Itxa/1534/2016 Of Pr. Commissioner Of Income Tax-14 v. M/. Atos India Pvt Ltd

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1534 OF 2016 Pr. Commissioner of Income Tax-14 .. Appellant v/s. M/s. Atos India P. Ltd. .. Respondent Mr. Suresh Kumar for the appellant Mr. Atul Jasani for the respondent CORAM : AKIL KURESHI & M.S. SANKLECHA, J.J. P.C. DATED : 23[rd] JANUARY, 2019 1.This appeal is filed by the Revenue against the judgment of theIncome Tax Appellate Tribunal ("the Tribunal" for short), raising following questions for our consideration :- (i)Whether on the facts and in the circumstances of the caseand in law, the Tribunal is correct in law in holding that projectrisk expenses amounting to Rs.2,38,83,772 debited on the profitand loss account for the year under consideration is in the natureof liquidated damages and is allowable deduction in the A.Y.2007-08? (ii)Whether on the facts and in the circumstances of the caseand in law, the Tribunal is correct in holding that whilecomputing income under Section 10A of the Act the expensesincurred in foreign exchange towards technical services providedoutside India if reduces from the export turnover should also beexcluded from total turnover? 2.Question no.(i) arises in following background. 3.The respondent assessee is a company registered under theCompanies Act. In the return filed for Assessment Year 2007-08, theassessee had claimed a sum of Rs.2.38 crores (rounded of) by way ofexpenses in the nature of liquidated damages. This liability arose out ofexecution of a contract by the assessee with HPCL. The contractbetween the assessee and the Hindustan Petroleum Ltd. (“HPCL” forshort) contained a clause for payment in case the execution of the work gets delayed. This clause reads as under :- “In case of delay in completing the job beyond the period ofcontract, the vendor shall be liable to pay a sum equivalent to0.5% of the total contract value for every week or part thereof ofthe delay subject to a maximum of 5% of the total contractvalue.” 4.The Assessing Officer, however, disallowed the claim on theground that the liability was contingent. The issue eventually reachedto the Tribunal. The Tribunal noted the terms of the contract betweenthe assessee and HPCL, also noted that admittedly delay had occurredin execution of the work by the assessee and, therefore, the assessee'sliability to make the payment had arisen. The Tribunal referred to andrelied upon the decision of the Supreme Court in case of Bharat Earth Movers, 245 ITR 425 and held that under said circumstances, the claimof expenditure should have been allowed. 5.Before us, learned Counsel for the Revenue argued that theliability was contingent in nature and further that in terms of Section 73of the Contract Act, 1972, liquidated damages can be claimed only onthe basis of the actual loss and this cannot be a matter of pre-decidedagreement between the parties. 6.At the outset, we may notice that the Assessing Officer had raisedonly one objection to the claim being contingent in nature. The facts onrecord would show that the agreement contained a clause under which,the assessee would have to pay 0.5% of the total contract value forevery week or part thereof for the delay in execution of the worksubject to ceiling of maximum 5% of the total contract value. The factthat there had been delay in execution of the work of the assessee is notin dispute. Under the circumstances, the liability of the assessee to paythe sum to the HPCL as per the said clause had arisen. The liabilitythus, had crystallized and cannot be said to be a contingent liability. 7.The objection of the Counsel for the Revenue on the basis of 6.At the outset, we may notice that the Assessing Officer had raisedonly one objection to the claim being contingent in nature. The facts onrecord would show that the agreement contained a clause under which,the assessee would have to pay 0.5% of the total contract value forevery week or part thereof for the delay in execution of the worksubject to ceiling of maximum 5% of the total contract value. The factthat there had been delay in execution of the work of the assessee is notin dispute. Under the circumstances, the liability of the assessee to paythe sum to the HPCL as per the said clause had arisen. The liabilitythus, had crystallized and cannot be said to be a contingent liability. 7.The objection of the Counsel for the Revenue on the basis of Sections 73 and 74 of the Contract Act also is not valid. To begin with,Section 74 of the Contract Act provides that in case of breach ofcontract if a sum is mentioned in the contract as the amount to be paidin case of such breach or there is any of the stipulation by way ofpenalty, the party complaining of such breach is entitled to the said sumwhether or not actual damage or loss is proved to have been caused bythe breach of contract. The case of the assessee would fall withinSection 74 of the Contract Act itself since the contract envisagedpayment of a sum pre-decided in case of breach of the agreement.Section 74 of the Act does not limit its applicability to a penaltystipulated in the contract but covers the case where any amount isagreed to be paid in case of breach of contract. In that view of thematter, reference to Section 73 of the Contract Act would not benecessary at all. In any case, what Section 73 provides is that when acontract has been broken, the party who suffers by such breach, isentitled to receive compensation for any loss or damages caused to himwhich naturally arose in the usual course of things from such contract.The question of applicability of Section 73 of the Act in the present casein view of the situation being covered by Section 74, would not apply.In any case, the provision of Section 73 would come into play if in caseof breach of the contract, any party were to resile from the terms of the Contract envisaging payment of liquidated damages as agreed in thecontract. In the present case, the assessee who was liable to pay thesaid amount, had neither disputed nor refuted its liability. Thisquestion, therefore, does not require consideration. 8.Question no.(ii) is squarely covered by the judgment of this Courtin case of CIT Vs. Gems Plus Jewellery India Ltd. (2011) 330 ITR 175in which the Court held that the amount of freight and insurance haveto be excluded for the purposes of computation of export turnover,which would also be excluded while computing total turnover of theassessee. This question is also therefore not entertained. 9.In the result, the appeal is dismissed. (M.S. SANKLECHA, J.) (AKIL KURESHI, J.)