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TMI Blog2024 (2) TMI 783X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of over-valued part of cost of imported capital goods out of capital work in progress; (iii) disallowance of interest on capital borrowed for overvalued part of imported capital goods; (iv) treating compensation received from M/s Essar Oil Ltd. as revenue receipt in nature ; (v) disallowance of depreciation claimed on overvalued part of work-in-progress post capitalization. 1.2. The issues raised in appeals and cross objection filed by the assessee include challenging validity of making additions by the AO without aid of any incriminating material found during the course of the search, qua (i) taxation of interest earned on margin money with bank under the head 'income from other sources'; (ii) disallowance of over-valued part of cost of imported capital goods; (iii) treating compensation received 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... *? 7. "Whether the Ld.CIT (A) is justified in deleting the disallowance u/s 37(1) of the Act. of Rs. 129,32,54.291/- thereby reducing the CWIP. ignoring the Statement of Shri Vijay Kumar Goyal (CA and General Manager (F&A) in the assessee company ] which was recorded on oath us. 132(4) of the IT. Act. 1961 on 11.05.2018 during the course of Search proceedings wherein he has categorically explained that how an invoice of Sungjin Geotec Co. Lid.. Korea with an original price of S11,98.190/- with gross weight of 154,827 kgs has been over valued at $32.98.500/- through routing the invoice from Global Supplier (UAE) FZE to BPIL. which in tum has billed the same to the assessee company at an overvalued valuation and on perusal of bill of landing seized during the course of scarch action, it is 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitrarily calculated 12% alleging that appellant has utilised the borrowed funds for acquisition of alleged overvalued capital goods recorded in CWIP in context with Onshore Supply Contract. We therefore pray to your honour to delete the addition made and necessary direction shall be given in this regard. 2.1. On the facts and circumstances of the case and in N.A. law, the Hon'ble CIT(A) erred in confirming the action of Ld. AO, there by presuming that the entire project was funded with Borrowed funds without appreciating the fact that appellant was mandated to maintain the Debt Equity ratio of 2:1. 2.2. Without prejudice to the ground no. 2 and 2.1, on N.A. the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming 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 fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores. The said contract included procurement, supply, erection, commissioning, testing of machinery and wrap up guarantee etc. The assessee also entered into a process technology license agreement with 'Saipem S.p.A', Italy, and 'Kellogg Brown & Root Inc.' USA. This project was supervised by 'M/s Project and Development India Ltd'. (PDIL). The project was funded by a consortium of Banks and Financial Institutions laid by 'IDBI' Bank. During the year under consideration said project was under construction and the commercial production started on 01.10.2017. 4.1. A search and survey action u/s 132/133A of the Income-tax Act, 1961 (in short 'the Act') were carried out in the case of the assessee on 10.05.2018 . Subsequently, a notice u/s 153A 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of Rs. 1,00,77,381/- is reduced from the Capital WiP on the ground that such 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. The plant has become operational in a later assessment year and not during the year under consideration. 4.3.1. In the case of CIT vs. Bokaro Steel Ltd. 236 ITR 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.2021, the Hon'ble ITAT, Bangalore has held that assessment u/s. 153A can be made even if no incriminating material was found during search action. In this judgment, the above cited judgments of the appellant have actually been considered by the Hon'ble ITAT. Hence, it cannot be stated that the position of law is squarely in favour of the appellant. A similar issue of incriminating 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 Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee awarded an 'EPC' contract dated 11.12.2009 to M/s EPIL for a lump sum fixed price of Rs. 3200 crores. Subsequently, in mid 2010 EPIL specifically requested assessee to split the above 'EPC' contract into three separate contracts, viz., Engineering and construction, onshore supply contract and offshore supply contract. The assessee contended that the split was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m OEM / actual suppliers and only invoice was routed through intermediary entity Global Supplies (UAE) FZE with the only purpose of inflation of invoice value. 5.12. It is pertinent to mention here that a copy of show cause notice alongwith relied upon documents had already been supplied by DRI to the assessee company and on further request by the assessee 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 Globa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice Engineering Procurement and Construction (EPC) contract dated 11.12.2009 with EPIL for Rs. 3200 crs. to set up ammonia and urea complex at Panagarh, Wesh Bengal. There have been subsequent modifications in the contract as well. It is seen that the contract is split into 3 parts and the agreement for the same was entered 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the contrary, the Ld. Counsel for the assessee submitted that entire project of installation and supply for the project was duly supervised by M/s PDIL, which is Government of India Undertaking and due intelligence was undertaken by Tata Consulting Engineers Ltd (TCEL), which was appointed 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 E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l rate of duty, thus having no implication of duty in respect of mis declaration of value, if any. Therefore, I find that the impugned goods are not liable for confiscation under Section 111(d) and 111(m) of Customs Act, 1962. Since goods are held not liable for confiscation, the penalty 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abated assessments . Thus, the addition of the overvaluation of the imported capital goods and the corresponding interest are also liable to be deleted. The corresponding/additional grounds of the appeal of the assessee are accordingly allowed. 8. The next issue is in respect 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, 5th 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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/-. For the sake of clarity, break up of year wise disallowance to be made as under: Onshore AY Basic (A) Cumulative Basic (B) Agreement Limit (C) Variation with Agreement (B)- (C) Amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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, the Ld. Counsel for the assessee submitted that Assessee Company was liable for fixed lump sum contract price of Rs. 3200 crores without any provision for price escalation and same was expressly provided in contract and EPC contract was split into three parts only for identification and execution of the relevant work. The Ld. Counsel submitted that the Assessing Officer failed to understand the nature of the transaction entered into between the assessee and EPIL. Each details/justification/explanation had been provided by the assessee company that three separate agreements have been agreed and entered into with EPIL on the specific request of the EPIL. The said agreement agreed and entered into with EPIL on specific request of EPIL, for smooth functioning an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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, the Assessing Officer has 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. In view of the above decisions relied upon by the assessee, we are of the opinion that such disallowance made by the Assessing Officer and sustained by the Ld. CIT(A) is not justified. Accordingly, we set aside the finding of the Ld. CIT(A) and dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial Operation Date (SCOD) of 1st 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 failure on the part of the EOL, not any delayed commissioning but also increased the cost of the project. The negotiation with respect to fixed cost reimbursement took place between IDBI Bank, EOL and the assessee and in August, 2014 EOL finally agreed to pay the assessee, expenses of Rs. 240 crores, which has been held by the Assessing Officer as Revenue receipt of the assessee, whereas according to the assessee this was receipt in the nature of the capital and therefore, assessee is eligible for set off of the same against the capital work-in-progress. The Ld. Assessing Officer disallowed this claim of the assessee observing as under: "4.4.4. Thus, the claim of the assessee that the compensation received is capital receipt is found to be not tenable in law as per facts of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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. 240 crores has accrued to the assessee for the period 01.04.2015 to 30.09.2015 pertaining to AY 2016-17 which is taxable as business income and the assessee has not offered to tax during the assessment year 2016-17." 11.1 On further appeal, the Ld. CIT(A) however deleted the addition holding the same to be capital cost of the plant. The relevant finding of the Ld. CIT(A) is reproduced as under: "7.3.2 The appellant has reduced the entire compensation of Rs. 240 crs. From IS CHIP in A.Y. 2017-18. However, t the entre compens that this compensation is revenue in nature and is liable to be taxed as such in the year under consideration. A perusal of the P&L Ac. of the appellant for the year shows that there is no income from Operations. Only other income of Rs. 1,2882 481/- has been included in the PaL Ac. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ane 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 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 therefore the compensation received also acquired the nature of the capital and eligible for adjustment against the capital work-in-progress. The Assessing Officer has made addition on substantive basis in the assessment year 2016-17 and on protective basis in assessment year 2017-18, for the reason that assessee has shown commissioning of the plant in that assessment year. In our opinion the Ld. CIT(A) has correctly charactized the compensation received by the assessee as in the nature of the capital and we do not find any infirmity in the order of the Ld. CIT(A) on the issue in dispute. Accordingly, we uphold the same. The relevant ground of appeal of the Revenue is accordingly dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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