TaxTMI 
TaxTMI 
2009 (9) TMI 710
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....t the assessee-company is engaged in the business of installation/erection and setting up/commissioning of various telecommunications projects. In these projects executed by the assessee, the contracts in question provide for warranty clauses in favour of the customers which is the normal industry practice. By virtue of the inclusion of the warranty clauses in the contract, the assessee-company sought to make a provision for the anticipated costs of the assessee-company' s liability under the warranties in respect of the projects executed by it. The amounts thereafter actually paid pursuant to the warranty clauses in the warranty period are subsequently met out of this provision. The assessee-company claimed that the expen....
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.... a company and for which a warranty was provided by the assessee-company then the warranty became the integral part of the sale price and consequently the warranty provisions had to be recognised because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate should be made of the amount of the obligation. The Supreme Court, therefore, held that the assessee incurs a liability for which it is entitled to deduction under section 37 of the Act. The Supreme Court, however, also noted the certain pre conditions which were required to be satisfied before allowing the making of such a provision. The relevant portions of the judgment are reproduced below (headnote) : " ....
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.... in the subsequent years that in the subsequent years higher amounts of claims towards warranty in fact took place. Counsel invited our attention to the assessment years 2004-05 and 2005-06 where provisions which were made during the year were Rs. 90,412,453 and Rs. 95,279,000, respectively, and against which the actual payments were Rs. 60,152,183 and Rs.64,711,000. Learned senior counsel contended that consequently in the subsequent years the claims of warranty, therefore, were a high percentage of the provision made. It was further contended that it is not as if a huge provision is made every year because there is a reversal in each subsequent year, i.e., although no doubt in each year provision is made as a....
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....of the warranty claims clearly showing that a sensible estimate has not been made. She referring to the chart further contended that the historical trend shows that the question of reversal in the subsequent years would not have arisen if the provision was made on a scientific basis. For the purpose of convenience, we reproduce the chart relied upon by the Revenue which is as under : Details of provision for warranty Assess- ment year Opening balance Actual war ranty expenses claimed during the year Balance Fresh provision made during the year Balance as on last date of accounting year 1998 _ 16,176 _ &nb....
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.... to be dismissed. This is because the entire stress of counsel for the Revenue on the aspect of the historical trend is not well founded inasmuch as the respondent-company commenced operation only in the year 1997-98 and in a period of 3 to 4 years it cannot be said that a " historical trend" emerges. It is not a matter of dispute that the respondent-assessee company is a multi-national company and carries out business throughout the world. The policy as prevalent for making a provision for warranty claims is universally applied by the assessee-company in various countries throughout the world where it carries on the business. Counsel for the respondent has placed reliance on its internal directives contained in its manual for t....
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....tion of this principle irons out the creases of any undue benefit to the assessee-company over a period of time and which can be said to be similar to the principle of valuation of closing stock in certain businesses at either cost or market price, whichever is lower. It is reiterated that the consistent application of the policy of provision which removes any issue of mala fides or dishonest intention on the part of the assessee-company for deferring its income because it could be that in particular year actual warranty claims may exceed the provision which is made. That the appellant-Revenue had sought framing of the following question of law : " Whether, on the facts and in the circumstances of the present case, the Tribunal was ri....