Compensation for non-performing Wind Turbine Generators is a capital receipt, not revenue income.

Issue:

Whether compensation received by an assessee from a supplier for the failure of Wind Turbine Generators (WTGs) to perform at guaranteed levels constitutes a capital receipt (not liable to tax) or a revenue receipt (taxable as income) under the Income-tax Act, 1961.

Facts:

The assessee had entered into two contracts with SEL for the purchase of Wind Turbine Generators (WTGs).
The WTGs installed by SEL failed to perform at the desired level for the initial two years.
Due to this non-performance, the assessee invoked the performance guarantee, and SEL paid compensation for the WTGs’ failure to meet the guaranteed performance levels.
The assessee claimed that this compensation was a capital receipt and thus not liable to tax.
The Assessing Officer (AO) contended that it was compensation for revenue loss, not for any loss or permanent impairment to a capital asset.
It was noted that the WTGs were procured by the assessee to act as an apparatus in its profit-earning source (manufacturing activity).
The failure of WTGs to perform as agreed and the consequent payment of compensation were clearly linked to the procurement of these WTGs.
The non-performance of the WTGs would logically delay or impair the establishment of the assessee’s overall profit-making apparatus.
Crucially, the compensation was not linked to any actual damages incurred by the assessee, nor was it related to the cost of the asset, a discount, or a reimbursement.

Decision:

The court ruled in favor of the assessee. It held that the compensation received from SEL for the failure to meet performance parameters was in the capital field and thus outside the purview of taxation. The court found the revenue’s argument that the compensation was for loss of revenue to be factually untenable.

Key Takeaways:

Capital vs. Revenue Receipt – Purpose of the Asset: The fundamental test is whether the compensation is for the impairment or damage to the profit-making apparatus itself (capital field) or for the loss of profits generated by that apparatus (revenue field).
Link to Procurement and Establishment of Apparatus: In this case, the WTGs were essential components of the assessee’s profit-making structure. Their non-performance affected the establishment or efficient functioning of this capital asset, rather than merely causing a temporary loss of revenue from an already established and functioning asset.
Compensation for Defects/Non-performance of Capital Asset: When compensation is received due to defects or failure of a capital asset to meet its intended performance parameters at the initial stage or during its establishment, it often takes on a capital character. It’s akin to receiving a reduction in the effective cost or value of a non-performing capital asset.
Absence of Link to Actual Damages/Loss of Profits: The court explicitly noted that the compensation was not tied to actual damages or reimbursement of specific losses of revenue. This strengthens the argument for it being a capital receipt, as it wasn’t compensating for a direct hit to current profitability.
Impairment of Profit-Making Apparatus: The key factor was that the non-performance of the WTGs impacted the very ability of the assessee to set up or run its profit-making activity efficiently, suggesting an impact on the capital structure rather than just a revenue stream.
Distinction from Business Interruption Compensation: If the WTGs had been performing and then suffered a breakdown leading to compensation for lost output/revenue, that would likely be a revenue receipt. Here, the issue was the initial failure to perform as guaranteed, affecting the asset’s foundational capability.

IN THE ITAT KOLKATA BENCH ‘A’

Essel Mining & Industries Ltd.

Addl. CIT, Range-5, Kolkata

PRADIP KUMAR CHOUBEY, Judicial member
and Rajesh Kumar, Accountant member

IT Appeal No.786 (KOL) of 2013
[Assessment Year 2008-2009]

APRIL 24, 2025

Akkal Dudhwewala, FCA for the Assessee. Subhendu Datta, CIT-DR for the Revenue.

ORDER

Rajesh Kumar, Accountant Member. – This is the second round of litigation before the Tribunal after the Hon’ble Calcutta High Court vide order dated 17.11.2021 passed in the appeal of the assessee filed u/s 260A of the Income-tax Act, 1961 (the Act) IA No. GA/1/2017 (Old No. GA/247/2017) in ITA 5/274/2017 referred the issue back to the Tribunal for fresh consideration to decide the legal issue in the light of decision by Hon’ble Supreme Court in the case of CIT v. Saurashtra Cements Ltd. (SC) after affording both the sides a fair and adequate opportunity of hearing. The Hon’ble High Court directed the Tribunal to decide whether compensation received by the assessee from Suzlon Energy Limited on account of failure of performance guarantee parameters of the capital assets namely Wind Turbine Generators, was on revenue account for reducing loss incurred in the course of business or a capital receipt outside the purview of taxation. Accordingly, the facts of the case and the sequence of events in the first round are dealt with in the following paras and adjudicated in terms of the above direction of the Hon’ble High Court.

2. The facts in brief are that, the assessee is engaged in the manufacture of iron ores, nitrogen gas and ferro-alloys and also generation of electricity and manufacture of railway sidings for captive use and during the year filed the return of income declaring total income of Rs. 11,73,01,47.760/- The assessee had entered into two contracts with M/s Suzion Energy Limited (SEL) for purchase of 48 Nos. and 12 Nos. of Wind Turbine Generators (WTG). As per terms of the purchase contracts, there was a generation guarantee clause in terms of which the supplier guaranteed the performance of the WTGs and in case the WTGs failed to perform, then a mechanism was provided and set out to compute the damages/compensation to be paid. In other words the short fall in guarantee generation would be compensated at the MSEB power purchase rate. Since the WTGs installed by supplier SEL failed to perform at the desired level for the initial two years, the assessee had invoked the performance guarantee and SEL compensated the assessee to the extent of Rs. 19.28 crores during the year. In the course of assessment, the assessee vide its letter dated 13.12.2010, raised a claim that the compensation received from M/s Suzlon Energy Limited (SEL) amounting to Rs. 19.28 crores was in the nature of capital receipt, not liable to tax, and therefore requested the AO to exclude the same while assessing the total income. The AO observed that, this contention of the assessee was not tenable because the compensation had arisen out of loss of revenue on account of non-performance of the capital asset at the guaranteed level and that it was not a compensation for any loss or permanent impairment to a capital asset but compensation for the revenue loss. The AO held that, the compensation was also not intended to subsidize the cost of the capital asset acquired from SEL, but it was intended to make good the loss of revenue for only two years on account of low power generation.

3. On appeal, the Ld. CIT(A) however held that the compensation so received did not emanate from the business activity of the assessee and therefore, held that it cannot be treated as a revenue receipt. At the same time however, the Ld. CIT(A) was of the view that the impugned receipt from SEL was intended towards the cost of machinery and therefore the Ld. CIT(A) directed that the said compensation be reduced from the cost of machinery, in terms of Explanation (10) of Section 43 of the Act. Aggrieved by the order of the Ld. CIT(A), both the assessee and the Revenue filed appeals before the Hon’ble Tribunal, which reversed the order of the Ld. CIT(A) and restored the order of the AO, by holding as under:-

12. 1 On examination of the order of lower authorities and other relevant records, we find that the machines were ordered in the financial year 2004-05 and 2005-6 At the time of purchase, the machine supplier guaranteed for the generation of minimum average units in 2 years. In the event of any shortfall in the guaranteed generation of units the compensation will be provided to the assessee. In the case on hand the machines were first purchased, installed and thereafter actually used for the production of units. In the later years the performance of these machines were quantified and accordingly performance of the machines was ascertained. So the fact is that the compensation was quantified and is received after putting the machine in actual use. Thus, from the above it is clear that the purpose of giving compensation to the assesse was to reduce the loss which the assessee might have incurred. Therefore, it is crystal clear that the compensation was given on Revenue account ie. to reduce the running loss of the assessee and that too in the course of the business. Thus the impugned compensation has direct nexus with the business of the assesse. In our considered view the facts of the case i.e. CIT v. Saurashtra Cement Limited reported in(SC) are different from the present case. The relevant facts of the case are enumerated below.

In the above case, the compensation was given to the assessee for late delivery of machine but in the instant case before us compensation was given due to non-performance of the machineries at desired level. In the former case the machines were not put into the use but in the later case the machines were actually put into use for the production of units. Therefore the compensation in the instant case before us cannot be treated as capital receipts, Similarly the cases i.e. ACIT v. RDS Construction Pvt. Ltd. ITA 377 to 383/PN/2013 and DCIT v. Xpro India Ltd. ITA 214/Kol/2011 relied upon by the assessee are distinguishable from the present case so far the issue was raised for the determination of actual cost u/s 43(1) of the Act.

