2019 (1) TMI 1366 - HC - Income Tax

Project risk expenses - consideration is in the nature of liquidated damages and is allowable deduction in the A.Y. 2007-08 - Held that - The facts on record would show that the agreement contained a clause under which, the assessee would have to pay 0.5% of the total contract value for every week or part thereof for the delay in execution of the work subject to ceiling of maximum 5% of the total contract value. The fact that there had been delay in execution of the work of the assessee is not in dispute. Under the circumstances, the liability of the assessee to pay the sum to the HPCL as per the said clause had arisen. The liability thus, had crystallized and cannot be said to be a contingent liability. The objection of the Counsel for the Revenue on the basis of Sections 73 and 74 of the Contract Act also is not valid. Section 74 of the Contract Act does not limit its applicability to a penalty stipulated in the contract but covers the case where any amount is agreed to be paid in case of breach of contract. In that view of the matter, reference to Section 73 of the Contract Act would not be necessary at all. In any case, what Section 73 provides is that when a contract has been broken, the party who suffers by such breach, is entitled to receive compensation for any loss or damages caused to him which naturally arose in the usual course of things from such contract. The question of applicability of Section 73 in the present case in view of the situation being covered by Section 74, would not apply. In any case, the provision of Section 73 would come into play if in case of breach of the contract, any party were to resile from the terms of the Contract envisaging payment of liquidated damages as agreed in the contract. In the present case, the assessee who was liable to pay the said amount, had neither disputed nor refuted its liability. This question, therefore, does not require consideration. - Decided in favour of assessee. Computing income u/s 10A - expenses incurred in foreign exchange towards technical services provided outside India if reduces from the export turnover should also be excluded from total turnover? - Held that - Issue squarely covered by the judgment of this Court in case of CIT Vs. Gems Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT in which the Court held that the amount of freight and insurance have to be excluded for the purposes of computation of export turnover, which would also be excluded while computing total turnover of the assessee. This question is also therefore not entertained. - Revenue appeal dismissed.

Summary

Issues:
1. Allowability of project risk expenses as deduction in A.Y. 2007-08.
2. Exclusion of expenses incurred in foreign exchange towards technical services from total turnover under Section 10A of the Act.

Issue 1:
The appeal addressed the question of whether project risk expenses amounting to ?2,38,83,772 debited on the profit and loss account for the relevant year were in the nature of liquidated damages and thus allowable as a deduction in the Assessment Year 2007-08. The respondent company had claimed this sum as expenses arising from a contract with HPCL, where a clause stipulated payment in case of project delay. The Assessing Officer initially disallowed the claim as contingent, but the Tribunal allowed it based on the crystallization of liability due to delay in work execution. The Tribunal's decision was supported by the Supreme Court's ruling in the case of Bharat Earth Movers, emphasizing that the expenditure should be allowed when liability arises. The Court rejected the Revenue's argument that the liability was contingent, clarifying that the agreement specified a pre-decided amount payable upon breach, falling within Section 74 of the Contract Act. The Court concluded that the liability had crystallized, making it non-contingent and thus allowable as a deduction.

Issue 2:
The second issue involved the exclusion of expenses incurred in foreign exchange towards technical services from total turnover while computing income under Section 10A of the Act. The Court cited a previous judgment in CIT Vs. Gems Plus Jewellery India Ltd., which held that certain expenses like freight and insurance must be excluded from export turnover and total turnover for computation purposes. As this principle was already established in the cited case, the Court did not entertain this question further and upheld the exclusion of such expenses. Consequently, the appeal was dismissed based on the findings related to both issues.