Facts of the Case

  • The assessee, Veolia India Pvt. Ltd., was engaged in contracts involving construction and subsequent operation & maintenance (O&M) phases.
  • The assessee followed the percentage completion method as per Accounting Standard AS-7 for revenue recognition.
  • Separate invoices were raised for construction phases and O&M activities.
  • The O&M phase commenced after completion of construction and continued for a longer duration.
  • The Revenue contended that O&M expenditure should be included in contract costs while computing revenue under the percentage completion method.
  • The Tribunal held that O&M activities are separate and cannot be clubbed with construction activities.

 Issues Involved

  1. Whether Operation & Maintenance (O&M) expenditure should be included in contract costs while applying the percentage completion method for revenue recognition.
  2. Whether O&M activities form part of construction activity for taxation purposes.
  3. Whether any substantial question of law arises from the Tribunal’s findings.

 Petitioner’s Arguments (Revenue)

  • The Revenue argued that O&M expenses form part of the overall contract and should be included in determining the percentage of completion.
  • It was contended that excluding such expenses leads to incorrect computation of taxable income.
  • The Revenue sought to challenge the Tribunal’s findings as erroneous in law.

 Respondent’s Arguments (Assessee)

  • The assessee submitted that:
    • O&M phase is distinct and independent from construction activity.
    • Separate invoices were raised and income from O&M was taxed in the year of receipt.
    • As per AS-7 and AS-9, separately identifiable components of a contract can be treated independently.
    • O&M activities are post-construction and cannot be included in percentage completion calculations.

 Court Findings / Judgment

  • The Delhi High Court upheld the Tribunal’s findings and observed:
    • O&M expenses are incurred after completion of construction activity and therefore cannot be included in contract cost.
    • The Tribunal’s findings were factual and based on proper appreciation of accounting standards.
    • No perversity or legal error was found in the Tribunal’s order.
    • No substantial question of law arose for consideration.
  • Accordingly, the appeal filed by the Revenue was dismissed.

 Important Clarification by Court

  • Operation & Maintenance (O&M) phase is separate from construction phase.
  • Revenue recognition under percentage completion method must exclude post-construction activities.
  • Accounting Standards (AS-7 & AS-9) allow segregation of contract components when they are independently identifiable.
  • Findings of fact by ITAT, when reasonable, cannot be interfered with under Section 260A.

 Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/RAS17042023ITA2182023_223308.pdf

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