TMI Blog2024 (2) TMI 783X X X X Extracts X X X X X X X X Extracts X X X X ..... the plant, interest is eligible for deduction against the cost of the asset or capital work-in-progress. In view of the settled principle laid down in the case of CIT v. Bokaro Steel Ltd. [ 1998 (12) TMI 4 - SUPREME COURT ] we do not find any infirmity in the order of the Ld. CIT(A) on the issue in dispute and we accordingly uphold the same. Validity of assessment u/s 153A - Both the conditions that firstly, assessment is unabated i.e. no assessment proceedings pending as on the date of the search and secondly no incriminating material found during the course of the search, are to be cumulatively fulfilled. When we examine the above ratio of Continental Warehousing Corporation [ 2015 (5) TMI 656 - BOMBAY HIGH COURT ] confirmed by Supreme Court in Abhisar Buildwell P. Ltd. [ 2023 (4) TMI 1056 - SUPREME COURT ], we find that qua the issue in dispute, there is no reference of any incriminating material in the order of the Assessing Officer. CIT(A) followed the decision of Sidharth Gupta [ 2022 (7) TMI 294 - ALLAHABAD HIGH COURT ] but in view of the decision of Abhisar Buildwell P. Ltd.(supra), said ratio of the decision of the Hon ble Allahabad High Court is no longer in op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee as non-genuine. If the assessee has actually paid the amount though it may be slightly more than the contracted price but if it is incurred wholly and exclusively for the purpose of the assessee, then merely for the reason that amount finally incurred has increased as compared to contracted price, AOhas no right to discard or ignore the excess price paid. It is for the assessee to decide whether it was required for the installation of the plant or for the purpose of the business and the Assessing Officer cannot decide what amount the assessee should pay to the EPC contractor - such disallowance made by the AO and sustained by the Ld. CIT(A) is not justified - direct the Assessing Officer to delete said addition. This ground of the appeal of the assessee is accordingly allowed. Addition of compensation received - character of compensation received from the EOL for failure in supplying Methane Gas for commissioning and dry run of the project - Receipts held by AO as business income - HELD THAT:- We find that the compensation paid mainly for the reason that the dry run of the project could not carried out which is part of the activity in the capital nature and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from M/s Essar Oil Ltd. as revenue receipt in nature.;. 2. Before us, both the parties agreed to take up the appeal for assessment year 2014-15 as a lead case and to follow the decision of the same in other year mutatis mutandis. Accordingly, we take up the appeal of the Revenue and the assessee for AY 2014-15 for adjudication. The grounds of the appeal of the Revenue for AY 2014-15 are reproduced as under: 1. Whether the Ld.CIT (A) is justified in deleting the disallowance u/s 37(1) of the Act. of Rs. 87.89.98.214/- being interest expense on borrowed funds holding that the ground is interlinked with the disallowance of Rs. 129.32.54.291/-? 2. The Applicant craves to leave. 10 add. 10 amend and/or to alter any of the ground of appeal. if need be. 3. Whether the Ld.CIT (A) is justified in deleting the addition u/s 56 of the Act, of Rs. 1.00.77.381/-, despite the fact that the opportunities were accorded to the assessee by the AO to substantiate its claim that the deposits are kept as margin money which are under lien with Bank in respect of guarantees and letter of credit for the purpose of setting up its plant* ? 4. Whether the Ld.CIT (A) is justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s seen that the original supplier Sungjin Geotec Co. Ltd. Korea has shipped this consignment directly to EPIL at Port Haldia/India. It is observed that Global Supplies (UAE) FZE has been used a routing entity. 2.1 The grounds of the assessee s appeal for AY 2014-15 are reproduced as under: 1. On the facts and circumstances of the case and in Rs. 1,00,26,394/law, the Hon'ble CIT(A) erred in confirming the order of learned assessing officer (Ld. AO) alleging overvaluation of capital goods recorded in CWIP in context with Onshore Supply Contract with Essar Projects India Ltd (EPIL) of Rs. 3,08,97,979/- The Hon'ble CIT(A) erred in comparing, the actual value of capitalisation made in books of Rs. 838 crores, with the Onshore Supply Contract Value of Rs. 765 cores as fixed initially. The hon'ble CIT(A) failed to take the cognisance of the submissions made during the appellate proceedings. We therefore pray to your honour to delete the addition made and necessary direction shall be given in this regard. 