M/s Continental Automotive Components India Pvt Ltd , Bangalore V. Assistant Commissioner of Income Tax Circle-2(1)(1), Bangalore

MA 15/BANG/2022

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 4187 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 3 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 26-05-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 22-02-2022
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Set aside
• Section: 37; 254(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER MP No.15/Bang/2022 [in IT(TP)A No. 713/Bang/2017] Assessment year : 2012-13 M/s. Continental Automotive Components (India) Pvt. Ltd., Plot No.53B, Bommasandra Industrial Area, Hosur Road, Attibele Hobli, Anekal Taluk, Bangalore – 560 099. PAN: AAKCS 9578C Vs. The Assistant Commissioner of Income Tax, Circle 2(1)(1), Bengaluru. APPELLANT RESPONDENT Appellant by : Shri T. Suryanarayana, Advocate Respondent by : Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru. Date of hearing : 08.04.2022 Date of Pronouncement : 27.05.2022 O R D E R Per Chandra Poojari, Accountant Member By this miscellaneous petition, the assessee wants to rectify the order of the Tribunal dated 24.11.2021. 2. The ld. AR submitted that the assessee in its appeal by way of ground No.25 had challenged the disallowance of provision for warranty of Rs.5,21,33,004. The Tribunal discussed this issue in paras 93 to 108 and remitted the issue to the AO with the following observations:- MP No.15/Bang/2022 Page 2 of 7 “107. We have heard both the parties and perused the material on record. This issue was considered by the Hon’ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT, 314 ITR 62 (SC) wherein it was held as under:- “16. The question which arose for determination was : whether during the assessment years 1949-50, 1950-51, 1951-52 and 1952-53 the assessee-company was entitled to claim deduction of the yearly premium from its profits under section 10(2)(xv) of the Income-tax Act, 1922. It was held that the provision in the policy for surrendering annuity and the provision in policy for return of premium was not entitled to deduction as the payment made to the trustees by the assessee-company was towards a contingent liability or towards a liability depending on a contingency, namely, the life of a human-being. It was held that putting aside of money which may become expenditure on the happening of an event is not an expenditure under section 10(2)(xv) of the 1922 Act. It was held on facts that the money was placed in the hands of trustees and/or the insurance company to purchase annuities, if required, but to be returned if the annuities were not purchased. Therefore, it was a case of setting apart of the money and consequently the assessee was not entitled to deduction under the said section. 17. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation. As stated above, the case of Indian Molasses Co. (P.) Ltd. (supra) is different from the present case. As stated above, in the present case we are concerned with an army of items of sophisticated (specialised) goods manufactured and sold by the assessee whereas the case of Indian Molasses Co. Ltd. (supra) was restricted to an individual retiree. On the other hand, the case of Metal Box Co. of India Ltd. (supra) pertained to an army of employees who were due to retire in future. In that case the company had estimated its liability under two gratuity schemes and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out its estimated liability on actuarial valuation. It had made provision for such liability spread over to a number of years. In such a case MP No.15/Bang/2022 Page 3 of 7 it was held by this Court that the provision made by the assessee- company for meeting the liability incurred by it under the gratuity scheme would be entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The same principle is laid down in the judgment of this Court in the case of Bharat Earth Movers (supra). In that case the assessee-company had formulated leave encashment scheme. It was held, following the judgment in Metal Box Co. of India Ltd.'s case (supra), that the provision made by the assessee for meeting the liability incurred under leave encashment scheme proportionate with the entitlement earned by the employees, was entitled to deduction out of gross receipts for the accounting year during which the provision is made for that liability. The principle which emerges from these decisions is that if the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 of the 1961 Act. It would all depend on the data systematically maintained by the assessee. It may be noted that in all the impugned judgments before us the assessee(s) has succeeded except in the case of Civil Appeal Nos. 3506-3524 of 2009 - Arising out of S.L.P.(C) Nos. 14178-14182 of 2007 - Rotork Controls India (P.) Ltd. v. CIT, in which the Madras High Court has overruled the decision of the Tribunal allowing deduction under section 37 of the 1961 Act. However, the High Court has failed to notice the "reversal" which constituted part of the data systematically maintained by the assessee over last decade. 18. For the above reasons, we set aside the impugned judgment of the Madras High Court dated 5-2-2007 - Rotork Controls India (P.) Ltd.'s case (supra) and accordingly the civil appeals stand allowed in favour of the assessee with no order as to costs.” 108. In view of the above judgment, we direct the AO to examine the assessee’s past record and allow the provision for warranty in the same proportion as compared to the sales as in the earlier assessment years. For this purpose, the AO may consider MP No.15/Bang/2022 Page 4 of 7 the data of the immediate past five assessment years and decide the issue accordingly.” 3. Now the grievance of the assessee is that the Tribunal had not followed the binding decision of the Supreme Court in the case of Rotork Controls India Private Limited [2009] 180 Taxman 422 (SC) and committed an error by directing the AO to allow the provision for warranty in the same proportion as compared to the sales as in the earlier assessment years. According to the ld. AR, this is a mistake apparent from the record requiring rectification. It was submitted that the assessee created provision for warranty by following a scientific method and on the basis of historical data, as such it ought to have been allowed in the light of the above decision of the Supreme Court. It is further submitted that as the percentage for the provision would not remain the same year to year, allowing provision in the same proportion as compared to sales of previous years would give rise to an anomalous situation and would result in change of methodology adopted by the assessee. Accordingly, he submitted that the order of the Tribunal may be rectified. 4. On the other hand, the ld. DR submitted that there is no mistake apparent on the record in the order of the Tribunal which warrants rectification. 5. We have heard both the parties and perused the material on record. We have also gone through the earlier order of the Tribunal along with the judgment of the Supreme Court in the case of Rotork Controls India Private Limited (supra). We find that warranty provision is a liability which could be measured only by using a substantial degree of estimation. The provision is recognized when :- (a) an enterprise has a present obligation as a result of a past event; MP No.15/Bang/2022 Page 5 of 7 (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. 6. If these conditions are not met, no provision can be recognized. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Here there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. The Supreme Court in the cited case has held that when large number of sophisticated goods are manufactured and sold for warranty and past records show that defects existed in some of the items, provision made by the assessee for warranty claim on the basis of past events is allowable as deduction u/s. 37. Taking clue from this judgment, the Tribunal observed that the provision is to be quantified on the basis of past record and to allow the provision for warranty in the same proportion as compared to the sales as in the earlier assessment years. This observation is specifically made by the Tribunal on the reason that the assessee was not able to establish the scientific basis adopted by it to quantify the warranty provision. The findings rendered by the Tribunal in its earlier order is a conscious decision after due application of mind. MP No.15/Bang/2022 Page 6 of 7 Therefore, the contention of the ld. AR to rectify the earlier findings consciously taken by the Tribunal amounts to review of the earlier findings in the garb of rectification u/s. 254(2) which cannot be allowed. The power of the Tribunal u/s. 254(2) of the Act is exercisable only when there is a mistake apparent from the record. However, it does not enable the Tribunal to review its earlier findings, but has the power only to correct such error which is apparent on the face of the record. In this case, the Tribunal has taken note of the Supreme Court judgment cited by the assessee and decided the issue after taking a conscious decision. We do not see any merit in the argument of the ld. AR in seeking rectification of the earlier order of the Tribunal. In our opinion, on the issue of warranty provision, the past history of the assessee is the best yardstick to determine the allowability of provision for warranty and we do not find any error in the order of the Tribunal so as to rectify the same. We therefore reject the contentions of the ld. AR. 7. In the result, the miscellaneous petition filed by the assessee is dismissed. Pronounced in the open court on this 27 th day of May, 2022. Sd/- Sd/- ( N V VASUDEVAN ) ( CHANDRA POOJARI ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 27 th May of 2022. / Desai S Murthy / MP No.15/Bang/2022 Page 7 of 7 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.