTS CONSIDERED BY THE HONBLE SUPR EME COURT IN ROTORK CONTROLS INDIA P. LTD V. CIT (SUPRA) AND THE FACTS OF THE CASE WHICH ARE AT PAR. FURTHER, IT HAS ALSO BEEN CLARIFIED BEFORE THE CIT(A) BY THE ASSESSEE THAT AS AGAINST THE PROVISION MADE OF RS.84,23,386/-, THE ACTUAL EXPENSES AGAINST SUCH PROVISION WAS RS.84,41,2 25/- INCURRED IN THE SUCCEEDING YEAR/S. THE YEAR-WISE DATA V IS--VIS THE PROJECT VALUE, PROVISION FOR WARRANTY AND ACTUAL EXPENSES AGAINST SUCH PROVISION IS AS UNDER:- F.Y. TOTAL PO VALUE PROVISION FOR WARRANTY (A) ACTUAL EXPENSES AGAINST SUCH PROVISION (B) EXCESS / (SHORTFALL) (A-B) % (B/A) 07-08 9,81,55,847 98,15,585 32,68,843 65,46,742 INCREMENTAL 08-09 16,68,62,888 84,23,386 84,41,225 (17,839) INCREMENTAL 09-10 30,61,29,000 (4,32,520) 59,61,905 (63,94,425) TOTAL 57,11,47,735 1,78,06,494 1,76,71,973 137,478 99.2 4 11. IN VIEW THEREOF AND FOLLOWING THE RATIO LAID DOWN BY TH E HONBLE SUPREME COURT IN ROTORK CONTROLS INDIA P. LTD V. CIT (SUP RA), WE ARE IN CONFORMITY WITH THE ORDER OF CIT(A) IN DELETING THE ADDITION OF ITA NO.1771/PN/2013 ATS CONVEYORS INDIA PVT. LTD. 6 RS.84,23,386/-. THE GROUNDS OF APPEAL RAISED BY THE REVEN UE ARE THUS, DISMISSED. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF DECEMBER, 2014. SD/- SD/- (G.S. PANNU) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED: 31 ST DECEMBER, 2014. GCVSR COPY OF THE ORDER IS FORWARDED TO : - 1) THE DEPARTMENT; 2) THE ASSESSEE; 3) THE CIT(A)-V, PUNE; 4) THE CIT-V, PUNE; 5) THE DR A BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE