T.N. Chopra, A.M. - (1.) THIS appeal filed by the assessee is directed against the order of the CIT(A) dt. 30th March, 1999, relating to asst. yr. 1996-97.
(2.) The main dispute raised through ground No. 1 to 6 is against the addition of Rs. 98,24,911 made by the AO for the provision made on account of warranty. The entire issue centers around the scope and ambit of the provisions of Section 145 of the IT Act, 1961 and the amplitude of the jurisdiction conferred upon the AO to reject the method of accounting followed by the assessee. At the outset, factual matrix of the case may be spelt out. The assessee company is engaged in the manufacture of items called Mass. Transfer equipments such as tower packings, trays and internal, etc. These items are used for the purpose of filling and activating distillation and absorption towers in the various mega a plants such as fertilizers, petroleum, chemical, etc. The assessee manufactures the products under technical collaboration of M/s Norton Chemical Process Products Corporation of U.S.A. According, to the assessee the products are highly sophisticated and specialised and are of utmost necessity for cost efficient, and optimum use of fertilizers, petrochemical, petroleum refinery and other chemical plants. It is further stated that tower packings are not uniform items mass produced for supply to the customers but are tailor made to the requirements of each mega plant. For different towers of the same plant, the calculations, specifications and design of the products involve a crucial and technically intensive exercise and any deviation from predicted performance would result in malfunctioning of the plant, thus exposing the assessee to arrange rectification or replacement of the defective equipment. Contracts for the supply of tower packings are secured by the assessee in response to globaly floated tenders which are overseen by reputed global consultants. The tender documents as well as the purchase orders provide for retention of upto 10 per cent of the sale value throughout the contractual guarantee period. This retention, amount has been paid to the assessee against irrevocable and unconditional bank guarantee in favour of the customer. In cases of two customers, namely, Indian Farmers Fertilizers Cooperative Ltd. and National Fertilizer Ltd., the amount of the performance bank guarantee is 5 per cent of the sale value whereas in the remaining cases performance bank guarantee is for 10 per cent of the said value. The assessee makes the warranty provision in its book equivalent to the amount of bank guarantee furnished to the customer. The period of guarantee usually varies from 12 months to 24 months as per terms of the contract. The assessee has been regularly making provision for the warranty from year to year and such provisions are reversed back on the expiration of period of guarantee and the amount on reversal of the provision is offered for taxation.
(3.) FOR the asst. yr. 1996-97 under appeal, the assessee has made provision, for warranty amounting to Rs. 96,24,911 by deducting the amount from the sale value. The details of the amount of warranty provision for which performance bank guarantee has been given by the assessee during the year to the various customers are placed at p 60 of the paper book filed by the learned counsel for the assessee- At p 39 of the paper book statement showing year-wise warranty provision has been filed which indicates the following particulars : JUDGEMENT_1477_TLIT0_20000.htm From the aforesaid figures it would be seen that provisions has been made in the books of account equivalent to the amount of performance bank guarantee, during the year when the bank guarantee is furnished and such provision is reversed during the year of expiration of the bank guarantee.;