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2015 (11) TMI 995 - ITAT MUMBAI

2015 (11) TMI 995 - ITAT MUMBAI - TMI - Disallowance of bad debts - Held that:- 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 .....

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ith regard to other cases relied upon we find that the F AA has thoroughly distinguished them and has given a finding 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 off .....

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aid 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 same, it would make no difference to the determination of the Arm's Length Price of the transaction. Once it is accepted that the ALP of the royalty is justified, there can b .....

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its vendor / licensor is not dependent upon its recovering the price of the products from its clients. - Decided in favour of the respondent - assessee. - ITA No.8376/Mum/2011, ITA No.8106/Mum/2011, ITA No.8218/Mum/2010 - Dated:- 7-10-2015 - Sh. A.D. Jain,Judicial Member & Rajendra,Accountant Member For The Assessee : Shri Kanchan Kaushal ,Dhanesh Bafna & Arpit Agarwal For The Revenue : Shri N.K. Chand -CIT PER RAJENDRA, AM Challenging the order dated of the CIT(A)- , Mumbai,the Assessin .....

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during the assessment amounting to ₹ 69,45,581 while computing the income under the head 'Profits and gains of business or profession'. 1.2 The Appellant prays that the bad debts amounting to ₹ 69,45,581 be allowed as deduction for the year under consideration. II. Addition of ₹ 19,96,50,209 on account of change in the method of accounting: 2.1 On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the addition amounting to &# .....

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on 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, documen .....

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end or alter any ground or add a new ground that may be necessary. ITA No.8218/Mum/2010- AY.2005-06: Following are the grounds of appeal for the AY. under appeal: 1.On the facts and in the circumstances of the case and in law, the Assistant Commissioner of Income Tax -10(1),Mumbai (hereinafter referred to as "the Learned AO") has erred in assessing the income of the appellant at ₹ 1 ,46,00,560. Addition on account of Transfer Pricing adjustment of ₹ 17,61,155 2. On the fact .....

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ances of the case, and in law, the Learned AO has erred in making addition towards transfer pricing adjustment on the reasoning that the assessee has not raised any objection before the DRP without appreciating that the same was objected by the assessee before the DRP, which is evident from the DRP application filed in form 36A. Addition on account of Advance Billings of ₹ 8,64,26,828 4.On the facts and in the circumstances of the case and in law, the Learned AO and the DRP authorities hav .....

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ars, the relief to the extent of advance billings considered as taxable income for the current financial year 2005-06 should not be included in those years. 7. Without 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 a .....

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eveloping 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.Details of filing of returns,returned incomes,assessed incomes,dates of the orders of CIT(A)can be summarised as under: ROI filed on Returned Inco .....

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ons the assessee filed details of aging analysis of bad debts of ₹ 86.38 lakhs as against the amount debited to P & L account of ₹ 16.93lakhs.The AO held that the assessee was not entitled to write off said bad debts.He also rejected the claim made by it about the bad debts of ₹ 86,38,802/-. 2.1.During the appellate proceedings,the assessee,before the First Appellate Authority(FAA) contended that during the AY.under appeal the assessee had written off bad debts of ₹ 8 .....

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that the amount of bad debts written off of ₹ 69,45,581/- was inadvertently not claimed as a deduction by the assessee either in original or the revised return of the income,that it realized the mistake during assessment proceedings,that vide its letter dated 22.11.2006 it made the above claim. After considering the submissions of the assessee and the assessment order,the FAA held that that the assessee had written of bad debts to the extent of ₹ 16,93,221/- in its books of accounts .....

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bserved,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 .....

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iled,that for any fresh claim of deduction the decision of the Hon'ble Apex Court in the case of Goetze India Ltd. was squarely applicable to the facts of the assessee.Accordingly,the action of the AO was upheld to the extent of ₹ 69.45 lakhs. 2.2.Before us,the Authorised Representative(AR)contended that the assessee had by mistake did not made a claim of the entire amount written off during the AY.under appeal,that vide letter no. 22.11.2006 the assessee had made the claim,that the am .....

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ted the order of the FAA. 2.3.We have heard the rival submissions and perused the material before us.We find that in the case of Pruthvi Brokers and Sharesholders Pvt.Ltd.(supra). An assessee is entitled to raise not merely additional legal submissions before the appellate authorities but is also entitled to raise additional claims before them. The appellate authorities have the discretion to permit such additional claims to be raised. The appellate authorities have jurisdiction to deal not mere .....

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imed 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 app .....

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t,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 assessment, an order u/s.143(3) of the Act was passed,assessing the total loss of the assessee at ₹ 3,98,69,991/-as against 24,40,44,974/-,as stated earlier.The disallowances/adjustments included transfer pricing adjustment of ₹ 18,57,454/-on account of royalty payable to CAII and addition of S .....

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on it changed its accounting policy.With regard to the change of policy,it was argued that the assessee provided to its customers not only the upgrades and enhancements of software purchased/licensed but also the maintenance of the software and unspecified future software products i.e.new release of a product,that under terms of the agreement it was required to provide services over a period falling in different financial years,that it had to provide a new release of the software product to the .....

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and had recognised only ₹ 5.33 Crores as revenue on account of licence fee out of total amount of invoices of ₹ 25.29 Crores,that it resulted in revenue loss of ₹ 19.96 Crores,that the change had diluted the income of the assessee for the year under appeal.He made an addition of ₹ 19,96,50,209/-to the total income of the assessee.He relied on the decision of the Honble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd.(227 ITR 172)and held that A .....

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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 m .....

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rd 5 Net Profit or loss prior period items and changes in accounting policies issued by the ICAI,that due to the above change,the loss for the year is higher by ₹ 13,97,55,146/- and reserves and surplus were lower by ₹ 13,97,55,146/-,that the decision relied upon by the AO was distinguishable to the present facts of the case,that in the assessee case under consideration,as per terms of the contract,the income was accruing to it over the period of the contract and therefore it had dec .....

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Ltd(260 ITR 102)in its support.It also relied upon other cases and argued that it was open to an assessee to make a clean change of the regular method adopted by it irrespective of the resultant loss to the revenue,that change in the method of accounting was made to reflect true and correct picture of the profits,that had this change not been made by the assessee the statutory auditors of the assessee might also have qualified the audit report,that the method of accounting had been followed regu .....

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ional consideration,that applying the accounting standards for revenue recognition,accrual concept and revenue v.cost concept the income accrued to the assessee over the tenure of the 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 .....

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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 services that would be rendered by the assessee in providing such new release/upgrades could not be estimated at the commenc .....

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e,that the P & La/c.would reflect illusory profits and hence would fail to reflect a true & fair view of the financial position of the assessee,that the primary consideration in selection of accounting policies are that the financial statement presented should represent true and fair view of the state of affairs of the enterprises,that in earlier years when the assessee was recognising entire sale revenue in the first year of contract itself,its claim for bad debts were substantially hig .....

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n the year in which product was sold and the entire income was reflected in revenue by it in the first year of sale of licnece,that the assessee had claimed that it had to upgrade/enhance the software during the contract period without charging anything from the customers,that it had claimed that it was following market practice.The FAA observed that it was not the market practice or trend to defer revenue on the straight line method based on such future services / upgrades,that during the asses .....

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riod, 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 princi .....

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same. The FAA, referring to the provisions of section 145 of the Act held that where the AO was not satisfied about the correctness of the accounts of the assessee he could complete the assessment in the manner provided u/s.144,that in the case under consideration the AO was not satisfied about the correctness of the accounts of the assessee, that the revenue received by the assessee during the year under consideration-for which there was no matching cost ascertained to be incurred-was brought t .....

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upto 79% to the future years,that the fact deferring of revenue was indicator that the method of accounting was incorrect,that no detail was available about expenditure incurred by the assessee in the subsequent years for the so called services towards maintenance and upgrading the softwares,that the updates were developed by the parent company,that each accounting/assessment year was a separate year and income of that particular year had to be taxed in the same year, that the tax payer could no .....

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e consumed,that in the accrual system of accounting recognition of revenue receivable could be postponed when the consideration was not determinable within a reasonable period of time, that advances received would the only exception in such a system,that the amount received by the assessee had not been offered to tax inspite of the fact that the underlying economic event of delivery of license of software/product had taken place and that money had been received by it as per the terms of the agre .....

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stpone 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 hypoth .....

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to recognize the revenue over the period of licence/contract without having to do with anything with matching cost,that when the licence of software/product was sold the major portion of expenses of marketing and distribution including payment of royalty were incurred,that it would receive the revenue in respect of those deliverable,that had there been any situation of such kind that either a high committed cost/further deliverable the customers would have withheld certain portion of such sale .....

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04-05 the bad debts were to the extent 16-20% of the revenue,that the by effecting the change the assessee had attempted to defer 79% of its revenue. With regard to alternate ground of allowing the consequential relief for the subsequent years the FAA held that those years were not before him,that such directions could not be given. The assessee had also mentioned that the revenue loss due to change in method was 13.97 crores and not 19.96 crores because of prepaid royalty of ₹ 5.98 crores .....

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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 c .....

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dance 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 sales followed by the parent company,that the statutory auditors have also certified assessee reflects true and fair view and principles generally accepted in India,that while passing the assessment order, the AO disregarded the above bonafide reasons for change in method of accounting.He relied upon the cases of Sn .....

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ard the rival submissions and perused the material before us.We find that during the year under consideration out of the total invoices amounting to ₹ 25,29,99,544/- towards license fees issued,the assessee recognised ₹ 5, 33,49,335/-as Revenue-License fees in the Profit and loss account and the balance amount of ₹ 19,96, 50,209/-was reflected as Advance Billings under the head Current in the Balance Sheet,that the corresponding royalty(related to such advance billings)of ͅ .....

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regularly followed by the assessee on and from AY.2004-05 onwards,that as a result of this new method of accounting, the amounts billed to the customers that were in excess of the revenue accrued on a straight line basis over the period of contract were recognised as Advance Billings in the financial statements of the assessee under the head Current Liabilities,that it also recognised the royalty paid to CAII in respect of the revenues considered for the year only and the balance royalty was co .....

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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 .....

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that change was made in accordance with the market practice.He directed the assessee to furnish details in respect of general practice followed in accounting and recognising revenue by the other players in the field. In response to the same the assessee submitted as under : You would appreciate that the accounting for software licenses and maintenance support depends upon various factors.Further, in the published accounts of the companies it was very difficult to ascertain whether the factors o .....

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eriod compared with total estimate of services provided over the entire contract. From the above reply,it is clear that the assessee was not able to prove that it was following some market practice.The nature of work done by the assessee and IBM was totally different. It is dealing in software prepared by the parent company and supplies updates to the customers during the period of linence.In the fast changing world of software there cannot be any long term contract.Even if there was any it was .....

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ses on account of such service/ upgrade.If any expenditure has been incurred,it is the parent company who develops the software as well as the upgrades it.We find that during 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 ad .....

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th 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 submitted that the appellant does not maintain project/contract wise accounting records. Therefore, any costs specific to the update of the c .....

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concept of matching cost it is imperative that incurring of expenditure with regard to the income earned or accrued to an assessee should be proved.For existence of matching concept two constituents must exit i.e. what is to be matched with what should be clearly proved.In the name of applying AS, revenue earned or accrued in a particular year should not be deferred/postponed.So,we hold that the method adopted by the assessee was not in accordance with matching principles because when the softwa .....

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heoretical issues,but has not proved as to how the theory,relied upon by it,was applicable to facts. Paying of taxes in subsequent years or showing corresponding royalty payment made to the parent company cannot be the basis for deferring the revenue from the year under appeal to subsequent years. 3.a.Here we would like to discuss some of the principles,culled out from various judgments, regarding accrual of income and method of accounting: i.It is universally accepted that income-tax is a levy .....

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s 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 .....

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receive it. It would not matter that the valuation of the income is postponed or that the materialisation of the income depends on some other contingency. iv.The question of accrual or non- accrual of income and the subsidiary question of the time of accrual of income have got to be decided on fiscal principles and not on the basis of any given accounting method which is in vogue or which might be practiced by the assessee. The concept of accrual of income for purposes of income-tax is a concre .....

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the point of view of real income taking the probability or improbability of realisation in a realistic manner In the matter of S. K.G.Sugar Ltd.(96ITR194),the Hon'ble Patna High Court has laid down following general principles with regard to accrual of liability are: (1) In a mercantile system of accounting actual cash receipt of income is not necessary for the purpose of taxing a particular item as income; it is sufficient if the income has accrued during the period in question. Similarly, .....

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expediency, then such forgoing cannot affect the accrual of the income for the purpose of carrying on the business and the liability so incurred cannot be obliterated by such forgoing. (3) Mere book entries are not decisive of the matter. What has to be seen and found out is the effect of the forgoing in law on the accrual 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 .....

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tion 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 th .....

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quent year some determinate service had to be provided by it,that there was no determined/committed expenditure which the assessee was required to incur in the future years towards the corresponding share of revenue,that the indeterminate event of providing of updates and services as and when the they were developed which had been in keeping with the industrial norm the assessee had a right to postpone the revenue.lnspite of adequate opportunitie,the assessee had not filed any facts before the F .....

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se 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.Confirming,his order,we decide ground no.2.1.against the assessee. 4.However,with regard to the ground no.2.2.we would like to state that 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 tax .....

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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 conf .....

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d been paid on the amount of bad debts even where the software had not worked at all ?" 3. The respondent had entered into a Software Distribution Agreement with CA Management Inc. (hereinafter referred to as "CAM!") whereunder the respondent was appointed as a distributor of the products of CAM I in India. Under the agreement, the respondent is liable to pay an annual royalty on all amounts invoiced at a rate of 30%. 4. The assessee filed its return of income for the A. Y. 2002- .....

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ondent's appeal was rejected by the CIT (A). 6. It is pertinent to note that the TPO by the order under section 92CA(3) observed that the respondent's contention regarding the rate of royalty being justified was not relevant, as there was no dispute regarding the same but that the issue was whether the royalty should be allowed to be written off to the extent of the unpaid invoices during the year itself. This, we presume, refers to the bad debts in respect of some of the invoices raised .....

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y basis of the order of the AO and the CIT (A) was that the respondent had paid the royalty to its principal CAII even on the bad debts and in cases where the customers had raised complaints regarding the quality of the products. It was 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 accoun .....

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ill 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 .....

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al while dealing with the rectification application to state that during the year 1984-85, the setting up of the plant itself was not complete, accordingly, there was no question of any production. Out of the total investment in machinery amounting to ₹ 5.70 crores, it was only about ₹ 1.09 crores which was spent during the assessment year 1984-85 and the fact to which the Revenue is terming to be production was mere receipt of a sum of about ₹ 1 lakh on account of job charges .....

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and licence to manufacture was also granted during that year, there is no reason to deny the benefit of section 80-I of the Act to the assessee for 7 years starting therefrom. 10. We find the contention raised by counsel for the assessee, supported by the facts as narrated above, to be persuasive. Section 80-I of the Act applies to any industrial undertaking which fulfils four conditions as laid down in sub-section (2) thereof and one of them being the Act to manufacture or produce articles. It .....

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e Tribunal. Accordingly, we dismiss the appeal of the Revenue on this issue. 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 respon .....

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stomers 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 has in turn sold / licensed such products. The two are distinct, unconnected transactions. The purchaser's / licensee's obligation to pay the consideration under its transaction with its vendor / licensor is not dependent upon its recovering .....

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