SHRI H.S. SIDHU AND SHRI J.S. REDDY, JJ.

ORDER

The order of the Bench was delivered by

G. D. Agrawal (Vice-President).-These appeals by the Revenue are directed against the order of learned Commissioner of Income-tax (Appeals)-IX, New Delhi for the assessment years 2007-08, 2005-06, 2009-10 and 2010-11.

2. In all these appeals, the only ground raised by the Revenue is against the deletion of 50 per cent. disallowance out of provision of warranty by the learned Commissioner of Income-tax (Appeals).

3. The facts of the case are that the assessee derives income from manufacturing and sale of engineering goods. The assessee made the provision for warranty in respect of after sales service year after year. The Assessing Officer disallowed 50 per cent. of such provision in respect of after sales service which is deleted by the learned Commissioner of Income-tax (Appeals) in each year following the decision of the hon'ble apex court in the case of Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC), of the hon'ble jurisdictional High Court in the cases of CIT v. Vinitec Corporation P. Ltd. [2005] 278 ITR 337 (Delhi) and CIT v. Ericssion Communications P. Ltd. [2009] 318 ITR 340 (Delhi). The Revenue, aggrieved with the order of the learned Commissioner of Income-tax (Appeals), is in appeal before us.

4. We have carefully considered the submissions of both sides and perused the relevant material placed before us. We find that the hon'ble apex court in the case of Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC) held as under (headnote) :

               "A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event ; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.

            The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37."

5. That hon'ble jurisdictional High Court in the case of Vinitec Corporation Pvt. Ltd. [2005] 278 ITR 337 (Delhi) held (headnote) :

               ". . . affirming the decision of the Tribunal, that the warranty clause was part of the sale document and imposed a liability upon the asses see to discharge its obligation under that clause for the period of warranty. It was a liability, which was capable of being construed in definite terms, which had arisen in the accounting year, although its actual quantification and discharge might be deferred to a future date. Once the assessee is maintaining his accounts on the mercantile system, a liability accrued, though to be discharged a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. To substantiate its claim for the assessment year 2000-01, the assessee had given the figures of the last five years of warrant liability provided vis-a-vis the expenditure incurred. These figures clearly exhibited that the assessee had incurred expenditure resulting from the warranty clause to the extent of more than 2 per cent. of its total sales in the previous years. There was direct nexus between the claim of the assessee and its obligation arising from the warrant."

6. Similarly, the hon'ble jurisdictional High Court in the case of Ericssion Communications P. Ltd. [2009] 318 ITR 340 (Delhi) held (headnote) :

                ". . . dismissing the appeal, that the policy and principles with respect to provisions for warranties which were made by the assessee was not simply an ad hoc method without any scientific basis. The scientific basis was consistently applied by the assessee for its business throughout the world. It was not as if the assessee took a huge benefit year after year by making a huge provision because in fact it was only the provision which was made in the first year which was carried forward in the subsequent years in which the provision was only for the additional difference on account of a higher turnover. It was only this difference of net amount which was additionally debited in the provision account because the difference in the earlier years was credited and a reversal entry made to the profit and loss account by the non-utilised amount being offered to tax as income. The consistent application of the policy of provision removed any issue of mala fides or dishonest intention on the part of an assessee for defer ring its income because it could be that in a particular year actual warranty claims may exceed the provision which was made. Thus, the provision for the warranty charges was a definite business liability allowable as a deduction during the years under consideration."

7. That the ratio of the above decisions of the hon'ble jurisdictional High Court as well as the hon'ble apex court would be squarely applicable to the case under appeal before us. Admittedly, the assessee is manufacturing sophisticated engineering goods and in each contract for the sale of goods, there is a warranty clause for providing after sales service. This finding of fact recorded by the learned Commissioner of Income-tax (Appeals) has not been controverted before us. Moreover, the Assessing Officer himself has allowed the 50 per cent. of the provision for after sales service expenses. Therefore, the Assessing Officer has also accepted that the provision per se is justified but it is excessive. The hon'ble apex court in the case of Rotork Controls India P. Ltd. [2009] 314 ITR 62 (SC) has also held that a reliable estimate is to be made in respect of warranty obligation. Therefore, the question remains whether the provision for after sales service obligation on account of warranty given by the assessee is reasonable or not. The Commissioner of Income-tax (Appeals) in his order for the assessment year 2010-11 at page 4 of his order has given the provision made for post sales expenses by the assessee and the actual expenditure incurred. The same is reproduced below for ready reference :

Historical trend of post sales expenses booked on estimate basis and actual expenses incurred (in rupees)

8. In the above chart, the figures for nine years have been given and we find that the provision was almost equal to the actual expenditure incurred in this regard. In most of the years, the provision made was less than the expenditure incurred. Only in two years, in the financial years 2002-03 and 2008-09, the provision marginally exceeded the actual expenditure incurred. From the above chart, it is evident that the provision made by the assessee was a fair and reasonable estimate of the post sales expenses to be incurred by the assessee in respect of goods supplied by it. Therefore, on these facts, the ratio of the above decisions of the hon'ble apex court and the hon'ble jurisdictional High Court would be squarely applicable. Respectfully following the same, we uphold the order of the learned Commissioner of Income-tax (Appeals) and dismiss the appeals filed by the Revenue.

9. In the result, all the appeals of the Revenue are dismissed.

The order pronounced in the open court on 28th January, 2015.