2020 (2) TMI 1452 - AAR - Income Tax

Advance ruling - Nature of receipt - claim for liquidated damages (LD) for termination of association agreement for mine development and operations (Association Agreement) - revenue or capital receipt - HELD THAT - After the arbitration award of ICC London the claim of the applicant of USD 17 mn. towards liquidated damages have been dismissed and the applicant is not entitled to receive any liquidated damages. It was also confirmed in the hearing before AAR on January 22 2020 that there is no appeal against the award and that it has become final. Thus question No. 1 as to the character of the liquidated damage qua revenue or capital is inconsequential. Amount of liquidated damages in dispute shall accrue to the applicant during the year ended March 31 2015 when such claim has been raised or in the year in which the final order/decree is passed by the court directing the payment of liquidated damages creating a right of the applicant - In regard to question No. 2 it is held that in view of the arbitration award nothing accrues to the applicant. MAT Computation u/s 115JB - Applicability of the provisions of sections 115JB and 43B of the Income-tax Act have also become inconsequential as there is no question of crediting any amount to the profit and loss account when there is no receipt of liquidated damages. Trade receivables written off in the accounts of the applicant for the year ended March 31 2015 - whether allowable as deduction under section 36(1)(vii) read with section 36(2) of the Act ? - HELD THAT - AR has elaborated the reason for the difference in figure. The former figure is the amount invoiced to SPL along with service tax and forex fluctuation difference whereas the latter figure is exclusive of foreign rate fluctuation difference amount. As explained from the financial statement that the invoiced amount and the foreign rate fluctuation difference was declared as income in the financial year 2014-15 and the service tax though not recovered from SPL was paid to the credit of Government to avoid demand and penalty and is therefore claimed as business expenditure under section 37. It is also alternately urged that the same is also allowable as trading loss or bad debt. The authorities cited in this regard have been perused by us and we are in agreement with the contention of the learned authorised representative on this issue. The Revenue may however verify these figures from the financial statements and the return of income filed by the applicant. The amount comprising of invoice amount and foreign rate fluctuation difference is allowable as bad debt under section 36(1)(vii) and the service tax paid but not realised is allowable as business expenditure under section 37.

Issues Involved:
1. Characterization of liquidated damages as capital receipt.
2. Accrual of liquidated damages.
3. Inclusion of liquidated damages in book profits under section 115JB.
4. Applicability of section 43B on non-deposit of service tax on liquidated damages.
5. Allowability of trade receivables written off as bad debts under section 36(1)(vii) read with section 36(2).

Detailed Analysis:

Issue 1: Characterization of Liquidated Damages as Capital Receipt
The applicant sought a ruling on whether the liquidated damages claimed from SPL on account of termination of the Association Agreement should be considered a capital receipt and thus not chargeable to tax. The applicant's claim for USD 17 million in liquidated damages was dismissed by the International Court of Arbitration, ICC. Consequently, the question of characterizing the liquidated damages as a capital receipt became academic and inconsequential.

Issue 2: Accrual of Liquidated Damages
The applicant questioned whether the liquidated damages would accrue during the year ended March 31, 2015, or in the year when the final court order is passed. Given the arbitration award dismissing the claim, it was held that nothing accrues to the applicant.

Issue 3: Inclusion of Liquidated Damages in Book Profits under Section 115JB
The applicant questioned whether the liquidated damages should form part of the book profits under section 115JB if they were not credited in the profit and loss account for the year ended March 31, 2015. Since there was no receipt of liquidated damages due to the arbitration award, the question became inconsequential.

Issue 4: Applicability of Section 43B on Non-deposit of Service Tax on Liquidated Damages
The applicant sought clarity on the applicability of section 43B for non-deposit of service tax on liquidated damages. As there was no receipt of liquidated damages, this question also became inconsequential.

Issue 5: Allowability of Trade Receivables Written Off as Bad Debts
The applicant claimed a deduction for trade receivables amounting to ?5,19,38,309 written off in the accounts for the year ended March 31, 2015. The Revenue contested this, arguing that the receipts were not included in the income of the applicant for the financial year 2014-15, and thus did not satisfy the conditions under section 36(2).

The applicant clarified that the amount of ?5,19,38,309 included development fees, expense reimbursement, and interest on unpaid invoices, restated due to forex rate fluctuations. The applicant had accounted for ?4,47,77,356 as income and ?16,26,453 as forex gain in the profit and loss account for the financial year 2014-15. The service tax of ?55,34,481 was paid through input tax credit and was part of the debt due from SPL.

The ruling held that the entire amount of ?5,19,38,309, including the service tax, was allowable as a deduction under section 36(1)(vii) and section 37 of the Income-tax Act. The service tax paid but not realized was also allowable as business expenditure under section 37.

Decision:
1. Questions 1, 3a, 3b, and 4 were deemed inconsequential due to the dismissal of the claim for liquidated damages by the International Court of Arbitration.
2. Question 2: Nothing accrues to the applicant.
3. Question 5: The amount of ?5,19,38,309, comprising the invoice amount and forex fluctuation difference, is allowable as bad debt under section 36(1)(vii), and the service tax paid but not realized is allowable as business expenditure under section 37 of the Income-tax Act.

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