Appeal details
Counselvise Citation
[2009] 115 COUNSELVISE.COM (IT) 0714 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-11-2009
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
A
Assessment Year
2002-2003
Appeal Filed On
23-07-2009
Judgement Text
PAGE 1 OF 6 ITA NOS.738 & 739/BANG/2009 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A' BEFORE SHRI K P T THANGAL, VICE PRESIDENT AND SHRI N L KALRA, A.M. ITA NOS.738 & 739/BANG/09 (ASST. YEARS 2002-03 & 2003-04) THE JOINT COMMISSIONER OF INCOME TAX, LTU, BANGALORE. - APPELLANT VS M/S IBM GLOBAL SERVICES INDIA PVT. LTD., NO.12, SUBRAMANAYA ARCADE, BANNERGHATTA ROAD, BANGALORE-29. - RESPONDENT APPELLANT BY : SHRI JASON P BOAZ RESPONDENT BY : SHRI AJAY ROTTI O R D E R PER N L KALRA : THE REVENUE HAS FILED APPEALS AGAINST THE RESPECTIVE ORDERS OF LEARNED CIT(A)-IV, BANGALORE. 2. THE GRIEVANCE OF THE REVENUE FOR THE ASST. YEA R 2003-04 IS THAT THE LEARNED CIT(A) HAS ERRED IN TRE ATING THE PROVISION FOR WARRANTY AS AN ASCERTAINED LIABILITY. 2.1 DURING THE COURSE OF PROCEEDINGS BEFORE US, TH E LEARNED DR SUBMITTED THAT ESTIMATED PROVISION FOR W ARRANTY IS ALLOWABLE IN VIEW OF THE DECISION OF THE HON'BLE AP EX COURT IN PAGE 2 OF 6 ITA NOS.738 & 739/BANG/2009 2 THE CASE OF ROTORK CONTROLS INDIA P. LTD. V CIT 314 ITR 62. THE ONLY ISSUE RAISED BY THE LEARNED DR IS THAT THE A SSESSEE HAS NOT QUANTIFIED THE PROVISION FOR WARRANTY ON A S CIENTIFIC BASIS. THERE IS NO MATERIAL ON RECORD AS TO HOW TH E PROVISION MADE FOR WARRANTY JUSTIFIES THE ACTUAL LIABILITY FOR WARRANTY. IT IS TRUE THAT AN ESTIMATE IS TO BE MADE AS ESTIMATE SHOULD BE ON THE BASIS OF PAST EXPERIENCE AND THE ESTIMATE SHOUL D NOT BE EXCESSIVE. THE LEARNED DR FURTHER SUBMITTED THAT O PENING PROVISION FOR WARRANTY WAS LESS AND THE CLOSING PROV ISION FOR WARRANTY HAS BEEN INCREASED. THE ACTUAL EXPENDITURE INCURRED FOR WARRANTY EXCEEDS THE PROVISION MADE FOR WARRANTY. 2.2 ON THE OTHER HAND, THE LEARNED AR SUBMITTED TH AT THE PROVISION HAS BEEN MADE ON THE SCIENTIFIC BASIS . THE PROVISION IS ALSO BEEN WRITTEN-OFF, IF IT IS NOT RE QUIRED. HOWEVER, THE LEARNED AR WAS NOT ABLE TO PROVIDE US THE SCIENTIFIC BASIS ON WHICH THE PROVISION FOR WARRANT Y HAS BEEN MADE. NOTHING HAS BEEN PLACED BEFORE US TO SHOW TH AT ACTUAL LIABILITY FOR WARRANTY IN EARLIER YEARS FAVOURS COMPAR ABLY WITH THE PROVISIONS MADE. 2.3 WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. THE HON'BLE APEX COURT IN THE CASE OF ROTORK CONTROLS I NDIA P. LTD. (SUPRA) HAS OBSERVED THAT A PROVISION IS A LIABILIT Y WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMA TION. A PROVISION IS RECOGNIZED WHEN : (A) AN ENTERPRISE HA S A PRESENT PAGE 3 OF 6 ITA NOS.738 & 739/BANG/2009 3 OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS P ROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOU NT OF THE OBLIGATION. IF THE ASSESSEE IS MANUFACTURING SOPHI STICATED GOODS AND THE PAST EXPERIENCE OF THE ASSESSEE SHOWS THAT SOME OF SUCH MANUFACTURED GOODS ARE FOUND TO BE DEFECTIV E, THEN NO CUSTOMER WILL BE PREPARED TO PURCHASE SUCH SOPHISTI CATED GOODS WITHOUT A WARRANTY. UNDER SUCH CIRCUMSTANCES, WARRA NTY BECOMES AN INTEGRAL PART OF THE SALE PRICE OF THE S OPHISTICATED GOODS. THE HON'BLE APEX COURT HELD THAT THE PRESEN T VALUE OF THE CONTINGENT LIABILITY LIKE THE WARRANTY EXPENSE, I F PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUED BASIS, COULD BE AN ITEM OF DEDUCTION U/S 37 OF THE I T ACT. 2.4 THE BANGALORE BENCH IN THE CASE OF M/S DIGITAL EQUIPMENT INDIA LTD. IN ITA NOS.6623 AND 6624/BOM/2 008 VIDE ORDER DATED 17TH NOVEMBER, 2009 RESTORED THE M ATTER TO THE FILE OF ASSESSING OFFICER FOR QUANTIFICATION OF ALLOWABILITY OF WARRANTY EXPENSES AS IN THAT CASE, WARRANTY EXPENS ES WERE ESTIMATED AT 12% AS AGAINST 1.5% IN THE CASE CONSID ERED BY THE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD. (SUPRA). THE PERCENTAGE OF TURNOVER IS TO BE CONSIDERED ON T HE BASIS OF THE DATA AVAILABLE WITH THE ASSESSEE COMPANY FOR THE EARLIER YEARS. SINCE WE ARE NOT HAVING THE BENEFIT OF ASCER TAINING AS TO WHETHER THE PERCENTAGE APPLIED BY THE ASSESSEE FOR M AKING PROVISION FOR WARRANTY IS BASED ON THE PAST EXPERIEN CE OF THE PAGE 4 OF 6 ITA NOS.738 & 739/BANG/2009 4 ASSESSEE, THEREFORE, THE ISSUE OF QUANTIFICATION OF ALLOWING THE PROVISION FOR WARRANTY EXPENSES IS RESTORED BACK ON THE FILE OF THE ASSESSING OFFICER. 3. THE GRIEVANCE OF THE REVENUE FOR THE ASST. YEAR 2002-03 IS THAT THE LEARNED CIT(A) HAS ERRED IN ALL OWING THE PROVISION FOR OBSOLESCENCE. 3.1 THE LEARNED DR ARGUED THAT THE PROVISION IS ON LY A CONTINGENT LIABILITY. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS CREATED THE PROVISION INDEPENDENT OF T HE VALUATION OF INVENTORY. 3.2 ON THE OTHER HAND, THE LEARNED AR SUBMITTED TH AT THE ISSUE STANDS COVERED BY THE DECISION OF THIS TRI BUNAL IN THE CASE OF THE ASSESSEE FOR THE ASST. YEAR 2001-02. 3.3 THE TRIBUNAL IN THE CASE OF THE ASSESSEE FOR T HE ASST. YEAR 2001-02 VIDE ORDER DATED 30TH OCTOBER, 20 07 ALLOWED THE PROVISION FOR OBSOLESCENCE AFTER OBSERV ING AS UNDER:- 'THE COMMISSIONER OF INCOME TAX (APPEAL) NOTING THE VARIOUS FACTORS AND THE FACT THAT THE ASSESSEE HAS BEEN FOLLOWING THE SYSTEM OF ACCOUNTING PRESCRIBED BY ACCOUNTING STANDARD 2 OF INVENTORIES PUBLISHED BY THE PAGE 5 OF 6 ITA NOS.738 & 739/BANG/2009 5 CHARTERED ACCOUNTANTS OF INDIA WHICH IS AN ACCEPTED SCIENTIFIC METHOD, HE FOUND THAT IN THE PROCESS OF VALUATION OF INVENTORIES, THE CREATION OF A 'PROVISION FOR OBSOLESCENCE' OF THE INVENTORIES WAS IN ACCORDANCE WITH THE ACCOUNTING STANDARDS AND PRINCIPLES PRESCRIBED AND IS ALSO SCIENTIFICALLY JUSTIFIED TAKING TO CONSIDERATION THE RAPID TECHNOLOGICAL ADVANCES AND EVER REDUCING PRICES INCLUDING THEIR MARKETABILITY THAT REQUIRE WRITE OFF OF SUCH STOCKS. FURTHER, IT WAS ALSO FOUND THAT THIS WAS THE CONSISTENT METHOD FOLLOWED BY THE ASSESSEE AND BEING SCIENTIFICALLY BASED AND BEING RELATED TO THE VALUATION OF INVENTORIES, THE PROVISION IS TO REFLECT THE CORRECT VALUE OF THE INVENTORIES OF THE CURRENT YEAR AND HENCE, THE CURRENT LIABILITY'. FOLLOWING THE EARLIER ORDER, IT IS HELD THAT THE LE ARNED CIT(A) WAS JUSTIFIED IN ALLOWING THE PROVISION FOR OBSOLES CENCE. 4. IN THE RESULT, THE APPEAL OF THE REVENUE FOR TH E ASST. YEAR 2002-03 IS DISMISSED AND FOR 2003-04, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 30TH NOVEMBER, 2 009. SD/- SD/- (K P T THANGAL) (N L KALRA) VICE PRESIDENT ACCOUNTANT MEMBER BANGALORE, DTD.30/11/2009 PAGE 6 OF 6 ITA NOS.738 & 739/BANG/2009 6 COPY TO : 1. THE ASSESSEE 2.THE REVENUE 3. THE CIT( A) CONCERNED.4. THE CIT CONCERNED. 5. THE DR 6. GUAR D FILE. 7. GF, ITAT, NEW DELHI. MSP/25.11. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.
