Automobile and pharmaceutical companies are set to get a major relief in their tax liability as the revenue department has decided to make it binding on tax officials to honour the potential costs of warranty and litigation as a deductible expenses while calculating their total income.
The move is seen as an attempt to reduce litigation and provide certainty to taxpayers.
The Tax Accounting Standards (TAS) finalised by the revenue department would prevent officers from disallowing the provision made for potential cost of warranty or litigation as a deduction, holding them as notional items.
There have been many instances in the automobile and consumer durables sectors, where companies such as Hyundai Motor India, Maruti Suzuki India and Carrier Airconditioning & Refrigeration were disallowed the provisions made for meeting the potential cost of warranty, saying such expenses cannot be allowed until these have actually been incurred.
The disputes on provisioning of cost of warranty between the tax department and manufacturers in a given year run into several crores of rupees and the row recurs year after year. Hyundai Motors India was disallowed a provision of Rs 8.26 crore in assessment year 2002-03, while Whirlpool India was denied a deduction of Rs 3 crore in assessment year 1996-97. Career Airconditioning & Refrigeration was denied deduction of Rs 60 lakh for assessment years 1998-99 to 2001-02.
“The revenue authorities till three or four years ago were not allowing the provision made for warranty cost and admitted only cash-basis expenses and this has led to a high level of litigation,” said Sethuraman R, director, finance, Hyundai Motor India.
TAS, which is expected to be notified under the Income Tax Act soon, will bring a great relief for automobile and consumer durable goods makers by upholding the spirit of Accounting Standard (AS) 29 on provisions and contingent liabilities notified under the Companies Act even for tax purposes, sources said.
"The move to uphold the spirit of AS29 in the proposed Tax Accounting Standards will be beneficial for this industry at a time when margins are under pressure and volumes sluggish," said Maruti Suzuki CFO Ajay Seth.
AS 29 allows a provision for cost of servicing a warranty, which may include cost of labour, spare parts or other expenses calculated in a scientific manner based on past experience. But assessing officers used to disallow the provision of such