Deputy Commissioner of Income-tax, V. Sulzer India Ltd., Pune

ITA 722/PUN/2016

• Counselvise Citation: [2018] 124 COUNSELVISE.COM (IT) 9684 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 5 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 19-09-2018
• Assessment Year: 2010-2011
• Appeal Filed On: 15-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K JADHAV
• Assessee Lawyers: RONAK G DOSHI
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUN E . , , ! , ' # BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AW ASTHY, JM . / ITA NO. 722/PUN/2016 '% & '& / ASSESSMENT YEAR : 2010-11 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-6, PUNE. ....... / APPELLANT (% / V/S. SULZER INDIA LTD. SULZER HOUSE, BANER ROAD, AUNDH, PUNE-411 007 PAN : AAACS7876D / RESPONDENT REVENUE BY : SHRI S.K. JADHAV ASSESSEE BY : SHRI RONAK G. DOSHI / DATE OF HEARING : 19.09.2018 / DATE OF PRONOUNCEMENT : 25.09.2018 ) / ORDER PER D. KARUNAKARA RAO, AM : THIS IS THE APPEAL FILED BY REVENUE AGAINST THE ORDER O F CIT(APPEALS)- 4, PUNE, DATED 19.01.2016 FOR THE ASSESSMENT YEAR 2010-11. 2. THE GROUNDS RAISED BY THE REVENUE READ AS UNDER: 1. WHETHER ON FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) IS CORRECT IN DELETING THE DISALLOW ANCE MADE BY THE AO ON ACCOUNT OF PROVISION OF WARRANTY AND AFTER SALES COST. 2 ITA NO.722 /PUN/2016 A.Y.2010-11 2. FOR THIS AND SUCH OTHER REASONS AS MAY BE URGED AT THE TIME OF HEARING, THE ORDER OF LD. CIT(A) MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 3. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR DELETE ANY OF THE ABOVE GROUNDS OF APPEAL DURING THE COURSE OF APPELL ATE PROCEEDINGS BEFORE THE HON'BLE TRIBUNAL. FROM THE ABOVE, IT IS EVIDENT THAT THE ISSUE RAISED BEFOR E US FOR ADJUDICATION IS WHETHER THE PROVISION OF WARRANTY AND AFT ER SALES COST CONSTITUTE AN ALLOWABLE DEDUCTION OR NOT. 3. BRIEFLY STATED RELEVANT FACTS INCLUDE THAT THE ASSESSE E IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF PETROLEUM REFINING A ND DISTILLATION EQUIPMENT AND FILED RETURN OF INCOME ON 09.10.2010 DECLARING TOTAL INCOME AT RS.36,35,46,570/- AFTER DEDUCTING SUM OF RS.3,95,09,000/- A S ALLOWABLE DEDUCTION ON ACCOUNT OF PROVISION OF AFTER SALES COST AN D ANOTHER SUM OF RS.1,53,30,352/- ON ACCOUNT OF PROVISION OF WARRANTY EXP ENSES. DURING SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE SAID CALCULATION WAS DONE BASED ON SCIENTIFIC VALUATION OF EXPENDITURE. AS A MATTER OF NORMAL BUSINESS EXPEDIENCY, THE ASSESSEE-COMPANY NEEDS TO PROVIDE FOR THE EXPENDITURE ON WARRANTY OR AFTER SALES SERVICES RANGING FROM 1 YEAR TO 18 MONTHS ON TH E PRODUCTS SOLD BY IT. ASSESSEE ALSO STATED THAT AS PER THE PROVISION OF WARRA NTY, THE SAME IS IN THE RANGE OF 20% OF THE ACTUAL. THE ASSESSING OFFICER DI D NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE BY HOLDING AS UNDER: THE CONTENTION IS NOT ACCEPTABLE ON FOLLOWING GROU NDS. NO OBLIGATION WAS EVER CAST ON THE DATE OF THE SALE AND CONSEQUENTLY