M/s Apple India Private Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-1(1)(1), Bangalore

ITA 423/BANG/2018

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 5042 (ITAT-BANGALORE)
• Duration Of Justice: 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 13-02-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO
• Assessee Lawyers: VENKATARAMAN SENIOR
• Section: 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, B ENGALURU BEFORE S HRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER I TA NO S . 422 & 423 / BANG/2 0 1 8 (ASSESSMENT YEAR S : 2013 - 14 & 2014 - 15 ) M/ S. APPLE INDIA PVT. LTD. 19 TH F LOOR, CONCORDE TOWER C UB CITY, NO.24, VITTAL MALLYA ROAD, BENGALURU - 56001. PAN: AABCA 1906 H VS. APPELLANT DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 1(1)(1), BENGALURU. RESPONDENT APPELLANT BY : SHRI VENKATARAMAN, SENIOR A DVOCATE. RESPONDENT BY : SHRI C.H.SUNDAR RAO, CIT(DR). DATE OF HEARING : 05/06/2018 DATE OF PRONOUNCEMENT : 03 /0 8 /2018 O R D E R PER I NTURI RAMA RAO, AM : THESE ARE APPEALS FILED BY THE ASSESSEE DIRECTED AGAINST DIFFERENT ORDERS OF THE LEA RNED COMMISSIONER OF INCOME - TAX (APPEALS) - 1 [CIT(A)], BENGALURU, DATED 30/10/2017 FOR THE ASSESSMENT YEARS 2013 - 14 AND 2014 - 15. 2. SINCE IDENTICAL ISSUE IS INVOLVED IN BOTH THE APPEALS, WE PROCEED TO DISPOSE OF THE SAME VIDE THIS COMMON ORDER. 3. FOR THE SAKE OF CLARITY AND CONVENIENCE, FACTS RELEVANT TO ASSESSMENT YEAR 2013 - 14 IN IT(TP)A NO.422/BANG/2017 ARE STATED HEREIN. ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 2 OF 13 4 . THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF APPEAL: ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 3 OF 13 ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 4 OF 13 5 . BRIEFLY , THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY DULY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINESS OF MARKETING AND RELATED SERVICES FOR SOFTWARE PRODUCTS OF M/ S. APPLE CO. THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2013 - 14 WAS FILED ON 28/1 1/2013 DECLARING INCOME OF RS.162,73,33,230/ - . AGAINST THE SAID RETURN OF INCOME, THE ASSESSMENT WAS COMPLETED BY THE DY. COMMISSIONER OF INCOME - TAX, [AO], CIRCLE 1(1), BENGALURU, VIDE ORDER DATED 29/12/2016 AT TOTAL INCOME OF RS.245,29,33,230/ - . THE DIS PARITY BETWEEN THE RETURNED INCOME AND THE ASSESSED INCOME IS ON ACCOUNT OF DISALLOWANCE OF PROVISIONS FOR WARRANTY EXPENSES TO THE EXTENT OF RS.82,56,00,000/ - ALLEGING TO BE EXCESSIVE NOT BASED ON HISTORICAL DATA /RELIABLE . THE AO NOTICED THAT THE ASSESSE E - COMPANY CLAIMED DEDUCTION OF PROVISION FOR WARRANTY EXPENSES OF RS.147,40,08,630/ - . THIS PROVISION IS IN ADDITION TO OPENING PROVISION FOR WARRANTY EXPENSES OF RS.21,41,30,976/ - . THE AO AGREED IN PRINCIPLE ON THE ALLOWABILITY OF THE PROVISION FOR WARRAN TY EXPENDITURE. THE AO, IN ORDER TO EXAMINE WHETHER THE PROVISION CREATED FOR THE YEAR IS IN LINE WITH GUIDELINES LAID