Vildirect: IncomeTax-caselaws-2020-VIL-01--DT

2020-VIL-01--DT

AUTHORITY FOR ADVANCE RULINGS (INCOME

A.A.R. No. 1723 of 2015

Date: 11.02.2020

IN RE : NORTH AMERICAN COAL CORPORATION INDIA PVT. LTD.

For the Applicant : Kanchun Kaushal, Chartered Accountant
For the Department : Smt. S. Padmaja, Commissioner of Income-tax, Departmental representative

BENCH

G. Chockalingam J. (Vice-Chairman), Kishore Kumar Vyawahare Member Revenue And Inder Kumar Member Law

JUDGMENT

4. In March 2011, NACC US incorporated a subsidiary, NACC India being the applicant, and through the Assignment and Assumption Agreement, Consent, and Second Amendment to the Association Agreement dated April 1, 2011 the rights and obligations of NACC US as per the original Association Agreement were transferred and assigned to the applicant, with the consent of SPL. Further, the applicant has entered into an Intellectual Property Licence and US Service Agreement (IP and Service Agreement) with NACC US dated April 1, 2011 for receiving services and a non-exclusive licence of Intellectual Right from NACC US.

5. NACC US, in the initial phase of mine development and later the applicant, rendered services to SPL under the above-mentioned agreements which contributed to the progress of the project in Sasan. According to the applicant, in 2013, SPL curtailed the activities of the applicant and engaged its in-house international consultants. The last invoice paid by SPL pertained to the period up to September, 2013 and it stopped making payment of invoices of the applicant pertaining to services performed after October 1, 2013.

6. The applicant claims that even after several written and in person requests, SPL did not honour its obligations under the agreement, therefore, the applicant was constrained to terminate the said agreement. The applicant is claiming to have terminated the agreement under section 6.2(c) read with section 8.1 of Association agreement for Mine Development and Operations between NACC and SPL. The applicant had sent a notice for termination of the Association agreement on July 23, 2014 claiming from SPL the past dues amounting to USD 12,59,310 for development fee and Rs. 1,70, 87,113 for reimbursement of expenses and of liquidated damages to the tune of USD 17 million as per section 6.3 of the Association Agreement. However, SPL refused to pay the aforesaid claims. Thereafter, the applicant filed a request for arbitration to the International Chamber of Commerce (ICC) in London. However, SPL filed a Civil Suit in the District Court in Singrauli against the applicant contending that arbitration proceedings cannot be held in front of the body outside India. The said court granted an ad-interim ex-parte injunction restraining the applicant from proceeding further with the arbitration before ICC in London. Against this the applicant got a relief from the hon'ble Madhya Pradesh High Court vide order dated March 9, 2015. However, SPL filed an appeal in the hon'ble Supreme Court of India by filing special leave petition on September 19, 2015.

7. The applicant has sought Ruling on the following questions :

"1. Whether on the facts, in law and in the circumstances of the case, the amount of liquidated damages claimed by the applicant from Sasan Power Limited (herein after referred to as 'SPL') on account of termination of Association Agreement for Mine Development and Operations shall be considered as a capital receipt in the hands of the applicant and thus not chargeable to tax under the Act ?

2. Without prejudice to question No. 1, whether on the facts and circumstances of the case, if answer to question No. 1 is in the negative, the amount of liquidated damages in dispute shall accrue to the applicant during the year ended March 31, 2015 when such claim has been raised or in the year in which the final order/decree is passed by the court directing the payment of liquidated damages creating a right of the applicant ?

3. (a) Whether on the facts, in law and in the circumstances of the case, where the amount representing claim of liquidated damages has not been credited in the profit and loss account for the year ended March 31, 2015 in terms of applicable Companies Act and Accounting Standards, the same shall not form part of the book profits under section 115JB of the Act ?

(b) Whether on the facts and circumstances of the case, if the answer to question No. 3 is negative, the said amount shall not again form part of the 'book profits' for the purpose of section 115JB of the Act in the year in which the said amount shall be accounted for in the books of account of the applicant ?

4. Whether on the facts, in law and in the circumstances of the case where for any reason it is held that the liquidated damages are subject to service tax under Service Tax Laws, the provisions of section 43B of the Act are applicable for non-deposit of service tax on liquidated damages, given that service tax has not been routed through the profit and loss account for the year ended March 31, 2015 nor any deduction in respect of the same has been claimed by the applicant ?

5. Whether on the facts and as per law, trade receivables amounting to Rs. 51,938,309 written off in the accounts of the applicant for the year ended March 31, 2015 are allowable as deduction under section 36(1)(vii) read with section 36(2) of the Act ?"

Applicant's contentions

8. In this regard, it is most respectfully submitted that the applicant had raised a claim on Sasan Power Limited (SPL) for liquidated damages (LD) to the tune of USD 17 million for termination of association agreement for mine development and operations (Association Agreement). Upon SPL's refusal to pay the above LD to the applicant, the applicant filed a request for arbitration on August 8, 2014, with the International Chamber of Commerce (ICC) in London.

9. It is submitted that as per the decision of ICC received in October 2018, the applicant's claim of USD 17 million towards LD has been dismissed by the International Court of Arbitration, ICC (page 62, point 18, para 272 sub-point (3) of the arbitration decision). Thus, NACC India is not entitled to receive the LD of USD 17 million from SPL as per the decision rendered by ICC. Thus question No. 1 on characterisation of LD as revenue or capital receipt would become academic in the light of dismissal of claim of LD in arbitration award.

10. Further, on account of dismissal of such claim by ICC, the LD to the tune of USD 17 million was a mere claim made by the applicant on SPL which neither results in accrual of income for the year ended March 31, 2015 nor to any subsequent year.

11. Accordingly, nothing accrues to the applicant during the year ended March 31, 2015 nor does it accrue in any subsequent years.

12. Further, it is stated that there being no receipt of LD, the question of crediting any receipt to the profit and loss account does not arise at the very threshold and hence, question 3.a, 3.b and 4 on applicability of provisions of section 115JB of the Act and section 43B of the Act in the peculiar facts and circumstances does not arise.

Contentions of the Revenue

13. The Revenue has argued that in regard to question No. 5, the applicant claims vide the notes forming part of financial statement that it is entitled for payment of the following amount :

Nature of unpaid payment	Period	Amount in Rs.	Amount claimed by the company to be written off at the end of March 2015	Financial year
Development fees	1-4-2014 to 23-7-2014	2,38,83,207	2,46,92,258	2014-15
Expense reimbursement	1-4-2014 to 23-7-2014	2,19,76,892	2,25,64,723	2014-15
Interest on unpaid invoices	For year ended 31st March 2015	44,51,757	46,81,328	2014-15
Total		5,03,11,856	5,19,38,309

The amount mentioned in column No. 3 of the above table is the amount of unpaid invoices claimed by the company in its notes forming part of the financial statement in para 25 under the headings development fees and expense reimbursements. However, while claiming bad debts, the applicant is claiming the amount mentioned in column No. 4 vide its notes forming part of amount in the column No. 4 as the unpaid invoices for the financial year 2014-15 rested at March 31, 2015. But, the reason behind the difference in the amounts in column Nos. 3 and 4 is not clear. As the interest on unpaid invoices is already claimed by the company, there seems no purpose in claiming separate amounts, one for the period from April 1, 2014 to July 23, 2014 and another, or the year ended in March 31, 2015. Thus, how the applicant has arrived at the amount of Rs. 5,19,38,309 as bad debts is not clear.

14. Further, according to section 36(2)(i) bad debt is admissible as reduction only if it is taken into account in computing the total income of the assessee of the previous year in which it is written off or an earlier year and the deduction under section 36(1)(vii) is available subject to the provisions of section 36(2). In the present case, the receipts which are accrued to the applicant and which are now written off as bad debt were not included in the income of the applicant for the financial year 2014-15. As mentioned above, the unpaid revenue was accrued to the applicant in the financial year 2014-15. So, the applicant should have recognized it either as its revenue or trade receivable. However, from the financial statements of the company, it is seen that it has not taken into account, these accrued receipts in its income. The total revenue mentioned in its profit and loss account is Rs. 4,55,92,076 which is less than the total amount of bad debts for the financial year 2014-15. In the balance sheet of the applicant under the head of trade receivables on 31st March, 2015 nothing is mentioned and the column is blank (note 10 of the financial statement). As the income accrued to the applicant is for the financial year 2014-15, it must not have been recognized as income in any other previous year. Thus, the basic condition to allow bad debts written off by the applicant, i. e., it should have included those debts in its income in that year or earlier years, is not satisfied here. Therefore, the applicant's plea to accept trade receivable as the

14. allowable deduction under section 36(1)(vii) of the Income-tax Act, is not acceptable.

14. Rejoinder

15. During the financial year 2014-15, the applicant has claimed expenses towards bad debts written off amounting to Rs. 5,19,38,309 in its books of account towards certain unpaid invoices for services due from SPL (other than LD).

16. The Revenue has contested against the allowability of the aforesaid claim on account of the following reasons/allegations :

(a) There is a difference in amount of Rs. 5,03,11,856 and Rs. 5,19,38,309 as provided in note 25 to the applicant's financials and the reason behind the said difference is not clear to the Revenue ; and

(b) The applicant has allegedly not included the aforesaid amount of Rs. 5,19,38,309 as income in the current financial year 2014-15 or earlier years, i. e., the basic condition provided under section 36(2) of the Act has allegedly not been satisfied.

17. It is urged that both the aforesaid observations of the Revenue are factually incorrect and are based on misappreciation of documents on record.

18. As regards the first reason, it would be observed from a perusal of note 25 of the applicant's financials that, the amount of Rs. 5,19,38,309 represents the amount restated as at March 31, 2015 as against Rs. 5,03,11,856 which is the actual amount invoiced to SPL during the financial year 2014-15. The said restatement is on account of difference in foreign exchange (forex) rate fluctuation on amounts invoiced to SPL in USD and which were recorded at closing exchange rate. The description/break-up of the aforesaid amounts invoiced to SPL is provided as follows :

Particulars.	Amount invoiced (Rs.)	Forex Difference (Rs.)	Amount restated as at 31st March 2015 (Rs.)
Development fees	2,38,83,207	8,09,051	2,46,92,258
Expense reimbursement	2,19,76,892	5,87,831	2,25,64,723
Interest on unpaid invoices	44,51,757	2,29,571	46,81,328
Total	5,03,11,856	16,26,453	5,19,38,309

19. Further, as regards the second reason, it is alleged that the applicant has not included the aforesaid amount of Rs. 5,19,38,309 as income in the financial year 2014-15. In this regard, the break-up of Rs. 5,19,38,309 is as follows :

Particulars.	Amount (Rs.)	Remarks
Amount invoiced to SPL (A)	4,47,77,356	Considered as income under the head “Revenue from operations” in profit and loss account.
Add : Service Tax invoiced on aforesaid amount (B)	55,34,481	Paid by the applicant through input tax credit (ITC) of service tax (ledger account of service tax)
Total invoice amount (C) = (A) + (B)	5,03,11,837
Add : Forex rate fluctuation difference (D)	16,26,453	Considered as forex gain in profit and loss account under the head “Net loss on foreign currency transaction and translation”.
Rounding off difference (E)	19
Total amount written off as bad debts (F) = (C) + (D) + (E)	5,19,38,309	Kindly refer profit and loss account at ledger account of SPL.

20. Thus, it would be observed above that the entire amount of Rs. 5,19,38,309 has been included as a part of debt due from SPL which was ultimately written off as non-profit and loss account and also the ledger account of SPL. Of this amount of Rs. 5,19,38,309, the applicant has duly accounted for Rs. 4,47,77,356 (serial A) in above tabulation and Rs. 16,26,453 (serial D) in above tabulation in its profit and loss account for the financial year 2014-15 and thus, duly considered in computing the income of the applicant in the financial year 2014-15. The service tax of Rs. 55,34,481 (serial B) in above tabulation has been paid through ITC (as evident from ledger of such service tax) and was to be recovered from SPL as a part of its debt as also reflecting in the ledger of SPL. Because the nature of such service tax recovery from SPL was of "tax" which was to be paid further by the applicant to the Government treasury, the applicant had to pay it out of its own pockets either physically through its bank or by way of ITC.

21. Thus, considering that the entire amount of Rs. 5,19,38,309 (including the service tax of Rs. 55,34,481) has been considered as a part of debt due to SPL and has been written off during the year under consideration, the same is allowable, as deduction under section 36(2) of the Act.

22. Even otherwise, as the applicant has duly considered the amount of Rs. 4,47,77,356 and Rs. 16,26,453 in its profit and loss account for the financial year 2014-15 and accounted for in computing the income of the applicant in the financial year 2014-15. Thus, both the aforesaid amounts are allowable as deduction under section 36(2) of the Act.

23. As regards the balance amount of Rs. 55,34,481 due from SPL towards service tax and which could not be recovered by the applicant, the same if not considered as allowable under section 36(2) of the Act should be otherwise be allowed under section 37 of the Act. Reliance in this regard is placed on the decision of the hon'ble Bombay High Court in the case of CIT v. Prime Broking Co. (I) Ltd. [2016] 76 taxmann.com 211 (Bom) wherein it has been held that service tax not paid by the client of the assessee in terms of invoice raised for onward payment to Government and paid by the assessee out of its own resources is allowable as deductible expenditure under section 37(1) of the Act. The relevant findings of the hon'ble Bombay High Court are reproduced as under :

"It is undisputed that the obligation under the Finance Act, 1994 to pay the service tax is on the respondent-assessee being the service provider. This obligation has to be fulfilled by the service provider whether or not if he receives the service tax from its clients/customers. Non-payment of such service tax into the treasury would normally result in demand and penalty proceedings under the Finance Act, 1994. Therefore, as rightly found by the Commissioner of Income-tax (Appeals) and the Tribunal the payment is on account of expediency, exclusively and wholly incurred for the purposes of business, therefore, deductible under section 37(1) of the Act. As the above position, as held by the Commissioner of Income-tax (Appeals) and the Tribunal, is self-evident from the provisions of law."

24. In this regard, the applicant further seeks to place reliance on the decision of the hon'ble Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC) wherein it was observed that where the expenditure in question was not allowable under section 10(2)(viib) of the Indian Income-tax Act, 1922 (1922 Act) but under section 10(2)(v) of the 1922 Act, the Tribunal had jurisdiction to admit that expenditure as permissible allowance in computation of taxable income of the assessee. The hon'ble Supreme Court had held in this context that (page 713 of 66 ITR) :

". . . There is nothing in the Income-tax Act which restricts the Tribunal to the determination of questions raised before the Depart mental authorities. All questions whether of law or fact which relate to the assessment of the assessee may be raised before the Tribunal : If for reasons recorded by the Departmental authorities in rejecting a contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the Departmental authorities and the Tribunal, and indeed they would be under a duty, to grant that relief. The right of the assessee to relief is not restricted to the plea raised by him."

Decision :

25. We have carefully considered the facts of the case and the submissions of the applicant and the Revenue. After the arbitration award of ICC London the claim of the applicant of USD 17 mn. towards liquidated damages have been dismissed and the applicant is not entitled to receive any liquidated damages. It was also confirmed in the hearing before AAR on January 22, 2020 that there is no appeal against the award and that it has become final. Thus, question No. 1 as to the character of the liquidated damage qua revenue or capital is inconsequential.

26. In regard to question No. 2, it is held that in view of the arbitration award nothing accrues to the applicant.

27. Question Nos. 3a, 3b and 4 on applicability of the provisions of sections 115JB and 43B of the Income-tax Act have also become inconsequential as there is no question of crediting any amount to the profit and loss account when there is no receipt of liquidated damages.

28. As regards, question No. 5 the learned authorised representative has elaborated the reason for the difference in figure of Rs. 5,19,38,309 and Rs. 5,03,11,586. The former figure is the amount invoiced to SPL along with service tax and forex fluctuation difference whereas the latter figure is exclusive of foreign rate fluctuation difference amount. It has also been explained from the financial statement that the invoiced amount and the foreign rate fluctuation difference was declared as income in the financial year 2014-15 and the service tax though not recovered from SPL was paid to the credit of Government to avoid demand and penalty and is therefore claimed as business expenditure under section 37. It is also alternately urged that the same is also allowable as trading loss or bad debt. The authorities cited in this regard have been perused by us and we are in agreement with the contention of the learned authorised representative on this issue. The Revenue may, however, verify these figures from the financial statements and the return of income filed by the applicant.

29. In view of the foregoing the questions raised are answered as under :

> Question Nos. 1. 3a, 3b and 4-The questions raised are inconsequential as a result of dismissal of claim of applicant towards liquidated damages by International Court of Arbitration.

> Question No. 2-Nothing accrues to the applicant.

> Question No. 5-The amount of Rs. 5,19,38,309 comprising of invoice amount and foreign rate fluctuation difference is allowable as bad debt under section 36(1)(vii) and the service tax paid but not realised is allowable as business expenditure under section 37 of the Income-tax Act.

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