AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (6) TMI 1732
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....#39;ble Supreme Court in the case of Rotork Controls India (P) Ltd., v. Commissioner of Income-tax, Chennai (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 and considered the facts and materials on record including the decisions cited before us. 9.1 While dealing with the issue in the order dated 30.1.2009 in ITA No. 774/Bang/2010 it has been observed as under: "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 righ....
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....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"...... If warranty provisions are based on experience and historical trends(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". 11.4. In the assessee's own case in identical facts for the immediately preceding year, the Tribunal in ITA No. 774 & 877/Bang/2008 vide order dated 30.1.2009 has decided the issue in favour of the assessee. The relevant finding of the Tribunal at para 5 of its order reads as follows:- "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 warr....
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.... there is no scientific basis or method being followed as claimed by it. Under the circumstances, any provision not being an allowable expenditure under the provisions of the Income-Tax Act, a sum of Rs. 10,16,76,472/- has to be disallowed. It is seen that the warranty provision made is in respect of two units, viz., 80IB unit and non 80IB unit, amounting to Rs. 7,52,95,286/- and Rs. 2,63,81,186/- respectively, which are reworked as per Annexure-I." 4. The First Appellate Authority - CIT [Appeals], however, granted the desired relief to the Respondent-Assessee in view of the decision of the Hon'ble Supreme Court in Rotork Controls India (P) Ltd., with the following observations: "7. The above shows that warranty provisions are of two types viz., warranty for one years known as 'ordinary warranty especially given for Laptops and warranty for 3 years known as comprehensive warranty given for servers and Desktops. The average failure rate for laptop has been estimated at 70% and accordingly provision has also been made at 70%. For server the provisions have been made @ 50% of the sale price whereas the failure rate has been calculated at 0023%, 0105% & 0112% respectively fo....
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....t 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. 10,16,76,422/- [Rupees Ten Crores Sixteen Lakhs Seventy Six Thousand, Four Hundred and Twenty two only) by the Assessing Authority is wholly unjustified. He even submitted before the Court that the Assessee-Company moved for rectification of the said order claiming the alternative relief of allowing the actual expenses incurred during the year, which were in excess of the provision to the extent of Rs. 10,16,76,422/- [Rupees Ten Crores Sixteen Lakhs Seventy Six Thousand, Four Hundred and Twenty two only) but even that was not allowed to the Assessee-Company by the Assessing Authority and thus the assessee was put to a disadvantage in both ways, which was quite illegal. 8. Having heard the learned Counsels for the parties, we are of the clear opinion that no substantial question of law arises in the present appeal filed by the Revenue. We are satisfied that the Respondent-Assessee company has consistently followed the similar practice with regard to making provision of warranty given to the customers for provi....
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....d money. 11. As is well settled, the appeal under Section 260-A 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 satisfied that the practice of making a provision for warranty in the present case has been found to be consistent, scientific and regular by the two Appellate Authorities below in consonance with the judgment of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra). The Hon'ble Supreme Court in the aforesaid case, discussed in detail how the accounting entries for product warranty are to be made by the Assessees. We quote below the relevant portion of the judgment for ready reference: "10. What is a provision? This is the question which needs 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 o....
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....s are important. As stated above, obligations 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. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. 13. In this case we are concerned with Product Warranties. To give an example of Product Warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2% of turnover 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 a....