TaxTMI 
TaxTMI 
2019 (4) TMI 873
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....ed to consider the detailed facts submitted in case of provision made on Kanoria Chemicals & Industries Ltd. Contract, including for liquidated damages payable. 4. The learned Commissioner of Income Tax (Appeals) erred in holding that liquidated damages for delay in completion were optional. 5. The learned Commissioner of Income Tax (Appeals) erred in disallowing provisions for cost overruns on incomplete contracts-Rs.1,92,34,146/- 6. The learned Commissioner of Income tax (Appeals) erred in not deleting provisions for costs on completed contracts amounting to Rs. 14,66,21,872/- which has been disallowed in earlier assessment years and were utilized/written back in the current year. 7. The learned Commissioner of Income Tax (Appeals) erred in confirming taxation of an amount of Rs. 28,84,90,428/-, as income, in respect of contracts accounted under "Percentage of Completion" (POC) Method. 8. The learned Commissioner of Income Tax (Appeals) erred in not considering that the appellant was following a regular method of accounting, sanctified by Accounting Standards. 9. The learned Commissioner of Income Tax (Appeals) failed to consi....
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.... e-filed by the assessee on 31/10/2006. During impugned AY, the assessee being resident corporate entity was stated to be engaged in supply of processors, designing, construction and commissioning of complete plants for chemical fertilizers, petrochemical, refining& other related industries. 2.1 The name of the assessee company has undergone change from Uhde India Private Limited to Thyssenkrupp Industrial Solutions (India) Private Limited vide certificate of incorporation pursuant to change of name issued by Registrar of Companies, Mumbai on 07/10/2014. Incorporating the same, revised Form No. 36 has been filed on 03/11/2017. Finding the same in order, we proceed to dispose-off the appeal as per the arguments of respective representatives. 2.2 For ease of reference, the grounds of appeal could be grouped &tabulated in the following manner: - Ground Nos. Nature of Addition Amount (Rs.) 1 to 4 Provision for costs on completed contracts 9,49,35,320/- 5. Cost overruns on completed contracts 1,92,34,146/- 6. Not Pressed NA 7 to 11 Income on Contracts accounted under Percentage of Completion Method 28,84,90,428/- 12 & 13 Excess of....
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....as essential for the company to provide for estimated costs likely to be incurred during the period between commissioning of the plant and final acceptance of the plant by the customer. These costswould generally include project specific travelling costs of the engineers, testing cost, supplies of replacement spares, replacement cost, modification costs etc. It was also necessary to make provisions for additional costs if sustainable production capability was not demonstrated within the guarantee period. 2.3.3 Similarly, under the cost-plusfees contracts, profits were recognized upon mechanical completion of the plant. The provisions were made mainly for re-engineering services to be provided and quantum of provision would relatively be lesser as compared to LSTK project since the company's liability under such contracts would be related to re-engineering services only. Mechanical completion was stated to be the stage at which the plant, after mechanical completion, was ready for acceptance of feed stock leading to production of guaranteed products. 2.3.4 On the basis of above, it was submitted that in both types of contracts future costs were still to be incurred by the comp....
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....bservations are already given in para 2.5 of the impugned order. To bolster these observations, after examining the provisions made against contracts entered into by the assessee with an entity namely Kanoria Chemicals & Industries Ltd., it was noted that the assessee reversed provisions to the extent of 45% in subsequent years and further out of total provisions of Rs. 5.78 Crores made against this project, the amount of Rs. 3.34 Crores were merely Liquidated damages for delay in time schedule, which were not mandatory but optional as per contractual terms. All the aforesaid factors led the Ld. first appellate authority to conclude that the provisions were made merely on the basis of surmises, suspicions, play safe based financial plans and were not capable of estimation with reasonable certainty and therefore, the same could not be allowed to the assessee. 2.3.7 The Ld. Sr. Counsel for Assessee [AR], Shri Percy Pardiwala, drawing our attention to the documents placed in the paper-book,submitted that the provisions were made on scientific basis in relation to each project as per input received from technical team. The assessee has made payment against these provisions in subseq....
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....dards as per Section 145(2) which necessitated creation of provisions for all known liabilities and losses. Our attention is drawn to the fact that project-wise provision made by the assessee was submitted to Ld. AO and complete details in respect thereof was available on record. It has been submitted that consistent method of accounting was being followed by the assessee for the past several years, in this regard. It has also been submitted that the provisions were allowable in full and if the provisions were allowed only to the extent of utilization in a subsequent year, then the same would indirectly, tantamount to allowance of expenditure on cash basis as against the accrual principle of mercantile system of accounting. Reliance has been placed on the judgment of Hon'ble Bombay High Court rendered in Shrikant Textiles Vs CIT [81 ITR 222].Reliance has also been placed on the decision of Hon'ble Apex Court rendered in Excel Industries Ltd. [358 ITR 295] &decision of Hon'ble Mumbai Tribunal rendered in Toyo Engineering Corp. Vs. DDIT [ITA No. 6600/Mum/2002 22/03/2004]for various submissions. 2.3.9 Per Contra, Ld. CIT-DR relied upon the orders of Tribunal in assessee's own ca....
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....e neutrality. 2.3.11 We have heard the rival contentions and perused relevant material on record including documents placed in the paper-book &judicial pronouncements relied upon by respective representatives. Since the issue is recurring in nature, for ease of understanding, at the outset, the status of appeal filed by the assessee in past years before the Tribunal could be tabulated in the following manner: - No. AY ITA No. Order Dated Remarks 1. 2000-01 ITA 8053/Mum/2004 23/10/2007 Assessee's appeal on the issue allowed 2. 2002-03 ITA 1926/Mum/2006 10/09/2008 Assessee's appeal on the issue partly allowed 3. 2003-04 ITA 6510/Mum/2009 30/09/2011 Assessee's appeal on the issue partly allowed 4. 2004-05 ITA 6511/Mum/2009 08/08/2012 Assessee's appeal on the issue partly allowed 5. 2005-06 ITA 1690/Mum/2012 04/07/2014 Assessee's appeal on the issue allowed The observation / conclusion in the latest order of the Tribunal for AY 2005-06 could be extracted in the following manner: - 2.5. We have heard the rival submissions and perused the material before us. In our opinion PC....
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....plant. We find that the FAA has disallowed provisions on the basis that the assessee had written back the amounts in subsequent years.He has not analyzed the data of earlier years and subsequent years to determine the alleged unreasonableness of the provisions.It is a fact that res judicata is not applicable to income tax proceedings and every year is an independent unit,but rule of consistency contemplates that the AO should not suddenly disallow any item without assigning some reason.From the order of the AO/FAA we are unable to find as how the facts and circumstances for the year 2001-02 were different from the facts for the year under consideration.Assessee was following the same system of making provisions for uncompleted projects for last so many years.There in nothing in the order of the FAA that could prove that provisions made by the assessee were not based on estimate given by experts.We have perused the paper book-it is found that internal memos are signed by one person,but the estimate of provision was prepared by three/four competent authorities,dealing with financial and technical sides of the projects(page 83, 89,124,138 of the PB).Inshort, the assessee was ....
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....ons of Rs. 949.35 Lacs, the assessee has incurred expenditure of Rs. 751.60 Lacs (which is more than 79% of the provisions) in the subsequent year and the excess provision i.e Rs. 393.14 Lacs have been offered to tax in AYs 2007-08 & 2008-09 by way of reversal. Further, the assessee is following consistent method of accounting and estimating the provisions on similar basis which is in line with the applicable accounting standards notified u/s 145(2) and as per statutory mandate. Nothing on record suggest that there was any change in method of accounting during impugned AY to recognize the revenue or expenses. 2.3.13 The assessee's submission before Ld. AO dated 06/11/2009 as placed from page nos. 55 onwards, reveal that project wise estimation were made by assessee for the expenditure to be incurred under each head. The same were arrived at after identifying expected cost required to be incurred in future on various projects. The elaborate working of the same along with relevant contracts entered into by the assessee with the customers has already been placed in the paper-book which establishes the fact that the estimates were not mere guess work or made out of thin air. Anot....