12. 2 Similarly the finding of the Id CIT(A) that the compensation received by the assessee should be reduced from the actual cost is not based on correct law. It is because the cost of the machine has not been met directly or indirectly by the government or any other person as required in Explanation 10 to section 43(1) of the Act. In fact the compensation was given with the sole purpose of reducing the loss which might have incurred by the assessee due to non-performance of the machineries at desired level. At the time of purchase of machineries there was no whisper about the meeting of the cost directly or indirectly by the machine supplier Therefore, in our considered view the question of reducing the actual cost of machinery does not arise. Hence the ground of appeal of the revenue is allowed and that of assessee’s ground is dismissed.

4. Being aggrieved by the order of the Hon’ble Tribunal, the assessee preferred an appeal u/s 260A of the Act before the Hon’ble Calcutta High Court, wherein the question raised was whether the Tribunal was justified in holding that the compensation received by the assessee from SEL, in terms of the purchase order, on account of failure of performance guarantee parameters of the WTG purchased by the assessee, was on revenue account for reducing loss incurred in the course of business and not a capital receipt, outside the purview of taxation. After taking into consideration the contentions of both the parties, their Lordships remitted the matter back to the Hon’ble Tribunal with the following findings and direction:-

“The learned counsel for the appellant submitted that the appellant is not pressing for consideration substantial questions of law. The said submission is based on record. Therefore, we are required to decide as to whether the compensation received by the appellant from M/s. Suzlon Energy Ltd. in terms of the purchase order on account of failure of performance guarantee parameters of capital assets purchased by the appellant was a capital receipt. The Assessing Officer held against the assessee and treated the same as a revenue receipt. On appeal, the Commissioner of Income Tax (Appeals) – VI (CITA), by an order dated 01.02.2013 reversed the decision of the Assessing Officer and directed the receipt to be treated as a capital receipt with a further direction to reduce the same from the value of the capital asset. The Revenue as well as the assessee filed appeals before the Tribunal. The Tribunal dismissed the assessee’s appeal and the Revenue’s appeal was allowed. The sheet anchor of the argument submitted by the assessee before the Tribunal was by placing reliance on the decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax v. Saurashtra Cement Ltd. reported in 300/325 ITR 422 (SC) as well as the decision of the Kolkata Bench of the Tribunal in the case of DCIT v. Xpro India Ltd. in ITA 214/Kol/2011 and ACIT v. RDS Construction Pvt. Ltd. in ITA 377 to 383/PN/2013. The Tribunal while interpreting the decision in Saurashtra Cement Ltd. (supra) went into the factual aspect and stated that in the said case, the compensation was paid for late delivery of the machinery whereas in the assessee’s case, the compensation was paid on account of the machinery supplied not functioning to the optimum effect. In our considered view, the manner in which the Tribunal distinguished the decision in Saurashtra Cement Ltd. Is incorrect. What is required to be considered by the Tribunal is the ratio laid down by the Hon’ble Supreme Court in the said decision and then test the case of the assessee as to whether the compensation received should be treated as a revenue receipt or a capital receipt. In the case of Rai Bahadur Jairam Valji (CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC) ), the Hon’ble Supreme Court after analysing the various judgments on the said point held that where by cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee’s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt It is settled legal position that there is no singular test available to determine whether a receipt is a capital receipt or a revenue receipt for which it is necessary that the Assessing Officer should examine the facts of each case. Therefore, we are of the considered view that the manner in which the Tibunal had interpreted the decision of Saurashtra Cement Ltd. and come to a conclusion that it does not help the assessee is incorrect. The Tribunal is required to rely the legal proposition laid down in the Hon’ble Supreme Court as well as the other decisions which have been referred to by the Hon’ble Supreme Court. In fact one such decision which was relied on by the assessee in the said case was that of the High Court of Madras in EID Parry Ltd. v. CIT [1998] 233 ITR 335 (Madras) For better appreciation, we quote paragraphs 11 and 12 of the decision in Saurashtra Cement Ltd.

