ASSISTANT COMMISSIONER OF INCOME-TAX vs. THERMAX ENGG. CONST. CO. LTD.,, PUNE

आदेश / ORDER

PER VIKAS AWASTHY, JM :

These two appeals by the Revenue are directed against the orders of Commissioner of Income Tax (Appeals)-II, Nashik for the assessment years 2009-10 and 2010-11, respectively of even dated i.e. 31-12-2013.

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Since, the facts and grounds raised in both the appeals are similar, these appeals are taken up together for adjudication and are disposed of vide this common order. For the sake of convenience the appeal of Revenue for assessment year 2009-10 is taken up first for adjudication.

ITA No. 476/PUN/2014, A.Y. 2009-10)

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appeal relating to negative Contract In Progress (CIP) has been adjudicated by the Tribunal against the Department in the case of assessee’s parent company Thermax Limited in ITA No. 1765 & 1803/PUN/2012 for the assessment year 2004-05 decided on 24-05-2019. The Commissioner of Income Tax (Appeals) has allowed this ground of appeal of assessee following the decision of his predecessor in the case of Thermax Limited in assessment year 2004-05. The ld. AR submitted that the issue relates to income recognition from contract activities. The assessee has made Provision for profit equalization in accordance with Accounting Standard 7 issued by the Institute of Chartered Accountants of India.

3.1 In respect of ground No. 2 of the appeal by the Department, the ld. AR submitted that the disallowance was made by Assessing Officer in respect of provision for retirement benefits (Leave Travel Allowance Rs.7,04,178/- and Medical Reimbursement Rs.2,49,191/-, Total Rs.9,53,369/-). The ld. AR submitted that similar disallowance in respect of leave travel allowance was made by the Assessing Officer in the case of assessee’s parent company, Thermax Limited. The issue travelled to the Tribunal. The Tribunal in appeal by the Revenue in ITA No. 1803/PUN/2012 (supra) decided the issue in favour of assessee. The ld. AR further submitted that the scheme of annual medical reimbursement and leave travel allowance is on identical footing. The ld. AR furnished a short note explaining the schemes. The same is reproduced here-in-below: “Objective: Flexibility to employees to draw from a common basket, benefits which are part of his package, based on his/her exigencies and needs. The Scheme: Employees currently have distinct entitlements for Annual Medical Reimbursement and LT A. However, since these two limits operate

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independently, employees are not able to use it judiciously, according to their different needs, across grades and year to year. In practice, this could be a genuine need for many.

Within the same entitlements on a cost to company basis, we would henceforth reckon a combined limit for Medical & LTA. Besides, few employees may have to their credit the brought forward balances on account of Medical accruals over the years and/or LTA for one/two years. Such balances will get merged effective 1st October 2003 to form a common pool.

LTA withdrawal:

Withdrawals towards LTA from this pool will be allowed in multiples of Rs.1,000/-, subject to the following limits: 1) Employees in grades up to and including P1 : Rs.40,000/- p.a. 2) Employees in the grades M5 to M3 : Rs.60,000/- p.a. 3) Employees in the grades M2/M1 : Rs.80,000/- p.a.

Such withdrawals will, off course, be subject to availability of balance to employee's credit and also on employee submitting necessary supporting as per IT act. A detailed note on the taxability of LTA has already been circulated by Finance. It will continue to apply.

Amount once claimed by the employee towards LTA can not be refunded back to the Company. An employee can claim L TA maximum twice in a financial year subject to above conditions. Those who have already claimed L TA during current financial year 2003-04 can also claim additional amount one more time subject to above conditions.

Medical withdrawal:

Medical withdrawals will be against actual spending, duly supported by bills, and subject to availability of balance to employee's credit. Income tax will be applicable beyond the exemption limits provided in the Tax Laws. Currently, medical reimbursements up to Rs. 15,000/- p.a. are exempted from Income Tax. Current frequency of claiming medical reimbursement every quarter will continue.

Those who wish to retain their unutilized balances of the combined entitlements can do so hereafter also. In the event of early separation or retirement, the balance lying to the credit will be paid along with full & final settlement, as done now for the medical credit. At the time of such exit, employee will have to submit medical bills towards claiming amount as medical reimbursement and balance amount lying to his credit thereafter will be paid to him as L TA. Income tax as applicable will be deducted at source from such payments.”

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3.2 The ld. AR submitted that the ground No. 3(a) and 3(b) of the appeal by the Revenue is in respect of liquidated damages. This issue has also been considered by the Tribunal in ITA No. 1765/PUN/2012 (supra) and has decided the issue in favour of assessee. The Commissioner of Income Tax (Appeals) following the decision of Tribunal in the case of Thermax Limited has granted relief to the assessee.

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“11. Ground No.2 is with respect to addition made to the contract income. AO noticed that assessee is a manufacturer of industrial boilers and heat transfer equipments and undertakes the projects on contract basis and the contract normally runs over a period of more than one year. The assessee was accounting for income on such projects by following the “Projection Completion method” and was raising invoices as per the scheduled payments agreed with the clients but at the same time had created provision towards “Contribution Equalization Provision” to adjust excess billing. During the year, the provision of contribution equalization debited to the Profit and Loss account was Rs.4,53,93,679/-. AO noticed that the excess amount realized as per the invoices was not offered as revenue receipts and to that extent profit was not offered as income. AO was of the view that since the invoices was raised as per the agreed schedule; the invoice value should be treated as revenue receipts. He further noticed that identical issue arose in A.Y. 1997-98 wherein it was held that the value reflected in invoices raised as per agreed schedule with the clients was to be treated as revenue receipts. AO therefore held that the provision of Rs.4,53,93,679/- cannot be allowed. He accordingly disallowed the same and made its addition. Aggrieved by the order of AO, assessee carried the matter before CIT(A), who granted partial relief to the Assessee by holding as under : “7.2. I find that the issue has elaborately been dealt with by my predecessor in appellant‟s case in appeal for A.Y. 2002-03, wherein it was held by him that although, in principle, the appellant cannot be found fault with for having followed Accounting Standard-7 in the matter of revenue recognition and accordingly, making provisions for equalization, its actual working is not above scrutiny. He held that the appellant was not justified in omitting to recognize revenue wherever completion was less than 33% of the total project or where the contracts were less than Rs.25 lacs. The Ld.CIT(A) also disapproved the appellant‟s act of further scaling down towards contingencies/unforeseeable losses. The facts of the case during this year are identical to those in A.Y. 2002-03 and I find no reason to form a view other than that of my predecessor. Accordingly, the Assessing Officer is directed to work out the excess provision in the light of the observation made by Ld.CIT(A) in A.Y.2002-03 and restrict the disallowance to that extent. Decided accordingly.” Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us. Revenue is also aggrieved by order of CIT(A) to the extent of relief granted by him and has therefore raised ground No.2 in its appeal. Since the grounds raised by assessee and Revenue are inter-connected, both are considered together.

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Assessing Officer rejected this method of making adjustment by the assessee. In the first appeal, the Commissioner of Income Tax (Appeals) partly accepted the claim of the assessee. Against the finding of the Commissioner of Income Tax (Appeals), both, the assessee and the Revenue have come in appeal. 9.1 We observe that similar issue had come up in the appeal of the assessee and the Revenue for assessment years 1998-99 and 1999-2000. The Co-ordinate Bench decided the issue in favour of the assessee. The relevant extract of the order of the Tribunal reads as under:- 22. On this aspect, it was a common ground between the parties that in assessment year 1997-98, the Tribunal vide its order dated 03.09.2014 (supra.) in the assessee‟s own case has upheld the stand of the assessee by following the decision of the Pune Bench of the Tribunal on a similar issue in the case of Thermax Babcock & Wilcox Ltd. vs. DCIT vide ITA Nos.157 & 158/PN/1995 dated 11.05.2001 for assessment years 1990- 91& 1991-92. The Tribunal in its order dated 03.09.2014 (supra) noted that in the case of Thermax Babcock & Wilcox Ltd. (supra) which was a group company of the assessee, the Tribunal upheld the allowability of provision for profit equalization while recognizing incomes on application of percentage of completion method in the case of long term contracts in the light of the AS-7 issued by the ICAI. In view of the decision of the Tribunal in the assessee‟s own case in the preceding assessment year, we do not deal with the issue any further except directing the Assessing Officer to implement the order of the Tribunal dated 03.09.2014 (supra) on this Ground too. As a consequence, whereas Ground of Appeal of the assessee is allowed that of the Revenue is dismissed.” There has been no change in the facts and circumstances in the present year, nor there is any change in the accounting treatment given by the assessee. We do not find any reason to deviate from the view taken by the Co-ordinate Bench in assessment years 1998-99 and 1999-2000. Accordingly, this ground in the appeal of the assessee is accepted and the ground raised by the Revenue in its appeal is dismissed. 19. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years and since in earlier years, the issue has been decided by Co-ordinate Bench of the Tribunal in assessee‟s favour, we therefore following the decision of the coordinate

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Bench of the Tribunal in assessee‟s own case for earlier years and for similar reasons, allow the ground of assessee and thus, the assessee‟s ground No.4 is allowed and Revenue‟s ground No.2 is dismissed. 14. Before us, since both the parties have admitted that the facts of the case in the present grounds are identical to that of earlier years and since in earlier years, the issue has been decided by Co-ordinate Bench of the Tribunal in assessee‟s favour, we therefore following the reasoning of the decision of the Co-ordinate Bench of the Tribunal in assessee‟s own case for earlier years and for similar reasons, allow the ground of assessee and thus the assessee‟s ground No.2 is allowed and Revenue‟s ground No.2 is dismissed.” 22. From the above discussion and the arguments made out by the ld. Counsel for the assessee, we find the AS-7 which existed prior to letter dated 01st April, 2003 continues to remain the same; but for minor changes. There are minor changes in relation to the computational issues. However, there is no change so far as “cost based” percentage completion method in concerned. Therefore, the computation of “recognition income” is concerned, the order of the CIT(A) is fair and reasonable and the same does not call for any interference. Accordingly, relevant grounds stand allowed in favour of the assessee. 23. Further, so far as adjustments made by the Assessing Officer to the estimated cost is concerned, the CIT(A) already granted part relief to the assessee. With reference to the freight outward to be included in the estimated total cost, we find it is a case of reimbursement of the actual cost incurred by the assessee. The inclusion in the total estimated cost when the same is returned has no effect on the income aspect. Therefore, being the case of reimbursement, there is no profit element. Consequently, recognition income of such reimbursement is not appropriate. Therefore, the order of the CIT(A) on this issue requires to be reversed. Accordingly, assessee is entitled to get relief on this issue also. Thus, ground no.2 of the assessee is allowed and the ground no.1(a) and 1(b) of the Revenue is dismissed.”

No material has been placed on record by the Revenue to distinguish the facts in the present assessment year. On parity of facts, the findings given by Tribunal in assessment year 2004-05 would mutatis mutandis apply to impugned assessment year. Thus, ground No. 1(a), 1(b) and 1(c) in the appeal by Revenue are dismissed being devoid of any merits.

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find that this issue has also been considered by the Co-ordinate Bench of Tribunal while adjudicating the appeal of Revenue in the case of Thermax Limited in ITA No. 1803/PUN/2012 for the assessment year 2004-05. However, in the said appeal the issue was confined to the reimbursement of medical expenditure to the employees. The assessee has furnished copy of the scheme which is combined for medical reimbursement and the leave travel concession. The scheme has been reproduced in para 3.1 of the order. The Co-ordinate Bench of Tribunal deleted the addition by following the order of Tribunal in ITA No. 1055 & 1056/PN/2009. The Commissioner of Income Tax (Appeals) in the impugned order has granted relief to the assessee by following the decision of his predecessor in assessment year 2004-05. The same has now been upheld by the Tribunal in ITA No. 1803/PUN/2012 (supra). We find no reason to interfere with the findings of Commissioner of Income Tax (Appeals). Accordingly, ground No. 2 of the appeal is dismissed.

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pre-design, discussion with the clients, drawings, designs, procurement, fabrication, erection, commissioning and installation of the equipments which is followed by performance guarantee according to the agreed conditions. The contracts generally contain clauses for payment of compensation in the form of liquidated damages which are usually payable at stipulated percentage of the contract value. Some-times the contracts provides for compensation for non performance or satisfactory performance of the products supplied by the Assessee. The payment of compensation/liquidated damages is made to ensure good customer relationship and future business. It was further submitted that the customer can recover the compensation in variety of ways like deduction from future payments etc. It was further submitted that the Assessee accounts for the compensation when the same is actually claimed by the customer or when it is deducted by the customer whichever is earlier. It was thus submitted that the nature of compensation was not in the nature of penalty for breach of statutory provision and that such breach was a normal incidence of trade. The submissions of the Assessee were not found acceptable to AO. AO after considering the submissions of the Assessee and after perusing the details furnished by the Assessee noted that the bad debts and liquidated damages as per the assessee are clearly not distinguishable as they are quite overlapping. He further concluded that the amount claimed as liquidated damages are short receipts from customers which have been written off as bad debts or sundry balances written off and that it was neither a case of compensation given by the Assessee nor a case of liquidated damages. He further observed that the claim as write off of bad debts also cannot be allowed as the amounts have not been written off in the books of accounts. He accordingly denied the claim and made addition of Rs 200.26 lacs. Aggrieved by the order of AO, Assessee carried the matter before CIT(A) who in principle agreed with the claim of Assessee but however directed the AO to verify the Assessee‟s claim to the extent supported by the clause of Liquidated damages as per contract and decide accordingly. The relevant findings of CIT(A) are as under: “The submission has been carefully considered by me. The appellant company has also furnished before me the partywise details of liquidated damages of Rs.200.26 lakhs. It has also filed sample copies of purchase orders of a few customers of the appellant company containing clause of Liquidated Damages according to which penalty at the prescribed rate is leviable in case of delay in supply of goods ordered. On perusal of these documents, in principle, I agree with the claim of the appellant company that the liquidated damages, arising out of the terms of the purchase orders, schedule, are allowable as business expenditure. The cases relied upon by the Assessing Officer while disallowing the liquidated damages of Rs.200.26 lakhs have also been successfully distinguished by the appellant by explaining the difference in the facts of appellant‟s case from the facts of those cases. In this view of the matter, I direct the Assessing Officer to verify and allow the appellant‟s claim of liquidated damages out of Rs.200.26 lakhs to the extent the amounts debited under this head are found supported by the clause of Liquidated Damages. Decided accordingly.”

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Aggrieved by the order of CIT(A), Assessee and Revenue are now in appeal before us. 23. Before us, Ld AR reiterated the submissions made before AO and CIT(A) and further submitted that Assessee is engaged in the business of manufacturing of engineering goods, heat transfer equipments such as boilers, heat pumps, manufacture of water treatment plants, waste water management system, pollution control systems etc. Some of the contracts provide for ancillary activities like erection and commissioning of the manufactured equipments. The contracts which the Assessee enters into with the customers generally carry a clause of payment of liquidated damages in the event of delay of deliveries, non-performance of supply of goods etc and the methodology of calculation of liquidated damages is prescribed in the contract. Based on the clause of the agreement, the customer, in the event of breach of the relevant provisions of the contract, debits the amount due under the contract as liquidated damages or withholds the amount while releasing payments for monies which are otherwise legally due to the Assessee in terms of the contract. Upon such deduction/holding back by the customers, the assessee accounts for the sum and wherever required issues a credit note towards the liquidated damages. In support of his contention of the contracts having clause for liquidated damages, he pointed to the sample purchase orders placed in the paper book. He submitted that the AO‟s conclusion that the issuance of credit notes does not tantamount to effective write off is factually incorrect despite the fact that a credit note is issued whereby the party‟s account is credited with a corresponding debit to the “liquidated damages” account in the books and more so when there is no denying of the fact that there was indeed a breach of contractual conditions. He further submitted that with respect to the claims there has been an accrual of liability and the customer enforcing the right vested by deducting the sum from the payments which are otherwise due to the Assessee. He further submitted that AO has confused the issue of claim of liquidated damages with the issue of claim of bad debts and that the claim of bad debts has been accepted by him. He further submitted that the reliance placed by AO in the case of N. Sundareswaran Vs CIT reported in 226 ITR 142 is misplaced as the facts are distinguishable from the facts of the present case as in that case the contract did not contain provision for liquidated damages and had only dealt with the case where the matter was to be referred to Arbitration. He further submitted that the facts in the case of CIT Vs. Seshasayee Industries Ltd.(242 ITR 691) are distinguishable and therefore not applicable to the present facts of the Assessee. He thereafter submitted that the expenditure has been incurred during the course of business and is for the purpose of business more so when CIT(A) has accepted the allowability of claim of liquidated damages as business expenditure. He further submitted that Hon‟ble Apex Court in the case of SA Builders (288 ITR 1) has held that to the extent that the expenditure may not have been incurred under legal obligation but yet it is allowable as a business expenditure if it is incurred on grounds of commercial expediency. It has further held that “commercial expediency” is a term of wide import and has been held to include such expenditure as a prudent businessmen incurs for the purpose of business. He further submitted that no disallowance of liquidated damages were made in earlier years though the assessee was following similar methodology for accounting. Ld AR thereafter submitted

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that when CIT(A) had accepted the allowability of claim for liquidated damages as a business expenditure then he should have not directed the AO to allow deduction to the extent there were Liquidated damages clauses in the purchase orders. He therefore reiterated that when the expenses have been incurred for the purpose of business and during the course of business, the claim of Assessee for allowing the expenditure be upheld.”

ITA No.477/PUN/2014, (A.Y. 2010-11)

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477/PUN/2014, as well. Accordingly, the appeal of Revenue is dismissed in the same terms.

Order pronounced on Wednesday, the 10th day of July, 2019.

Sd/- Sd/- (अननऱ चतुवेदी / Anil Chaturvedi) (ववकास अवस्थी / Vikas Awasthy) ऱेखा सदस्य / ACCOUNTANT MEMBER न्यानयक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 10th July, 2019. RK आदेश की प्रनतलऱवऩ अग्रेवर्त / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. आयकर आयुक्त (अऩीऱ) / The CIT(A)-II, Nashik 3. आयकर आयुक्त / The CIT-V, Pune 4. ववभागीय प्रनतननधध, आयकर अऩीऱीय अधधकरण, “ए” बेंच, 5. ऩुणे / DR, ITAT, “A” Bench, Pune. गार्ड फ़ाइऱ / Guard File. 6. //सत्यावऩत प्रनत // True Copy// आदेशानुसार / BY ORDER,

ननजी सधचव / Private Secretary, आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune