MRF Limited Vs DCIT (ITAT Chennai)
Conclusion: Assessee had given the scientific basis for the warranty in respect of tyres sold to the truck segment and non-truck segment and further the issue was pending with the AO because AO had to verify the details in term of the decision of the Supreme court in the case of Rotork Controls India Pvt. Ltd., vs. CIT,314 ITR 62(SC). Therefore, the matter need to go back to the file of AO.
Held: Assessee was engaged in the business of manufacturing of tyres. It was noted that this matter travelled up to ITAT and ITAT in ITA Nos.641 to 645/Chny/2018 dated 09.05.2018 set aside the matter back to the file of the AO to follow the principle laid down by Hon’ble Supreme Court in the case of Rotork Controls India Pvt. Ltd., vs. CIT,314 ITR 62(SC). AO while giving appeal effect to the order of ITAT passed order and confirmed the disallowance reiterating the original findings. Aggrieved assessee preferred appeal before CIT(A). CIT(A) adjudicated the issue and confirmed the disallowance. On appeal before Tribunal. It was noted from the order of CIT(A) that neither the AO nor CIT(A) had examined the details filed before them during the set aside assessment proceedings or even remand proceedings by AO and simply noted that assessee could not establish that all the conditions prescribed in the decision of Hon’ble Supreme Court in the case of Rotork Controls India Pvt. Ltd., were satisfied. The authorities below had neither examined the issue nor gone into the details and just simpliciter confirmed the disallowance. Assessee could not produce before the AO or the CIT(A) as to how the provision was made based on historical trend and a reliable estimate as held by Hon’ble Supreme Court. Assessee had filed the details but there was no mechanism to verify the same and accordingly, the matter need to go back to the file of AO.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
These appeals by the assessee are arising out of the common order of Commissioner of Income Tax (Appeals)-12, Chennai in ITA Tr. Nos.192, 193 & 194/CIT(A)-9/2018-19 dated 31.07.2019. The assessments were framed by the DCIT, LTU-II, Chennai for the assessment years 2011-12, 2012-13 & 2013-14 u/s.143(3) r.w.s. 92CA(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide orders of different dates 19.03.2014, 31.12.2014 & 29.12.2016 respectively.
2. The only issue in these three appeals of assessee is as regards to the order of CIT(A) confirming the action of AO in disallowing the provision for warranty amounting to Rs.5.66 Crores in AY 2011-12, Rs.4.65 Crores in AY 2012-13 and Rs.10.14 Crores in AY 2012-13. For this, assessee has raised identically worded grounds in all the three years except the quantum. Hence, we will take the facts and grounds from assessment year 2011-12 and decide the issue. The relevant grounds read as under:-
2. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of provision for warranty amounting to Rs. 5.66 crore.
2.1 The Commissioner of Income tax (Appeals) erred in holding that the appellant had adopted a flat rate on the turnover of truck and non truck segment eventhough the assessee company is adopting the rate which changes from year to year based on previous year experience.
2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that warranty is an estimate based on previous experience and that actual expenditure may not match the provision and any excess or shortage in the provision is made is adjusted in the subsequent year. Rotork Controls India P.Ltd Vs. CIT, 314 ITR 62(SC).
3. Briefly stated facts are that the assessee is engaged in the business of manufacturing of tyres. We noted that this matter travelled up to ITAT and ITAT in ITA Nos.641 to 645/Chny/2018 dated 09.05.2018 set aside the matter back to the file of the AO to follow the principle laid down by Hon’ble Supreme Court in the case of Rotork Controls India Pvt. Ltd., vs. CIT,314 ITR 62(SC). The AO while giving appeal effect to the order of ITAT passed order and confirmed the disallowance reiterating the original findings. Aggrieved assessee preferred appeal before CIT(A).
4. The CIT(A) after taking remand report from the AO and the AO in his remand report for all three years agitated the issues stating that the provisions made by the assessee is of unscientific basis and the same was again retained. It was also contended that for assessment year 20 14-15 also, DRP upheld the issue for provision of warranty and even before AO nothing new was produced. The AO in his remand report dated 24.07.20 19 observed as under:-
1. The issue of warranty provisions was dealt by the Hon’ble ITAT Order in ITA No.641 to 645/Chny/201 8 dated 09.05.2018. As per Para 8.3 of the order, the Hon’ble ITAT has clearly given a finding that the provision was not made on scientific basis and no consistent method was followed by the assessee in creating warranty provisions. The Hon’ble ITAT set aside the matters to the file of the A.O. and asked for examining whether ratio of Rotork Controls India Pvt Ltd is applicable and if not then only the actual amount incurred will be allowed. Pursuant to this, the A.O. examined and found that the provisions were made on an unscientific basis and the same was again retained. The relevant orders for the same are enclosed.
2. It is also brought to your kind notice that the Hon’ble DRP for the A.Y. 20 14-15 has also upheld the issue of provisions tor warranty in form of expenses. The relevant order is enclosed.
3. In view of the above the AO/DRP has already examined the applicability of M/s Rotork Controls India Pvt Ltd in this case and found that the assessee has not made provision in a scientific manner. Since the issue is already examined, no opportunity is provided to the assessee and this office is not in receipt of any new evidences in this case.
The CIT(A) adjudicated the issue and confirmed the disallowance by observing in para 6.7 (iv) (c) & (d) & (v) as under:-
6.7….
(iv)…..
(c) In the case under consideration, the appellant is manufacturing only tyre which is a single item and not an army of items running into thousands of units of sophisticated goods. Therefore, the provision for warranty in the case under consideration can constitute a contingent liability not entitled to deduction u/s 37 as per the decision of the Hon’ble Supreme Court.
(d) The appellant could not establish satisfactorily that all the conditions prescribed by the Hon’ble Supreme Court are satisfied.
(v) In view of the above and also for the reasons stated by the AO in the appeal effect order as well as findings of the Hon’ble DRP for the AY 20 14-15, it is concluded that the facts and circumstances of the case under consideration are different and distincuishable from the facts and circumstances of the case of Rotork Controls India Pvt. Ltd., vs. CIT, 180 Taxman 422(SC)
Aggrieved assessee came in appeal before us.
5. Now before us, the ld.counsel for the assessee filed completed details of provision for warranty working for three assessment years as under:-
Provision for warranty workings for the Assessment Year 2011-12
Amount in INR Crores
