Relief to Dell International: ITAT rules Amount received towards Warranty is Refundable even on Cancellation of Warranty Agreement [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore Bench granted relief to M/s. Dell International Services India Private Limited and held that amount received towards warranty is refundable even on cancellation of warranty agreement.

The Assessee,M/s. Dell International Services India Private Limited is engaged in the business of sale of computer hardware, and also offers warranty service to the customers, which represents a contractual obligation on part of the Assessee to provide services for a defined period for a given consideration agreed. Though the entire sale price for warranty is invoiced to customers along with sale of products during the previous year, the obligation to provide services and the outflow of resources (cost of spares, labour and logistics) would happen over a period of time.

Therefore, in line with the matching principles of accounting, the revenue for the same would be recognized proportionately in the year of providing the services. Also, following the matching concept, the cost in relation to providing such services would also be recognized in the same year. The AO brought to tax the deferred revenue of Rs.124,88,69,986/- by holding that the income not only accrued to the Assessee in the current year but was also received and admitted as revenue in the sales tax return and service tax return.

The DRP rejected the objections of the Assessee, by holding that the amount received by the Assessee is not refundable to the customers, and therefore the amount paid by the customers was towards outright purchase of services and not an advance to be appropriated against future use of services.

However, it is submitted by the Counsel for the assessee, T. Suryanarayana, that upon cancellation of the contract, the Assessee has to refund the entire consideration less cost of services already rendered. On perusal of a sample warranty terms it can be noticed that the assessee would refund the money upon premature cancellation of warranty service.

The Division Bench relied on the judgments in Schneider Electric IT Business India Pvt. Ltd. v. JCIT, LTU in order to arrive at the conclusion. The Bench consisting of George George K, Judicial Member and Padmavathy S, Accountant Member held that “In the light of the decision of the coordinate bench of the Tribunal and considering the facts of the case as discussed above, we are of the view that claim of the assessee deserves to be accepted and the addition made by the AO as confirmed by the DRP is hereby deleted. This ground accordingly is allowed in favour of the assessee.”

To Read the full text of the Order CLICK HERE

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