In the light of the above, we are of the view that the matter requires to be remanded to the Tribunal for a fresh consideration to consider the legal issue which was decided by the Hon’ble Supreme Court in Saurashtra Cement Ltd. It goes without saying that the Revenue also will be given adequate opportunity by the Tribunal to put forth their contentions on the grounds canvassed by the assessee before us in this appeal. In the result, the appeal is allowed and the order passed by the Tribunal is set aside on the subject issue alone, namely, whether the compensation received by the assessee from Suzion Energy Ltd. in terms of the purchase orders on account of failure of performance guarantee parameters of capital assets, namely, wind turbine generators, purchased by the assessee was on revenue account made for reducing loss incurred in the course of business or a capital receipt outside the purview of taxation and the matter shall be remanded to the Tribunal for a fresh decision on merits and in accordance with law.” (emphasis supplied)

5. The Ld. AR apprised the bench with the factual matrix of the case in light of the decision rendered by the Hon’ble Supreme Court in the case of CIT v. Saurashtra Cement Ltd. 422 (SC)). He pointed out that, the question before the Hon’ble Supreme Court was whether the compensation paid for delay in supply of machinery was capital or revenue in nature. In that case, it was observed that, the purchase agreement inter alia contained a provision for liquidated damages, if the items were delivered late, which was to be computed at a percentage of the cost of machinery. The Hon’ble Supreme Court observed that the damages to the assessee, due to the delay was intimately linked with the procurement of capital asset in as much as it lead to delay in coming into existence the profit making apparatus and therefore such compensation could not be treated as loss of profit to the assessee. The Apex Hon’ble Court accordingly held that the compensation was for sterilization of the profit earning source and therefore in the nature of capital receipt. While drawing contrast with the facts of the present case, the Ld. AR for the assessee invited our attention to the relevant purchase contracts with SEL, copies of which was placed at Pages 25 to 41 of the Paper book, more particularly to the generation guarantee’ clause in which the supplier had guaranteed the performance of the WTG at an optimum level for a period of 2 years and that in the event the performance parameters were not met, compensation was agreed to be paid, which would be computed on the basis of the MSEB power purchase rate. According to the Ld. AR, what was to be seen is the nature and purpose of the performance guarantee and not the mechanism of computation and disbursement of the compensation. He submitted that the non-performance of the WTGs installed by SEL at the optimum level resulted in sterilization of the profit earning source as the said asset’s performance turned out to be substantially below the specifications agreed upon. He therefore contended that, the compensation paid for not meeting the performance parameters was in the nature of capital receipt and not revenue in nature. The Ld. AR further relied upon the decision of the Hon’ble Calcutta High Court in the case of PCIT v. Xpro India Limited ITR 668 (Calcutta)), wherein, according to him, the Hon’ble High Court following the decision of Hon’ble Apex Court (supra) had upheld the assessee’s plea that the compensation awarded for not meeting the performance parameters was in the capital field. The Ld. AR also cited the decision of this Tribunal in the case of ACIT v. Ramkrishna Forgings Ltd. In ITA No. 113/Kol/2017 dated 13.03.2020.

6. Per contra, the Ld. CIT, DR relied heavily on the order of the AO. According to him, the compensation paid by SEL was towards the loss of Revenue caused due to non-generation of power by the WTGs. The ld DR submitted that He argued that, the assessee had installed the WTGs to aide generation of electricity for their captive consumption and that due to the non-performance of the WTGs, the assessee would have otherwise purchased power from MSEB and therefore the compensation paid for the non-performance by computing the short fall units and multiplying the same with the MSEB power rate which clearly represented compensation for the opportunity cost incurred by the assessee. The Ld. CIT, DR, also filed synopsis of his arguments, which has been taken on record.

7. We have heard both the parties and perused the materials on records carefully including the order of the Hon’ble Calcutta High Court (supra). We note that the limited issue before us is, whether the compensation received for under-performance of the WTGs installed by SEL was revenue in nature or capital receipt not liable to tax. The Hon’ble Court had observed that, the manner in which this Tribunal had earlier interpreted the decision of Saurashtra Cement Limited (supra) to come to a conclusion that, it does not help the assessee, was incorrect and therefore has now required this Tribunal to consider the legal issue which was decided by the Hon’ble Supreme Court in Saurashtra Cement Limited (supra) in light of the facts of the present case. Hence, in order to adjudicate this legal issue before us, we consider it prudent to first put the facts of the case in proper perspective. It is undisputed that, the assessee had acquired 60 Nos. WTGs from SEL, under two purchase contracts, both of which are noted to be identically worded. At Page 37 of the Paper book, the assessee has placed the relevant purchase contract and the relevant ‘generation clause’ is noted to be as under-

“8. Generation Guarantee

SEL guarantee a minimum average generation of 305 lacs units per WTG p.a totaling to 2928 lacs units from 48 nos. WTGs total in 2 years at Controller at 100% grid availability.

Any variation in the wind up to 5% of generation shall be considered in case of shortfall for calculating generation guarantee.

This guarantee is for the first 2 years of operation commencing from 61 day from the date of commissioning Any shortfall in the guaranteed generation for the project after grid adjustment and wind variation of 5% will be reimbursed by SEL at MSEB power purchase rate at the end of the 2nd year.

The above guarantee will be supported by 10% Performance Bank Guarantee and 90% Corporate Bank Guarantee”.

8. It is observed that, the WTGs installed by SEL had failed to perform and therefore the assessee had invoked the performance guarantee given in the purchase contract vide letter dated 25.02.2008. From the notes to the annual accounts, copy of which was placed at Page 63 of the Paper book, revealed that the matters were referred for arbitration and in the meanwhile the suppliers had paid compensation of Rs. 19.28 crores including encashment of bank guarantee of Rs.9.78 crores towards the non-performance of the WTGs at the guaranteed levels.

9. We find from the decision of the Hon’ble Supreme Court, in the case of Saurashtra Cement Ltd. (supra) that the Hon’ble Court was seized with the question as to whether the compensation paid for delay in delivery of the machinery would constitute loss of profit and therefore will be revenue in nature or whether it would tantamount to compensation for sterilization of profit earning source itself and thereby in the nature of capital receipt. Answering the question in favour of the assessee and holding the compensation to be capital receipt, the Hon’ble Supreme Court is noted to have observed as under-

*13. We have considered the matter in the light of the afore-noted broad principle. It is clear from clause No. 6of the agreement dated 1-9-1967, extracted above, that the liquidated damages were to be calculated at 0.5 percent of the price of the respective machinery and equipment to which the items were delivered late, for each month of delay in delivery completion, without proof of the actual damages the assessee would have suffered on account of the delay. The delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset, ie, the cement plant, which would obviously lead to delay in coming into existence of the profit-making apparatus, rather than a receipt in the course of profit-earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof came into play. The afore-stated amount received by the assessee towards compensation for sterilization of the profit-earning source, not in the ordinary course of their business.

in our opinion, was a capital receipt in the hands of the assessee. We are, therefore, in agreement with the opinion recorded by the High Court on question Nos. (1) and

(ii) extracted in Para 1 (supra) and hold that the amount of Rs. 8,50,000 received by the assessee from the suppliers of the plant was in the nature of a capital receipt.”

10. A perusal of the above decision shows that, where the damages to the assessee is linked with the procurement of a capital asset, then such damages is to be treated as amount paid for sterilization of the capital asset and not a receipt arising in the ordinary course of business and therefore in the nature of capital receipt. Going back to the facts of the present case, it is observed that the assessee had procured WTGs from SEL, which was meant to act as an apparatus in the profit earning source of the assessee, viz., its manufacturing activity. The failure of the WTGs to perform at the agreed parameters leading to payment of compensation by the supplier, was clearly linked with the procurement of the WTGs and that the non-performance of WTGs would obviously delay or impair the coming into existence of the overall profit making apparatus of the assessee. It is noted that the said compensation is not linked to any actual damages incurred by the assessee or to the cost of the asset or is a discount or reimbursement to the assessee and therefore the case of the Revenue that, the said compensation was for loss of revenue is found to be factually untenable. The Ld. AR also brought to our notice that, further compensation of Rs.22.22 crores was received from SEL in the subsequent AY 2009-10 as well, in which the assessee had claimed the same to be capital receipt and the Revenue, in the order passed u/s 143(3) of the Act dated 30.12.2011, had accepted the same and did not draw any adverse view on this issue. For these reasons therefore, the arguments raised by the Ld. CIT, DR in support of the order of the AO is rejected.

11. We have also perused the decision of the Hon’ble Calcutta High Court in the case of PCIT v. Xpro India Ltd. (supra), and find it to be squarely applicable to the facts of the present case. In that case, the assessee had acquired a machinery from UK, which failed to perform at the desired levels and therefore the assessee had claimed compensation from the supplier. The compensation so received for non-compliance with the performance parameter was treated to be capital receipt by the assessee. Though the AO agreed that the compensation receipt was capital in nature, but adjusted the same against the cost of the machinery in terms of Explanation (10) to Section 43(1) of the Act. On appeal, this Tribunal held that, the compensation received from the UK supplier on account of under performance of the machinery was in the nature of capital receipt outside the purview of taxation. The operative paras of the Hon’ble jurisdictional High Court decision is as under:

8. The next issue is with regard to the compensation received from M/s. Batenfeld, UK. The Assessing Officer was of the view that the entire amount of compensation had reduced the cost of the machinery and therefore, denied relief to the assessee. The correctness of the said finding was considered by the CIT (A) and after noting that the entire amount of compensation would not reduce the actual cost of machinery and there is no dispute to the fact that the assessee had capitalised the full invoice value of machinery in its books of accounts and accordingly, claimed depreciations and noting the decision of the Hon’ble Supreme Court in Sourashtra Cement Ltd. (supra) directed the Assessing Officer to restrict the disallowance of depreciation pertaining to 10% of the compensation received by the assessee which will go to reduce the cost of machinery, and for the remaining amount the assessee’s case was accepted. With regard to the 10% of the amount which was directed to be restricted, the assessee was not an appeal before the Tribunal. The Tribunal after considering the findings recorded by the CIT (A) examined the settlement which was executed between the assessee and the UK Company which show that the compensation was given on account of nonachievement of performance parameters. After noting the relevant clauses in the settlement agreement, the Tribunal held that the condition specified in section 143 (1) of the Act for directing the actual cost from value of the machines were applicable to the compensation amount paid to the assessee. We find there is no error in the approach of the Tribunal or that of the CIT (A) for us to interfere. Accordingly, substantial questions of law No. 7 and 8 are answered against the revenue.”

12. We also note that identical issue was also involved in the case of Ramkrishna Forgings Limited (supra), wherein the compensation given by the suppliers for technical loss caused due to under-performance of the machines installed was held by the coordinate bench to be on capital account, by observing as under.-

“7. Ground No. 2, is on the issue as to whether compensation received for under performance of SMS EMU CO machine installed in the financial year 2007 2007-08.

7.1. The compensation for under performance was split into two ie., technical loss amounting to Rs.5,16,27,109/- and financial loss of Rs. 3,09,76,266/-. The issues was whether the compensation received on account of technical loss is a capital receipt or a revenue receipt. The Assessing Officer relied on the decision of CIT v. Manna Ramji & Co., [1972] 86 ITR 29 (SC), and was of the view that this receipt is taxable as income.

Before the Id. First Appellate Authority, the assessee relied on the following case-law and claimed that the compensation received for technical loss for was on capital account:-

CIT v. Saurashtra Cement

Xpro India Ltd. [ITA No. 214/Kol/2011, order dt. 23/03/2016)

Deputy Commissioner of Income Income-tax, Circle -4, 4, Kolkata v. Tongani Tea Co. Ltd. 188 (Kolkata – Trib.) Kolkata ITAT]

7.2. The Id. CIT(A) at para 2.4. page 7 of his order, held as follows:

“2.4. As pointed out by the AR the relevant facts in the case of Manna Ramji are different in so far as the compensation was for rent for the user of godown. The Assessing Officer has not challenged the appellant’s claim that the said amount of compensation was for impairment of the assets and was not to compensate for the profit. The AO has observed that the compensation was to co compensate the revenue loss of earning but has not established his case that underperformance of the equipment was liable to be treated as revenue loss. On the contrary the appellant’s submission has relied on some judicial decisions as noted above which demonstrate that underperformance of the assets in the present case is equivalent to capital loss as the impact is for the entire life of the assets involved. It appears that the machine procured did not meet the specifications promised by the vendor/manufacturer and as a result the supplier agreed to return a part of the sums received from the appellant and termed the sum so received as compensation for technical loss. Compensation termed as financial loss (3,09,76,266/-) was offered by the appellant as revenue receipt/income and so it is not in dispute. The former compensation is for the permanent impairment of the asset whose performance turned out to be below the specifications agreed during the purchase. The issue appears to be covered by the judicial decisions relied upon in the submission and listed above. Following the said decisions the Ground No. 2 is allowed and the compensation towards the technical loss computed at Rs. 5, 16,27,109/-is termed as capital receipt.”

8. Simialrly the coordinate bench l in the case of Xpro India Ltd. (supra), while deciding a similar issue held as follows:

“8. We have heard both the sides and perused the materials available on record. Before us the Id. DR submitted that that the assessee is claiming double deduction by not reducing the compensation from the value of the machine which is not as per law and relied in the order of AO. On the other hand the learned AR submitted that compensation was received as the machine supplier failed to meet the predetermined performance parameters therefore it is a capital receipt. From the facts of the case of the finding that the assessee has purchased plant and machinery from a company based in UK which agreed for certain performance parameter but failed to achieve the desired level of performance. Accordingly the UK Company had to pay the compensation to the assessee in terms of the agreement. The AO has linked compensation with the cost of machines and held that it needs to be reduced from the value of the machine. However we find from the settlement deed with the UK Company that compensation was given as the performance parameters were not achieved. The settlement deed is placed on page number 193 of the paper book. The relevant extract of the settlement deed is reproduced below :-

“THIS DEED WITNESSETH 1.1 Without accepting the CONTENTION OF XPRO THAT THEE IS ANY DEFECT IN THE Co-extrusion extrusion Film Manufacturing Equipment supplied by BATTENFELD to XPRO under the Contract, but in light of the fact that the performance parameters could not be dermonstrated, BATTENFELD shall pay a sum of € 450,000,000 (Euro four hundred and fifty thousand) to XPRO

From the above, it is clear that the compensation was awarded for not meeting the performance parameters. The compensation was not computed with the reference to the cost of the said machines. The compensation paid was neither in form of discount nor against the price nor it was in the nature of subsidy nor it was in the nature of the reimbursement. We further find that it was not even compensation for the recouping the damage caused to the plant and machinery. None of the conditions specified in Sec. 143(1) of the Act for deducting the actual cost from value of the machines were applicable to the compensation. Therefore we are inclined not to reduce the actual cost of the plant and machinery by the amount of compensation. Accordingly we have no hesitation in approving the order of the Id. CIT(A). Hence this ground of Revenue’s appeal is dismissed.”

8.1. The Hon’ble Supreme Court in the case of Saurashtra Cement Ltd. (supra). (supra) was considering a compensation received from the suppliers by way of liquidated damages. It held as follows:-

9. As the id. CIT(A) has applied the proposition of law laid down by the Hon’ble Supreme Court, on similar facts, we have to uphold the same and dismiss Ground No. 2 of the revenue in both the appeals.

13. It was brought to our notice that, the above decision of this Tribunal was accepted by the Revenue and no further appeal was preferred on this issue before the Hon’ble Calcutta High Court. Having regard to the above decisions (supra) and the fact that the Revenue itself has acceded to the assessee’s identical claim in the subsequent AY 2009-10, we hold that the compensation received from SEL for failure to meet the performance parameters is in capital field outside the purview of taxation. The AO is accordingly directed to exclude the same while computing the assessable income.

14. In the result, the appeal of the assessee is allowed.