TaxTMI 
TaxTMI 
TaxTMI 
2018 (6) TMI 1557
X X X X Extracts X X X X
X X X X Extracts X X X X
....her hardware supplied by the Respondent- Company to its customers. The Learned Tribunal also referred to and relied upon the decision of the Hon'ble Supreme Court in the case of IBM India Ltd -v- CIT (A) [290 ITR (at) 183] . The relevant portion of the order of the Tribunal is quoted below for ready reference: "5. We have heard the rival contentions and perused the material available on record. We are of the considered view that the assessee's case clearly falls in line with the legal ratio set out by the various appellate decisions cited at Bar in so far as the provision for warranty stood crystallized as soon as the sale was made which a customer would like to be fulfilled within the warranty period and is at the cost of an assessee's goodwill. Therefore the residual amount purported to have been held by the Assessing Officer as an excess provision cannot be considered as a contingent provision and not an ascertained liability. The warranty period continues beyond an year which fact was rightly considered by the Id.CIT(A) confining to the various decisions such as IBM India Ltd (supra) reported in 290 ITR (AT) 183. Similar view has been taken by other co-ordinate Benches of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sideration. In view of the discussion above, a sum of Rs. 84,79,478/- is disallowed, being provision for warranty." 4. The First Appellate Authority - CIT [Appeals], however, granted the desired relief to the Respondent- Assessee with the following observations: "3.2 In the grounds of appeal and submissions, the appellant submits that provision for warranty is allowable as a deduction. I find that there is a detailed order of the ITAT, Bangalore Bench 'B' in ITA No.755/Bang/03 dated 2.3.2006 in the case of IBM India Ltd. in that case, the ITAT held that provision for warranty is revenue expenditure. Respectfully following the decisions of the ITAT mentioned above, it is held that the provision for warranty cannot be treated as a contingent liability. The AO is directed to allow the appellant's claim for deduction of provision for warranty." 5. The Second appeal filed by the Revenue before the Tribunal also failed. Hence, the present appeal before us by the Revenue. 6. The Learned Counsel for the Revenue Mr.K.V.Aravind submitted that the Assessing Authority had followed the decision of the Hon'ble Supreme Court and finding that the Respondent-Assessee company ha d not adopt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by the Company itself has been reversed by the respondent-Company and only the provision to the extent of making an adequate provision for meeting such possible expenses for repairs and maintenance has been debited by the Assessee- Company in its books of accounts over the period of six years, the details of which are given by the Assess ing Authority itself in the assessment order. 9. We are absolutely at a loss to understand how the Assessing Authority has found the said consistent practice of the Assessee-Company to be unscientific and untenable and then proceeded to disallow the entire claim of provision made by the Assessee-Company in this regard. Neither allowing t he provision made for warrantees nor the actual expenses incurred by the company to be deducted from the profits of the company during the year is absolutely arbitrary and unscientific on the part of Assessing Authority, to say the least. There was absolutely n o basis for the Assessing Authority to make both the disallowances of provision for warranty as well as actual expenses at the same time in the hands of the Respondent-Assessee. In view of the comparison of actual expenses and provisions made for warrant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itions are not met, no provision can be recognized. 11. 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. 12. 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 fro m 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 o f resources to settle that obligation. Where 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. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under Section 37 of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfills 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 relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning pol....