So long as the provision for anticipated costs under the warranties given by the British company is estimated on a scientific basis based on its past experience, such provision would be deductible from the taxable income under the Indian income-tax law.

In the subsequent years when the provision is found to be excessive, it will have to be reversed and such excess amount would be taxable as income under 41(1) of the Income-tax Act, 1961.

The Supreme Court of India and the Delhi High Court have considered this point and held that the provision which has a scientific basis of computation would be deductible from the taxable income. Such scientific basis should be consistently adhered to every year.

If it is found that the provision is made on an ad hoc basis, or that the company makes a large provision in one year simply to reduce its taxable profits, the provision would not be allowed as a deduction. According to the apex court, the present value of the warranty liability, if properly ascertained and discounted, can be an item of deduction. Such liability would depend on the nature of the business and the product manufactured, the volume of sales, and the historical trend.

Under section 9(1)(vii) of the Income-tax Act, 1961, fees for technical services are taxable in India. Technical services are defined by this provision to include consultancy services. This expression also includes managerial or technical services. However, a Double Tax Avoidance Agreement may provide a different basis for taxation. In that case, the provisions of the Agreement would prevail over the provisions of the income-tax law.

Under several Double Tax Avoidance Agreements, independent professional services are taxable in the country where they are rendered, provided the persons rendering such services are physically present in that country for more than the number of days specified in the agreement. For example, under the Indo-UK Double Tax Avoidance Agreement, Article 15 provides that a professional would be taxable on the income earned by him in the country where he provides services if he has spent 90 days or more in that country. In that case, the income attributable to such services would be taxable in the country where the services are rendered.

Hence, in the case of the law firm referred to by you, it would be necessary to consider the provisions of the Double Tax Avoidance Agreement which would be applicable depending on the country where the firm is resident. The provisions of such agreement would be taken into account while determining the tax liability.

If the subsidy is given by the state government which is linked to the capital cost of the plant and machinery, such amount would not be taxable as income. However, the subsidy so received would be reduced from the cost of the assets and depreciation would be allowed only on the net amount. If a subsidy is received for repayment of a term loan, it would be treated as a capital receipt.

If the subsidy is given for the day to day running of the business, or to reduce the cost of raw materials, the amount would be taxable as a revenue receipt. Hence, the exact nature of the subsidy would have to be ascertained to determine whether it is taxable as income or not.