AI Drafter 
TaxTMI 
TaxTMI 
2019 (3) TMI 1782
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....nce of Provision for Warranty ignoring the facts that the provision made is on estimate basis and the reliability and correctness of the basis cannot be ascertained. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in facts and in law in deleting the addition of Rs. 2,97,93,143/- on account of Disallowance of Technical Know-How / Royalty ignoring the fact that section 32(1)(ii) provides for depreciation @ 25% in case of intangible assets where the Technical know-how is specifically included under this category. 3. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal." 2. Briefly stated that facts necessary for adjudication of the controversy at hand are : Assessing Officer noticed that the assessee has made the provision for warranty of Rs. 2,13,40,735/- by debiting the same to P & L Account. Declining the contention raised by the assessee, AO proceeded to disallow the amount of Rs. 2,13,40,735/- created and charged to P & L Account by the assessee on the ground that the provision is made merely on estimat....
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....eds to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (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. If these conditions 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 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. Where there are....
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....of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules 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 c....
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....are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case." 10. Ratio of Rotark Controls India Ltd. Vs. CIT 314 ITR 62 (SC) (supra) is provision for liability which can be measured only by using a substantial degree of estimation. The Ld. AR for the assessee contended that the company has made a provision for warranty on scientific basis by making complete trail of sales made to M/s. Avtar Tyres and this provision was made before auditing the financial of the assessee and drew our attention towards letter dated December 26, 2012 available at page 67 of the paper book written to the AO. 11. Along with letter, assessee has given complete detail of the sale made during the year under assessment. Assessee has also brought on record before Ld. CIT(A) copy of relevant extract of complaints registered qua the sales made to Avatar Tyres as "Annexure 5". Assessee also brought on record relevant extract of claim inspection register / claimed defect identification qua the complaint filed by the purchasers of the tyre as "Annexure 6" and also brought on record letter issued for replacement reward in respect of aforesaid complaint as ....
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....ect to maximum production of 4,00,000 units. The assessee company shall make further payment of Euro 1.5 per unit for production beyond, 400,000/- units. It is also not in dispute that during the year under assessment the assessee's production was less than 4,00,000 unit, thus, made the payment of 4,00,000 Euros only. 17. The Ld. AR for the assessee contended that when the assessee was authorized to utilize "know how" received in a limited and restricted manner for its business purpose only having no right to transfer the same or to make copies thereof or to use the date and drawings for any purpose other than the manufacture of tyres in own business and on termination of the agreement, the assessee was required to discontinue use of the technology, hence, acquired no proprietary right in the know-how received from continental AG and relied upon decision rendered by Delhi High Court in CIT vs. Sharda Motor Industries Ltd. 319 ITR 109 (Del. HC), CIT vs. Hero Honda Motors Ltd. 372 ITR 481 (Del.HC). 18. The Ld. DR supported the assessment order by relying upon decision rendered by Hon'ble Supreme Court Honda Siel Car India Ltd., And decision rendered by co-ordinate bench of Trib....
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....reement was not for setting up of the factory. (b) in the cited case the foreign company who gave the technology agreed not to manufacture similar products in India while there is no such regulation in our agreement. (c) in the cited case the technical knowledge obtained was held to give an advantage of enduring nature to the assessee-company and as it had the right to continue to manufacture the product even after termination of the agreement. While in our case the design patent applies to the foreign company and we are only licensed to produce the goods for Hyundai Car and we cannot continue to produce the goods if the agreement is terminated. This itself is a major difference between the case cited by your honour and the facts of our case. On the facts and after applying the aforesaid principle, it becomes crystal clear that the expenditure is of revenue nature." 20. In a similar set of facts and circumstances, Hon'ble Delhi High Court in case cited as Hero Honda Motors Ltd (supra). held the payment made by the assessee for using technology licensed by Hero Honda Motors as revenue expenditure by returning following findings :- "....