Warranty Provision & Full R&D Deduction Allowed Under Section 37(1) & 35(2AB) IT Act : ITAT Delhi

The Income Tax Appellate Tribunal (ITAT) Delhi Bench has delivered a significant ruling in Sona BLW Precision Forgings Ltd. vs CIT(A), affirming that provisions for warranty and research & development expenditures are allowable deductions under the Income Tax Act, 1961. The decision clarifies the scope of Section 37(1) for warranty liabilities and Section 35(2AB) for in-house R&D facilities, providing much-needed certainty for businesses in the automotive and manufacturing sectors.

Background & Facts

The Dispute

Sona BLW Precision Forgings Ltd. (the Assessee), a manufacturer of automotive components, filed appeals against orders dated 10.06.2025 passed by the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, for Assessment Years 2017-18 and 2018-19. The disputes arose from disallowances made by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961, which were upheld by the CIT(A).

Key Facts

• The Assessee, originally Comstar Automotive Technologies Private Limited, was amalgamated with Sona BLW Precision Forgings Ltd. pursuant to an order of the National Company Law Tribunal (NCLT) Chandigarh Bench dated 07.01.2022, with effect from 05.07.2019.
• For AY 2017-18, the Assessee filed its return on 23.11.2017, declaring a total income of INR 1,44,97,74,420, and a revised return on 23.08.2018, declaring INR 1,38,10,38,210.
• For AY 2018-19, the Assessee filed its return on 25.11.2018, declaring a total income of INR 1,46,22,91,480 and claiming a refund of INR 87,13,150.
• The AO completed assessments for AY 2017-18 on 26.12.2019 and for AY 2018-19 on 02.04.2021, making the following disallowances:
  • AY 2017-18:
    • Disallowance of provision for warranty: INR 1,40,00,000
    • Disallowance of excess claim of royalty: INR 1,33,33,333
    • Interest under Section 234C: INR 30,80,683
  • AY 2018-19:
    • Disallowance of provision for warranty: INR 90,00,000
    • Disallowance of deduction under Section 35(2AB): INR 1,36,70,201
    • Interest under Section 234C: INR 2,16,459

Procedural History

• AY 2017-18:
  • 26.12.2019: Assessment order passed by AO under Section 143(3).
  • 10.06.2025: CIT(A) upheld the disallowances.
  • Present appeal filed before ITAT.
• AY 2018-19:
  • 02.04.2021: Assessment order passed by AO under Section 143(3).
  • 10.06.2025: CIT(A) upheld the disallowances.
  • Present appeal filed before ITAT.

The Parties' Positions

For the Assessee

• Warranty Provision: The Assessee contended that the provision for warranty is a contractual obligation arising at the time of sale and is estimated using a scientific and consistent methodology based on past trends. It relied on the Supreme Court’s decision in Rotork Controls India (P) Ltd. (2009) 314 ITR 62 (SC), which held that such provisions are allowable as deductions under Section 37(1).
• Royalty Payment: The Assessee argued that the TDS of INR 1,33,33,333 on royalty payments to its parent company in Mauritius was part of the total royalty consideration, as it had undertaken the tax liability under the Intellectual Property Transfer Agreement (IPR Agreement). It relied on decisions such as Commissioner of Income-Tax vs Standard Polygraph Machines Pvt. [2002] 124 taxmann 669 (Madras HC) and Tata Yadogawa Ltd. vs. Commissioner of Income-tax [2010] 8 taxmann.com 174 (Jharkhand HC).
• R&D Deduction: The Assessee claimed that its in-house R&D facility was approved by the Department of Scientific and Industrial Research (DSIR) on 21.08.2017 under Form 3CM, and thus, all expenditures incurred on scientific research should be allowed as deductions under Section 35(2AB). It relied on the Delhi High Court’s decision in Nagravision India (P.) Ltd. vs. Secretary, DSIR [2024] 159 taxmann.com 558 (Delhi HC), which held that DSIR approval is only required for the facility, not the expenditure.

For the Revenue

• The Revenue relied on the orders of the AO and CIT(A), arguing that:
  • The warranty provision was excessive given the Assessee’s opening balances.
  • The royalty payment was fixed at INR 12,00,00,000 by the Settlement Commission’s order dated 30.06.2016, and any excess payment, including TDS, was not allowable.
  • The R&D deduction was restricted to the amount certified by DSIR in Form 3CL, as the AO had done.

Relief Sought

The Assessee sought:

• Deletion of disallowances for warranty provisions (INR 1,40,00,000 for AY 2017-18 and INR 90,00,000 for AY 2018-19).
• Deletion of disallowance for excess royalty claim (INR 1,33,33,333 for AY 2017-18).
• Deletion of disallowance for R&D expenditure (INR 1,36,70,201 for AY 2018-19).
• Adjustment of interest under Section 234C for both assessment years.

The Legal Issue

The central questions before the ITAT were:

1. Whether the provision for warranty is allowable as a deduction under Section 37(1) of the Income Tax Act, 1961, when estimated using a scientific methodology based on past trends.
2. Whether the TDS on royalty payments, undertaken by the Assessee under an IPR agreement, forms part of the royalty consideration and is allowable as a business expenditure.
3. Whether the deduction under Section 35(2AB) for in-house R&D expenditure is restricted to the amount certified by DSIR in Form 3CL or extends to all expenditures incurred on an approved facility.

Arguments Presented

For the Appellant

• Warranty Provision: The Assessee argued that warranty obligations are contractual and accrue at the time of sale, making them a present obligation with a probable outflow of resources. It relied on Rotork Controls India (P) Ltd. (2009) 314 ITR 62 (SC), which held that such provisions are allowable under Section 37(1) if estimated scientifically. It also cited Marelli Um Electronic Systems (P.) Ltd. vs. DCIT [2025] 181 taxmann.com 660 (Delhi-Trib.) and Apple India (P.) Ltd. vs Deputy Commissioner of Income-tax [2023] 152 taxmann.com 102 (Karnataka HC).
• Royalty Payment: The Assessee contended that the TDS of INR 1,33,33,333 was part of the royalty consideration, as it had undertaken the tax liability under the IPR agreement. It relied on Section 195A of the Act, which provides for grossing-up payments where income is payable "net of tax." It also cited Commissioner of Income-Tax vs Standard Polygraph Machines Pvt. [2002] 124 taxmann 669 (Madras HC) and DIT v. Italian Thai Development Co. Ltd. [2014] 45 taxmann.com 61 (Delhi HC).
• R&D Deduction: The Assessee argued that Section 35(2AB) only requires DSIR approval for the R&D facility, not the expenditure. It relied on the Delhi High Court’s decision in Nagravision India (P.) Ltd. vs. Secretary, DSIR [2024] 159 taxmann.com 558 (Delhi HC), which held that DSIR’s role is limited to approving the facility, and the expenditure is eligible for weighted deduction if incurred on an approved facility. It also cited Claris Lifesciences Ltd. [2008] 174 Taxman 113 (Gujarat HC) and Sandhar Technologies Ltd. vs. Deputy Commissioner of Income-tax [2024] 160 taxmann.com 1208 (Delhi-Trib.).

For the Respondent

• The Revenue relied on the orders of the AO and CIT(A), arguing that:
  • The warranty provision was excessive and not justified by actual expenses.
  • The royalty payment was fixed at INR 12,00,00,000 by the Settlement Commission, and the TDS was not part of the consideration.
  • The R&D deduction was correctly restricted to the amount certified by DSIR in Form 3CL.

The Court's Analysis

Warranty Provision

The ITAT held that the provision for warranty is a legitimate trading expense allowable under Section 37(1) of the Act. It relied on the Supreme Court’s decision in Rotork Controls India (P) Ltd. (2009) 314 ITR 62 (SC), which established that:

"A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision."

The ITAT noted that the Assessee’s warranty provision was based on a scientific methodology and historical trends, and the CIT(A) had not disputed the methodology. It also cited the coordinate bench decision in Marelli Um Electronic Systems (P.) Ltd. vs. DCIT [2025] 181 taxmann.com 660 (Delhi-Trib.), which held that opening balances cannot be a basis to disallow warranty provisions if the methodology is sound.

Royalty Payment

The ITAT held that the TDS of INR 1,33,33,333 on royalty payments forms part of the total royalty consideration and is allowable as a business expenditure. It relied on Section 195A of the Act, which provides for grossing-up payments where income is payable "net of tax." The ITAT also cited the Madras High Court’s decision in Commissioner of Income-Tax vs Standard Polygraph Machines Pvt. [2002] 124 taxmann 669 (Madras HC), which held:

"The amount paid by the assessee as income-tax on the amount paid to the foreign collaborator was only in discharge of the liability of the collaborator which the assessee had undertaken to pay as part of the agreement entered into with the foreign collaborator for receiving the technical know-how under the agreement."

The ITAT noted that the Settlement Commission’s order dated 30.06.2016 did not adjudicate on the allowability of the TDS amount, and the Assessee had undertaken the tax liability under the IPR agreement.

R&D Deduction

The ITAT held that the deduction under Section 35(2AB) is not restricted to the amount certified by DSIR in Form 3CL. It relied on the Delhi High Court’s decision in Nagravision India (P.) Ltd. vs. Secretary, DSIR [2024] 159 taxmann.com 558 (Delhi HC), which held:

"Section 35(2AB) of the Act does not link the expenditure incurred to the approval of R&D facility by DSIR and therefore, it does not prescribe that it is only such expenditure that gets incurred post approval of the facility which would qualify for deduction."

The ITAT noted that Section 35(2AB)(1) only requires DSIR approval for the in-house R&D facility, and once approved, all expenditures incurred on scientific research (except cost of land and building) are eligible for weighted deduction. It also cited CBDT Circular No. 763 dated 18.02.1998, which clarifies that DSIR’s role is limited to approving the facility.

The Verdict

The ITAT partly allowed the Assessee’s appeals, directing the AO to:

• Delete the disallowance of warranty provisions for both assessment years:
  • INR 1,40,00,000 for AY 2017-18
  • INR 90,00,000 for AY 2018-19
• Delete the disallowance of TDS on royalty payments of INR 1,33,33,333 for AY 2017-18
• Delete the disallowance of R&D expenditure of INR 1,36,70,201 for AY 2018-19
• Adjust interest under Section 234C for both assessment years as a consequential matter.

What This Means For Similar Cases

Warranty Provisions Are Allowable Under Section 37(1)

• Businesses can claim warranty provisions as deductions if they are estimated using a scientific methodology based on past trends.
• The Supreme Court’s decision in Rotork Controls India (P) Ltd. (2009) 314 ITR 62 (SC) remains the governing precedent.
• Opening balances cannot be a basis to disallow warranty provisions if the methodology is sound and consistent.

TDS on Royalty Payments Forms Part of Consideration

• If an assessee undertakes the tax liability of a foreign collaborator under an agreement, the TDS paid forms part of the total consideration and is allowable as a business expenditure.
• Section 195A of the Act supports grossing-up payments where income is payable "net of tax."
• The Settlement Commission’s orders do not override the contractual obligations between parties.

DSIR Approval Is Only for R&D Facility, Not Expenditure

• Section 35(2AB) only requires DSIR approval for the in-house R&D facility, not the expenditure incurred.
• Once the facility is approved, all expenditures on scientific research (except cost of land and building) are eligible for weighted deduction.
• The Delhi High Court’s decision in Nagravision India (P.) Ltd. vs. Secretary, DSIR [2024] 159 taxmann.com 558 (Delhi HC) is the governing precedent.