DCIT, CIRCLE - 12(1), KOLKATA, KOLKATA vs. M/S. INTERNATIONAL SEAPORTS (HALDIA) PVT. LTD., KOLKATA

That on the facts & circumstances of the case and in law, the Ld. CIT(A) has erred by not appreciating the facts that the aforesaid repairing work was not routine repairing works of the assessee company & it required technical assistance to bring the ship unloaders in a good condition for future works. AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 2

That on the facts & circumstances of the case and in law, the Ld. CIT(A) has erred by not appreciating the facts that the aforesaid expenditure had 'endowed an enduring advantage to the assessee, the benefit of which the assessee would reap for years to come.

That on the facts & circumstances of the case and in law, the Ld. CIT(A) has not appreciated the fact that the ship-unloader was shut down for around couple of months and re-commissioned after making the aforesaid repairing works.

That on the facts & circumstances of the case and in law, the Ld. CIT(A) has not appreciated the fact that the aforesaid repairing expenditure included huge amounts, benefit from the same reaped for years, incurred at the time of some special circumstances, need technical assistance to make work, etc. & accordingly, the same is capital expenditure. 6.That on the facts & circumstances of the case and in law, the Ld. CIT(A) has not appreciated the fact that the assessee company had made payment to SAIL of Rs.20,61,419/- & Rs.9,36,337/- on account of payment of railway siding charges & demurrage charges respectively without making TDS.

That on the facts & circumstances of the case and in law, the Ld. CIT(A) has erred by allowing the appeal of the assessee company stating that in the given case, bills for the amount in question were not raised on the assessee company & accordingly, disallowance u/s 40(a)(ia) of the I.T. Act, 1961 should not be made.

That on the facts & circumstances of the case and in law, the Ld. CIT(A) has erred by allowing the appeal of the assessee company without appreciating the facts that there was no evidence on record that SAIL had deducted TDS on the payments made to Haldia Dock Complex on behalf of the assessee and merely claimed the reimbursement.

The appellant craves leave to add/alter/modify the grounds of appeal.”

In Ground Nos. 1 to 5 referred above, the moot point before the Tribunal is in respect of claim of expenditure on account of repairs to be treated as revenue or capital expenditure in nature.

Brief facts of the case are that assessee is a private limited company carrying on the activities of building, maintaining and operating berth no. 4A at Haldia Dock Complex (HDC), Kolkata Port Trust. Assessee discharges AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 3 cargo from incoming vessels using ship unloader, conveyor and stacker in a sequence such that these machineries function as an integrated mechanized unit or system. Deed of license dt. 14/05/2002 was executed between Board of Trustees for the Port of Kolkata and the assessee wherein assessee was entrusted with the project of building the facilities at berth no. 4A at Haldia Dock Complex to be utilized to handle the imported coal from Steel Authority of India Limited (SAIL).

Return of income was filed on 27/09/2012 reporting a total income of Rs.83,69,450/-. In the course of assessment proceedings, ld. Assessing Officer noted that an amount of Rs.5,02,24,450/- has been claimed as expenditure in the profit and loss account under the head “Repairs and Maintenance”. This entire amount was paid to Portek Systems & Equipments Pte. Ltd., Singapore (hereinafter “Portek”). Ld. Assessing Officer was of the view that the repairs and maintenance undertaken by the assessee through Portek were in the nature of capital expenditure and disallowed the same. Ld. Assessing Officer also disallowed a sum of Rs.15,55,218/- incurred on account of customs duty by assuming it to be intrinsically linked with capital expenditure. 4.1. 1. During the year under consideration, assessee had undertaken repairs of two ship unloaders (identified as ‘SUL#1’ & ‘SUL#2’). These repairs involved replacement, restorations and re-alignment of various parts of the machineries which had worn out either due to ageing or due to damage. Out of the two unloaders, SUL#2 was damaged due to a cyclone in 2006, which was repaired for permanent restoration after a series of temporary repairs undertaken till 2011. Portek undertook the repair work for SUL#2 for which it was responsible for engaging machineries and mobilizing AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 4 manpower. It also had the responsibilities for modifying design of main trolleys so as to prevent accidents, keeping the main design intact.

In the course of repair work, assessee also undertook upgradation of existing automation system with Siemens-make PLC panels with inbuilt transformers through Nextgen Automation Pvt. Ltd. (hereinafter “Nextgen”). These equipments were mounted by Portek in course of replacement of old parts but were commissioned by Nextgen. Expenditure on this upgradation of automation system amounting to Rs.5,21,03,578/- was capitalized by the assessee in its books of account and correspondingly a sum of Rs.2,61,37,677/- was deducted from the gross block of machinery on account of obsolescence. Ld. Assessing Officer also invoked the provisions of Section 40(a)(i) r.w.s. 195 of the Act in respect of repair expenses disallowed by him of Rs.5,21,03,578/-. Further, ld. Assessing Officer made a disallowance u/s 40(a)(ia) of the Act in respect of three expenses claimed by the assessee which, according to the ld. Assessing Officer ought to have been subjected to TDS and on which no TDS was done. Details of the said expenses disallowed is tabulated as under:- Entity Amount Nature of Services A Haldia Dock Complex Rs.42,32,776 Premium on lease hold land B Steel Authority of India Rs.20,61,419 Payment of railway siding charges C Steel Authority of India Rs.9,36,337 Demurrage Charges Total Rs.72,30,532

Assessment was thus completed by determining the total income at Rs.6,92,58,778/-

Aggrieved, assessee went in appeal before the ld. CIT(A) who deleted all the additions made by the ld. Assessing Officer. AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 5

Aggrieved, revenue is in appeal before the Tribunal.

Before us, Shri Somnath Ghosh, Advocate, represented the assessee and Shri Sudipto Guha, CIT D/R, represented the Department.

Ld. D/R supported the order of the ld. Assessing Officer according to which the repairs and renovation undertaken by the assessee were of capital in nature since there was a planned shutdown involving technical inputs and automation. He also submitted that ld. CIT(A) has not enquired on the aspect of enduring benefits accruing to the assessee arising out of the exercise of repairs and renovation undertaken by the assessee.

Ld. Counsel for the assessee placed on record, a written submission along with paper book containing 160 pages. He submitted that assessee was awarded with a contract of building, maintaining an operating berth no. 4A at Haldia Dock Complex (HDC), Kolkata Port Trust, for a period of thirty years and a license agreement for the same was executed on 14/05/2022. He pointed out that for large and frequent use of berth where machineries of heavy loads are stored, the structural alignment of cranes, plates and hydraulic cylinders of the ship unloaders gets damaged and substantial wear and tear is a natural phenomenon. He further stated that a disaster in the form of a cyclone in 2006 struck the eastern part of India which caused severe damage to the ship unloaders. An inspection exercise was carried out by the assessee through Larsen & Tubro (L&T), Engineering Constructions & Contract division according to which, SUL#2 was reported by L&T as unsafe for use and to be taken out of operation. Report dt. 11/04/2008 submitted by L&T is placed in the paper book at page no. 99 AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 6 which pointed for the repair action to be undertaken by the assessee. Another technical audit for the ship unloader SUL#1 was undertaken by the assessee through KFT GmbH vide report dt. 12/12/2007 wherein also, it was strongly recommended to take SUL#2, out of operation. This report is placed at page 100 of the paper book.

Ld. Counsel for the assessee, referred to the license agreement entered by the assessee with the Board of Trustees for the Port of Kolkata, placed in paper book from page 51 in respect of construction, operation, management and maintenance of berth no. 4A at Haldia Dock Complex (HDC), Kolkata Port Trust. Clause 3.8 of the said license agreement deals with the operation and maintenance wherein, at Clause 3.8(a) it is stated that:- “3. 8. Operation and Maintenance Phase (a) Obligations of the Licensee In addition to any of its other obligations under this Agreement, the Licensee shall from the Date of Commercial- Operation until the expiry of the License Period (Operations, Phase) manage, operate, maintain and repair the Project Facilities and Services, entirely at its cost, charges, expenses" and risk in accordance with the provisions of this Agreement. The Licensee's obligations under this Article 3.8 shall include but shall not be limited to the following;….. [emphasis supplied by us by underline] ********** **********

This Clause further deals with the aspect of repairs and maintenance, replacement of equipment and repair of damage and destruction in sub clause (ii), (iii) and (iv) which are reproduced as under:- “(ii) Repairs and Maintenance The Licensee shall: a) Abide by the Operations and Maintenance Plan as outlined in Appendix IX; AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 7 b) Maintain the Project Facilities and Services in accordance with Good Industry Practice with the objective of providing adequate service standards and ensuring that the Project Facilities and Services to be transferred to the Licensor upon expiry of the License Period are in good condition, normal wear and tear expected; c) Meet all costs of operation, maintenance and repairs of the Project Facilities and Services or any part thereof. iii) Replacement of Equipment The Licensee shall at its cost plan for replacement of the equipment well ahead of the due dates therefore and replace the equipment as per the Equipment Replacement Plan set out in Appendix X. (iv) Repair of Damage and Destruction The Licensee shall at its own costs, promptly and diligently repair, replace or restore any of the Project Facilities and Services or part thereof, which may be lost, damaged, or destroyed. Licensee agrees that he shall, at its own cost, risk and expense, promptly and with due diligence replace, restore or cause repair and restoration of any and all such-property leased herein which may become the subject of loss: damage. or destruction, howsoever caused regardless of whether such loss, damage or destruction is partial or total. Licensor shall not be liable for damages by reason of any inconvenience or interruption to the business of Licensee arising from any taking over under the power of eminent domain or on account of any loss, damage or destruction of the leased premises by fire, casualty or other cause whatsoever, or from the making of additions, alterations or repairs to the leased premises.” [emphasis supplied by us by underline]

By referring to these clauses in the license agreement, ld. Counsel submitted that assessee carried out repairs in his leasehold property so as to keep the same in proper condition. He submitted that the assessee is not the owner of the property. Assessee is in the capacity of the holder of leasehold rights. He thus submitted that the very basis of conceiving the character of the expenditure as capital by the ld. Assessing Officer is at variance with the AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 8 facts of the instant case. There was no proximate relationship between the repairs undertaken by the assessee and enduring benefits as speculated by the ld. Assessing Officer. He stated that the expenditure undertaken on repairs was incurred to facilitate carrying on of the existing business very efficiently and profitably which did not bring into existence any new asset and thus the finding that the expenditure incurred brought enduring benefit to the assessee, does not hold good in the facts and circumstances of the case. He also stated that ld. Assessing Officer has not disputed the genuineness of the expenditure incurred. Another important fact pointed out by the ld. Counsel for the assessee is in respect of another job of upgradation undertaken by the assessee towards new automation system carried on through Nextgen. Expenses incurred in this respect in the sum of Rs.5,21,03,578/- was capitalized in the books of accounts. In this respect, a sum of Rs.2,61,37,677/- were also deducted from the block of assets owing to obsolescence for which he referred to note no. 8 of the fixed assets forming part of the audited financial statement of the assessee for the year ending as on 31/03/2012, placed from page no. 148 of the paper book. Ld. Counsel thus submitted that ld. Assessing Officer has construed the expenditure of Rs.5,02,24,450/- incurred towards repair claimed as revenue expenditure akin to the one incurred on account of upgradation.

In respect of the disallowance made u/s 40(a)(ia) of the Act on account of non-deduction of tax at source for which payment is made to SAIL towards railway siding charges and demurrage charges, ld. Counsel for the assessee submitted that assessee was engaged in activities under a contract for importing cooking coal for SAIL. He submitted that there were occasions when the assessee could not execute their work within time AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 9 allotted to SAIL by Haldia Dock Complex and thus railway siding charges and demurrage charges were charged by Haldia Dock Complex on SAIL who in turn charged the same on the assessee by way of making a deduction from the amounts payable by SAIL to the assessee. Ld. Counsel submitted that ld. Assessing Officer has misunderstood the issue and held that these payments have been made by the assessee without deduction of tax at source u/s 194C of the Act. He contended that in the first place, the payments were received by the assessee from SAIL for underlaying the imported cooking coal. Charges levied by Haldia Dock Complex on SAIL for delays, were deducted by SAIL from these payments to the assessee. Thus, there was no payment made by the assessee to SAIL on these two accounts and, therefore, no tax could have been deducted at source from such payments. He, thus, submitted that it is a clear case of reimbursement of actual expenses incurred by SAIL and, therefore, are not of the nature falling within the scope of Section 194C of the Act. According to him, provisions of Section 194C of the Act are not applicable to the reimbursement of actual expenses and thus, the assessee is not liable to deduct tax at source from such reimbursement of actual expenses. Accordingly, no disallowance should have been made by ld. Assessing Officer in the first place. Ld. Counsel also placed reliance on several judicial precedents including that of the Hon’ble Supreme Court and several Hon’ble High Courts. Reference to certain judicial precedents referred by him is tabulated as under, which was also reproduced in the order of the ld. CIT(A) at page 4 & 5:-

Bharat Gears Ltd. vs. CIT If the equipment as a whole is to be ITR 161) replaced, it would mean that it is not repaired and it may be a case of replacement…. a replacement in AY: 2012-13 "Repair" implies the existence of a thing The expenditure is to bring into (107 ITR 63) existence a sophisticated communication system to bring about connectivity of the assessee's office in Delhi and Bombay with other establishments of the assessee in India and abroad. The expenditure is not merely on wires and cables etc. but AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 12 expenditure is on installation of sophisticated network. Taking into consideration all these aspects we hold that the assessee was not at all justified in treating such expenditure as part of repairs and renovation.

While giving findings, ld. CIT(A) noted the contentions of assessee at page 8 of his order, which is reproduced hereunder:- “1. The A.O. had overlooked the fact that repairing jobs in question did not add to working capacities of existing machinery.

Cost of upgraded part was capitalized by the appellant.

The A.O. had ignored the fact that the repairs involved technical expertise as possessed by Portek and that planned shutdown was inevitable for repairing the unloaders, which work in sequence with other parts.

There was no major modification in design, to give rise to new asset.”

Considering the contentions of the assessee as good, ld. CIT(A) noted that assessee undertook repairs so as to keep the ship unloaders in working condition as well as on preventive aspects to prevent future accidents. He also noted that assessee has claimed cost of repairs as revenue expenditure for one part of the repair exercise and for the other part, it has capitalized the cost incurred in respect of upgradation of the equipment. On the aspect of requirement of deduction of tax at source on payments made to Portek u/s 195 r.w.s. 9(1)(vii) of the Act, under the head “Fees for Technical Services”, ld. CIT(A) noted that work undertaken by Portek, does not fall within the meaning of fees for technical services as the second explanation to Section 9(1)(vii) of Act does not include consideration for any construction/assembly, mining or a like project undertaken by the recipient. He also noted that the principal place of business of Portek was out of India AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 13 and it did not have any permanent establishment in India. So also, their stay in India during the relevant year was less than 183 days. He, accordingly held that no withholding tax was required in terms of Double Tax Avoidance Agreement (DTAA) between India and Singapore. Considering all of the above, ld. CIT(A) deleted the addition of Rs.5,36,58,796/-.

In respect of disallowance made by ld. Assessing Officer u/s 40(a)(ia) of the Act for payment of railway siding charges and demurrage charges without deduction of tax at source, ld. CIT(A) allowed the appeal of the assessee by treating this expenditure as reimbursement in nature.

We have heard the rival contentions and perused the material available on record and have gone through the submissions made before us.

Admittedly it is a fact on record that SUL#2 had suffered significant damages from the cyclone in year 2006. Technical assessment and audit was undertaken by the assessee through L&T and KFT GmbH referred above, who had in their inspection reports strongly advised that SUL#2 is unsafe to be used and to be taken out of operation. We also take note of the terms and conditions of the license agreement quoted above which also requires an obligation on the assessee to undertake repairs and maintenance, repairs of damage and destruction. Work order dt. 07/10/2011 issued by the assessee on Portek placed in the paper book at page 40, while referring to the scope of work also states that “the work scopes for the above accident repair are as follows:”. AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 14

1 The moot point before us on this issue relates to deciding whether the expenditure claimed by the assessee in respect of repairs amounting to Rs.5,02,24,450/- is of revenue in nature or capital.

2 It is well settled that, whether a particular expenditure is revenue expenditure incurred for the purpose of business or not, must be determined on a consideration of all the facts and circumstances and by the application of principles of commercial trading. It is also settled that if the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. It is not disputed that the ship unloaders are located at the port area and almost every year the ship unloaders are affected by everyday wear and tear and need heavy repairs to keep them in usable conditions. It is also a fact that the Assessing Officer has not disputed the genuineness of the expenditure incurred by the assessee.

3 It is also pertinent to take note of the fact that assessee had undertaken another project of upgradation of new automation system through another vendor i.e., Nextgen and the expenses incurred on this account in the sum of Rs.5,21,03,578/- were capitalized by it in the regular books of accounts. Further, sum of Rs.2,61,37,677/- was deducted/reduced from the gross block of assets on account of obsolescence. Thus, assessee had categorically demarcated the exercise of repairs which were undertaken by it on revenue account and on capital account. AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 15

4 It is prudent to note that repairing is a continuous process and the quantum of expenditure varies, depending upon the requirement. The statutory prescription contained in Section 31 of the Act allows for claiming expenditure incurred in respect of repairs of machinery, plant or furniture used for the purpose of business or profession. The explanation to the said section mentions that the amount paid on account of current repairs shall not include any expenditure in the nature of capital expenditure. The said section reads as under:-

It is also a fact on record, undisputed that the assessee is not the owner of the property and is a leaseholder and is required to carry out repairs in the leasehold property in terms of the license agreement which are reproduced above. In this respect, it is important to note the scope, facilities and services as well as the list of equipment and other infrastructure required to be installed at berth no. 4A and also the assets of the licensor contained in the said license agreement in appendix-II annexure-I and annexure-III respectively, placed at pages 86 & 87 in the paper book. The same are reproduce as under:- AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 16 AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 17 AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 18

From the above extraction, we noted that the licensor assets are in respect of waterfront area and the backup area which have been handed over to the licensee i.e., the assessee under the license agreement. However, the list of equipment and other infrastructure to be installed are towards the obligation of the assessee. Thus, keeping the provision of Section 31 of the Act and the terms and conditions of the license agreement along with the inspection report of L&T and the nature of repair work undertaken by the assessee, we are of the considered view that in order to entitle an assessee to claim deduction towards repairs as revenue expenditure, it has to be taken in commercial sense which means that the repairs which are undertaken under the normal course of usage for the purpose of preservation, maintenance or proper utilization. We understand that the objective of expenditure should not be to bring a new asset into existence nor to obtain new or different addition. The quantum of expenditure incurred in the repairs is not relevant for determining whether it is an expenditure on current repairs or not because the extent of repairs and the amount spent AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 19 depends upon various factors. This issue has been succinctly dealt by the Hon’ble Bombay High Court in the case of Commissioner of Income-tax v. Chowgule & Co. (P.) Ltd. [1995] 214 ITR 523 (Bom), wherein it has listed the propositions that emerged while dealing with the similar issue on the claim of repair expenses u/s 31 of the Act, which are reproduced as under:-

Similar issue has been addressed by the Hon’ble Allahabad High Court in the case of Commissioner of Income-tax, Kanpur v. Saran Engg. Co. [2011] 10 taxmann.com 14 (All) wherein the decision of the Hon’ble Supreme Court in the case of CIT v. Saravana Spg. Mills (P.) Ltd. JT [2007] 10 SC 111, was referred wherein the Hon’ble Supreme Court had interpreted the words 'current repairs' and laid down that the basic test to find out as to what constitutes 'current repairs' by holding that the expenditure must have been incurred 'to preserve and maintain' an already existing asset and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage.

In the present case before us, ld. Counsel for the assessee has evidently demonstrated from the documents placed on record by referring to the inspection report for the inspection carried out in the year 2007 & 2008 as well as the terms of license agreement and the work order placed on Portek and a separate work order placed on Nextgen for upgradation of new automation system. Assessee has also categorically demarcated the expenses incurred on account of repairs of revenue in nature and of capital in nature which have been duly accounted and reported in the audited financial statements. It is thus axiomatic that the expenditure incurred by AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 21 the assessee in the facts of the case are on revenue account which have been rightfully allowed by the ld. CIT(A). We thus, find no reason to interfere with the findings given by the ld. CIT(A) in this respect. Accordingly, Ground Nos. 1 to 5 by the Revenue in this respect are dismissed.

In respect of disallowance made by the ld. Assessing Officer u/s 40(a)(ia) of the Act, on account of non-deduction of tax at source u/s 194C on railway siding charges of Rs.20,61,419/- and demurrage charges of Rs.9,36,337/-, we note that both these charges arose out of the failure on part of the assessee to complete the work within the prescribed time allotted by Haldia Dock Complex, Kolkata Port Trust to SAIL which was charged to SAIL who in turn deducted the same from the payments made by SAIL to the assessee. It is an admitted fact that assessee is contractually bound by SAIL to act as a handling contractor for imported coking coal and there is an agreement between the two parties to the effect that any incidental charges relating to handling job were to be deducted from the payments made to assessee by SAIL. In pursuance of this activity of handling contractor for SAIL, assessee had received the payments from SAIL after deduction of the two impugned expenses. Assessee has claimed these two expenses as admissible expenses in its Profit & Loss account.

1 It was pointed out to us by the ld. Counsel that there was no payment made by the assessee to SAIL or to the Port Trust on account of these two impugned expenses which have been disallowed by the ld. AO for want of deduction of tax at source by the assessee while making payment of the same. AY: 2012-13 International Seaports (Haldia) Pvt. Ltd. 22

2 Reference is made to the legal maxim ‘impotentia excusat legam’ and ‘lex non cogit ad impossibilia’ in this respect. When there is an invincible disability to perform mandatory part of the law that impotentia excuses. Law does not compel one to do that which one cannot possibly perform. Where the law creates a duty or charge and the party is disabled to perform it, without any default in him and has no remedy over it, there the law will, in general, excuse him. Therefore, when it appears that the performance of the formalities prescribed by a statute has been rendered impossible by circumstances over which the person interested had no control, the circumstances will be taken as a valid excuse.

3 In the present case before us, Haldia Dock Complex, Kolkata Port Trust levied charges on SAIL who in turn deducted the same from the payments made by SAIL to the assessee. Ld. AO has raised his doubts whether SAIL has made payments for these levies to Haldia Dock Complex, Kolkata Port Trust after deduction of applicable tax at source which is separate from of the contractual arrangement between SAIL and assessee for the handling job of imported coking coal. Considering the factual matrix of the case and the two legal maxims dealt above, we do not find any reason to interfere with the finding given by ld. CIT(A) in this respect. Accordingly, Ground Nos. 6 to 8 by the Revenue in this respect are dismissed.

In the result, appeal of the revenue is dismissed.

""यथ" / The Respondent 3. संबंिधत आयकर आयु" / Concerned Pr. CIT 4. आयकर आयु" अपील / The CIT(A)- ( ) िवभागीय "ितिनिध, आयकर अपीलीय अिधकरण "ायपीठ,कोलकाता/DR,ITAT,

Kolkata, 6. गाड" फाईल /Guard file.