The present appeal was filed by Marelli UM Electronic Systems Private Limited agai nst the assessment order dated 28.10.2024 passed under Section 143(3) of the Income-tax Act, 1961, pursuant to the directions issued by the Dispute Resolution Panel-I, New Delhi under Section 144C(5) for Assessment Year 2021-22.

The core issue involved in the appeal pertained to the disallowance of provision for warranty amounting to ₹32,75,336, treated by the Assessing Officer as an unascertained liability and hence not allowable under Section 37 of the Act.

The assessee is engaged in the business of manufacturing and sale of electronic components such as instrument clusters, body computers, telematics systems and related automobile electronics. As part of its regular business operations, the assessee provides a two-year warranty on all products sold, which is an integral and inseparable part of the sales contract. Products could not be commercially sold without such warranty commitments.

During the relevant assessment year, the assessee created a provision for warranty of ₹90,80,952, calculated at 0.5% of sales based on historical data and past experience. The opening balance of warranty provision as on 01.04.2020 stood at ₹2,71,92,662, while actual utilisation during the year amounted to ₹58,05,616.

The Assessing Officer disallowed the unutilised portion of the incremental provision on the ground that the assessee already had sufficient opening balance and that the provisioning method lacked scientific basis. The Dispute Resolution Panel upheld this view, characterising the provision as an unascertained liability.

Before the Tribunal, the assessee demonstrated that warranty obligations arose from past sales and that the provisioning methodology was consistently followed over several years. It was also highlighted that no such disallowance was made in earlier or subsequent assessment years, including AYs 2016-17 to 2018-19, 2020-21 and 2023-24.

The Tribunal placed reliance on the landmark judgment of the Hon’ble Supreme Court in Rotork Controls India (P) Ltd. v. CIT (2009) 180 Taxman 422 (SC), wherein it was categorically held that warranty provisions are allowable deductions when:

  • A present obligation exists arising from past events,
  • There is a probability of outflow of resources, and
  • A reliable estimate of the obligation can be made based on historical trends.

The Tribunal observed that the assessee satisfied all the above conditions. It further noted that the warranty provision was based on past experience, historical utilisation patterns and a defined warranty policy, thereby fulfilling the accrual and matching principles of accounting.

Additionally, the Tribunal followed its own coordinate bench decision in the case of Marelli Powertrain India Pvt. Ltd. v. ACIT (ITA No. 3665/Del/2024), involving identical facts and warranty provisioning methodology, wherein such provision was held to be allowable.

The Tribunal categorically held that merely because a portion of the warranty provision remained unutilised during the year or because sufficient opening balance existed, the deduction could not be denied. Provisions based on experience and historical data cannot be disturbed in the absence of evidence proving them to be excessive or arbitrary.

Accordingly, the disallowance of ₹32,75,336 was deleted and the appeal of the assessee was allowed, with a direction to grant deduction of the warranty provision under Section 37 for the relevant assessment year.

SOURCE LINK : https://itat.gov.in/public/files/upload/1765973802-2NSMmS-1-TO.pdf

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