Higher warranty provision cannot be disallowed without examining basis/working of claim

Brief of the case:

The ITAT Bangalore in the case of Hewlett Packard India Sales P. Ltd held that creation of warranty Provision which is much higher than previous years provision cannot be disallowed without examining the scientific basis used by the assessee in working out the same.

Facts of the case:

• Assessee had debited a sum of Rs.74,54,02,531/- towards warranty expenditure out of which a sum of Rs. 23,72,84,914/-. was provision made for warranty in respect of goods sold during the previous years.AO disallowed the provision amount by considering the same as provision for unascertained liabilities thus, not allowable as deduction u/s 37.
• Aggrieved by the order of AO assessee moved an appeal before CIT(A) , who allowed the assessee’s appeal by relying on the judgement of the Hon’ble Supreme Court in the case of Rotork Controls India P. Ltd [314 ITR 62].
• Aggrieved by the CIT(A)’s order , revenue is in appeal before tribunal.
  

Contention of the Assessee:

• Assessee justifying the increase in warranty provisions as compared contended that the said increase was due to change in methodology proviy of ascertain provision i.e earlier, only standard cost of parts consumed were considered for ascertaining the warranty, whereas for this assessment year it had also considered other related costs like customs duty for calculation.
• Assessee also placed reliance on the decision of Hon’ble Supreme Court in the case of Rotork Controls India P. Ltd [314 ITR 62] wherein assessee was also a party to the case and in that case court allowed the warranty provision made on scientific basis.
• It was also contended that the changed components which were included to determine warranty provision like cost of spare parts and cost of labour involved in the warranty was scientifically estimated, based on historical and technical data.

Contention of the Revenue:

• The sale in the current financial year is almost the same as that of in previous one. assessee could not show how there would be a drastic increase in provisioning when sales volumes were similar. This by itself showed that there was no scientific basis in estimating the warranty provisioning. Further such warranty provision which has been made without any scientific basis is a contingent liability and thus, not allowable.

• Though the assessee had reiterated that provision was made on a scientific basis, it had never furnished the particulars before the AO. Therefore according to him the matter required a fresh look by the AO.
  

Issue before the ITAT:

Whether the drastic increase in warranty provision inspite of a little change in sales as compared to previous financial year was allowable ?

Held by ITAT Delhi:

• The variance in the warranty provision made in the current year, as compared to the previous financial year was on account of change in methodology of computation of warranty cost. But the assessee has justified the excess provision by considering labour & spare parts costs and customs duties. Revenue has no plea in rebuttal of such additional items consideration for warranty calculation.
• None of the lower authorities have verified whether the change in methodology was based on a scientific principle and whether the computation done by the assessee was in accordance with the law laid down by the Hon’ble Apex Court in the case of Rotork Controls India P. Ltd, where assessee was also a party. We are of the opinion that this issue requires a fresh look by the AO.
• Therefore, the court opined that issue requires a fresh look by the AO. In result the court order the case remit back to the file of AO to examine the validity of assessee’s claim.