Hirotec India Private Limited, Coimbatore V. DCIT, Coimbatore

ITA 3489/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5000 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 23-02-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 29-12-2016
• Court: TRIBUNAL
• Department Lawyers: DURAI

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: CHENNAI . . . , '.. $ , ) BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO.3489/MDS/2016 * * /ASSESSMENT YEAR: 2012-13 M/S.HIROTEC INDIA PRIVATE LTD., 7/147, POWER HOUSE ROAD, KEERANATHAM, COIMBATORE-641 035. VS. THE DY. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-2, COIMBATORE. [PAN: AACCK 5948 E ] ( - /APPELLANT) ( ./- /RESPONDENT) - 0 / APPELLANT BY : MR.SP.CHIDAMBARAM, ADV. ./- 0 /RESPONDENT BY : MR.DURAIPANDIAN, JCIT 0 /DATE OF HEARING : 23.02.2017 0 /DATE OF PRONOUNCEMENT : 12.04.2017 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER DATED 31.08.2016 OF COMMISSIONER OF INCOME TAX (APPEALS)- 1, COIMBATORE, IN ITA NO.10/15-16 FOR THE AY 2012-13 AND RAISED THE F OLLOWING GROUNDS: ITA NO.3489/MDS/2016 :- 2 -: 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) [CIT(A)] IS CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE. 2. DISALLOWANCE OF PROVISION FOR WARRANTY 2.1 THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MAD E BY THE ASSESSING OFFICER FOR PROVISION FOR WARRANTIES TO THE EXTENT OF RS.50,00, 000/- ON THE GROUND THAT THE SAME IS EXCESSIVE AND NOT BACKED BY SCIENTIFIC DATA. 2.2 THE CIT(A) ERRED IN NOT CONSIDERING THE APPELLANTS SUBMISSION ON THE RATIONALE BEHIND CREATION OF PROVISION FOR WARRANTY THAT WAS NECESSA RY FOR THE TYPE OF PRODUCTS MANUFACTURED AND SOLD BY THE APPELLANT. 2.3 THE CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT WARRANTY PROVISION WAS CREATED BASED ON THE COMPLEXITY OF THE PROJECT ON A SCIENTIFIC BA SIS AS DETERMINED BY THE ENGINEERS WHO WORKED ON THE PROJECT BASED ON PAST EXPERIENCE. 2.4 THE CIT(A) ERRED IN CONCLUDING THAT THERE WAS NO MA TERIAL WARRANTY CLAIMS MADE IN THE PRIOR YEARS WITHOUT APPRECIATING THE FACT THAT THER E HAS BEEN SIGNIFICANT SALES FROM MANUFACTURING ONLY FROM AY 2011-12. 2.5 WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE CIT(A) ERRED IN CONSIDERING AN ARBITRARY AMOUNT OF RS.9,46,409/- AS ALLOWABLE WARRANTY CLAIM AS AGAINST THE CLAIM MADE BY THE COMPANY OF RS.59,46,409/- SUCH AN ARBITRARY ESTIMAT E OF ALLOWANCE IS CONTRARY TO FACTS OF THE CASE. 3. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, SU BSTITUTE, RESCIND, MODIFY AND/OR WITHDRAW IN ANY MANNER WHATSOEVER ALL OR ANY OF THE FOREGOING GROUNDS OF APPEAL AT OR BEFORE THE HEARING OF THE APPEAL. 2.0 ALL THE GROUNDS OF THE APPEAL ARE RELATED TO THE D ISALLOWANCE OF PROVISIONS FOR WARRANTY. DURING THE ASSESSMENT PRO CEEDINGS, THE ASSESSING OFFICER (IN SHORT AO) FOUND THAT THE AS SESSEE HAS DEBITED A SUM OF RS.59,46,409/- TOWARDS PROVISION FOR WARRANT Y. THE AO HAS ASKED FOR FURNISHING A REPORT ON ACTUARIAL VALUATION FOR ASCERTAINING THE WARRANTY LIABILITY. THE ASSESSEE FAILED TO FURNISH THE EVID ENCE REGARDING THE ASCERTAINMENT OF LIABILITY ON ACTUARIAL BASIS. THER EFORE, THE AO DISTINGUISHED THE FACTS OF THE ASSESSEES CASE WITH THAT OF THE HONBLE SUPREME COURT DECISION IN THE CASE OF ROTORK CONTRO LS INDIA P. LTD. VS. CIT, CHENNAI REPORTED IN 314 ITR 62(SC) AND DISALLO WED THE AMOUNT OF RS.59,46,409/-. ITA NO.3489/MDS/2016 :- 3 -: 3.0 THE ASSESSEE WENT ON APPEAL BEFORE THE LEARNED COM MISSIONER OF INCOME TAX(APPEALS) (IN SHORT LD.CIT(A)) AND THE LD.CIT(A) PARTLY ALLOWED A RELIEF OF RS.9,46,409/- AS AGAINST THE P ROVISIONS OF RS.59.46 AND CONFIRMED THE BALANCE AMOUNT OF RS.50.00 LAKHS. 4.0 AGGRIEVED BY THE ORDER OF THE LD.CIT(A), THE ASSES SEE IS ON APPEAL BEFORE THIS TRIBUNAL. APPEARING FOR THE ASSESSEE, THE LEARNED AUTHORIZED REPRESENTATIVE (IN SHORT LD.AR) ARGUED THAT THE ASSESSEE IS ENGA GED IN THE MANUFACTURE OF SOFTWARE DESIGNS AND DEVELOPMENT SERVICE AND MAN UFACTURING OF INDUSTRIAL ROBOTS. IN THIS LINE OF BUSINESS, ORIGIN AL EQUIPMENT MANUFACTURERS (OEMS) LIKE FORD INDIA, GENERAL MOTOR HAVE STRINGENT QUALITY REQUIREMENTS.THE ASSESSEE IS LIABLE FOR WAR RANTY OF SALE OF GOODS AND SERVICES. IT INVOLVES LENGTHY PROCESS MANUFACT URING AND CATERING TO THE QUALITY NORMS AND SMALL FAILURE CAN LEAD TO HUG E LOSS OF REVENUE. WARRANTY EXTENDED BY THE ASSESSEE BASED ON THE PROJ ECTS AWARDED BY OEMS VENDOR ITEMS ALSO COVERED UNDER WARRANTY. THEY ARE LEGALLY OBLIGED TO PROVIDE ITS REPRESENTATIVES TO ASSESS ANY DAMAGE IDENTIFIED TO BE CAUSED BY EMPLOYEES/MATERIALS INSTALLED BY THE ASSE SSEE. CONTRACTUAL OBLIGATION BY THE ASSESSEE TO REPAIR AND REPLACE TH E DEFECTIVE MATERIAL. WARRANTY PROVISIONS WAS MADE TO MEET WHICH ARISE AT CUSTOMER SITE ALSO. PROVISION IS MADE BASED ON PAST EXPERIENCE DEPENDIN G ON THE PROJECTS HANDLED. THE LD.AR FURTHER SUBMITTED THAT THE LD.C IT(A) WHILE CONFIRMING THE ADDITION OF RS.50.00 LAKHS HAS NOT MADE ANY SCI ENTIFIC ANALYSIS. IN ITA NO.3489/MDS/2016 :- 4 -: VIEW OF THE COMPLEXITY OF THE WORK INVOLVED BY THE ASSESSEE COMPANY, THE ASSESSEE COMPANY HAS RIGHTLY MADE THE WARRANTY PROV ISIONS OF RS.59,46,409/-WHICH SHOULD BE ALLOWED AS DEDUCTION. THE LD.AR ALSO ARGUED THAT THE CASE MAY BE REMITTED BACK TO THE FI LE OF THE AO FOR VERIFICATION OF THE ACTUARIAL VALUATION. ON THE OT HER HAND, THE LD.DR ARGUED THAT THE ASSESSEE HAS NOT SUBMITTED ACTUARIA L VALUATION OF THE ALLOWABILITY AND THE EXPENDITURE IS PURELY PROVISIO NAL AND HISTORICAL EXPERIENCE ALSO SHOWS THAT LIABILITY IS AROUND RS.2 .5 LAKHS TO RS.9 LAKHS FOR THE LAST THREE YEARS WHICH IS EVIDENT FROM THE LD.C IT(A) ORDER. THEREFORE, THE LD.DR VEHEMENTLY OBJECTED FOR REMITTING THE MAT TER BACK TO THE FILE OF THE AO. 5.0 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED BEFORE US. THE LD.CIT(A) HAS ANALYZED THE EXPENDITURE INCURRE D AND PROVISIONS MADE BY THE ASSESSEE FOR THE AYS 2013-14 & 2015-16 AS UNDER: 8. DURING THE COURSE OF APPEAL PROCEEDINGS, THE ASS ESSEE WAS DIRECTED TO FURNISH THE PROVISIONS MADE IN THE SUBSEQUENT YEARS AND THE WAR RANTY CLAIM DURING THE YEAR. THIS IS ILLUSTRATED BY THE FOLLOWING CHART: WARRANT MOVEMENT FY 2013-14 TO 2015-16: PARTICULARS AMOUNT (RS.) OPENING BALANCE AS ON 1 ST APRIL 2013 1,59,49,246.00 ADD: PROVISION MADE DURING THE YEAR 75,03,704.00 LESS: WARRANTY CLAIM DURING THE YEAR 34,756.00 PROVISIONS REVERSED DURING THE YEAR 20,00,000.00 20,34,756.00 CLOSING BALANCE AS ON 31 ST MARCH 2014. 2,14,18,195.00 ITA NO.3489/MDS/2016 :- 5 -: PARTICULARS AMOUNT (RS.) OPENING BALANCE AS ON 1 ST APRIL 2014 2,14,18,195.00 ADD: PROVISION MADE DURING THE YEAR 62,09,740.00 LESS: WARRANTY CLAIM DURING THE YEAR 9,24,098.00 PROVISIONS REVERSED DURING THE YEAR - 9,24,098.00 CLOSING BALANCE AS ON 31 ST MARCH 2014. 2,67,03,837.00 PARTICULARS AMOUNT (RS.) OPENING BALANCE AS ON 1 ST APRIL 2015 2,67,03,837.00 ADD: PROVISION MADE DURING THE YEAR 55,43,949.00 LESS: WARRANTY CLAIM DURING THE YEAR 2,47,786.00 PROVISIONS REVERSED DURING THE YEAR - 2,47,786.00 CLOSING BALANCE AS ON 31 ST MARCH 2014. 3,20,00,000.00 10. DURING THE CURRENT YEAR, THE ASSESSEE HAS MADE HUGE PROVISION OF RS.59,46,409/- TOWARDS WARRANTY. SINCE THE EXPENDITURE SHOWS THAT WARRANTY CLAIM MADE BY THE ASSESSEE FOR EACH YEAR IS EXCESSIVE WHICH IS NOT BACKED BY A NY ACTUAL VALUATION OR SCIENTIFIC DATA AS STATED BY THE HONBLE SUPREME COURT IN ROTORK CONTR OLS PRIVATE LIMITED VS. CIT (314 ITR 62J(SC). HOWEVER, CONSIDERING THAT THE ASSESSEE HAS PROVIDED WARRANTY FOR VARIOUS PARTS SUPPLIED TO THE CUSTOMERS FOR ONE YEAR, TWO YEARS A ND THREE YEARS, SOME PROVISIONS FOR WARRANTY CLAIMS NEED TO BE CREATED. 6.0 FROM THE ABOVE DATA, IT IS EVIDENT THAT THE ASSESS EE HAS CREDITED A SUM OF RS.75,03,704/- FOR THE FY 2013-14 AGAINST TH E ACTUAL WARRANTY CLAIM OF RS.34,756/-. FOR THE FY 2014-15, THE PROV ISION MADE WAS RS.62,09,740/- AND THE WARRANTY CLAIM WAS RS.9,24,0 98/- FOR THE FY 2015-16, THE PROVISIONS MADE WAS RS.55,43,949/- AND THE WARRANTY CLAIM WAS ONLY RS.2,47,786/-. THE ACCUMULATED BALANCES OF WARRANTY CLAIM FOR THE YEAR ENDING 31.03.2014 WAS RS.3,20,00,000/-. T HE ASSESSEE COMPANY ALSO NOT REVERSING THE UNUTILIZED PORTION O F THE WARRANTY PROVISIONS MADE IN THE EARLIER YEARS. THE ASSESSEE IS REVERSING PALTRY AMOUNTS AGAINST THE HUGE PROVISIONS MADE. FOR THE F Y 2013-14, THE ITA NO.3489/MDS/2016 :- 6 -: ASSESSEE REVERSED THE AMOUNT OF RS.20.00 LAKHS AGAI NST THE PROVISIONS OF RS.75.03 LAKHS AND FOR THE FY 2014-15 RS.9,24,098/ - AND FOR THE FY 2015-16, IT WAS RS.2,47,786/- WHICH CLEARLY INDICAT ES THAT HUGE PROVISIONS ARE MADE FOR NOMINAL AMOUNT OF WARRANTY CLAIM DURIN G THE YEAR, THEREBY, SUBSTANTIALLY REDUCING THE TAXABLE INCOME. DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE HAS NOT SUBMITTED THE BASIS OF MAKING PROVISIONS OF RS.59,46,409/-. FOR A QUERY FROM THE BENCH, FOR ACTUARIAL VALUATION OF LIABILITY, THE LD.AR HAS REPLIED NEGAT IVELY. THE ASSESSEE COULD NOT ESTABLISH THAT THE PROVISIONS ARE MADE ON THE B ASIS OF EXPECTED LIABILITY. HISTORICAL EXPERIENCE ALSO REVEALS THAT THE ASSESSEE IS MAKING HUGE SUMS OF PROVISION WITHOUT ANY BASIS. THE SUBM ISSIONS MADE BY THE LD.AR ARE GENERAL IN NATURE WITHOUT ANY SUPPORTING DOCUMENTS. THE ASSESSEE IS NOT REVERSING THE UNUTILIZED PORTION OF THE WARRANTY. NO SYSTEMATIC DATA HAS BEEN PROVIDED BY THE ASSESSEE W ITH REGARD TO PROVISIONS MADE FOR WARRANTY. THEREFORE, THE DECIS ION OF THE HONBLE SUPREME COURT RELIED UPON BY THE ASSESSEE IS NOT AP PLICABLE IN THE ASSESSEES OWN CASE AND WE DO NOT FIND ANY INFIRMIT Y IN THE ORDER OF THE LD.CIT(A) AND THE SAME IS CONFIRMED. ITA NO.3489/MDS/2016 :- 7 -: 7.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMI SSED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH APRIL, 2017, AT CHENNAI. SD/ - SD/ - ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ' . . $ ) (D.S.SUNDER SINGH) /ACCOUNTANT MEMBER /CHENNAI, 5 /DATED: 12 TH APRIL, 2017. TLN 0 .$6 76 /COPY TO: 1. - /APPELLANT 4. 8 /CIT 2. ./- /RESPONDENT 5. 6 . /DR 3. 8 ( ) /CIT(A) 6. * /GF