No Tax Liability on Compensation received towards Interest cost, Insurance cost, cost of Modification and Validation of the Assets, Warranty, Restating, etc.: ITAT

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By Taxscan Team – On September 23, 2022 1:58 pm

Tax Liability - Compensation - Interest cost- Insurance cost - Modification - Assets - Warranty - ITAT - taxscan

The Income Tax Appellate Tribunal (ITAT) Mumbai bench has held that no tax liability on compensation received towards interest cost, insurance cost, cost of modification and validation of the assets, warranty, restating, etc.

The appellant, M/s. Tata Advanced Systems Limited entered into an agreement with Boeing Ltd for the production of the floor beams for the Dreamliner project. Boeing Ltd agreed to pay compensation to the appellant for interest and insurance costs incurred by the appellant and to offset the extra cost incurred by the appellant for the Boeing project due to the delay on their part.

During the assessment proceedings, the compensation was reduced from the total income being capital receipt not chargeable to tax. The Assessing Officer imposed tax liability upon the compensation received from Boeing Ltd and against which the appellant preferred an appeal before ITAT.

The counsel for the appellant submitted that Tribunal in the assessee’s case for the Asst Years 2010-11, 2011-12, and 2012-13 had adjudicated the same and held that the compensation received by the assessee from Boeing Co. would go to reduce the cost of the aerospace project of the assessee company.

The Coram of Mr. Vikas Awasthy, Judicial Member, and Mr. M. Balaganesh, Accountant Member has observed that the appellant capitalizes the compensation received on the ground that the business was already set up and ready for production but could not be taken forward due to product change configuration stated by Boeing Co. The lower authority nowhere doubted the commercial rationale of incurrence of such expenses for the Boeing project.

The Tribunal has held that “we have no hesitation in holding 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 Rs 10,15,04,000/- towards validation support services, warranty, asset modifications, etc would go to reduce the cost of the aerospace project of the assessee company”.

Mr. Rajan Vora appeared on behalf of the appellant and Mr. Brajendra Kumar appeared on behalf of the respondent.To Read the full text of the Order CLICK HERE

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