1.1. On the facts and circumstances of the case and in N.A. law the, the hon'ble CIT (A) erred in confirming the order of Ld. AO, without appreciating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the action of Ld. AO without appreciating the fact that Average rate of interest for the funds borrowed by the appellant during the A.Y. 2013-14 and 2014-15 was 11.42% and 9.18% respectively. 2.3. On the facts and circumstances of the case and in N.A. law, the hon'ble CIT (A) erred in confirming the order of Ld. AO without appreciating the fact that the order was passed Us 153A of the Act without considering the fact that no incriminating documents in respect of such disallowance were found during the course of entire search proceedings. 2.2 Before us the assessee raised additional grounds, which are reproduced as under: 1. On the facts and circumstances of the case and in law, the hon'ble CIT (A) erred in confirming the order of Ld. AO without appreciating the fact that the order was passed u/s 153A of the Act without considering the fact that assessment for the year under consideration was completed u/s 143(3) of the Act and no incriminating documents in respect of interest income of Rs. 100,77,381/-were found during the course of entire search proceedings. 2. On the facts and circumstances of the case and in law, the hon'ble CIT (A) erred in con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act was issued on 13.02.2020. In response, the assessee filed return of income u/s 153A of the Act. The assessment proceedings u/s 153A was completed on 30.09.2021 after making various additions/disallowance. On further appeal, the Ld CIT(A) partly allowed the appeal of the assessee. Aggrieved, both the Revenue and assessee are in appeal raising grounds as reproduced as above. 4.2 The Ground No. 1 of the appeal of the Revenue relates to addition of interest income on margin money kept with Bank/Financial Institution, which was held by the Assessing Officer as taxable under the head income from other sources . The brief facts qua the issue in dispute are that the Assessing Officer observed following interest income/receipts: Particulars Amount Remarks Interest Income On account of Margin money which are under lien with bank in respect of guarantees and for the letter of credit 1,00,77,381 Treated by the assessee as directly related to the project of setting up plant and reduced from work in progress. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 315, the Hon'ble Apex Court held that if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets . In the case of CIT vs. Karnal Co-operative Sugar Mills Ltd. 243 ITR 2, the Hon'ble Apex Court held that the interest earned out of deposits to open a letter of credit for the purchase of the machinery required for setting up the plant was incidental to the acquisition of the assets and ruled in favour of the assessee . In view of the decision of the Hon'ble Apex Court, by respectfully following the same, this ground stands allowed. 4.4 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that the Assessing Officer has rejected the contention of the assessee that interest income is derived from or attributed to the activity of the construction of the project and therefore same is eligible to be adjusted against the capital work-in-progress. But, we find that the Hon ble Supreme Court in the case of Bokaro Steel Ltd. (supra) has held that when assessee receives any amount which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing material came up before the Allahabad High Court in the case of PCIT vs. Siddharth Gupta in ITA No. 17 of 2022. In the said appeal, 2 questions of law were raised. i. Whether assessment or re-assessment under section u/s. 153A of the Income Tax Act, 1961 can be framed only on the basis of incriminating material found during the course of search under section 132 of the Act. . Whether assessment or re-assessment under section u/s. 153A of the Income Tax Act, 1961 can be framed where no incriminating material has been found in the search under section 132 of the Act. Eventually, the Hon'ble High Court upheld the stand of the revenue and ruled that assessment can be framed even when no incriminating material has been found u/s. 132 of the Act. While doing so, the Hon'ble High Court considered a host of The judgment was rendered decisions including CIT vs. Kabul Chawla 380 ITR 573. on 04.07.2022. The appeal fled by the assessee before the Hon'ble Supreme Court as dismissed vide SLP (Civil) Diary No. 29742/2022 dated 12.12.2022. In view of the fact that the order of the Honible Supreme Court is declaratory in nature, the decision of the Hon'ble Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as done merely to enable EPIL for proper implementation and execution over the scope of work of the EPC contract and the total scope and lump sum fixed price remained the same. The agreement for split of the EPC contract was entered into 29.07.2010, break up of which is as under: Engineering and Procurement Contract (E C) - Rs 635 Crore(g325483 of Paperbook of A.Y. 2013-14) Onshore Supply Contract - Rs 765 Crore (page no. 484-568 of Paperbook of A. Y. 2013-14) Offshore Supply Contract - Rs 1800 Crore. (page no. 569-675 of Paperbook of A.Y. 2013-14) 5.1 For offshore supply of the capital goods, the assessee made contract for Rs. 1800 Crores. The Assessing Officer in para 5.1 of the assessment order has noted that Directorate of Revenue Intelligence(DRI), Mumbai issued a show cause to Essar Group of Companies including M/s EPIL, regarding overvaluation of goods imported from M/s Glob Supplier (RFZE, UAE). It is to be noted that while performing offshore supply of capital goods to the assessee, the EPIL procured/imported goods from original equipment manufacturers through M/s Glob Supplier (FZE UAE). In view of the show cause notice issued by the DRI, the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee the same were supplied once again to the assessee. The show cause notice has discussed in detail alongwith supporting documentary evidences how the over valuation of invoices with respect to Onshore Contract with EPIL has been done by the assessee via Global Supplies (UAE) FZE. 5.13. The assessee has failed to furnish satisfactory reply to business prudence and exigency prompted the Board of Directors to take a decision to route all capital goods through an agreement with EPIL despite the fact that goods were shipped directly to India from OEM / actual suppliers at an highly inflated import value. The reply given by the assessee is vague and without any supporting corroborative evidence. Further, it is also pertinent to mention here that the assessee company was in possession of invoices issued by foreign suppliers to Global Supplies (UAE) FZE and the invoices issued by Global Supplies (UAE) FZE to EPIL which clearly shows that Global Supplies (UAE) FZE is issuing inflated value invoices to EPIL which in turn has been used by the assessee company to inflate cost of its capital goods. DRI has calculated the extent of overvaluation of import invoices at 98.75% as per the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into 29.07.2010 at agreed lumpsum price which are as under:- Engineering and Procurement Contract (E C) - Rs. 635 cr. Onshore Supply Contract - Rs. 765 cr. Offshore Supply Contract - Rs. 1800 cr. b. According to the appellant, the contract price of Rs. 3200 crs. is based on the fixed lumpsum contract without any provision for price escalation except as expressly provided in the contract. This is noted from Clause 14.1 of the contract dated 11.12.2009 which reads as follows :- Unless otherwise stated in the Contract The Contract Price shall constitute a lumpsum fixed price and will not be adjusted save as expressly provided in the contract, and includes any and all direct indirect and ancillary costs of whatsoever nature, including all profit, all license, royalty and other fees, taxes including all deductions and withholdings, but not including indirect taxes in India, Insurance premiums, license fees and other charges, whether directly or indirectly relating to or arising out of the supply and in accordance with this contract These facts have been placed by the appellant before the AO during the assessment proceedings as well. Thus, thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the lenders. It was submitted that in the report prepared by both these experts, overall project cost had been compared with like projects which were proposed to be set up and it emerged from those reports that project cost of the assessee was lowest in peer comparison. Further, the Ld. Counsel submitted that the Assessing Officer failed to appreciate that the assessee had placed a fixed price rupees contract on EPIC for overseas supply component, as such the assessee was immune from fluctuation in foreign currency and therefore the assessee had no reason to question the value of invoices raised by the EPIL, based on which the assessee had filed bill of entry. Further, the Ld. Counsel for the assessee submitted that the disallowance was made merely on the basis of the quantification made in the show cause notice issued on 11.03.2015 by the Department of Revenue Intelligence, Mumbai on M/s EPIL and other associated companies for alleged overvaluation of import from M/s Glob Supply (FZE UAE). The Ld. Counsel brought to our notice that said show-cause notice issued by the DRI has been dropped vide order dated 18.05.2023 of Principal Commissioner of Customs Adjudication, Mumbai. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 112 (a) or 112 (b) of Customs Act, 1962 is not being imposed. There is a proposal in SCN for imposition of penalty u/s 114 AA of the Customs Act, 1962. I find that the SCN, in para 29.5, has stated that since invoices have been manipulated for purpose of over valuation and false and incorrect declaration/ statements have been made in the import document, penalty u/s 114 AA is imposable. However, as stated earlier, the charges of over invoicing of import goods have been held as not maintainable, there is no false or incorrect declaration in the import documentation and therefore, no penalty is imposable u/s 114 AA on the importer notices. 5.4.1 Since, the very basis of the making addition of overvaluation in purchase of capital goods has been cancelled; the addition made in the hands of the assessee on that very same basis cannot be sustained. Accordingly, we uphold the finding of the Ld. CIT(A) on the issue in dispute. The relevant grounds of the appeal of the Revenue are accordingly dismissed. 6. The next issue is regarding disallowance of interest of Rs. 86,89,98,214/- calculated @ 12% on the funds borrowed for utilisation in alleged overvaluation of imported capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of disallowance u/s 37(1) of the Act at Rs. 70,77,37,047/- by the Assessing Officer on the ground that the assessee has recorded excess expenses in the books of accounts in context with onshore supply contract with EPIL. 8.1. The brief fact qua the issue in dispute are that in post search inquiry the assessee submitted that entire turnkey project of manufacturing of Ammonia and Urea was split into three subcontracts as under: Offshore Supply Contract Rs. 1800 Crores Dated 29.07.2010 Onshore Supply Contract Rs. 765 Crores Dated 20.08.2010 E C Contract Rs. 635 Crores Dated 29.07.2010 8.2 Further, the Assessing Officer perused the seized material found from the premises located at B-Wing, 5 th floor, Poonam Chambers, Dr. Annie Besat Road, Worli, Mumbai (page No. 67 to 86), which included a letter written by Shri Prasant (EPIL) to Shri Nishant Kanodia (i.e. director of assessee company) dated 07.02.2017, wherein the actual expenditure incurred on the three contract differed from the original contract valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation that splitting of contract into 3 parts is merely to enable EPIL for proper implementation and execution of overall scope of work does not hold water as the total contract value has been specifically split up into 3 parts by assigning separate specific values for each component of the contract. If the splitting of the original contract was only for the convenience purpose there was no need to assign spate values to each component to the original contract in a case where total contract value is already assigned in original agreement. Further, it is also pertinent to mention here that in none of these agreements it is mentioned that the contract value between these agreements can be adjusted within the original contract value of Rs. 3200 crores. Further, the contention of the assessee that these 3 agreements are irrelevant for the assessee company is not valid because through these agreements specific separate value has been assigned to the three portion of the actual agreement. 6.16. Therefore, the differential amount of Rs. 73,86,35,024/- is excess booked which is liable to disallowed in the year in which the expense amount crosses the limit of Rs. 7,65,00,00,000/-. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that EPIL exited before the completion of the project and therefore the project was incomplete and cost required to be incurred by EPIL have now been incurred by Matix to complete the project. The appellant has also relied on the statement of Shri Rakesh Patwa (employee of appellant) recorded u/s. 132(4) of the Act on 12.05.2018 to buttress its claim. The appellant has also referred to a certification by Chartered Engineer vide letter dated 08.05.2018. I am afraid, I am unable to entertain these submissions of the appellant. Such findings/submissions do not emanate from the assessment order and it is not known whether all these evidences and records were placed by the appellant before the AO. The appellant has repeatedly harped (including in the letter dated 11.01.2023) that the contract of Rs. 3200 crs. was a lumpsum fixed price contract. Under the circumstances, in my view, the excess expenditure claimed to be incurred by the appellant over and above the contracted price of Rs. 765 crs. towards Onshore supply (within the overall cost price of Rs. 3200 crs.) cannot be allowed. Hence, the AO's action of reduction of CWIP by Rs. 70,77,37,045/- stands upheld. 8.4 Before us, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee in its books of account in respect of onshore supply of part of the project. The entire project has been bifurcated by the EPIL in three parts, the first part is of engineering and construction, second part is of onshore supply and third part is offshore supply. In the case of engineering and construction and offshore supply the expenditure booked by the assessee is lower than contract price, however in case of the onshore supply the actual cost booked by the assessee in its books of account is of Rs. 832 crores as compared to Rs. 765 crores agreed between the parties. The contention of the assessee is that the total turnkey project price was Rs. 3200 crores whereas assessee has booked in books of account only Rs3018.99 crores, which is lower than the overall contract price. According to the Assessing Officer the assessee agreed for contract price of Rs. 765 crores for onshore supply of lump sum basis and therefore, the excess price paid by the assessee cannot be allowed. We are of the opinion that the Assessing Officer has not held the excess payment of Rs. 70.77 crores paid by the assessee as non-genuine. If the assessee has actually paid the amount though it may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Ltd. (EPIL). The scheduled commission date of the project was 1 st April, 2014. During pre-commissioning and commissioning activity, power was derived from Gas Turbine Generators which consume natural/methane for testing of equipments like chemical cleaning of boilers, steam blowing of steam headers, cooling water flushing , lube oil flushing of rotary machines etc. As per the terms of the contract of project, it was the responsibility of the Essar India Project Ltd. to arrange for methane gas from M/s Essar Oil Ltd. The assessee had entered into GSPA agreement dated 11.12.2009 with EOL for long term supply of coal methane gas for a period of 20 years. According to the assessee, the plant was ready for commissioning as per lender s stipulated time for scheduled Commercial Operation Date (SCOD) of 1 st April, 2014 for the Fertilizer Plant but the EOL failed to supply the requisite amount of coal based methane (CBM) gas to the plant of assessee, therefore the assessee was unable to carry out the plant s pre-commissioning and commissioning activity. The gas is the basic material and there was a delay on the part of EOL, thus the production could not be undertaken. This failur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account books as compensation or consideration received for loss of earnings or profits, it is revenue receipt. If the payment is received in the ordinary course of the business of the assessee for loss of stock-in-trade, it is revenue receipt. If, on the other hand, the payment received is towards compensation for extinction or sterilisation partly or fully of a profitearning source (capital asset), such receipt not being in the ordinary course of the assessee's business, it must be construed as capital receipt. Any sum received in substitution of income is revenue receipt. It was been held that damages received are the compensation for the profits which were to be earned. 4.8. Now in the instant case as already observed, compensation has been paid for non-supply or short supply of CBM which is the main raw material for the production of Ammonia- Urea. Thus, the compensation is directly linked to the Revenue generating activity of the assessee and it has to be treated as Revenue Receipt. 4.9. Assessee being a company has to compulsory follow mercantile system of accounting. As per the fifth Amendment to SPA between EOL and MFCL on 01.09.2015, compensation of Rs. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the specific facts of this case, the addition made by the AO by treating the compensation as 'Business Income stands deleted. However, such income shall indeed be reduced from CWIP and the enhanced depreciation granted, if any, shall stand withdrawn, so that there is no double benefit to the appellant. In view of this specific finding, other averments of the AO or that of the appellant are not required to be adjudicated. 11.2 We have heard rival submission of the parties and perused the relevant material on record. The dispute is in respect of the character of compensation received from the EOL for failure in supplying Methane Gas for commissioning and dry run of the project. It is undisputed that the compensation has been paid by the EOL to the assessee for the reason of non-supply of the quantity of the methane gas to the assessee for its dry run of the project and due to which the project cost of the assessee has gone up and therefore, the EOL agreed to pay compensation of Rs. 240 crores to the assessee. The issue-in-dispute is in relation to nature of the compensation whether it is in the character of the revenue or in the capital. We find that the compensation paid ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
