Tribunal rules O&M phase excluded from completion method; VAT, Service Tax not part of contract value for revenue.

The tribunal allowed the appeal of the assessee, holding that the amount related to the O&M phase should not be included in the percentage of completion method for construction activities. Additionally, VAT and Service Tax should be excluded from the construction contract value for revenue recognition under AS 7.

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Issues Involved:
1. Short recognition of contract revenue under Accounting Standard (AS) 7.
2. Misapplication of AS 7 to revenue from Operation and Maintenance (O&M) services.
3. Inclusion of Value Added Tax (VAT) and Service Tax in the construction contract value for revenue recognition under AS 7.

Issue-wise Detailed Analysis:

1. Short Recognition of Contract Revenue under AS 7:
The assessee contested the order of the CIT(A) for sustaining the action of the AO, which alleged short recognition of contract revenue under AS 7 by incorrectly treating the 'revised work order value' of Rs. 27,70,60,188 for Project Demo Zone as the 'contract value' instead of the construction contract value of Rs. 21,94,78,821. The AO held that the entire contract value, including the O&M phase, should be considered while calculating the percentage of completion method. The CIT(A) upheld this view, considering the O&M phase as part of the composite contract.

2. Misapplication of AS 7 to Revenue from O&M Services:
The assessee argued that the CIT(A) erred in applying AS 7 to an income/revenue item amounting to Rs. 4,15,26,000 related to O&M services, which should be considered only during the period when the O&M activity actually takes place. The O&M phase, which involves post-construction activities like volumetric billing, collection of payments, and monitoring connections, was argued to be separate from the construction contract. The tribunal examined the terms of the contract and payments made by the Nagpur Municipal Corporation (NMC) to the assessee, finding that the O&M phase is distinct and should not be included in the percentage of completion method for construction activities. The tribunal held that the amount allotted for the O&M phase cannot be included in determining the percentage of completion method in recognition of revenue. The appeal on grounds 2 and 2.1 was allowed.

3. Inclusion of VAT and Service Tax in Construction Contract Value:
The assessee contested the inclusion of amounts aggregating to Rs. 2,68,39,975 towards VAT and Service Tax in the construction contract value for revenue recognition under AS 7. The tribunal referred to CBDT Circular No. 4/2008, which clarified that service tax does not partake the nature of income and should not be considered for calculating profits. Similarly, VAT should also be excluded while determining the revenues of the year. The tribunal allowed the appeal on ground 2.2, excluding VAT and Service Tax from the construction contract value for revenue recognition purposes.

Conclusion:
The tribunal allowed the appeal of the assessee, holding that:
1. The amount related to the O&M phase should not be included in the percentage of completion method for construction activities.
2. VAT and Service Tax should be excluded from the construction contract value for revenue recognition under AS 7.

Order Pronounced in the Open Court on 27/04/2020.

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