9911796707
TMI Blog2016 (11) TMI 731X X X X Extracts X X X X X X X X Extracts X X X X ..... earned CIT (A) has grossly erred in not accepting the method of revenue recognition regularly followed by the Appellant based on the percentage completion method prescribed by the Accounting Standard 7 (AS-7) issued by the Institute of Chartered Accountants of India. Further, they have wrongly understood the accounting treatment spelt in this standard with regard to revenue recognition. Ground No. 3: The learned AO/Transfer Pricing Officer (hereinafter referred to as "TPO" for short) has grossly erred by not following the Circular No 14/2001 issued by the CBDT while proposing a transfer pricing adjustment under section 92CA(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act" for short) without appreciating the fact that there is no intention as well as scope for shifting of profits outside India for the transactions which was completely consummated in India and being assessed as income and as well as expenditure as per provisions of the Act and the learned CIT (A) has erred in confirming the same. Ground No. 4: The learned TPO has grossly erred on facts and in law by proposing the enhancement to the income of the Appellant by holding that the transactions wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 for building highway projects. Assessee alongwith joint venture partner secured three highway projects for the purpose of improving and broadening of the highways under the contract awarded by the National Highway Authorities of India ('NHAI' in short). Assessee filed its return of income declaring a loss of Rs. 1,74,60,536/-. AO noted that during the year under consideration assessee has shown total contract receipt of Rs. 14,46,76,266/- on which the assessee has shown book loss of Rs. 6,74,312/- and after making adjustment as per the provisions of Income-tax Act, arrived at a loss of Rs. 1,74,60,536/-. AO asked the assessee to furnish the relevant details. Assessee has worked out the percentage completion by taking the actual cost during the year over total project cost. AO noted that the revenue recognition on the basis of revised cost adopted by the assessee is not proper. The method adopted by the assessee in view of the AO is applicable in the cases where actual revenue was not clearly measurable, whereas in the case of the assessee, the bills were submitted to the NHAL at the end of the month on the basis of actual work executed during the month. AO noted that in these bil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising the revenue and cost based on percentage completion is not acceptable. CIT (A) noted that the assessee till the end of 31.03.2003 has incurred the cost of Rs. 14,59,87,760/-, which worked out to 4.48% of the estimated project cost of Rs. 326 crores. Based on the method of accounting followed the assessee would have recognised 4.48% of estimated revenue of Rs. 459 crores i.e., Rs. 20.56 crores as against Rs. 14.46 crores shown in the books of account. These figures were taken by the CIT (A) on the basis of additional claim filed by the assessee before the Disputes Adjudication Board. Thus the CIT (A) concluded that unless the additional claim is settled, it is not possible to reliably estimate the cost and Revenue, based on percentage completion method. Accordingly the CIT (A) has directed the AO to compute the total income by considering the revenue of Rs. 14,11,08,715/- and cost incurred of Rs. 14,29,36,737/- after excluding the cost pertaining to AE and including the depreciation as well as disallowances made u/s.43B of the Act. 07. Before us, the Ld. AR of the assessee has submitted that as per para 10 of AS-7, the initial amount of revenue as well as variation in the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t incurred. Therefore, the revenue is recognised only to the extent of cost incurred that are expected to be recovered. Even in the case where the out come of the contract cannot be estimated reliably, it may be probable that the total contract cost will exceed the total contract revenue. In such cases any expected excess of total contract cost over total contract revenue for the contract is recognised as an expense immediately. Thus the Ld. DR has submitted that when the cost as well as the revenue of the project can be estimated reliably, then the revenue should be recognised on actual basis and not on percentage basis. 09. We have considered the rival submissions as well as the relevant material on record. The AO rejected the books of account and estimated the income of the assessee at the rate of 8% on the actual cost incurred during the year as per the bills raised by the assessee. The CIT (A) has reversed the finding of the AO so far as the rejection of the books of account as well as estimation of the income at the rate of 8%. However, the CIT (A) has held that the income of the assessee should be computed on the basis of the actual cost and revenue as recorded in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the undersigned is in agreement with the finding of the Assessing Officer that 'the revenue (contract receipts) and the costs were accounted by the assessee and were, measurable, recognising revenue on the basis of estimated costs is unwarranted.' The method of accounting of recognising revenue & cost based on percentage completion is also not acceptable in view of the reasons given below:- (i) if the additional claim dated 14.9.2010 filed before the Dispute Adjudication Board, the appellant has made the following additional claims in respect of contract:- S No. Nature of Dispute Amount in (Rs.) 1 Loss due to price adjustment In Indian rupees 1,42,07,042/- 2 Non-reimbursement of escalation of foreign component 26,59,77,119/- 3 Claim on method of measurement 19,74,09,064/- 4 Interest on delayed reimbursement In respect of royalty 1,59,74,610/- 5 Losses due to non-payment of certified amount 6,42,56,408/- 6 The claim from the breach of the Agreement 10,47,47,172/- 7 On account of prolongation cost 27,59,12,813/- 8 Loss of owning cost of Plant & Equipments 11,37,94,645/- 9 Loss suffered due to cash loan for the original contract period 1,41,91, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not applicable as in that case in the assessment year 2006-07, the method of accounting regularly followed from the assessment year 2003-04 and accepted by the Department till the assessment year 2005-06 was rejected without assigning any reason contrary to the case of the appellant, in which in the first year itself, the percentage completion method has been rejected. Similarly, the decision of the ITAT Mumbai, in the case of Unique Enterprises v. ITO (2010-TIOL-737-ITAT-Mum.) on which the reliance has been placed by the appellant also , it is held that the method of Accounting regularly followed cannot be disturbed unless it is established that the method in vogue is not correct and it distorts the profit of the particular year. However, in this case it has been established in the first year itself, that the percentage completion method is not appropriate. (ii) If the percentage completion method as applied by the appellant is accepted, then the question will arise about the taxability of the revenue received on settlement of additional claims which have not been recognised as revenue for working out percentage of revenue in the ratio of the estimation of the cost. Similarly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 92 CE report) The following are the details of the international transactions as per 3CEB report: Sl. No. Description of the Transaction Amount 1 Sub-Contract payments Rs. 10,74,19,247 2 Materials issued for work execution Rs. 4,09,61,840 3 Reimbursement of expenses incurred Rs. 36,98,87,464 12. Out of these three international transactions, the transaction in respect of reimbursement of expenses was accepted by the TPO in the proceedings u/s.154 of the Act, and therefore there is no dispute in respect of this transaction of reimbursement of expenses. As regards international transaction in respect of sub-contract payment and materials issued for work execution the assessee has bench marked the same by selected the TNMM as the most appropriate method. Assessee selected four comparables. The TPO rejected the comparables selected by the assessee and carried out a fresh search. The TPO has selected ten comparables with mean net margin of 8.37% as under :- Sl. No. Name of the Company Operating Revenues Net Margin (PBIT) on Sales 1 Ashoka Buildcon Limited 119.45 4.89 2 Gannon Dunkerley & Co. Ltd. 493.02 3.44 3 Mackintosh Burn Ltd. 119.67 3.44 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process, the Tribunal has taken a consistent view that in the normal course 15% is the tolerance range of RPT which can be relaxed maximum to 25%. In the case of the assessee, neither the assessee nor the TPO has applied the filter of RPT. However, it is a relevant factor for selecting the comparable price that RPT should not exceed the tolerance range as discussed above. In view of the above discussion, we set aside this issue to the record of AO / TPO to verify the RPT of the comparables and then apply a suitable filter of RPT not exceeding the maximum tolerance range of 25%. 16. Since the income of the assessee has been recomputed by taking into consideration a different revenue and cost amounts as it was taken by the assessee in the return of income, therefore, the AO / TPO is directed to recomputed the adjustment on account of ALP by considering the margins of the assessee as per the income computed by the CIT (A). Accordingly the issue of TP adjustment is set aside to the record of the AO/TPO. 17. On the objection of the assessee regarding non-application of TP provisions when the AE of the assessee is also subjected to the tax jurisdiction of India, we find that when the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