THERE WAS NO ACCRUED LIABILITY. THE LIABILITY HAD NOT CRYSTALLIZED ON THE DATE OF T HE SALE AND, THEREFORE, APPELLANT IS NOT ENTITLED TO DEDUCTION IN RESPECT O F THE PROVISION MADE FOR WARRANTY CHARGES. THE AMOUNT WHICH IS PROVIDED FOR OR KEPT APART CANNOT BE HELD TO BE EXPENDITURE, ACTUALLY INCURRED AND CONSE QUENTLY DEDUCTION IS NOT ADMISSIBLE. HENCE, MERELY BECAUSE THE ASSESSEE IS M AINTAINING ITS ACCOUNT ON MERCANTILE BASIS, IT CANNOT CLAIM THAT THE PROVISIO N MADE TOWARDS WARRANTY IS AN ACCRUED LIABILITY. 3 ITA NO.722 /PUN/2016 A.Y.2010-11 A REFERENCE IS INVITED TO INDIAN MOLASSES CO. (P.) LTD. VS. CIT (SC) 37 ITR 66, WHEREIN IT WAS HELD THAT EXPENDITURE, IS, WHAT IS P AID OUT OR AWAY AND IS SOMETHING WHICH IS GONE IRRETRIEVABLE. THE ASSESSEE HAS NOT PAID OUT THE MONEY BUT SIMPLY MADE THE PROVISION AND DEBITED IT TO P & L A/C., WHICH CANNOT BE TERMED AS PAYMENT WITHIN THE MEANING TO S ECTION 37 OF THE I.T.ACT. SECTION 37 OF THE 1961 ACT DOES NOT REFER TO MAKIN G OF PROVISION IT ONLY REFERS TO DEDUCTION PERMISSIBLE ON ACCOUNT OF ACTUAL EXPE NDITURE INCURRED. FURTHER, THE ASSESSEE HAS NOT GIVEN ANY SCIENTIFIC METHOD OF CALCULATION TO ARRIVE AT SUCH LIABILITY. IT IS THUS CLEAR THAT THE PROVISION FOR WARRANTY DEBITED IS CONTINGENT LIABILITY. THE SAME IS NOT ALLOWABLE AND AMOUNT OF RS.1,53,30,352/- AND RS.3,95,09,000/- ADDED BACK TO THE TOTAL INCOME. PENALTY PROCEEDINGS U/S. 271 (1)(C) IS INITIATED SE PARATELY. 4. AGGRIEVED WITH THE ORDER OF ASSESSING OFFICER, ASSESSEE FILED APPEAL BEFORE THE CIT(A). DURING FIRST APPELLATE PROCEEDINGS, APART FROM GIVING THE CALCULATION ON THE BASIS OF INTERNAL EVALUATION, THE ASSESSEE RELIED HEAV ILY ON THE JUDGMENT OF THE HON'BLE SUPREME COURT OF INDIA IN TH E CASE OF ROTORK CONTROLS INDIA LTD. REPORTED AS 314 ITR 62 WHEREIN IT WA S HELD THAT THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE WARRANTY EXPENSE , IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACTUARIAL BASIS, CAN BE AN ITEM OF DEDUCTION U/S.37 OF THE I.T.ACT. HE ALSO REFERRED TO THE RATIO LAID DOWN BY THE HON'BLE APEX COURT IN THE CASE OF INDIAN MOLASSES CO.(P.) LTD. VS. CIT (SC) REPORTED AS 37 ITR 66 IN FAVOUR OF THE REVENUE. THE CIT(A) EXTRACT ED THE WRITTEN SUBMISSIONS OF THE ASSESSEE, EXTRACTED THE OPERATIVE PAR AGRAPHS FROM THE HON'BLE APEX COURT JUDGMENT IN THE CASE OF ROTORK CONT ROLS INDIA LTD. (SUPRA.), TABULATED DATA RELATING TO THE MATTER OF DECIDING THIS ISSUE IN THE ASSESSEES OWN CASE SINCE ASSESSMENT YEAR 1998-99 ON WARDS IN PARA 4 OF HIS ORDER AND GRANTED RELIEF TO THE ASSESSEE. THE CIT(A) A LSO RELIED ON THE DECISIONS OF THE TRIBUNALS AS WELL AS JUDGMENTS OF HON'BLE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE ETC. AND HELD AS UNDER : 5. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF T HE APPELLANT IN THE LIGHT OF THE FACTUAL MATRIX OF THE CASE AND THE LEG AL POSITION ON THE SUBJECT. ON THE ISSUE OF PROVISIONS FOR WARRANTY AN D PROVISION FOR AFTER SALES COST, I AM OF THE VIEW THAT IN SUM AND SUBSTA NCES, THEY ARE ONE AND THE SAME. IN THIS REGARD, I ALSO PLACE RELIANCE ON THE JUDGMENT RENDERED BY THE HON'BLE ITAT E BENCH, MUMBAI IN I TA NOS. 3677 & 8219/MUM/2004, WHEREIN, IT HAS BEEN HELD THAT 4 ITA NO.722 /PUN/2016 A.Y.2010-11 5. WE HAVE CONSIDERED THE RIVAL SUBMISSION AND PER USED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE CONT ENTION OF THE ASSESSING OFFICER THAT THE ASSESSEE COMPANY CAN DEB IT THE EXPENDITURE RELATING TO THE SALES WARRANTY DIRECTLY TO THE P & L ACCOUNT IS NOT ACCEPTABLE WHEN THE ASSESSEE IS ESTI MATING THE WARRANTY LIABILITYES ON THE BASIS OF SOME SCIENTIFI C METHOD AND THE SAME SYSTEM IS FOLLOWING SINCE SEVERAL YEARS. T HE ASSESSING OFFICER IS NOT JUSTIFIED TO ADD THE PROVISIONS MADE DURING THE YEAR UNDER DISPUTE. IT IS FURTHER OBSERVED THAT THE ASSESSEE IS CREDITING EXCESS PROVISION TO THE PROFIT AND LOSS A CCOUNT AS AND WHEN THE PROVISIONS ARE EXISTED THAN THE REQUIRED. UNDER THESE CIRCUMSTANCES, WE FIND NO INFIRMITY IN THE ORDER OF THE LD.CIT(A) WHICH IS IN ACCORDANCE WITH THE VARIOUS TRIBUNAL DE CISIONS. THIS GROUND OF THE REVENUE THEREFORE, FAILS. IN THIS REGARD, I ALSO PLACE RELIANCE ON THE JUDGME NT RENDERED BY THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDIA LTD.(SUPRA.), WHEREIN IT HAS BEEN HELD THAT A LIABILITY DETERMINE D ON A SCIENTIFIC BASIS CANNOT BE REGARDED AS A CONTINGENT LIABILITY AND TH E PROVISION MADE FOR WARRANTY IN RESPECT OF GOODS SHOULD BE ALLOWED U/S. 37(1) OF THE ACT. RESPECTFULLY, FOLLOWING THE DECISIONS OF HON'BLE IT AT E BENCH, MUMBAI IN ITA NOS. 3677 & 8219/MUM/2004, HON'BLE SU PREME COURT IN THE CASE OF ROTORK CONTROLS INDIA LIMITED AND TH E APEX COURT IN THE CASE OF INDIAN MOLASSES CO. (P.) LTD., I HAVE NO HE SITATION IN DELETING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF PROVI SION FOR WARRANTY OF RS.1,53,30,352/- AND AFTER SALES COST OF RS.3,95 ,09,000/-. HENCE, GROUND NO.1 STANDS ADJUDICATED. 5. AGGRIEVED WITH THE RELIEF GRANTED BY THE CIT(A) TO ASSE SSEE, THE REVENUE IS IN APPEAL BEFORE US WITH THE GROUNDS EXTRACTED ABOVE. 6. BEFORE US, THE LD. DR FOR THE REVENUE HEAVILY RELIED ON THE ORDER OF ASSESSING OFFICER AND SUBMITTED THAT ASSESSEE HAS NOT FU RNISHED PROPER CALCULATION AND DETAILS OF THE EXPENDITURE INCURRED ON ACC OUNT OF SAID PROVISIONS I.E. PROVISION OF WARRANTY AND AFTER SALES COST. 7. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSE E DESCRIBED THE MANNER IN WHICH THE ASSESSING OFFICER MADE ADDITION WITHOUT CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN RIGHT PERSPECTIVE. RELY ING HEAVILY ON THE ORDER OF CIT(A), LD. COUNSEL SUBMITTED THAT, ON SIMILAR FACTS, T HE CLAIM OF THE ASSESSEE WAS ALLOWED IN PREVIOUS ASSESSMENT YEARS IN ASSESSEES OWN CASE. HE CITED THE LIST OF CASES IN WHICH RELIEF WAS GRANTED BY THE TRIBUNAL 5 ITA NO.722 /PUN/2016 A.Y.2010-11 AND THE HON'BLE HIGH COURT RELYING HEAVILY ON THE DATA TABULATED IN CIT(A)S ORDER IN PARA 4 ( PAGE-7). HE ALSO RELIED ON THE APEX COUR T JUDGMENT IN THE CASE OF ROTORK CONTROLS INDIA LTD. (SUPRA.). HE FURTHER SUBM ITTED THAT UPTO 80% OF THE ACTUAL PROVISION WAS FINALLY UTILIZED IN THE NEXT T O NEXT YEAR (12 TO 18 MONTHS OF THE WARRANTY PERIOD.) 8. WE HAVE HEARD BOTH THE PARTIES ON THIS LIMITED ISSUE OF ALLOWABILITY OF PROVISION OF WARRANTY AND AFTER SALES COSTS. THIS ISSUE IS P ERENNIALLY BEING RAISED BY THE REVENUE SINCE ASSESSMENT YEAR 1998-99 O NWARDS. THE DETAILS OF THE SAME ARE EXTRACTED AS UNDER: A.Y. ITA NO./ CIT(A) NO. RELEVANT PARA NO./PG. NO. OF THE ORDER RELEVA NT PG. OF PB REMARKS 1998-99 2790/M/03 PARA 5/PAGE NO.2 NO APPEAL FILED BY THE DEPARTMENT AGAINST THE SAID DISALLOWANCE BEFORE THE HON'BLE BOMBAY HIGH COURT. 1999-00 5047/M/04 PARA 2/ PAGE NO.1 2000-01 3677/M/04 PARA 21/PAGE NO.6 2001-02 8219/M/04 PARA 36/PAGE NO.10 2002-03 N.A N.A ALLOWED BY AO IN ASSESSMENT. 2003-04 2871/M/07 PARA 11/ PAGE NO.4 NO APPEAL FILED BY DEPARTMENT AGAINST THE SAID DISALLOWANCE BEFORE THE HON'BLE BOMBAY HIGH COURT. 2004-05 6135/M/07 PARA 12/PAGE NO.11 2005-06 3366/M/10 PARA 14/PAGE NO.13 2006-07 4435/M/11 PARA 2/ PAGE NO.2 2007-08 6740/M/11 PARA 3/ PAGE NO.2 2008-09 IT- 205/2011- 12 PARA 1.2/ PAGE 4 NO APPEAL FILED BEFORE THE HON'BLE ITAT BY THE 6 ITA NO.722 /PUN/2016 A.Y.2010-11 2009-10 U/S. 143 (3) OF THE IT ACT. PAPER BOOK 111 DEPARTMENT AGAINST THE RELIEF GRANTED BY THE HON'BLE CIT(A)/AO. FROM THE TABLE EXTRACTED ABOVE, IT IS EVIDENT THAT THE CLAIM OF THE ASSESSEE IN PRINCIPLE IS ALLOWED BY THE HONBLE JURISDICTIONA L HIGH COURT IN ASSESSEES OWN CASE IN MANY ASSESSMENT YEARS I.E. 1998- 99 TO 2009-10. IT IS ALSO EVIDENT FROM THE ABOVE TABLE THAT THE ASSESSING O FFICER HIMSELF ALLOWED CLAIMED OF THE ASSESSEE IN ASSESSMENT YEAR 2002-0 3 AND 2009-10. IN SAME ASSESSMENT YEAR, THE DEPARTMENT ACCEPTED THE SAID DECISION OF THE TRIBUNAL AND NEVER FILED APPEAL BEFORE THE HON'BLE BOMBAY H IGH COURT. AS SUCH, DECISION OF CIT (A) IS, IN PRINCIPLE, AS PER JUDGMENT LAID DOWN BY THE HON'BLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA LTD. (SUPRA.). IT IS A SETTLED LEGAL PRINCIPLE THAT IN ANY CASE WHERE ESTIMATION IS DONE BASED ON SCIENTIFIC METHOD AND CALCULATED PROPERLY, THE PROVISION MAD E FOR WARRANTY IN RESPECT OF GOODS SHOULD BE ALLOWED U/S. 37 (1) OF THE ACT . THEREFORE, WE ARE OF THE OPINION THAT THE ORDER OF THE CIT(A) IS FAIR AND REASONABLE AND THE SAME DOES NOT REQUIRE ANY INTERFERENCE. ACCORDINGLY, GRO UNDS RAISED BY THE REVENUE ARE DISMISSED. 9. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 25 TH DAY OF SEPTEMBER, 2018. SD/- SD/- ( ! /VIKAS AWASTHY) ( . / D. KARUNAKARA RAO ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; !' / DATED : 25 TH SEPTEMBER, 2018. SB 7 ITA NO.722 /PUN/2016 A.Y.2010-11 ) * +',- . ', / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT (APPEALS)-4, PUNE 4. THE PR. CIT-3, PUNE. 5. %&' () , * () , +,- , / DR, ITAT, A BENCH, PUNE. 6. './ 01 / GUARD FILE. // TRUE COPY // * 2 / BY ORDER, 3 (- /PRIVATE SECRETARY * () , / ITAT, PUNE.