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.... stand of Ld. first appellate authority, we allow Ground Nos. 1 to 4 of the assessee's appeal. 2.4 Ground No. 5: Cost overruns on incomplete contracts 2.4.1 The cost overruns on incomplete projects for Rs. 192.34 Lacs stem from the fact that these costs represent expected loss to be incurred on a particular contract after considering the revenue generated from that contract, cost already incurred on the said project and estimated future costs to be incurred in future to complete the projects. It was submitted that such cost overruns in excess of the contract value which could not be recovered from the client was crystallized, identified, determined and the same was provided in the books in tune with Accounting Standard-7 [AS-7] issued by ICAIand hence, allowable to the assessee. The contract wise details of provisions for cost overruns on incomplete contracts was also provided before Ld.AO, the details of which has already been extracted in the impugned order on page no.7. However, not convinced with assessee's submissions, the same was disallowed by Ld. AO. The Ld. CIT(A) confirmed the disallowance by relying upon the order of Tribunal for AY 2003-2004. Aggrieved, the assess....
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....In other words, in the opinion of Ld. AO, the billing done by the assessee under these projects were to be recognized as sales revenue in the books of account as against recognized by the assessee on the basis of percentage of completion method of accounting since progress billing was nothing but the actual work completed by the assessee under the project. Although the assessee defended the same vide reply dated 25/11/2009 by submitting that the revenue is recognized on the basis of percentage of completion method, however, not convinced, Ld. AO opined that revenue recognized in the books wasless than progress billingand therefore, the PCM adopted by the assessee as per AS-7 to recognize the revenue did not represent real profits earned by the assessee. Further, by adopting this method, the true sales were not being reflected in the books. Finally, disregarding the assessee's submissions, an amount of Rs. 28.84 Crores representing understatement of profits in respect of 28 contracts was disallowed and added to the income of the assessee.The details of the same has already been reproduced on page nos. 12 to 14 of the quantum assessment order. The stand of Ld. AO, upon confirmatio....
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....od would be actual cost spent by the assessee. The progressive billing has to be as per value of each contract and not as per the cost of the contract. Our attention is drawn to the fact that the project was completed to the extent of 98.3% whereas the assessee has taken the completion to the extent of 96.8% only by taking the direct actual cost. The case law of IOT infrastructure has sought to be distinguished on the ground that in that case progressive billing was done not for the amount of work done but for the mobilization and other advances receivable by the assessee as against the fact of the present case where the billing has been done wholly on the basis of work completed and there was no advance involved. 2.5.4 However, Ld. Sr. Counsel, in the rejoinder, submitted that progress billing had nothing to do with the recognition of the revenue since revenue were recognize on the basis of percentage of work done to ensure matching of cost and revenues in accordance with the accounting standards and therefore, progress billing could not be construed to be an invoice raised for the portion of the contract that has been completed to date rather it is only a billing done as per p....
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.... followed completed contract method. During assessment proceedings, it transpired that the assessee raised invoices against these 13 projects for Rs. 22.52 Crores and reflected the same on the liabilities side of the Balance Sheet. Similarly, the costs of Rs. 18.56 Crores were accumulated against these projects and reflected on the asset side of the Balance Sheet. The Ld. AO opined that though substantial work was done under these projects and invoices were also raised, no profit was shown against the same. Result antly, the differential of the two amounts i.e. Rs. 396.15 Lacs was added to the income of the assessee. The stand of Ld. AO, upon confirmation by first appellate authority, is under appeal before us. 2.6.2 Th Ld. Sr. Counsel submitted that the costs as well as revenues are recognized under these projects on completed contract method. These revenues as well as costs were accumulated in the similar manner for AYs 2004-05 & 2005-06 also which has been accepted by the revenue and therefore, there was no reason to disturb the same in this AY. Per contra, Ld. CIT-DR submitted that, upon change of method of accounting, the revenues from such projects were to be offered to ta....