Date Of Judgment 25-06-2018, Ita v. M/S. Acer India Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 25 DAY OF JUNE 2018 PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A. No.431/2017 BETWEEN : 1]THE PR. COMMISSIONER OFINCOME-TAX CIT (A)5[‘T]FLOOR, BMTC BUILDING ~80 FEET ROAD, KORAMANGALA~BBNGALURU - 560095INCOME-TAX CIT (A)5[‘T]FLOOR, BMTC BUILDING ~80 FEET ROAD, KORAMANGALA~BBNGALURU - 560095 oD THERE DBPUTY COMMISSIONER OFINCOME TAX, CIRCLE 1(1) (1), |~ FLOOR, BMTC BUILDING,80 FEET ROAD, KORAMANGALA~BBNGALURU — 560095. _ APPBLLANTS| (BY SRI K.V.ARAVIND, ADV.) AND : M/s ACER INDIA PVT. LTD.,EMBASSY HEIGHTS, 6[‘L]FLOOR, ©No.13, MAGRATH ROADBENGALURU — 560025 _. RESPONDENT. (BY SRI ANKUR PAT, ADV.) Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. THIS INCOMB TAX APPBAL IS FILED UNDER SECTION|260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER|DATED 29.11.2016 PASSED IN IT(TP)A NO.1961/BANG/2014,FOR THE ASSESSMENT YEAR 2009-2010, PRAYING TO: |I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATEDABOVE. [I]. ALLOW THR APPKAL AND SBT ASIDEB THR ORDERPASSED)BYTHEINCOME-TAX.APPBRLLATBTRIBUNAL, BENGALURULN|IT(TP)ANO.1961/BANG/2014—DATED29.11.9016 CONFIRMING THRE ORDER OF THERE APPELLACOMMISSIONBR AND CONFIRM THR ORDER PASSBD BY THE!DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1),.BENGALURU. THIS APPEAL COMING ON FOR ADMISSION, THIS DAY,|Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING: JU DBiGMENT Mr. K.V.Aravind,Adv. for Appellants — Revenue.Mr. Ankur Pai,Adv. for Respondent — Assessee. The Revenue has filed this appeal u/s 260-A of theIncome Tax Act, 1961 |'Act' for short] raising purportedsubstantial questions of law arising from the order ofthe Income Tax Appellate Tribunal |'Tribunal’ for short]dated29.11.20161n |IT A.No. 1561/Bang/2014for A.Y. 2009-10 inDy.Commiissioner of Income Tax,Circle 1(1)(1), Bangalore -—v- M/s Acer India Pvt. Ltd.,Bangalore Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 3/27 a2Learned Tribunal following its own order fortheprecedingassessmentgyear1n theCaSE€oT|Respondent-Assessee itself, allowed the|provision ofwarrantymade by the Assessee tor meeting theprobable costs of repairs and maintenance of computersand other hardware supplied by the Respondent-Company to its customers. The Learned Tribunal alsoreferred to and relied upon the decision of the Hon'bleSupreme Court in the case ofRotork Controls India (P) Ltd., -v- Commissioner of Income-tax, Chennai(2009) 180 Taxman 422(SC). The relevant portion otfthe order of the Tribunal is quoted below for readyreference: “AWe.have|heardthe|learnedDepartmental Representative as well as learned|Authorised Representative and considered the|relevant material on record. At the outset we!note that this is a recurring issue for last several|assessment years and has been decided in|favour of the assessee by this Tribunal. This|Tribunal in assessee’s own case for A.Ys 2007- Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 4/27 O8 & PYOOSB-O9 vide order dated 04.11.2015 iITA Nos.1179 & 1180/Bang/2012 has held in|paras 9 to 12 as under: “Q We have also heard the learnedDepartmental Representative and considered|the facts and materials on record including the|decisions cited before us. 9.1 While dealing with the issue invtheorderdated30.01.2009in|ITANo.774/ Bang/ 2010 it has been observeas under: Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 4/27 O8 & PYOOSB-O9 vide order dated 04.11.2015 iITA Nos.1179 & 1180/Bang/2012 has held in|paras 9 to 12 as under: “Q We have also heard the learnedDepartmental Representative and considered|the facts and materials on record including the|decisions cited before us. 9.1 While dealing with the issue invtheorderdated30.01.2009in|ITANo.774/ Bang/ 2010 it has been observeas under: &D|We|have|heardtherivalcontentionsand perusedthe|materialavailableOrlrecord.We.areof|theconsidered view that the assessee’s case|clearly falls in line with the legal ratio set|out by the various appellate decisions cited|at Bar in so far as the provision for|warranty stood crystallized as soon as the|sqle was made which q customer would|like to be fulfilled within the warranty|period and is at the cost of an assessee’s|goodwill. Therefore, the residual amountpurported to have been held by theAssessing Officer as an excess provision Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 5/27 cannot be considered as a_ contingentprovision and not an ascertained liability.|The warranty period continues beyond an|year which fact was rightly considered bythe learned CIT(A) confining to the various|decisions such as IBM India Ltd., [supra||reported in 290 ITR (AT) 183. Similar view|has been taken by _ other’ co-ordinaBenches of the Tribunal therefore requiresno further deliberation. In the light of the|above, we hold the view that the decision of|the learned CIT(A) requires no _ furtheinterference on the issue. The revenue’s|appeal stands dismissed.” 