KUNKEL WAGNER (INIDA) P. LTD, MUMBAI V. DCIT 9(2), MUMBAI

ITA 6993/MUM/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62582 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-06-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 08-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P K B MENON
• Assessee Lawyers: AARTI VISSANJI

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH A, MUMBAI BEFORE SHRI B.R. MITTAL, J.M. AND SHRI RAJENDRA SI NGH, A.M. ITA NO.6993/MUM/2010 ASSESSMENT YEAR : 2007-08 M/S. KUNKEL WAGNER (INDIA) PVT. LTD. PIROJA COURT, 9, MEERA BAUG, SANTACRUZ(W) MUMBAI-400 054. PAN NO. AAACK 9554 C DY. COMMISSIONER OF INCOME TAX -9(2) 2ND FLOOR, AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : MS. AARTI VISSANJI RESPONDENT BY : SHRI P.K.B. MENON DATE OF HEARING : 29.5.2012 DATE OF PRONOUNCEMENT : 13.6.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER D ATED 13.8.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. T HE ONLY DISPUTE RAISED IN THIS APPEAL IS REGARDING ADDITION OF RS.22,79,776/- ON ACCOUNT OF PROVISION OF WARRANTY CLAIM. 2. THE FACTS IN BRIEF ARE THAT THE AO DURING THE ASSESSM ENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD MADE CLAIM OF ITA NO.6993/M/10 A.Y.07-08 2 RS.22,79,776/- ON ACCOUNT OF PROVISION OF WARRANTY CLAI M. ASSESSEE SUBMITTED THAT PROVISION FOR WARRANTY CLAIM WAS ALLOWAB LE IN VIEW OF JUDGMENT OF HON'BLE SUPREME COURT IN CASE OF ROTORK CO NTROLS INDIA (P) LTD. VS. CIT (314 ITR 62). THE AO HOWEVER DID N OT ACCEPT THE CONTENTION RAISED. IT WAS OBSERVED BY HIM THAT THE ASSESSE E WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING UNDER WHICH THE CLAIM COULD BE ALLOWED ONLY WHEN THE LIABILITY HAD BEEN INCURRED DURING THE YEAR. IN THIS CASE, AS PER AO, LIABILITY HAD NOT CRYSTALLIZED A ND WAS A MERE PROVISION. THE AO THEREFORE, DISALLOWED THE CLAIM. 2.1 IN APPEAL, THE ASSESSEE AGAIN REITERATED THE SUBMISSIO N THAT THE CLAIM WAS ALLOWABLE IN VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. CIT( SUPRA). CIT(A) HOWEVER DID NOT ACCEPT THE CLAIM OF THE ASSESSEE. IT WAS O BSERVED BY HIM THAT THE JUDGMENT OF HON'BLE SUPREME COURT (SUPRA ) WAS DISTINGUISHABLE. IT WAS ALSO OBSERVED BY HIM THAT, IN TH AT CASE, STATISTICAL DATA OVER THE YEARS HAD INDICATED THAT EQUI PMENT BEING A SOPHISTICATED ITEM, NO CUSTOMER WAS PREPARED TO BUY THE I TEM WITHOUT WARRANTY. THEREFORE WARRANTY BECAME AN INTEGRAL PART OF THE SALE PRICE OF THE ITEM. THE APEX COURT THEREFORE HELD THAT PRO VISION FOR WARRANTY HAD BEEN RIGHTLY MADE BY THE ASSESSEE BECAUSE IT HAD INCUR RED A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS. CIT(A) FU RTHER OBSERVED ITA NO.6993/M/10 A.Y.07-08 3 THAT, IN THE PRESENT CASE, FOUNDRY MOULDING PLANTS AND SAND PREPARATION PLANTS WHICH WERE SUPPLIED BY THE ASSESSEE W ERE MANUFACTURED IN GERMANY BY THE PARENT COMPANY. THE A SSESSEE MANUFACTURED AND SUPPLIED ONLY CONVEYING AND HANDLING EQUIPMENT USED IN THEIR MANUFACTURE. CIT(A) ALSO OBSERVED THAT TH E ASSESSEE HAD NOT EXPLAINED THE NATURE OR JUSTIFICATION FOR WARRANT Y. THE ASSESSEE HAD NOT CITED ANY PAST EVENT OF DEFECTS BEING DETECTED SO AS TO MAKE WARRANTY AS INTEGRAL PART OF SALE PRICE. CIT(A), THERE FORE, AGREED WITH THE AO THAT THE CLAIM WAS NOT ALLOWABLE AND ACCORDINGLY CONFIRMED THE DISALLOWANCE AGGRIEVED BY WHICH, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3. BEFORE US, THE LD. AR FOR THE ASSESSEE ARGUED THAT I T WAS NOT CORRECT TO SAY THAT THE ASSESSEE HAD NOT GIVEN NECESSARY DET AILS REGARDING WARRANTY OBLIGATION. THE ASSESSEE HAD GIVEN A DETAILED NOTE, A COPY OF WHICH HAS BEEN PLACED AT PAGE-3 OF THE PAPER BOOK IN WHICH DETAILS REGARDING WARRANTY HAD BEEN GIVEN WHICH WAS AV AILABLE BEFORE BOTH THE AUTHORITIES BELOW. IN THE SAID NOTE, THE ASSE SSEE HAD CLEARLY MENTIONED THAT ALL EQUIPMENTS SOLD AND SUPPLIED WERE U NDER WARRANTY AND WARRANTY PERIOD RANGED FROM 12-14 MONTHS FROM COM MISSIONING OF THE EQUIPMENTS SOLD AND SUPPLIED. THE PERIOD OF WAR RANTY COMMENCED FROM THE DATE OF COMMISSIONING OF THE EQUIPME NT. THE ASSESSEE HAD ALSO MENTIONED IN THE NOTE THAT IT WAS MAKIN G PROVISION ITA NO.6993/M/10 A.Y.07-08 4 OF WARRANTY CLAIM @ 2% AND IN CASE THE SAME WAS FOUND T O BE EXCESSIVE COMPARED TO ACTUAL VALUE IN FUTURE, EXCESS WAS OF FERED AS INCOME. THE ASSESSEE HAD ALSO FILED DETAILED CALCULATION O F WARRANTY CLAIM GIVING PARTICULARS SUCH AS NAME OF CUSTOMER, ORDER A MOUNT, NET SALES, WARRANTY AMOUNT ETC. TO THE AUTHORITIES BELOW A COPY OF WHICH HAS BEEN PLACED AT PAGE-4 OF THE PAPER BOOK . THE ASSESSE E HAD ALSO FILED COPIES OF THE CONTRACT WHICH IS PLACED IN THE PAPER BOOK AT PAGES 13-25 AND AT PAGES 34-45. IN THE SAID CONTRACTS, AT PAGE S 24 AND 45 RESPECTIVELY, GUARANTEE PERIOD WAS CLEARLY MENTIONED I N CLAUSE (6) OF THE CONTRACT WHICH WAS 12 MONTHS FROM THE DATE OF INSTA LLATION, APPROVAL AND ACCEPTANCE OF THE TOTAL PLANT BY THE PART Y. IT WAS ALSO MENTIONED THAT ANY REPAIRED/REPLACED COMPONENT WILL B E GUARANTEED FOR FRESH 12 MONTHS AFTER DATE OF REPAIR/REPLACEMENT. IT WAS ACCORDINGLY SUBMITTED THAT THE ASSESSEE HAD GIVEN FULL DE TAILS /PARTICULARS AND PROVISION FOR WARRANTY CLAIM WAS ALLOW ABLE IN VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF R OTORK CONTROLS INDIA (P) LTD. VS. CIT (SUPRA), AND THEREFORE, DISALLO WANCE WAS NOT JUSTIFIED. THE LD. DEPARTMENTAL REPRESENTATIVE ON TH E OTHER HAND SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND PLACED RE LIANCE ON THE FINDINGS GIVEN IN THE RESPECTIVE ORDERS. IT WAS ALSO SUBM ITTED THAT THERE WAS NO BASIS GIVEN FOR MAKING THE PROVISION @ 2% OF SALES. ITA NO.6993/M/10 A.Y.07-08 5 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWAB ILITY OF CLAIM OF DEDUCTION OF RS.22,79,776/- ON ACCOUNT OF WARRANTY CLAI M. THE ASSESSEE WAS MANUFACTURING AND SUPPLYING CONVEYING AND HAND LING EQUIPMENTS USED IN THE MANUFACTURE OF FOUNDRY MOULDING PLANTS AND SAND PREPARATION PLANTS. THE ASSESSEE UNDER THE PROVISIONS OF CONTRACT WITH THE BUYERS OF THE EQUIPMENTS HAD MADE PROVISIONS F OR WARRANTY IN THE YEAR OF SALE OF EQUIPMENTS. THE AO HAS NOT ALLOWED THE CLAIM ON THE GROUND THAT THE ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING IN WHICH ONLY THOSE CLAIMS COULD BE ALLOWED IN RESPECT OF WHICH LIABILITY HAD BEEN INCURRED BY THE ASSESSEE DURING THE YEAR. IN THIS CASE THE LIABILITY WOULD ARISE IN FUTURE WHEN THE DEFECTS ARE FOUND IN THE EQUIPMENTS AND THEREFORE, IT WAS OF THE NATURE OF CONTINGENT LIABILITY. CIT(A) HAS CONFIRMED THE ORDER OF AO. THE ASSESSEE HAD PLACED RELIANCE ON THE JUDGMENT OF HON'BLE SUPREME COU RT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. (SUPRA), IN SUPPORT OF THE CLAIM WHICH HAS NOT BEEN FOLLOWED BY THE AUTHORITIES BELOW ON THE GROUND THAT THE SAME WAS DISTINGUISHABLE. 4.1 IN OUR VIEW, THE DECISION OF THE AUTHORITIES BELOW TO DISALLOW THE CLAIM CANNOT BE UPHELD. THE ASSESSEE HAD FILED COPY OF CONT RACTS WITH THE BUYERS IN WHICH THERE WAS SPECIFIC CLAUSE REGARDING WA RRANTY. ITA NO.6993/M/10 A.Y.07-08 6 THEREFORE, AS SOON AS THE SALE IS MADE, THE ASSESSEE INCURS TH E LIABILITY ON ACCOUNT OF WARRANTY CLAIM EVEN THOUGH THE EXPENDIT URE MAY BE ACTUALLY INCURRED IN SUBSEQUENT YEARS. THEREFORE, THE CL AIM OF DEDUCTION ON ACCOUNT OF PROVISION FOR WARRANTY CLAIM IS ALLOWABLE AS DEDUCTION IN MERCANTILE SYSTEM OF ACCOUNTING AND THIS VIE W IS ALSO SUPPORTED BY THE JUDGMENT OF HON'BLE SUPREME COURT IN CASE OF ROTORK CONTROLS INDIA (P) LTD. (SUPRA). THE ASSESSEE HAD GIVEN FULL DETAILS/PARTICULARS OF THE PROVISIONS OF WARRANTY CLAIM AND ASSESSEE HAD ALSO GIVEN COPIES OF THE CONTRACTS WITH THE PARTIES I N WHICH THERE WAS SPECIFIC PROVISION FOR WARRANTY. AS REGARDS QUANTUM O F CLAIM THE ASSESSEE HAD BEEN CONSISTENTLY MAKING CLAIM @ 2% OF SALES AND , IN CASE, IN THE SUBSEQUENT YEAR, THE PROVISION MADE IS FOUND TO BE EXCESSIVE, BALANCE AMOUNT IS OFFERED FOR INCOME AND, IN CA SE, EXPENDITURE ACTUALLY INCURRED IS FOUND TO BE MORE, FUR THER DEDUCTION IS CLAIMED IN SUBSEQUENT YEAR. EVEN IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. (SUPRA), WARRANTY PROVISION @ 1.5% OF SALES HA VE NOT FOUND ALLOWABLE. WARRANTY PERCENTAGE WILL DEPEND UPON FACTS AND CIRCUMSTANCES OF EACH CASE. THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE SYSTEM AND ADJUSTMENTS HAVE BEEN MADE IN FUTURE. T HE LD. AR HAS FILED COPY OF PROFIT AND LOSS ACCOUNT FOR ASSESSMENT YEAR 20 10-11 TO DEMONSTRATE THAT EXCESS PROVISION HAS BEEN OFFERED AS INCO ME. WE, THEREFORE, SEE NO REASON TO INTERFERE WITH THE SYSTEM BEING ITA NO.6993/M/10 A.Y.07-08 7 CONSISTENTLY FOLLOWED BY THE ASSESSEE. IN OUR VIEW, THE O RDER OF CIT(A) CONFIRMING THE DISALLOWANCE CANNOT BE UPHELD . WE ACCORDI NGLY SET ASIDE THE ORDER OF CIT(A) AND ALLOW THE CLAIM OF THE ASSESSEE. 5. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13.6.2012. SD/- SD/- (B.R. MITTAL ) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 13.6.2012. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.