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M/s. AES Solar Energy Gujarat Pvt. Ltd. Versus DCIT, Circle -1 (1) , Gurgaon

Liquidated damage received/receivable - revenue receipt chargeable to tax - Held that:- We have observed that in the case of CIT Vs. Saurashtra Cement Ltd. (2010 (7) TMI 11 - SUPREME COURT) the assessee was to be paid compensation at a rate of 0.5% of the price of the respective portion of the machinery for each month of delay by way of liquidated damages from the supplier, without proof of actual loss. Whereas, in the instant case damages in the EPC contract agreement between the assessee and s .....

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ontactors failure to achieve substantial completion by 31st December 2011. - The back to back arrangement of liquidated damages in EPC contract as noted by the Ld. CIT-(A) in the impugned order, manifest that the primary objective behind introduction of the liquidated damages clause in EPC contract agreement was to protect the assessee from actual business losses. The act of shifting of site by the assessee and consequently non-availability of transmission lines also contributed, resulting i .....

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es are in the nature of revenue receipt, then same cannot be reduced out of the cost of asset and hence the assessee is eligible for claiming depreciation on the full cost of the asset (without reducing the liquidated damages). In the interest of justice, we feel it appropriate to restore the issue to the file of the Assessing Officer with the direction to allow the depreciation on the cost of the asset without reducing the liquidated damages. We also direct the Assessing Officer to verify from .....

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view of the decision of the Tribunal in the case of Eagle Synthetics (Pvt.) Ltd. (2010 (2) TMI 719 - ITAT, Ahmedabad) wherein the Tribunal directed the Assessing Officer to grant opportunity to file the audit report in form No. 10CCB on the basis of enhanced income - Rejection of the reduction of section 80IA deduction that income was not derived from the undertaking - Plain reading of the sec 80IA(1) provision, it is clear that any profit and gains ‘derived’ by an undertaking or enterprise .....

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there is no direct nexus between the profit and gains of the undertaking and the receipt from liquidated damages, and thus, assessee is not eligible for deduction under section 80IA of the Act on the said receipt. Since the enhancement of the profit is not as a result of the eligible business, the CBDT Circular No. 37/2016 by the Ld. counsel is also not applicable over the facts of the instant case. Accordingly, we uphold the finding of the Ld. CIT-(A) on the issue in dispute and dismiss ground .....

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ppropriate to restore the issue to the file of the Assessing Officer, who is directed to examine the documentary evidences submitted by the assessee and also to verify from the respective authorities whether the solar power plants in question generated any electricity on or before 31/03/2012 and decide the issue in dispute in accordance with law. - ITA No. 2569/Del/2016 - Dated:- 11-9-2017 - SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER For The Appellant : Sh. Salil Kapoor .....

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prejudicial to the Appellant and contrary to the facts & circumstances of the case. Issue 1 - Treatment of liquidated damages receivable from Enfinity Solar Solutions Private Limited, on account of delay in construction of the solar power plant, as revenue receipt chargeable to tax. 2. The learned Assessing Officer ( AO ) has erred in holding that the liquidated damages, amounting to Rs.7,58,05,766/- receivable from Enfinity Solar Solution Pvt. Ltd. on account of the delay in the constructio .....

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idated damages as revenue receipts instead of reducing the liquidated damages from the cost of the asset. 5. The learned AO, without appreciating the fact that the Appellant has reduced the liquidated damages from the cost of the asset and claimed depreciation on such reduced cost, has erred in not allowing the claim of income-tax depreciation on the cost of assets without reducing the liquidated damages sought to be taxed as revenue receipt. 6. The learned AO, having treated the liquidated dama .....

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the commissioning certificate issued by Gujarat Energy Development Agency, a government of Gujarat organization. 9. Without prejudice to the fact that the solar power plant was actually put to use during the subject AY, the learned AO has erred in disallowing depreciation on solar power plant which was ready for use during the subject AY. Issue 3 - Deduction under section 80-IA of the Income-tax Act. 1961 ( the Act ) 10. Without prejudice to the above, the learned AO ought to have allowed deduc .....

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rounds of appeal as it may be advised to do so. 2. The facts in brief of the case are that during relevant period, the assessee company entered into the business of generation of electricity from solar power plant in the state of Gujarat. The assessee company filed return of income declaring loss of ₹ 1,30,14,985/- on 30/11/2012. The case was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 (in short the Act ) was issued and complied with. In the assessment .....

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at the liquidated damage received/receivable by the assessee, is revenue receipt chargeable to tax. 4. The facts in respect of issue in dispute are that the assessee entered into a power purchase agreement with the government of Gujarat (in short the PPA ) on 29/05/2010 for supply of power in a time bound manner and date of commissioning of power plants were fixed as 30/06/2011 for 3MW and 31/12/2011 for 12MW. The PPA contract agreement was containing a clause for liability of liquidated damages .....

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unt of ₹ 7,58,05,766/- was receivable as liquidated damages by the assessee company from M/s Enfinity for delay in construction of the solar power plants. The assessee adjusted the liquidated damages receivables against the cost of solar power plant on the ground that such liquidated damages are related to the construction of the solar power plant. According to the assessee the amount represents a payment made for sterilization of the profit earning source and thus it was capital in nature .....

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ctricity, and, therefore, the liquidated damages received are revenue in nature. Before the learned CIT-(A), the assessee relied on the decision of the Hon ble Supreme Court in the case of Commissioner of Income Tax Vs. Saurashtra Cement Ltd. (325 ITR 422) (SC) and submitted that damages which are directly linked with the procurement of a capital asset and attributable to delay in coming in existence of a profit-making apparatus, represents compensation for sterilization of the profit earning so .....

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s reproduced as under: 4.6 Thus, in the present case, there is a contract between the appellant and the government (PPA) which contain is backed up by (hedged by) another contract between the appellant and the supplier of the machinery that is affinity* solar. Both these contracts are back-to-back and the need to be read along with each other and these contracts were part of the business process of the appellant. None of these contracts would have worked independently because they were interconn .....

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C) has observed as under: The question whether a particular receipt is capital or revenue has frequently engaged the attention of the Courts but it has not been possible to lay down any single criterion as decisive in the determination of the question. Time and again, it has been reiterated that answer to the question must ultimately depend on the facts of a particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account .....

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on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide Van Den Berghs Ltd. v. Clark5. That, however, is not to say that the question is one of fact, for, as observed in Davies (1935) 3 I.T.R. (Eng. Cas.) 17 (H.M. Inspector of Taxes) v. Shell Company of China Ltd. 6, these questions between capital and income, trading profit or no trading profit, are questions whic .....

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m EPC on account of delay in raising of solar plant are in the nature of receipts of revenue nature. These cannot be characterized as a receipts for sterilization of profit apparatus. The ground of appeal is dismissed. 5. Ld. counsel of the assessee filed a paper book containing pages 1 to 79. He relied on the submission made before the Ld. CIT-(A) and submitted that the finding of the Ld. CIT-(A) that liquidated damages clause in EPC contract agreement was for hedging the liquidated damages cla .....

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t of EPC contract available on pages 9 to 14 of the paper book. He further submitted that the condition of liquidated damages in PPA contract with Government cannot determine the nature of liquidated damages in respect of EPC contract with the supplier. In view of the arguments, the Ld. counsel requested to treat the liquidated damages as capital in nature. Alternatively he argued that in case the liquidated damages are considered as revenue in nature, then the cost of the asset should be direct .....

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at are also in terms of per day per megawatt. Since in the case of the assessee there are two power plants having capacity of 3 MW and 12 MW and the per day liquidated damages was to be calculated in respect of delay in commissioning of the plants accordingly, but no such calculation was available on record. The Ld. Sr. DR supported the finding of the learned CIT-(A) that the clauses of liquidated damages in the EPC contracts are for hedging back-to-back losses due to liquidated damages clause i .....

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District Kutch, having date of construction and scheduled commercial operation as under: S.No. Plant MW Scheduled commercial operation date Date of commencement of construction 1. 3MW 30/06/2011 31/03/2011 2. 12MW 31/12/2011 30/09/2011 7.1 This PPA agreement contained a clause for liquidated damages for delay in commissioning of the project. The said clause available on pages 31 of the paper book reads as under: 4.3 Liquidated damages for delay in Commissioning the Project / Solar Photovoltaic G .....

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make payment of the liquidated damages for a period exceeding 30 days, GUVNL shall be entitled to invoke the Bank Guarantee to recover the liquidated damages amount In case of delay more than 1 year, GUVNL assumes no obligation and has right to terminate the Power Purchase Agreement by giving 1 month Termination note. 1. The project cannot be Commissioned by Scheduled Commercial Operation Date because of Force Majeure event; or 2. The Power Producer is prevented from performing its obligations .....

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entered into EPC contract agreement for commissioning of solar power plants with M/s. Enfinity . In the paper book the assessee has submitted only the pages 1, 35 and 36 of the said agreement. Therefore, the terms of completion of the contract specified in the agreement are not available before us. The clause containing delay damages as mentioned on page 35 of the said agreement (page 13 of the paper book) reads as under: 8.6 Delay Damages (a) Without prejudice to paragraphs (b) and (c) below, i .....

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etion Certificate issued in accordance with-Sub-Clause 10.1 (Substantial Completion of the Works). (b) Without prejudice to paragraph (a) above, paragraph (c) below, if Contractor fails to achieve Substantial Completion by 31 December 2011 in accordance with Sub-Clause 8.2 (Time for Substantial Completion and Time for Completion), Contractor shall, subject to Sub-Clause 2.5 (Owner's Claims) and when requested by Owner, indemnify Owner for the net present value of any reduction in the tariff .....

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requested by Owner, pay delay damages to Owner in the amount of Rs.1,061,281 for every day which elapses between the Time for Completion and the Time of Completion specified in the Taking-Over Certificate. 7.4 In view of the request of the assessee for change of location, the power purchase agreement was modified on 21/09/2011 by the GUVNL with the condition that the assessee has changed the location of the solar power project after lapse of significant time, the non-availability of transmissio .....

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ages. There is no evidence on record whether those letters were acknowledged by M/s Enfinity . In the letters, the assessee has proposed to adjusted liquidated damages of ₹ 7,58,05,766/- from the invoices raised by Enfinity . 7.6 The learned counsel also drawn our attention to paper book pages 55 to 56, which is a letter issued by GUVNL to the assessee about liquidated damages proposed to be charged to the assessee. The relevant para of the letter reads as under: It is further to clarify t .....

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l Operation Date (SCOD) of your solar I power project was 30th June 2011 for 3 MW and 31 December 2011 for balance 12 MW. further solar project was not ready on 31 December 2011 pending transmission line, in such / a situation stating delay on account of GETCQ is not correct- It Is also clarified that as per PPA liquidated damages is applicable for delay of each day from SCOD. In view of above, as your solar power project failed to achieve commercial operation by SCOD, as Article 4.3 of the PPA, .....

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n or before SCOD even in case transmission line is not available. You are therefore requested to pay liquidated damages from SCOD to likely commercial operation date at the rate of Rs. 10000 /Day /MW for delayed of first 60 days and thereafter ₹ 15000 ID ay /MW towards delayed Commercial Operation Date as per our letter dated 10.2.2012, failing which GUVNL shall encash your Performance Bank Guarantee without further notice. 7.7 In background of the above facts, the issue for determination .....

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of their business and, therefore, it was a capital receipts in the hands of the assessee. The Hon ble Supreme Court, however, in earlier para - 11 of the decision said that it has not been possible to lay down any single criteria as decision in the determination of the question whether a particular receipt is capital or revenue in nature and it depends ultimately on the facts of particular case. 7.8 In the instant case, the Ld. CIT-(A) has analyzed the facts and arrived at a conclusion that liq .....

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et and are attributable to delay in coming into existence of a profit-making apparatus represents compensation for sterilization of the profit-earning source and the same is a capital receipt. The relevant extract of the decision of the Hon'ble Supreme Court is as below: 13 It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset i.e. the cement plant, which would obviously lead to delay in coming into existence of the profit m .....

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our opinion, was a capital receipt in the hands of the assessee 4.4 In order to appreciate the entire gamut of the aforesaid judgment, it would be useful to first understand that a number of commercial contracts provide for liquidated damages and under Indian Contract Act, such damages are ascertainable before breach of contract. There is no quarrel about taxability of liquidated damages emerging from general commercial contract entered in business because these are clearly taxable as revenue re .....

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uation where the breach of contract has resulted in diminishing the very source of profit earning. For example, A enters into a contract with B for supply of machinery for bottling plant which was to be used for the repackaging of bulk medicine. And assuming that such a contract contains a clause that any delay in supply of the machinery would result into liquidated damages, the receipt of such liquidated damages would be capital receipt because any delay in supply of bottling plant has resulted .....

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e actual damages, a clause of liquidated damages is enshrined in the contract, in such situation that liquidated damages are not related to general sterilization of profit apparatus but are intricately linked with the actual damages suffered/likely to be suffered on account on account of delay of providing bottling plant. It is evident from the above, that not all liquated damages connected to the contract of supply of capital goods would result into capital receipt. There can be a situation whe .....

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aily damages. The claim of the liquidated damages of the assessee, has been examined by the lower authorities on the basis of the letters of the assessee addressed to the M/s. Enfinity, copy of which are available on pages 15-22 of the paper book. No acknowledgement of said letter by the contractor M/s Enfinity has been filed by the assessee. In the circumstances, we are adjudicating the issue of liquidated damages as capital or revenue expenditure on the basis of evidences available on record. .....

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L are also on per day basis. 7.11 Further, we find that the assessee itself in its letter dated 17/02/2012 addressed to M/s. Enfinity which is available on page 15 of the paper book, has referred clause 8.6 (b) of the EPC contract agreement which states that contactor should indemnity the assessee for the net present value for any reduction in the tariff received by the plant as a result of contactors failure to achieve substantial completion by 31st December 2011. 7.12 The back to back arrangem .....

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IT-(A) on the issue in dispute is well reasoned and no further interference is required. Accordingly, we uphold the finding of the learned CIT-(A) on the issue in dispute and grounds no. 1 to 4 of the appeal are dismissed. 8. The ground No. 5, relates to grievance of the assessee of not allowing the claim of depreciation under Income-tax Act on full cost of assets (without liquidated damages sought to be taxed as revenue receipt). 8.1 Since while adjudicating the ground No. 1 to 4 of the appeal, .....

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so direct the Assessing Officer to verify from the supplier M/s Enfinity , the cost of asset charged to the assessee and liquidated damages. The assessee shall be afforded adequate opportunity of being heard. The ground No. 5 of the appeal is accordingly allowed for statistical purposes. 8.2 The Ground No. 6 and 10 are in respect of allowing deduction under section 80I of the Act on enhanced income due to treating liquidated damages as revenue receipt and depreciation disallowed. 8.3 The learned .....

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Trib.) and filed copy of the said decision. The Ld. counsel also referred to the CBDT Circular No. 37/2016 and submitted that deduction under Chapter - VI of the Act are admissible on enhancement of the profit of the eligible business. 8.4 On the other hand, Ld. Senior DR submitted that the amount in question is not derived from the operations eligible as per section 80IA of the Act and, therefore, no deduction could be allowed to the assessee on said amount of receipt. 8.5 We have heard the riv .....

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sion of the Tribunal in the case of Eagle Synthetics (Pvt.) Ltd. (supra) wherein the Tribunal directed the Assessing Officer to grant opportunity to file the audit report in form No. 10CCB on the basis of enhanced income. The relevant finding of the Tribunal is reproduced as under: 22 We have considered the rival submissions and perused the material on record along with the orders of the authorities below. We find that Hon'ble Madras High Court in the case of Valli Cotton Traders Pvt. Ltd. ( .....

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0HHC is a defect. 8.... Therefore, it is clear that the spirit behind sub-ss (5) and (9) of s. 139 r/w s. 80HHC of the Act is that the assessee should be given a fair and reasonable opportunity to claim the benefit as available under the statute; any denial on technical ground is not justified. Merely because the assessee seeks to claim deduction under s. 80HHC based on the audit report in Form 10CCAC after setting aside of the original assessment order and at the stage of remittance of the matt .....

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under s. 80HHC. Respectfully, following the above decision of Hon'ble Madras High Court, we direct the AO to grant the opportunity to assessee company to file the audit report in Form No. 10CCB on the basis of enhanced income after giving effect to this order and if on the basis of details and evidences furnished it is found that the assessee is eligible for deduction u/s. 80IB(4) then A.O. is directed to grant such deduction in accordance with the provisions of law. 8.6 The second ground o .....

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shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.] 8.7 As per the plain reading of the above provision, it is clear that any profit and gains derived by an undertaking or enterprise from eligible business is the only allowed for deduction under section 80IA of the Act. In the .....

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scheme of the Central Government where under the export entitlements become available. There must be, for the application of the words derived from , a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the export promotion scheme applies. There under, the assessee is entitled to import entitlements, which it can sell. The sale .....

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e said receipt. Since the enhancement of the profit is not as a result of the eligible business, the CBDT Circular (supra) cited by the Ld. counsel is also not applicable over the facts of the instant case. Accordingly, we uphold the finding of the Ld. CIT-(A) on the issue in dispute and dismiss grounds No. 6 of the appeal. 9. In ground Nos. 7 to 9 of the appeal assessee challenged disallowance of depreciation amounting to ₹ 4,02,28,060/- on solar power plants. According to the Assessing O .....

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ice was raised by the assessee in the month of August, 2012 only. Keeping in view of these facts, the Assessing Officer held that plant was not put to use for generation of power during the relevant previous year and he disallowed the claim of depreciation on these plants. 9.2 Before the learned CIT-(A), the assessee submitted that fact of solar power plant put to use was evident from the monthly injection report issued by the Gujarat Energy Transmission Corporation Limited for the month of Marc .....

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ioned on the scheduled commissioning date due to delay in arranging transmission system it would be the sole responsibility of the assessee. In view of the said letter it was clear that the solar power plants were not commissioned till 14th of March 2012 i.e. date of issuing letter, whereas the assessee claimed that 4 MW plant was operational on 04/03/2012 and other part was operational on 12/03/2012. In view of these facts the learned CIT-(A) concurred with the finding of the Assessing Officer .....

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n 31/03/2012. The Ld. counsel also referred to invoice dated 01/08/2012 which is available on page 59 of the paper book and according to which both plants 4 MW and 6 MW came into operation w.e.f. 04/03/2012 and 31/03/2012 respectively. The Ld. counsel also referred to the certificate issued by Gujarat Energy Transmission Corporation limited dated 26/05/2012 according to which the assessee generated 625.122 units of electricity for the month of March, 2012. 9.4 In view of these evidences, the lea .....

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eciation as per low after verification of the documentary evidences submitted by the assessee. 9.6 We have heard the submission of the parties and perused the relevant material on record. The claim of the assessee is that the 4 megawatt (MW) plant was commissioned on 04/03/2012 and 6 MW plant was commissioned on 31/03/2012. The assessee supported its contention with the supplementary PPA signed on 19/07/2012. The Revenue on the other hand, referred the letter dated 14/03/2012 of GUVNL, according .....

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