TMI Blog2020 (5) TMI 375X X X X Extracts X X X X X X X X Extracts X X X X ..... on method in recognition of the revenue. The amounts of O M phase have been duly offered to tax in the year of receipts. We also find that the Phase-I and the Phase- II are the preparatory construction phases over a period of 18 months whereas the operations maintenance ( O M phase) of such constructed project is of 60 months. Maintenance activities cannot be clubbed with the construction activity. Having gone through the accounting standards (AS-7 and AS-9 ), we find that application of the standard to separately identifiable components of single contract is allowable while determining the percentage completion of the project. Since, the O M phase commences after the construction of activity of rehabilitation phase, we hereby hold that the amount pertaining to O M phase needs to be separately considered while determining the profits out of the construction activities. C onsideration of VAT for recognizing the revenue under AS-7 - HELD THAT:- AO has considered this amount for calculating the revenues of the year. CBDT Circular No. 4 /2008 dated 04.04.2008 clarified that service tax doesn t partake the nature of income. The Circular was issued while dealing with Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed to add, supplement, revise or amend grounds raised hereinabove in the interests of justice. 3. The assessee company is engaged in activities relating to water distribution, supply, maintenance, treatment / management and / or sewage treatment/ sanitation/ related civil construction activities. It earns revenue from the execution of construction contracts for water infrastructural facilities as well as by way of income from operation and maintenance ( O M) of such facilities. 4. During the year under consideration, the assessee was offered and implementing construction contract of the Project Demo Zone (PDZ) pertaining to rehabilitation and implementation of water supply in the pilot area of Dharampeth of Nagpur Municipal Corporation. The contract received by the assessee consists of three parts namely, Study Phase Rehabilitation Phase and O M Phase 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 has to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) required in the Contract are achieved B. Contract Cost: ₹ 302.6 million i. Technical Services: Study Phase ₹ 24.36 million Rehabilitation Phase ₹ 24.90 million O M Phase (5 years) ₹ 41.50 million ii. Rehabilitation Cost: ₹ 211.80 million C. Contract structure and tasks performed: 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 rehabilitation of water assets (pipes, valves, meters customer connections, billing and collection system etc.) 2. Phase Rehabilitation 18 Months ( comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of AS 7 are as under: 1. Types of Contracts A Construction Contract is any contract which is entered 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/function or the nature of their ultimate purpose or use. A. Fixed Price Contract A contract in which the contractor agrees to a fixed contract price. In some cases, there may be an element 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 basis of an increase in the cost of raw materials. B. Cost-plus Contract A contract in which the contractor is reimbursed for costs incurred or agreed costs, plus a percentage of these costs of a fixed fee. 2. Combining and Segmenting of Construction Contracts I. Combining of Construction contracts A group of contracts, either with one or more customers, shall be considered as a single construction contract when all the contracts are negotiated as a single package, are inter- l inked and form part of a single ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ganization 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. Under this method, revenue and cost are recognized in the statement of profit and loss in the accounting periods in which the work is performed. IV. Contract work-in-progress A contractor may incur 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 determined 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: i f the total cost of the contract is ₹ 30 lakhs and the cost incurred till date is ₹ 15 lakhs, the stage of completion is regarded as 50 % complete i. e. 15 lakhs / 30 lakhs) II. Surveys of work performed; (for example: in a contract for construction of a bridge, the site i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he specific industry where 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 failure to sell, the goods involved are often valued at the net realizable value (NRV). Such amounts are not defined in the definition of the revenue but are still sometimes recognized in the statement of profit and loss. Example: Harvesting of Agricultural Crops or extraction of mineral ores. B. Rendering of Services Revenue recognition of services depends as the service 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 execution of more than one act. Revenue is recognized with the completion of each such act. (b) Completed Service Contract Method: This method of accounting recognizes revenue in the statement of profit loss only when the rende ..... X X X X Extracts X X X X X X X X Extracts X X X X
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