DCIT, New Delhi V. M/s. Nokia Siemens Networks India Pvt. Ltd., Bangalore

ITA 3202/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3645 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 24-05-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 23-05-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: AMIT SHRIVASTAVA A
• Keywords: Business expenditure; Question of law
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 1 , NEW DELHI BEFORE SHRI N.K. SAINI , ACCOUNTANT MEMBER AND SHRI K.N. CHARY , JUDICIAL MEMBER I.T.A. NO. 3202 /DEL /201 4 ASSESSMENT YEAR: 20 04 - 05 DCIT CIRCLE - 13(1) NEW DELHI VS. NOKIA SIEMENS NETWORKS INDIA PVT. LTD., 10 TH FLOOR, RAHEJA TOWERS, 26 - 27, M.G. ROAD, BANGALORE PAN - AABCS9839H [APPELLANT] [RESPONDENT] DEPARTMENT BY: SH. SANJAY I. BARA , CIT RESPONDENT BY: SH. DEEPAK CHOPRA, SMT. RASHMI CHOPRA & AMIT SHRIVASTAVA, ADVOCATES DATE OF HEARING: 22 01 2018 DATE OF PRONOUNCEMENT: 31 01 2018 O R D E R PER N.K. SAINI , A.M: THIS IS AN APP EAL BY THE DEPARTMENT AGAINST THE ORDER DATED 26.2.2014 OF THE LEARNED CIT(A), XVI, DELHI . THIS APPEAL WAS EARLIER DISPOSED O F F BY THE ITAT DELHI BENCH E NEW DE LHI VIDE ORDER DATED 30.6.2017 WHEREIN THE ISSUES RELATING TO LIQUIDATED DAM AGES AND PROVISION FOR WARRANTY WERE RESTORED TO THE LEARNED CIT(A) . AGAINST THE SAID ORDER ASSESSEE PREFERRED AN APPEAL BEFORE THE HON BLE JURISDICTIONAL HIGH COURT IN ITA NO. 641/2017 WHEREIN VIDE ORDER DATED 23.11.2017 THE ISSUE RELATING TO THE LIQUIDATED DAMAGES AND ITA NO. 3202 /DEL/201 4 2 PROVISIONS FOR WARRANTY CLAIMED BY THE ASSESSEE AS EX PENSES, WERE DIRECTED TO BE ADJUDICATED. ACCORDINGLY, THIS APPEAL WAS FIXED FOR HEARING. 2. DURING THE COURSE OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE, AT THE VE RY OUTSET STATED THAT THE ISSUE RELATING TO THE LIQUIDATED DAMAGES STANDS COVERED IN A SSESSEE S FAVOUR BY THE JUDGMENT OF THE HON BLE KARNATAKA HIGH COURT VIDE ORDER DATED 18 TH 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 W AS 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 AFOR ESAID CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE . 3. A FTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES AND THE MATERIAL ON RECORD , I T 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 18 TH JULY, 2011 THIS ISSUE HAS BEEN DECIDED IN ASSESSEE S FAVOUR BY FOLLOWING THE JUDGMEN T 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 PARA S 4 AND 5 OF THE AFORESAID ORDER DATED 18 TH JULY, 2011 WHICH READ AS UNDER: - 4. THE QUESTION THAT IS INVOLVED IN THIS APPEAL IS NOW CLEARLY COVERED BY THE JUDGMENT OF THE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. COMMISSIONER OF INCOME TAX REPORTED IN (2009) 314 ITR 62 WHEREIN THE APEX COURT HAS HELD AS UNDER: 10. WHAT IS PROVISION? THIS IS THE QUESTION WHICH NEEDS TO BE ANSWERED. A PROVISION IS RECOGNIZED WHEN: (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLI GATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. ITA NO. 3202 /DEL/201 4 3 11. LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS. 12. A PAST EVENT THAT LEADS TO A PRESENT OBLIGATION IS CALLED AS AN OBLIGATING EVENT. THE OBLIGATING EVENT IS AN EVENT THAT CREATE S AN OBLIGATION WHICH RE SULTS IN AN OUTFLOW OF RESOURCES. IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE THAT IS RECOGNISED AS PROVISION. FOR A LIABILITY TO QUALIFY FOR RECOGNITION THERE MUST BE NOT ONLY PR ESENT OBLIGATION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION WHERE THERE ARE A NUMBER OF OBLIGATIONS (E.G. PRODUCT WARRANTIES OR SIMILAR CONTRACTS) THE PROBABILITY THAT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT, IS DETERMI NED BY CONSIDERING THE SAID OBLIGATIONS AS A WHOLE. IN THIS CONNECTION, IT MAY BE NOTED THAT IN THE CASE OF A MANUFACTURE AND SALE OF ONE SINGLE ITEM THE PROVISION FOR WARRANTY COULD CONSTITUTE A CONTINGENT LIABILITY NOT ENTITLED TO DEDUCTION UNDER S . 37 O F THE SAID ACT . HOWEVER, WHEN THERE IS MANUFACTURE AND SALE OF AN ARMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHISTICATED GOODS, THE PAST EVENT OF DEFECTS BEING DETECTED IN SOME OF SUCH ITEMS LEADS TO A PRESENT OBLIGATION WHICH RESULTS IN AN ENTERPR ISE HAVING NO ALTERNATIVE TO SETTLING THAT OBLIGATION. IN THE PRESENT CASE, THE APPELLANT HAS BEEN MANUFACTURING AND SELLING VALVE ACTUATORS. THEY ARE IN THE BUSINESS FROM ASST YR. 1983 - 84 ONWARDS. VALVE ACTUATORS ARE SOPHISTICATED GOODS. OVER THE YEARS AP PELLANT 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 SOPHIS TICATED 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 EN TERPRISE 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 THIS APPEAL . ITA NO. 3202 /DEL/201 4 4 4 . IN VIEW OF THE ABOVE, THE ISSUE RELATING TO PROVISION FOR WARRANTY CLAIMED IS DECIDED IN FAVOUR OF THE ASSESSEE . 5 . A S REGARDS TO THE ANOTHER ISSUE RELATING TO LIQUIDATED DAMAGES , T HE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT LIABILITY FOR LIQUIDATED DAMAGES WAS AN ASCERTAINED LIABILITY AND NOT A CONTINGENT LIABILITY , T HE PROVISION WAS MADE @ 0.5% TO 0.7% OF THE SALE VALUE AS PER THE CONTRACT BETWEEN THE ASSESSEE AND CUSTOMERS. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE TRANSFERRED THE ACTUAL DAMAGES PAID , TO THE PROFIT AND LOSS ACCOUNT. THE SAID LIQUIDATED DAMAGES WERE TO BE PAID BY THE ASSESSEE ON ACCOUNT OF DELAY IN MAKING SUPPLIES TO ITS CUSTOMERS DURING THE YEAR AND THE REMAINING AMOUNT OF PROVISION WAS CARRIED FORWARD TO THE BALANCE SHEET, THEREFORE, THE AO WAS NOT JUSTIFIED IN CONSIDERING THE PROVISION FOR LIQUIDATED DAMAGES IN THE NATURE OF UN ASCERTAINED LIABILITY AND THE LEARNED CIT(A) HAD RIGHTLY DELETED THE ADDITION MADE BY THE AO. THE RELIANCE WAS PLACED ON THE JUDGMENT OF HON BLE APEX COURT IN THE C ASE OF ROTORK CONTROLS INDIA LIMITED VS. CIT (S UPRA) . IN HIS RIVAL SUBMISSIONS, THE LEARNED CIT DR STRONGLY SUPPORTED THE ORDER OF THE AO AND FURTHER SUBMITTED THAT SINCE THE LIQUIDATED DAMAGES WERE CONTINGENT IN NATURE THEREFORE, THE AO RIGHTLY MADE THE A DDITION. 6 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IT IS NOTICED THAT THE FACTS RELATING TO THIS ISSUE ARE NARRATED BY THE LEARNED CIT(A) IN PARA S 3. 5.1 TO 3.5.7 OF THE IMPUGNED ORDER WHICH READ AS UNDER: - 3.5.1 GROUND NO. 5 IS ON THE ISSUE OF DISALLOWANCE PROVISION FOR LIQUIDATED DAMAGES RS 1,199,672 BY AO. DURING THE FY RELEVANT TO THE SUBJECT AY, AN AMOUNT OF RS 196,651,910 HAS BEEN DEBITED TO THE PROFIT AND LOSS ACCO UNT IN RESPECT OF PROVISION FOR LIQUIDATED DAMAGES AND THE SAME WAS CLAIMED AS TAX DEDUCTIBLE EXPENDITURE. FURTHER, PROVISION FOR LIQUIDATED DAMAGES AMOUNTING TO RS 20,452,238 WAS UTILIZED AND WRITTEN BACK/ CREDITED, RESPECTIVELY DURING THE FY RELEVANT TO THE SUBJECT AY. THE APPELLANT IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF TELECOM EQUIPMENT AND THEREFORE IS OBLIGED TO SUPPLY TELECOM EQUIPMENT AND PROVIDE INSTALLATION AND COMMISSIONING SERVICES IN RESPECT OF TELECOM EQUIPMENT ITA NO. 3202 /DEL/201 4 5 UNDER THE TE RMS OF THE CONTRACT. THE APPELLANT IS OBLIGATED TO UNDERTAKE 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 DA MAGES 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 I S 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 INV OCATION 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 CONTRAC TUAL OBLIGATIONS OF THE APPELLANT WITH ITS CUSTOMER. 3 . 5 . 3 DURING THE FY RELEVANT TO THE SUBJECT AY, WHILE EXECUTING VARIOUS ORDERS RECEIVED FROM THE CUSTOMERS, CERTAIN CRITICAL ITEMS IMPORTED WERE SHORT SHIPPED BY THE FOREIGN SUPPLIER. FURTHER, SOME ITEMS PROC URED LOCALLY COULD NOT BE DELIVERED WITHIN THE STIPULATED TIME FOR THEIR NON AVAILABILITY. ADDITIONALLY, WHEN THE PAYMENTS WERE ACTUALLY MADE, THE ACCOUNTS WERE ADJUSTED WITH REFERENCE TO ANY REMISSION OR WAIVER THAT THE COMPANY MAY GET IN RESPECT OF DAMA GES PAYABLE FOR THE LATE DELIVERY AND THE SAME WAS BROUGHT TO TAX UNDER SECTION 41(1) OF THE ACT BY CREDITING THE LIQUIDATED DAMAGES ACCOUNT. THE AO VIDE THE SUBJECT ASSESSMENT ORDER HAS DISALLOWED RS 176,199,672 (RS 196,651,910 LESS RS 20,452,238) BEING N ET PROVISION FOR LIQUIDATED DAMAGES ALLEGING THE SAME TO BE IN THE NATURE OF UNASCERTAINED LIABILITY. 3 . 5 . 4 IN THE CONTEXT OF ALLOWANCE FOR PROVISION FOR LIQUIDATED DAMAGES, PUNE TRIBUNAL IN THE CASE THERMAX BABCOCK AND WILCOX LTD VS ADDITIONAL COMMISSIONER OF INCOME TAX (304 ITR 130) HELD AS UNDER: THE ASSESSEE HAS IMPORTED A LIABILITY ON ITSELF TO PAY LIQUIDATED DAMAGES FOR THE DELAY IN COMPLETING THE WORK WITHIN THE SPECIFIED TIME, AND AS SUCH, THE ESTIMATED EXPENDITURE WHICH WOULD BE INCURRED TOWARDS LIQUI DATED DAMAGES WOULD BE DEDUCTIBLE FROM THE RECEIPTS OF THE YEAR. THIS CERTAIN ACT OR EVENT OF NOT COMPLETING THE WORK WITHIN STIPULATED TIME HAS IMPORTED A DEFINITE AND ABSOLUTE LIABILITY ON THE ASSESSEE AND MERELY BECAUSE OF THE FACT THAT LIABILITY WOULD BE DISCHARGED AT A FUTURE DATE AND, THERE IS A DIFFICULTY IN ESTIMATING THE CORRECT AMOUNT THEREOF WOULD NOT CONVERT THIS DEFINITE AND ABSOLUTE LIABILITY INTO CONDITIONAL ONE AS HAS BEEN HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF CALCUTTA CO. LTD. V. CIT [1959] 37 ITR I (SC), METAL BOX COMPANY OF INDIA LTD. V. THEIR WORKMEN [1969] 73 ITR 53 (SC) AND BHARAT EARTH MOVERS V. CIT [2000] 245 ITR 428 (SC) 3 . 5 . 5 SIMILAR POSITION HAS BEEN UPHELD IN THE FOLLOWING DECISIONS: ( I ) K.C.P. LIMITED VS. ITO (34 ITD 50) (HYDERABAD TRIBUNAL) ( II ) CIT VS. RAM LAL RAJARAM (235 ITR 156) (ALLAHABAD HIGH COURT) IN THIS REGARD, IT IS FURTHER SUBMITTED THAT THIS ISSUE HAS BEEN SETTLED IN FAVOUR OF THE ITA NO. 3202 /DEL/201 4 6 APPELLANT BY THE HON BLE CIT(A) - XX FOR AY 2005 - 06 (COPY OF THE ORDER IS ENCLOSED AS ITEM 11 OF THE PAPER BOOK). RELEVANT PORTION OF THE ORDER IS REPRODUCED HEREUNDER FOR YOUR REFERENCE: - THE FACTS OF THE CASE IS THAT IT UNDERTAKES CONTRACTS FOR MATERIAL SUPPLY AND THE 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 PROVIS IONS 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 PR OPER DEDUCTION WHILE WORKING OUT THE PROFITS AND GAINS OF HIS BUSINESS, REGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE AND ACCOUNTANCY. THE SAID PRINCIPLE HAS BEEN DULY AFFIRMED BY THE HON BLE SUPREME COURT IN THE CASE OF BHARAT EARTH M OVERS LIMITED VS CIT (245 ITR 428). 3.5.7 IN VIEW OF THE ABOVE, IT CAN BE SAID THAT A CONDITION SUBSEQUENT, THE FULFILLMENT OF WHICH MAY RESULT IN THE REDUCTION OR EVEN EXTINCTION OF THE LIABILITY, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT LIABILITY INTO A CONTINGENT LIABILITY IF SUCH LIABILITY C AN BE ESTIMATED WITH A REASONABLE CERTAINTY. IN THE INSTANT CASE, THE LIABILITY ON ACCOUNT OF LIQUIDATED DAMAGES IS CAPABLE OF QUANTIFICATION WITH REASONABLE DEGREE OF CERTAINTY IN SO FAR AS THE CONTRACTS BETWEEN THE APPELLANT AND ITS CUSTOMERS PROVIDE FOR THE SAID DAMAGES UPON BREACH OF THE CONDITION AS TO DELIVERY OF EQUIPMENT, WHICH IS QUITE PREVALENT / INHERENT IN THE BUSINESS OF THE APPELLANT AND FREQUENCY OF OCCURRENCE OF SAME IS CAPABLE OF BEING ESTIMATED ON A REASONABLE / SCIENTIFIC BASIS. IN THE IN STANT CASE, THE APPELLANT, IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, RECORDED THE REVENUES AND LIABILITIES, WHICH WERE CAPABLE OF ESTIMATION WITH REASONABLE LEVEL OF CERTAINTY. THE PROVISION FOR LIQUIDATED DAMAGES ARE ALWAYS INCURRED UND ER THE CONTRACT ON ACCOUNT OF DELAYS CAUSED BY THE APPELLANT IN SUPPLY OF MATERIALS. HENCE, THE APPELLANT SUBMITS THAT, IT IS THEREFORE RIGHT THAT THE PROVISION FOR LIQUIDATED DAMAGES BE RECORDED IN THE SAID AY AND CLAIMED AS A DEDUCTION. ACCORDINGLY, BASE D ON THE ABOVE, THE APPELLANT SUBMITS THAT THE CLAIM FOR PROVISION FOR LIQUIDATED DAMAGES BE ALLOWED AS A DEDUCTIBLE EXPENDITURE WHERE THE SAME EMANATES FROM CONTRACTUAL OBLIGATION OF THE APPELLANT AND IS LIKELY TO ARISE IN FUTURE, BASED ON THE PRUDENT EST IMATE / SCIENTIFIC ANALYSIS. 7 . THE LEARNED CIT(A) DELETED THE IMPUGNED ADDITION BY OBSERVING AS UNDER: - ITA NO. 3202 /DEL/201 4 7 4.4.1 GROUND NO. 5 OF APPEAL IS DIRECT AGAINST DISALLOWANCE OF A SUM OF RS. 1 7,61,99,671/ - TOWARDS PROVISION FOR LIQUIDATED DAMAGES. DURING THE YEAR, THE ASSESSEE HAS CLAIMED PROVISION FOR LIQUIDATED DAMAGES TO THE TUNE OF RS. 17,61,99,671/ - . THE ASSESSEE STATED THAT IN TERMS OF THE PURCHASE ORDER RECEIVED FROM CUSTOMERS, LIQUIDATE D DAMAGES @ 0.5% PER WEEK SUBJECT TO A MAXIMUM OF 0.7% OR SUCH OTHER RATE AS PER THE RELEVANT CONTRACT WOULD BE IMPOSED FOR THE LATE DELIVERY OF EQUIPMENT. THE STIPULATION IN THE PURCHASE ORDER CLEARLY SHOWS THAT THE LIABILITY FOR LIQUIDATED DAMAGES IS CER TAIN, 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 MET HOD 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 AMOU N TING 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 AROSE NO SOONER THAN THERE WAS A BREACH. THE COMPANY HAD PROVIDED FOR THE LIQUIDATED DAMAGES PERTAINING TO THE PERIOD OF DELAY FALLING WITHIN THE PREVIOUS YEAR IN ORDER TO ARRIVE AT THE TRUE INCOME OF THAT YEAR BASED ON THE ACCRUAL METHOD OF ACCOUNT. THE COMPANY IS FOLLOWING THE METHOD ON A CONSISTENT BASIS. 4.4.2 HON BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS LTD. V. CIT (245 1TR 428) HELD THAT IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURR ING OF THE LIABILITY. IT SHOULD ALSO BE CAPABLE FOR BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. SIMILAR DISALLOWANCE WAS DELET ED BY ID. CIT(A) IN AY 2005 - 06 FOLLOWING THE DECISION OF HON BLE ITAT IN THE CASE OF THERMAX BABCOCK AND WILCOX LTD. V. ADDL. CIT 304 ITR 130 (AT). IN VIEW OF THE ABOVE FACTUAL AND LEGAL POSITION, THE ADDITION OF RS. 17,61,99,671/ - TOWARDS PROVISION FOR LI QUIDATED DAMAGES MADE BY THE AO IS LEGALLY NOT SUSTAINABLE. THEREFORE, THE SAME IS DELETED. THE APPEAL IS ALLOWED IN THIS GROUND. 8 . IN THE PRESENT CASE FROM PAGE NO. 136 OF THE ASSESSEE S PAPER BOOK, IT IS NOTICED THAT TOTAL PROVISION FOR LIQUIDATED DAMAGES WAS OF RS. 19,66,51,910/ - OUT OF WHICH RS. 2, 0 4,52, 2 38/ - WERE UTILIZED AND CREDITED / WRITTEN BACK, THE REMAINING AMOUNT OF RS. 17 ,61,99,672/ - WAS THE ACTUAL ITA NO. 3202 /DEL/201 4 8 AMOUNT OF THE DAMAGES WHICH WERE ACCOUNTED FOR IN THE PROFIT AND LOSS ACCOUNT. IN THE INSTANT CASE, THE LEARNED CIT(A) CATEGORICALLY STATED THAT WHEN THE PAYMENTS WERE 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 ACT BY CREDITING THE LIQUIDATED DAMAGES ACCOUNTS. THEREFORE, THE IMPUGNED AMOUNT WAS NOT ONLY THE PROVISI ON BUT THE ACTUAL AMOUNT OF THE LIQUIDATED DAMAGES PERTAINING TO THE PERIOD OF DELAY FALLING WITHIN THE PREVIOUS YEAR RELATING TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THE LEARNED CIT(A) CATEGORICALLY STATED THAT THE ASSESSEE WAS FOLLOWING THIS METHOD C ONSISTENTLY. WE, THEREFORE, DO NOT SEE ANY VALID GROUND TO INTERFERE WITH THE FACTUAL FINDINGS GIVEN BY THE LEARNED CIT(A) AND ACCORDINGLY DO NOT SEE ANY MERIT IN THE GROUND RAISED BY THE DEPARTMENT. 9 . IN THE RESULT, APPEAL OF THE DEPARTMENT I S DISMISSED. (ORDER P RONOUNCE D IN THE OP EN COURT ON 31 . 01.2018. ) SD/ - SD/ - [K.N. CHARY] [ N.K. SAINI ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 31 .01.2018 SH ITA NO. 3202 /DEL/201 4 9 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR