Valmet Chennai Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 551/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8855 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 14-07-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 10-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JOE SEBASTIAN
• Assessee Lawyers: P S PRABHAKAR PARTNER

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , . , ! '# $ [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ] ./ I.T.A.NO.551/MDS/2016 / ASSESSMENT YEAR : 2011-12 M/S VALMET CHENNAI PVT. LTD CENTRAL SQUARE I, VTH FLOOR CIPET ROAD, THIRU VI KA INDUSTRIAL ESTATE GUINDY, CHENNAI 600 032 VS. THE ASSTT. COMMISSIONER OF INCOME-TAX CORPORATE CIRCLE 3(2) CHENNAI [PAN AAFCM 6191 C] ( %& / APPELLANT) ( '(%& /RESPONDENT) / APPELLANT BY : SHRI P.S PRABHAKAR, PARTNER, CA /RESPONDENT BY : SHRI JOE SEBASTIAN, CIT / DATE OF HEARING : 14-07-2016 ! / DATE OF PRONOUNCEMENT : 15-07-2016 / O R D E R PER N.R.S.GANESAN, JUDICIAL MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE ASSESSING OFFICER CONSEQUENT TO THE DIRECTION OF THE DISPUTE RESOLUTION PANEL (DRP) FOR THE ASSESSMENT YEAR 2011 -12. ITA NO551/16 :- 2 -: 2. SHRI P.S. PRABHAKAR, LD. REPRESENTATIVE FOR THE AS SESSEE SUBMITTED THAT THE ONLY ISSUE ARISES FOR CONSIDERAT ION IS DISALLOWANCE OF PROVISION FOR WARRANTY TO THE EXTENT OF ` 1,62,87,000/-. 3. ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEE FOR THE FIRST TIME ENTERED INTO CONTRACT WITH M/S PHOENIX P ULP & PAPER, THAILAND, IN RESPECT OF THE WARRANTY OBLIGATION AGA INST PROPER DESIGN, MATERIALS AND WORKMANSHIP OF THE EQUIPMENTS SUPPLIE D FOR A PERIOD OF 18 MONTHS FROM THE COMPLETION OF COMMISSIONING OR F OR 36MONTHS FROM THE LAST CIF MAIN SHIPMENT WHICHEVER COMES FI RST. THE PROVISION FOR WARRANTY WORKED OUT 2.63% OF THE TOTAL CONTRACT VALUE. THE LD. REPRESENTATIVE FURTHER SUBMITTED THAT THE ACTUAL EX PENDITURE INCURRED OUT OF THE WARRANTY PROVISION WAS MORE THAN 83%. T HEREFORE, THE ENTIRE CLAIM OF THE ASSESSEE HAS TO BE ALLOWED. P LACING RELIANCE ON THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE O F CIT VS M/S LUK INDIA P. LTD., TAX CASE (APPEAL) NOS. 489 TO 494 OF 2010, DATED 5.7.2010, THE LD. REPRESENTATIVE SUBMITTED THAT EVE N THOUGH THE PROVISION HAD NOT BEEN MADE ON SCIENTIFIC BASIS, SI NCE THE ASSESSEE HAS ACTUALLY INCURRED MORE THAN 83% OF THE PROVISIO N AS EXPENDITURE, THE CLAIM OF THE ASSESSEE HAS TO BE ALLOWED AS DED UCTION WHILE COMPUTING THE TOTAL INCOME. ALTERNATIVELY, THE LD. REPRESENTATIVE SUBMITTED THAT THE ASSESSEE HAS INCURRED ` 1,35,53,652/- AS EXPENDITURE FOR THE YEAR UNDER CONSIDERATION. THER EFORE, THIS ACTUAL ITA NO551/16 :- 3 -: EXPENDITURE HAS TO BE ALLOWED IN THE LIGHT OF THE J UDGMENT OF THE MADRAS HIGH COURT IN M/S LUK INDIA P. LTD. (SUPRA). AT THE BEST, THE AUTHORITIES BLOW COULD RESTRICT THE DISALLOWANCE ON LY TO THE EXTENT OF ` 27,33,348/-. 4. ON THE CONTRARY, SHRI JOE SEBASTIAN, LD. DEPARTMENT AL REPRESENTATIVE SUBMITTED THAT THE PROVISION FOR WAR RANTY HAS TO BE WORKED OUT ON SCIENTIFIC BASIS BY TAKING INTO CONSI DERATION OF THE PAST EXPERIENCE. THIS IS WHAT EXACTLY HELD BY THE APEX COURT IN ROTORK CONTROLS INDIA PVT. LTD VS CIT, 314 ITR 62. THERE CANNOT BE ANY PRESUMPTION THAT MERELY BECAUSE THE ASSESSEE HAS SP ENT 83% OF PROVISION FOR WARRANTY, THE ENTIRE PROVISION WAS SP ENT FOR THE PURPOSE OF EXECUTING THE WARRANTY. REFERRING TO THE ALTER NATIVE SUBMISSION OF THE LD. REPRESENTATIVE FOR THE ASSESSEE, THE LD. D R SUBMITTED THAT SINCE ADMITTEDLY THE ASSESSEE INCURRED EXPENDITURE OF ` 1,35,53,652/- THE SAME CAN BE ALLOWED WHILE COMPUTING THE TAXABLE INCOME. HOWEVER, THE ENTIRE AMOUNT OF ` 1,62,87,000/- AS CLAIMED BY THE ASSESSEE CANNOT BE ALLOWED. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. TH E APEX COURT IN ROTORK CONTROLS INDIA PVT. LTD.(SUPRA) CONSIDERED T HIS ISSUE AND FOUND THAT PROVISION FOR WARRANTY BASED UPON PAST EXPERIE NCE OF THE ITA NO551/16 :- 4 -: COMPANY SHALL BE BASED ON SCIENTIFIC METHOD. WHEN THE PROVISION FOR WARRANTY WAS MADE ON PAST EXPERIENCE AND HISTORICAL TREND, THE QUESTION OF REVERSAL IN THE SUBSEQUENT YEARS MAY NO T ARISE. THEREFORE, IT IS OBVIOUS THAT THE ASSESSEE-COMPANY HAS TO MAKE PROVISION FOR WARRANTY BASED UPON ITS PAST EXPERIENCE AND HISTORI CAL TREND. IN THE CASE BEFORE US, NO SUCH METHOD WAS ADOPTED. THE A SSESSEE UNILATERALLY EARMARKED A SUM OF ` 1,62,87,000/- AS PROVISION FOR WARRANTY. IN FACT, NO BASIS WAS ADOPTED. THE ASS ESSEE CLAIMS THAT SINCE 83% OF THE PROVISION FOR WARRANTY WAS INCURRE D AS EXPENDITURE, THE ENTIRE CLAIM HAS TO BE ALLOWED. THIS TRIBUNAL IS UNABLE TO UPHOLD THE CONTENTION OF THE LD. REPRESENTATIVE FOR THE AS SESSEE. HOWEVER, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE RE IS SOME JUSTIFICATION IN THE ALTERNATIVE SUBMISSION OF THE LD. REPRESENTATIVE. AS RIGHTLY CONTENDED BY THE LD. REPRESENTATIVE, THE EX PENDITURE INCURRED TO THE EXTENT OF ` 1,35,53,652/- FOR CARRYING OUT THE WARRANTY NEEDS TO BE ALLOWED AS EXPENDITURE. THEREFORE, THIS TRIBUN AL IS OF THE CONSIDERED OPINION THAT THE CLAIM OF THE ASSESSEE TO THE EXTENT OF ` 1,35,53,652/- HAS TO BE ALLOWED. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE ACTUAL EXPENDITURE OF ` 1,35,53,652/- WHILE COMPUTING THE TAXABLE INCOME OF THE ASSESSEE AS EXPENDITURE. THE ASSES SING OFFICER SHALL RESTRICT THE DISALLOWANCE TO ` 27,33,348/-. ITA NO551/16 :- 5 -: 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PART LY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH OF JULY, 2016, AT CHENNAI. SD/- SD/- ( . ) (D. KARUNAKARA RAO) ! / ACCOUNTANT MEMBER ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER #$ / CHENNAI %& / DATED: 15 TH JULY, 2016 RD &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF