ACER India Private Ltd, Bangalore V. DCIT, Bangalore

ITA 22/BANG/2011

• Counselvise Citation: 2221114 RSA 2011
• Duration Of Justice: 1 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 06-03-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 12-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CITI
• Assessee Lawyers: SHARATH RAO

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BANGALORE BANGALORE BANGALORE BENCH BENCH BENCH BENCH A AA A BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI N. N.N. N.BARAT BARAT BARAT BARATH HH HVAJA SANKAR, VICE VAJA SANKAR, VICE VAJA SANKAR, VICE VAJA SANKAR, VICE- -- -PRESIDENT PRESIDENT PRESIDENT PRESIDENT A AA AND NDND ND SMT. P.MADHAVI DEVI SMT. P.MADHAVI DEVI SMT. P.MADHAVI DEVI SMT. P.MADHAVI DEVI, JUDICIAL MEMBER , JUDICIAL MEMBER , JUDICIAL MEMBER , JUDICIAL MEMBER ITA NO.22(BANG)/2011 (ASSESSMENT YEAR: 2006-07) M/S.ACER INDIA (PRIVATE) LTD., 6 TH FLOOR, EMBASSY HEIGHTS NEXT TO HOSMAT HOSPITAL, MAGRATH ROAD, BANGALORE-560 025. PAN: AACCA 1237 A PAN: AACCA 1237 A PAN: AACCA 1237 A PAN: AACCA 1237 A VS. APPELLANT DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 11(1), BANGALORE. RESPONDENT APPELLANT BY: SHRI SHARATH RAO, C.A. RESPONDENT BY : SHRI S.K.AMBASTHA, CIT-I DATE OF HEARING: 06-03-2012 DATE OF PRONOUNCEMENT: 16-03-2012 O R D E R O R D E R O R D E R O R D E R PER PER PER PER N.BARATHVAJA SANKAR, VP: N.BARATHVAJA SANKAR, VP: N.BARATHVAJA SANKAR, VP: N.BARATHVAJA SANKAR, VP: THIS APPEAL WAS DISMISSED FOR NON-PROSECUTION BY O RDER OF THIS TRIBUNAL DATED 13-10-2011. SUBSEQUENTLY, O N FILING OF MISC. PETITION BY THE ASSESSEE, THIS APPEAL WAS RES TORED BY ORDER DATED 13-1-2012. THUS, THIS APPEAL CAME UP FOR HEAR ING ON 6 TH MARCH 2012. 2. THE ONLY POINT AT ISSUE RAISED BEFORE US IS REG ARDING ALLOWABILITY OF PROVISION FOR WARRANTY AMOUNTING TO ITA 22(BANG)/2011 PAGE 2 OF 7 `60,697,849/- (NET OF ACTUAL EXPENSES INCURRED BY T HE ASSESSEE). THE RELEVANT EFFECTIVE GROUNDS RAISED B EFORE US READ AS UNDER: 2. THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE DEPUTY COMMISSIONER OF INCOME TAX (DCIT) TOWARDS THE NET PROVISION FOR WARRANTY AMOUNTING TO `60,697,349 (NET OF ACTUAL EXPENSES INCURRED BY THE APPELLANT). 3. THE LEARNED CIT(A) HAS ERRED IN FACTS IN CONCLU DING THAT THE AVERAGE FAILURE RATE COMPUTED BY THE APPELLANT FOR LAPTOPS SOLD UNDER WARRANTY DURING THE FINANCIAL YEAR 2005-06 IS 70% OF THE UNITS SOLD UNDER WARRANTY, AS AGAINST 0.70% OF THE UNITS SOLD UNDER WARRANTY. ACCORDINGLY, THE LEARNED CIT(A) HAS ERRED ON FACTS IN CONCLUDING THAT THE AVERAGE FAILURE RATE CONSIDERED BY THE APPELLANT IS ON A VERY HIGH SIDE AND UNREASONABLE, AND THEREBY UNSCIENTIFIC AND NOT BASED ON PAST EXPERIENCE. 4. THE LEARNED CIT(A) HAS ERRED IN FACTS IN CONCLUDING THAT THE AVERAGE FAILURE RATE COMPUTED BY THE APPELLANT FOR SERVICES SOLD UNDER WARRANTY DURING THE FINANCIAL YEARS 2003-04, 2004-05 AND 2005-06 IS 23%, 105% AND 112% RESPECTIVELY OF THE UNITS SOLD UNDER WARRANTY DURING EACH OF THE SAID FINANCIAL YEARS, AS AGAINST 0.23%, 1.05% AND 1.12% RESPECTIVELY OF THE UNITS SOLD UNDER WARRANTY DURING EACH OF THE SAID FIN ANCIAL YEARS. ACCORDINGLY, THE LEARNED CIT(A) HAS ERRED ON FACTS IN CONCLUDING THAT THE AVERAGE FAILURE RATE CONSIDERED BY THE APPELLANT IS ON A VERY HIGH SIDE AND UNREASONABLE AND THEREBY UNSCIENTIFIC AND NOT BASED N PAST EXPERIENCE. 5. THE LEARNED CIT(A) HAS ERRED IN FACTS IN CONCLU DING THAT THE AVERAGE FAILURE RATE COMPUTED BY THE ALT FOR DESKTOPS SOLD UNDER WARRANTY DURING THE FINANCIAL YEARS2003-04, 2004-05 AND 2005-06 IS ON A VERY HIGH SIDE AND UNREASONABLE, BASED ON MISAPPLICATION OF FACTS AND WRONG UNDERSTANDING OF THE FAILURE RATES AS PROVIDED BY THE APPELLANT AND THEREBY UNSCIENTIFIC AND NOT BASED ON PAST EXPERIENCE. 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON ACTS BY NOT RELYING UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PRIVATE LTD. VS. CIT (314 ITR 62) WITHOUT APPRECIATING THE FACTS OF THE SAID CASE AND ITS ITA 22(BANG)/2011 PAGE 3 OF 7 RELEVANCE TO THE APPELLANTS CASE. 7. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS BY NOT PLACING RELIANCE ON THE DECISION OF THE BANGALORE INCOME TAX APPELLATE TRIBUNAL (ITAT) IN THE CASE OF IBM INDIA PRIVATE LTD. (290 ITR 163). 8. THE LEARNED CIT(A) OUGHT TO HAVE RELIED UPON TH E DECISION OF THE HONBLE BANGALORE ITAT IN THE APPELLANTS OWN CASE FOR ASSESSMENT YEAR 2004-05 WHEREIN THE SAME ISSUE RELATING TO THE PROVISION FOR WARRANTY HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT. 9. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS BY DISREGARDING THE DECISIONS RELIED UPON BY THE APPELLANT WITHOUT PROVIDING ADEQUATE REASONS FOR THE SAME. 10. THE LEARNED CIT(A), RELYING ON HIS DECISION IN THE CASE OF AMCO BATTERIES LTD. (ITA NO.265/AC- 11(1)/A-1/07-08) HAS ARBITRARILY HELD THAT IN ORDER TO CONCLUDE THAT THE WARRANTY PROVISION HAS BEEN COMPUTED ON A SCIENTIFIC BASIS, THE ACTUAL EXPENSES INCURRED AS A PERCENTAGE OF WARRANTY PROVISION MUST BE ABOVE 66%. ACCORDINGLY LEARNED CIT(A) HAS ERRED N LAW AND ON FACTS IN HOLDING THAT PROVISION FOR WARRANTY CREATED BY THE APPELLANT IS NOT ON A SCIENTIFIC BASIS, MERELY BECAUSE THE ACTUAL EXPENSES INCURRED BY THE APPELLANT, AS A PERCENTAGE OF WARRANTY PROVISION CREATED, IS LESS THAN 66%. 3. AT THE TIME OF HEARING LEARNED CHARTERED ACCOUN TANT FOR THE ASSESSEE PLACED ON RECORD COPIES OF THE FOL LOWING ORDERS OF THIS TRIBUNAL IN ASSESSEES OWN CASE: (I) ITA NO.774 & 877/BANG/08 DT,30-1-2009 FOR THE ASSESSMENT YEAR 2004-05, AND (II) ITA NO.784/BANG/2010 DT.25-2-2011 FOR ASSESSME NT YEAR 2005-06 ITA 22(BANG)/2011 PAGE 4 OF 7 BY PLACING THE ABOVE DECISIONS ON RECORD, THE CHART ERED ACCOUNTANT SUBMITTED THAT THE VERY SAME POINT AT IS SUE WAS THE SUBJECT MATTER OF APPEALS IN THOSE TWO APPEALS. 4. WE HAVE ALSO HEARD THE LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDERED THE FACTS AND MATERIA LS ON RECORD INCLUDING THE DECISIONS CITED BEFORE US. WH ILE DEALING WITH THE ISSUE IN THE ORDER DATED 30-1-2009 IN ITA NO. 774/BANG/2010 IT HAS BEEN OBSERVED AS UNDER: 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE ARE O F THE CONSIDERED VIEW THAT THE ASSESSEES CASE CLEARL Y FALLS IN LINE WITH THE LEGAL RATIO SET OUT BY THE V ARIOUS APPELLATE DECISIONS CITED AT BAR IN SO FAR AS THE PROVISION FOR WARRANTY STOOD CRYSTALLIZED AS SOON A S THE SALE WAS MADE WHICH A CUSTOMER WOULD LIKE TO BE FULFILLED WITHIN THE WARRANTY PERIOD AND IS AT THE COST OF AN ASSESSEES GOODWILL. THEREFORE, THE RESIDUAL AMOUNT PURPORTED TO HAVE BEEN HELD BY THE ASSESSING OFFICER AS AN EXCESS PROVISION CANNOT BE CONSIDERED AS A CONTINGENT PROVISION AND NOT AN ASCERTAINED LIABILITY. THE WARRANTY PERIOD CONTINU ES BEYOND AN YEAR WHICH FACT WAS RIGHTLY CONSIDERED BY THE LD.CIT(A) CONFINING TO THE VARIOUS DECISIONS SU CH AS IBM INDIA LTD. (SUPRA) REPORTED IN 290 ITR (AT) 183. SIMILAR VIEW HAS BEEN TAKEN BY OTHER CO-ORDINATE BENCHES OF THE TRIBUNAL THEREFORE REQUIRES NO FURTH ER DELIBERATION. IN THE LIGHT OF THE ABOVE, WE HOLD TH E VIEW THAT THE DECISION OF THE LD.CIT(A) REQUIRES NO FURTHER INTERFERENCE ON THE ISSUE. THE REVENUES APPEAL STANDS DISMISSED. AGAIN IN THE ORDER DATED 25-2-2011 IN ITA NO.784/BA NG/2010, IT HAS BEEN OBSERVED AS UNDER: 11.2 THE ASSESSEE CREATES PROVISION FOR WARRANTY BASED ON THE ESTIMATION OF EXPENDITURE LIKELY TO BE INCURRED ON THE PAST SALES MADE ON YEARLY BASIS AT THEN PREVAILING MARKET PRICES FOR SPARES AND LABOUR. FO R THE RELEVANT PREVIOUS YEAR, THE ASSESSEE ESTIMATED THE WARRANTY LIABILITY AT RS.12,76,77,530/- AND CREATED A PROVISION ONLY FOR RS.12,16,75,204/- IN THE BOOKS O F ACCOUNT BY CHARGING A PROVISION OF RS.8,24,29,136/- TO THE DEBIT IN THE P&L ACCOUNT AND CLAIMED IT AS ITA 22(BANG)/2011 PAGE 5 OF 7 DEDUCTION. THE ASSESSEE COMPANY HAD CREATED THE PROVISION BASED ON THE ESTIMATION OF WARRANTY LIABI LITY, WHICH IS BASED ON FAILURE RATES OF THE PAST YEAR DATA/EXPERIENCE AND INDUSTRY TRENDS AND NOT ON ADHO C BASIS. THE ASSESSEE HAS NOT CHANGED THE METHOD OF COMPUTING THE WARRANTY PROVISION AND IT HAS BEEN FOLLOWED CONSISTENTLY. 11.3 THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. 314 ITR 62 WOULD BE SQUARELY APPLICABLE TO THE FACTS OF THE CASE. T HE HONBLE SUPREME COURT HAS HELD THAT PROVISION MADE ON PAST EXPERIENCE IS A SCIENTIFIC METHOD AND IS THE M OST APPROPRIATE METHOD. THE RELEVANT EXTRACT OF THE DECISION IS PROVIDED BELOW:- 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) UNDER THE CIRCUMSTANCES, THE THIRD OPTION IS MOST APPROPRIATE BECAUSE IT FULFILLS ACCRUAL CONCEPT AS WELL AS THE MATCHING CONCEPT. FOR DETERMINING AN APPROPRIATE HISTORICAL TREND, IT IS IMPORTANT THAT THE COMPANY HAS A PROPER ACCOUNTING SYSTEM FOR CAPTURING RELATIONSHIP BETWEEN THE NATURE OF THE SALES, THE WARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT SUBSEQUENTLY.. IF WARRANTY PROVISIONS ARE BASED ON EXPERIENCE AND HISTORICAL TREND(S) AND IF THE WORKING IS ROBUST THEN THE QUESTION OF REVERSAL IN THE SUBSEQUENT TWO YEARS, IN THE ABOVE EXAMPLE, MAY NOT ARISE IN A SIGNIFICANT WAY. 11.4 IN THE ASSESSEES OWN CASE IN IDENTICAL FACT S FOR THE IMMEDIATELY PRECEDING YEAR, THE TRIBUNAL IN ITA NO.774 & 877/BANG/2008 VIDE ORDER DATED 30.1.2009 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. T HE RELEVANT FINDING OF THE TRIBUNAL AT PARA 5 OF ITS O RDER READS AS FOLLOWS:- ITA 22(BANG)/2011 PAGE 6 OF 7 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEES CASE CLEARLY FALLS IN LINE WITH THE LEGAL RATIO SET OUT BY THE VARIOUS APPELLATE DECISIONS CITED AT BAR IN SO FAR AS THE PROVISION FOR WARRANTY STOOD CRYSTALLIZED AS SOON AS THE SALE WAS MADE WHICH A CUSTOMER WOULD LIKE TO BE FULFILLED WITHIN THE WARRANTY PERIOD AND IS AT THE COST OF AN ASSESSEES GOODWILL. THEREFORE, THE RESIDUAL AMOUNT PURPORTED TO HAVE BEEN HELD BY THE AO AS AN EXCESS PROVISION CANNOT BE CONSIDERED AS A CONTINGENT PROVISION AND NOT AN ASCERTAINED LIABILITY. THE WARRANTY PERIOD CONTINUES BEYOND AN YEAR WHICH FACT WAS RIGHTLY CONSIDERED BY THE LD. CIT(A) CONFINING TO THE VARIOUS DECISIONS SUCH AS IBM INDIA LTD. (SUPRA) REPORTED IN 290 ITR (AT) 183 = (2007-TIOL-22-ITAT-BANG). SIMILAR VIEW HAS BEEN TAKEN BY OTHER COORDINATE BENCHES OF THE TRIBUNAL THEREFORE REQUIRES NO FURTHER DELIBERATION. IN THE LIGHT OF THE ABOVE, WE HOLD THE VIEW THAT THE DECISION OF THE LD. CIT(A) REQUIRES NO FURTHER INTERFERENCE ON THE ISSUE. THE REVENUES APPEAL STANDS DISMISSED. 11.5 IN VIEW OF THE ABOVE FACTS AND THE DECISION REFERRED ABOVE, WE HOLD THAT DISALLOWANCE OF PROVIS ION OF WARRANTY IS TO BE DELETED AND IT IS ORDERED ACCORDI NGLY. FOLLOWING THE ABOVE DECISIONS, WE HOLD THAT THE CIT (A) IS NOT JUSTIFIED IN UPHOLDING THE DISALLOWANCE OF PROVISIO N FOR WARRANTY AND ACCORDINGLY ALLOW THE GROUND OF APPEAL OF THE A SSESSEE ON THIS ISSUE. 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH MARCH, 2012. SD/- SD/- ( (( (SMT. P.MADHAVI DEVI SMT. P.MADHAVI DEVI SMT. P.MADHAVI DEVI SMT. P.MADHAVI DEVI) )) ) JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER (N.BARAT (N.BARAT (N.BARAT (N.BARATH HH HVAJA SANKAR) VAJA SANKAR) VAJA SANKAR) VAJA SANKAR) VICE VICE VICE VICE- -- -PRESIDENT PRESIDENT PRESIDENT PRESIDENT EKS ITA 22(BANG)/2011 PAGE 7 OF 7 COPY TO : COPY TO : COPY TO : COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) CONCERNED 4. CIT 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE