TMI Blog2015 (11) TMI 995X X X X Extracts X X X X X X X X Extracts X X X X ..... nding that facts of the case under consideration are different from those cases.We agree with him.Therefore,we hold that the order of the F AA does not suffer from any legal or factual infirmity. Thus confirming FAAs order - Decided against the assessee. While determining the income of an assessee for a particular income all the necessary facts have to considered. Income offered by an assessee cannot be taxed twice i.e.same income cannot be taxed in two A Y.s.Seocndly,if the assessee has offered portion of its income for taxation then while determining the total income for that year such income it has to be taken in to consideration. The claim made by the assessee has to be verified in light of the above observations. Decided in favour of the assessee in part. TPA - AO held that the royalty should not be allowed to be written off to the extent of the unpaid invoices during the year itself - Held that:- Such cases ought to be dealt with on the basis that no sales had occurred and that therefore, there was no question of payment of any royalty to that extent, as the payments were not received by the respondent and were written off in its books of account had not paid for the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, the Hon'ble CIT(A) erred in facts and circumstances of the case and in law in concluding that the revenue loss due to change in the method of accounting is ₹ 19,96,50,209 and not ₹ 13,97,55,146. 2.3The Appellant prays that the change in the method of accounting adopted by the Appellant be accepted and the addition of ₹ 19,96,50,209 be deleted. III. Initiation of penalty proceedings: 3.1 On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in concluding that mere initiation of penalty does not cause any prejudice against the Appellant. 3.2 The Appellant prays that the penalty proceedings under section 271 (1)(c) be dropped. IV. The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the time of hearing. ITA No.8106/Mum/2011- AY.2004-05: Grounds field by the AO read as under: 1. On the facts and in the circumstances of the case and in law,the Ld. CIT (A) erred in deleting the adjustments done by the TPO and consequent addition ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut prejudice to the above, the Learned AO and the DRP authorities have erred in not allowing the deduction for royalty at 30% of advance billings (payable in accordance with the relevant distribution agreement) considered as income for the year. That Appellant craves leave to add, to amend, to substitute, to withdraw, to modify, to alter and/or reinstate the foregoing grounds of the appeal at or before the time of hearing. Assessee-company,CA(India)Technologies Private Limited(CATPL),a company incorporated in India,is a wholly-owned subsidiary of Computer Associates International Inc.(CAII)of USA.It is primarily engaged in licensing mainframe midrange and system infrastructure software products of CAII(US),developing software that can generally be deployed ut of box or with customer/industry-specific adaptations and developing of software that allows technologists and programmers to write custom applications and create new categories of packaged applications.It has also established a technical support-centre at Tidel Park, a software technology park (STP) unit in Chennai and the profits made by the STP unit are eligible for tax holiday under section 10A of the Act.Det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had written of bad debts to the extent of ₹ 16,93,221/- in its books of accounts and had claimed the same in its P L account,that such debts which have been written off were offered to tax and are of revenue in nature,that the action of the AO in disallowing such claim of the assessee on the ground that it had not been able to demonstrate that such debts had become really bad was not sustainable.Following the decision of the Hon'ble ApexCourt in the case of TRFLimited (2010-TIOL-15-SC-IT),he directed the AO to allow the claim.With regard to the balance bad debts,he observed,that such debit to the provision for doubtful debt had not been debited to the P L account of the assessee.He referred to the decision of the Vijaya Bank (231CTR2)and held that the assessee(s)were now required not only to debit the profit and Loss account but simultaneously also reduce loans and advances or the debtors from the asset side of the Balance sheet to the extent of the corresponding amount so that at the end of the year the amount of loans and advances/ debitors was shown as net of provisions for impugned bad debt,that debit at both places was essential to make claim and allowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claimed that the assessee had reversed the entry with regard to the amount written off during the year i.e.it had brought the amount in question under the head bad debts from the head provision for bad debts.The FAA without considering the above argument had decided the issue.Therefore,in the interest of justice we are remitting back the matter to the file of the FAA for verification purposes.He would allow the claim of the assessee with regard to the bad debts written off during the year under appeal amounting to ₹ 69.45 lakhs,if same have been transferred from the provisions of bad debts to bad debts.Ground no.1 is decided in favour of the assessee,in part. 3.Next ground i.e. ground no.2 is on account of addition of ₹ 19,96,50,209/- on account of change in the method of accounting.In order to determine Arm s Length Price(ALP)in relation to the international transactions reported in Form 3CEB,the AO referred the case to the Transfer Pricing Officer(TPO) u/s. 92CA(1) of the Act,who passed an order on 05.12. 2006,u/s.92CA(3) of the Act, making an adjustment in respect of the Royalty payable to its Associated Enterprise ('AE').On completion of the scrutiny as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO had failed to appreciate the entire facts of the case,that until the previous year,it recognised revenue on stand-alone maintenance contracts and license fees as per contract terms,that in the current year,it had started recognising revenue on stand-alone maintenance contracts on a straight line basis over the period of the contract,that the method was adopted in accordance with Accounting Standard 9 on Revenue Recognition issued by the Institute of Chartered Accountants of India (ICAI),that for the sale of licenses it started recognising revenue on such license fees on a straight line basis by deferring the revenue rateably over the period of such contract, that at the end of a reporting period,an amounts billed in excess of the revenue accrued on a straight line basis over the contract period were recognised as advance billings, that the change in accounting policy had been made to ensure a more appropriate presentation of the financial statements in accordance with generally accepted revenue recognition principles and is also in line with the policy for revenue recognition in respect of maintenance contracts and license sales followed by the parent company, which prepares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract,that the assessee was under an obligation to provide to its customer free of cost, any New Product or New variations in the product or additional or new functionality in the product, which it would develop in thefuture,during the term of the contract,that it was not just up -gradation or maintenance of the software that it is providing for, but it was developing altogether new software for its clients,that in order to be competitive in the software industry it was required to introduce new and innovative products at regular intervals,that going by the matching concept, the assessee had recognised its revenue spread over the term of the contract in order to match the revenue with the cost incurred for developing new software. The assessee relied upon the decision of the Chennai Tribunai dated May 26, 2010 in the cases of Mahindra Holidays and Resorts(2010-TIOL-262-ITAT-MAD-SB), Sify ELearning Ltd(124 TTJ 331),GFA Anlagenbau Gmbh(57 ITD 81)and argued that the assessee had agreed to provide its customers with a new release / upgrades to the software product,without charging any additional fees for such release/upgrades over the term of the contract,that the amount of service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in specific about the practice of revenue recognition by the other dealers of the same field,that the assessee had cited example of IBM India Pvt.Ltd.,that in the case of IBM the contract was for a long period, that it was not about sale of licence of the software which had some term of licence,that matching principle recognised the fact that revenue and cost should be accounted for on the basis when the revenue is recognised the relevant cost was recognised as well,the assessee was following straight line method of accounting, that it was deferring the proportionate revenue based on the number of years for the licence was valid,that method adopted by it was not in accordance with matching principles, that when the software licence was sold or when the software contract was completed the assessee would receive full revenue,that at that point of time there would not be significant expenses, that would be required to be incurred by it either for the services of such licence software or for providing upgrades.He directed the assessee,vide order sheet entry 19.07.2011,to give cost incurred by it for subsequent update of the licences which were sold during the year and for the compli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... license of software/product had taken place and that money had been received by it as per the terms of the agreement,that the future event were such for no liability had accured,that the liability was not even ascertainable at the close of the accounting period. With regard to change of method based on the AS issued by the ICAI, the FAA held that assessee was following particular AS since inception,that the AS had not changed in the year under appeal warranting change in the method of accounting, that there was no justification to follow and change the method of accounting in such a fashion that would postpone major portion of the revenue to the future years,that it was not following proportionate completion method of accounting where recognition of revenue could be postponed due to uncertainties, that on being asked details of cost incurred by it in subsequent years pertaining to the product sold during the year under appeal it had not filed any details,that it had admitted that such licensed based costing/product based costing was not maintained by it, that postponement of revenue on a hypothetical basis could not be considered a valid reason for change of method. Considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and K K Khullar. 3.2.Before us,the AR contended that that the change in the method of accounting was made considering the change in the terms of the contract wherein the assessee had to provide new release of the software products to the customers over the period of contract without consideration,that the assesseechanged its method of accounting to reflect the revenues on rateable basis,that same was in accordance with AS 9 -Revenue Recognition,that the change in the method of accounting made in the year under consideration had been regularly followed by the assessee in the subsequent years,that in the instant case the assessee had changed its terms of contracts with the customers and hence, it was imperative for it to change the method of accounting, that the assessee was justified in changing its accounting method to correctly reflect its financial position,that the change in accounting policy had been made to ensure a more appropriate presentation of the financial statements of the assessee in accordance with the generally accepted principles of revenue recognition, that it was also in line with the revenue recognition policy in respect of maintenance contracts and license sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g was changed to converge with the AS prescribed by the ICAI.The FAA held that the change in method of accounting was not genuine and the assessee had in the garb of change had postponed 79%of its revenue. We are of the opinion that the primary issue to be decided is whether the change in method of accounting can be allowed considering the facts of the case.Undisputed facts are that the assessee is selling the software of the parent company it paid royalty to the CIIA,that it was following a particular method of accounting from inception and was recognsing the income on sale of software for that particular year,that during the year under appeal it started recongnising its income on straight line method.There is no doubt that the change in method of accounting for bona fide purpose has been accepted and allowed by the courts from very beginning.The AO has been given power,u/s.145(3)of the Act to reject the change if he is of the opinion that the method of accounting adopted is such that true profit cannot be deduced therefrom.It is said that the duty of the AO is to administer the provisions of the Act in the interest of public revenue and to prevent evasion or escapement of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the appellate proceedings ,the FAA had made a specific query with regard to the expenditure incurred under the head service/ upgrade of software in the subsequent years and the hearing was fixed on 02.08.20 II.As per the F AA the assessee did not furnish required details.He again directed it to file necessary details and adjourned the matter to 16.08.20 11.But,the details were not made available to him.He again directed the assessee to comply the directions and on 27.08.2011,the assessee submitted as under: As you are aware that during the year under consideration, the appellant had changed its method of accounting for recognizing revenue from license fee and maintenance contract to Straight Line basis such that revenue was recognized rateably over the period of contract. As per the contract of sale of software with the customers the appellant was required to provide active maintenance charges consisting of operational support and assistance for updated versions, improvisation and enhancement to the product at no extra cost to the customers,as regards the specific costs incurred by the appellant for the subsequent upgrades of the license sold during the year, it is submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be summarised as under: ii.Profits do not accrue from day to day or even from month to month and have to be ascertained by a comparison of assets at two stated points. Unless the right to profits comes into existence, there is no accrual of profits and the destination of profits must be determined by the title thereto on the day on which they arise. iii. Where an assessee regularly employs the mercantile method of accounting, his income, profits and gains have to be computed in accordance with that method of accounting, i.e., on the basis of accrual, and not on the basis of receipt.Under this system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received. Similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. Where accounts are kept on the mercantile basis, the profits or gains are credited though they are not actually realised, and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. In other words the basic conception of the accrual of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the income or the incurring of the liability or expenditure. 3.b.In the case under appeal,the receipt of income as well as accrual took place as soon as the sale proceeds of software were received and not when the life span of software would come to an end.Therefore,spreading the income over the licence-period of the software,in our opinion,was not justified.The agreement was for up-gradation and improvisation of software - it was not warranty. Even in the matter of warranty,after the case of Rotork Controls India P.Ltd.(314ITR62)things have become very clear-it talks of historical trend.During the course of hearing before us.the assessee had not given any indication about the expenditure incurred by it for improving and upgrading the software during the remaining period of licence.ln short,the argument of matching the revenue v/s.cost is missing.lt our opinion,the method adopted by it would fall in the category which 'tends to distort the picture for the purpose of taxable income of the assessee'. 3.c.Now,we would like to discuss the cases relied upon by the assessee. We find that in the case of Mahindra Holding and Resorts(supra)it was held that the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered to be infructous. ITA No.8106IMumI2011- A Y.2004-05: 6.Grounds field by the AO is about deleting the adjustments done by the TPO and consequent addition made by him. During the assessment proceedings,the AO held that the royalty should not be allowed to be written off to the extent of the unpaid invoices during the year itself. At the time of hearing before us,representatives of both the sides agreed that the issue stands covered by the order of the Tribunal (IT A5420-21 /Mum/2006/ A Y.2002-03 03-04- dtd. 28.01.2010) and that the Hon'ble Bombay High Court had confirmed the order on 03.07.2012 (ITA NO.20 of2011-).We find that the Court has dealt the matter as under: 2. The appeal is admitted and with the consent of the parties heard finally on the following substantial question of law :- Whether on the facts and circumstance of the case and. in law, the ITAT was justified in deleting the disallowance made of royalty paid by the assessee to CA. Management Inc. USA for distribution of software products in India without appreciating that the royalty had been paid on the amount of bad debts even where the software had not worked at all ? 3. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account. 7. The ITAT by the impugned order, rightly came to the conclusion that merely because the respondent had paid the royalty even in respect of the products sold by it to the clients, who As far this question is concerned, the contention raised on behalf of the Revenue is that the unit having been set up during the assessment year 1984-85, a period of 7 year to claim benefit under section 80-I of the Act, would expire in the assessment year 1991-92 and during the year in question, the assessee will not be entitled to claim this benefit. The finding recorded by the Tribunal permitting the benefit to the assessee under section 80-I of the Act during the year in question treating the same to be seventh year of production deserves to be set aside. On the other hand, the contention of learned counsel for the assessee is that the Revenue had moved an application for rectification under section 254(2) of the Act, which has been dismissed by the Tribunal vide order dated October 13, 2003, but though the present appeal was filed thereafter, this fact has not been disclosed in the present appeal. He further states as per the spirit of the Act, an assessee is entitled to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . had not paid for the same, it would make no difference to the determination of the Arm's Length Price of the transaction. 8.Section 92C of the Act reads as under:- XXXXXXXXXXX 9.Section 92C provides the basis for determining the ALP in relation to international transactions. It does not either expressly or impliedly consider failure of the respondent's customers to pay for the products sold to them by the respondent to be a relevant factor in determining the ALP. Indeed in the absence of any statutory provision or the transactions being colourable bad debts on account of purchasers refusing to pay for the goods purchased by them from the assessee can never be a relevant factor while determining the ALP of the transaction between the assessee and its principal. Once it is accepted that the ALP of the royalty is justified, there can be no reduction in the value thereof on account of the assessee's customers failing to pay the assessee for the product purchased by them from the assessee. Absent a contract to the contrary, the vendor or licensor is not concerned with whether its purchaser / licensee recovers its price from its clients to which it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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