AHM Fowzie, Sri Lanka's petroleum minister, said Iran had agreed to pay $700m for the upgrade.
On Monday, Ahmedinejad held talks in Pakistan over the security aspect of a gas pipeline originating from Iran and passing through Pakistan on its way to India.
Delhi and Islamabad are at odds over the issue.
It is expected that Ahmadinejad will finally seal a deal involving the three countries.
Apart from the security angle, the project was stalled by disputes over price and transit fees.
However, the $7bn deal is being opposed by the US, which wants to isolate Iran over its nuclear programme.
Crucial for India
Lieutenant-General Ravi Sawhney (retired), a former Indian military intelligence official, told Al Jazeera that the talks with Iran would be crucial for India.
"It will be a political dialogue at the highest level which will smoothen the way for the pipeline between Iran and India," said Sawhney.
Sawhney said that US would have no say over anything, once the deal between India and Iran came through.
India imports more than 70 per cent of its energy needs and has been racing to secure new supplies of oil and gas.