DY.CIT., C-8(3), MUMBAI V. SECURITIES P. LTD., PUNE

ITA 4435/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6604 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2006-2007
• Appeal Filed On: 02-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANISH KANOJIA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER & SHRI N.V. VASUDEVAN, JUDICIAL MEMBER. I.T.A. NO. 4050/MUM/2011. ASSESS MENT YEAR : 2006-07 SULZER INDIA LTD., DEPUTY COMMISSIONER OF GATE NO. 304, KONDHAPURI, VS. INCOME-TAX, RANGE-8(3), PUNE-NAGAR ROAD, SHIRUR, MUMBAI. PUNE 412 209. PANAAACS7876D. APPELLANT. RESPONDENT. I.T.A. NO. 4435/MUM/2011 ASSES SMENT YEAR : 2006-07. DEPUTY COMMISSIONER OF SULZER INDIA LTD., INCOME-TAX, RANGE-8(3), VS. MUMBAI. MUMBAI. APPELLANT. RESPONDENT. ASSESSEE BY : SHR I RONAK DOSHI. DEPARTMENT BY : SHRI MANISH KANOJIA. DATE OF HEARI NG : 09-04-2012. DATE OF PRONOUNC EMENT : 13-04-2012, O R D E R PER P.M. JAGTAP, A.M. : THESE TWO APPEALS, ONE FILED BY THE ASSESSEE BEING ITA NO. 4050/MUM/2011 AND THE OTHER FILED BY THE REVENUE BEING ITA NO. 44 35/MUM/2011 ARE CROSS APPEALS WHICH ARE DIRECTED AGAINST THE ORDER OF LEA RNED CIT(APPEALS)-18, MUMBAI DATED 17-03-2011. 2 ITA NO.4435/MUM/2011& ITA NO.4050/MUM/2011. 2. FIRST WE SHALL TAKE UP THE APPEAL OF THE REVENUE WHICH INVOLVES A SOLITARY ISSUE RELATING TO ASSESSEES CLAIM FOR DEDUCTION OF RS.49,92,935/- ON ACCOUNT OF PROVISION OF WARRANTY. 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING HITECH ENGINEERING EQUIPM ENT AND COMPONENTS THEREOF. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATI ON WAS FILED BY IT ON 30-11- 2006 DECLARING TOTAL INCOME OF RS.5,92,21,358/- WHI CH WAS SUBSEQUENTLY REVISED TO RS.3,49,87,358/- ON 21-03-2008. WHILE COMPUTING ITS TOTAL INCOME, THE ASSESSEE COMPANY HAD CLAIMED DEDUCTION OF RS.49,92,935/- ON ACCOUNT OF PROVISION FOR WARRANTY. SINCE THE SIMILAR DEDUCTION CLAIMED BY TH E ASSESSEE WAS DISALLOWED IN THE ASSESSMENTS MADE FOR THE EARLIER YEARS, THE AO DISALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE ON ACCOUNT OF PROVISION FOR WARRANTY IN THE ASSESSMENT COMPLETED FOR THE YEAR UNDER CONSIDERATION. ON APPE AL, THE LEARNED CIT(APPEALS) DELETED THE DISALLOWANCE MADE BY THE AO ON THIS ISS UE FOLLOWING THE DECISION OF THE TRIBUNAL RENDERED IN ASSESSEES OWN CASE FOR EA RLIER YEARS DELETING THE SIMILAR DISALLOWANCE. 3. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT ITS CLAIM F OR DEDUCTION ON ACCOUNT OF PROVISION FOR WARRANTY WAS JUSTIFIED BY THE ASSESSE E IN THE EARLIER YEARS AS WELL AS IN THE YEAR UNDER CONSIDERATION BY OFFERING THE FOL LOWING EXPLANATION : IN THE COURSE OF BUSINESS AND AS A MATTER OF NORM AL BUSINESS EXPEDIENCIES, THE COMPANY NEEDS TO GIVE WARRANTY RANGING FROM ONE YEAR TO EIGHTEEN MONTHS ON THE PRODUCTS SOLD BY IT. ALL MODIFICATION , REPLACEMENTS IN THE PRODUCTS FOR THEIR MALFUNCTIONING ARE NEEDED TO BE RECTIFIED FREE OF COST. IN ORDER TO MEET THIS COST, THE COMPANY BASED ON HISTO RIC DATA OF FREE SUPPLIES MADE, CLAIMS ADMITTED IN PAST, MAKES THE ESTIMATION FOR THE FUTURE LIABILITY 3 ITA NO.4435/MUM/2011& ITA NO.4050/MUM/2011. ON ACCOUNT OF WARRANTY SUPPLIES LIKELY TO BE MADE F OR THE SALES EFFECTED DURING THE YEAR. WHILE MAKING THE PROVISION FOR WARRANTY, THE PAST E XPERIENCE OF THE ACTUAL CLAIMS HAS BEEN TAKEN INTO ACCOUNT. THE SAID CLAIM EXPERIENCE IS CONSIDERED TO CALCULATE THE AVERAGE PERCENTAGE OF ACTUAL CLAIM S WITH SALES, DURING THE LAST THREE YEARS. THEREAFTER, THE SAID MOVING AVERA GE PERCENTAGE HAS BEEN APPLIED ON THE CURRENT YEARS SALES TO ARRIVE AT TH E PROVISION FOR WARRANTY. THE PROVISION SO MADE, IS REVIEWED DURING THE PERIO D OF CONTRACTUAL WARRANTY PERIOD WITH THE CUSTOMER. THE ACTUAL CLAIM S MADE DURING THE SAID PERIOD ARE ADJUSTED WITH THE AMOUNT SO PROVIDED. UP ON COMPLETION OF THE CONTRACTUAL WARRANTY PERIOD, THE REMAINING AMOUNT, IF ANY, IS REVERSED AND CREDITED TO PROFIT AND LOSS ACCOUNT UNDER THE HEAD PROVISION NO LONGER REQUIRED AND OFFERED FOR THE INCOME TAX. KEEPING IN VIEW THE ABOVE SUBMISSIONS AS WELL AS TH E DETAILS OF COMPUTATION OF THE PROVISION FOR WARRANTY FURNISHED BEFORE THE AO, IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT THE SAID PROVISION REPRESENTED ASCERT AINED LIABILITY WHICH WAS ALLOWABLE AS DEDUCTION. AT THE TIME OF HEARING BEFO RE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS FURNISHED THE SAID DETAILS TO SHO W THAT PROVISION FOR WARRANTY WAS MADE IN THE YEAR UNDER CONSIDERATION AT 1% OF THE S ALES VALUE BASED ON THE AVERAGE OF WARRANTY UTILIZATION FOR THE IMMEDIATELY PRECEDI NG THREE YEARS WORKED OUT AT 0.63%. HE HAS ALSO POINTED OUT THAT THE EXCESS PROV ISION MADE FOR WARRANTY IN THE EARLIER YEARS TO THE EXTENT OF RS.22,54,967/- WAS R EVERSED BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION. IT SHOWS THAT PROVISION F OR WARRANTY ONLY TO THE EXTENT OF RS.27,37,968/- WAS ACTUALLY DEBITED BY THE ASSESSEE ON NET BASIS FOR THE YEAR UNDER CONSIDERATION WHICH COMES TO 0.55% OF THE CORRESPON DING SALES WHICH IS LESS THAN THE ACTUAL AVERAGE OF WARRANTY UTILIZATION OF 0.63% FOR THE IMMEDIATELY PRECEDING THREE YEARS. IT, THEREFORE, FOLLOWS THAT THE PROVIS ION FOR WARRANTY WAS MADE BY THE ASSESSEE ON CERTAIN SCIENTIFIC BASIS WHICH WAS BEI NG CONSISTENTLY FOLLOWED OVER THE YEARS. IT IS OBSERVED THAT THIS ISSUE RELATING TO A SSESSEES CLAIM FOR DEDUCTION ON 4 ITA NO.4435/MUM/2011& ITA NO.4050/MUM/2011. ACCOUNT OF PROVISION FOR WARRANTY CAME FOR CONSIDER ATION BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 1998-99 AND VIDE ITS ORDER DATED 1 ST SEPT., 2006 PASSED IN ITA NO. 2790/MUM/2003, THE COORDINATE BENCH OF THIS TRIBUNA L HELD THAT THE AO WAS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF PROVISION MADE FOR WARRANTY WHICH WAS ESTIMATED ON SCIENTIFIC BASIS AND THE SAID BASIS WAS CONSISTENTLY FOLLOWED SINCE SEVERAL YEARS . IT WAS ALSO NOTED BY THE TRIBUNAL THAT THE EXCESS PROVISION MADE FOR WARRANT Y IN THE EARLIER YEARS WAS REVERSED BY THE TRIBUNAL AND THE SAME WAS OFFERED T O TAX AS INCOME. THE SAID DECISION RENDERED IN ASSESSMENT YEAR 1998-99 HAS BE EN CONSISTENTLY FOLLOWED BY THE TRIBUNAL IN THE SUBSEQUENT YEARS. SINCE THE ISS UE INVOLVED IN THE YEAR UNDER CONSIDERATION AS WELL AS ALL THE MATERIAL FACTS REL EVANT THERETO ARE SIMILAR TO THAT OF THE EARLIER YEARS, WE FOLLOW THE DECISION RENDERED BY THE TRIBUNAL IN THE EARLIER YEARS AND UPHOLD THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) ALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF P ROVISION MADE FOR WARRANTY. THE APPEAL OF THE REVENUE IS ACCORDINGLY DISMISSED. 4. NOW WE SHALL TAKE UP THE APPEAL OF THE ASSESSEE, GROUND NO. 1 AND 2 OF WHICH INVOLVE A COMMON ISSUE RELATING TO ASSESSEES CLAIM FOR DEDUCTION ON ACCOUNT OF PROVISION MADE FOR AFTER SALES COST. WH ILE JUSTIFYING ITS STAND THAT THE SAID PROVISION REPRESENTED AN ASCERTAINED LIABILITY ELIGIBLE FOR DEDUCTION, THE FOLLOWING SUBMISSION WAS MADE BY THE ASSESSEE BEFOR E THE AO: IN CASE OF MAKING PROVISION FOR AFTER SALES COST, THE COMPANYS TECHNICAL DEPARTMENT IDENTIFIES THE SALES PROJECT, WHICH IS H AVING THE SPECIALIZED MANUFACTURING SCOPE. THE CRITICAL COMPONENTS, SUB A SSEMBLIES, GET IDENTIFIED RIGHT FROM THE MANUFACTURING STAGE, ON WHOSE PERFOR MANCE; THE SUCCESSFUL COMMISSIONING OF THE PROJECT AT CUSTOMER SITE IS DE PENDED. THE SPECIALIZED EFFORTS ARE MADE TO REACH TO THE ACCEPTABLE QUALITY OF THOSE CRITICAL COMPONENTS. AFTER THE DUE CARE, THE SAID COMPONENTS GET DISPATCHED TO THE 5 ITA NO.4435/MUM/2011& ITA NO.4050/MUM/2011. SITE FOR INSTALLATION PURPOSE. SINCE THE SUPPLY IS MADE TO VARIOUS PETROCHEMICALS REFINERIES, THERE IS TIME LAG BETWEE N RECEIPT OF THE SAID COMPONENTS AND THE START OF THE INSTALLATION WORK. UPON RECEIPT OF THE SAID COMPONENTS AT SITE THE INSTALLATION ENGINEERS, INSP ECT THE SAME WITH ACTUAL SITE CONDITIONS AND INFORM THE TECHNICAL DEPARTMENT ABOUT HIS FINDINGS. THE SAID FEEDBACK FROM THE SITE, GETS REVIEWED BY THE P ROJECT / TECHNICAL DEPT. BASED OF THE FINDING, THE PROJECT / TECHNICAL DEPT. ADVICES TO MAKE PROVISION OF THE COST FOR REWORK, REMANUFACTURING OR REDESIGN OF THE IDENTIFIED COMPONENTS. DURING THE PERIOD OF ACTUAL INSTALLATIO N, THE SAID PERFORMANCE OF THE SAID COMPONENTS GET ANALYZED AND REVIEWED BY PE RIODICALLY BASED ON THE EXECUTION OF THE PROJECT THE PROJECT / TECHNICAL DE PT. THE ACTUAL SUPPLIES, IF REQUIRED ARE MADE BY WAY OF REWORK. REMANUFACTURING OR REDESIGN OF THE DEFECTIVE COMPONENTS DURING THE SAID PERIOD. THE SA ID COMPONENTS GET REINSTALLED AT SITE. THE CERTIFICATE OF INSTALLATIO N / PERFORMANCE IS OBTAINED FROM THE CUSTOMERS AT THE TIME OF COMMISSIONING OF THE SAID COMPONENTS. THE COST OF THE SAID DEFECTIVE COMPONENTS IS ADJUST ED WITH THE PROVISION MADE. UPON COMPLETION OF THE CONTRACTUAL WARRANTY P ERIOD, THE REMAINING AMOUNT OF THE PROVISION FOR THE SAID SPECIFIC SALES PROJECT, IF ANY, IS REVERSED AND CREDITED TO PROFIT AND LOSS ACCOUNT UNDER THE H EAD PROVISION NO LONGER REQUIRED AND OFFERED FOR THE INCOME TAX. THE ABOVE SUBMISSION MADE BY THE ASSESSEE WAS NOT F OUND ACCEPTABLE BY THE AO AND THE DEDUCTION CLAIMED BY THE ASSESSEE ON ACCOUN T OF PROVISION MADE FOR AFTER SALES COST WAS DISALLOWED BY HIM TREATING THE SAME AS LIABILITY OF CONTINGENT NATURE. FOR THIS CONCLUSION, HE RELIED ON THE ASSES SMENT MADE IN ASSESSEES OWN CASE FOR THE EARLIER YEARS WHERE A SIMILAR DISALLOW ANCE WAS MADE. BEFORE THE LEARNED CIT(APPEALS), IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT THE NATURE OF PROVISION MADE BY THE ASSESSEE FOR AFTER SALES COST IN RESPECT OF TURN KEY PROJECTS WAS SIMILAR TO THAT OF THE PROVISION MADE FOR WARRA NTY IN RESPECT OF SALE OF PRODUCTS. KEEPING IN VIEW THIS SUBMISSION MADE BY T HE ASSESSEE, THE LEARNED CIT(APPEALS) REMANDED THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO THE ASSESSEE TO FURNISH THE RELEVANT DETAILS TO ESTABLI SH THAT THE PROVISION MADE FOR AFTER 6 ITA NO.4435/MUM/2011& ITA NO.4050/MUM/2011. SALES COST WAS ACTUALLY IN THE NATURE OF WARRANTY. THE AO WAS DIRECTED BY THE LEARNED CIT(APPEALS) TO VERIFY THE SAID DETAILS AND DECIDE THIS ISSUE AFRESH ON MERITS. 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, WE ARE OF THE VIEW THAT IF THE PROVISION MA DE BY THE ASSESSEE FOR AFTER SALES COST WAS ACTUALLY IN THE NATURE OF WARRANTY AS CLAI MED BY THE ASSESSEE FOR THE FIRST TIME BEFORE THE LEARNED CIT(APPEALS), THE AO SHOULD GET AN OPPORTUNITY TO VERIFY THE RELEVANT DETAILS WHICH THE ASSESSEE MAY FURNISH TO SUPPORT AND SUBSTANTIATE ITS STAND. IN THAT VIEW OF THE MATTER, WE HOLD THAT THI S MATTER HAS TO BE RESTORED TO THE FILE OF THE AO FOR DECIDING THE SAME AFRESH IN THE INTEREST OF JUSTICE. WE, THEREFORE, AGREE WITH THE VIEW OF THE LEARNED CIT(APPEALS) ON THIS ISSUE AND DISMISS GROUND NO. 1 AND 2 OF THE ASSESSEES APPEAL. 6. THE REMAINING GROUNDS RAISED BY THE ASSESSEE IN THIS APPEAL I.E. GROUND NO. 3 AND 4 ARE NOT PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE. THE SAME ARE ACCORDINGLY DISMISSED AS NOT PRESSED. 7. IN THE RESULT, THE APPEAL OF THE REVENUE AS WELL AS THE APPEAL OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON THIS 13 TH DAY OF APRIL, 2012. SD/- SD/- (N.V.VASUDEVAN) (P.M. JAG TAP) JUDICIAL MEMBER ACCO UNTANT MEMBER MUMBAI, DATED: 13 TH APRIL, 2012. 7 ITA NO.4435/MUM/2011& ITA NO.4050/MUM/2011. COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, E-BENCH. (TRUE COPY) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI. WAKODE