TaxTMI 
TaxTMI 
2018 (11) TMI 600
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....erred to and relied upon the decision of the hon'ble Supreme Court in the case of Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC) ; [2009] 180 Taxman 422 (SC). The relevant portion of the order of the Tribunal is quoted below for ready reference : "4. We have heard the learned Departmental representative as well as learned authorised representative and considered the relevant material on record. At the outset we note that this is a recurring issue for last several assessment years and has been decided in favour of the assessee by this Tribunal. This Tribunal in the assessee's own case for the assessment years 2007-08 and 2008-09 vide order dated November 4, 2015 in ITA Nos. 1179 and 1180/Bang/2012 has held in paras 9 to 12 as under : '9. We have also heard the learned Departmental representative and considered the facts and materials on record including the deci sions cited before us. 9.1 While dealing with the issue in the order dated January 30, 2009 in ITA No. 774/Bang/2010 it has been observed as under : "5. We have heard the rival contentions and perused the mate rial available on record. We are of the considered view....
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....on is provided below (page 72 of 314 ITR) : "In this case, we are concerned with product warranties. To give an example of product warranties, a company dealing in computers gives a warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for war ranty expense in the year in which it is incurred ; (b) it makes a pro vision for warranty only when the customer makes a claim ; and (c) it provides for warranty at 2 per cent. of turnover of the company based on past experience (historical trend) . . . Under the circumstances, the third option is the most appropriate because it fulfils accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing the relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently . . . If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way." ....
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....record any specific method used to arrive at the estimate of defective pieces. In fact, in the first place there should have been a meticulous and sound method to arrive at the rate of defects. Only after that stage is crossed one can create the required provisions. As per the order (supra) that exercise does not get over there. Over the years the figures have to be relooked and changed to suit the changing rate of defects. Even this has not been done. In short it can be concluded that the provisions for warranty are not created on a scientific basis. Therefore such provision should not be allowed. 5.5 After analysing the facts as per the order of the Supreme Court, i.e.,-whether the working has been robust based on historical data, whether there is minimal reversals, whether the estimates are reduced as one approaches the end of the warranty period and whether any detailed assessment of the warranty provisions had been done ? It is seen that the predominant answer to all these questions in this case is 'No'. 5.6 To highlight again, from the details furnished by the assessee it is also seen that the provisions created as a percentage to the actual claims, ....
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....initial provision created after ascertaining the actual amount spent out of such provision, taking into account the actual complaints received and repairs and maintenance undertaken by the respondent-assessee for the customers, consistently a reasonable amount of provision was made by the assessee by reversing the excess provision made in each year and the very trend of reducing percentage of provision for warrantees over sales going down from 3.36 per cent. in the assessment year 2004-05 to 1.87 per cent. in the current assessment year 2009-10, would show that no excess provision was created by the assessee-company to claim unnecessary deduction from the taxable profits of the respondent-company and since a consistent scientific method has been adopted by the respondent-assessee, the learned assessing authority could not have arrived at any such findings for alleged unscientific method adopted by the assessee and therefore, disallowance of the entire claim of provision in this regard of Rs. 20,00,38,020 (rupees twenty crores thirty eight thousand and twenty only) by the assessing authority is wholly unjustified. He even submitted before the court that the assessee- company moved f....
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.... at the manner in which the assessing authority in the present case has very casually disallowed the said claim in the hands of the respondent-assessee. Moreover, when the higher appellate authorities have corrected the said approach of the assessing authority by the first appellate authority allowing the appeal of the assessee and the Tribunal dismissing the appeal of the Revenue, we are all the more pained to see that the Revenue still felt dissatisfied and has brought up the matter before this court under section 260A of the Act without actually any substantial question of law arising in the matter. This reflects the irresponsible manner in which the Revenue Department becomes a frivolous litigant in Constitutional courts, by dragging such case, wasting public time and money. 11. As is well settled, the appeal under section 260A of the Act lies before this court only on substantial questions of law. The final fact findings of the Tribunal under the Act are binding on this court and cannot be disturbed unless they are found to be perverse on the basis of established material on record. We do not find any such case of revenue in the present appeal. 12. Moreover, we are satis....
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....uch items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling valve actuators. They are in the business from the assess ment years 1983-84 onwards. Valve actuators are sophisticated goods. Over the years appellant has been manufacturing valve actuators in large numbers. The statistical data indicates that every year some of these manufactured actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. There fore, the warranty became integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obli gations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. ....
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....nd of the period pre scribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the esti mate at the year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the sub sequent two years, in the above example, may not arise in a signif icant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obli gation w....