TaxTMI 
TaxTMI 
2018 (4) TMI 311
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.... assessee, at the very outset stated that the issue relating to the liquidated damages stands covered in assessee's favour by the judgment of the Hon'ble Karnataka High Court vide order dated 18th July, 2011 in assessee's own case (copy of which is placed at page nos. 86 to 92). It was further submitted that earlier the assessee was assessed at Bangalore and was under the jurisdiction of High Court of Karnataka at Bangalore and now the assessee has shifted to New Delhi and assessed at New Delhi. In his rival submissions, the learned CIT DR although supported the order of the AO but could not controvert the aforesaid contention of the learned counsel for the assessee. 3. After considering the submissions of both the parties and the material on record, it is noticed that an identical issue having similar facts was a subject matter of the departmental appeal before the Hon'ble Karnataka High Court, wherein vide order dated 18th July, 2011 this issue has been decided in assessee's favour by following the judgment of the Hon'ble Apex Court in the case of Rotork Controls India (P) Limited vs. CIT reported in (2009) 314 ITR 0062 and relevant findings are given in paras 4 and 5 of the a....
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....has been manufacturing and selling valve actuators in large numbers. The statistical data indicates that every year some of these manufactured actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. Therefore, warranty became integral part of the sale price of the value actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. 5. In view of the declaration of the law by the Apex Court which clearly applies to the facts of this case, no substantial question of law arises for consideration in....
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.... supply of equipment/services in time bound manner and in accordance with specific standards as stipulated in the terms of contracts. Further, the appellant is contractually required to pay for damages resulting on account of delay or default of any contractual obligations. 3.5.2 In the event, any compensation for default or delay on contracts become payable and such payables are pending at the end of the FY due to events undertaken during the FY, the appellant creates a provision for such likely compensation. The said provision is written back only after the fulfillment of all obligations by the company and after the performance bank guarantees are released. Generally the provisions are utilized/ released anytime between one to five years. The said provisions are made based on invocation of liquidated damages clause by the customers and delay in supply / short supply of equipment to the customers. Liquidated damages arise on the appellant on account of delay in making supplies to its customers or for any delay in respect of contractual obligations of the appellant with its customer. 3.5.3 During the FY relevant to the subject AY, while executing various orders received from ....
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....e contracts governing this business activity contains clauses for liquidated damages for any defaults on the part of the assessee. Appellant follows mercantile system of accounting. Prudence as prescribed by CBDT in its guidelines dated 25.01.1996, mandates creation of such provisions. Respectfully following the decision of the Hon'ble ITAT in the case of Thermax Babcock and Wilcox Ltd (supra), I hold that the provision is allowable under the law. AO is directed to delete the addition made on this ground." 3.5.6 Without prejudice to above, the appellant submits that the provision for liquidated damages has been made on a reasonable and scientific basis. Accordingly, in view of the contentions of the appellant for Ground 3 above (Provision for warranty), provision for liquidated damages is wholly allowable under the provisions of the Act. Further the appellant wishes to submit that it is a trite law that, for a taxpayer who is maintaining his books of accounts on mercantile system, a liability which is already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted pri....
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....ability for liquidated damages is certain, accrued and is not dependent upon the happening of any event other than delay in deliveries. As the company defaulted in the delivery terms, the liquidated damages have been rightly considered as business expenditure. The company is following the method on a consistent basis. When the payment was actually made the accounts were adjusted with reference to any remission or waiver that the company may get in respect of damages payable for the late delivery and the same was brought to tax u/s 41(1) of the IT Act, 1961 by crediting the liquidated damages account. The AO held that the provision made for liquidity damages amounting to Rs. 17,61,99,671/- is unascertained liability in the nature of contingent liabilities and, therefore, added the same. In terms of the purchase order, liquidated damages @ 0.5% per week subject to a maximum of 0.7% would be imposed. The company defaulted in the delivery terms, therefore, the above liability is as definite liability. Further, as the liability is determinable 0.05% per week subject to a maximum of 0.7%, therefore, the liability is also an ascertained liability. The liability to pay liquidated damages a....