Advances for Extended Warranty are Taxable Upon Contract Maturity to Avoid Double Taxation, While Stock, Depreciation, and ESOP Disallowances Require Factual Verification

By | November 10, 2026
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Advances for Extended Warranty are Taxable Upon Contract Maturity to Avoid Double Taxation, While Stock, Depreciation, and ESOP Disallowances Require Factual Verification
Issue
  • Whether taxing advances collected towards extended warranty in the year of receipt amounts to double taxation when the assessee already offers them to tax in the year of contract maturity.
  • Whether a discrepancy of 228 vehicles between tax and cost audit reports should be added to closing stock under Section 69A when claimed to be capitalized test vehicles.
  • Whether disallowance of depreciation due to a mismatch between fixed asset additions under the Companies Act and the Income-tax Act is sustainable without examining the assessee’s reconciliation statement.
  • Whether ESOP-related expenses payable to a parent entity can be disallowed solely due to non-remittance without verifying subsequent actual remittance and supporting evidence.
Facts
  • Extended Warranty Revenue (AYs 2014-15 to 2017-18): The assessee-automobile manufacturer collected advance amounts from customers for extended warranties, recognizing and offering this revenue to tax in the year the warranty obligations matured or were completed. The Assessing Officer (AO) added these advances as taxable income in the year of receipt.
  • Unexplained Stock Discrepancy (AY 2014-15): The AO noted a difference of 228 motor cars between the production/sales figures in the tax audit report versus the cost audit report. Estimating the unit cost at ₹5.08 lakh, the AO made an addition of ₹11.59 crore as unexplained stock under Section 69A. The assessee submitted that these vehicles were used internally as test vehicles and capitalized under fixed assets. The DRP directed treating them as closing stock for the relevant year and opening stock for the subsequent year.
  • Depreciation Mismatch (AY 2014-15): The AO disallowed excess depreciation claimed by the assessee due to variance between fixed asset additions under the Companies Act and the Income-tax Act (arising from foreign exchange loss capitalization and opening WDV adjustments), without considering the reconciliation provided by the assessee.
  • ESOP Expenses Disallowance (AY 2016-17): The AO disallowed ESOP expenses payable to the USA parent entity on the grounds that the liability was not remitted during the relevant period. The assessee sought verification of actual remittance made during FY 2015-16 along with documentary proof.
Decision
  • Extended Warranty Income: Decided in favour of the assessee. Since the assessee consistently offered extended warranty income to tax in the year of contract maturity, taxing the receipts in the year of sale would lead to double taxation. The addition made by the AO was held to be unjustified.
  • Unexplained Stock (Section 69A): Matter remanded to the AO. Vehicles utilized as test vehicles in the course of business cannot be treated as part of closing stock. However, as the assessee’s submission required factual verification of evidence, the issue was remanded to the AO for due verification.
  • Depreciation Reconciliation: Matter remanded to the AO to examine and verify the reconciliation statement submitted by the assessee regarding fixed asset additions and adjustments.
  • ESOP Expenditure: Matter remanded to the AO for fresh consideration to verify whether the remittance to the parent entity was made during FY 2015-16 and to examine the supporting evidence.
Key Takeaways
  • Prevention of Double Taxation: Revenue from extended warranty contracts spreading across multiple years cannot be taxed upfront in the year of receipt if the assessee follows a consistent accounting method of offering it to tax upon maturity of the service obligations.
  • Capitalized Assets vs. Inventory: Vehicles diverted for R&D or internal testing purposes and capitalized under fixed assets cannot be treated as closing stock under Section 69A, provided factual evidence supports their operational use.
  • Remand for Administrative Errors: Where the AO fails to consider reconciliation statements (such as WDV/depreciation differences) or proof of cross-border expense remittances (such as ESOP liability payouts), appellate authorities will remand the matter for factual verification rather than confirming ad-hoc additions.
IN THE ITAT CHENNAI BENCH ‘D’
Ford India (P.) Ltd.
v.
Assistant Commissioner of Income-tax, LTU
S.S. Viswanethra Ravi, Judicial Member
and Inturi Rama Rao, Accountant Member
I.T.(TP)Appeal No. 98 (Chny) of 2018 and 90 (Chny) of 2019 and othrs.
[Assessment years 2014-15 to 2017-18]
OCTOBER  8, 2026
Ajit Jain and Sandeep Pincha, CAs for the Appellant. K. Jayaganesh, CIT for the Respondent.
ORDER
S.S. Viswanethra Ravi, Judicial Member.-These appeals filed by the assessee are directed against the separate orders dated 30.10.2018, 29.10.2019-(Form-36) passed by the Assistant Commissioner of Income Tax, LTU-1 (AO), and order dated 28.03.2021, 25.02.2022 passed by National e-Assessment Centre (NFAC), Delhi, for the assessment years 2014-15, 2015-16, 2016-17 & 2017-18, respectively.
2. Since issues raised in these appeals of the assessee are similar based on the same identical facts, with the consent of both the parties, we proceed to hear the appeals together and pass consolidated order for the sake of convenience.
First we shall take up IT(TP)A No.98/Chny/2018 for AY 2014-15:
3. Ground no.1 is general in nature, requiring no adjudication.
4. The ld.AR, Shri. Ajit Jain, CA, submits that the assessee is not interested to pursue ground nos. 2 to 5, as the same were finalised under Mutual Agreement Procedure (MAP) between the competent authorities of India and United States. He drew our attention to the letter dated 03.09.2026 and prayed to consider the requirement under Rule 44G(8) of Income-tax Rules, 1962 for withdrawal of grounds forming part of the MAP Resolution dated 12.06.2026. The ld.DR, Shri. K. Jayaganesh, CIT, reported no objection. Accordingly, ground nos. 2 to 5 relevant to transfer pricing grounds are dismissed as withdrawn.
5. Ground no.6 raised by the assessee challenging the final assessment order in treating the advance warranty as income of the assessee during the year of receipt. We find the present issue is covered by the order of this Tribunal in assessee’s own case which is at page no.49 of the paper book. We find the Tribunal discussed the issue in para no.8.1 of the said order which is reproduced herein below:
“8.1 We have heard the rival submissions in the light of material available on records. It is an undisputed fact of the case that the appellant has received amounts qua extended warranty and which have not been offered as income of the year under consideration. It is also an admitted fact of the case that the amounts in respect of unfulfilled extended warranty commitments would be offered to tax in the year of its completion. This brings us to the issue of examination of the concept of warranty including two types of warranty germane to the dispute. Warranty is a form of quality assurance offered by a manufacturer to its customers in the form that in the event of any manufacturing defects etc the seller would rectify the defects during the warranty period. Even though in market the warranties are projected as free rectifications the fact of the matter is that every seller collects some amount in the sale price itself to offset costs arising in any future claims. As fairly conceded by the assesse, it is collecting an amount qua base warranty from the customers at the time of sales. The assesse over and above the base warranty period, let us say for two years as in this case, offers another warranty known as extended warranty to the customers with the promise that in case a defect comes in the product even after two years then it shall rectify the same. In lieu of this assurance, the assesse collects as an advance payment the extended warranty amount from its customers. As per terms of contract, the extended warranty contract comes to force only after the completion of base warranty agreement. Naturally the extended warranty receipts taken during the year of sales would become income of the assesse, if any in the year when such warranty agreements becomes enforceable. At this stage it is also pertinent to point out that not all receipts received on account of extended warranty contracts would become income of the assesse even in the year when such warranty agreements becomes enforceable. Simply because only those components of extended warranty receipts would be income of the assesse which have not been claimed by the customers. The amounts received qua extended warranty contracts are akin to prepaid expenses for repairs of cars. Naturally assesse will deem only those amounts as its income in respect of which no claims arose by the customers. Wherever warranty claims were made by customers pointing out some defect in the car, the assesse would not be showing the same as its income.”
6. On perusal of the above, we note that the assessee has already been offering said amounts in the year of maturity of such contracts, there taxation in the year of sale of car would certainly tantamount to a case of double taxation. Therefore, the Tribunal held that the amount received by the assessee as advance from customers towards extended warranty which was added by the AO, is not justified. We find no other view brought on record by the revenue, therefore, following the order of ITAT in assessee’s own case for AY 2012-13, we hold the order of AO in treating amounts received towards extended warranty as income, is not justified. Thus, ground no.6 raised by the assessee is allowed.
7. Ground no.7 raised the assessee challenging the action of AO in making addition on account of understated stock value. The ld.AR submits that during the subjected AY, the company has reported quantitative data in the tax audit report vis-a-vis cost audit report, wherein the difference between tax audit report and cost audit report recorded as understatement of stock and the AO treated the said difference as income of the assessee. Further, he submits the difference in the quantity of units manufactured and sold is on account of certain vehicles used as ‘test cars’ and used for own purposes. During the relevant AY, the assessee has capitalised certain units of vehicles manufactured that were used for its business requirements. The assessee capitalised the said test vehicles by raising the invoice in its own name and referred to page no.652 to 662 of the paper book. He vehemently argued that the said units are removed from inventory and added to fixed assets. Further, the same were considered as a removal and applicable excise duty has been remitted by the company for the purpose of excess loss. Further, he submits that the test cars/used cars are disposed off subsequently as old units for nominal value and sales tax was levied and collected from customers, referred to page no. 652 to 662. He submits that the said sale is accounted in the books by reducing the sale value from fixed asset block and for the purpose of disclosure in TAR/ITR, the assessee has reported the total units on finished products sold during the relevant AY by including the quantity of aforesaid sale of test cars/ used cars. He argued that the difference in quantitative figures represents those units which has been capitalised in the books of accounts and consequently there is no undervaluation of inventories by the company. Further, that the difference in quantity of stock manufactured/sales effected is on account of difference in disclosure policies of car vis-a-vis accounting standards.
8. The ld.DR relied on the order of the AO.
9. We have heard both the parties. During the course of assessment proceedings, the AO found discrepancy in the number of motor cars manufactured and the number of cars sold and found that there was a difference of 228 vehicles and cost of production per unit was estimated at 5,08,225/- and therefore, same was included as part of closing stock, accordingly made addition of Rs.11,58,75,188/-. However, during the course of proceedings before the DRP, the assessee stated that the differential number of cars were used as test vehicles for the business of the assessee. However, the DRP directed the AO to consider as part of closing stock and allow same as part of the opening stock in the subsequent year.
10. Being aggrieved, Assessee is in appeal before us. We perused the material on record and the orders passed by the Lower Authorities. It is an admitted position that there was difference between number of vehicles manufacture and sold. The assessee had explained before the DRP that the differential number of vehicles were used as test vehicles in the business of the assessee. Therefore, the question of including these vehicles as a part of closing stock does not arise. However, the DRP without dealing with these submissions of the assessee, had directed the AO to include as a part of closing stock and allow the same as a part of opening stock for subsequent assessment year. In our considered opinion, the submission of the assessee requires verification of the facts and evidence on record. Therefore, we are of the considered opinion that the matter requires to be remanded to the file of AO for due verification of the submissions of the assessee. Accordingly, the matter is restored to the file of AO. Therefore, this Ground of appeal No.7 is partly allowed for statistical purpose.
11. Ground no.8 raised by the assessee challenging the action of the AO in making disallowance on account of excess depreciation claimed. The Ld.AR drew our attention to the page no. 763 of the paper book and submits that the assessee filed reconciliation which was not considered by the AO. The Ld.AR prayed to remand the matter to the file of AO for his fresh consideration.
12. The Ld.DR reported no objection.
13. We have heard both the parties. We find the difference in fixed asset addition as per Companies Act vis-a-vis Income Tax Act is due to exchange loss capitalisation and adjustment to opening WDV of the block. We find the assessee filed reconciliation of difference in respect of particulars, addition to the fixed assets as per the Income-tax Act by adding exchange loss less adjustments to opening WDV as per block. On perusal of the page no. 763 of the paper book vol-II. We note that the said details considered by the assessee were not approved by the AO. Therefore, considering the request of the ld.AR and no objection of the ld.DR, we deem it proper to remand the matter to the file of the AO for his consideration of the reconciliation as placed on record at page 763 of the paper book vol-II. The assessee is liberty to file evidences in this regard and ground no. 8 raised by the assessee is allowed for statistical purposes.
14. In the result, appeal filed by the assessee is partly allowed.
Now we take up IT(TPA) No: 90/Chny/2019 for AY 2015-16:
15. Ground no.1 is general in nature, requiring no adjudication.
16. The ld.AR, submits that the assessee is not interested to pursue ground nos. 2 to 4, as the same were finalised under Mutual Agreement Procedure (MAP) between the competent authorities of India and United States. He drew our attention to the letter dated 03.09.2026 and prayed to consider the requirement under Rule 44G(8) of Income-tax Rules, 1962 for withdrawal of grounds forming part of the MAP Resolution dated 12.06.2026. The ld.DR, reported no objection. Accordingly, ground nos. 2 to 4 relevant to transfer pricing grounds are dismissed as withdrawn.
17. With regard to ground no. 5, we find the issue is similar to the ground no.6 raised in IT(TP)A 98/chny/2018 for AY 2014-15, we find by following ITAT’s order in assessee’s own case we held the order of AO in treating the advance received from customers on extended warranty is not an income. The ld. AR and ld. DR reported facts and circumstances for the year under consideration is similar and based on same identical facts to AY 2014-15, therefore, we hold the view taken by us in AY 2014-15 in the aforesaid paragraph is equally applicable to the facts on hand. Thus, ground no.5 raised by the assessee is allowed.
18. Ground no.6 raised by the assessee regarding the initiation of penalty proceedings u/s. 271(1)(c)/ 270A of the Act. Since it is consequential in nature, therefore, ground no.6 raised by the assessee is dismissed as infructuous.
19. In the result, appeal filed by the assessee is partly allowed.
Now we take up IT(TP)A No. 29/Chny/2021 for AY 2016-17
20. We find that this appeal was filed with a delay of 10 days. The assessee filed an affidavit explaining the reasons to condone the said delay. On perusal of the same and upon hearing both the parties, we find the reasons stated by the assessee are bonafide which really prevented the assessee in filing the appeal in time. Thus, delay of 10 days condoned.
21. Ground no.1 is general in nature, requiring no adjudication.
22. The ld.AR, submits that the assessee is not interested to pursue 2ground nos. 2 to 4, as the same were finalised under Mutual Agreement Procedure (MAP) between the competent authorities of India and United States. He drew our attention to the letter dated 03.09.2026 and prayed to consider the requirement under Rule 44G(8) of Income-tax Rules, 1962 for withdrawal of grounds forming part of the MAP Resolution dated 12.06.2026. The ld.DR, reported no objection. Accordingly, ground nos. 2 to 4 relevant to transfer pricing grounds are dismissed as withdrawn.
23. With regard to ground no. 5, we find the issue is similar to the ground no.6 raised in IT(TP)A 98/chny/2018 for AY 2014-15, we find by following ITAT’s order in assessee’s own case we held the order of AO in treating the advance received from customers on extended warranty is not an income. The ld. AR and ld. DR reported facts and circumstances for the year under consideration is similar and based on same identical facts to AY 2014-15, therefore, we hold the view taken by us in AY 2014-15 in the aforesaid paragraph is equally applicable to the facts on hand. Thus, ground no.5 raised by the assessee is allowed.
24. Ground no.6 raised by the assessee challenging the action of AO in making disallowance on account of Employee Stock Option expenses (ESOP). The ld.AR prayed to remand the matter to the file of AO for his fresh examination as to whether the assessee remitted to the parent entity of Ford Motor Company during the financial year 2015-16.
25. The ld.DR reported no objection.
26. We heard both the parties. On perusal of the finding in page no.9 of the assessment order, we note that the assessee itself accepted that recognised liability on account of ESOP was not remitted to the parent entity in USA and therefore, considering the submissions of the ld.AR we deem it proper to remand the matter to the file of AO for his fresh consideration. The assessee is liberty to file evidences in support of its claim. Thus, ground no.6 raised by the assessee is allowed for statistical purposes.
27. Ground no.7 raised by the assessee regarding the initiation of penalty proceedings u/s. 271(1)(c)/ 270A of the Act. Since it is consequential in nature, therefore, ground no.7 raised by the assessee is dismissed as infructuous.
28. In the result, appeal filed by the assessee is partly allowed.
Now let us take up IT(TP)A No. 20/Chny/2022 for AY 2017-18:
29. Ground no.1 is general in nature, requiring no adjudication.
30. The ld.AR, submits that the assessee is not interested to pursue ground nos. 2 to 6, as the same were finalised under Mutual Agreement Procedure (MAP) between the competent authorities of India and United States. He drew our attention to the letter dated 03.09.2026 and prayed to consider the requirement under Rule 44G(8) of Income-tax Rules, 1962 for withdrawal of grounds forming part of the MAP Resolution dated 12.06.2026. The ld.DR, reported no objection. Accordingly, ground nos. 2 to 6 relevant to transfer pricing grounds are dismissed as withdrawn.
31. With regard to ground no. 7, we find the issue is similar to the ground no.6 raised in IT(TP)A 98/chny/2018 for AY 2014-15, we find by following ITAT’s order in assessee’s own case we held the order of AO in treating the advance received from customers on extended warranty is not an income. The ld. AR and ld. DR reported facts and circumstances for the year under consideration is similar and based on same identical facts to AY 2014-15, therefore, we hold the view taken by us in AY 2014-15 in the aforesaid paragraph is equally applicable to the facts on hand. Thus, ground no.7 raised by the assessee is allowed.
32. Ground no.8 raised by the assessee regarding the initiation of penalty proceedings u/s. 271(1)(c)/ 270A of the Act. Since it is consequential in nature, therefore, ground no.8 raised by the assessee is dismissed as infructuous.
33. In the result, appeal filed by the assessee is partly allowed.