TaxTMI 
TaxTMI 
2026 (8) TMI 47
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....ether and the facts in issues are identical, both the appeals are being disposed of by this common order for the sake of convenience and brevity. 3. The grounds of appeal raised by the assessee in ITA No.5349/Del/2025 for AY 2017-18 are as under: 1. Based on the facts and circumstances of the case, Sona BLW Precision Forgings Limited (the Assessee) respectfully submits the present appeal before the Hon'ble Income Tax Appellate Tribunal (Hon'ble ITAT") under Section 253(1)(a) of the Income-tax Act. 1961 ('the Act"), against the order dated 10 June 2025 (hereinafter referred to as the 'impugned order), passed by Commissioner of Income-tax (Appeals), NFAC ('Ld. CIT(A)") under Section 250 of the Act, on the following grounds, which are without prejudice to each other: Disallowance of provision for warranty amounting to INR 1,40,00,000 1. Based on the facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in upholding the order passed by the Assistant Commissioner of Income-tax, Corporate Circle 1(2) Che ('Ld. AO') and confirming the disallowance of claim of deduction of provision for warranty amounting to INR 1,....
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....mstar Automotive Technologies Private Limited (Comstar'") has been amalgamated with the Assessee pursuant to the order of the Hon'ble National Company Law Tribunal ('NCLT') Chandigarh Bench dated 7 January 2022 with effect from 5 July 2019. Comstar was engaged in the business of manufacturing and assembly of starter motors, alternators, and starter kits forming part of the automobiles in the domestic and international market. Comstar (hereinafter referred to as 'the Assessee) filed its income-tax return for AY 2017-18 on 23 November 2017 under section 139(1) of the Act declaring a total income of INR 1,44,97,74,420. Subsequently, the Assessee filed revised return on 23 August 2018 declaring a total income of INR 1,38,10,38,210. The case was selected for scrutiny assessment and accordingly notice under Section 143(2) of the Act was issued for AY 2017-18. 5. The Ld. AO completed the assessment vide order dated 26.12.2019 under Section 143(3) of the Act by making the following disallowances: Income as per Normal provisions of the Act Amount in INR Taxable income as per return of income 138,10,38,210 Add: Disallowance of provision for warranty 1....
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....y the Assessee on an accrual basis is purely scientific in nature and is well supported by the judgement of Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (2009) 314 ITR 62 (SC) and therefore, should be considered as a legitimate trading expense allowable under Section 37(1) of the Act. 11. The ld AR relied on the decision of coordinate bench of ITAT in the case of Marelli Um Electronic Systems (P.) Ltd. vs. DCIT/Assessment Unit, Income-tax Department [2025] 181 taxmann.com 660 (Delhi - Trib.) and on the decision of Karnataka High Court in the case of Apple India (P.) Ltd. Vs Deputy Commissioner of Income-tax [2023] 152 taxmann.com 102 (Karnataka). 12. With respect to Ground No. 2 the AR stated that the Assessee has entered into an Intellectual Property Transfer Agreement with its Parent Company in Mauritius during August 2009. Accordingly, the payments were made to its Parent Company to the tune of INR 44.10 crore for use of the Patents during the AY 2010-11. The issue was contemplated before the Hon'ble Settlement Commission. The Commission upon hearing both the parties, has passed its order dated 30 June 2016, whereby the said payment to the pa....
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....n 195A of the Act which provides that where the income is payable "net of tax", then, for the purpose of deduction of tax, such amount of payment would be increased by the amount of tax. In other words, the net amount is required to be grossed-up for the purpose of deduction of tax at source. In light of the above, the Assessee prays to your Honor to allow the claim for deduction of withholding tax amounting to INR 1,33,33,333 (paid on a gross-up basis on the royalty payment) as a business expenditure for the captioned year. The Assessee in this regard submits that, as per the ratio laid down by the above-mentioned judicial precedents and in accordance with the provisions of the Act, the amount of INR 1,33,33,333 forms an integral part of the royalty consideration payable to the Parent Company and thus deserves to be deducted as a business expense while computing the income chargeable to tax under the head "Profits and gains of Business or Profession". 16. Per contra the ld DR vehemently relied on the orders of AO and the CIT(A). 17. We have heard the rival submissions and have carefully perused the materials on record. We note that it is an admitted fact that Warranty repres....
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....tegral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. 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 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 ....
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....cts by the AO, then the deduction of the same should be allowed. The ITAT decision is reproduced as under: "14. We find that Id. tax authorities had considered addition on account of provision for warrantee primarily on the basis that when assessee already had an opening balance of provision of more than.5% sales of last 2 years then assessee had no need to increase provision by an amount of Rs. 90,80,952/-, We are of the considered view that once the practice of providing provision of the nature of warrantee has worked out over the years then only for the reason of the opening balance being sufficient to discharge the events of satisfying the liability during the year cannot be a basis to dilute the warrantee claim. Provisions are established to be on the basis of experience and historical trend which have not been countered by any facts establishing that the working of the provision itself is faulty. There is no allegation that the nature of products and services do not give rise an obligating event so as to not create a provision. The year wise working of provision for warrantee provided to us and reproduced above show that the warrantee provision utilized during the ye....
