Provisions of Warranty Expenses deductible on Estimate basis: ITAT [Read Order]

The Income Tax Appellate Tribunal ( ITAT ) New Delhi, in Huawei Telecommunication (India) vs, ACIT expenditure on account of warranty expenses are the liability in the present which is liable to be deducted on estimate basis.

The appellant-assessee is engaged in the business of trading of telecom equipment. The assessee provides warranty services to the buyers by way of repair and replacement for a predefined period. During the year the assessee company provided for warranty expenses of Rs 37.87 Lacs and debited the same to the profit and loss account. The assessee was asked to explain why the provision for the warranty expenses is allowable to the assessee. The assessee explained that the warranty expenses have been determined on the basis of the costs liable to be incurred in relation to warranty obligation contracted with respective customers. The Assessing Officer (A.O) rejected the contentions of the assessee and reasoned that the warranty expenses provided by the assessee was not on the scientific basis in compliance of the accrual basis of accounting and hence was not allowable as deduction.  He further held that the provision made by the assessee is contingent and is not a liability is present. He disallowed the expenditure. The appeal preferred to the Commissioner of Income Tax (Appeals)(CIT(A)) was rejected. Aggrieved, assessee filed appeal before the Tribunal.

The Counsel for the assessee argued that that the according to the percentage of actual work completed the assessee estimates estimated local labor cost for the warranty and other overhead on estimated total warranty costs are determined. From the above figures, the earlier year balance provision is reduced and the balance liability is made during the year. He, therefore, submitted that the lower authorities had failed to appreciate that there was no arithmetical formula, which could apply to each and every industry identically in the case of provision of warranties.

The Counsel for the Revenue reiterated the decision of the lower authorities.

The ITAT Bench comprising of Judicial Member Amit Shukla & Accountant Member Prashant Maharishi found that the revenue earned by the assessee during the year was credited to the profit and loss account of the year and the corresponding warranty provision expenditure required to be made over a period of the warranty claim is definitely charged to the profit and loss account to arrive at the correct figure of the profit for the year. Therefore, according to the Bench, liability of warranty cost was not contingent.

“There cannot be straightjacket formulae for warranty provision in each industry alike. Therefore, the reliable estimate made by the assessee is required to be looked from the perspective of the industry in which the assessee operates. It is further required to be seen that what kind of expenditure has been incurred by the assessee in subsequent years that will give the best picture with the original provision made by the assessee’s reliable estimate or not. Further, as the sale prices have been booked into the profit and loss account the corresponding expenditure on account of warranty expenses are also a liability in present and therefore it cannot be said that it is a contingent liability wherein the contract with the customers the clauses of warranty are existing. Therefore, it is an allowable expenditure. In fact, there cannot be any doubt that the assessee is eligible for the deduction of warranty expenditure.” observed the bench.