2012 (10) TMI 842 - AT - Income Tax

Revenue recognition Accrual of income - Assessee is a non-resident Providing onshore construction work and onshore services in connection in relation to power & gas projects - Following the percentage of completion method for contracts as per AS 7 Assessee entered into two Onshore Construction Initial Work Agreement During the year assessee had received advance and expenditure incurred shown as WIP AO estimates 40% of contract was completed & addition made for 10% of receipt amount Held that - The assessee did not produce invoices before AO. Issue remit back to revenue with direction to allow another opportunity to the assessee to place on record all the invoices on the basis of which assessee had been receiving payments from EDC in respect of Contract If the entire payment received by assessee during the year is in respect of said agreement and is in respect of work done under that agreement then the project having completed more than 20% will be liable to be assessed to that extent during the year under consideration and appropriate assessment will be done by the AO with regard to year under consideration. Issue remand back to AO

Summary

Issues Involved:
1. Classification of Initial Work Agreements (IWAs) as independent contracts or part of the main contract.
2. Application and acceptance of Accounting Standard 7 (AS-7) in recognizing revenue.
3. Treatment of advances received as income.
4. Application of Rule 10 of the Income Tax Rules.
5. Charging of interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Initial Work Agreements (IWAs) as Independent Contracts or Part of the Main Contract:
The assessee argued that the IWAs should be considered as part of the main contract rather than independent contracts. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the IWAs as standalone contracts. The Tribunal observed that both the IWAs and the main contract were related to the same project and had interconnections. Thus, the percentage of completion should be evaluated considering the total value of the project, not just the IWAs. The Tribunal directed the AO to reassess the issue by considering all invoices related to the IWAs to determine the actual work completed.

2. Application and Acceptance of Accounting Standard 7 (AS-7) in Recognizing Revenue:
The assessee followed AS-7, recognizing revenue only after 20% of the project work was completed. The AO disbelieved the assessee's claim of completing only 14% of the work and estimated the completion at 40%, thereby assessing the income. The Tribunal noted the assessee's adherence to AS-7 and directed the AO to re-examine the invoices to verify the completion percentage. If the work completed exceeded 20%, the income should be assessed accordingly.

3. Treatment of Advances Received as Income:
The AO treated the advance of Rs. 320 crores received from Enron Development Corporation (EDC) as income, while the assessee claimed it as a liability. The Tribunal directed the AO to reassess whether the entire payment from EDC pertained to work done under the IWAs. If proven, the completion percentage would exceed 20%, making the income assessable in the year under consideration.

4. Application of Rule 10 of the Income Tax Rules:
The AO applied Rule 10 to estimate the income, which was confirmed by the CIT(A). The Tribunal's decision to reassess the invoices and completion percentage indirectly addresses the application of Rule 10, as the accurate determination of work completed will impact the income estimation.

5. Charging of Interest under Section 234B of the Income Tax Act:
The levy of interest under Section 234B was contested by the assessee. The Tribunal directed the AO to reconsider the issue of interest after reassessing the main issue, ensuring compliance with the provisions of law and providing the assessee a reasonable opportunity of hearing.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to reassess the issues based on the invoices and completion percentage of the project, ensuring a fair and accurate determination of income and interest liability.