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Income Tax Appellate Tribunal, DELHI BENCH ‘I’, NEW DELHI
Before: SH. N. K. BILLAIYA & SH. C.N. PRASAD
5486/Del/2017 and 1013/Del/2015 are three separate appeals remanded by the Hon’ble High Court of Delhi for reconsideration by this Tribunal vide order dated 28.07.2023 in for A.Y. 2004-05. ITA No.823/2018 for A.Y. 2007-08 and ITA No.302/2022 for A.Y. 2010-11.
In view of parity of facts A.Y.2004-05 is taken as a lead year.
The entire quarrel revolves around the provisions of the liquidated damages in the revenue’s appeal before the Hon’ble High Court. The revenue had questioned the decision of this Tribunal on the grounds that the Tribunal had not given a definitive finding whether the said provision represented an ascertained liability. The relevant findings of the Hon’ble High Court read as under :-
"13. Having examined the record, there is no dispute qua the following aspects:
(i) The respondent/assessee entered into a contract for supply of specified goods with BSNL. (ii) The contract contained a provision for imposition of liquidated damages for delay in supply. The rate for imposition of liquidated damages was pegged at 0.5% of the value of the delayed supply for each week of delay, or part thereof for the period up to 10 weeks, and thereafter, the rate would stand enhanced to 0.7% of the value of the delayed supply for each week of delay or part thereof for another 10 weeks of delay. [Clause 15.2 of the contract executed between the respondent/assessee and BSNL captures this aspect of the matter], (iii) The AO disallowed the provision amounting to Rs. 17.61.99.671/-, which was the difference between the provision created during the year i.e.,Rs.19,66,51,910/- and the amount actually utilized i.e., Rs.2,04,52,238 although the actual difference is Rs. 17,61,99,672/-. According to the AO, the said amount i.e., Rs.17,61,99,671/- represented unascertained liability. (iv) The CIT(A), via the order dated 26.02.2014, reversed this view, which, as indicated above, was, in turn, overturned by the Tribunal, in the first round, via order dated 30.06.2017.
(v) The Tribunal, upon remand by a coordinate bench of this court via the order dated 23.11.2017, reexamined the matter. While reexamining the matter, the Tribunal noted in extenso the order of the CIT(A) passed in the first round. After extracting the order of the CIT(A), the Tribunal made the following observations, which are contained in paragraph 8. For the sake of convenience, the said observations are set forth: “8. In the present case from page no. 136 of the assessee’s book, it is noticed that total provision for liquidated damages was ofRs. 19,66,51,910 - out of which Rs.2,04,52,238/- were utilized and credited written back the remaining amount of Rs. 17,61,99,672/- was the actual 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 411) of the Act by crediting the liquidated damages accounts. Therefore. the impugned amount was not only the provision 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 consistently. 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. ” [Emphasis is ours]’”
Thereafter the Hon’ble High Court held that the Tribunal failed to give a clear finding as to whether the provision of liquidated damages is in the nature of an ascertained liability. The relevant observation of the Hon’ble High Court read as under :
“The issue which the Tribunal had to grapple with, and clearly return a finding one way or the other, was whether the said amount i.e. INR
17,61,99,672/- in the given facts and circumstances of the case represented an ascertained liability.” 5. The directions of the Hon’ble High Court are very specific which say that the Tribunal will re-examine the issue based on the material on record and return a finding one way or the other as to whether amount of Rs.176199672/- represented an ascertained liability.
The representatives of both the sides were heard at length. Case records carefully perused in the light of the decision of the Hon’ble High Court of Delhi (supra). The written submission of the DR has been thoughtfully considered. We do not find much relevance in the submissions made by the DR as the directions of the Hon’ble High Court are very specific which say that the Tribunal will re-examine the issue based on the material on record.
In the assessment order dated 15.12.2006 on examination of the claim of provision for liquidated damages to the tune of Rs.176199761/- the AO made the following observations while disallowing the said provision :- “It could be seen from the above that the liability shown as liquidated damages is on a provisional basis and is not very certain to accord and has not crystallised when it was quantified. These are contingent in nature, the actual liability crysatallises only when the customer finalises Assessee’s bills after negotiation. The Assessee’s contention that such liability is provided as per the accounting standards fixed by the CBDT is not acceptable since such liabilities will depend on many factors like the customer making claim either as per the terms of the contract or otherwise agreed to and exhausting the possibility of waiver or reduction. The liability will be ascertained only after the supply is made and the ascertained of the actual damages claimed by the customer subject to reduction or waiver etc. and not on the date of sale. As on this date, this will be just as estimate and contingency in nature. Mere anticipation of damages that might become a liability at a point of time in future could be termed only as a contingent liability. The variation in the amount of claim and the amount of settlement also indicated that the anticipated liability is not on any reasonable estimate. Therefore, the provision made for liquidated damages amount to Rs.176199671 is considered as unascertained liability in the nature of contingent liabilities and the amount of Rs.17,61199,671 is disallowed……..”
When the said decision of the AO was challenged before the CIT(A) the CIT(A) has given the following findings :-
“4.4.1 Ground no. 5 of appeal is directed against disallowance of a sum of Rs. 17,61,99,671/- towards provision for liquidated damages. During the year the assessee has claimed provision of liquidated damages to the tune of Rs. 17,61,99,671. The assessee stated that in terms of the purchase order received from customers liquidated damages @0.5% per week subject to a maximum of 0.7% or such other rate, as per the 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 certain, 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 method on 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 are brought to tax u/s. 41(1) of the IT Act, 1961 by crediting the liquidated damages account. 4.4.2 The Supreme Court in the case of Bharat Earth Movers Ltd. Vs. CTT (245ITR 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 incurring of the liability. It should be capable of being ascertained with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied then the liability is not a contingent one. Similar disallowance was deleted by the CIT(A) in Ay 2005- 06 following the decision of Thermax Babcock Wilcox Ltd. Vs. Addl. CIT (304 ITR 130 (AR). In view of the above factual and legal position the addition of Rs. towards provision of liquidated damages made by the AO is not legally sustainable. Therefore, the same is deleted. The appeal is allowed on this ground.
This finding of the CIT(A) was confirmed by this Tribunal.
Given a specific mandate of the Hon’ble High Court (supra) all that needs to be adjudicated and a specific finding given is whether the amount of Rs.17619967/- being the provision for liquidated damages was an ascertained liability or not.
The quarrel relating to the allowability of provision has to be considered in the light of the ratio laid down by Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd. 180 taxmann 422 wherein the Hon’ble Supreme Court for determination of whether a provision is an ascertained liability enunciated following principles :- a. A provision is a liability which can be measured only by using a substantial degree of estimation.
b. A liability is said to be ascertained where there is present obligation of a past event (obligating event); c. Probable that an outflow of resources will be required to settle the obligation; d. A reliable estimate can be made of the amount of the obligatior
The above principles have to be applied on facts of the case in hand.
The assessee is engaged in the business of supplying telecom equipment and during the period under consideration has supplied equipment to BSNL and MTNL. At this stage it would be appropriate to consider the contract wise details of liquidated damages including provision movement which is as under :-
A perusal of the above show that in respect of contracts A perusal of the above show that in respect of contracts A perusal of the above show that in respect of contracts executed between April April -2003 to March -2004 owing to the dela owing to the delay in supplies the total provision created by the assessee towards the total provision created by the assessee towards the total provision created by the assessee towards liquidated damages amounted to Rs.196651920/ liquidated damages amounted to Rs.196651920/-. It can be seen . It can be seen from the above table the utilization and release which pertain to table the utilization and release which pertain to table the utilization and release which pertain to prior periods amounted to Rs.20452238/-. Hence, the net amount of Rs.176199672/- was debited to P & L account.
