TaxTMI 
TaxTMI 
2024 (7) TMI 1437
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....l ["ITAT"] dated 31 October 2017 and has framed the following questions for our consideration: - "2.1 Whether the Ld. ITAT erred in deleting the disallowance of Provision of Liquidated Damages of Rs. 8.98 crores without appreciating that the said amount was on account of unascertained liability for which there did not exist a probability of outflow of resources? 2.2 Whether a provision can be allowed only on the basis of a clause of liquidated damages contained in an agreement without actually quantifying the amount payable to the other party and without raising any bill on account of the said contract? 2.3 Whether the Ld. ITAT erred in allowing the claim of warranty of Rs. 7.06 crores by applying the ratio decide....
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.... by the assessee. From the perusal of the submissions made by the assessee before the ld. CIT(A) and also relevant findings, we find that the assessee which is engaged in the business of manufacturing of cement plant technology equipment and for rendering services on such supply, had entered into written contract with the parties wherein there was specific clause agreed amongst the parties in relation to liquidated damages on account of delay in deliverables. The relevant clauses clearly point out that there is a contractual obligation to pay liquidated damages in respect of contract whenever there would be default in providing services on time to the customers and in terms of deliverables as agreed in the contract. Since time was the essen....
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....sed on correct appreciation of facts and law, hence we confirm the order of CIT(A) on this score and accordingly, ground No.1 raised by the Revenue is dismissed." 3. As would be manifest from the above, there is a concurrent finding which has come to be recorded by both the Commissioner of Income Tax (Appeals) ["CIT(A)"] as well as the ITAT that the liquidated damages upon being waived were written off after the same had been waived in the subsequent year. 4. Similar is the position that we find in respect of provisioning for warranty. Dealing with this aspect, the ITAT has held as follows: - "14. So far as the issue relating to disallowance of „provision for warranty‟, it is an admitted fact that under the terms ....
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....or 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 per cent 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 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 re....
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....ip services and erred in validity of suo-moto rectification order by the Ld. TPO under Section 154 of the Act when the order was passed by the Ld. TPO to give the correct effect to the Ld. DRPs order?" 7. Insofar as Question no. 2.7 is concerned, the ITAT has essentially taken into consideration, the undisputed fact that there was a failure on the part of the Transfer Pricing Officer ["TPO"] to provide an opportunity to the assessee of being heard before enhancing income. It has in this connection observed as follows : - "15. This appeal by the assessee challenges the rectification order passed by the TPO vide order dated 25.02.2016. It has been submitted that there was a failure to provide an opportunity to the assessee of bein....