COMMISSIONER OF INCOME-TAX, BANGALORE Vs. NOKIA SIEMENS NETWORKS INDIA (P.) LTD.

JUDGEMENT

(1.) THE Revenue has preferred this appeal challenging the finding of the Tribunal, which has approved the provision for warranty.

(2.) THE Assessing Officer has allowed the provision for warranty amounting to Rs. 2.83 crores. The Commissioner in his revisional jurisdiction held, it was not allowable as expenditure. Therefore, he issued a show -cause notice to the assessee to file objection to the proposed action of allowing the provision for warranty. The assessee submitted his reply. He contended that the provision for warranty is created on accrual basis on last day of each quarter. Withdrawal is arrived at on the basis of earlier experience with the customer, sale of similar equipments and analysis on a scientific basis. Actual warranty related expenses incurred are adjusted against the provision. The provision is generally kept for one year and balance if any, is written back. The provision for warranty is an accrued expenditure. The Commissioner was not satisfied with the said explanation. He held that warranty provision is a contingent provision and it would not constitute expenditure. The provision created by the assessee would be deductible if the incurring of the liability on account of warranty is certain and is capable of being estimated with reasonable certainty. Finally he held that the provision for warranty amounting to Rs. 2.83 crores allowed by the Assessing Officer is withdrawn. Aggrieved by the same, assessee preferred an appeal. In the appeal, the Tribunal, relying on the judgment of the High Court in the case of CIT v. Wipro GE Medical Systems IT Appeal Nos. 342,343 and 345 of 2003, held the provision for warranty is an allowable expenditure and such provision is not a contingent expenditure and thus, the order of the Assessing authority was restored. Aggrieved by the same, the present appeal is filed.

(3.) THE question that is involved in this appeal is now clearly covered by the judgment of the Apex Court in the case of Rotork Controls India (P) Ltd. Vs. Commissioner of Income Tax, Chennai, (2009) 314 ITR 62 SC wherein the Apex Court has held as under: 10. What is provision? This is the question which needs to be answered. 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 resource 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. 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 enterprise of resources embodying economic benefits. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations 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 outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligation as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects 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 year 1983 -84 onwards. Valve actuators are sophisticated goods. Over the years appellant has been manufacturing and selling valve actuators in large numbers. The statistical data indicates that every year some of these manufactured actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. Therefore, warranty became integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs 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 reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case.