M/S. AVRORA (INDIA) MARINE SYSTEMS PVT.LTD.,NAVI MUMBAI vs. ITO., CIR.-10(3)(4), MUMBAI

Per D.T. GARASIA, Judicial Member:

2. The effective Ground No.1 & 2 of the appeal reads as under: “1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in confirming the addition of Rs.25,75,357/- made in the assessment order. He ought not to have done so.

2 A.Y.2007-08 GROUND OF APPEAL

NO.1

3. The short facts of the case are that the assessee company is engaged in business of Providing Marine Services. During the course of assessment proceedings, the Assessing Officer [AO] noted that assessee had contract with M/s. Veljan Hydrair Pvt. Ltd. (Veljan) which has a contract with Mazgaon Dock Ltd. (MDL) for supplying certain equipments used to build a warship. A.O. further noted that as per terms of contract, full price of the equipment is not released by the client, but 10% thereof is retained and paid after a period of time depending upon satisfactory performance and company accounts for only 90% of the invoice value as sales income and balance receipt is accounted on actual receipts only. A.O. asked the assessee as to why the retention money should not be brought to tax, in response to which the assessee filed letter dated 15.12.2009 which has been reproduced in the assessment order in Para 4, page 2,3 & 4 stating that due to existence of significant uncertainties as to total value that customers may pay, it was thought proper to recognize revenue only to the extent of formal customer acceptance of value due and payable or actual collections and hence 10% of order value was deducted in bill. Assessee also stated before A.O. that as per Accounting Standard-9 where uncertainties exist, income does not accrue. On consideration of assessee’s explanation A.O. noted that risk and reward were transferred to the buyer i.e. Veljan, who in turn has transferred the same to MDL. Further, another condition viz. siginificant certainty of revenue was also fulfilled since Russian Supplier had given warranty for equipments supplied. A.O. also quoted the quality and guarantee obligations. A.O. also referred to Accounting Standard -9 and concluded that the key criteria for determining when to recognize revenue from a transaction involving the sale of goods was satisfied in the present case. A.O. held that assessee has transferred the risk and reward of the value of work done and there was no uncertainty as to recovery of 10% of retention amount and the

4. Matter carried to CIT(A) and CIT(A) has dismissed the appeal of the assessee. Learned AR submitted that assessee company is an Indo – Russian joint venture between Avrora Corporation Science and Production. Assessee submitted that assessee has billed to its customer 90% of order value of each ship-set. The purchase order placed by its customer M/s. Veljan as per the terms agreed with it clearly specifies that 10% of advance payment will be made on submission of invoice with equipment performance bank Guarantee for 10% of order value which will remain valid for extended guarantee period. Assessee had no right to bill the customers for the jobs which have never carried out and condition which were remaining to be complied with. The assessee referred Accounting Standard -9 and stated that revenue normally not to be recognized until the customer accepts delivery and installation and inspection are complete. The assessee has submitted the copy of sale bill raised and copy of payment advice received from Veljan. These all documentary evidence reveal that assessee has not received 10% of the bill amount and it has received the balance 10% amount subsequently and has offered the same to taxation in A.Y.2011-12. Ld. AR relied upon the decision of Jurisdictional High Court in case for Commissioner of Income Tax Vs. Associated Cables 286 ITR 596 (Bom) and various decisions of the Tribunal.

5. On the other hand learned AR submitted that as per Clause 6.3 of the Contract, the supplier has guaranteed the quality of products supplied and there was no liability of the assessee in case any defect was noted. Hence, there was no uncertainty in respect of receipt of balance 10% of retention money. Even as per Accounting Standard -9, assessee was required to offer 100% amount as revenue on accrual basis in Profit & Loss Account since no uncertainty existed as to quantum of revenue and risk and reward had already been transferred to the buyer company.

4 A.Y.2007-08 6. We have heard the rival contentions. The assessee is supplier of equipment goods used in building warship which is manufactured by Mazgaon Dock Ltd., through Veljan. As per the terms of contract full price of equipment is not released by Veljan but 10% is kept as retention and released upon satisfactory performance of equipment. We have gone through the invoices, we have verified the sale bill and we find that 10% of the sale bill is retained by the purchaser, which is released after satisfactory performance. The same was as per contractual term and the retention money could not be received by the assessee before satisfactory performance. We find that the assessee has offered the retention money whenever received by him. Therefore, in our opinion, as held by our Jurisdictional High Court in case of CIT Vs. Associate Cables 286 ITR 596 (Bom), we are of the view that assessee had no right to receive the retention money and therefore, it cannot be taxed in the year under consideration. The Hon’ble High Court has decided by observing as under:- “The question of law sought to be raised in this appeal is as to whether the retention money could be considered to be the income of the assessee in the year in which the amount was retained. The Tribunal has referred to a judgment of the Tribunal in Associate Cables (P) Ltd. Vs Dy.CIT (1994) 49 TTJ (Bom) TM 191 : (1994) 206 ITR 48 (Bom)TM(AT). Mr. Sathe appearing for the respondent has, however, drawn our attention to two judgment is reported in the case of CIT Vs. Simplex Concrete Piles (India) P. Ltd. (1989) 79 CTR (Cal) 71 : (1989) 179 ITR 8 (Cal.) A division Bench of the Calcutta High Court in the matter has held that the payment of retention money in the case of contract is deffered and is contingent on satisfactory completion of contract work. Right to receive the retention money is accrued only after the obligations under the contract are fulfilled and, therefore, it would not amount to an income of the assessee in the year in which the amount is retained. The other judgment relied upon is in the case of CIT Vs. Ignified Boilers (I) Ltd. (2006) 203 CTR (Mad) 458 : (2006) 283 ITR 295 (Mad.). In that judgment also, a Division Bench of the Madras High Court has held that the amount retained does not accrue to the assessee and, therefore, the assessee would not be liable”

Respectfully following the above judgment, we allow this ground of the assessee’s appeal. GROUND OF APPEAL

NO.2 5 A.Y.2007-08

7. During the course of assessment proceedings A.O. observed that assessee has claimed rebate to customers which includes freight charges, clearance charges, bank charges, custom duty and demand draft commission charges. A.O. noted that these transactions are directly related to the transaction involving high sea sales entered into between the assessee and M/s.Veljan. A.O. further noted that as per copy of High seas sales agreement, all risk and reward were transferred to M/s. Veljan and Veljan was to bear the cost of clearance of such goods and all cost relating the said equipment was the liability of Veljan. Hence, A.O. proposed to disallow the charges other than liquidated charges. In response, assessee did not make any submissions. Accordingly, A.O. disallowed an amount of Rs.65,08,171/- under the head rebate to customer.

8. Matter carried to CIT(A) and CIT(A) has dismissed the appeal of the assessee.

9. During the course of hearing learned AR pleaded for opportunity to adduce evidences to substantiate this claim before Ld. AO. Learned DR raised no serious objections against the same.

10. Having heard both the parties, we find that assessee did not produce any evidence before AO and CIT(A) to prove his claim. Therefore, in the interest of justice, we restore the matter back to the file of AO for fresh adjudication. Accordingly, this ground stands allowed for statistical purposes.

11. In the result, appeal of Assessee stands partly allowed.

Order pronounced in the open court on 04.10.2017.