Where the provision of warranty was made on scientific way and based on past history it was allowed as deduction: Dell International case
Provisions for expenditures have to be made in the reasonable way otherwise the same may be disallowed while computing the income and tax thereon of an assessee. Recently, in Dell International Services India Pvt. Ltd. vs. DCIT [IT(TP)A No.85/Bang/2014 & CO No.21/Bang/2016 [in IT(TP)A No.1838/Bang/2013] and JCIT vs. Dell International Services India Pvt. Ltd.[ IT(TP)A Nos.1838/Bang/2013 & 1026/Bang/2014],{decided on 13.10.2017}, one of the ground raised by Revenue was that the CIT(A) had erred in allowing the excess provision towards warranty expenses created by the assessee without appreciating the fact that the AO has clearly brought out the fact that the provision was made in an unscientific way.
Briefly, the assessee was in the business of trading in computer systems besides providing software development services (IT services) and also Information Technology Related Services (ITRS). The AO found from the profit and loss account of the assessee that in arriving at the profits of the business, the Assessee had claimed as deduction a sum of Rs. 4,71,61,000/- towards ‘warranty expenditure’. Out of this amount, a sum of Rs. 2,21,80,000/- was actually paid by the assessee on account of warranty claims made by the customers. Thus the balance amount of Rs. 2,49,81,000/- was only a provision made for possible claims on account of warranty liability. According to the AO, the expenditure being contingent one, the same cannot be allowed as a deduction only computing income from business.
The plea of the Assessee before the AO was that the provision for liability on account of possible warranty claim was made on a scientific basis with minimum margin of error. The Assessee claimed that the liability to incur the expenditure on account of warranty liability was a certain liability and that the quantification of such liability was based on sales made in each year and the quantum of claims on account of warranty liability as a percentage of sales in the past. The assessee also relied on the decision of the Hon’ble ITAT in its own case for the assessment years 2003-04 and 2004-05, wherein similar claim was held to be a liability of the Assessee and allowable as deduction while computing income from business of the Assessee. The Assessee thus claimed that the liability in question was not contingent liability and should be allowed as deduction.
The AO examined the aspect whether the provision by the Assessee on account of warranty liability was made on scientific basis with minimum margin of error. He was of the view that in making a provision on account of warranty liability the Assessee merely adopts a formula and by doing so claims that the liability was an ascertained liability. He was of the view that the estimation made should be more or less equal to the actual expenditure incurred. The AO examined the provision made for liability on account of warranty claims by the Assessee in the past and the actual liability it discharged on account of such claims, which was as follows:
