Assessments of EPC contractors cannot be done merely by assuming and comparing accounts with Form 26AS



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Assessing EPC contractors requires more than just comparing accounts with Form 26AS. These businesses involve manufacturing, trading, and services, with complex cash flows and income recognition methods like the percentage completion method. Reconciling cash flows, GST records, and accounting records for tax purposes is crucial. Income tax authorities should not solely rely on GP ratios or Form 26AS to estimate income, especially when detailed, audited transaction records are maintained. Variations in profit are normal due to market conditions and business operations, and these should be considered with substantive reasons before rejecting accounts.

EPC contractor's business is a typical business which includes manufacture, trading as well as provision of services. The cash flows happen at the very beginning of the project and maximum purchases happen at the very beginning. Biling is done and GST accrues as per Schedule of Biling as approved by the principle/client. The goods move to the site of the principle as per requirement and the Recognition of income is in accordance with the percentage completion method as prescribed by AS-9 issued by ICAI. Hence, the matching of the cash flows, GST records and accounting records for Income Tax purposes requires many reconciliations.

EPC Contractor Assessments: Beyond Form 26AS

Many a times of Income Tax Authorities adopt a simplistic way of determining an estimated income of the EPC Contractors vide comparison of GP Ratio/ Form 26AS/etc although the assessee maintains voluminous details of the transactions carried out to run the business which are even audited. Wholesale rejection of books of accounts is not warranted just on the basis of Form 26AS or even low GP ratio as against average of last few years. While running a business, especially such a complicated business, it is not possible to maintain astatic graph of profit in all the years. The earning of profit depends upon several market conditions as well as the mode and manner in which the business has been carried out and in case assessee can demonstrate the same as comparable by reasonable means, the same cannot be rejected without substantive reasons.

 

Further, in most EPC contracts, there are disputes at the end of the project with the principle which is settled only by arbitration and hence after the project is completed the principles do not co-operate. Every year of assessment is a separate year and has its own specific and peculiar transactions. While making assessments, additions cannot be made only on account of fall in GP without any other basis and going into the books of accounts. The same was held in the case of TOTAL INTEGRATED DESIGN (INDIA) PVT. LTD Vs ITO, WARD-25(3), NEW DELHI [2023-VIL-1019-ITATDEL].

Even in case of professionals, many a times recognition of income is on cash basis whereas the recognition of the expense by the clients and deduction of TDS is on due basis. For example, in case of audit fees which is generally provided at the end of the year by the company on provisional basis. But the same is recorded by the auditor in the subsequent year on receipt basis resulting in mismatch of details of TDS contained in Form 26AS. At the time of payment, the company/auditor renegotiates the provision which has been created and a lesser/more payment is made but the TDS return filed for the previous year is not revised resulting in mismatch with Form 26AS. Hence the service Industry's books cannot be rejected only on the basis of Form 26AS without going into the evidences.

 

FAQ :

EPC contractor businesses are complex, involving manufacturing, trading, and services with unique cash flow patterns and income recognition methods. Simple comparisons to Form 26AS often miss these intricacies and require detailed reconciliations.

EPC contractors typically experience cash flows at the project's beginning, significant initial purchases, and income recognition based on the percentage completion method as per AS-9.

No, wholesale rejection of books of accounts is not warranted solely on the basis of Form 26AS or a low GP ratio, especially if the assessee maintains voluminous, audited transaction details.

Profitability can fluctuate due to various market conditions and the specific way the business is conducted. If an assessee can demonstrate these factors reasonably, their accounts should not be rejected without substantive reasons.

Disputes are common in EPC contracts, often settled through arbitration. This can lead to a lack of cooperation from clients, impacting the settlement of project accounts and potentially complicating assessments.

Yes, in service industries, income recognition might be on a cash basis while expenses are recorded on a due basis by clients, leading to TDS mismatches in Form 26AS. These should be investigated with evidence rather than outright rejecting books.


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About the Author

DESIGNATED PARTNER

Mr. Vivek Jalan is a FCA, Qualified LL.M (Constitutional Law) and LL.B. He is the Chairman of The Fiscal Affairs and Taxation Committee of The Bengal Chamber of Commerce and Industry. He is the Convenor on Indirect Taxes of the CII- Economic Affairs and Taxation Committee (ER); He is also a visiting faculty for Indirec ... Read more

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