M/s Veolia India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 4615/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 1989 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2010-2011
• Appeal Filed On: 30-08-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR ANJULA JAIN
• Assessee Lawyers: R RAGHUNATH
• Section: 205; 201; 48; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES G, NEW DELHI BEFORE MS. SUSHMA CHOWLA, VICE PRESIDENT DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 4615/DEL/2016 : ASSTT. YEAR : 201 0-11 VEOLIA INDIA PVT. LTD. (EARLIER KNOWN AS VEOLIA WATER (INDIA) PVT. LTD.), B-1, MARBLE ARCH, 9, PRITHVIRAJ ROAD, NEW DELHI - 110011 VS DCIT, CIRCLE-26(1), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AABCV7389R ASSESSEE BY : SH. R. RAGHUNATH, CA REVENUE BY : DR. ANJULA JAIN, SR. DR DATE OF HEARING: 30 . 0 1 .2020 DATE OF PRONOUNCEMENT: 27 .0 4 .2020 ORDER PER DR. B.R.R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE A GAINST THE ORDER OF LD. CIT(A)-33, NEW DELHI DATED 09.05.2 016. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSESS EE: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE IMPUGNED ORDER OF THE LD. COMMISSIONER OF INCOME TA X (APPEALS) [HEREAFTER REFERRED TO AS CIT(A)] IS BA D IN LAW AND ON FACTS. 2. THAT, ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) HAS ERRONEOUSLY SUSTAINED THE AC TION OF THE AO ALLEGING SHORT RECOGNITION OF CONTRACT RE VENUE UNDER ACCOUNTING STANDARD (AS) 7 - CONSTRUCTION CONTRACTS (HEREAFTER REFERRED TO AS AS 7) BY INCORRECTLY TREATING THE REVISED WORK ORDER VALUE OF RS.27,70,60,188 FOR PROJECT DEMO ZONE AS THE CONTR ACT VALUE (INCLUDING THE CONSIDERATION FOR OPERATION A ND MAINTENANCE SERVICES AND ALL THE APPLICABLE TAXES O F RS 4,15,26000) INSTEAD OF THE CONSTRUCTION CONTRACT VA LUE OF RS.21,94,78,821. ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 2 2.1 THAT, THE LEARNED CIT(A) HAS ERRED IN MISAPPLIC ATION OF AS 7 TO AN ITEM OF INCOME/ REVENUE AMOUNTING TO RS 4,15,26,000 NOT RELATED TO CONSTRUCTION ACTIVITY CA RRIED OUT DURING THE POST CONSTRUCTION PERIOD VIZ. REVENU E FROM OPERATION AND MAINTENANCE (O&M) SERVICES DURIN G THE REGULAR O&M PHASE WHICH IS REQUIRED TO BE CONSI DERED ONLY DURING THE PERIOD WHEN O&M ACTIVITY ACTUALLY T AKES PLACE. 2.2 THAT, THE LEARNED CIT(A) HAS ERRED IN CONSIDERI NG AMOUNTS AGGREGATING TO RS.26,839,975 TOWARDS VALUE ADDED TAX AND SERVICE TAX INCLUDED IN THE CUSTOMER' S WORK ORDER AS CONSTITUTING PART OF CONSTRUCTION CON TRACT VALUE FOR THE PURPOSES OF RECOGNIZING REVENUE UNDER AS7. 3. THAT THE APPELLANT MAY BE ALLOWED TO ADD, SUPPLE MENT, REVISE OR AMEND GROUNDS RAISED HEREINABOVE IN THE INTERESTS OF JUSTICE. 3. THE ASSESSEE COMPANY IS ENGAGED IN ACTIVITIES RE LATING TO WATER DISTRIBUTION, SUPPLY, MAINTENANCE, TREATMENT / MANAGEMENT AND / OR SEWAGE TREATMENT/SANITATION/REL ATED CIVIL CONSTRUCTION ACTIVITIES. IT EARNS REVENUE FROM THE EXECUTION OF CONSTRUCTION CONTRACTS FOR WATER INFRASTRUCTURAL FA CILITIES AS WELL AS BY WAY OF INCOME FROM OPERATION AND MAINTEN ANCE (O&M) OF SUCH FACILITIES. 4. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E WAS OFFERED AND IMPLEMENTING CONSTRUCTION CONTRACT OF T HE PROJECT DEMO ZONE (PDZ) PERTAINING TO REHABILITATION AND IMPLEMENTATION OF WATER SUPPLY IN THE PILOT AREA OF DHARAMPETH OF NAGPUR MUNICIPAL CORPORATION. THE CON TRACT RECEIVED BY THE ASSESSEE CONSISTS OF THREE PARTS NA MELY, STUDY PHASE REHABILITATION PHASE AND O&M PHASE ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 3 5. THE ISSUE TO BE ADJUDICATED IS WHETHER THE COSTS AND EXPENSES PERTAINING TO O&M PHASE ARE INCLUDABLE OR NOT WHILE CALCULATING PERCENTAGE COMPLETION METHOD AS PER THE PROVISIONS OF AS 7 (ACCOUNTING STANDARD RELATING TO CONSTRUCTION CONTRACT). 6. THE AO HAS HELD THAT THE ENTIRE CONTRACT VALUE H AS TO BE CONSIDERED WHILE CALCULATING PERCENTAGE OF COMPLETI ON METHOD ON THE GROUNDS THAT IT IS A COMPOSITE CONTRACT CONS ISTING OF THREE DIFFERENT PARTS AND HENCE, THE THIRD PART CAN NOT BE CONSIDERED SEPARATELY. THE LD. CIT (A) HELD THAT TH E O&M PHASE OF THE CONTRACT OF RS.4,15,00,000/- IS TO BE CONSID ERED FOR COMPUTATION AS PER AS 7 INSTEAD OF AS 9. BEFORE US DURING THE ARGUMENT, THE LD. AR ARGUED BASED ON THE SUBMISSION S FILED IN THE FORM OF PAPER BOOK PAGE NOS. 1 TO 108. THE LD. DR RELIED ON THE ORDERS OF THE LD. CIT (A). 7. HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERU SED THE MATERIAL AVAILABLE ON RECORD. 8. THE FACTS RELEVANT TO THE ADJUDICATION ARE THAT, NOTWITHSTANDING THE REVISED WORK ORDER, THE SANCTIO NED EXPENDITURE PERTAINING TO O&M PHASE STOOD AT RS.4,15,26,000/- (PAGE NO. 48 & 50 PB). THE KEY POI NTS OF THE CONTRACT ISSUED BY THE NAGPUR MUNICIPAL CORPORATION IS AS UNDER:(PAGE NO. 52 & 53 PB) THE NAGPUR MUNICIPAL CORPORATION (NMC) AS THE OWNE R OF THE WATER SUPPLY INFRASTRUCTURE ASSETS OF THE CITY OF NAGPUR DECLARES THAT THE COMPANY VEOLIA WATER (INDI A) PRIVATE LIMITED (VW INDIA) A SUBSIDIARY OF VEOLIA E AU- COMPAGNIE GENERALE DES EAUX, FRANCE AND HAVING ITS REGISTERED OFFICE AT B-1, MARBLE ARCH, 9, PRITHVIRA J ROAD, NEW DELHI-110011 WAS AWARDED THE CONTRACT (CONTRAC T) ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 4 FOR IMPLEMENTATION OF UNINTERRUPTED WATER SUPPLY A ND REDUCTION OF UFW WITH IMPROVEMENT IN LEVEL OF SERVI CE TO THE CONSUMER IN PILOT AREA OF DHARAMPEETH ZONE AT NAGPUR, MAHARASHTRA, INDIA. VIDE WORK ORDER NO. W/EE/01/2007/JN115 DATED JUNE 7, 2007. THE CONTRACT COMMENCED ON JULY 5, 2007 AND IS CURRENTLY ON GOING . PERFORMANCE OF VW INDIA HAS BEEN SATISFACTORY UNDER THIS CONTRACT. A. UNDER THIS CONTRACT FOLLOWING KEY ISSUES HAVE BE EN IMPLEMENTED SUCCESSFULLY: 1. PROVIDING CUSTOMERS WITH UN-INTERRUPTED WATER SUPPLY AT STIPULATED PRESSURE. 2. REDUCTION OF UN-ACCOUNT FOR WATER (UFW) BY REDUCING LEAKAGES AND UNMEASURED SUPPLY. 3. 100% METERING WITH GOOD QUALITY METERS HAVING LONG LIFE SPANS. 4. IMPROVED AND EFFICIENT BILLING AND COLLECTION MECHANISM INCLUDING METER READING, BILLS GENERATION , DISTRIBUTION & COLLECTION. 5. BETTER SERVICES TO URBAN POOR (CUSTOMERS IN SLUM S) BY IMPLEMENTATION OF SLUM POLICY; INDIVIDUAL CONNECTIONS HAVE BEEN PROVIDED BY REPLACING PUBLIC STAND POSTS. 6. ATTENDING CUSTOMER COMPLAINTS WITHIN THE STIPULA TED TIME. 7. IMPLEMENT GOOD ENGINEERING PRACTICES TO UPGRADE EXISTING NETWORK. 8. BRING ACCOUNTABILITY ON DESIGN, IMPLEMENTATION, AND O&M WITH SINGLE AGENCY THROUGH PERFORMANCE BASED CONTRACT. 9. IMPROVED WATER QUALITY 10. ALL THE KEY PERFORMANCE INDICATORS (KPIS) REQUI RED IN THE CONTRACT ARE ACHIEVED B. CONTRACT COST: RS.302.6 MILLION I. TECHNICAL SERVICES: STUDY PHASE RS.24.36 MILLION REHABILITATION PHASE RS.24.90 MILLION O&M PHASE (5 YEARS) RS.41.50 MILLION II. REHABILITATION COST: RS.211.80 MILLION C. CONTRACT STRUCTURE AND TASKS PERFORMED: ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 5 1. PHASE-I: STUDY 9 MONTHS (COMPLETED): FOLLOWING WORKS WERE CARRIED OUT IN THIS PHASE: TOPOGRAPHIC SURVEY CUSTOMER SURVEYS FOR 17,500 HOUSEHOLDS PIPELINE CONDITION SURVEY NETWORK MODELING OF WATER SUPPLY NETWORK INCLUDING EXISTING PIPES AND PROPOSED REHABILITATION AND REPLACEMENTS USING WATER GEM WITH A NETWORK LENGTH OF 205 KM PREPARATION OF REHABILITATION PLAN FOR REHABILITATI ON OF WATER ASSETS (PIPES, VALVES, METERS CUSTOMER CONNECTIONS, BILLING AND COLLECTION SYSTEM ETC.) 2. PHASE REHABILITATION 18 MONTHS (COMPLETED): FOLLOWING WORKS WERE CARRIED OUT IN THIS PHASE REPLACEMENT OF HOUSE SERVICE CONNCTION: 16,125 CONNECTIONS REHABILITATION OF WATER PIPE LINE NETWO RK OF ABOUT 205 KM INCLUDING LAYING OF NEW PIPELINES O F ABOUT 90 KM (HDPE PIPE 71 KM AND DI 19 KM) ESTABLISHMENT OF MONITORING POINTS FOR FLOW & PRESS URE 15 NOS. ESTABLISHMENT OF MONITORING POINTS FOR WATER QUALIT Y 10 NOS. PROGRESSIVE O&M OF THE REFURBISHED WATER SUPPLY SYSTEM WHERE 24 POINTS FOR WATER QUALITY 10 NOS. PROGRESSIVE O&M OF THE REFURBISHED WATER SUPPLY SYSTEM WHERE 247 WATER WAS BEING DELIVERED DEVELOPED AN EFFICIENT CUSTOMER BILLING AND COLLECT ION ESTABLISHMENT OF CUSTOMER CARE CENTRE FOR WATER SUPPLY AT CUSTOMER FACILITY CENTRE METER READING, BILL PREPARATION, DISTRIBUTION AND COLLECTION OF WATER BILLS ON BEHALF OF NMC. 3. PHASE- III: OPERATION & MAINTENANCE 60 MONTHS (ON- GOING) O&M OF WATER SUPPLY NETWORK TO DELIVER 247 WATER SUPPLY TO ALL CUOTOMERS; JUL 2011 ONWARDS NO. OF 247 CONNECTIONS 16125 QUARTERLY VOLUMETRIC BILLING FOR DOMESTIC CUSTOMERS MONTHLY VOLUMETRIC BILLING FOR BULK WATER CUSTOMER AND MAJOR CONSUMERS ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 6 COLLECTION OF PAYMENT RELATED TO WATER CHARGES AND DEPOSIT THE SAME WITH NMC ATTENDING CUSTOMER COMPLAINTS WITHIN STIPULATED TIM E FRAME SUBMIT A QUARTERLY PERFORMANCE REPORT ON KPIS PRESCRIBED IN THE CONTRACT NEW CONNECTIONS & DISCONNECTIONS. DETECTION OF ILLEGAL CONNECTIONS. 9. AS PER THE TERMS MENTIONED IN THE LETTER DATED 31.01.2012, THE PHASE-I PERTAINING TO THE STUDY PHA SE OF 9 MONTHS STANDS COMPLETED AND PHASE-II PERTAINING TO REHABILITATION FOR A PERIOD OF 18 MONTHS ALSO STAND S COMPLETED. AS PER THE LETTER OF THE NMC, PHASE-III CONSISTING OF O&M IS FOR A PERIOD OF 60 MONTHS AND IS ONGOING. THE LETTER AL SO MENTIONS THAT THE O&M WORKS INVOLVE VOLUMETRIC BUILDING OF T HE CONSUMERS, COLLECTION OF PAYMENTS, MONITORING OF NE W CONNECTIONS, DISCONNECTIONS AND ILLEGAL CONNECTIONS . THIS MAINTENANCE WORK IS FOR A PERIOD OF 5 YEARS WHICH I S POST THE EXECUTION OF WORK. THE SAME CAN BE DECIPHERED FROM PARA 3, PHASE-III OF THE LETTER OF THE EXECUTIVE ENGINEER, NMC. 10. IN THIS BACKGROUND WHETHER O&M PHASE FALLS UNDE R THE PART OF THE COMPOSITE CONTRACT LIABLE TO BE APPORTI ONED IN THE PERCENTAGE OF COMPLETION METHOD IS EXAMINED. THE RE LEVANT EXCERPTS OF AS 7 ARE AS UNDER: 1. TYPES OF CONTRACTS A CONSTRUCTION CONTRACT IS ANY CONTRACT WHICH IS EN TERED INTO SPECIFICALLY FOR CONSTRUCTION OF AN ASSET OR A COMBINATION OF ASSETS THAT ARE CLOSELY INTER-LINKED OR INTER-DEPENDENT W.R.T. THEIR TECHNOLOGY/DESIGN/FUNC TION OR THE NATURE OF THEIR ULTIMATE PURPOSE OR USE. A. FIXED PRICE CONTRACT A CONTRACT IN WHICH THE CONTRACTOR AGREES TO A FIXE D CONTRACT PRICE. IN SOME CASES, THERE MAY BE AN ELEM ENT ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 7 OF COST ESCALATION CLAUSE IN THE CONTRACT WHICH IS MUTUALLY AGREED TO BETWEEN THE PARTIES. FOR EXAMPLE, THE PARTIES AGREE TO INCLUDE A CLAUSE IN THE CONTRACT FOR ADJUSTING THE CONTRACT PRICE ON THE BA SIS OF AN INCREASE IN THE COST OF RAW MATERIALS. B. COST-PLUS CONTRACT A CONTRACT IN WHICH THE CONTRACTOR IS REIMBURSED FO R COSTS INCURRED OR AGREED COSTS, PLUS A PERCENTAGE OF THES E COSTS OF A FIXED FEE. 2. COMBINING AND SEGMENTING OF CONSTRUCTION CONTRAC TS I. COMBINING OF CONSTRUCTION CONTRACTS A GROUP OF CONTRACTS, EITHER WITH ONE OR MORE CUSTOMERS, SHALL BE CONSIDERED AS A SINGLE CONSTRUCTION CONTRACT WHEN A LL THE CONTRACTS ARE NEGOTIATED AS A SINGLE PACKAGE, ARE I NTER- LINKED AND FORM PART OF A SINGLE PROJECT AND ARE PERFORMED IN A CONTINUOUS SEQUENCE. F FOR EXAMPLE, A CONTRACT FOR CONSTRUCTION OF THREE SIMILAR BUILDINGS (SIMILAR IN ALL ASPECTS) ON A SINGLE PLOT NEGOTIATED ALL AT ONCE. II. SEGMENTING OF CONSTRUCTION CONTRACTS WHERE A CONTRACT INCLUDES MORE THAN ONE ASSET, THE CONSTRUC TION OF EACH ASSET SHOULD BE TREATED AS A SEPARATE CONSTRUCTION CONTRACT WHEN SEPARATE PROPOSALS HAVE BEEN GIVEN FOR EACH ASSET, EACH ASSET HAS BEEN SEPARATEL Y NEGOTIATED AND THE COSTS AND REVENUES OF EACH ASSET CAN BE IDENTIFIED SEPARATELY. FOR EXAMPLE, A CONTRACT FOR CONSTRUCTION OF THREE DIFFERENT BUILDINGS ON THE SAME PLOT WITH DIFFERENT SPECIFICATIONS AND EACH BUILDING IS SEPARATELY NEGO TIATED WITH THE CONTRACTOR. 3. REVENUE FROM A CONTRACT THE REVENUE FROM A CONTRACT INCLUDES THE FOLLOWING TO THE EXTENT IT IS PROBABLE OF GENERATING REVENUE AND IS MEASURABLE: I. THE INITIAL AMOUNT OF REVENUE AGREED IN THE CONT RACT; II. CLAIMS AND INCENTIVES ON ACCOUNT OF VARIATIONS IN CONTRACT WORK; 4. COSTS OF A CONTRACT ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 8 THE COST OF A CONTRACT INCLUDES THE FOLLOWING: I. DIRECTLY RELATED COSTS THAT TO THE SPECIFIC CONT RACT II. COSTS WHICH ARE GENERALLY ATTRIBUTABLE AND ALLO CATED TO THE CONTRACT ACTIVITIES III. OTHER COSTS WHICH ARE SPECIFICALLY CHARGEABLE TO THE CUSTOMER UNDER THE TERMS OF THE CONTRACT 5. RECOGNITION OF REVENUE AND COST FROM A CONTRACT WHERE THE RESULT OR OUTCOME OF ANY CONTRACT FOR CONSTRUCTION CAN BE PROJECTED, THE RELATED CONTRACT REVENUE AND CONTRACT COSTS SHALL BE RECOGNIZED BY T AKING INTO ACCOUNT THE STAGE OF COMPLETION OF SUCH CONTRA CT. EXPECTED LOSSES SHALL BE RECOGNIZED IMMEDIATELY AS EXPENSES. I. IN CASE OF A FIXED PRICE CONTRACT, THE OUTCOME C AN BE ESTIMATED IN A RELIABLE MANNER WHEN ALL THE FOLLOWI NG CONDITIONS ARE SATISFIED: I. THE ENTIRE REVENUE FROM A CONTRACT CAN BE RELIAB LY MEASURED II. IT IS APPARENT THAT THE ECONOMIC BENEFITS OF SU CH CONTRACT WILL FLOW TO THE ORGANIZATION III. BOTH CONTRACT COSTS AND STAGE OF COMPLETION CA N BE MEASURED IV. CONTRACT COSTS CAN BE CLEARLY IDENTIFIED FOR A COMPARISON BETWEEN ACTUAL COSTS AND PRIOR ESTIMATES II. IN CASE OF A COST-PLUS CONTRACT, THE OUTCOME CA N BE ESTIMATED IN A RELIABLE MANNER WHEN ALL THE FOLLOWI NG CONDITIONS ARE SATISFIED: I. IT IS PROBABLE THAT ECONOMIC BENEFITS OF THE CON TRACT WILL FLOW TO THE ORGANIZATION II. CONTRACT COSTS ATTRIBUTABLE TO THE CONTRACT CAN BE IDENTIFIED AND MEASURED CLEARLY III. PERCENTAGE OF COMPLETION METHOD THIS METHOD DEFINES THE RECOGNITION OF REVENUE AND COST TAKING INTO ACCOUNT THE STAGE OF COMPLETION OF A CONTRACT. UNDE R THIS ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 9 METHOD, REVENUE AND COST ARE RECOGNIZED IN THE STATEMENT OF PROFIT AND LOSS IN THE ACCOUNTING PERI ODS IN WHICH THE WORK IS PERFORMED. IV. CONTRACT WORK-IN-PROGRESS A CONTRACTOR MAY IN CUR COSTS THAT RELATE TO FUTURE ACTIVITY IN A CONTRACT. SUCH COSTS ARE RECOGNIZED AS AN ASSET IF IT IS PROBABLE THAT THEY WILL BE RECOVERED. 6. DETERMINATION OF THE STAGE OF COMPLETION THE STAGE OF COMPLETION OF A CONTRACT MAY BE DETERM INED IN DIFFERENT WAYS. DEPENDING ON THE NATURE OF THE CONTRACT, THE METHODS MAY INCLUDE: I. THE PROPORTION OF CONTRACT COST INCURRED W.R.T. THE TOTAL ESTIMATED COST OF CONTRACT; (FOR EXAMPLE: IF THE TOTAL COST OF THE CONTRACT IS RS. 30 LAKHS AND THE COST INCURRED TILL DATE IS RS. 15 LAKHS, THE STAGE OF CO MPLETION IS REGARDED AS 50% COMPLETE I.E. 15 LAKHS / 30 LAKH S) II. SURVEYS OF WORK PERFORMED; (FOR EXAMPLE: IN A CONTRACT FOR CONSTRUCTION OF A BRIDGE, THE SITE INS PECTOR CAN DO A SURVEY AND WITH REGARDS TO THE TECHNICALIT IES OF THE PROJECT, INFORM HOW MUCH WORK HAS BEEN COMPLETE D) III. COMPLETION OF A PHYSICAL PROPORTION OF CONTRAC T WORK (FOR EXAMPLE: IN A CONTRACT FOR CONSTRUCTION OF A F IVE STOREY BUILDING, IF THREE STORIES ARE COMPLETE, THE STAGE OF COMPLETION FOR THE SAME IS REGARDED AS 60% I.E. 3 STORIES/5 STORIES) WHEN THE OUTCOME OF A CONSTRUCTION CONTRACT CANNOT BE ESTIMATED, THE REVENUE AND COST SHOULD BE RECOGNIZE D ONLY TO THE EXTENT OF CONTRACT COSTS INCURRED WHOSE RECOVERY IS PROBABLE. 11. SIMILARLY, THE RELEVANT PART OF THE AS- 9 WITH REGARDING RENDERING OF SERVICES IS AS UNDER: APPLICABILITY OF AS 9 REVENUE RECOGNITION THIS STANDARD WAS ISSUED BY ICAI IN THE YEAR 1985 A ND IN THE INITIAL YEARS, IT WAS RE-COMMENDATORY FOR ON LY LEVEL I ENTERPRISES AND BUT WAS MADE MANDATORY FOR ALL OTHER ENTERPRISES FROM APRIL 01, 1993. ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 10 AS PER ICAI, ENTERPRISE MEANS A COMPANY AS DEFINED IN SECTION 3 OF THE COMPANIES ACT, 1956. LEVEL I ENTERPRISES ARE THOSE ENTERPRISES WHOSE TURNOVER FOR THE IMMEDIATELY PRECEDING ACCOUNTING YEAR EXCEEDS 50 CRORES. THE TURNOVER HERE DOES NOT INCLUDE OTHER INCOME AND IS APPLICABLE FOR HOLDING AS WELL AS SUBSIDIARY COMPANIES. EXPLANATION REVENUE RECOGNITION EMPHASIZES ON THE TIMING OF RECOGNITION OF REVENUE IN THE STATEMENT OF PROFIT A ND LOSS OF AN ENTERPRISE. THE AMOUNT OF REVENUE ARISING FROM A TRANSACTION IS USUALLY DETERMINED BY AN AGREEMENT BETWEEN THE PARTIES INVOLVED IN THE TRANSACTION. WHEN UNCERTAINTIES ARISE REGARDING THE DETERMINATIO N OF THE AMOUNT OR ITS ASSOCIATED COSTS, THESE UNCERTAINTIES MAY INFLUENCE THE TIMING OF THE REVEN UE. A. SALE OF GOODS ONE KEY ELEMENT FOR DETERMINING THE RECOGNITION OF REVENUE OF A TRANSACTION INVOLVING THE SALE OF GOOD S IS THAT THE SELLER HAS TRANSFERRED THE PROPERTY IN THE GOODS TO THE BUYER FOR A CONSIDERATION. IN MOST CAS ES, THE TRANSFER OF PROPERTY IN THE GOODS RESULTS IN TH E TRANSFER OF THE SIGNIFICANT RISKS AND REWARDS IN OWNERSHIP OF THE GOODS. HOWEVER, THERE ARE SITUATIONS WHERE THE TRANSFER OF SIGNIFICANT RISKS DOESNT COINCIDE WITH THE TRANSFE R OF GOODS TO THE BUYER, IN SUCH CASES REVENUE HAS TO BE RECOGNIZED AT THE TIME OF TRANSFER OF SIGNIFICANT R ISKS AND REWARDS TO THE BUYER. EXAMPLE: GOODS SENT TO TH E CONSIGNEE ON APPROVAL BASIS. THERE ARE CERTAIN CASES IN THE SPECIFIC INDUSTRY WH ERE THE PERFORMANCE MAY BE SUBSTANTIALLY COMPLETE PRIOR TO THE EXECUTION OF THE TRANSACTION GENERATING REVENUE . IN SUCH CASES, WHEN THE SALE IS ASSURED UNDER GOVERNMENT GUARANTEE OR A FORWARD CONTRACT OR WHERE THE MARKET EXISTS AND THERE IS A NEGLIGIBLE RISK OF ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 11 FAILURE TO SELL, THE GOODS INVOLVED ARE OFTEN VALUE D AT THE NET REALIZABLE VALUE (NRV). SUCH AMOUNTS ARE NOT DEFINED IN THE DEFINITION OF T HE REVENUE BUT ARE STILL SOMETIMES RECOGNIZED IN THE STATEMENT OF PROFIT AND LOSS. EXAMPLE: HARVESTING O F AGRICULTURAL CROPS OR EXTRACTION OF MINERAL ORES. B. RENDERING OF SERVICES REVENUE RECOGNITION OF SERVICES DEPENDS AS THE SERV ICE IS PERFORMED. THIS IS FURTHER DIVIDED INTO TWO WAYS : (A) PROPORTIONATE COMPLETION METHOD: THIS METHOD OF ACCOUNTING RECOGNIZES REVENUE IN THE STATEMENT OF PROFIT & LOSS PROPORTIONATELY WITH THE DEGREE OF COMPLETION OF EACH SERVICE. HERE THE SERVICE COMPLETION CONSISTS OF THE EXECUTI ON OF MORE THAN ONE ACT. REVENUE IS RECOGNIZED WITH TH E COMPLETION OF EACH SUCH ACT. (B) COMPLETED SERVICE CONTRACT METHOD: THIS METHOD OF ACCOUNTING RECOGNIZES REVENUE IN THE STATEMENT O F PROFIT & LOSS ONLY WHEN THE RENDERING OF SERVICES U NDER A CONTRACT IS COMPLETED OR SUBSTANTIALLY COMPLETED. 12. FURTHER, WE HAVE GONE THROUGH THE PAYMENTS MADE BY THE NMC TO THE ASSESSEE. THE PAYMENT PATTERN REVEALS TH AT THE ASSESSEE HAS RAISED SEPARATE INVOICES FOR O&M PHASE ON A REGULAR BASIS AS PER SECTION 5 OF TOR CLAUSE 8.3 AN D THE SAME HAVE BEEN DULY ACCOUNTED IN THE YEARS IN WHICH IT H AS BEEN RECEIVED. THUS, ON GOING THROUGH THE ENTIRE FACTS O F THE CASE, WE FIND THAT THE THREE DIFFERENT PHASES OF THE WORK WHICH ARE TOTALLY SEPARATE IN EXECUTION. KEEPING IN VIEW THE FACT, THAT THE O&M PHASE CANNOT BE A PART OF THE CONSTRUCTION ACTI VITY AS THE O&M PHASE INVOLVES THE SUPPLY OF WATER TO THE RESID ENCE GIVING CONNECTIONS AND MONITORING THE CONNECTIONS WHICH IS CLEARLY A POST CONSTRUCTION ACTIVITY, WE HOLD THAT THE AMOUNT ALLOTTED FOR O&M PHASE CANNOT BE INCLUDED IN DETERMINING THE PER CENTAGE ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 12 OF COMPLETION METHOD IN RECOGNITION OF THE REVENUE. WE ALSO FIND THAT THE AMOUNTS OF O&M PHASE HAVE BEEN DULY O FFERED TO TAX IN THE YEAR OF RECEIPTS. WE ALSO FIND THAT THE PHASE-I AND THE PHASE-II ARE THE PREPARATORY CONSTRUCTION PHASE S OVER A PERIOD OF 18 MONTHS WHEREAS THE OPERATIONS & MAINTE NANCE (O&M PHASE) OF SUCH CONSTRUCTED PROJECT IS OF 60 MO NTHS. HENCE, THE MAINTENANCE ACTIVITIES CANNOT BE CLUBBED WITH THE CONSTRUCTION ACTIVITY. HAVING GONE THROUGH THE ACCO UNTING STANDARDS (AS-7 AND AS-9), WE FIND THAT APPLICATION OF THE STANDARD TO SEPARATELY IDENTIFIABLE COMPONENTS OF S INGLE CONTRACT IS ALLOWABLE WHILE DETERMINING THE PERCENT AGE COMPLETION OF THE PROJECT. SINCE, THE O&M PHASE COM MENCES AFTER THE CONSTRUCTION OF ACTIVITY OF REHABILITATIO N PHASE, WE HEREBY HOLD THAT THE AMOUNT PERTAINING TO O&M PHASE NEEDS TO BE SEPARATELY CONSIDERED WHILE DETERMINING THE PROF ITS OUT OF THE CONSTRUCTION ACTIVITIES. THE APPEAL OF THE ASSE SSEE ON GROUND NOS. 2 & 2.1 IS HEREBY ALLOWED. CONSIDERATION OF VAT FOR RECOGNIZING THE REVENUE UN DER AS-7: 13. BRIEF FACTS OF THE ISSUE ARE THAT THE CONTRACT GIVEN BY THE NMC INCLUDE TOTAL TAXES OF RS.2,68,39,975, THE BREA KUP OF WHICH IS AS UNDER: (A) SERVICE TAX (A1) STUDY PHASE RS.30,10,893/- REHABILITATION PHASE RS.30,83,944/- O&M PHASE RS.51,32,614/- TOTAL RS.1,12,27,451/- (A2) REHABILITATION COST RS.65,66,588/- ITA NO. 4615/DEL/2016 VEOLIA INDIA PVT. LTD. 13 (B) VALUE ADDED TAX REHABILITATION PHASE RS.90,45,934/- 14. THE AO HAS CONSIDERED THIS AMOUNT FOR CALCULATI NG THE REVENUES OF THE YEAR. 15. THE CBDT CIRCULAR NO. 4/2008 DATED 04.04.2008 C LARIFIED THAT SERVICE TAX DOESNT PARTAKE THE NATURE OF INCO ME. THE CIRCULAR WAS ISSUED WHILE DEALING WITH SECTION 194- I. SINCE, THE SUM AND SUBSTANCE OF THE CIRCULAR IS THAT THE S ERVICE TAX DOESNT FORM A PART OF THE INCOME OF THE ASSESSEE, THE SAME NEED NOT BE CONSIDERED FOR CALCULATING THE PROFITS OF THE ASSESSEE FOR THE YEAR. SIMILARLY, THE VALUE ADDED T AX WHICH DO NOT FORM THE PART OF THE INCOME OF THE ASSESSEE ALS O NEEDS TO BE EXCLUDED WHILE DETERMINING THE REVENUES OF THE Y EAR IN THE INSTANT CASE. AS A RESULT, APPEAL OF THE ASSESSEE O N GROUND NO. 2.2 IS HEREBY ALLOWED. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27/04/2020. SD/- SD/- (SUSHMA CHOWLA) (DR. B.R.R. KUMAR) VICE PRESIDENT ACCOUNTANT MEMB ER DATED: 27/04/2020 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR