Ita/737/2018 Of Ttk Prestige Ltd v. The Deputy Commissioner Of Income-Tax

I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 14 DAY OF OCTOBER, 2022 PRESENT THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR AND THE HON’BLE MR. JUSTICE UMESH M. ADIGA I.T.A NO. 737 OF 2018C/WI.T.A No. 736 OF 2018I.T.A No. 738 OF 2018 IN ITA No.737 OF 2018 BETWEEN : TTK PRESTIGE LTD., 11 FLOOR BRIGADE TOWERS 135, BRIGADE ROAD BANGALORE-560 025 …APPELLANT (BY DR. R.B. KRISHNA ADVOCATE) [THROUGH VIDEO CONFERENCING] AND: THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE 7(1)(1), BMTC BUILDING 2 FLOOR, ROOM NO.240 80 FEET ROAD, KORAMANGALA BENGALURU-560 095 …RESPONDENT (BY SHRI. E.I. SANMATHI, ADVOCATE) . . . . I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 2 THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED: 03.08.2018 (ANNEXURE-C), PASSED IN ITA No.2229/BANG/2016, FOR THE ASSESSMENT YEAR 2012-2013, PRAYING TO FORMULATE OR REFORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ETC. IN ITA No.736 OF 2018 BETWEEN : TTK PRESTIGE LTD. 11 FLOOR BRIGADE TOWERS 135, BRIGADE ROAD BANGALORE-560 025 …APPELLANT (BY DR. R.B. KRISHNA, ADVOCATE) [THROUGH VIDEO CONFERENCING] AND: THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE 7(1)(1), BMTC BUILDING 2 FLOOR, ROOM No.240 80 FEET ROAD, KORAMANGALA BENGALURU-560 095 …RESPONDENT (BY SHRI. E.I. SANMATHI, ADVOCATE) . . . . THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED: 03.08.2018 (ANNEXURE-C), PASSED IN ITA No.2228/BANG/2016, FOR THE ASSESSMENT YEAR 2011-2012, PRAYING TO FORMULATE OR REFORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ETC. I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 IN ITA No.738 OF 2018 BETWEEN : TTK PRESTIGE LTD. 11 FLOOR BRIGADE TOWERS 135, BRIGADE ROAD BANGALORE-560 025 …APPELLANT (BY DR. R.B. KRISHNA ADVOCATE) [THROUGH VIDEO CONFERENCING] AND: THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE 7(1)(1), BMTC BUILDING 2 FLOOR, ROOM No. 240 80 FEET ROAD, KORAMANGALA BENGALURU-560 095 …RESPONDENT (BY SHRI. E.I. SANMATHI, ADVOCATE) . . . . THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED:03.08.2018 (ANNEXURE-C), PASSED IN ITA No.1552/BANG/2017, FOR THE ASSESSMENT YEAR 2013-2014, PRAYING TO, FORMULATE OR REFORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ETC. THESE ITAs, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 22.08.2022 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S.DINESH KUMAR J., PRONOUNCED THE FOLLOWING:- I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 JUDGMENT These three appeals by the assessee have been admitted to consider following questions of law: 1. Whether the Income Tax Appellate Tribunal has erred in law in reversing the considered order of the Commissioner of Income Tax (Appeals) without appropriately dealing with the reasons assigned therein; and the impugned order remains perverse? erred in law in reversing the considered order of the Commissioner of Income Tax (Appeals) without appropriately dealing with the reasons assigned therein; and the impugned order remains perverse? 2. Whether the Income Tax Appellate Tribunal, while reversing the order of the Commissioner of Income Tax (Appeals), has proceeded on irrelevant considerations while ignoring the relevant aspects of the matter, including the fact that on introduction of new range of products, past data may not be available? reversing the order of the Commissioner of Income Tax (Appeals), has proceeded on irrelevant considerations while ignoring the relevant aspects of the matter, including the fact that on introduction of new range of products, past data may not be available? 2. Whether the Income Tax Appellate Tribunal, while reversing the order of the Commissioner of Income Tax (Appeals), has proceeded on irrelevant considerations while ignoring the relevant aspects of the matter, including the fact that on introduction of new range of products, past data may not be available? reversing the order of the Commissioner of Income Tax (Appeals), has proceeded on irrelevant considerations while ignoring the relevant aspects of the matter, including the fact that on introduction of new range of products, past data may not be available? 2. We have heard Dr. R.B. Krishna, learned Advocate for the assessee and Shri. E.I. Sanmathi, learned Standing Counsel for the Revenue. 3. Brief facts of the case are, assessee is a Public Limited Company engaged in the business of sale of pressure cookers and cookware. For A.Y[1]. 1Assessment Year I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 5 2011-12 (ITA No.736/2018), the assessee filed its return of Income declaring an income of Rs.109,19,58,100/-. The AO[2]completed the assessment under Section 143(3) of the Income Tax Act, 1961 ('1961 Act' for short) and vide Assessment order dated 25.03.2014 disallowed the provision at the rate of 1% of the sale value of kitchen appliances, other than pressure cooker and cookware towards warranty. On appeal filed by the assessee, the CIT(A)[3] vide order dated 27.09.2016, allowed the provision. 4. For A.Y. 2012-13 (ITA No.737/2018), the assessee filed its return of Income declaring an income of Rs.142,02,31,210/-. The AO completed the assessment under Section 143(3) of the Income Tax Act, 1961 ('1961 Act' for short) and vide Assessment order dated 13.03.2015 disallowed the provision at 2 Assessing Officer 3Commissioner of Income Tax (Appeals) I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 6 the rate of 1% of the sale value of kitchen appliances, other than pressure cooker and cookware towards warranty. On appeal filed by the assessee, the CIT(A) vide order dated 21.10.2016, allowed the provision. 5. For A.Y. 2013-14 (ITA No.738/2018), the assessee filed its return of Income declaring an income of Rs.146,90,40,340/- and debited Rs.3,82,38,767/- as warranty provisions. The AO completed the assessment under Section 143(3) of the Income Tax Act, 1961 ('1961 Act' for short) and vide Assessment order dated 28.03.2016 disallowed the provision. On appeal filed by the assessee, the CIT(A) vide order dated 08.03.2017, allowed the provision. 6. On further appeal by the Revenue, the ITAT[4], C-Bench, vide common order dated 03.08.2018 set-aside the order passed by the CIT(A) 4 Income Tax Appellate Tribunal I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 7 and remanded the issue with regard to disallowance of provision for warranty expenses to the AO for fresh consideration. 7. Dr. Krishna, for the assessee submitted that in addition to manufacture and sale of pressure cookers and cookware, assessee also markets kitchen home appliances, which carry a warranty for repair and replacements. Assessee has also exported 'Customer designed pressure cookers' to UK. Assessee has also introduced new kitchen home appliances every year. In 2009-10, 26 new products were launched. In 2010-11, 39 new products were launched and in 2011-12, 52 new products were launched. Being new products, assessee expected higher warranty claims. Hence, a provision for warranty at the rate of 1% turnover with respect to turnover in UK market and sales of all electrical appliances was made. I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 8 7. Dr. Krishna, for the assessee submitted that in addition to manufacture and sale of pressure cookers and cookware, assessee also markets kitchen home appliances, which carry a warranty for repair and replacements. Assessee has also exported 'Customer designed pressure cookers' to UK. Assessee has also introduced new kitchen home appliances every year. In 2009-10, 26 new products were launched. In 2010-11, 39 new products were launched and in 2011-12, 52 new products were launched. Being new products, assessee expected higher warranty claims. Hence, a provision for warranty at the rate of 1% turnover with respect to turnover in UK market and sales of all electrical appliances was made. I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 8 8. Dr. Krishna urged that the law on the point is settled and the CIT(A) applying the correct position of law granted relief to the assessee. The ITAT, without proper application of mind has disallowed the provision on the ground that the past event should be the basis for making provision; that assessee is in the business for a long time and ought to have demonstrated that the provision of 1% for anticipated liability on account of warranty claims is based on its own past experience. 9. Dr. Krishna contended that in respect of new kitchen appliances, there will be no past experience. He submitted that the CIT(A), while considering the appeal against the order passed by the AO for the A.Y. 2011-12, has recorded a finding of fact in para 6.9 of his order that the assessee had incurred warranty expenses for the A.Y. 2011-12 and A.Y. 2012-13 to an extent of Rs.2,86,91,966/- and the same have been accounted against the provision I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 9 for warranty created and not debited to 'profit and loss' account of those respective years. The CIT(A) has also recorded assessee's submission that assessee had incurred warranty expenses of Rs.4.96 Crores for A.Y. 2013-14, Rs.7.89 Crores for A.Y. 2014-15 and Rs.3.85 Crores for A.Y. 2015-16. 10. Shri. Krishna has placed reliance on Rotork Controls India Pvt. Ltd., Vs. Commissioner of Income-Tax, Chennai[5]. 11. Shri. Sanmathi for the Revenue argued opposing the appeal and submitted that the CIT(A) has erred in allowing the appeal by considering the facts in assessment years 2013-14 to 2015-16. In substance, he submitted that the provision made for items other than pressure cookers and cookware, is not based on the warranty claims of previous years, Hence, the conditions prescribed in Rotork Controls, 5 (2009)314 ITR 62 (SC) - paras - 27,28,29,30 I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 10 are not fulfilled. Therefore, the ITAT has rightly allowed the appeal and remitted the matter to the Assessing Officer. With these submissions, he prayed for dismissal of these appeals. 12. We have carefully considered rival contentions and perused the records. 13. In Rotork Controls, it is held that a provision is a liability, which can be measured only by using a substantial degree of estimation and it is recognized when: (a) an enterprise has a present obligation as result of past event; result of past event; (b) it is probable and an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of obligation. amount of obligation. 14. Further, illustration of a Company dealing with Computers has been given in para 27. Three I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 options have been examined with regard to the provision for warranty and it is held as follows: (a) an enterprise has a present obligation as result of past event; result of past event; (b) it is probable and an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of obligation. amount of obligation. 14. Further, illustration of a Company dealing with Computers has been given in para 27. Three I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 options have been examined with regard to the provision for warranty and it is held as follows: "27. In the present case we are concerned with product warranties. To give an example of product warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers the following options: (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for 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). 28. The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the accounting standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. 29. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognised (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognised the cost incurred to earn that revenue including warranty costs has to be fully provided for. When valve actuators are sold and the warranty costs are an 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 a case the second option is also inappropriate. 30. Under the circumstances, the third option is most appropriate because it fulfils accrual concept as well as the matching concept. ………….." I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 12 15. Assessee's case is, it has been in the business of manufacture and sale of pressure cooker and cookware. It also trades in kitchen home appliances which carry warranty for repair and replacements. Most markets for pressure cookers had already matured. Customer designed pressure cookers were exported to UK market for the first time and therefore assessee expected high warranty claims. Assessee claims to have introduced 26 new kitchen wares in 2009-10, 39 new products in 2010-11 and 53 products in 2011-12. 16. The Commissioner(Appeals) has recorded a finding that the assessee had incurred warranty expenses towards warranty claims during financial years 2011-12, 2012-13 to an extent of Rs.2.86 Crores and the same had been accounted against the provision made for warranty. He has also recorded that according to the assessee it had incurred I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 13 warranty expenses of `4.96 Crores for A.Y. 2013-14, `7.89 Crores for A.Y. 2014-15 and `3.85 Crores for A.Y. 2015-16. already matured. Customer designed pressure cookers were exported to UK market for the first time and therefore assessee expected high warranty claims. Assessee claims to have introduced 26 new kitchen wares in 2009-10, 39 new products in 2010-11 and 53 products in 2011-12. 16. The Commissioner(Appeals) has recorded a finding that the assessee had incurred warranty expenses towards warranty claims during financial years 2011-12, 2012-13 to an extent of Rs.2.86 Crores and the same had been accounted against the provision made for warranty. He has also recorded that according to the assessee it had incurred I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 13 warranty expenses of `4.96 Crores for A.Y. 2013-14, `7.89 Crores for A.Y. 2014-15 and `3.85 Crores for A.Y. 2015-16. 17. It is not in dispute that assessee is in the business of manufacture and sale of pressure cookers and kitchen ware. It has exported customer designed pressure cookers and kitchen ware to a new market in England. Unless these products carry warranty, particularly when the product is an imported one, the Customers will not choose to purchase such products unless it is covered with warranty. Based on its past experience, assessee has made provision of 1% of the sales value towards warranty and replacement expenses. As against provision of Rs.2.81 Crores for the year 2011-12, the warranty expenses incurred during the financial year 2012-13 and 2013-14 is Rs.2.86 Crores, which is more than the provision made. I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 18. The ITAT has noted in para 20 of its order that the CIT(A) had considered warranty expenses for A.Y. 2013-14 and 2014-15, whereas, he ought to have considered the past event while considering the provision made by the assessee. A careful perusal of CIT(A)'s order shows that CIT(A) in para 6.9 has considered the warranty claims for financial years 2011-12 and 2012-13 (A.Y. 2012-13 and 2013-14). Therefore, the finding recorded by the ITAT is factually incorrect. We may also record that the relevant Assessment Years under consideration is, 2011-12 to 2013-14. The warranty claims if any, will be received either in that year or subsequent years. The CIT(A) has recorded the factual aspect that assessee had incurred warranty expenses of Rs.2.86 Crores for the claims during the financial years 2011-12 and 2012-13. The warranty claims said to have been discharged for the subsequent years namely A.Y. 2013-14 to 2015-16 are also much higher and to I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 15 be precise, Rs.4.96 Crores, Rs.7.89 Crores and Rs.3.85 Crores respectively. 19. In para 27 of Rotork Controls, extracted hereinabove, it is held that when warranty costs are integral part of the sale price, then assessee has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. 20. The CIT(A) has passed a detailed order by recording the factual aspect of the case and considering the authorities on the point, where as, the ITAT has considered expenses incurred in incorrect A.Ys. Further, in our view, the ITAT has misconstrued the law laid down in Rotork. 21. In view of undisputed facts that the exported products were pressure cookers and the kitchen ware and the claims received for the A.Y. in question, is in excess of the provision made, in our I.T.A No.737/2018 C/W I.T.A No.736/2018 I.T.A No.738/2018 16 view, the provision has been made based on the past experience of the assessee in its business. 22. In view of above discussion, these appeals merit consideration. Hence, the following: ORDER (a) Appeals are allowed. (b) The questions of law are answered in favour of the assessee and against the Revenue. No costs. Sd/- JUDGE SPS Sd/- JUDGE