TMI Blog2023 (8) TMI 714X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in accordance with law. Accrual of income - Addition towards billing in excess of Revenue - HELD THAT:- When the assessee rises bills, the customer has also claimed the expenditure based on the invoices raised by the assessee. So, on one side, the customer claims the expenditure for the works executed by the assessee and the other side, the assessee does not recognize the income and shown it in current liabilities. This leads to clear anomaly in reporting income and expenditure. Assessee contents that part of the Revenue reported in future years, but the contention of the assessee cannot be accepted for the simple reason that when the assessee is following mercantile system of accounting, Revenue should be recognized as and when income accrues and arises to the assessee, irrespective of the fact that the assessee has received the income or not. In this case, the assessee has already raised invoices to its customers on the basis of percentage completion method and in our considered view, the moment assessee rises invoices, income accrues to the assessee. Therefore, the assessee needs to recognize Revenue when it has risen invoices. However, the assessee is postpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ITAT Chennai Benches in the case of M/s. Verizon Data Verizon Data Services India Pvt. Ltd [ 2023 (3) TMI 190 - ITAT CHENNAI] Thus, we quashed order passed by the TPO and consequent draft assessment order passed by the AO, directions issued by the DRP and final assessment order passed by the AO. - SHRI MAHAVIR SINGH, HON BLE VICE PRESIDENT AND SHRI MANJUNATHA.G, HON BLE ACCOUNTANT MEMBER For the Appellant : Mr. Darpan Kirpalani, Adv. For the Respondent : Mr. S. Maruthu Pandian, CIT ORDER PER MANJUNATHA.G, ACCOUNTANT MEMBER: These two appeals filed by the assessee are directed against separate, final Assessment Order passed by the AO u/s. 143(3) r.w.s.144C(13) of the Income Tax Act, 1961 (in short the Act ) both dated 21.11.2019 30.04.2021, in pursuant to Dispute Resolution Panel directions, issued u/s. 144C(5) of the Act, both dated 25.09.2019 22.03.2021 and pertains to AYrs 2015-16 2016-17. Since, the facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are being disposed off, by this consolidated order. IT (TP) A No.15/Chny/2020 for the AY 2015-16: 2. The assessee has ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oning the commercial expediency. 2.6 The Learned TPO/AO and the Hon'ble DRP have erred in law and in facts, by violating the principles of consistency and judicial discipline by not following the binding judicial precedents in Appellant's own case as well as other decisions of higher appellate forums, thereby leading to undue harassment to the appellant and chaos in administration of tax laws. 3. ADDITIONS TO THE INCOME UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS OR PROFESSION ON ACCOUNT OF BILLING IN EXCESS OF REVENUE. 3.1 The Learned AO and the Hon'ble DRP have grossly erred in making an addition of INR 52,31,62,000 on account of billing in excess of revenue by not accepting the revenue recognition principle adopted by the Assessee which is in line with the prescribed Accounting Standards (AS) and Income Computation and Disclosure Standards (ICDS). 3.2 The Learned AO and the Hon'ble DRP have grossly erred by not accepting the principles of Percentage Completion Method as prescribed under Accounting Standard 7 issued by the Institute of Chartered Accountants of India (ICAI), which states that the revenue should be recognized for a contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee has entered into various international transactions including payment of management fees to its AE, M/s. Durr Systems GmbH. The TPO has accepted all transactions of the assessee with its AE are at ALP, except payment of management fees to its AE amounting to Rs. 3,78,78,968/-. In respect of payment of management fees, the TPO suggested downward adjustment of Rs. 3,78,78,968/- on the ground that the assessee could not file any evidences to justify rendering of services by the AE and necessity of making payment of management fees to its AE. In pursuant to TP adjustment as suggested by the TPO in their order dated 31.10.2018, the AO has passed draft assessment order u/s. 143(3) r.w.s.92CA of the Act, dated 28.12.2018 and proposed TP adjustment as suggested by the TPO in respect of management fees paid to the AE. The AO had also made additions towards reversal of billing in excess of Revenue amounting to Rs. 52,31,62,000/-. The assessee filed an objection before the DRP against draft assessment order. The DRP-2, Bangalore, vide their directions dated 25.09.2019 issued u/s. 144C(5) of the Act, upheld TP adjustment suggested by the TPO in respect of management fees paid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of TPO was given on each annexure. 3. At page no.21, the TPO held that except one mail, seeking sourcing support, all other documents are either basic manuals which can be accessed from any search engine or routine mail communication between two entities. 4. From page no.22 onwards, the contention of appellant against the TPO observation was presented. 5. At page no.27, the TPO had discussed about a specific questionnaire issued to the appellant dated 14.08.2018. However, the appellant replied dated 06.09.2018 that they were not privy to such information called for. 6. This fact is once again recorded by DRP at para 3.4. 7. In view of the above, the TPO called for the details of the employees who are heading the department's concerned and collected those details. 8. Upon thorough analysis, the TPO concluded that when the assessee themselves had such experienced persons in their pay roll, need for management services does not arise. 9. As per the appellant, the cost incurred by Durr Germany was allocated to Durr India for providing respective services with a markup of 7%. If so what was the evidence of cost incurred was not provided. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE, M/s. Durr Systems GmbH, Germany, amounting to Rs. 3,78,78,968/-. The assessee has justified payment of management fees by filing certain e-mail communications between assessee and its AE. The TPO has made additions towards management fees on the ground that except e-mail communications, the assessee could not file any evidences to prove rendering of services by its AE and necessity of making huge fees. We find that similar issue came up for consideration before the Tribunal for the AY 2009-10 2012-13 also. ITAT Chennai Benches under identical set of facts and circumstances, has set aside the issue to the file of the AO/TPO with a direction to follow TNMM method adopted by the assessee to benchmark various international transactions including management fees paid to AE. The relevant findings of the Tribunal are as under: 7. We have heard the rival contentions. Similar issue came up in the assessee s case before this tribunal for the yrs. 2009-10, 2010-11 2011-12. This tribunal in ITA Nos.754/Mds/2014, No.972/Mds/2015 No.455/Mds/2016 dated 21.12.2006 disposed the matter as under: 10. We have considered the rival contentions and perused the orders of the authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in international transactions or specified domestic transactions ; Other methods mentioned in the said Rule are resale price method, cost plus method, profit split method and transactional net margin method. There is residual clause (f) which gives freedom to the ld. TPO to fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or service is available. Ld. TPO and ld. DRP were not able to identify a single uncontrolled comparable for bench marking R D fees and management fees paid by the assessee. This may be due to the difficulties in finding another entity that had rendered services which were identical to what were given to the assessee by M/s. Durr Systems Gmbh, Germany, that too in an uncontrolled set of circumstance. In such a situation in our opinion assessee could not be faulted in insisting that the TNMM method adopted by it for analyzing its international transactions with Associated Enterprises, for the impugned assessment years should be accepted. Nevertheless, we find that lower authorities having rejected the TNMM method did not verify the appropriateness of the comparables selected by the assessee in its TP study. Functional profile of the comparables and that of the assessee were never verified. Lower authorities did not verify whether the Arm s Length Price analysis done by the assessee based on TNMM was correctly done and whether any modification in the comparables selected or the PLI computed were necessary. Thus, while setting aside the orders of the lower authorities for all the imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting and income accrues to the assessee in legal perspective. In response, the assessee stated that it has followed the method of recognition of Revenue and accounting for billing done in excess of Revenue, as per schedule-VI of the Companies Act and Accounting Standard-7. The assessee further claimed that it has followed ICDS standards and as per which, the Revenue has been recognized on the basis of percentage completion method. The AO, however, was not convinced with the explanation furnished by the assessee and according to the AO, when assessee follows mercantile system of accounting, income accrues the moment bill is raised. Further, unless assessee completes certain percentage of work, it cannot raise bill to its clients. Therefore, when the assessee has raised bill in legal perspective, the income accrues to the assessee. Therefore, the question of reversing such income does not arise. Therefore, rejected the arguments of the assessee and made addition towards reversal of billing in excess of Revenue. 5.1 The Ld. Counsel for the assessee submitted that the DRP is erred in sustaining addition towards billing in excess of Revenue by not accepting the Revenue recognitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction contract, the cost debited to P E a/c was the actual cost incurred and the revenue has to be recognized on the basis of cost incurred. 6. From the movement of aggregate amount of contract cost, cost debited in to P L a/c, billing in excess revenue noticed from the paper book that the appellant has been postponing the revenue recognition year after year. 7. This has been duly observed by DRP at paragraph 6.2. 8. DRP examined this aspect and held that billed/invoiced revenue is nothing but the revenue covered by the estimate of completion. Hence, all the invoiced revenue needs to be accounted for the year in which invoices are raised. It was also held that if the work is not completed to the expected stage, the assessee would not have raised an invoice. No customer would pay or accept a bill for the work which is not completed. From the financials available from the paper book of the appellant the following facts are also brought on record;(EncI: Table-1) 1. AY: 2012-13: Factually, the aggregate amount of cost incurred up to 31.03.2012 was Rs. 192.93 Cr and the cost debited to P L was Rs. 112.22 Crinthe A.Y. 2012-13. 2. AY 2013-14: As on 31.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomer has also claimed the expenditure based on the invoices raised by the assessee. So, on one side, the customer claims the expenditure for the works executed by the assessee and the other side, the assessee does not recognize the income and shown it in current liabilities. This leads to clear anomaly in reporting income and expenditure. The assessee contents that part of the Revenue reported in future years, but the contention of the assessee cannot be accepted for the simple reason that when the assessee is following mercantile system of accounting, Revenue should be recognized as and when income accrues and arises to the assessee, irrespective of the fact that the assessee has received the income or not. In this case, the assessee has already raised invoices to its customers on the basis of percentage completion method and in our considered view, the moment assessee rises invoices, income accrues to the assessee. Therefore, the assessee needs to recognize Revenue when it has risen invoices. However, the assessee is postponing recognition of Revenue, even though, it has completed certain percentage of work and rise bills to the clients for the reasons best known to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chemicals Ltd., had considered the issue and held that education cess claimed by the assessee would not be allowed as expenditure u/s. 37 r.w.s.40(a)(ii) of the Act. Therefore, by following the decision of the Hon ble Supreme Court in the case of JCIT v. Chambal Fertilizers Chemicals Ltd., we reject the additional grounds of appeal filed by the assessee on this issue. 8. In the result, appeal filed by the assessee in IT (TP) A No.15/Chny/2020 is partly allowed for statistical purposes. IT (TP) A No.38/Chny/2021 for the AY 2016-17: 9. The assessee has raised the following grounds of appeal: The grounds of appeal listed below are independent and without prejudice to each other. 1. General grounds 1.1. The order of the Income-tax Officer, National e-Assessment Centre, Delhi ('Assessing Officer' or 'AO') passed pursuant to the order of the Transfer Pricing Officer - 1(2), Chennai (Transfer Pricing Officer' or TPO') and the directions issued by the Dispute Resolution Panel (the 'DRP'), to the extent prejudicial to the Appellant, is erroneous, bad in law, and contrary to the facts and circumstances of the case. 1.2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.1. The AO and DRP have erred in making an addition of INR 1,05,82,000 whereas as per the financial statements, the difference between billing in excess of revenue between two years is INR 99,82,000. 4.2. The AO and DRP have grossly erred in making an addition of INR 1,05,82,000 on account of billing in excess of revenue by not accepting the revenue recognition principle adopted by the Assessee which is in line with the prescribed Accounting Standards (AS) and Income Computation and Disclosure Standards (ICDS). 4.3. The AO and DRP have grossly erred by not accepting the principles of Percentage Completion Method as prescribed under AS 7 issued by the Institute of Chartered Accountants of India (ICAI), which states that the revenue should be recognized for a contract on the basis of the percentage/ stage of completion of the contract. 4.4. The AO and DRP have grossly erred by not following the principles of AS 7 and ICDS 3 and have held that revenue accrues basis invoices raised by the Company without considering the percentage/ stage of completion of the contract. 4.5. The AO and DRP have grossly erred in not considering the fact that the method of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r VI A in the computation sheet without appreciating that the Appellant is eligible for deduction of INR 7,00,000 under Chapter VIA of the Act. 8.2. The Appellant prays that the learned AO erred by not directing that the amount disallowed under section 40(a)(i) and section 40(a)(ia) would be allowable as a deduction in the subsequent year when the taxes with respect to the payments were remitted. 8.3. The AO has erroneously levied interest under section 234D of the Act. 8.4. The AO has erred in initiating penalty proceedings under section 270A of the Act. 8.5. The AO has erred in passing the order based on the original return of income filed by the Appellant without considering the modified return. The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto. Further, the Appellant craves that the grounds raised above are without prejudice to each other. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal. 10. The brief f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus, arguments of the Ld.Counsel for the assessee should be rejected. 13. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. As per provisions of Sec. 153(1) of the Act, normal time limit for completion of assessment is prescribed at 21 months from the end of the assessment year, in which, the income was first assessable. As per provisions of Sec. 153(4) of the Act, in case, a reference to the TPO, time limit gets extended for a further period of 12 months. As per provisions of Sec. 92CA of the Act, the TPO should pass their order at least 60 days prior to the last date, the period of limitation referred to in sec. 153 of the Act, for making assessment aspects. The assessment year involved in the present case is AY 2016-17. The extended time limit for completion of assessment in the given case is 31.12.2019. The period of 60 days prior thereto would run till 01.11.2019 and any date prior thereto would come to 31st October or before. If an order was passed on 01.11.2019, then same would be barred by limitation and this legal principle is supported by the decision of Hon ble jurisdictional High Court of Madr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ALP as determined by the TPO and the phrase having regard to was replaced by the phrase in conformity with . Thus, according to the revenue, the AO hardly need apply his mind with respect to the ALP determined and the prescription of 60 days is merely for internal convenience of the different officers to facilitate step by step completion of assessment. 20. Much has been stated about the use of the words in the computation itself, such as may , shall , the absence of reference to month as it may have led to an ambiguity of whether the period should be reckoned as 30 or 31 days and the absence of the phrase no order shall be made as used in Section 153. This, according to the revenue, leads to the conclusion that there is nothing sacrosanct about the period of 60 days which must be construed as flexible. 21. On the question of alternate remedy, I see no reason to relegate the petitioners to the Assessing Authority for completion of draft assessment that may be challenged before the DRP. Limitation, which is the issue raised in these writ petitions, is a mixed question of law and facts, but there are no disputes on factual aspects in the present case. The writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue is to the effect that limitation expires only on 12 a m of 01.01.2020. However, this would mean that an order of assessment can be passed at 12 a m on 01.01.2020, whereas, in my view, such an order would be held to be barred by limitation as proceedings for assessment should be completed before 11.59.59 of 31.12.2019. The period of 21 months therefore, expires on 31.12.2019 that must stand excluded since Section 92CA(3A) states before 60 days prior to the date on which the period of limitation referred to Section 153 expires . Excluding 31.12.2019, the period of 60 days would expire on 01.11.2019 and the transfer pricing orders thus ought to have been passed on 31.10.2019 or any date prior thereto. Incidentally, the Board, in the Central Action Plan also indicates the date by which the Transfer Pricing orders are to be passed as 31.10.2019. The impugned orders are thus, held to be barred by limitation. It has been pointed out that the present assessee was also a party to this litigation. Since at that stage, the draft assessment order was under challenge by assessee before Ld. DRP, it was directed by Hon ble Court that the petitioner would pursue the remedy opted by them. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by limitation. Delving into other legal ground as well as entering into the merits of the assessment has been rendered merely academic in nature. 14. In this case, the TPO has passed their order on 01.11.2019 and assessment year involved is AY 2016-17. In our considered view, the case is squarely covered by the decision of ITAT Chennai Benches in the case of M/s. Verizon Data Services India Pvt. Ltd. Thus, by following the decision of co-ordinate Bench, we quashed order passed by the TPO and consequent draft assessment order passed by the AO, directions issued by the DRP and final assessment order passed by the AO. 15. The assessee has raised various grounds challenging additions made by the AO in pursuant to TP adjustment and other corporate tax issues. Since, the assessment order passed by the AO would be held to be nullity and liable to be quashed dwelling into other issues on merits of the assessment has been rendered merely academic in nature and thus, does not require any specific adjudication. 16. In the result, appeal filed by the assessee in IT (TP) A No. 38/Chny/2021 is allowed. 17. In the result, appeal filed by the assessee in IT (TP) A No. 15/Chny/2020 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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