Advocate Akhilesh Kumar Sah
Recently, in Apple India Pvt. Ltd. vs. DCIT [ITA Nos.422 & 423/Bang/2018 (A.Y.s: 2013-14 & 2014-15), decided on 03.08.2018], appeals were filed by the assessee directed against different orders of the Commissioner of Income-tax (Appeals)-1 [CIT(A)], Bengaluru, dated 30/10/2017 for the AYs 2013-14 and 2014-15. Since identical issue was involved in both the appeals, the common order was passed.
Facts & Decision in brief:
Briefly, the facts of the case were that the assessee-company duly incorporated under the provisions of the Companies Act, 1956 was engaged in the business of marketing and related services for software products of Apple Co. The return of income for the AY 2013-14 was filed on 28/11/2013 declaring income of Rs.162,73,33,230/-. Against the said return of income, the assessment was completed by the DCIT, [AO], Circle 1(1), Bengaluru, vide order dated 29/12/2016 at total income of Rs.245,29,33,230/-. The disparity between the returned income and the assessed income is on account of disallowance of provisions for warranty expenses to the extent of Rs.82,56,00,000/- alleging to be excessive not based on historical data/reliable. The AO noticed that the assessee-company claimed deduction of provision for warranty expenses of Rs.147,40,08,630/-. This provision was in addition to opening provision for warranty expenses of Rs.21,41,30,976/-. The AO agreed in principle on the allowability of the provision for warranty expenditure. The AO, in order to examine whether the provision created for the year was in line with guidelines laid down by the Hon’ble Apex Court in the case of Rotork Controls India (P.) Ltd. vs. CIT (314 ITR 62)(SC), called upon the assessee-company to furnish certain details vide his questionnaire dated 21/10/2016. In response to this questionnaire, the assessee-company filed a detailed explanation on 08/12/2016. Based on the data furnished by the assessee-company, the AO observed that the closing balance of provision for warranty is increasing tremendously on account of non-utilization and therefore, he inferred that the provision for warranty was not created in a robust way and further the provision of warranty in terms of percentage of sale is not constant and varies from year to year which increased from 2% to 10%. Based on this analysis, the AO inferred that provision created based on ad-hoc basis and no scientific method was adopted nor based on the historical trends. Therefore, AO held that such ad-hoc provision should not be allowed as a deduction. Further AO noticed that the assessee-company had not reversed the excess provision created in earlier year after expiry of the warranty period. As a result, the provision for warranty gets accumulated and the assessee-company was deriving advantage of not offering excess provision to tax. The AO analyzed the data for the provisions for warranty and actual expenses incurred on warranty and keeping in view the order of Tribunal for the AY 2013-14 held that provision for warranty expenditure should be restricted to 2.14% of the sales and accordingly, the AO had allowed Rs.64.84 crores as against the claim of Rs.147.74 crores thereby disallowing the sum of Rs.82.56 crores.
Against the assessment order, an appeal was filed before the CIT(A) who confirmed the action of the AO after due analysis of provision created during the year and utilization in the earlier year as well as in the subsequent periods.
On further appeal before ITAT Bangalore, the learned Members observed that there is no dispute as to the satisfaction of condition (a) and (b) above. The dispute is only with regard to whether provision made for warranty expenditure was reliable estimate of obligation to be settled. The Hon’ble Supreme Court, in the case of Rotork Controls India (P) Ltd. (supra) laid down that if the warranty is based on past experience i.e. historical trend, the estimate can be said to be reliable. In the present case, on perusal of chart showing provision for preceding as well as succeeding AYs of the year under consideration, year-end provision is getting accumulated disproportionate to increase in turnover which goes to suggest that the system of accounting for provision for warranty is not robust/reliable. There is a huge difference in the amount of provision made and actual utilization. Further, there is nothing to show that there is any system of re-assessment or evaluation of provision for warranty at the yearend or any reversal of pro rata based on actual expenditure incurred in respect of period for which warranty had expired. Further it is not demonstrated before us that the global policy of the company to provide for warranty expenditure meets the conditions laid down by the Hon’ble Apex Court in the case of Rotork Controls India (P.) Ltd.(supra). Nor was the working of the provision furnished demonstrating that the amount of provision worked out was in accordance with stated policy of the company for provision for warranty expenditure. The learned Members of the ITAT opined that the assessee derived advantage by deferring its income to the extent of excess warranty provision to subsequent years. Therefore, such excess provision cannot be allowed as a deduction as it cannot be said to be reliable. The CIT(A) had rightly restricted the amount of allowable provision for warranty at the rate of 2.14% of sales.
The facts and circumstances and grounds of appeal for AY 2014-15 were similar to AY 2013-14. For parity of reasons given in the appeal for AY 2013- 14, the grounds of appeal for AY 2014-15 were also dismissed. In the result, the appeals filed by the assessee-company for AYs 2013-14 and 2014-15 were dismissed.