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.....2016, the applicant filed another letter stating that in the spirit of settlement and to put a quietus to all disputable issues Rs. 12 crores may be allowed as royalty payable on the IPs. and the rest Rs. 32.10 crores treated as dividend paid u/s 115O to CML. The applicant has further undertaken to pay the with-holding taxes at 10% on the amount of royalty (Rs. 12 crores) by grossing up the payment together with the appropriate interest w/s.201 of the Act till the date of payment of with-holding taxes...... 8.5.3. Taking into consideration all the facts and circumstances of the case, it is held that a sum of Rs. 12 cores be allowed as royalty to meet the ends of justice. The offer made by the applicant vide its letter dated 24.6.2016 is found to be reasonable and fair....." 24. We further find that the Settlement Commission did not adjudicate on the issue of the taxes paid amounting to Rs 1,33,33,333 on the said Royalty payment of Rs 12,00,00,000 made to the Parent Company, being allowable or not. We find that the taxes paid on Royalty payment was only in discharge of the tax liability of the Parent Company which the Assessee had undertaken in terms of the IPR agreemen....
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....icial precedents, when, as in the instant case, the liability of withholding taxes is borne by the assessee, then the amount of withholding taxes is to be considered as having acquired the character of cost that forms an integral part of the entire consideration paid as royalty. We are therefore of the considered view that the claim for deduction of withholding tax amounting to Rs 1,33,33,333, paid on a gross-up basis on the royalty payment, as a business expenditure for the captioned year is an allowable expenditure. The disallowance made by the AO is accordingly deleted. The ground is allowed. 27. Ground 3 regarding levy of taxes u/s 234C is consequential in nature. 28. The grounds of appeal raised by the assessee in ITA No.5350/Del/2025 for AY 2018-19 are as under: "Based on the facts and circumstances of the case, Sona BLW Precision Forgings Limited ('the Assessee) respectfully submits the present appeal before the Hon'ble Income Tax Appellate Tribunal (Hon'ble ITAT) under Section 253(1)(a) of the Income-tax Act, 1961 ('the Act'), against the order dated 10 June 2025 (hereinafter referred to as the 'impugned order"), passed by Commissioner....
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....der Section 35(2AB) of the Act. 3.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the amount of deduction upto the amount stated in Form 3CI., thereby disallowing part of in-house scientific research expenditure, amounting to INR 1,36,70,201, failing to appreciate that once the in-house research and development facility is approved by DSIR, all expenses incurred on scientific research is required to be allowed as deduction under Section 35(2AB) of the Act. Interest under Section 234C of the Act 4. Based on the facts and circumstances of the case and in law, the Ld. AO has erred in computing interest under Section 234C of the Act at INR 2,16,459. 4.1. On the facts and circumstances of the case and in law, Ld. AO has erred in computing interest under Section 234C of the Act amounting to INR 2,16,459 on the assessed income instead of returned income. The Assessee prays for leave to add, alter, amend and/or modify any of the grounds of appeal at or before the hearing of the appeal." 29. Comstar (hereinafter referred to as 'the Assessee) filed its income-tax return for AY 2018-19 on 25 ....
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....as disallowed. S. No. Nature of expense Amount of expense reported under Form 3CL by DSIR (A) Amount of dedn allowed by AO (150% of A) 1. Capital expenditure 5,79,25,492 8,68,88,238 2. Revenue expenditure 11,95,60,000 17,74,85,492 Total 17,93,40,000 26,62,28,238 Thereafter, the Ld. CIT(A) upheld the said disallowance 35. The ld counsel of the assessee submitted that section 35(2AB)(1) of the Act provides that it is only the in-house R&D facility that should be approved by DSIR and no approval from DSIR is required in respect of the expenditure eligible for weighted deduction. Further Section 35(2AB)(1) refers to 'any' expenditure, therefore, weighted deduction is to be allowed on expenditure 'so incurred'. The ld AR referred to Section 35(3) of the Act which provides that if any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, CBDT shall refer the question to DSIR, whose decision shall be final. Section 35(3) of the Act does not provide the scope for referring to DSIR for determi....
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....to 460 of the PB) * Banco Products (India) Ltd. vs. DCIT [2018] 95 taxmann.com 132 (Gujarat HC) (Refer Page No. 480 to 487 of the PB) * USV Ltd. vs. DCIT [2012] 24 taxmann.com 218 (Mumbai Trib.) (Refer Page No. 488 to 502 of the PB) 38. The ld DR vehemently relied on the order of the AO and the CIT(A). 39. We have heard the rival submissions and have perused the materials on record. As far ground 2 is concerned, the decision rendered herein above for AY 2017-18 applies mutatis mutandis to the facts of the case for AY 2018-19. The ground is therefore allowed. 40. To adjudicate the issue in ground 3, it would be pertinent to extract the relevant provision of law u/s 35(2AB). "(2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to on....
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....ation of expenditure incurred in accordance with Rule 6(7A) are preparatory steps and a pre-condition for the ultimate consideration of deductions under section 35(2AB). 20. Interpreting Section 35(2AB) and Rule 6 in the manner suggested by the respondent would also appear to be wholly illogical when one bears in mind the indubitable fact that Section 35(2AB) is aimed at according deductions in respect of expenditure already incurred. This is manifest from the provision using the expression "expenditure so incurred." If the expenditure which could form the subject of Section 35(2AB) were to be restricted only to that which is incurred post the grant of approval to the center in terms of Rule 6(5A), there would hardly be any incentive for the creation of such a facility. The irrationality of that stand further comes to the fore when one bears in mind the fact that if the facility were not existing, there would be no occasion for the DSIR to either inspect the same or enter into a collaborative arrangement. 22. Both Section 35(2AB) and Rule 6 speak of expenditure which has already been incurred and therefore it would be wholly incorrect to read those provisions as e....