ACIT, New Delhi V. M/s Fiamm Minda Automotive Ltd, Delhi

ITA 4869/DEL/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81613 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 13-08-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 13-08-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASHIMA NEB
• Assessee Lawyers: R K KAPOOR CHARTERED ACCO
• Keywords: Opportunity of being heard
• Section: 37

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 DELHI DELHI DELHI DELHI BENCH BENCH BENCH BENCH B BB B : NEW DELHI : NEW DELHI : NEW DELHI : NEW DELHI BEFORE SHRI G.D. AGRAWAL, VICE BEFORE SHRI G.D. AGRAWAL, VICE BEFORE SHRI G.D. AGRAWAL, VICE BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND PRESIDENT AND PRESIDENT AND PRESIDENT AND SHRI SHRI SHRI SHRI CHANDRA MOHAN GARG CHANDRA MOHAN GARG CHANDRA MOHAN GARG CHANDRA MOHAN GARG, JUDICIAL , JUDICIAL , JUDICIAL , JUDICIAL MEMBER MEMBER MEMBER MEMBER ITA NO ITA NO ITA NO ITA NO. .. .4869/DEL/2013 4869/DEL/2013 4869/DEL/2013 4869/DEL/2013 ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR : : : : 2007 2007 2007 2007- -- -08 0808 08 ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -6(1), 6(1), 6(1), 6(1), NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. VS. VS. VS. VS. M/S FIAMM MINDA AUTOMOTIVE LTD., M/S FIAMM MINDA AUTOMOTIVE LTD., M/S FIAMM MINDA AUTOMOTIVE LTD., M/S FIAMM MINDA AUTOMOTIVE LTD., (NOW KNOWN AS MINDA ACOUSTIC (NOW KNOWN AS MINDA ACOUSTIC (NOW KNOWN AS MINDA ACOUSTIC (NOW KNOWN AS MINDA ACOUSTIC LTD.), LTD.), LTD.), LTD.), B BB B- -- -64/1, WAZIRPUR INDUSTRIAL AREA, 64/1, WAZIRPUR INDUSTRIAL AREA, 64/1, WAZIRPUR INDUSTRIAL AREA, 64/1, WAZIRPUR INDUSTRIAL AREA, DELHI DELHI DELHI DELHI 110 052. 110 052. 110 052. 110 052. PAN : AAACF8168K. PAN : AAACF8168K. PAN : AAACF8168K. PAN : AAACF8168K. (APPELLANT) (RESPONDENT) APPELLANT BY : MS. ASHIMA NEB, SR.DR. RESPONDENT BY : SHRI PRADEEP DINODIA AND SHRI R.K. KAPOOR, CHARTERED ACCOUNTANTS. ORDER ORDER ORDER ORDER PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP PER G.D. AGRAWAL, VP : : : : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF LEARNED CIT(A)-X, NEW DELHI DATED 13 TH JUNE, 2013 FOR THE AY 2007-08. 2. THE ONLY GROUND RAISED BY THE REVENUE READS AS U NDER:- WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF 50% OF THE PROVISIONS OUT OF THE EXPENDITURE CLAIMED UNDER THE HEAD POST SALES EXPENSES FOR WARRANTY EXPENSES, ON THE BASIS OF THE JUDGEMENT OF HON'BLE SUPREME COURT GIVEN IN THE CASE OF ROTORK CONTROL INDIA VS. CIT (2009) 314 ITR 62 (SC), COMPLETING IGNORING THAT THE ABOVE CASE LAW WAS DISTINGUISHED ON THE FACTS BY THE AO IN THE ASSESSM ENT ORDER. 3. AT THE TIME OF HEARING BEFORE US, LEARNED DR STA TED THAT THERE IS A TYPOGRAPHICAL ERROR IN THE ABOVE GROUND AND THERE WAS A ITA-4869/DEL/2013 2 DISALLOWANCE OF 100% OF THE PROVISIONS BY THE ASSES SING OFFICER WHICH IS DELETED BY THE CIT(A). IN THE GROUND, IT HAS BE EN WRONGLY MENTIONED AS 50%. SHE, THEREFORE, SUBMITTED THAT EITHER THE REVENUE SHOULD BE ALLOWED TIME TO MODIFY THE GROUND OF APPEAL OR THE BENCH MAY TREAT THE GROUND AS MODIFIED. 4. LEARNED COUNSEL FOR THE ASSESSEE STATED THAT IT IS APPARENT THAT THERE IS A TYPOGRAPHICAL ERROR IN THE GROUND AND TH EREFORE, THE REQUEST OF THE LEARNED DR FOR SUBSTITUTING THE 100% DISALLO WANCE INSTEAD OF 50% DISALLOWANCE MAY BE ACCEPTED AND THE APPEAL MAY BE PROCEEDED ON MERITS. 5. IN VIEW OF THE ABOVE, WE DEEM THE GROUND AS MODI FIED AND IN THE GROUND OF APPEAL, DISALLOWANCE OF 50% WOULD BE READ AS DISALLOWANCE OF 100%. WITH THIS, WE PROCEED TO DECIDE THE APPEA L ON MERITS. 6. AT THE TIME OF HEARING BEFORE US, LEARNED DR REF ERRED TO THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF RO TORK CONTROLS INDIA P.LTD. VS. CIT [2009] 314 ITR 62 (SC) FOR GIVING RELIEF TO THE ASSESSEE AND STATED THAT AS PER THE ABOVE DECISION OF HONBL E APEX COURT, THERE SHOULD BE A RELIABLE ESTIMATE OF THE LIABILITY OF W ARRANTY EXPENSES DEPENDING UPON THE NATURE OF BUSINESS, NATURE OF PR ODUCE MANUFACTURED AND SOLD AND SCIENTIFIC METHOD OF ACCO UNTING ADOPTED BY THE ASSESSEE. THE HISTORICAL TREND SHOULD ALSO BE KEPT IN MIND WHILE ESTIMATING THE LIABILITY FOR WARRANTY EXPENSES. SH E REFERRED TO THE CHART AT PAGE 4 OF THE CIT(A)S ORDER AND POINTED O UT THAT DURING THE ACCOUNTING YEAR RELEVANT TO THE ASSESSMENT YEAR 200 6-07, THE PROVISION MADE WAS ` 165.11 LAKHS WHILE THE ACTUAL LIABILITY WAS ONLY ` 35.14 LAKHS. IN THE YEAR UNDER CONSIDERATION, THE PROVISION MADE WAS ` 129.29 LAKHS WHILE THE ACTUAL LIABILITY IS ` 8.95 LAKHS. IN THE YEAR ENDED ON 31 ST MARCH, 2008, NO PROVISION IS MADE BUT THE PROVISIO N ITA-4869/DEL/2013 3 UTILIZED WAS ` 25.78 LAKHS. IN THE YEAR ENDED ON 31 ST MARCH, 2009, NEITHER ANY PROVISION WAS MADE NOR ANY PROVISION WA S UTILIZED FOR FULFILLING THE WARRANTY CONDITIONS. THAT THIS CLEA RLY INDICATES THAT THE ASSESSEE IS NOT FOLLOWING ANY SCIENTIFIC METHOD AND MOREOVER, THE PROVISION MADE IS VERY EXCESSIVE. SHE, THEREFORE, SUBMITTED THAT THE ORDER OF LEARNED CIT(A) SHOULD BE REVERSED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 7. LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER H AND, STATED THAT THE ASSESSEE IS A UNIT OF FIAMM GROUP. IT IS ENGAG ED IN MANUFACTURING HORNS FOR FOUR WHEELERS AND THE ASSESSEE PROVIDES M ANUFACTURING WARRANTY OF THREE YEARS WHICH IS IN-BUILT IN THE CO NTRACT OF SALES. THAT IT IS THE GLOBAL EXPERIENCE OF FIAMM GROUP THAT THE LI ABILITY OF WARRANTY IS 2 TO 2.5%. THAT THE ACCOUNTING YEAR RELEVANT TO AS SESSMENT YEAR 31 ST MARCH, 2005 WAS THE FIRST YEAR OF THE ASSESSEES BU SINESS IN INDIA AND, THEREFORE, THE ASSESSEE MADE THE PROVISION FOR WARR ANTY AS PER ITS GLOBAL EXPERIENCE. THAT WHEN IN THE SUBSEQUENT YEA R IT CAME TO THE KNOWLEDGE OF THE ASSESSEE THAT THE CLAIM OF WARRANT Y IN INDIA IS NOT AS HIGH AS IN THE GLOBAL MARKET, THE ASSESSEE ITSELF W ROTE BACK THE PROVISION FOR WARRANTY AND OFFERED THE SAME AS INCO ME. HE POINTED OUT THAT ` 100.33 LAKHS IS OFFERED AS INCOME IN AY 2008-09 AND ` 89.63 LAKHS IN AY 2009-10. THE CIT(A) HAS ALSO DIRECTED THE ASSESSING OFFICER VERIFY THIS ASPECT AND THEREAFTER ALLOWED THE RELIE F IF THESE PROVISIONS HAVE BEEN WRITTEN BACK. HE, THEREFORE, SUBMITTED T HAT THE ORDER OF LEARNED CIT(A) IS QUITE FAIR AND REASONABLE. THE S AME SHOULD BE SUSTAINED. HE ALTERNATIVELY SUBMITTED THAT IF AT A LL ANY PART OF THE PROVISION IS DIRECTED TO BE DISALLOWED, THEN A SUIT ABLE DIRECTION MAY BE GIVEN TO THE ASSESSING OFFICER FOR NOT TAXING THE W RITING BACK OF THE PROVISION IN THE SUBSEQUENT YEAR, OTHERWISE, IT WOU LD AMOUNT TO DOUBLE TAXATION. ITA-4869/DEL/2013 4 8. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF BOTH THE SIDES AND PERUSED RELEVANT MATERIAL PLACED BEFORE US. HO NBLE APEX COURT HAS CONSIDERED THE ISSUE OF PROVISION FOR WARRANTY IN THE CASE OF ROTORK CONTROLS INDIA P.LTD. (SUPRA) AND HELD AS UNDER:- HELD, REVERSING THE DECISION OF THE HIGH COURT, TH AT THE VALVE ACTUATORS, MANUFACTURED BY THE ASSESSEE, WERE SOPHISTICATED GOODS AND STATISTICAL DATA INDICATED THAT EVERY YEAR SOME OF THESE WERE FOUND DEFECTIVE; THAT VALVE ACTUATOR BEING A SOPHISTICATED ITEM NO CUSTOMER WAS PREPARED TO BUY A VALVE ACTUATOR WITHOUT A WARRANTY . THEREFORE, THE WARRANTY BECAME AN INTEGRAL PART OF THE SALE PRICE; IN OTHER WORDS, THE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. IN THIS CASE THE WARRAN TY PROVISIONS HAD TO BE RECOGNIZED BECAUSE HAD A PRESE NT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF THE OBLIGATION. THEREFORE, THE ASSESSEE HAD INCURRED A LIABILITY DURING THE ASSESSMENT YEAR WHI CH WAS ENTITLED TO DEDUCTION UNDER SECTION 37 OF THE INCOM E-TAX ACT, 1961. THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE T HE WARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCO UNTED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDUCTION UNDER SECTION 37. THE PRINCIPLE OF ESTIMATION OF THE CONTINGENT LIABILITY IS NOT THE NORMAL RULE. IT WOULD DEPEND ON THE NATURE OF THE BUSINESS, THE NATURE OF SALES, THE NATURE OF THE PR ODUCE MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WOULD ALSO DEPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF AR TICLES PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ON LY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVIS ION IS RECOGNIZED WHEN : (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS P ROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLED 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. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDIC ATES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING ITA-4869/DEL/2013 5 MANUFACTURED IN THE PAST AND THE FACTS SHOW THAT DE FECTS EXISTED IN SOME OF THE ITEMS MANUFACTURED AND SOLD, THEN PROVISION MADE FOR WARRANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37. 9. THUS, THEIR LORDSHIPS, WHILE HOLDING THAT THE PR OVISION FOR WARRANTY IS AN ALLOWABLE DEDUCTION, HAVE FURTHER OB SERVED THAT THERE SHOULD BE A RELIABLE ESTIMATE OF SUCH LIABILITY BAS ED UPON THE NATURE OF PRODUCT MANUFACTURED AND SOLD, THERE SHOULD BE SOME SCIENTIFIC METHOD FOR ESTIMATING THE LIABILITY AND SUCH ESTIMA TE SHOULD ALSO BE BASED UPON THE PAST EXPERIENCE. THE CIT(A) HAS GIV EN THE CHART IN HIS ORDER GIVING THE YEAR-WISE DETAILS OF THE PROVISION FOR WARRANTY AND THE PROVISION ACTUALLY UTILIZED FOR FULFILLING THE WARR ANTY AND THE PROVISION REVERSED. THE SAME IS REPRODUCED BELOW:- WARRANTIES 31.3.10 31.3.09 31.3.08 31.3.07 31.3.06 31.3.05 OPENING BALANCE 38,01,467 1,27,64,810 2,53,77,350 1,33,43,468 3,47,106 ADDITIONAL PROVISION DURING THE YEAR 74,05,358 1,29,29,833 1,65,11,140 3,47,106 PROVISIONS UTILIZED DURING THE YEAR (25,78,800) (8,95,951) (35,14,868) PROVISIONS REVERSED DURING THE YEAR (89,63,343) (1,00,33,740) CLOSING BALANCE 1,12,06,825 38,01,467 1,27,64,810 2,53,77,350 1,33,43,468 3,47,196 10. FROM THE ABOVE CHART, WE DO NOT FIND ANY CONSIS TENCY IN THE PROVISION FOR WARRANTY. AT THE TIME OF HEARING BEF ORE US, THE LEARNED COUNSEL FOR THE ASSESSEE WAS UNABLE TO STATE THE ME THOD BY WHICH ITA-4869/DEL/2013 6 SUCH PROVISION FOR WARRANTY WAS COMPUTED. CONSIDER ING THE TOTALITY OF THE FACTS, WE DEEM IT PROPER TO SET ASIDE THE ORDER S OF AUTHORITIES BELOW AND RESTORE THE MATTER TO THE FILE OF THE ASS ESSING OFFICER. WE DIRECT THE ASSESSEE TO SUBMIT BEFORE THE ASSESSING OFFICER THE BASIS BY WHICH THE PROVISION FOR THE LIABILITY OF WARRANTY W AS COMPUTED. THEREAFTER, THE ASSESSING OFFICER IS DIRECTED TO EX AMINE THE REASONABLENESS OF THE SAME IN THE LIGHT OF THE PARA METERS LAID DOWN BY HONBLE APEX COURT IN THE CASE OF ROTORK CONTROLS I NDIA P.LTD. (SUPRA). WE DIRECT THE ASSESSING OFFICER TO ALLOW THE LIABIL ITY WHICH IS FOUND TO BE REASONABLE CONSIDERING THE FACTS AND CIRCUMSTANC ES OF THE CASE. WE FURTHER DIRECT THE ASSESSING OFFICER THAT IF ANY PART OF THE LIABILITY IS DISALLOWED, HE WILL ENSURE THAT IF THE SAME IS WRIT TEN BACK IN THE SUBSEQUENT YEAR, THEN, IN THE SUBSEQUENT YEAR, THE TAX MAY NOT BE LEVIED ON THE PROVISION WRITTEN BACK WHICH IS DISAL LOWED IN THIS YEAR, OTHERWISE, IT WOULD AMOUNT TO DOUBLE TAXATION WHICH IS NOT PERMISSIBLE IN LAW. WITH THIS OBSERVATION, WE SET ASIDE THE OR DERS OF AUTHORITIES BELOW ON THIS POINT AND RESTORE THE MATTER TO THE F ILE OF THE ASSESSING OFFICER TO BE READJUDICATED AS PER OUR DIRECTION AB OVE AND IN THE LIGHT OF THE DECISION OF HONBLE APEX COURT IN THE CASE O F ROTORK CONTROLS INDIA P.LTD. (SUPRA). NEEDLESS TO MENTION THAT ASS ESSING OFFICER WILL ALLOW ADEQUATE OPPORTUNITY OF BEING HEARD TO THE AS SESSEE. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS TRE ATED TO BE ALLOWED FOR STATISTICAL PURPOSES. DECISION PRONOUNCED IN THE OPEN COURT ON 22 ND AUGUST, 2014. SD/- SD/- ( (( (CHANDRA MOHAN GARG CHANDRA MOHAN GARG CHANDRA MOHAN GARG CHANDRA MOHAN GARG) )) ) (G.D. AGRAWAL (G.D. AGRAWAL (G.D. AGRAWAL (G.D. AGRAWAL) )) ) JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER VICE PRES VICE PRES VICE PRES VICE PRESIDENT IDENT IDENT IDENT DATED : 22.08.2014 VK. ITA-4869/DEL/2013 7 COPY FORWARDED TO: - 1. APPELLANT : ASSISTANT COMMISSIONER OF INCOME TAX, ASSISTANT COMMISSIONER OF INCOME TAX, ASSISTANT COMMISSIONER OF INCOME TAX, ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -6(1), NEW DELHI. 6(1), NEW DELHI. 6(1), NEW DELHI. 6(1), NEW DELHI. 2. RESPONDENT : M/S FIAMM MINDA AUTOMOTIVE LTD., M/S FIAMM MINDA AUTOMOTIVE LTD., M/S FIAMM MINDA AUTOMOTIVE LTD., M/S FIAMM MINDA AUTOMOTIVE LTD., (NOW KNOWN AS MINDA ACOUSTIC LTD.), (NOW KNOWN AS MINDA ACOUSTIC LTD.), (NOW KNOWN AS MINDA ACOUSTIC LTD.), (NOW KNOWN AS MINDA ACOUSTIC LTD.), B B B B- -- -64/1, WAZIRPUR INDUSTRIAL 64/1, WAZIRPUR INDUSTRIAL 64/1, WAZIRPUR INDUSTRIAL 64/1, WAZIRPUR INDUSTRIAL AREA, AREA, AREA, AREA, DELHI DELHI DELHI DELHI 110 052. 110 052. 110 052. 110 052. 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR