Provision for warranty: deduction allowed where provision based on scientific past-claim trends and proper accounting entries.

Provision for warranty was contested as a disallowance; the article explains that the assessee quantified the warranty provision after adjusting reversals of excess prior provisions and presented accounting entries and technical justification based on past claim trends. The provision was held to be computed on a scientific basis and the accounting treatment was found consistent and uncontroverted, leading to direction to allow deduction for the warranty provision. The reasoning follows precedent recognizing reliable actuarial or empirical bases for provisioning, making the provision deductible for tax purposes.

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Issues: Whether the National Faceless Appeal Centre (NFAC) was justified in confirming the disallowance of the assessee's provision for warranty for AY 2014-15.

Analysis: The assessee manufactures technical and complex products (ECUs) and maintained a warranty provision equal to 0.5% of net sales for the two-year warranty period. The assessee provided detailed year-wise computations, accounting entries, and explanation of the methodology based on past trends and risk factors relevant to the product. The rationale for the provision remained uncontroverted before the Tribunal and reliance was placed on the Supreme Court decision in Rotork Controls India (P) Ltd which supports allowance of provisions made on a scientific basis. The Tribunal found no infirmity in the calculation or the accounting treatment and concluded that the provision was determined on a scientific basis taking into account historical claim experience.

Conclusion: Deduction for the provision for warranty is allowed in favour of the assessee; the disallowance confirmed by the NFAC is set aside and the appeal is allowed.

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