TaxTMI 
TaxTMI 
2026 (1) TMI 1301
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....ssee and ld. Counsel has submitted that the issue involved has been decided in favour of the assessee's group company. 3. The facts in brief are that the assessee company, M/s Marelli UM Electronic Systems Private Limited, is engaged in the business of manufacturing and sale of body computers, instrument clusters, electronic equipment and other products including telematics, navigation etc. for automobile manufacturers. During the year under consideration, the company had income from sale of finished goods viz. instrumental cluster, body computer and TRF, Antenna etc., other traded goods and sale of services as well. 4. During the proceedings, it was noticed that as per P&L account of the assessee for A.Y. 2021-22, the assessee has debited the P&L A/c by provision made for warranty of Rs. 90,80,952/- for the year under consideration. It was noticed that the assessee has opening balance of the provision of warranty on 01.04.2020 of Rs. 2,71,92,662/- and the assessee has also further added incremental amount of Rs. 90,80,952/- (0.5% of sales last two years) during the year however, the assessee has only utilized the provision amount of Rs. 58,05,616/- during the year under cons....
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....ning amount of provision of warranty of Rs. 32,75,336/- (9080952- 5805616) which has not been utilized from the amount of incremental amount of provision during the year, is to be disallowed and added back to the total income of the assessee for A. Y. 2021-22. 6. Therefore, the draft assessment order u/s 143(3) r.w.s 144B r.w.s 144C(1) of the Act for A.Y. 2021-22 was served to the assessee on 20.12.2023 with proposed addition of Rs. 32,75,336/- on the account of disallowance of provision of warranty and opportunity of thirty (30) days was given to the assessee for filing his objections or accept this order. Aggrieved by this draft assessment order u/s 143(3) r.w.s 144B r.w.s 144C(1) of the I.T. Act, the assessee filed a petition before the Dispute resolution panel on 16.01.2024 raising objection to the proposed addition of Rs. 32,75,336/- on the account of disallowance of provision of warranty u/s 37 of the I.T. Act. 7. The DRP has passed its order u/s 144C(5) of the Act dated 20.09.2024 and has given certain specific directions in the order regarding this proposed addition which is as under:- "the matter has been considered. Under the Act, expenditure towards ascert....
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....ovision for warranty for AY 2021-22 Amount (In Rs.) Cumulative sales for FYs 2019-20 & 2020-21 442,09,97,048 Provision required to be maintained on 31.03.2021 as per policy @ 0.6891% of sales [A] 3,04,67,998 Opening balance of provision as on 01-Apr-2020 [B] 2,71,92,662 Warranty provision utilized during the year [C] 58,05,616 Incremental provision made during the year (expense claimed in P&L A/c) [A] - {[B]-[C]} 90,80,952 Working where unutilised provision is first reversed and fresh provision is made Amount of excess provision reversed {[B]-[C]} - Credited to P&L A/c 2,13,87,046 Provision made during the year - debited to P&L A/c 3,04,67,998 Net impact on P&L 90,80,952 12. Further year wise of working of provision for warrantee along with how the issue was dealt by the revenue has been provided and for convenience the same is also reproduced below: 12.1 Lastly, we find that in the case of group company also similar fact was provided. 13. Now with regard to allowability as a deduction under Section 37 of the Act decision of Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. Vs. CIT, Chenn....
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.... 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. Therefore, 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, 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....
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....ll 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 subsequent two years, in the above example, may not arise in a significant 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 obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are - provisioning which relates to present obligation, it arises out ....