1O.Againin|theorderdated25.02.2011 in ITA No.784/Bang/ 2010, it hasbeen observed as under: “11.2 The assessee creates provision for warranty based on the estimation ofexpenditure likely to be incurred on the|past sales made on yearly basis at thenprevailing market prices for spares andlabour. For the relevant previous year, the|assessee estimated the warranty liability|atRs. 12,76,77,530/-and.created(O Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. provision only for Rs.12,16,75,204/- in thebooks of account by charging a provision of|Rs.8,24,29,136/- to the debit in the P&Laccountandclaimedit|asITA22(Bang)/2011 Page 5 of 7 deduction. TheaASSCSSCCCOrMlPpahadcreatedtheprovision based on the _ estimation owarranty liability, which is based on failure|rates of the past year data/ experience andindustry trends and not on adhoc basis.|The assessee has not changed the method|of computing the warranty provision and it|has been followed consistently. 11.3 The decision of the Hon’bleSupreme Court in the case of Rotork|Controls India Pvt. Ltd., 314 ITR 62 wouldbe squarely applicable to the facts of the|case. The Hon'ble Supreme Court has heldthat provision made on pase experience is a|scientificmethod|and1S theMOST|appropriate method. The relevant extract of|the decision is provided below: ‘In this case, we are concerned withProduct Warranties. To give an example ofProduct Warranties, a company dealing in Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 7/27 computers gives warranty for a period of 36|months from the date of supply. The said|company considers following options: (a)|accountfor warranty expense in the year in|which it is incurred; (b) itt makes a provisionfor warranty only when the customermakes a provision for warranty only when|the customer makes a claim; and(ce) ttprovidesforwarrantyat2%ofturnover of the company based on pastexperience (historical trend).... ‘In this case, we are concerned withProduct Warranties. To give an example ofProduct Warranties, a company dealing in Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 7/27 computers gives warranty for a period of 36|months from the date of supply. The said|company considers following options: (a)|accountfor warranty expense in the year in|which it is incurred; (b) itt makes a provisionfor warranty only when the customermakes a provision for warranty only when|the customer makes a claim; and(ce) ttprovidesforwarrantyat2%ofturnover of the company based on pastexperience (historical trend).... Under the circumstances, the thirdoption is most appropriate because itfulfills accrual concept as well as thematching concept.For determining anappropriate historical trend, it is importantthat the company has a proper accounting|system for capturing relationship betweenthe nature of the sales, the warranty|provisions made and the actual expensesincurred against itt subsequently”.. If warranty provisions are based on|experience and historical trends(s) and if|the working is robust then the question of| Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 8/27 reversal in the subsequent two years, in the|above example, may not arise in @asignificant way’. ll. In the assessee’s own case in identical|facts for the immediately preceding year, the|Tribunal in ITA No.22/Bang/2011 assessment|year 2006-07 vide order dated 16.03.2012 has|decided the issue in favour of the assessee,|following the orders of the Tribunal for earlier|years namely, 2004-05 and 2005-06. 12. Following the above decisions for earlieryears passed by the Co-ordinate Bench of|Bangalore, we hold that the CIT(A) is_ notjustified in upholding the disallowance _ oprovision for warranty and accordingly dismiss|the ground of appeal of the revenue on this|issue. ” Following the earlier orders of this Tribunal in|assessee’s own case, we do not find any error|or iulegality in the tmpugned order of CIT(Appeals) qua this issue. Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 9/27 3.The Assessing Authority in the present casedisallowed the entire amount of such provision ofwarranty ofRs.20,00,38,020/-{Rupees Twenty Crores|Thirty Eight Thousand and Twenty only| by holding inpala5.4|oT the.impugnedAssessmentOrder,Annexure-Adated 16.03.2013that the system ofmaking of the provision for warranty by the Assessee-Company was not scientific and the reversal of theprovision at the year end in view of the actual claims.made by the customers was huge, varying from 23% to100% and therefore, since the Assessee has not followedthe scientific system of making a provision in thisregard, the entire amount of provision deserves to bedisallowed and the same was added back to the'declared income of the Assessee. The relevant extract ofthe assessment order is also quoted below for readyreference: “5.4. It1S S@CCTthatyear-after-yeartheassessee 1s making warranty reversals of| Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 10/27 “5.4. It1S S@CCTthatyear-after-yeartheassessee 1s making warranty reversals of| Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 10/27 significant amounts. As held by the_ order/supra] if the warranty estimates are done in a|robust way there will not be any huge reversals|of the provisions.Even basing solely on thisfact, one can conclude that the provisionsare not being created in a technical orscientific manner,However, the other aspectswere also analyzed. It is observed that the ratio|of actual claims to that of the provision created|also widely varied between the years.In factthe variation ts about five times, the ratioranging from about 23% to close to 100%.The assessee 1s also not in a position to lay on|record any specific method used to arrive at the|estimate of defective pieces. In fact, in the first|place there should have been a meticulous and|sound method to arrive at the rate of defects.|Only after that stage is crossed one can create|the required provisions. As per the order /[supra|that exercise does not get over there. Over the|years the figures have to be relooked and|changed to suit the changing rate of defects.|Even this has not been done. In short it can be}concluded that the provisions for warranty are| Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. not created on a scientific basis. Therefore such|provision should not be allowed. 5.5After analyzing the facts as per the order|of the Supreme Court .e., - whether the working|has been robust based on historical data,|whether there is minimal reversals, whether the|estimates are reduced as one approaches the|end of the warranty period and whether any|detail assessment of the warranty provisions|had heen done? It is seen that'the predominantanswer to all these questions in this case 1séIN> 5.6To highlight again, from the _ detailfurnished by the assessee it is also seen that|the provisions created as a percentage to the|actual claims, over the years, has’ widelyvaried. For the AY 2006-07 the percentage was|only about 23%, within the next year 1.e., for the|AY 2007-08 the figure has steeply gone up to|99% which subsequently went down to 49%. For|the year under scrutiny t.e., AY 2009-10 the|figure has almost touched 100%. It can be easilyseen that there is huge fluctuation of figures.| Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 12/27 Given this fact, the assessee cannot claim that|the estimates were made ona scientific basic. If|that were actually the case, then such excessive|variations between the years would not have|been there. 5.7Going by all the above I conclude that the|method being followed by the assessee to create|the provision 1s not scientific. AS per the decision|in the case ofRotork Controls India [P] Ltdsuch a claim should not be allowed. In otherwords, the provision of warranty amounting toRs.200,038,020/-shouldbe.disallowed. Accordingly,am|AmountofRs.200,038,020/-towardsprovistonforwarranty ts disallowed and brought totax.> 4.The First Appellate Authority — CIT |Appeals|],however, granted the desired relief to the Respondent-Assessee in view of the decision of the Hon'ble Supreme Court in ©Rotork Controls India (P) Ltd.,with thefollowing observations: Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 13/27 “238Respectfully following the decisions of|the Hon’ble ITAT referred to above, since the)appellant has been consistent in following the|method for creating provision for warranty|even for the assessment year 2009-10, I hold)that the AO was not justified in disallowing the|appellant’sclaimfordeductionoT Rs.20,00,38,020/- and delete the disallowance|accordingly.” 5.The Second appeal filed by the Revenuebefore the Tribunal also failed. Hence, the present appeal before us by the Revenue. Court in ©Rotork Controls India (P) Ltd.,with thefollowing observations: Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 13/27 “238Respectfully following the decisions of|the Hon’ble ITAT referred to above, since the)appellant has been consistent in following the|method for creating provision for warranty|even for the assessment year 2009-10, I hold)that the AO was not justified in disallowing the|appellant’sclaimfordeductionoT Rs.20,00,38,020/- and delete the disallowance|accordingly.” 5.The Second appeal filed by the Revenuebefore the Tribunal also failed. Hence, the present appeal before us by the Revenue. 6.The Learned Counsel for the Revenue| Mr.K.V.Aravindsubmitted that the Assessing Authorityhad followed the decision of the Hon'ble Supreme Courtand finding that the Respondent-Assessee company hadnot adopted the scientific basis for creating provision forwarranty and therefore, the provision in this regard wasrightly disallowed by the Assessing Authority. T On the other hand, the Learned Counsel forthe Respondent-AssesseeMr.Ankur Pai,brought to our|noticethat|theinitial provisioncreatedafter Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 14/27 ascertaining the actual amount spent out of suchprovision, taking into account the actual complaints.received and repairs and maintenance undertaken bythe Respondent-Assessee for customers, consistently areasonable amount of provision was made by theAssessee by reversing the excess provision made in eachyear and the very trend of reducing percentage of43)1<(<)8for warrantees over sales going down from3.36% in the A.Y.2004-05 to 1.87% in the current|A.Y.2009-10, would show that no excess provision was.created by the Assessee-Company to claim unnecessarydeduction from the taxable profits of the Respondent-Company and since a consistent scientific method has_been adopted by the Respondent-Assessee, the learnedAssessing Authority could not have arrived at any suchfindings for alleged unscientific method adopted by theAssessee and therefore, disallowance of the entire claimof provision in this regard ofRs. 20,00,38,020/-|Rupees Twenty Crores Thirty Eight Thousand and. Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 15/27 Twenty only| by the Assessing Authority is whollyunjustified. He even submitted before the Court that theAssessee-Company moved for rectification of the saidorder claiming the alternative relief of allowing theactual expenses incurred during the year, which were ineCXCeSSoT|theprovisionTO theexTen¢yoT|Rs.20,00,38,020/-}Rupees Twenty Crores Thirty EightThousand and Twenty only| but even that was notallowed to the Assessee -Company by the AssessingAuthority and thus the assessee was put to adisadvantage in both ways, which was quite illegal. 8.Having heard the learned Counsels for theparties, we are of the clear opinion that no substantialquestion of law arises in the present appeal filed by theRevenue. We are satisfied that the Respondent-Assesseecompany has consistently followed the similar practicewith regard to making provision of warranty given to theCustomers|forprovidingthem freerepairsand Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 16/27 maintenance for the computers and hardware suppliedto them, which in their ordinary course of business, theRespondent-Company gave such warrantees. The excess.provision created by the Company itself has beenreversed by the respondent-Company and only theprovision to the extent of making an adequate provisionfor meeting such possible expenses for repairs andmaintenance has been debited by the Assessee-Company in its books of accounts over the period of sixyears, the details of which are given by the AssessingAuthority itself in the assessment order. Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 16/27 maintenance for the computers and hardware suppliedto them, which in their ordinary course of business, theRespondent-Company gave such warrantees. The excess.provision created by the Company itself has beenreversed by the respondent-Company and only theprovision to the extent of making an adequate provisionfor meeting such possible expenses for repairs andmaintenance has been debited by the Assessee-Company in its books of accounts over the period of sixyears, the details of which are given by the AssessingAuthority itself in the assessment order. Q We are absolutely at a loss to understandhow the Assessing Authority has found the saidconsistent practice of the Assessee-Company to beunscientific and untenable and then proceeded todisallow the entire claim of provision made by theAssessee-Company in this regard. Neither allowing theprovision made for warrantees nor the actual expenses Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 17/27 incurred by the company to be deducted from theprofits of the company during the year is absolutelyarbitrary and unscientific on the part of AssessingAuthority, to say the least. There was absolutely nobasis for the Assessing Authority to make both thedisallowances of provision for warranty as well as actualexpenses at the same time in the hands of theRespondent-Assessee. In view of the comparison ofactual expenses and provisions made for warranty, thedetails of which are given in the Assessment Orderitself, we do not find any abnormal fluctuation or excess_provision made by the Assessee-Company on thisaccount. 1Q,We express our concern and dissatisfactionat the manner in which the Assessing Authority in thepresent case has very casually disallowed the said claimin the hands of the Respondent-Assessee. Moreover,when the Higher Appellate Authorities have corrected Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 18/27 the said approach of the Assessing Authority by theFirst Appellate Authority allowing the appeal of theAssessee and the Tribunal dismissing the appeal of theRevenue, we are all the more pained to see that theRevenue still felt dissatisfied and has brought up thematter before this Court under Section J60-A ot the Actwithout actually any substantial question of law arisingin the matter. This reflects the irresponsible manner inwhich the Revenue Department becomes a frivolous.litigant in constitutional courts, by dragging such case,wasting public time and money. 11)As is well settled, the appeal under Section260-A of the Act lies before this Court only on.substantial questions of law. The final fact findings ofthe Tribunal under the Act are binding on this Courtand cannot be disturbed unless they are found to beperverse on the basis of established material on record. Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. We do not find any such case of Revenue in the presentappeal. — 12.Moreover, we are satisfied that the practiceof making a provision for warranty in the present casehas been found to be consistent, scientific and regularby the two Appellate Authorities below in consonancewith the judgment of the Hon'ble Supreme Court in thecase ofRotork Controls India (P) Ltd.(supra). The Hon'ble Supreme Court in the aforesaid case, discussedin detail how the accounting entries for productwarranty are to be made by the Assessees. We quotebelow the relevant portion of the judgment for readyreference: “10. What is a provision? This is the question|which needs to be answered.A provision tsa liability which can be measured onlybyusing(osubstantialdegreeofestimation.A provision 1s recognized when:|(a) an enterprise has a present obligation as a. 12.Moreover, we are satisfied that the practiceof making a provision for warranty in the present casehas been found to be consistent, scientific and regularby the two Appellate Authorities below in consonancewith the judgment of the Hon'ble Supreme Court in thecase ofRotork Controls India (P) Ltd.(supra). The Hon'ble Supreme Court in the aforesaid case, discussedin detail how the accounting entries for productwarranty are to be made by the Assessees. We quotebelow the relevant portion of the judgment for readyreference: “10. What is a provision? This is the question|which needs to be answered.A provision tsa liability which can be measured onlybyusing(osubstantialdegreeofestimation.A provision 1s recognized when:|(a) an enterprise has a present obligation as a. Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. result of a past event; (b) it is probable that anoutflow 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 canbe recognized. 11. Liability is defined as a present obligation|arising from past events, the settlement of|which is expected to result in an outflow from|the|enterpriseof|TCSOULrCeSembodyingeconomic benefits. 12.A past event that leads to a presentobligation tis called as an obligatingevent.The obligating event is an event thatcreates an obligation which results in an|outflowof|TESOUTCEeS.It|1S onlythoseobligations arising from past events existing|independently of the future conduct of the|business of the enterprise that is recognized|as provision. For a liability to qualify for|recognition there must be not only present|obligation but also the probability of an| Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 21/27 outflow of resources to settle that obligation.|Where there are a number of obligations (e.g. product warranties or similar contracts) theprobability that an outflow will be required insettlement, is determined by considering theSaid|obligationsas|aWhole.In.thisconnection, it may be noted that in the case ofa manufacture and sale of one single item the|provision for warranty could constitute acontingent liability not entitled to deduction|under Section 37 of the said Act. However,|when there is manufacture and sale of|anarmy of items running into thousands of|units of sophisticated goods, the past event ofdefects being detected in some of such items|leads to a present obligation which results in|an enterprise having no alternative to settling|that obligation. In the present case, the|appellant has been manufacturing and selling|Valve Actuators. They are in the business.from assessment years 1983-84 onwards.Valve Actuators are sophisticated goods. Overthe years appellant has been manufacturing|Valve Actuators in large numbers. Thestatistical data indicates that every year Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 22/27 some of these manufactured Actuators arefound to be defective. The statistical data overthe|yearsalsoindicatesthat|beingsophisticated item no customer is prepared to.buy Valve Actuator without a_ warrantu.Therefore, warranty became integral part of|the sale price of the Valve Actuator(s). In otherwords, warranty stood attached to the sale|price of the product. These aspects areimportant.ASstatedabove,obligationsarisingfrom)pasteventshavetoberecognized as provisions. These past events|are known as_ obligating events. In_ thpresent case, therefore, warranty provisionneeds to be recognized because the appellant|is an enterprise having a present obligation|as a result of past events resulting in an|outflow of resources. Lastly,|a reliableestimate can be made of the amount of the|obligation. In short, all three conditions for|recognition of a provision are satisfied in this|CAaASC 13.In this case we are concerned with§Product Warranties.To give an example of| Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 23/27 Product Warranties, a company dealing incomputers gives warranty for a period of 36|months from the date of supply. The said|company considers following options : (a)|account for warranty expense in the year in|which it ts incurred; (b) it makes a provisionfor warranty only when the customer makes.a claim; and (c) it provides for warranty at 2%|of turnover of the company based on past|experience (historical trend). The first optionts |unsustainable since it would tantqmount to}accounting for warranty expenses on cash|basis,which1S|prohibitedboth.underthe CompaniesAct as.wellas|by|the|Accounting Standards which require accrualconcept to be followed. In the present case,|the Department ts insisting on the first option|which, as stated above, is erroneous as it|rules out the accrual concept. The secondoption is also inappropriate since it does not|reflect the expected warranty costs in respect|of revenue already recognized (accrued). In|other words, it is not based on matching|concept. Under the matching concept, If|revenue is recognized the cost incurred to| Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 24/27 earn that revenue including warranty costs|has to be fully provided for. When Valve|Actuators are sold and the warranty costs arean integral part of that sale price then the|appellant has to provide for such warranty|costs in its account for the relevant year,|otherwise the matching concept fails. In such|(OCAaASthe|secondoption1S|alsoinappropriate. Under the circumstances, the|third option is most appropriate because itfulfills accrual concept as well as_ thematchingconcept. Fordetermining|anappropriate historical trend, it is importantthat the company has a proper accounting|system for capturing relationship between thenature of the sales, the warranty provisions|made and the actual expenses incurred|against it subsequently. Thus, the decision on|the warranty provision Should be based on|past experience of the company. A detailedassessment of the warranty provisioning|policy is required particularly if the experienceSuggests|that|warrantyprovisions aregenerally reversed if they remained unutilizedat the end of the period prescribed in the| Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 25/27 warranty. Therefore, the company should|scrutinize the historical trend of warrantyprovisions made and the actual expenses|incurred against it. On this basis a sensible|estimate should be made. The warranty|provision for the products should be based ontheestimate.al|YET|end.of|future warranty expenses. Suchestimatesneedreassessment every year. AS one reaches|close to the end of the warranty period, the|probability that the warranty expenses willbe incurred is considerably reduced and that|Should be reflected in the estimation amount. Whether this should be done through a prorata reversal or otherwise would require|assessment of historical trend. If warranty|provisions are based on experience andhistorical trend(s) and if the working is robust|thenthequestionof|reversal|in|the|subsequent two years, in the above example, may not arise in a significant way. In our|view, on the facts and circumstances of this|case, provision for warranty is rightly made|by the appellant-enterprise because it has|incurred a present obligation as a result of| Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 26/27 Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 26/27 past events. There is also an outflow ofresources. A reliable estimate of the obligation|was also possible. Therefore, the appellant|has incurred a liability, on the facts and|circumstancesof|thisCase,duringthe|relevant assessment year which was entitled|to deduction under Section 37of the 1961|Act. Therefore, all the three conditions forrecognizing a liability for the purposes of|provisioning stands satisfied in this case. It is|important to note that there are four important|aspectsof|provisioning.|They|areprovisioningwhichrelatesTo presentobligation, it arises out of obligating events, it|involves outflow of resources and lastly it|involves reliable estimation of obligation.|Keeping in mind all the four aspects, we are.of the view that the High Court should not to|have interfered with the decision of the|Tribunal in this case.” 13,We are, therefore, satisfied that both theAppellate Authorities below were justified in returningthe proper findings of facts on the relevant material Date of Judgment 25-06-2018, ITA No.431/2017 The Pr. Commissioner of Income-tax CIT[A] & another Vs. M/s. Acer India Pvt. Ltd. 27/27 before them and have rightly found that the provisions.oT|warrantymade.bytheRespondent-Assessee| Company was on the basis of the scientific andconsistent method and therefore, the present appeal ofthe Revenue does not give rise to any substantialquestion of law and the same deserves to be dismissedand is accordingly dismissed. No costs. Sd/-.JUDGE. Sd/-.JUDGE.