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Why India’s income tax tribunal is ‘unhappy’ with Apple

After Google, another US tech giant, Apple, has faced the ire of the Indian taxman. An income tax tribunal has disallowed Apple’s warranty claims to be adjusted against outgoing taxes.

Ruling that Apple had derived an income advantage by using more warranty provisions than it was entitled to, the Income Tax Appellate Tribunal in Bengaluru disallowed the deductions claimed by the iPhone maker for the assessment years 2013-14 and 2014-15. The company used to create a warranty provision at the end of every year at a specified percentage of sales. However, the assessing officer of the tax department found the provision was created on an ad hoc basis — no scientific method was used and neither was it based on historical trends.

Based on the analysis, the officer disallowed the deductions. The officer noticed that during the year in question, the warranty provision had spiked. Apple then filed an appeal with the tribunal for the two assessment years.

The tribunal said the reasons for the higher provisions were two-fold: the percentage at which it was calculated ranged from 2% to 10% and the excess set aside in previous years was not reversed even after the expiry of the warranty period.

The order noted that “the company had derived benefit by deferring its income to the extent of excess provision to subsequent years and such provision can’t be said to be reliable for the purpose of calculating its income. Hence, the excess provision made by the assessee was disallowed and taxed in its hands. Further, the tribunal restricted the amount of provision for warranty to the extent of 2.14% of its sales.”

This is not the first time the judiciary has resolved a dispute over allowing warranty provisions. Courts have concluded that warranty provision deductions should be allowed only if they have been calculated and recognised on a scientific basis and they are in accordance with the trend of past years.

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