Tata Advanced Systems Limited Vs ACIT (ITAT Mumbai)
Conclusion: In present facts of the case, the Hon’ble Tribunal by relying on the previous Judgments of the Tribunal in assessee’s own case for previous Assessment Years held that the compensation so received by the assessee company would only go to reduce the cost of project as it is effectively meant to cover up for the expenses and investments incurred by the assessee for the said project. Hence, the receipt of compensation would be capital in nature and would go to reduce the cost of project.
Facts: The issue to be decided in this appeal was with regard to taxability of compensation received by the assessee company during the Asst Year 2013-14 amounting to Rs 7,34,25,476/- towards interest cost; Rs 11,46,651/- towards insurance cost and Rs 10,15,04,000/- towards cost of modification and validation of the assets , warranty, restating etc.
The Hon’ble Tribunal observed that the assessee company had entered into the agreement for production of the floor beams for Dreamliner project. Due to the delay, the interest and insurance cost connected to the production of capital assets of assessee was affected and cost meter related to it was continuously increasing beyond the expected budgets. Due to this reason, compensation was paid to the assessee for interest and insurance cost incurred by the assessee and to offset the extra cost incurred by the assessee for the project. The said compensation was credited to profit and loss account in the books of accounts. However, for the purpose of income tax, the same was reduced from the total income being capital receipt not chargeable to tax. The delay in project was due to further change in specifications due to which the project was further delayed because of which compensation was paid to the assessee.
The Hon’ble Tribunal observed that the very same issue came up for consideration before this Tribunal in assessee’s own case for the Asst Years 2010-11, 2011-12 and 2012-13 and this Tribunal vide its order dated 27.10.2021 had adjudicated the same and held that the compensation received by the assessee would go to reduce the cost of project of the assessee company. In the said previous Tribunal order, it was observed as under:
1. Due to certain reasons production was delayed and as assessee have made all investments, the assessee was compensated by the other party.
2. As per terms and conditions between assessee and other party, it was deciphered out that the other party could make modifications to the project and suspend the work. In accordance to which assessee could make claims.
3. The compensation received was in connection with interest expenditure of Rs. 15,80,29,570/- and insurance related expenses of Rs52,09,915/- related to the said project. The said compensation figure was determined on the borrowing costs at approximate rate of 12 to 13% of the investment and other costs incurred by the assessee company.
4. The assessee treated that receipt of aforesaid compensation as capital receipt as it was received due to suspension of operations at the behest of the other Company itself. Moreover, it was also pleaded that the interest cost and all other incidental expenses incurred by the assessee for the said project had been capitalized and hence the receipt of compensation would only go to reduce the cost of project of the assessee company.
5. The compensation so received by the assessee company would only go to reduce the cost of project as it is effectively meant to cover up for the expenses and investments incurred by the assessee for the said project. Hence, it was that the receipt of compensation would be capital in nature and would go to reduce the cost of project.
6. Similarly all expenditure incurred by the assessee including Rs 3,75,34,846/- (which was claimed as revenue expenditure by assessee) should also be capitalized to the Capital Work in Progress.
The Hon’ble Tribunal on basis of the observations made by the Hon’ble Tribunal in previous Assessment Years, observed that it is not in dispute that the compensation is received by the assessee for validation support services, asset modifications etc proposed. Therefore, the compensation received is akin to the character of compensation received by assessee towards interest and insurance cost. Therefore, the decision rendered by this tribunal for compensation received towards interest and insurance cost supra would squarely be applicable for compensation received for validation support services, warranty, asset modifications etc also. Therefore, it was held that the compensation received by the assessee in Asst Year 2013-14 of Rs 7,34,25,476/- towards interest cost ; of Rs 11,46,651/- towards insurance cost and of Rs 10,15,04,000/- towards validation support services, warranty, asset modifications etc would go to reduce the cost of aerospace project of the assessee company.
Accordingly, appeals of the Assesee were allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These appeals in ITA Nos.89/Mum/2020 & 90/Mum/2020 for A.Yrs.2013-14 & 2014-15 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-6, Mumbai in appeal No.CIT(A)-6/IT-106/2016-17 & CIT(A)-6/IT-105/2016-17 respectively dated 23/10/2019 & 17/10/2019 respectively (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 29/12/2016 by the ld. Asst. Commissioner of Income Tax, Circle-2(3)(1), Mumbai (hereinafter referred to as ld. AO).
Identical issues are involved in both these appeals and hence they are taken up together and disposed of by this common order for the sake of convenience.
2. The only identical issue to be decided in this appeal is with regard to taxability of compensation received by the assessee company from Boeing Co. during the Asst Year 2013-14 amounting to Rs 7,34,25,476/- towards interest cost ; Rs 11,46,651/- towards insurance cost and Rs 10,15,04,000/- towards cost of modification and validation of the assets , warranty, restating etc.
3. We have heard the rival submissions and perused the materials available on record. We find that the assessee company had entered into the agreement with Boeing Ltd for production of the floor beams for Dreamliner project. Due to the delay on the part of Boeing Ltd, the interest and insurance cost connected to the production of capital assets of assessee was affected and cost meter related to it was continuously increasing beyond the expected budgets. Due to this reason, Boeing Ltd agreed to pay compensation to the assessee for interest and insurance cost incurred by the assessee and to offset the extra cost incurred by the assessee for the Boeing project. The said compensation received by the assessee has been credited to profit and loss account in the books of accounts. However, for the purpose of income tax, the same was reduced from the total income being capital receipt not chargeable to tax. The delay in project was due to further change in specifications by Boeing due to which the project was further delayed because of which Boeing has agreed to compensate the assessee. The said facts is also disclosed in the Directors’ Report for the year ending 31.3.2013 as under:-
“Business Overview
Due to the change in design from “Hybrid Titanium Floor Beams” to “Advanced Composite Floor Beams (ACFB)” by Boeing for their 787 Dreamliner Program, modified contract agreement was signed with Boeing during FY 2012, Accordingly, to meet the modified requirement, new set of facilities have been created at Nagpur and project activities are being progressed in line with the mutually agreed project schedule. The Company is also exploring business opportunities with other international aerospace OEMs such as Airbus. Pratt & Whitney, Rolls Royce etc.
Operations
To undertake the production of new advanced composite floor beams (ACFB) for Boeing 787 Dreamliner, TAL and Boeing have been working together to build-up the manufacturing facilities and factory set-up as per the new engineering and technological requirements. The special processes have been NADCAP approved and the manufacturing facility has been qualified to manufacture aerospace components. The Company has already commenced the production and supply of metal fittings for the initial sets of floor beams being produced by Boeing at their development center (ADC). Manufacturing of composite pre-production manufacturing (PPM) beams has started, after the successful qualification of composite facility by Boeing. The manufacture and supply of the complete floor beams are expected to commence during the later part of the FY 13-14,
12. The commercial production was further delayed and the said fact is also disclosed as under Note 38(a) of Financial Statements (Refer Page 52A)
“The Company is incurring, inter alla, borrowing cost and incidental expenses in setting up the project which was expected to commence commercial operations in April 2009. Boeing is compensating the Company for the delay in completion of the Project resulting from its actions and accordingly, with effect from April 2009, the incidental expenses and borrowing costs incurred on the Project are not being capitalized but are charged to Statement of Profit and Loss and the related compensation received is credit to Statement of Profit and Loss upto 31 July, 2012. The commercial production of Composite Beam is further delayed and Company has initiated discussions with Boeing for compensation of incidental expenses for the period commencing 1 August 2012. Pending completion of this process, the incidental expense incurred with effect from 1 August 2012 relating to Composite Floor Beam are being capitalized.”
3.1. We find that the assessee company commenced commercial production of floor beams at Nagpur with effect from 29.3.2015 which fact is also mentioned in the financial statements for the year ended 31.3.2015 placed on record before us.
3.2. At the outset, the ld. AR before us stated that the very same issue came up for consideration before this Tribunal in assessee’s own case for the Asst Years 2010-11, 2011-12 and 2012-13 and this Tribunal vide its order dated 27.10.2021 had adjudicated the same and held that the compensation received by the assessee from Boeing Co. would go to reduce the cost of aerospace project of the assessee company. The relevant operative portion of the said tribunal order which narrates the entire facts and adjudication thereon are reproduced below:-
2.1. We have heard the rival submissions and perused the materials available on record. We find that the assessee company is engaged in the business of manufacturing of machines, jigs, fixtures, equipment, material handling system, fluid power solutions etc having its existing manufacturing unit in Pune. As part of new business expansion plan, the assessee began setting up an infrastructure for providing aerospace solutions at MIHAN SEZ area in Nagpur in the year 2008. The project with Boeing Co. was entered into by assessee for expansion of its existing business, for which purpose, an agreement was entered in February 2008 for supply of floor beams (as per their specification) for the Dreamliner range of aircrafts launched by Boeing Co. The infrastructure for providing aerospace solutions was ready for production in March 2009. Till the time the commercial production could be started, all costs incurred by the assessee for the expansion project was directly capitalized as part of Work in Progress (WIP). Subsequently there was change in design by Boeing Co. because of which commercial production was delayed by the assessee on request of Boeing Co. Accordingly, the manufacturing operations of assessee for this expansion project were temporarily suspended. Since assessee had already made all the investments, employed people for the said project and was ready to start production, assessee was provided compensation by Boeing Co. for such outlays of expenditures incurred. This fact has also been disclosed in the notes to the annual report vide page 18 of the factual paperbook dated 04/01/2018. The relevant extract is reproduced below:
“The major contract signed with The Boeing Company for supply of Hybrid Titanium Floor Beams for its new 787 Dreamliner airplanes has undergone some changes in the definition of the product requirements, due entirely to the Boeing Company. The Company is continuing to work on setting up the facilities as per their modified requirement, in line with Boeing’s new changed product configuration.
This fact was also disclosed in the Director’s report of the Financial Statements prepared for the year under consideration vide page 5 of the factual paperbook dated 04/01/2018). The relevant extract is reproduced below:
“As a part of a unique concurrent engineering work methodology, Boeing and TAL are working together to buildup the engineering technology, facilities and factory set-up to their new changed configuration. Though, Boeing have announced two set of delays and a new modified product configuration during the year, for their Dreamliner program, the current interactions indicate that there are no further major impacts on the program and the Company’s supplies are expected to commence from 11-1-2012″
2.2. The assessee had made huge investments towards expansion of its business activities and total investment made in this project till 3103/2010 was Rs. 113.58 crore. The assessee submitted the details of such capital investment before the ld AO vide letter dated 21/12/2012 as under:-