The procurement orders from BSNL are on record wherein in clause-5 the delivery schedule of the ordered quantity has been mentioned wherein under sub clause-3 it is directed specifically that any slippages in actual supplies from the month wise delivery schedules shall invite liquidated damages charges as per clause - 15. The delivery schedule is as under :-
5.0 Delivery Schedule: i) The delivery of the equipment shall commence immediately on placement of Purchase order and shall be completed in Eight months Goods shall remain at the risk of suppliers until delivery has been completed. The delivery of equipment will be to ultimate consignes as given in PO. ii) Delivery Schedule shall be as follows for the ordered quantity as detailed in Annex I:
3 months from date of PO 20% 4 month from date of PO 16% 5 month from date of PO 16% 6 month from date of PO 16% 7 month from date of PO 16% 8 month from date of PO
Balance Qty.
Any slippages in actual supply from the month-wise delivery schedule shall invite LD charges as per Clause 15, and the prices for such Extension shall be governed by as per clause 11 (b) of general (commercial) conditions of the contract encased as per Annexure-II.
The supplier shall provide software to meet the requirement of TEC Spec. No, G/LLT-01/04 Dec 90 (Vol. 1&1) with Amenamant-1 Section "C" Chapter 3 and software maintenance shall be as per Chapter-4 Section -E of TEC Specification No GILLT-01/04Der.98 with Amendment-1 Detailed technical specification of the equipment will be as por Annexure-VA and Software shall be V13 version.
7.0 All the new hardware/Software required to implement the new features/ functions will be validated by TEC in the first exchange to be supplied against this lender. However as a special case, the equipment can be despatched to the sites without waiting for results for validation, thus delinking despatch of the equipment from validation. Following payment forms would be applicable a) 90% on proof of despatch pending validation. b) 5% after completion of validation and implementation in balanced exchanges procured against this tender. c) Balance 5% against TOC.
8.0 Inspection of the equipment shall be carried out by the representative of Telecom QA Circle, Bangalore as per prescribed test schedule and commercial supplies to be accepted after QA Certificate is issued by Quality Assurance Wing and after Excise Gate Pass issued by Excise Authority, Govt. of India
9.0 Ali required technical assistance for Installation, commissioning and monitoring of equipment shall be provided by the supplier at no extra cost during laboratory evaluation, validation, type approval and field trial
10.0 Tools/Testers/instruments and simulators require for CCS-7 and ISDN Testing Validation and Acceptance Testing (AT) of each se shall be provided by the bidder on returnable basis
11.0 Spares including consumables not included in material list bui required will be supplied free of cost over a period of three years starting from the date of final acceptance
12.0 in case validation of the exchanges is not completed within the original delivery schedule the warranty period shall be deemed to have been extended by the corresponding period of delay
13.0 The supplier is bound to supply additional quantities of item to the extent o'10% of the value of the order as per Clause 9 of Annexure-Vill, i e Special Conditions of Contract
4.0 Payment terms and coraition regarding repair of PCBs. Export Supervision Charges, Per Line installation Charges etc. are placed as Annexure.VI. Work of installation, testing and commissioning is generally to be done by Department Staff This work snail be awarded to vendor only in eventuality of shortage of installation staff with the specific approval of Head of Circle and his IFA.
15.0 l any of the field units wants to procure any other PCBs which is not included in the material list, the same has to be done in consultation with MM Cell of BSNL HQ only
16.0 The contracto: shall furnish firm training schedule including now features/procedures (Both hardware & software). He should provide training free of cost for at least two persons per site and within two months prior to the supply of equipment to that site.
17.0 For governing this supply all the mandatory. clauses of TEC GRS MTS, all general commercial conditions special conditions as indicated vide following Annexures (attached with this A.P.O.) are to be complied.
(i) General commercial conditions of contract Annexure-VII (ii) Special conditions of Contract Annexure-VIII (iii) Activities/Special conditions of the Contract Annexure-IV
The relevant schedule for liquidated damages charges read as under :-
“15.1 The date of delivery of the stores stipulated in the acceptance of tender should be deemed to be essence of the contract and delivery must be completed not later than the dates specified therein. Extension will not be given except in exceptional circumstances. Should, however, deliveries be made after expiry of the contract delivery period without prior concurrence of the purchaser and be accepted by the consignee such deliveries will not deprive the purchaser of his right to recover liquidated damages under clause 15.2 below. However, when supply is made within 2 days of the contracted original delivery period the consignee may accept the stores and in such cases the provisions of clause 15.2 would not apply.
15.2 Should the tenderer fail to deliver the stores or any consignment thereof within the period prescribed for delivery the purchaser shall be entitled to recover 0.5% of the value of the delayed supply for each week of delay or part thereof for a period up to 10 weeks and thereafter at the rate of 0.7% of the value of the delayed supply for each week of delay or part thereof for another 10 weeks of delay. In the case of package supply where the delayed portion of the supplies materially hampers installation and commissioning of the system LD charged shall be levied as above on the total value of the concerned package of the PO. Quantum of liquidated damages assessed and levied by the purchaser shall be final and not challengeable by the supplier.”
A pertinent question arose while hearing the appeal whether the amount of liquidated damages were ever disputed by the assessee. The answer is found in the order by the Hon’ble High Court of Delhi dated 01.10.2018 where the assessee was specifically asked to furnish an affidavit to explain whether the amount of liquidated damages were never disputed by the assessee. The order of the Hon’ble High Court and the affidavit of the assessee read as under :-
In the light of the above it can be safely concluded that the assessee could not dispute / challenge the levy of liquidated damages and the fact relating to the delay has never been questioned by the revenue at any stage in the earlier round of litigation and not even today before us. Therefore, two things have crystallized undisputedly, firstly there was a delay and secondly the liquidated damages were never disputed by the assessee. The principles laid down by the Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) apply on the facts of the case in hand. At this stage it would be pertinent to consider the following movement of provision of liquidated damages :-
Assessment Opening Creation during the Utilization Release/ Closing Debited to PI year Year Balance Written Balance back AY 2004- OS 135.314,238 196.651.910 20,452.238 311,513,910 176,199,672 AY 2005- 06 311.513.910 29.602.855 4.643.188 110,046.185 226.427.392 24,959,667 AY 2006- 07 226,427,392 59.373,585 44.391.108 79,030,343 162.379,526 14,982,477 AY 2007- 08 162.379.526 102.684.554 70.272.572 50.392.194 144.399.314 32,411,982
The observations of the AO that till the customer actually raised the claim for liquidated damages the provision would be unascertained liability is in direct conflict with what the Hon’ble Supreme Court has held in the case of Rotork India (P) Ltd. (supra).
Summarizing the entire controversy facts, on record show that the assessee could not dispute / challenge the levy of liquidated damages. In term of clause-15.2 mentioned elsewhere, it is clear that if the assessee failed to deliver the equipment as per the schedule the purchaser would be entitled for the recovery of 0.5% of the value of the delayed supply for each week of delay or part thereof for a period up to 10 weeks and thereafter @ 0.7% for the next 10 weeks. Thus, given the mandate of the Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd (supra) and the happening of the event being the necessary condition, the moment assessee defaulted for the supply of equipment as per the given schedule it immediately incurred the liability to pay liquidated damages. It is being re-emphasize here that the revenue never disputed the delay in the delivery. Pursuant to the specific directions of the Hon’ble High Court of Delhi at para 18.1 of its order in dated 28.07.2023 we decide the captioned appeals in favour of the assessee and against the revenue. The provisions for liquidated damages are directed to be allowed.
The order is pronounced in the open court on 13.10.2023.