TMI Blog2013 (5) TMI 469X X X X Extracts X X X X X X X X Extracts X X X X ..... e the invoice before the Assessing Officer. However, in the year under consideration, it has not been disputed by the AO that invoice has not been furnished. Thus, no basis for sustaining the addition and consequently set aside the impugned order passed by the Commissioner (Appeals) and allow the ground no.1, raised by the assessee. Disallowance of overheads of Enron Power Service B.V. pertaining to employees whose salaries have been debited by the assessee on which tax has been paid - Held that:- For claiming any expenses under section 37(1) onus is upon the assessee to prove that the expenditure has been incurred only for its business purpose which can be discharged by way of some evidence. In the present case, the assessee has neither produced any agreement between the assessee and Enron Power Service, B.V., as to what kind of training and service have been provided to the employees of the assessee and what was the terms and conditions for making such payments. No details have been produced showing the nature of service rendered and the nature of reimbursement of expenses & reasoning given by the AO has not been rebutted with any kind of documentary evidence to support the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Respondent : Mr. Mahesh Kumar ORDER Per Amit Shukla, J.M. The present appeal preferred by the Assessee, is against the impugned order dated 25th February 2004, passed by the learned Commissioner (Appeals)-XXXIII, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short "the Act"), for the assessment year 2000-01, on the following grounds:-- "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs. 11,01,94,324 made by the ITO. Both the learned CIT(A) and the ITO have erred in disregarding AS-7 issued by the ICAI and in relying upon section 145(3) of the Act. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of Rs. 9,35,91,110 representing overheads of EPS-BV pertaining to employees whose salaries have been debited by the appellant and on which tax has been paid by the appellant. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of Rs. 1,56,61,303, paid as legal and professional charges. 4. On the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r observed that by adopting percentage of completion method, the assessee manages to suppress the revenue / receipts to the extent of the difference between the invoiced amount and the amounts arrived as per the percentage of work adopted by the assessee. This can lead to arbitrary decision with regard to the percentage of work completed. Under the mercantile system of accounting, the Revenue is said to be accrued or arising, when a legal right in respect of it comes into existence. In this case, the assessee gets the legal right when it raises the invoice in pursuance of contract agreements and as per the schedule laid down. It is not right on the part of the assessee to suppress or under report the accrued revenue by resorting to the manipulation in its accounting policy. He relied upon the judgment of Kerala High Court in Janatha Contract Co. v/s CIT, [1978] 105 ITR 627 (Ker.) and the judgment of Hon'ble Supreme Court in CIT v/s Gajapathy Naidu (A.), [1964] 53 ITR 114 (SC). He also relied upon the judgment of Hon'ble Supreme Court in Standard Triumph Motor Co. v/s CIT, [1993] 201 ITR 391 (SC), wherein the judgment of Madras High Court in Standard Triumph Motor Co. Ltd. (supra) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed price contracts and not cost plus contracts. The billing and payment schedules are pre-determined and are irrespective of quantum of work completed. The assessee raised invoice strictly as per schedule and not as per the actual work done as the invoices mainly represent pre- determined progress payments to be made and in no way represents the cost incurred by the assessee. The invoices are raised on the first day of every month as per the schedule. They are not indicative of the stage of completion of the project. Further, the provisions of section 143(3) are not warranted in assessee's case as correctness and completeness of the accounts of the assessee cannot be doubted as no defect has been found in the books of account. For adopting the said method of accounting, the assessee has relied upon the decision of the Tribunal in M.N. Dastur Co. Ltd. v/s DCIT, [1997] 62 ITD 113 (Bangl.). 7. The Commissioner (Appeals), though completely agreed with this contention of the Assessee, however, held that in support of this contention, the assessee has not filed any evidence to prove as to how much work was completed during the year under consideration and how much expenditures were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... schedule as given in the contract and submitted that there is no dispute by the Assessing Officer regarding the quantum of total revenue, the total cost incurred and the estimated cost declared by the assessee. As against the invoices aggregating to Rs. 595,01,51,900, the assessee has recognized revenue of Rs. 583,99,57,576 and the difference is hardly 2%. In such a big project, such a difference cannot be said to be much of difference. He also reiterated the decision M.N. Dastur Co. Ltd. (supra). 9. On the other hand, the learned Departmental Representative relied upon the findings of the Commissioner (Appeals) and the Assessing Officer and submitted that once the invoices has been raised, the assessee was obliged to recognize the revenue as per the invoices. The findings of the Commissioner (Appeals) that the details of how much quantity of work was completed during the year under consideration have not been proved. Without any details, no actual profit can be determined. He further submitted that in the immediately preceding year, the Tribunal in assessee's own case has set aside this issue on the ground that invoices were not produced. Reference was made to Para-18 of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st incurred to date which bears the estimated total cost of the contract. To understand the basis for recognisition of revenue under the percentage of completion method, the relevant extract of AS-7 is reproduced herein below:- "9. Percentage of Completion Method 9.1 Under the percentage of completion method, the amount of revenue recognised is determined by reference to the stage of completion of the contract activity at the end of each accounting period. The advantage of this method of accounting for contract revenue is that it reflects revenue in the accounting period during which activity is undertaken to earn such revenue. 9.2 The stage of completion used to determine revenue to be recognised in the financial statements is measured in an appropriate manner. For this purpose no special weightage should be given to a single factor; instead, all relevant factors should be taken into consideration; for example, the proportion that costs incurred to date bear to the estimated total costs of the contract, by surveys which measure work performed and completion of a physical proportion of the contract work. 9.3 Progress payments and advances received from customers may not nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e held that the AS-7 is against the provisions of law or the profits cannot be determined for the purpose of taxability. Even under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of the expenses. The revenue and income earned during the accounting period is required to be compared with the expenditure incurred for earning that revenue. This matching is required to be done on accrual basis. Under percentage of completion method, the revenue is recognized on the actual work done and matching cost is taken to arrive at the profitability of relevant accounting year. Under a contract, the project is spread for several years and actual profit can only be determined after the completion of the project, however, the AS-7 provides that the revenue can be recognized on the basis of actual work done and the proportionate cost estimated on such a project. For e.g., in a given contract, if the estimated profit is taken at 10%, the cost is estimated in that proportion and the balance is taken or transferred to work- in-progress. Thus, we do not find any infirmity in the method of accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices before AO and this fact has been spelt out in the assessment order at more than one place. Ld. A.R also did not deny the fact that these invoices were not produced either before AO or before Ld. CIT(A). simultaneously it was submitted by Ld. A.R that assessee is in a position to produce invoices which could not be produced earlier. Those invoices will be very relevant and germane to the issue as from those invoices it can be determined that how much work was completed by the assessee during the year under consideration. No material has been brought on record by the assessee to show that the total amount received by it amounting to Rs. 320,14,19,720/- from EDC did not pertain to "OnCon IWA" as the payment, if any, was to be made by EDC on the basis of that contract was in respect of work done by the assessee. If the total amount of Rs. 320,14,19,720/- is paid by EDC on completion of such work then the percentage of work as computed in the above part of this order will be more than 20%. However, in the interest of justice, we consider it just necessary to restore this issue to the file of AO with direction to allow another opportunity to the assessee to place on record all the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid. 15. The assessee, in its financial statements of total income attached to the return of income, submitted that it has debited a sum of Rs. 9,35,90,110, to its Profit Loss Account on account of indirect pay roll overheads payable to Enron Power Service B.V., a Dutch entity on which no tax has been deducted. It has been claimed as expenditure on the ground that the amount is not chargeable to tax in India because the same is in the nature of reimbursement of cost, therefore, no tax is to be deducted at source under section 195. The Assessing Officer required the assessee to furnish copies of agreements, invoices and all relevant correspondence with Enron Power Service B.V. pertaining to the said amount which was debited to Profit Loss account. In response, the assessee submitted that these payments were in the nature of reimbursement of expenses and were overhead amounts for LNG and power which were recorded in the indent books for the assessee. There are no invoices or agreements to support these amounts. This system of charging overheads is a worldwide policy of Enron Group of companies and is followed for all projects globally. These expenses are recorded through entr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer that firstly, if the salaries were allowed as deduction, then the overhead should have been allowed as an expenditure which were in the nature of training for the staff used in India which is related to the work of assessee's business; secondly, in view of the nature of expenditure incurred, agreements, invoices, etc., are not necessary as it is an expenditure incurred on employees working on assessee's project; thirdly, it was purely in the nature of reimbursement of expenditure and, hence, no tax is to be deducted at source. The Commissioner (Appeals) too rejected the assessee's contentions and confirmed the findings of the Assessing Officer that in the absence of any proof that service has been rendered by the Enron Power Service B.V. to the assessee, the claim cannot be allowed. He further observed that even during the course of appellate proceedings, no evidence whatsoever have been furnished. Accordingly, he dismissed the assessee's ground. 17. Before us, the learned Counsel for the assessee submitted that though there is no evidence, however, such nature of expenses cannot be disallowed as it is part and parcel of assessee's business because training is required to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er as well as by the Commissioner (Appeals). The assessee was unable to provide the details of employees or technicians to whom training was given and even failed to prove that it pertains to the employees whose salaries have been debited in the Profit Loss account by the assessee. The nature of expenditure incurred for expatriate staff working in India which has been reimbursed has also not been proved. In the absence of any evidence in support of the claim, we confirm the disallowance of Rs. 9,35,91,110, and accordingly, ground no.2, is treated as dismissed. 20. In ground no.3, the assessee has challenged the disallowance of Rs. 1,56,61,303, paid as legal and professional charges. 21. During the course of assessment proceedings, the assessee was required to produce the details of professional services rendered with proof and summary of services rendered. The assessee, in response, filed the details of legal and professional fees of Rs. 50,000 and above against which TDS has been deducted along with the photocopy of bills. It also furnished the details of services rendered by Arther Andersen and Pricewaterhouse as required by the Assessing Officer. From these details, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) is upheld. Thus, ground no.3, is treated as dismissed. 25. In ground no.4, the assessee has challenged disallowance of Rs. 8,95,350, made under section 40A(3) r/w Rule-6DD. 26. The Assessing Officer required the assessee to furnish the details of cash payment of Rs. 20,000 and above and as to why the same should not be disallowed. In response, the assessee submitted that last part of the payment was made in cash to the expatriate staff. These staff members were foreigner who were visiting remote site of Guhaghar for a short period of time. Being foreign citizen, RBI permission would have been required to open the bank account, which is a very time consuming task. Hence, it was impracticable to open a bank account of these foreign staff for the purpose of making the payment for traveling and other allowance for a short period. Besides this, near the site office no bank was available. The Assessing Officer, as per the notings given in the audit report in Form 3CD, held that 20% of the payment which aggregated to Rs. 8,95,350, is disallowed. 27. Before the Commissioner (Appeals), the assessee made the same submissions as were made before the Assessing Officer. The Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X
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