DOWN BY THE HON BLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA (P.) LTD. VS. CIT (314 ITR 62)(SC), CALLED UPON THE ASSESSEE - COMPANY TO FURNISH CERTAIN DETAILS VIDE HIS QUESTIONNAIRE DATED 21/10/2016. AO CALLED UPON THE ASSESSEE - COMPANY TO FURNISH THE FOLLOWING DETAILS VIDE THE ABOVE QUESTIONNAIRE: ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 5 OF 13 'BASED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE M/S.ROTORK CONTROLS I NDIA PVT. LTD. VS. CIT, THE FOLLOWING DETAILS ARE TO BE ASCERTAINED TO ALLOW THE CLAIM OF THE PROVISION FOR WARRANTY. PLEASE FURNISH THE FOLLOWING FACTS AND FIGURES: 1. PLEASE LIST OUT THE DEFECTS EXISTED IN THE ITEMS MANUFACTURED AND SOLD FOR THE FY 2012 - 13, FY Y 11 - 12 AND F. Y 2010 - 11, AND HISTORICAL TREND OF THE SAME DEFECTS. 2. PLEASE FURNISH THE NUMBER OF ITEMS MANUFACTURED WITH THE DEFECTS MENTIONED ABOVE FOR THE FY 12 - 13, FY. 11 - 12 AND FY 2010 - 11. 3. PLEASE FURNISH THE REASONABLE ESTIMATE MADE TOWAR DS AMOUNT OF OBLIGATION BASED ON THE ABOVE - MENTIONED DEFECTS AND NUMBER OF SUCH ITEM, FOR THE F Y 2012 - 13, F Y 11 - 12 AND F Y 2010 - 11. 4. PLEASE FURNISH THE ACTUAL OUTFLOW OF RESOURCES TO SETTLE THE ABOVE - MENTIONED OB LIGATION FOR TH E FY.2012 - 13, F.Y 11 - 12 A ND FY2010 - 11. 5. PLEASE EXPLAIN THE METHOD FOLLOWED TO DETERMINE THE REASONABLE ESTIMATE MENTIONED IN QUESTION NO.3.' 6. IN RESPONSE TO THIS QUESTIONNAIRE, THE ASSESSEE - COMPANY FILED A DETAILED EXPLANATION ON 08/12/2016. BASED ON THE DATA FURNISHED BY THE ASSESSEE - COMPANY, THE AO OBSERVED THAT THE CLOSING BALANCE OF PROVISION FOR WARRANTY IS INCREASING TREMENDOUSLY ON ACCOUNT OF NON - UTILIZATION AND THEREFORE, HE INFERRED THAT THE PROVISION FOR WARRANTY WAS NOT CREATED IN A ROBUST WAY AND FURTHER THE PROVISION OF WARRANTY IN TERMS OF PERCENTAGE OF SALE IS NOT CONSTANT AND VARIES FROM YEAR TO YEAR WHICH INCREASED FROM 2% TO 10%. BASED ON THIS ANALYSIS, THE AO INFERRED THAT PROVISION CREATED BASED ON AD - HOC BASIS AND NO SCIENTIFIC METHOD WAS ADOPTED NOR BASED ON THE HISTORICAL TREND S. THEREFORE, AO HELD THAT SUCH AD - HOC PROVISION ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 6 OF 13 SHOULD NOT BE ALLOWED AS A DEDUCTION. FURTHER AO NOTICED THAT THE ASSESSEE - COMPANY HAD NOT REVERSED THE EXCESS PROVISION CREATED IN EARLIER YEAR AFTER EXPIRY OF THE WARRANTY P ERIOD. AS A RESULT , THE PROVISION FOR WARRANTY GETS ACCUMULATED AND THE ASSESSEE - COMPANY IS DERIVING ADVANTAGE OF NOT OFFERING EXCESS PROVISION TO TAX. THE AO ANALYZED THE DATA FOR THE PROVISIONS FOR WARRANTY AND ACTUAL EXPENSES INCURRED ON WARRANTY AND KEEPING IN VIEW THE ORDER OF TRIBUNAL FOR THE ASSESSMENT YEAR 2003 - 14 HELD THAT PROVISION FOR WARRANTY EXPENDITURE SHOULD BE RESTRICTED TO 2.14% O F THE SALES AND ACCORDINGLY, THE AO HAD ALLOWED RS.64.84 CRORES AS AGAINST THE CLAIM OF RS.147.74 CRORES THERE BY DISALLOWING THE SUM OF RS.82.56 CRORES. 7 . BEING AGGRIEVED BY THE ABOVE ASSESSMENT ORDER, AN APPEAL WAS PREFERRED BEFORE THE LD.CIT(A) WHO, VIDE IMPUGNED ORDER, HAD CONFIRMED THE ACTION OF THE AO AFTER DUE ANALYSIS OF PROVISION CREATED DURING THE YEAR AND UTILIZATION IN THE EARLIER YEAR AS WELL AS IN THE SUBSEQUENT PERIOD S . 8. BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US IN THE PRESENT APPEAL. LEARNED SENIOR COUNSEL FOR ASSESSEE VEHEMENTLY SUBMITTED THAT PROVISION FOR WARRANTY WAS BASED ON G LOBAL POLICY OF THE GROUP COMPANIES FOR WARRANTY PROVISION. GLOBAL POLICY CONFORMS TO THE PRINCIPLES OF ACCRUAL AND PRUDENCE. HE FURTHER SUBMITTED THAT THE PROVISION FOR WARRANTY IS REQUIRED TO BE MADE EVEN IN TERMS OF PARA.14 OF ACCOUNTING STANDARD 29. HE FURTHER SUBMITTED THAT THE PROVISION FOR WARRANTY IS ONLY TAX NEUTRAL AS IT IS ONLY A TIMING ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 7 OF 13 DIFFERENCE. HE ALSO PLACED RELIANCE ON THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ERICSSION COMMUNICATIONS (P.) LTD. (185 TAXMAN.160) WHEREIN THE HON BLE HIGH COURT HELD THAT THE PROVISION FOR WARRANTY MADE FOLLOWING GLOBAL POLICY WAS HELD TO BE ALLOWABLE DEDUCTION. HE SUBMITTED THAT THERE IS NO SPECIFIC METHOD LAID DOWN TO ARRIVE AT THE RELIABLE ESTIMATE OF THE WARRANTY EXPENDITURE AN D THEREFORE, RESORT TO ANY STATISTICAL TOOL WHICH TAKES INTO CONSIDERATION PAST EXPERIENCE IN COMPUTING THE ESTIMATE AND THE GLOBAL POLICY OF THE COMPANY IS TO ADOPT LINEAR REGRESSION METHOD WHICH TAKES INTO ACCOUNT ACTUAL NUMBER OF PRODUCTS RECEIVED BACK BY THE COMPANY DURING THE PERIOD FROM THE BEGINNING OF THE PREVIOUS CALENDAR YEAR TILL THE MONTH PRECEDING THE MONTH IN WHICH THE PROVISION IS BEING MADE. THE ANNUALIZED RATE OF RETURN OR FAILURE RATE OF THE PRODUCT IS COMPUTED BY THE GLOBAL WARRANTY TEAM BASED ON PAST EXPERIENCE OF VARIOUS APPLE PRODUCTS TO DETERMINE THE FREQUENCY OF REPAIRS FOR EACH PART ON A GLOBAL BASIS. WHERE PROVISIONS ARE INTRODUCED IN A PARTICULAR REGION, THE GLOBAL WARRANTY TEAM USES THE EXPERIENCE IN OTHER REGIONS AND USES THE S AME TO COMPUTE THE FAILURE RATE. IT IS SUBMITTED THAT THE GLOBAL WARRANTY TEAM PROVIDES ADJUSTMENT ENTRIES FOR ADDITIONAL PROVISION REVERSAL AS AT THE END OF EACH QUARTER BASED ON ACTUAL IN ORDER TO ENSURE THAT THE PROVISION OUTSTANDING REPRESENTS BEST ES TIMATE OF THE EXPECTED OUTFLOW BASED ON WARRANTY CLAIM IN THE PREVIOUS QUARTER. IT IS FURTHER SUBMITTED THAT REPAIR COST IS ALSO ON SCIENTIFIC BASIS BASED ON PAST EXPERIENCE. BASED ON ANNUALIZED RATE OF RETURN AND THE COST OF REPAIRS, AMOUNT OF WARRANTY PROVISION TO BE MAINTAINED TOWARDS ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 8 OF 13 FUTURE WARRANTY CLAIM WILL BE DETERMINED. IN SUPPORT OF THE METHODOLOGY FOLLOWED BY THE APPELLANT IT WAS STATED THAT DETAILED WORKING WAS PROVIDED TO THE AO WHICH IS AS UNDER: THIS POLICY IS BEING CONSISTENTLY FOLLOWE D AND WHICH IS IN CONFORMITY WITH THE PARA - METERS LAID DOWN BY THE HON BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. (SUPRA) . IT IS SUBMITTED THAT THE ORDER OF THE AO AS WELL AS THE LD.CIT(A) IS BASED ON THE FINDING THAT THE APPELLANT COMPANY DID NOT REVER SE ANY EXCESS PROVISION BEFORE CLOSURE OF THE FINANCIAL YEAR SO AS TO REDUCE EXCESS PROVISION CREATED. HOWEVER, IT IS SUBMITTED THAT THIS FINDING IS CONTRARY TO THE FACT THAT THE GLOBAL TEAM ADVISES THE AMOUNT OF PROVISION REQUIRED T O BE MADE TAKING INTO CONSIDERATION THE ACTUAL NUMBER OF ITEMS RETURNED AND THE REPAIR COST OF SUCH ITEMS. THUS , IT WAS SUBMITTED THAT THE POLICY ADOPTED BY THE ASSESSEE - COMPANY IS IN CONSONANCE WITH THE PARA - METERS LAID DOWN BY THE HON BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. (SUPRA) AND THE SAME IS ALLOWABLE AS DEDUCTION. 9 . ON THE OTHER HAND, THE LD.CIT(DR) PLACED HEAVY RELIANCE ON THE ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE POLICY ADOPTED BY THE ASSESSEE - COMPANY IS NOT ROBUST AD - HOC PROVISION AS ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 9 OF 13 THERE WAS NO SYSTEM OF EVALUATION OF OUTSTANDING PROVISIONS AND THE SYSTEM OF REVERSAL OF THE EXCESS PROVISION. 10 . WE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ONLY ISSUE INVOLVED IN THE PRESENT APPEAL IS WHETHER THE METHODOLOGY O F THE ASSESSEE - COMPANY FOR COMPUTATION OF PROVISION FOR WARRANTY IS AD HOC AND NOT CONSONANCE WITH PARAMETERS LAID DOWN BY THE HON BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. (SUPRA) OR NOT . IT MUST B E NOTED THAT THE AO AS WELL AS THE LD.CIT(A) HAD NOT DISPUTED IN PRINCIPLE THE ALLOWABILITY OF THE PROVISION FOR WARRANTY EXPENDITURE . BUT THE ONLY DISPUTE IS WITH REGARD TO METHODOLOGY ADOPTED BY THE APPELLANT FOR COMPUTING PROVISION FOR WARRANTY E XPENDI TURE, WHETHER IT IS BASED ON SCIENTIFIC METHOD OR BASED ON HISTORICAL DATA OF THE PAST YEARS OR NOT . THE AO AS WELL AS THE LD.CIT(A) INFERRED THAT EXCESS PROVISION FOR WARRANTY OVER AND ABOVE THE PERCENTAGE OF SALES ADOPTED IN EARLIER YEAR CANNOT BE ALLOW ED AS A DEDUCTION AND ACCORDINGLY RESTRICTED THE CLAIM TO THE EXTENT OF RS.2.14% OF SALES. BEFORE US, LEARNED SENIOR COUNSEL FOR ASSESSEE HAD DRAWN OUR ATTENTION TO THE TABLE EXTRACTED AT PARA .5 ABOVE TO SHOW THAT PROVISION FOR WARRANTY IS BASED ON GLOBAL POLICY OF THE COMPANY, THE PROVISION WAS NOT MADE ON AD - HOC BASIS BUT ON SCIENTIFIC METHOD OF LINEAR REGRESSION METHOD. THE HON BLE APEX COURT AS WELL AS THE ACCOUNTING STANDARD 29 LAID DOWN THE PARA - METERS ON WHICH PROVISION FOR WARRANTY EXPENSES CAN BE ALLOWED AS A DEDUCTION: ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 10 OF 13 A) AN ENTERPRISE HAS A PRESENT OBL I G ATION AS A RESULT OF A PAST EVENT; B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND C) A RELIABLE ESTIMATE CAN BE MADE OF THE ;AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. 11. IN THE PRESENT CASE, THERE IS NO DISPUTE AS TO THE SATISFACTION OF CONDITION (A) AND (B) ABOVE. THE DISPUTE IS ONLY WITH REGARD TO WHETHER PROVISION MADE FOR WARRANTY EXPENDITURE IS RELIABLE ESTIMATE OF OBLIGATION TO BE SETTLED. THE HON BLE SUPREME COURT, IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. (SUPRA) LAID DOWN THAT IF THE WARRANTY IS BASED ON PAST EXPERIENCE I.E. HISTORICAL TREND, THE ESTIMATE CAN BE SAID TO BE RELIABLE. IT IS FURTHER HELD AS FOLLOWS: 13. . . . . . . . . . . . . . . . .A DETAILED ASSESSMENT OF THE WARRANTY PROVISIONING POLICY IS REQUIRED PARTICULARLY IF THE EXPERIENCE SUGGESTS THAT WARRANTY PROVISIONS ARE GENERALLY REVERSED IF THEY REMAINED UNUTILIZED AT TH E END OF THE PERIOD PRESCRIBED IN THE WARRANTY. THEREFORE, THE COMPANY SHOULD SCRUTINIZE THE HISTORICAL TREND OF WARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT. ON THIS BASIS A SENSIBLE ESTIMATE SHOULD BE MADE. THE WARRANTY PROVISION FOR THE PRODUCTS SHOULD BE BASED ON THE ESTIMATE AT YEAR END OF FUTURE WARRANTY EXPENSES. SUCH ESTIMATES NEED REASSESSMENT EVERY YEAR. AS ONE REACHES CLOSE TO THE END OF THE WARRANTY PERIOD, THE PROBABILITY THAT THE WARRANTY EXPENSES WILL BE INCURRED IS CO NSIDERABLY REDUCED AND THAT SHOULD BE REFLECTED IN THE ESTIMATION AMOUNT. WHETHER THIS SHOULD BE DONE THROUGH A PRO RATA REVERSAL OR OTHERWISE WOULD REQUIRE ASSESSMENT OF HISTORICAL TREND. 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. IN OUR VIEW, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, PROVISION FOR WARRANTY IS RIGHTLY MADE BY THE AP PELLANT - ENTERPRISE ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 11 OF 13 BECAUSE IT HAS INCURRED A PRESENT OBLIGATION AS A R ESULT OF PAST EVENTS. . . 1 2 . IN THE PRESENT CASE, ON PERUSAL OF CHART SHOWING PROVISION FOR PRECEDING AS WELL AS SUCCEEDING ASSESSMENT YEARS OF THE YEAR UNDER CONSIDERATION, Y EAR - END PROVISION IS GETTING ACCUMULATED DISPROPORTIONATE TO INCREASE IN TURNOVER WHICH GOES TO SUGGEST THAT THE SYSTEM OF ACCOUNTING FOR PROVI SION FOR WARRANTY IS NOT ROBUST/RELIABLE. THERE IS A HUGE DIFFERENCE IN THE AMOUNT OF PROVISION MADE AND ACTUAL UTILIZATION. FURTHER, THERE IS NOTHING TO SHOW THAT THERE IS ANY SYSTEM OF RE - ASSESSMENT OR EVALUATION OF PROVISION FOR WARRANTY AT THE YEAREND OR ANY REVERSAL OF PRO RATA BASED ON ACTUAL EXPENDITURE INCURRED IN RESPECT OF PERIOD FOR WHICH WARRANTY HAD E XPIRED. FURTHER IT IS NOT DEMONSTRATED BEFORE US THAT THE GLOBAL POLICY OF THE COMPANY TO PROVIDE FOR WARRANTY EXPENDITURE MEETS THE CONDITIONS LAID DOWN BY THE HON BLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA (P.) LTD. (SUPRA) . NOR WAS THE WORKING OF THE PROVISION FURNISHED DEMONSTRATING THAT THE AMOUNT OF PROVISION WORKED OUT WAS IN ACCORDANCE WITH STATED POLICY OF THE COMPANY FOR PROVISION FOR WARRANTY EXPENDITURE. 13. THE HON BLE DELHI HIGH COURT IN THE CASE OF ERICSSION COMMUNICATIONS (P.) LTD. (SUPRA) , RELIED UPON BY THE APPELLANT , NOWHERE L AID DOWN THE PROPOSITION OF LAW THAT WHEN THE METHODOLOGY ADOPTED BY THE ASSESSEE - COMPANY FOR THE PROVISION OF WARRANTY EXPENDITURE DOES NOT MEET THE PARAMETERS LAID DOWN BY THE HON BLE APEX COURT IN TH E CASE OF ROTORK CONTROLS INDIA (P.) LTD. (SUPRA) AND ACCOUNTING S TANDARD 29, STILL IT COULD BE ALLOWED AS ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 12 OF 13 A DEDUCTION . THE RATIO LAID DOWN IN THE SAID CASE IS NOT APPLICABLE TO THE PRESENT CASE ON ACCOUNT OF DISTINGUISHING FACTS. I N THE SAID CASE , THERE W AS NO ACCUMULATION OF PROVISION FOR WARRANTY EXPENDITURE DISPROPORTIONATE TO THE INCREASE IN TURNOVER . THE HON BLE DELHI HIGH COURT MADE A CLEAR OBSERVATION THAT THE INCREASE IN THE PROVISION IS ONLY ON ACCOUNT OF INCREASE IN TURNOVER AND ALSO UNUTILIZED PORTION OF THE PROVISION WAS OFFERED TO TAX IN SUBSEQUENT YEARS. IN THESE GIVEN FACTS, THE HON BLE HIGH COURT RENDERED A FINDING THAT THERE WAS NO MALA - FIDES ON THE PART OF THE ASSESSEE - COMPANY TO DEFER ITS INCOME AND ACCORDINGLY, HELD THAT THE METHODOLOG Y ADOPTED WAS ON A SCIENTIFIC BASIS AND ALLOWED THE DEDUCTION AND HELD THAT WHEN A COMPANY WAS FOLLOWING A GLOBAL POLICY , THE SAME CANNOT BE TERMED AS AD - HOC PROVISION . WHEREAS IN THE PRESENT CASE, AS OBSERVED BY US SUPRA, THERE WAS NO SYSTEM OF REVERSA L OF PROVISION CREATED EARLIER AND THE PERCENTAGE OF SALES ADOPTED FOR COMPUTATION OF PROVISION FOR WARRANTY EXPENDITURE GOES ON INCREASING FROM YEAR TO YEAR, THEREBY RESULTING IN ACCUMULATION OF PROVISION FOR WARRANTY EXPENDITURE. THUS, THE RATIO OF THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF ERICSSION COMMUNICATIONS (P.) LTD. (SUPRA) CANNOT BE APPLIED TO THE CASE ON HAND. 14. IN THE LIGHT OF ABOVE FACTUAL SITUATION, WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE DERIVED ADVANTAGE BY DE FERRING ITS INCOME TO THE EXTENT OF EXCESS WARRANTY PROVISION TO SUBSEQUENT YEARS. THEREFORE, SUCH EXCESS PROVISION CANNOT BE ALLOWED AS A ITA NO S . 422 & 4 23 /BANG/20 18 PAGE 13 OF 13 DEDUCTION. THEREFORE, IN OUR CONSIDERED OPINION, THE PROVISION MADE FOR WARRANTY CANNOT BE SAID TO BE RELIABLE. TH E AO, AS CONFIRMED BY THE LD.CIT(A) HAD RIGHTLY RESTRICTED THE AMOUNT OF ALLOWABLE PROVISION FOR WARRANTY AT THE RATE OF 2.14% OF SALES. THEREFORE, WE DO NOT FIND ANY FA LLACY IN THE REASONING OF THE ORDER OF THE LD.CIT(A). ACCORDINGLY, THE GROUNDS OF APP EAL OF THE ASSESSEE ARE DISMISSED. 15 . THE FACTS AND CIRCUMSTANCES AND GROUNDS OF APPEAL FOR ASSESSMENT YEAR 2014 - 15 ARE SIMILAR TO ASSESSMENT YEAR 2013 - 14. FOR PARITY OF REASONS GIVEN IN THE APPEAL FOR ASSESSMENT YEAR 2013 - 14, THE GROUNDS OF APPEAL FO R ASSESSMENT YEAR 2014 - 15 ARE ALSO DISMISSED. 16 . IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE FOR ASSESSMENT YEARS 2013 - 14 AND 2014 - 15 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 03 RD AUGUST , 2018 S D/ - SD/ - ( SUNIL KUMAR YADAV ) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : BENGALURU. D A T E D : 03 / 0 8 /201 8 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME - TAX APPELLATE TRIBUNAL BANGALORE