M/s Apple India Private Limited, Bangalore v. DCIT, Bangalore

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K. JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY ACCOUNTANT MEMBER ITA NO. 609/BANG/2010 ASSESSMENT YEAR : 2005 - 06 M/S. APPLE INDIA PVT. LTD. (FORME RLY KNOWN AS M/S. APPLE COMPUTERS INTERNATIONAL PVT. LTD.) NO.24 19 TH FLOOR CONCORDE TOWER C VITTAL MALLYA ROAD U.B. CITY BANGALORE 560 001. : APPELLANT VS. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 11(1) BANGALORE. : RESPOND ENT APPELLA NT BY : SHRI MAHAVEER C. JAIN C.A. RESPONDENT BY : SMT. SWATHI S. PATIL CIT - II(DR) O R D E R PER A. MOHAN ALANKAMONY ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(APPEALS) - I BANGALORE DATED 9.2.2010 IN ITA NO.95/DC 11(1)/A - I/08 - 09 FOR THE ASSESSMENT YEAR 2005 - 06. 2. THE ASSESSEE HAS RAISED SIX GROUNDS IN ITS APPEAL. THE CRUX OF THE ISSUE IS THAT THE LD. CIT(A) HAS ERRONEOUSLY UPHELD THE ORDER OF THE LD. ITA NO.609/BANG10 PAGE 2 OF 7 AO DISALLOWING PROVISION FOR WARRANTY E XPENSES TO THE TUNE OF RS.95 33 312 DISREGARDING THE ORDERS OF THE CIT(A) FOR THE A.Y. 2003 - 04 IN THE ASSESSEE S OWN CASE. F ACTS IN BRIEF 3. THE ASSESSEE M/S. APPLE INDIA PVT. LTD. IS A SUBSIDIARY OF APPLE COMPUTERS INC. LTD. IRELAND WAS INCORPORATED IN INDIA ON 19.1.1996 AND IS ENGAGED IN TRADING HARDWARE PRODUCTS MANUFACTURED BY THE PARENT COMPANY AND ALSO PROVID E MARKETING AND RELATED SERVICES FOR PROMOTING THE PRODUCTS OF THE PARENT COMPANY. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE A.Y. 2005 - 06 ON 30.11.2005 DECLARING A TOTAL INCOME OF RS.4 61 47 0 20 . THE RETURN OF INCOME WAS SELECTED FOR SCRUTINY AND ORDER U/S. 143(3) OF THE ACT WAS PASSED BY THE ASSESSING OFFICER ON 15.12.2008 WHEREIN THE LD. AO RECOMPUTED THE INCOME OF THE ASSESSEE BY DISA LLOWING THE PROVISION FOR WARRANTY TO THE TUNE OF RS.95 33 312. THE ASSESSEE A PPEALED BEFORE THE LD. CIT(A) - I. T HE LD. CIT(A) DISMISSED THE APPEAL OF THE ASSESSEE BY HIS ORDER DATED 9.2.2010 WHICH IS UNDER CHALLENGE BEFORE US. 4. THE OBSERVATIONS AND FINDI NGS OF THE LD. AO WAS THAT AS CAN BE SEEN FROM THE ASSESSEE S SUBMISSION AS ABOVE THE PROVISION FOR THE YEAR DEBITED TO THE P&L ACCOUNT UNDER THE HEAD WARRANT EXPENSES IS RS.1 89 79 863/ - . THE ASSESSEE HAS INCURRED ACTUAL EXPENSES TO THE EXTENT OF RS. 94 44 551/ - . A SUM OF RS.95 33 312/ - DEBITED TO THE P & L ACCOUNT IS STILL PENDING IN THE NATURE OF PROVISION. ANY PROVISION IS NOT AN ALLOWABLE EXPENDITURE UNDER ITA NO.609/BANG10 PAGE 3 OF 7 THE INCOME - TAX ACT. THEREFORE THE SUM OF RS.95 33 312/ - IS BEING DISALLOWED. 5. THE LD. CI T(A) DELIBERATED THE ISSUE IN DETAIL AND AFTER OBTAINING A REMAND REPORT FROM THE LD. AO ARRIVED AT THE FOLLOWING CONCLUSION: 6.2 THE ABOVE SHOWS THE ALLOWANCE OF PROVISION ON A WARRANTY DEPENDS ENTIRELY ON THE FACTS OF THE CASE AND IT IS SETTLED LAW THA T IF DIFFERENTIAL FACT IS NOT POINTED OUT SPECIFICALLY THE DECISION RENDERED EARLIER BY THE HIGHER AUTHORITY SHOULD BE FOLLOWED. AS PER THE LEARNED ITAT IN THE A.Y. 2003 - 04 NO FACT OR MATERIAL COULD BE BROUGHT ON RECORD BY THE REVENUE TO SHOW THAT THE A CTUAL EXPENDITURE OF EARLIER YEARS IS MISMATCH WITH THE ESTIMATION OF PROVISION RESULTING IN DISMISSAL OF REVENUE S APPEAL. THIS IS NOT THE CASE HERE. HERE IT IS BEING POINTED OUT THAT WHILE THE ACTUAL EXPENDITURE IN A.Y. 2004 - 05 IS 97% OF THE PROVISION AND IN A.Y. 2006 - 07 IT IS 83% AND IN A.Y. 2007 - 08 IT IS 90% IT IS ONLY 49.77% THIS YEAR REVEALING THE GLARING MISMATCH DESERVING TO DISALLOW A PORTION OF WARRANTY PROVISION ON THE BASIS OF PRINCIPLE OF REVERSAL AND MISMATCH WHICH I OBSERVE HAS BEEN RI GHTLY APPLIED BY THE A.O. THUS NO VIOLATION OF PRINCIPLES OF JUDICIAL DISCIPLINE IS BEING MADE HERE BY UPHOLDING THE ADDITION AND DISMISSING THIS GROUND OF APPEAL. 6. LD. AR MADE THE FOLLOWING SUBMISSIONS BEFORE US. (1) THE ASSESSEE PROVIDES WARRANTY TO IT S PRODUCTS AGAINST DEFECTS IN MATERIALS AND WORKMANSHIP UNDER THE NORMAL USE FOR A PERIOD OF ONE YEAR FROM THE DATE OF THE RETAIL SALE TO THE ORIGINAL BUYER. (2) BY VIRTUE OF THIS WARRANTY PROVIDED BY THE ASSESSEE TO ITS CUSTOMERS THE ASSESSEE IS BOUND TO I NCUR EXPENDITURE FOR A VALID CLAIM FOR REPAIR/REPLACEMENT OF HARDWARE AND IN SOME CASES FOR THE REFUND OF THE PURCHASE PRICE OF THE PRODUCT. ITA NO.609/BANG10 PAGE 4 OF 7 (3) THE ASSESSEE HAD PRICED ITS PRODUCT IN SUCH A WAY AS TO COVER THE COST OF THIS WARRANTY EXPENSES. APART FROM THI S INITIAL WARRANTY COVERAGE THE ASSESSEE ALSO PROVIDES APPLE CARE PROTECTION PLAN WHICH IS A UNIQUE INTEGRATED SERVICE AND SUPPORT SOLUTION THAT EXTENDS BEYOND THE INITIAL WARRANTY PERIOD OF ONE YEAR TO THREE YEARS FROM THE DATE OF PURCHASE AT A PREDETE RMINED PRICE WHICH INCLUDES EXPERT TELEPHONE ASSISTANCE GLOBAL REPAIR COVERAGE ON SITE REPAIR FOR DESKTOP COMPUTERS WEB BASED SUPPORT SERVICE AND POWERFUL DIAGNOSTIC TOOLS. (4) THEREFORE THE ENTIRE GROSS RECEIPTS OF THE ASSESSEE CANNOT BE CHARGED TO THE P ROFIT AND LOSS ACCOUNT OF THE ASSESSEE ON THE YEAR OF ITS RECEIPT BECAUSE CERTAIN EXPENDITURE PERTAINING TO THESE RECEIPTS MAY BE INCURRED IN THE SUBSEQUENT PERIOD I.E. TILL THE PERIOD THE WARRANTY EXPIRES. (5) THE ASSESSEE HAD MADE THE PROVISION ON THE BAS IS OF CONCRETE SCIENTIFIC EVALUATION COMMERCIAL PRUDENCE AND NOT BY MERE ADHOC ESTIMATION. THE PROVISION IS NOT CONTINGENT IN NATURE SINCE THE LIABILITY ARISING OUT OF THE PROVISION IS CERTAIN TO ITS NEAREST EXTENT. (6) THE ASSESSEE ALSO PLACED RELIANCE ON THE FOLLOWING CASE LAWS: - ITO V. WANSON (INDIA) LTD. (1983) 5 ITD 102 (PUNE) - SINGHAL & CO. V. ITO (1982) 1 ITD 476 ( CHD) - JAY BEE INDUSTRIES V. DCIT (1998) 61 TTJ 403 (ASR) - VOLTAS LTD. V. DCIT (1998) 61 TTJ 543 (BOM) - CIT V. MAJESTIC AUTO (1994) 48 TTJ 56 6 (CHD) ITA NO.609/BANG10 PAGE 5 OF 7 - CIT & DCIT (ASST.) V. WIPRO GE MEDICAL SYSTEMS (ITA NO.438/02) - M/S. ROTORK CONTROLS INDIA (P) LTD. V. CIT CHENNAI (2007) 293 ITR 311 (SC) - WIPRO GE MEDICAL SYSTEMS V. DCIT (2003) 80 TTJ 455 (BANG) - CIT V. VINITEC CORPORATION (P) LTD. DELHI HIGH COUR T JUDGMENT DATED 5.5.2005 IN ITA NO.107 OF 2005 - CALCUTTA CO. LTD. V. CIT (1959) 37 ITR 1 (SC) - BHARATH EARTH MOVERS V. CIT (2000) 162 CTR 325 (SC) - IRC V. MITSUBISHI MOTORS NEW ZEALAND LTD. (1996) 222 ITR 697 (PC) (7) FROM THE CHART PROVIDED BY THE ASSESSEE W ITH RESPECT TO THE PROVISIONS MADE AND ACTUAL AMOUNT SPENT FOR THE A.Y. 2004 - 05 2005 - 06 2006 - 07 AND 2007 - 08 IT IS EVIDENT THAT THE ASSESSEE HAS INCURRED EXPENDITURE DUE TO WARRANTY MUCH MORE THAN PROVIDED DURING THE EARLIER YEAR. (8) THE ASSESSEE HAD ARRI VED THE PROVISION FOR WARRANTY BASED ON PAST EXPERIENCE IN A SCIENTIFIC MANNER FURTHER VOUCHED BY THE CERTIFICATION OF A CHARTERED ACCOUNTANT. (9) FOR THE A.Y. 2003 - 04 THE ITAT IN ASSESSEE S OWN CASE IN ITA NO.930/BANG/06 VIDE ITS ORDER DATED 18.10.2007 HAD ALLOWED SUCH PROVISION. 7. LD. DR VEHEMENTLY OPPOSED TO THE ARGUMENTS OF THE LD. AR AND SUPPORTED THE ORDER OF LD. AO AND LD. CIT(A). SHE ASSERTED THAT THE PROVISION MADE BY THE ASSESSEE IS VERY MUCH ON THE HIGHER SIDE AND WITHOUT ANY SCIENTIFIC BASIS. TH E DETAILS SUCH AS BREAK UP OF EXPENDITURE ITA NO.609/BANG10 PAGE 6 OF 7 INCURRED RELATING TO THE PERIOD OF WARRANTY WAS NOT PROVIDED BY THE ASSESSEE FOR THE REVENUE TO EXAMINE ITS GENUINENESS. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORDS BEFORE US. AT THE OUTSET ON E XAMINING THE PAPERBOOK SUBMITTED BY THE ASSESSEE WE HAVE OBSERVED THAT THE ITAT IN THE ASSESSEE S OWN CASE FOR THE A.Y. 2003 - 04 HAS HELD AS FOLLOWS: 5. IN THE INSTANT CASE THE PERCENTAGE OF 2.14% HAS BEEN ARRIVED FROM THE APPLE GROUP S PRIOR EXPERIENC E IN THE INDIAN INTERNATIONAL MARKET AND THE POST SALES SUPPORT RENDERED BASED ON THE TECHNICAL EVALUATION. BASIS SO GIVEN HAS NOT BEEN HELD AS ARTIFICIAL. NO MATERIAL HAS BEEN PLACED ON RECORD BY REVENUE THAT ACTUAL EXPENDITURE OF EARLIER YEARS IS MISMA TCH WITH THE ESTIMATION. IN VIEW OF THESE FACTS AND THE POSITION OF LAW AS DISCUSSED ABOVE WE HOLD THAT LEARNED CIT(A) WAS JUSTIFIED IN ALLOWING THE EXPENDITURE. 9. IT IS PERTINENT TO MENTION HERE THAT THE FACTS AND ISSUES OF THE CASE ARE IDENTICAL TO TH AT OF THE A.Y. 2003 - 04 WHICH HAVE BEEN ALREADY ADJUDICATED BY OUR PREDECESSORS. THE REVENUE HAS NOT BROUGHT OUT ANY MATERIAL ON RECORD TO ESTABLISH OTHERWISE. FROM THE CERTIFICATE ISSUED BY THE CHARTERED ACCOUNTANT IT IS EVIDENT THAT THE COMPANY HAS COMP LIED WITH THE GUIDELINES ISSUED BY CHARTERED ACCOUNTANTS OF INDIA WITH RESPECT TO ACCRUAL AND CONSISTENCY CONCEPTS AND ALSO SATISFY THE REQUIREMENTS OF ACCOUNTING STANDARDS 29. FURTHER TAKING NOTE OF ALL THE DECISIONS CITED BY THE LD. AR WE ARE OF TH E CONSIDERED VIEW THAT THE ASSESSEE IS JUSTIFIED IN MAKING THE PROVISION FOR WARRANTY TO THE EXTENT OF RS.95 33 313. THEREFORE WE HEREBY DIRECT THE LD. AO TO DELETE THE ADDITION MADE ON ACCOUNT OF PROVISION FOR WARRANTY . IT IS ESSENTIAL TO MENTION THAT DURING THE COURSE OF THE HEARING LD. AR CLARIFIED THAT FOR THE A.Y. 2003 - 04 THE ASSESSEE ITA NO.609/BANG10 PAGE 7 OF 7 COMPANY S NAME WAS M/S. APPLE COMPUTER INTERNATIONAL PVT. LTD. WHICH WAS LATER CHANGED TO M/S. APPLE INDIA PVT. LTD. 10. IN THE RESULT THE APPEAL OF THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 4 TH DAY OF FEBRUARY 2011 . SD/ - SD/ - ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE DATED THE 4 TH FEBRUARY 2011. DS/ - COPY TO: BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE. 1 . APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE