Citation Codes

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Case Number

Tax Case (Appeal) Nos. 163 of 2003, 1, 94, 95, 229, 565 of 2004 and 2203 of 2006

Attorney(S)

For the Appellant: T. Ravikumar, Advocate.
For the Respondent: R. Vijayaraghavan for in all the T.Cs. Subbaraya Aiyar & Padmanabhan, Advocates.

Judges

P.D Dinakaran
Chitra Venkataraman, JJ.

Acts

Section 40 A (2) (b) (iv) of the Income Tax Act,

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Smart Summary

Structured Summary of the Provided Opinion

Factual and Procedural Background

Multiple income-tax appeals (T.C.(A) Nos. 1/2004, 94/2004, 95/2004, 163/2003, 229/2004, 565/2004 and T.C.No.2203/2006) were clubbed for a common order because they raised identical issues. The appeals arise from assorted orders of the Income-tax Appellate Tribunal, Madras (various Benches) in respect of the deductibility of provisions made by assessees for warranty charges and, in some appeals, a dispute over corporate service charges paid to a closely connected (holding) company.

Procedurally, in at least one representative matter (T.C.(A) No.163 of 2003) the assessing officer treated the warranty provision as an unascertained/uncertain liability and disallowed the deduction; the first appellate authority allowed the claim following earlier Tribunal orders; the assessing officer appealed further. Similar factual patterns and earlier orders in related assessments led to the present cluster of appeals.

Legal Issues Presented

Whether the Tribunal was right in holding that the warranty provision (a provision created for future warranty claims under terms of sale) is an allowable deduction?
Whether the Tribunal was right in holding that a provision made in respect of future claims that may not arise at all is deductible expenditure in the current year?

Arguments of the Parties

Revenue's Arguments (Standing Counsel)

Relied on the Supreme Court decision in Shree Sajjan Mills Ltd. v. Commissioner of Income-Tax ((1985) 156 ITR 585) and on Vazir Sultan Tobacco Co. Ltd. v. CIT ([1981] 132 ITR 559) to draw the distinction between a provision (charge against profits) and a reserve (appropriation of profits).
Submitted that where there is no obligation crystallised as on the date of the accounts and no reliable basis (such as prior-year statistical data) for forming a provision for an uncrystallised or uncertain liability, the provision is not allowable.
Relied on decisions including Indian Smelting and Refining Co. Ltd. ([2001] 248 ITR 4), Commissioner of Income-Tax v. Dynavision Ltd. ([2004] 265 ITR 289), Bharat Earth Movers ([2000] 245 ITR 428) and others to emphasise that contingent liabilities, by their nature, cannot be allowed as deductible provisions unless the liability is certain or capable of reasonable estimation.
Pointed to authorities (including a Privy Council/other precedent and Mitsubishi Motors New Zealand Ltd. citation) where statistical/empirical data justified forecasting of warranty or remedial costs, to distinguish those cases from the present appeals where no such data were furnished.
With respect to corporate service charges, urged that in the absence of necessary details to support the claim, disallowance is justified (citing Shatrunjay Diamonds and V.S.T. Motors).

Assessees' Arguments

Assessees' counsel argued that a committed liability is an accrued liability and that even if exact quantification is postponed, a provision founded on the contractual warranty obligation should be deductible (referred to Section 37(1) and decisions supporting provision-based deductions).
Contended that the liability under a warranty clause arising from the terms of sale is a committed liability and should not be treated as contingent merely because exact quantification will be determined later.
For some appeals (and in particular instances) assessees relied on past experience/previous years' data (in other cases) and on High Court decisions (e.g., Vinitec and Indian Transformers decisions) where prior-year data enabled reasonable estimation and thereby supported allowance of provisions.
Regarding corporate service charges, assessees contended that the holding company did render additional services and that commercial exigencies justify the payments; they relied on the Tribunal's acceptance of calculation sheets and commercial explanation for the payments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Shree Sajjan Mills Ltd. v. Commissioner of Income-Tax ((1985) 156 ITR 585)	Distinction between provision and reserve; liabilities such as gratuity are contingent until accrual event occurs; deduction requires existence of liability with certainty (or satisfying statutory requirements for particular schemes).	Cited to show that a liability must be certain (or capable of reasonable estimation) to qualify as a deduction; used to support rejection of provisions for contingent warranty liabilities in these appeals.
Vazir Sultan Tobacco Co. Ltd. v. CIT ([1981] 132 ITR 559 (SC))	Explains commercial accountancy distinction between provisions (charges against profits) and reserves (appropriations of profits).	Quoted to delineate that provisions are deductions only where they represent liabilities and are not mere appropriations or general reserves.
Indian Smelting and Refining Co. Ltd. v. Commissioner of Income-Tax ([2001] 248 ITR 4)	Discussed contingent liability; relied on by the Revenue to show that contingent liabilities generally cannot be provided for as deductions.	Cited by the Revenue; the Court noted this authority but held it distinguishable on facts where liability was not certain.
Commissioner of Income-Tax v. Dynavision Ltd. ([2004] 265 ITR 289)	Characterisation of liability as contingent; statement that deductible expenditure must be towards a liability actually existing at the time and that putting aside money which may become expenditure on the happening of an event is not expenditure.	Relied upon by the Court to support the proposition that funds set aside for possible future contingent expenditure do not amount to deductible expenditure.
Bharat Earth Movers v. Commissioner Of Income Tax, Karnataka ([2000] 245 ITR 428)	Leave encashment case: provision for accrued leave deemed not to be contingent where liability was proportionate to entitlement and capable of estimation.	Referenced and treated as distinguishable; Court drew the distinction that where liability is certain (even if quantification is deferred), deduction may be allowable, unlike the warranty provisions before the Court.
Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd. ([1996] 222 ITR 671 at 701)	Authority where statistical/empirical data permitted accurate forecasting of remedial/warranty costs (Privy Council reasoning cited).	Discussed by the Court as an example where prior experience data justified provision; the Court observed there was no comparable data in the present appeals and hence the precedent did not help the assessees here.
Commissioner of Income-Tax v. Vinitec Corporation Pvt. Ltd. ([2005] 278 ITR 337 (Delhi))	High Court decision where figures for five years of warranty liability vis-à-vis expenditure enabled reasonable estimation.	Examined by the Court and held distinguishable because the cases cited there were supported by multi-year data, which was absent in the present appeals.
Commissioner of Income-Tax v. Indian Transformers Ltd. ([2004] 270 ITR 259)	Another High Court decision relied on by assessees concerning estimation of warranty liabilities based on data.	The Court observed that that decision likewise depended on prior-year details and therefore did not support allowance where no such details were shown.
Metal Box Company Of India Ltd. v. Workmen ([1969] 73 ITR 53)	Referenced in relation to gratuity and accrual principles.	Cited in the discussion of the gratuity jurisprudence to illustrate when liabilities become accruable and deductible.
Commissioner of Income-Tax v. Shatrunjay Diamonds ([2003] 261 ITR 258)	Authority holding that in the absence of necessary supporting details, disallowance of a claim was justified.	Relied on by the Revenue in the corporate service charge issue; Court cited it to support the proposition that lack of details can justify disallowance.
V.S.T. Motors Ltd. v. Commissioner of Income-Tax ([2003] 260 ITR 440)	Authority on disallowance where supporting particulars were lacking.	Cited by the Revenue for the proposition that absence of necessary details can justify rejection of a claim; Court considered this in remitting the service-charge issue for fresh consideration.

Court's Reasoning and Analysis

The Court proceeded by identifying the core legal principle from Supreme Court jurisprudence: to qualify as a deductible provision the liability must exist with certainty (be an accrued liability) even if quantification can be postponed; mere possibility of a liability (contingent liability) cannot be allowed as a deduction. The Court emphasized the distinction between provision (a charge against profits to meet a liability) and reserve (an appropriation of profits).

Applying that principle, the Court examined the facts presented by the assessees: the warranty provisions were created at an ad hoc percentage of turnover (commonly 1.5%) without accompanying particulars demonstrating that the liability was likely to arise or that it could be reasonably estimated from past data. The Court noted that in those authorities where provisions for warranty or similar obligations were allowed, the claim was supported by prior-year statistical or empirical data which enabled a reasonable forecast of expected liability (for example, the cited Privy Council/Mitsubishi decision and the Vinitec/Indian Transformers High Court decisions).

The Court found no such data or pattern presented by the assessees in the present appeals. In the absence of previous-year details or other evidence enabling a reasonable estimate, the provision assessed as a percentage of turnover was held to be unjustified: it represented a put-aside for a liability that might never crystallise, and therefore constituted a contingent liability not deductible under the income-tax regime (and not deductible even under a mercantile system when the contingency is uncertain).

On the separate issue of corporate service charges (T.C.Nos.94 and 95 of 2004), the Court reviewed the Tribunal's acceptance of the assessee's calculations but observed that the Tribunal did not advert to or set out sufficient facts about the additional services rendered to justify the extra payments. Given the absence of details in the Tribunal's order, the Court considered it appropriate to remit the question to the assessing authority to permit the assessee to furnish particulars and for the authority to re-examine the claim.

For T.C.No.2203 of 2006 (and other like cases where the assessee relied on prior experience), where the assessment showed that certain payments (e.g., Rs.150 per set for one-year warranty) were made to an external service company and that other long-term warranty liabilities were only payable if and when events occurred, the Court treated such obligations as contingent and subject to the same principle: absent certainty or capable estimation, such provisions are not deductible.

Holding and Implications

Holding: The Court allowed the appeals preferred by the Revenue on the question of warranty charges, holding that the warranty provisions as claimed were not deductible because they represented contingent liabilities not sufficiently certain or supported by data to be treated as accrued liabilities for deduction purposes.

Direct Consequences and Implications:

The Tribunal's orders allowing ad hoc percentage provisions for warranty charges were reversed where no prior-year data or other particulars were produced to show reasonable estimation of liability.
For T.C.Nos.94 and 95 of 2004, the specific question concerning disallowance under Section 40A(2)(b)(iv) for corporate service charges paid to a closely connected company was remitted to the assessing authority for fresh consideration so that the assessee may produce particulars of the additional services rendered to justify payments in excess of 2%.
For appeals following the same factual pattern (e.g., T.C.No.2203 of 2006), the Court held against deduction of contingent warranty provisions for the reasons stated above.
The Court recorded: "No costs."

Note on precedent: The Court's decision applied existing principles from higher authority (including the Supreme Court) regarding the requirement of certainty (or reasonable estimability) of liability for a deduction; the opinion does not state that it is laying down a new legal precedent beyond applying those principles to the facts before it.

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Commissioner Of Income-Tax v. Rotork Controls India Ltd. And Others (Formerly Beacon Rotork Controls Ltd.)

94/2004, 95 of 2004 & 565 of 2004 M/s.Beema Manufacturers Pvt. Ltd., Chennai ... Respondent in T.C.No.229/2004 M/s.Thompson Consumer Electronics, 44, 1st Main Road, Gandhi Nagar, Adyar, Chennai-20 ... Respondent in T.C.No.2203/2006 T.C.(A)No.163 of 2003 is against the order of the Income-tax Appellate Tribunal, Madras 'A' Bench, dated 28.2.2003 in ITA No.468/(Mds)/95.

T.C.(A)No.1 of 2004 is against the order of the Income- tax Appellate Tribunal, Madras 'A' Bench, dated 7.7.2003 in ITA No.874/Mds/1996.

T.C.(A)No.94 of 2004 and 95 of 2004 are against the common order of the Income-tax Appellate Tribunal, Madras 'C' Bench, dated 28.4.2003 respectively in ITA Nos.276 and 1244/Mds/95.

T.C.(A)No.229 of 2004 is against the order of the Income-tax Appellate Tribunal, Madras 'D' Bench, dated 30.9.2003 in ITA No.1285/Mds/2001.

T.C.(A) No.565 of 2004 is against the order of the Income-tax Appellate Tribunal, Madras 'B' Bench, dated 10.02.2004, in ITA No.1091/Mds/97.

T.C.(A)No.2203 of 2006 is against the order of the Income-tax Appellate Tribunal, Madras 'B' Bench, dated 31.10.2005 in ITA No.1317/Mds/2001.

) All these appeals are clubbed together, for passing a common order, considering the identity of the issues raised therein.

2. The common question that arises for consideration is, whether the Tribunal was right in holding that the warranty provision is an allowable deduction ? and, whether the Tribunal was right in holding that a provision made in respect of future claims that may not rise at all is a deductible expenditure in the current year ?

3. In T.C.No.94 of 2005, apart from the warranty charges, there is yet another question relating to the disallowance under Section 40 A (2) (b) (iv) of the Income Tax Act, regarding payment of corporate service charges paid to a closely connected company.

4. The facts in all these appeals centre on the question of warranty charges. Taking T.C.No.163 of 2003 for consideration of facts, it may be seen that the assessee made a provision as regards warranty charges payable under the terms of sale. It is stated that such a provision is made in the accounts to mete out the future requirements arising on account of the warranty clause in the sale agreement. It is admitted by the assessee that the warranty provision made as against the liability had not crystalised against the assessee. Consequently, holding the provisions as unascertained liability, the assessing authority rejected the plea of the assessee. The Assessing Officer followed the orders passed earlier, in respect of similar claims. Aggrieved of the same, the assessee preferred an appeal before the first appellate authority, who followed the earlier orders of the Tribunal and allowed the claim. Aggrieved of this, the Assessing Officer further went on appeal, following the orders passed earlier under similar circumstances. Hence, these appeals.

5. It is a matter of fact that in all these cases, the claims are not made on the basis of any particular data available for earlier years.

6. Learned counsel appearing for the revenue referred to the decision of the Supreme Court in Shree Sajjan Mills Ltd. v. Commissioner of Income-Tax, (1985) 156 ITR 585, and makes a particular reference to the distinction between 'provision' and 'reserve', dealt with by the Apex Court and to the extract from the decision reported in Vazir Sultan Tobacco Co.Ltd. v. CIT [1981] 132 ITR 559 (SC), which may be usefully extracted hereunder :

"The distinction between a provision and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P.& L.account and the balance sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest."

7. Based on the said decision, the learned Standing Counsel submits that when there was no obligation cast as on the date of sale except for an agreement and in the absence any comparison to make a provision for an uncrystallised or uncertain liability, the assessee was not entitled to the benefit, as granted by the Tribunal. He also placed reliance on the decisions in Indian Smelting and Refining Co.Ltd. v. Commissioner of Income-Tax, [2001] 248 ITR 4 and Commissioner of Income-Tax v. Dynavision Ltd., [2004] 265 ITR 289 and makes a reference to page 297, to impress on the fact that the contingency liability, by its very nature, cannot have a provision for purposes of deduction. He also made a specific reference to the decision in Bharat Earth Movers v. Commissioner Of Income Tax, Karnataka., [2000] 245 ITR 428, and submitted that the same is distinguishable on facts and in the absence of certainty of a liability and certainty of an event to incur that liability, a provision cannot go for deduction. The learned counsel further submitted that the assessees in these cases have not submitted any proof as regards previous pattern of expenditure, to maintain a provision. In this connection, he placed reliance on Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd., [1996] 222 ITR 671 at 701; Commissioner of Income-Tax v. Vinitec Corporation Pvt. Ltd., [2005] 278 ITR 337 (Delhi) and Commissioner of Income-Tax v. Indian Transformers Ltd., [2004) 270 ITR 259.

8. Per contra, Mr.Vijayaraghavan, learned counsel for the assessees, submits that a committed liability is an accrued liability and, hence, even though the exact quantification is postponed to a future date, yet a provision in terms of the agreement undertaken has to be considered for deduction. In short, he submits that the determination of exactness of the liability on a future date does not make a liability as on the date of agreement a contingency liability. In this connection, he placed reliance on Section 37 (1) and drew support from [2001] 248 ITR 4 and [2000] 245 ITR 428. In the above circumstances, the learned counsel for the assessees prays that the order of the Tribunal be upheld.

9. We agree with the submission made by the learned counsel for the revenue, that considering the nature of the liability, which is yet to crystalise but loaded with uncertainty of the event to cause a liability, there is no justification to accept the plea of the assessees to uphold the order of the Tribunal.

10. The reliance placed on the decision of the Supreme Court in (1985) 156 ITR 585 needs to be noted herein. It relates to a provision for future use for payment of gratuity to the employees on retirement or on termination of their services. The Apex Court held that the liability to pay gratuity becomes an accrued liability of an assessee, when the employees retire or when their services are terminated and, until then, the right to receive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent liability qua the employer. Taking note of the nature of liability, the Supreme Court also made a reference to the decision in Metal Box Company Of India Ltd. v. Workmen, [1969] 73 ITR 53, and held that it was permissible for an assessee, if he so chooses, to provide in his profit and loss account for the estimated liability under a gratuity scheme, by ascertaining the present value on accrued basis and claiming it as an ascertained liability, to be deducted in the computation of profits profits and gains of the previous year. Referring to the provisions of section 40 A (7) in that case, the Supreme Court held that the requirements for gratuity to be deductible under the Act must be fulfilled under Section 40 A (7). It may be noted that though it relates to a gratuity payment, the fact remains, that, to qualify for a deduction, there must be a liability and it is a certainty. Although the quantification, as such might be postponed to a future date, as long as the event is of certainty, the claim for deduction, as such, cannot be denied. However, where the liability itself is not held out with certainty, which may happen or may not happen, such liabilities, contingent in character, cannot be the subject matter of deduction, even under the mercantile system of accounting. The eligibility or otherwise for deduction hence depends on the certainty of the event, namely, the liability to occur even under the terms of sale agreement. Hence, with such uncertainty, the writ large on the occurring of an event, there is no justification to extend the benefit of deduction on the provision on a contingent liability. The decision reported in [2001] 248 ITR 4 relied on by the assessee is distinguishable to the effect that the provision made for liability on the basis of show cause notice, which the assessee did not admit as a liability, was not deductible; that was only a contingent liability and, hence, could not constitute as an expenditure for the purpose of income tax. [2004] 265 ITR 289 is the decision of this Court, on the question of the character of a liability as the contingent liability. Referring to the decision in [1985] 156 ITR 585 (SC), this Court held that

the basic requirement is that the amount sought to be excluded should be an expenditure and the expenditure, which is deductible for income tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money, which may become expenditure on the happening of an event is not an expenditure.

11. The Revenue as well as the assessees placed reliance on [2000] 245 ITR 428. This relates to a claim on leave encashment. The assessee, in that case, created a fund making provision for meeting its liability, arising on account of accumulated earned/vacation leave. A certain sum was set apart in a separate account as provision for encashment of accrued leave. Assessee made a claim for deduction. The High Court reversed the view of the Tribunal that provision for accrued leave salary was a contingent liability that was not a permissible deduction. Reversing the said view, the Apex Court held that the provision made by the assessee therein for meeting its liability was under the leave encashment scheme proportionate with the entitlement earned by the employees of the company, subject to a ceiling on accumulation as applicable on relevant date. Consequently, the Apex Court held that the liability was not a contingent liability.

12. A perusal of the decision of the Supreme Court shows that what should be certain is the incurring of the liability. Even though the actual quantification may not be possible, it should also be capable of being estimated with reasonable certainty. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti, though it will be discharged at a future date. It makes no difference to the point of time when the liability shall have to be discharged.

13. The Supreme Court decision referred to above lays down the law on the question of deductibility of a provision on contingent liability and that the deduction to be allowable thereon must be that liability existing with certainty to be called an accrued liability. Hence, where there was no difficulty in ascertaining the existence of a liability, mere existence of difficulty in actual quantification does not convert the accrued liability to that of a conditional one, to look upon to the happening of an event. The settled principles, hence, emphasis on the existence of element of certainty rather than on the quantification of the liability.

14. A perusal of the facts in these cases makes it clear that what has been projected in these cases is that under the terms of the agreement of sale, there is a warranty provision. The accounts of the assessee made a provision for warranty at a percentage on the turnover.

15. Learned counsel for the assessee could not deny the fact that considering the uncertainty of a liability, deduction could still be a possibility under the law declared by the supreme Court.

16. In none of these cases, the assessee could lay its hand on the actual incurring of a liability under the warranty clause on the basis of fixing a percentage on the turnover. In the absence of any details, accepting the claim of percentage on the turnover could not be sustained.

17. As to the reliance placed on the decision in [1996] 222 ITR 697, as rightly submitted by the learned Standing Counsel for the Revenue, the said decision was prompted by the statistical data available that in respect of 63% of the vehicles sold by the tax payer, they were returned to the dealers for some kind of work to be done under the warranty clause. The Privy Council held that the tax payer could reasonably make an accurate forecast, based on the previous experience, as to what would be the total cost of remedial work for all the vehicles sold in a given year. Taking note of the commercial practice, the Privy Council granted the relief in the assessee's appeal.

18. With no such details in the appeals at any stage of the proceedings, we do not find any justification to grant 1.5 per cent on the total turnover, as provision for the warranty clauses.

19. Learned counsel for the assessee placed reliance on [2005] 278 ITR 337 (Delhi), a decision of the Delhi High Court, and [2004] 270 ITR 259, a decision of the Kerala High Court.

20. A perusal of the above two decisions shows that the claims in those cases were based on the data of the previous years, which enabled the assessee to estimate its liability under the warranty clause.

21. In the decision reported in [2005] 278 ITR 337 (Delhi), the Delhi High Court noted that the assessee had given figures for five years of warranty liability provided vis-a-vis the expenditure incurred, so also, in the decision reported in [2004] 270 ITR 259.

22. We do not think that the decisions of the Delhi High Court and the Kerala High Court lend support to the cause of action. In the absence of any such details, an adhoc provision on a percentage of the turnover disentitles the assessee to the relief.

23. Learned counsel for the assessees reiterated the fact that under the terms of sale, warranty clause is a committed liability and, as such, the claim is not reasonable as to the particular percentage in the total turnover.

24. We do not agree with the above said submission of the learned counsel that they could be granted some ad hoc percentage. Considering the fact that the liability, as such, being a contingent one and not a certainty, we fail to understand the reasoning of the Tribunal in accepting the case of the assessee on the strength of decisions, which certainly are based on definite data. Under the circumstances, the decision of the Tribunal deserves to be reversed.

25. As regards the question relating to the charges paid under additional service charges arising in the case of T.C.Nos.94 and 95 of 2004, we find that the Tribunal granted the relief , without adverting to the facts which required the additional expenditure. It is stated that under the terms of the agreement, with increased sales, amount was paid as a corporate service charge to the holding company. The assessing authority allowed the claim in earlier years based on this. However, in respect of the assessment year 1991-92, the assessee claimed that payment at 2% required a revision commensurate with the increase in turnover. The Assessing Officer, however, rejected the claim, as excessive and unreasonable, having regard to the nature of services rendered by the holding company. The assessee explained the increase in the payment of commission, on account of the increase in the turnover. Hence, a sum of Rs.25.00 lakhs extra was paid to the holding company. The first appellate authority, confirming the order of the assessing authority, held that the disallowance of Rs.15.00 lakhs was reasonable and hence allowance of Rs.10.00 lakhs was upheld. The Commissioner also held that the assessee had not produced any data regarding the services rendered extra, justifying the huge payment.

26. On appeal, the Tribunal held that the assessee had produced the necessary calculation sheet; that the assessee had spent less amount towards the charges, consequent to the fact that where it had no branches, it took the services of the holding company to get its business. The Tribunal held that there was nothing to show that the calculation given by the assessee was found to be false. Consequently, it was not open to the revenue to reject the contention in an ad hoc manner.

27. The learned Standing Counsel referred to the decisions in Commissioner of Income-Tax v. Shatrunjay Diamonds, [2003] 261 ITR 258 and V.S.T.Motors Ltd. v. Commissioner of Income-Tax, [2003] 260 ITR 440, wherein it was held that in the absence of necessary details to support the claim, disallowance was justified and, hence, prayed for restoring the order of the Assessing Officer.

28. Per contra, learned counsel for the assessees, however, submitted that there is no denial of the fact that the holding company had rendered additional services. He submitted that the authorities must look at the commercial exigencies, which require the payment to the fixed extent. Learned counsel also submitted that considering the various aspects of the claim, the Tribunal had rightly concluded the issue in favour of the assessee.

29. A perusal of the order of the Tribunal shows that the Tribunal has mainly accepted the plea of the assessee that the expenditure was warranted by commercial exigencies and the assessee would have spent more if it were to maintain branches, instead of taking services of a holding company.

30. We feel, in the absence of any details in the order as to the services rendered, in order to result in a better business, the matter be remitted to the assessing authority for fresh consideration on issue of granting relief to enable the assessee to furnish the details as to the additional services rendered, to justify the payment over and above 2% services charges on the sales effected. Consequently, the first question in T.C.Nos.94 and 95 of 2004, namely, whether the Income Tax Appellate Tribunal was right in holding that the disallowances made under Section 40 A (2) (b) (iv) of the Income Tax Act in respect of corporate service charges paid to a closely connected company were not justified, stands remanded to the assessing authority to re-do the assessment in this regard.

31. As regards T.C.No.2203 of 2006, learned counsel appearing for the assessee submitted that the calculation of the liability was made on scientific basis with reference to the past experience. Consequently, the decision of the Privy Council as well as the decision of the Apex Court will have a bearing on the issue.

32. A perusal of the assessment order shows that the assessee company paid on an average Rs.150/- per set to T.D.Electronics. The liability to pay arose as and when sales were effected. The assessing authority noted that in the case of five year warranty, the entire expenditure spent was dependent on the liability occurring. Since the obligation was purely contingent and not actual, their claim was not sustainable. The Tribunal followed the earlier year's order in the assessee's case as well as that of the Privy Council in [1996] 222 ITR 697.

33. It may be noted that the assessee was providing warrantee for the repair for a period of one year, when they were paying Rs.150/- per set to another company, by name, T.D.Electronics Service Company. That apart, there was another five year warranty and the expenditure on this account was estimated at Rs.68.00 lakhs and this expenditure was to be incurred only when there arose a liability, to be borne. The facts herein are no different from that of the earlier cases.

34. Under the circumstances, we do not find any justification to accept the plea of the assessee that the proviso merited a deduction. In the light of the view that we have taken, which is supported by the decision of the Supreme Court, the appeals preferred by the Revenue, on the question of warranty charges as a contingent liability, are allowed, holding that the same as not deductible. No costs. dixit To The Commissioner of Income Tax, Chennai.

Commissioner Of Inco... v. Rotork Controls Indi...