TaxTMI 
TaxTMI 
2017 (9) TMI 811
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 construction of the solar power plant is in the nature of revenue receipt. 3. The learned AO has erred in not appreciating the fact that the said liquidated damages are receivable on account of delay in construction of the solar power generating plant (ie the capital asset) and hence is in the nature of capital receipt not chargeable to tax. 4. Without prejudice to the fact that the liquidated damages are in the nature of capital receipt not chargeable to tax, the learned AO has erred in treating such liquidated 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, h....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 3. In grounds No. 1 to 6, the assessee is aggrieved with finding of the Ld. Assessing Officer and the Ld. CIT-(A) that 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 i.e. if the plant was not commissioned on schedule dates. For commissioning of these plants, the assessee entered into an Engineering, Procurement, Construction (EPC) contract with 'M/s. Enfinity Solar Solutions Private Limited' ( in short 'the Enfinity'). The 'EPC' contract also contained condition for liability of liquidated damages payable to the assessee in case of delay in completion of the EPC contract. During the assessment year under consideration, in accordance....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tracts were part of the business process of the appellant. None of these contracts would have worked independently because they were interconnected and interlinked. Under such circumstances, any default happening in any part of EPC contract would have resulted in consequences into the other one. The above mentioned special circumstances make this case distinguishable from the facts of the case as quoted by the appellant above. The ratio given in the above-mentioned judgment applies to the present case in different manner because Hon'ble Supreme Court in the case of Commissioner of Income Tax Saurashtra Cement Ltd. (325 ITR 422) (SC) 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 in reaching a conclusion. In Rai Bahadur Jairam Valji (su....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee and 'M/s. Enfinity' regarding liquidated damages. He also referred to extract 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 directed to be enhanced accordingly and depreciation may be allowed on enhanced written down value of the asset. 6. On the contrary, the Ld. Sr. DR relied on the finding of the learned CIT-(A). He referred to page 13 of the paper book, which contained clause related to 'Delay Damages' in EPC contract and submitted that liquidated damages in the EPC contract have been specified to compensate loss in earning per day. He further submitted that liquidated damages in the 'PPA' contract with Government of Gujarat are also in terms of per day per megawatt. Since in the case of the assessee there are two power p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2. The Power Producer is prevented from performing its obligations because of material default on part of GUVNL 3. Power Producer is unable to achieve commercial operation on Scheduled Commercial Operation Date because of delay in transmission facilities/evacuation system for reasons solely attributable to the GETCO. 7.2 On 20/07/2011, the assessee requested for change of location of the project from the village Bandhdi, Taluka Bhachu, Distruct Kutch to Gujarat Solar Park at Village Charanka, Taluka Santhalpur, District - Patan. 7.3 On 09/08/2011, the assessee 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, if Contractor fails to achieve Substantial Completion by the Time for Substantial Complet....
X X X X Extracts X X X X
X X X X Extracts X X X X
....' conveying the amount of liquidated damages. 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 Rs. 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 that the delay in commissioning of the project is not attributable to GETCO as M/s. AES has failed to identified Solar Power Project site in timely manner and changed the location of solar power project after lapse of about 16 months time from the date of signing of PPA. Accordingly, M/s AES is solely responsible for delay of commissioning of Solar Power Project. Moreover, as per Power Purchase Agreement executed with GUVNL for supply of power from ] 15 MW Solar Power Project, Scheduled Commercial 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 proj....
X X X X Extracts X X X X
X X X X Extracts X X X X
....PC contract agreement was as a result of liquidated damages clause in the PPA agreement between the assessee and GUVNL as under: "4.3 I have given careful consideration to the contention of the appellant and primarily the decision of Hon'ble Supreme Court in the case of Commissioner of Income Tax vs Saurashtra Cement Ltd (325 ITR 422) (SC) as quoted by the appellant, wherein it was held that damages which are directly linked with the procurement of a capital asset 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 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 asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rined 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 where delay in supply of capital goods/machinery has resulted in actual damages which are ascertainable and have been at the centre of the contract." 7.9 We have noticed that the full EPC contract agreement has not been produced before us and, therefore, we are unable to find out the terms of completion of the EPC contract specified in the agreement. The assessee has also not furnished any certificate from the supplier the date on which construction of the power plants was completed and working of daily 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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 counsel of the assessee submitted that the assessee is eligible for deduction under section 80IA of the Act, if the liquidated damages are held as revenue receipts. He further submitted that nonfiling of form No. 10CCB, cannot be a ground for declining the deduction under section 80IA of the Act. In support of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le 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 matter, particularly, under the facts and circumstances of the case when, in the original return, the assessee had shown loss and subsequently, after the AO passed an order under s. 147 of the Act which resulted in profit, at which point of time the assessee claimed deduction under s. 80HHC based on the audit report in Form 10CCAC, in view of the specific provisions available under the statute, the assessee should not be denied the opportunity to file audit report for the purpose of claiming benefit 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 ded....
X X X X Extracts X X X X
X X X X Extracts X X X X
....obligation between the assessee and EPC contractor. In our opinion, 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 (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 Rs. 4,02,28,060/- on solar power plants. According to the Assessing Officer, the assessee has given certificate of commissioning of the solar power plants and no evidence supporting that actual power was generated was given by the assessee. The Assessing Officer has in the assessment order has mentioned that in case of another assessee of having similar nature of income, the authority issuing certificate clearly mentioned that work of power generation was started on the date mentioned in the certifi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rporation 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 learned counsel submitted that solar plants were put to use and the assessee is entitled for depreciation on said power plants as per rules. 9.5 On the contrary, the Ld. Sr. DR submitted that there is an apparent inconsistency in the latter dated 14/03/2012 of 'GUVNL' which is available on pages 55 of the paper book and the supplementary PPA dated 19/07/2012 and other evidences cited by the assessee. Accordingly, he requested that matter may be restored back to the Assessing Officer for allowing depreciation 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 to which the ....