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TMI Blog2025 (5) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ind Turbine Generators, was on revenue account for reducing loss incurred in the course of business or a capital receipt outside the purview of taxation. Accordingly, the facts of the case and the sequence of events in the first round are dealt with in the following paras and adjudicated in terms of the above direction of the Hon'ble High Court. 2. The facts in brief are that, the assessee is engaged in the manufacture of iron ores, nitrogen gas and ferro-alloys and also generation of electricity and manufacture of railway sidings for captive use and during the year filed the return of income declaring total income of Rs. 11,73,01,47.760/- The assessee had entered into two contracts with M/s Suzion Energy Limited (SEL) for purchase of 48 Nos. and 12 Nos. of Wind Turbine Generators (WTG). As per terms of the purchase contracts, there was a generation guarantee clause in terms of which the supplier guaranteed the performance of the WTGs and in case the WTGs failed to perform, then a mechanism was provided and set out to compute the damages/compensation to be paid. In other words the short fall in guarantee generation would be compensated at the MSEB power purchase rate. Since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these machines were quantified and accordingly performance of the machines was ascertained. So the fact is that the compensation was quantified and is received after putting the machine in actual use. Thus, from the above it is clear that the purpose of giving compensation to the assesse was to reduce the loss which the assessee might have incurred. Therefore, it is crystal clear that the compensation was given on Revenue account ie. to reduce the running loss of the assessee and that too in the course of the business. Thus the impugned compensation has direct nexus with the business of the assesse. In our considered view the facts of the case i.e. CIT Vs. Saurashtra Cement Limited reported in 325 ITR 422 are different from the present case. The relevant facts of the case are enumerated below. In the above case, the compensation was given to the assessee for late delivery of machine but in the instant case before us compensation was given due to non-performance of the machineries at desired level. In the former case the machines were not put into the use but in the later case the machines were actually put into use for the production of units. Therefore the compensation in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Assessing Officer held against the assessee and treated the same as a revenue receipt. On appeal, the Commissioner of Income Tax (Appeals) - VI (CITA), by an order dated 01.02.2013 reversed the decision of the Assessing Officer and directed the receipt to be treated as a capital receipt with a further direction to reduce the same from the value of the capital asset. The Revenue as well as the assessee filed appeals before the Tribunal. The Tribunal dismissed the assessee's appeal and the Revenue's appeal was allowed. The sheet anchor of the argument submitted by the assessee before the Tribunal was by placing reliance on the decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax v. Saurashtra Cement Ltd. reported in (2010) 325 ITR 422 (SC) as well as the decision of the Kolkata Bench of the Tribunal in the case of DCIT v. Xpro India Ltd. in ITA 214/Kol/2011 and ACIT v. RDS Construction Pvt. Ltd. in ITA 377 to 383/PN/2013. The Tribunal while interpreting the decision in Saurashtra Cement Ltd. (supra) went into the factual aspect and stated that in the said case, the compensation was paid for late delivery of the machinery whereas in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aside on the subject issue alone, namely, whether the compensation received by the assessee from Suzion Energy Ltd. in terms of the purchase orders on account of failure of performance guarantee parameters of capital assets, namely, wind turbine generators, purchased by the assessee was on revenue account made for reducing loss incurred in the course of business or a capital receipt outside the purview of taxation and the matter shall be remanded to the Tribunal for a fresh decision on merits and in accordance with law." (emphasis supplied) 5. The Ld. AR apprised the bench with the factual matrix of the case in light of the decision rendered by the Hon'ble Supreme Court in the case of CIT vs Saurashtra Cement Ltd. (325 ITR 422). He pointed out that, the question before the Hon'ble Supreme Court was whether the compensation paid for delay in supply of machinery was capital or revenue in nature. In that case, it was observed that, the purchase agreement inter alia contained a provision for liquidated damages, if the items were delivered late, which was to be computed at a percentage of the cost of machinery. The Hon'ble Supreme Court observed that the damages to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their captive consumption and that due to the non-performance of the WTGs, the assessee would have otherwise purchased power from MSEB and therefore the compensation paid for the non-performance by computing the short fall units and multiplying the same with the MSEB power rate which clearly represented compensation for the opportunity cost incurred by the assessee. The Ld. CIT, DR, also filed synopsis of his arguments, which has been taken on record. 7. We have heard both the parties and perused the materials on records carefully including the order of the Hon'ble Calcutta High Court (supra). We note that the limited issue before us is, whether the compensation received for under-performance of the WTGs installed by SEL was revenue in nature or capital receipt not liable to tax. The Hon'ble Court had observed that, the manner in which this Tribunal had earlier interpreted the decision of Saurashtra Cement Limited (supra) to come to a conclusion that, it does not help the assessee, was incorrect and therefore has now required this Tribunal to consider the legal issue which was decided by the Hon'ble Supreme Court in Saurashtra Cement Limited (supra) in light of the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered the matter in the light of the afore-noted broad principle. It is clear from clause No. 6of the agreement dated 1-9-1967, extracted above, that the liquidated damages were to be calculated at 0.5 percent of the price of the respective machinery and equipment to which the items were delivered late, for each month of delay in delivery completion, without proof of the actual damages the assessee would have suffered on account of the delay. The delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset, ie, the cement plant, which would obviously lead to delay in coming into existence of the profit-making apparatus, rather than a receipt in the course of profit-earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had acquired a machinery from UK, which failed to perform at the desired levels and therefore the assessee had claimed compensation from the supplier. The compensation so received for non-compliance with the performance parameter was treated to be capital receipt by the assessee. Though the AO agreed that the compensation receipt was capital in nature, but adjusted the same against the cost of the machinery in terms of Explanation (10) to Section 43(1) of the Act. On appeal, this Tribunal held that, the compensation received from the UK supplier on account of under performance of the machinery was in the nature of capital receipt outside the purview of taxation. The operative paras of the Hon'ble jurisdictional High Court decision is as under: 8. The next issue is with regard to the compensation received from M/s. Batenfeld, UK. The Assessing Officer was of the view that the entire amount of compensation had reduced the cost of the machinery and therefore, denied relief to the assessee. The correctness of the said finding was considered by the CIT (A) and after noting that the entire amount of compensation would not reduce the actual cost of machinery and there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on capital account:- CIT vs. Saurashtra Cement [2012] 325 ITR 422 (SC) Xpro India Ltd. [ITA No. 214/Kol/2011, order dt. 23/03/2016) Deputy Commissioner of Income Income-tax, Circle -4, 4, Kolkata vs. Tongani Tea Co. Ltd. [63 taxmann.com 149 Kolkata ITAT] 7.2. The Id. CIT(A) at para 2.4. page 7 of his order, held as follows: "2.4. As pointed out by the AR the relevant facts in the case of Manna Ramji are different in so far as the compensation was for rent for the user of godown. The Assessing Officer has not challenged the appellant's claim that the said amount of compensation was for impairment of the assets and was not to compensate for the profit. The AO has observed that the compensation was to co compensate the revenue loss of earning but has not established his case that underperformance of the equipment was liable to be treated as revenue loss. On the contrary the appellant's submission has relied on some judicial decisions as noted above which demonstrate that underperformance of the assets in the present case is equivalent to capital loss as the impact is for the entire life of the assets involved. It appears that the machine procured did not meet the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay a sum of EUR 450,000,000 (Euro four hundred and fifty thousand) to XPRO From the above, it is clear that the compensation was awarded for not meeting the performance parameters. The compensation was not computed with the reference to the cost of the said machines. The compensation paid was neither in form of discount nor against the price nor it was in the nature of subsidy nor it was in the nature of the reimbursement. We further find that it was not even compensation for the recouping the damage caused to the plant and machinery. None of the conditions specified in Sec. 143(1) of the Act for deducting the actual cost from value of the machines were applicable to the compensation. Therefore we are inclined not to reduce the actual cost of the plant and machinery by the amount of compensation. Accordingly we have no hesitation in approving the order of the Id. CIT(A). Hence this ground of Revenue's appeal is dismissed." 8.1. The Hon'ble Supreme Court in the case of Saurashtra Cement Ltd. (supra). (supra) was considering a compensation received from the suppliers by way of liquidated damages. It held as follows:- 9. As the id. CIT(A) has applied the proposition of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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