The Principal Commissioner Of ... vs M/S Nokia India Pvt. Ltd.
2018 Latest Caselaw 5234 Del

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*    IN THE HIGH COURT OF DELHI AT NEW DELHI
+                   INCOME TAX APPEAL No. 955/2018
                                  Date of decision: 31st August, 2018.

THE PRINCIPAL COMMISSIONER OF INCOME TAX -6
                                         ..... Appellant
                 Through: Mr. Ruchir Bhatia, Sr. Standing
                 Counsel.

                   Versus
M/S NOKIA INDIA PVT. LTD.              ..... Respondent
                   Through: Mr. Vikas Srivastava, Mr.
                   Sumit Mangal and Ms. Rashi Gupta,
                   Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE CHANDER SHEKHAR

SANJIV KHANNA, J. (ORAL)

Present appeal by the Revenue under Section 260A of the

Income Tax Act, 1961 ('Act', for short) in the case of Nokia India Pvt.

Ltd ('respondent-assessee' for short) assails the order dated 30th

January, 2018 passed by the Income Tax Appellate Tribunal

('Tribunal' for short). The appeal pertains to Assessment Year 2003-

04.

2. First issue relates to provision for warranty of Rs. 5.48 crores.

The Assessing Officer vide assessment order dated 27.02.2006 had

disallowed claim for provision for warranty as unascertained liability,

and that only the actual warranty charges incurred could be allowed as

expenditure. The Assessing Officer had also observed in the

assessment order that the sales of the respondent-assessee had taken

off on a large scale with substantial increase in sales of mobile phones

etc. from Rs.58.9 crores to Rs.830.5 crores. To support the

disallowance made, the Assessing Officer held that the technology in

the mobile phone industry was rapidly improving and therefore, past

experience regarding warranty claims was not relevant to

scientifically compute and calculate provision for warranty as

ascertained expenditure.

3. The Commissioner of Income Tax (Appeals) vide order dated

25.03.2010 affirmed these findings holding that the provision for

warranty was a contingent liability and was not an allowable expense.

The warranty expense was to be allowed on actual basis, in the year of

occurrence and not in the year in which provision was made.

4. The Tribunal vide the impugned order has allowed the appeal

of the respondent-assessee as the accounts were maintained on

mercantile basis. Provision for warranty was made on the basis of

scientific principles and on actuarial basis. Reference was made to

ratio in Rotork Control India Pvt. Ltd. Vs. Commissioner of Income

Tax (2009) 314 ITR 62 (SC). The Delhi High Court in the

respondent-assessee's own case in ITA Nos.841/2009 and 842/2009

relating to Assessment Year 2001-02, has affirmed the order of the

Tribunal deleting the same disallowance made by the Assessing

Officer as unjustified and contrary to law.

5. Counsel for Revenue has drawn our attention to the table

showing details of provisions for warranty claimed in different years

referring to the table/chart in the order passed by the Commissioner of

Income Tax (Appeals). The said table reads as under:-

"

(Rs. in Crore)

Asst Opening Closing Amount Actual Am of Total Percenta balance balance of warrant expense Sales for ge of year of of Provisio y s the year closing warranty warrant n expense debited (from provsn

(a) (b) y (c) disallow to P/L Mobile to sales ed (e) a/c phone) (h)=(c)/

(g) (g)

(d) (f)

2001-02 1.65 1.44 0.94 1.78 1.57 66.57 2.16

2002-03 1.44 1.24 0.78 1.60 1.40 58.97 210

2003-04 1.24 6.73 5.48 5.87 11.36 830.51 0.81

2004-05 6.73 25.20 18.47 23.30 41.77 2,408.01 1.05

2005-06 25.20 64.10 32.02 68.70 107.60 4,729.14 1.36

"

He submits that the claim for warranty was not based on scientific

principles or actuarial basis. Therefore, notwithstanding the earlier

order, the Tribunal was not justified in accepting the plea of the

respondent/assessee.

6. We have considered the contention but do not find any merit in

the same. As stated by the Assessing Officer in the assessment order,

the table reveals that there was substantial increase and jump in sales

year after year in the Assessment Years 2002-03, 2003-04, 2004-05

and 2005-06, from Rs.58.97 crores to Rs.830.51 crores to Rs.2408.01

crores, and then to Rs.4729.14 crores, respectively. The provision for

warranty would accordingly increase in numerical terms. Pertinently,

the percentage of closing provision of warranty with reference to

quantum of sales had decreased and came down as is reflected in the

figure in the column (h) of the table above. In the present case, we are

only concerned with the Assessment Year 2003-04 in which the

percentage of closing provision to sales was only 0.81%. Variation in

figure would indicate that no thumb rule was applied. Moreover in

case of doubt and debate, Income Tax Authorities should have asked

for the basis and the formula/criteria applied by the

respondent/assessee to compute provision for warranty. On the other

hand without disputing the computation, disallowance was made by

holding that actual expenditure on warranty claims and not provision

for warranty was allowable as expenditure. This proposition is wrong

and incorrect. Improvement in technology would not justify

disallowance of claim/expenditure on account of provision for

warranty, though in a given case on basis of data it could be relevant

factor in making the calculations.

7. In the aforesaid factual matrix and in view of the decision of the

Supreme Court in Rotork Control India Pvt. Ltd. (supra) and decision

of this Court in respondent-assessee's case in ITA Nos.841/2009 and

842/2009, we do not find any good ground or reason to accept the

aforesaid contention of the Revenue.

8. Second issue raised by the Revenue relates to capitalization of

marketing expenses to the extent of Rs.39.98 lakhs. Assessing Officer

had observed that the respondent-assessee had provided mobile

handsets to their dealers, employees and after-sale-service centres. He

held that these mobile handsets should be considered as capital assets

used by the respondent-assessee for its business and accordingly the

respondent-assessee was entitled to claim deprecation on these mobile

handsets. This addition was upheld by the Commissioner of Income

Tax (Appeals) holding his predecessors in the Assessment Years

2000-01, 2001-02 and 2002-03 had upheld the said decision, though

appeals were pending before the Tribunal.

9. The Tribunal in the impugned order has held that the

respondent-assessee was engaged in the manufacture, import and sale

of mobile handsets. They had a large number employees, a wide team

of dealers and sales personnel. The respondent-assessee had

transferred title or ownership of the mobile handsets to the employees,

dealers, sales personnel etc., who were given mobile handsets free of

cost and were no longer owned by the respondent-assessee. These

mobile phones were not to be returned to the respondent-assessee.

Accordingly, the cost of the mobile phones was business expenditure

and was rightly reduced from the inventory. Thus, the respondent-

assessee was justified in treating these mobile phones as expenditure

incurred. The amount cannot be capitalized.

10. The aforesaid finding regarding capitalization or business

expenditure is a finding of fact. Obviously, respondent-assessee could

not have claimed title and depreciation, once the mobile phones etc.

had been given and ownership had been transferred to the employees,

dealers, sales personnel and after-sales-service centres. In the absence

of any material and evidence to show that the findings of fact are

perverse, we do not see any reason to interfere with the impugned

order on the said aspect.

11. The third issue raised by Counsel for Revenue relates to

addition of more than Rs.2.68 crores on account of stocks damaged

during transportation etc., which had not been included in the closing

stock. The Assessing Officer held that value of the mobile phones

damaged in transit should be included the closing stock. The

Commissioner of Income Tax (Appeals) had affirmed the addition

observing that he would follow the orders of the earlier assessment

years, though appeals on this issue was pending before the Tribunal.

12. The Tribunal has deleted the said addition on the ground that it

would amount to double addition. No other reason is stated.

13. Counsel for respondent-assessee, at this stage, states that this

issue may be remanded to the Tribunal for fresh decision as the

reasoning given by the Tribunal is not correct and not germane to the

issue in question. He states that the question of law need not be

framed. Recording the said concession, this issue with regard to the

damaged handsets and their inclusion in the closing stock is remitted

to the Tribunal for fresh decision.

14. Fourth issue raised in the present appeal relates to addition of

Rs.8.50 lakhs made on account of disallowance of the claim on

account of obsolescence. Respondent-assessee had written off and

debited the profit and loss by Rs.34,00,339/- as provision for

obsolescence of inventory. The Assessing Officer had made an adhoc

disallowance of 25% from the Rs.34,00,339/- , i.e. Rs. 8.50 lakhs

observing that respondent-assessee had not been able to justify and

show the total extent of disallowance. Reference was made to the

assessment orders for the Assessment Years 2000-01 and 2001-02

wherein similar additions were made. This addition was upheld by

the Commissioner of Income Tax (Appeals).

15. Tribunal while deciding the said issue had noticed and had

referred to the order of High Court in ITA No.841/2009 and

842/2009, decided on 14.07.2009, wherein the addition was upheld.

The decision in ITA Nos.841 and 842/2009 was distinguished by the

Tribunal on facts as in the said case the Assessing Officer had issued

a questionnaire requiring the respondent-assessee to furnish details

and justify claim for provision for obsolescence of inventory. As no

details/papers were furnished, the addition of 25% of the total claim

for obsolescence was made.

16. In the present case, after noticing the factual matrix the

Tribunal observed that the closing stock has to be valued on the basis

of net realisable value. The said issue has been remanded to the

Assessing Officer to determine and deicide afresh the cost of obsolete

items with reference to net realizable value. In view of the said

direction for remand, we do not think that any substantial question of

law arises for consideration.

17. Recording the aforesaid including the concession made by the respondent-assessee on the issue of damaged stock, the present appeal is disposed of without any order as to costs.

18. To cut short the delay, the parties on the issue of damaged stocks are directed to appear before the Tribunal on 26th September, 2018.

SANJIV KHANNA, J.

CHANDER SHEKHAR, J.

AUGUST 31, 2018/NA