DCIT, New Delhi V. M/s UOP India (P) Ltd., Gurgaon

ITA 2552/DEL/2011

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3241 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 11 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-04-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 27-04-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 16-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Additional evidence

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : D : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO.2552/DEL/2011 ASSESSMENT YEAR : 2005-06 DCIT, CIRCLE-18(1), ROOM NO.211A, CR BUILDING, NEW DELHI. VS. UOP INDIA (P) LTD., UNITECH TRADE CENTRE, 1 ST FLOOR, SECTOR-43, BLOCK C, SUSHANT LOK, PHASE-I, GURGAON. PAN: AAACU2687E ASSESSEE BY : SHRI S.K. AGARWAL, CA DEPTT. BY : SHRI UMESH CHAND DUBEY, SR. DR DATE OF HEARING : 27.04.2017 DATE OF PRONOUNCEMENT : 28.04.2017 ORDER PER R.S. SYAL, VP: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER PASSED BY THE CIT(A) ON 28.02.2011 IN RELATION TO T HE ASSESSMENT YEAR 2005-06. ITA NO.2552/DEL/2011 2 2. THE ONLY GROUND RAISED IN THIS APPEAL IS AGAINST THE DELETION OF ADDITION OF RS.3,76,16,855/- MADE BY TH E ASSESSING OFFICER BY APPLYING NET PROFIT RATE OF 8.68% AS AGA INST 2.5% SHOWN BY THE ASSESSEE. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS ENGAGED IN PROVIDING TECHNICAL AND ENGINEERING SERV ICES AND ALSO EXECUTION AND SUPPLY OF EQUIPMENTS FOR LARGE P ROJECTS IN THE FIELD OF REFINERY FOR DOMESTIC AND OVERSEAS PRO JECTS. RETURN DECLARING INCOME OF RS.1.04 CRORE WAS FILED. THE ASSESSING OFFICER OBSERVED THAT THE NET PROFIT RATE SHOWN BY THE ASSESSEE AT 2.51% FOR THE INSTANT YEAR WAS MUCH LOWER THAN 11.03% AND 12.50% OF THE IMMEDIATELY TWO PRECEDING YEARS. ON BEING CALLED UPON TO EXPLAIN THE REASONS FOR DEC LINE IN THE NET PROFIT, THE ASSESSEE SUBMITTED THAT THERE WAS I NCREASE IN COST OF SALES ON CERTAIN PRODUCTS WHICH WAS NEGOTIA TED SOME TIME BACK, BUT, WERE EXECUTED DURING THE CURRENT YE AR AND ALSO THERE WAS INCREASE IN DEPRECIATION DUE TO CAPITALIZ ATION OF ITA NO.2552/DEL/2011 3 LEASEHOLD IMPROVEMENTS AND PURCHASE OF NEW ASSETS D URING THE YEAR. THE ASSESSING OFFICER DID NOT ACCEPT THE ASSE SSEES JUSTIFICATION FOR DECLINE IN THE NET PROFIT RATE BY FINDING THAT NO STOCK REGISTER WAS MAINTAINED BY IT; NO DETAILS OF GROSS PROFIT RATE FOR THE LAST TWO YEARS AND CURRENT YEAR WERE P ROVIDED; THE REPLY FURNISHED BY THE ASSESSEE TOWARDS INCREASE IN COST OF SALES AND INCREASE IN DEPRECIATION WAS VAGUE. HE, THEREFORE, INVOKED THE PROVISIONS OF SECTION 145. NET PROFIT RATE SHOWN BY THE ASSESSEE IN TWO EARLIER YEARS WAS AVERAGED A T 8.68%. SUCH NET PROFIT RATE WAS APPLIED ON THE TURNOVER OF THE ASSESSEE TO THE TUNE OF RS.60.97 CRORE FOR MAKING AN ADDITIO N OF RS.3,76,16,855/-. THE ASSESSEE FILED CERTAIN ADDIT IONAL EVIDENCE BEFORE THE LD. CIT(A) JUSTIFYING THE REASO NS FOR DECLINE IN THE NET PROFIT RATE. SUCH ADDITIONAL EV IDENCE WAS SENT TO THE ASSESSING OFFICER FOR REMAND REPORT. A FTER CONSIDERING THE REMAND REPORT AND ALSO THE ASSESSEE S REPLY TO THE REMAND REPORT ALONG WITH OTHER RELEVANT MATERIA L, THE LD. CIT(A) DELETED THE ADDITION BY OBSERVING THAT THE B OOKS OF ITA NO.2552/DEL/2011 4 ACCOUNT WERE NOT RIGHTLY REJECTED BY THE ASSESSING OFFICER AND, HENCE, THE ADDITION WAS NOT SUSTAINABLE. THE REVEN UE IS AGGRIEVED AGAINST THE DELETION OF ADDITION. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. BEFORE TAKING UP THE I SSUE ON MERITS, IT IS RELEVANT TO MENTION THAT THE LD. DR S TRONGLY OBJECTED TO THE ADMISSION OF ADDITIONAL EVIDENCE IN CONTRAVENTION OF RULE 46A. HE RELIED ON CERTAIN DEC ISIONS IN SUPPORT OF HIS POINT. WE ARE NOT INCLINED TO ACCEP T THIS OBJECTION, FIRSTLY BECAUSE THERE IS NO SUCH GROUND TAKEN IN THE MEMORANDUM OF APPEAL, AND SECONDLY, THE ADDITIONAL EVIDENCE ACCEPTED BY THE LD. CIT(A) WAS DULY CONFRONTED TO T HE AO, WHOSE REMAND REPORT WAS ALSO OBTAINED. AS SUCH, WE CANNOT ACCEPT THE OBJECTION OF THE LD. DR. 5. ON MERITS, THE ASSESSEE HAS A COMBINED STREAM OF REVENUE FROM PROJECTS AS WELL AS FROM SERVICES. THERE IS N O DEMARCATION IN THE ACCOUNTS INDICATING THE INCURRIN G OF ITA NO.2552/DEL/2011 5 EXPENSES FOR A PARTICULAR SOURCE OF REVENUE. THE A SSESSING OFFICER REJECTED THE ACCOUNTS AND MADE THE ADDITION MAINLY BECAUSE OF DECLINE IN THE NET PROFIT RATE FOR THE I NSTANT YEAR AS AGAINST THE PRECEDING YEARS AND THEN BECAUSE THE AS SESSEE DID NOT MAINTAIN ANY STOCK REGISTER. 6. FROM THE PERUSAL OF ACCOUNTS, WE FIND THAT TH E ASSESSEE IS NOT CARRYING ANY INVENTORY. NEITHER, THERE IS ANY O PENING STOCK NOR A CLOSING STOCK. THE ASSESSEE IS BOOKING PURCHA SE OF MATERIAL AND SPARES DIRECTLY TO THE PROJECTS UPON I NCURRING ITSELF. AS THE ASSESSEE IS NOT HAVING ANY STOCK, TH ERE CAN BE NO QUESTION OF MAINTAINING ANY STOCK REGISTER. 7. THE NATURE OF BUSINESS CARRIED ON BY THE ASSE SSEE IS SUCH THAT THERE CANNOT BE ANY CONSISTENCY IN THE RATE OF PROFIT OVER THE YEARS. THE ASSESSING OFFICER OBJECTED TO UNBIL LED REVENUE OF UNCOMPLETED CONTRACTS REFLECTED BY THE ASSESSEE IN ITS BALANCE SHEET AT RS.1,47,85,384/-. SUCH OBJECTION WAS TAKEN DURING THE COURSE OF REMAND PROCEEDINGS. THE ASSES SING ITA NO.2552/DEL/2011 6 OFFICER OPINED THAT THIS MUCH AMOUNT SHOULD HAVE BE EN BROUGHT TO TAX. HERE, IT IS RELEVANT TO MENTION TH AT THE ASSESSEE IS FOLLOWING PERCENTAGE COMPLETION METHOD. REVENUE IS BOOKED IN THE ACCOUNTS CORRESPONDING WITH THE PERCENTAGE O F COMPLETION OF PROJECT. IF, FOR EXAMPLE, THE ASSESSE E HAS INCURRED A COST OF RS.100/- ON ONE PARTICULAR PROJE CT, THE ASSESSEE ALSO RECOGNIZES REVENUE IN RESPECT OF SUCH COST OF RS.100/- IRRESPECTIVE OF THE FACT WHETHER SUCH REVE NUE HAS BEEN BILLED OR NOT. THIS AMOUNT OF RS.1.47 CRORE AS SHOWN IN THE BALANCE SHEET IS UNBILLED REVENUE ON UNCOMPLETE D CONTRACTS WHICH WAS INCLUDED BY THE ASSESSEE IN ITS OVERALL F IGURE OF REVENUE TAKEN TO THE PROFIT & LOSS ACCOUNT. IN THE SUBSEQUENT YEAR WHEN THE ASSESSEE WILL ISSUE INVOICE FOR THE A MOUNT, THE CORRESPONDING AMOUNT APPEARING IN THE BALANCE SHEET FOR THE INSTANT YEAR WILL GET REVERSED. IT, THEREFORE, TRA NSPIRES THAT THE UNBILLED REVENUE, ADVERSELY CONSIDERED BY THE ASSES SING OFFICER IS, IN FACT, AN ITEM OF INCOME DULY OFFERED BY THE ASSESSEE FOR TAXATION. ITA NO.2552/DEL/2011 7 8. THE ASSESSING OFFICER HAS, THEN, OBJECTED TO A D EBIT OF RS.70,39,513/- IN THE ASSESSEES PROFIT & LOSS ACCO UNT WITH THE NARRATION ESTIMATED LOSS ON INCOMPLETE CONTRAC T. THE ASSESSEE IS REGULARLY FOLLOWING THIS PATTERN OF EST IMATING LOSS ON INCOMPLETE CONTRACTS AND BOOKING SUCH LOSS IN IT S PROFIT & LOSS ACCOUNT. IF A CONTRACT WAS ENTERED INTO AN EA RLIER YEAR WHOSE EXECUTION STARTED A LITTLE LATER, THERE IS BO UND TO BE INCREASE IN THE COST WITHOUT THERE BEING ANY CORRES PONDING INCREASE IN THE REVENUE. THE ASSESSEE RECOGNIZES S UCH ESTIMATED LOSS ON INCOMPLETE CONTRACTS IN CONSONANC E WITH THE ACCOUNTING STANDARDS BY GIVING THE CORRESPONDING CR EDIT IN THAT BALANCE SHEET UNDER THE HEAD PROVISION FOR ES TIMATED LOSS ON INCOMPLETE CONTRACTS. IN A SUBSEQUENT YEAR, WHE N THE CONTRACT IS COMPLETED, SUCH PROVISION IS REVERSED A ND THE ACTUAL PROFIT OR LOSS IS DEDUCED. THIS METHOD OF R ECOGNIZING LOSS OF INCOMPLETE CONTRACTS HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE, WHICH HAS NEVER BEEN OBJECTED IN THE PAST. IN THIS VIEW OF THE MATTER, THERE CANNOT BE ANY OBJECT ION TO SUCH ITA NO.2552/DEL/2011 8 DEBIT IN THE PROFIT & LOSS ACCOUNT. QUANTUM OF SUC H LOSS HAS NOT BEEN DISPUTED BY THE AO. 9. IT IS FURTHER RELEVANT TO NOTE THAT THE ASSESS EE VEHEMENTLY ARGUED BEFORE THE AUTHORITIES BELOW THAT SOME OF TH E CONTRACTS WHICH WERE ENTERED INTO IN EARLIER YEARS GOT CONCLU DED IN THE INSTANT YEAR AND THE REVENUES FELL MUCH SHORT OF CO STS. THIS WAS SHOWN BY WAY OF A TABLE WHICH HAS BEEN REPRODUC ED ON PAGE 7 OF THE IMPUGNED ORDER AS BELOW:- PROJECT NAME PROJECT REVENUE PROJECT COST PROFITABILITY % IOCL AROMATICS (AGREEMENT EXECUTED ON JULY 12, 2002) 214 232.6 (18.6) (9.00) BPCL MEROX (AGREEMENT EXECUTED ON MARCH 23, 2004) 70 75 (5) (7.00) 10. IT CAN BE SEEN FROM THE ABOVE PROJECT-WISE TABL E COVERING NEARLY 75% OF THE TOTAL REVENUE OF THE ASSESSEE FOR THE INSTANT YEAR THAT THE PROJECT COSTS FAR EXCEEDED THE PROJEC T REVENUES AND THE ASSESSEE INCURRED LOSS OF RS.23.6 MILLION F ROM THESE TWO PROJECTS. THIS LOSS HAS IMPACTED THE ULTIMATE PROFIT OF THE ITA NO.2552/DEL/2011 9 ASSESSEE. THIS POSITION HAS NOT BEEN CONTROVERTED B Y THE ASSESSING OFFICER EVEN IN THE REMAND PROCEEDINGS. 11. APART FROM THAT, THE ASSESSEE EXPLAINED BEFORE THE ASSESSING OFFICER THAT THERE WAS INCREASE IN THE AS SETS WHICH RESULTED IN HIGHER DEPRECIATION AND, ULTIMATELY, LO W NET PROFIT. THIS OBJECTION WAS ALSO NOT TAKEN INTO CONSIDERATIO N WHOSE EFFECT IS THAT THERE IS AN ADDITIONAL DEBIT OF RS.1 .06 CRORE ON THIS ACCOUNT. 12. IF THE EFFECT OF THE ABOVE EXTRAORDINARY ITEMS IS TAKEN AWAY, THE NET PROFIT RATE OF THE ASSESSEE TURNS OUT TO BE 18.39%, AS AGAINST 2.51% AS UNDER: PARTICULARS AMOUNT [AS PER AUDITED FINANCIAL STATEMENTS] AMOUNT [EXCLUDING THE IMPACT OF ITEMS MENTIONED BELOW] TOTAL TURNOVER 609,710,648 609,710,648 LESS: PROJECT REVENUE (IOCL &BPCL) - (280,000,000) TURNOVER (EXCLUDING IOCL AND BPCL REVENUE [A] - 329,710,648 TOTAL COST 594,404,618 594,404,618 LESS: PROJECT COST (IOCL - (307,671,880) ITA NO.2552/DEL/2011 10 &BPCL) LESS: ESTIMATED LOSS ON INCOMPLETE CONTRACTS AS PER AS-7 - (7,039,513) LESS : DEPRECIATION ON ASSETS ADDED DURING THE YEAR - (10,609,582) COST (EXCLUDING ITEMS MENTIONED ABOVE) [B] - 269,083,643 NET PROFIT [C=A-B] 15,306,030 60,627,005 NET PROFIT AS A % OF TURNOVER [C/A*100] 2.51 18.39 13. IT IS APPARENT THAT THE EXTRAORDINARY ITEMS HAV E REDUCED THE NET PROFIT OF THE ASSESSEE TO 2.51%. IT GOES WI THOUT SAYING THAT WHEN THERE IS A GENUINE DECLINE IN THE NET PRO FIT RATE FOR THE REASONS WHICH ARE AS OBVIOUS AS ARE PREVALENT I N THE PREVALENT CASE, THERE CAN BE NO REJECTION OF BOOKS OF ACCOUNT. WE, THEREFORE, HOLD THAT THE AO WAS NOT JUSTIFIED I N REJECTING THE BOOKS OF ACCOUNT. 14. IT IS PERTINENT TO NOTE THE ASSESSEES NET PROF IT RATE FOR NINE YEARS WHICH HAVE BEEN TABULATED ON PAGE 6 OF T HE IMPUGNED ORDER AS UNDER:- ITA NO.2552/DEL/2011 11 A.Y. TURNOVER NET PROFIT IN RS. NET PROFIT RATE (AS A % OF TURNOVER) C=(B/A)*100 2008-09 760,614,230 22,408,295 2.95 2007-08 539,863,913 38,850,923 7.20 2006-07 516,727,612 37,610,084 7.28 2005-06 609,710,648 15,306,029 2.51 2004-05 466,410,865 51,428,933 11.03 2003-04 462,907,308 57,879,953 12.50 2002-03 193,478,333 2,863,156 1.48 2001-02 301,335,322 24,684,053 8.19 2000-01 80,680,170 4,883,528 6.05 15. IT CAN BE SEEN FROM THE NET PROFIT RATES THAT T HERE IS A WIDE FLUCTUATION FROM AS LOW AS 1.48% TO AS HIGH AS 12.5 0%. THERE IS NO CONSISTENCY IN THE PROFIT RATES. THE ASSESSE E DECLARED NP RATE OF 2.95% FOR THE A.Y. 2008-09 WHICH HAS BEEN A CCEPTED BY THE ASSESSING OFFICER IN ASSESSMENT MADE U/S 143 (3) OF THE ACT. A COPY OF SUCH ORDER HAS BEEN PLACED ON RECOR D. 16. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE LD. CIT(A) WAS FULLY JU STIFIED IN DELETING THE ADDITION. ITA NO.2552/DEL/2011 12 17. IN THE RESULT, THE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.04.2017. SD/- SD/- [SUCHITRA KAMBLE] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 28 TH APRIL, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR/NEW DELHI.