2015 (11) TMI 995 - AT - Income Tax

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 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 - Decided in favour of assessee in part. Addition on account of change in the method of accounting - Held that - In the case under appeal the assessee had changed method of accounting deferring more than 75% of its revenue to future period perpetually. Such a change in our opinion is not a bona fide change. With 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 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 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 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 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 the price of the products from its clients. - Decided in favour of the respondent - assessee.

Issues Involved:
1. Disallowance of Bad Debts
2. Addition due to Change in the Method of Accounting
3. Initiation of Penalty Proceedings
4. Deletion of Adjustments by the Transfer Pricing Officer (TPO)
5. Addition on Account of Transfer Pricing Adjustment
6. Addition on Account of Advance Billings

Detailed Analysis:

1. Disallowance of Bad Debts:
The assessee claimed a deduction for bad debts amounting to Rs. 69,45,581, which was disallowed by the Assessing Officer (AO) and partially upheld by the CIT(A). The Tribunal noted that the assessee had written off bad debts in its books and claimed them in its Profit & Loss account. However, the claim was not made in the original or revised return but during assessment proceedings. The Tribunal referred to the case of Pruthvi Brokers and Shareholders Pvt. Ltd., which allowed raising additional claims before appellate authorities. The Tribunal remitted the matter back to the CIT(A) for verification to allow the claim if the bad debts were transferred from provisions to bad debts.

2. Addition due to Change in the Method of Accounting:
The AO added Rs. 19,96,50,209 to the income due to a change in the method of accounting for software licenses, which the CIT(A) upheld. The Tribunal observed that the change was made to reflect revenues on a straight-line basis over the contract period, aligning with Accounting Standard 9. However, the AO and CIT(A) found the change unjustified, as it deferred a significant portion of revenue to future years without corresponding expenses. The Tribunal held that the change was not bona fide and upheld the addition. However, it allowed the assessee's claim to be verified for any relief in subsequent years to avoid double taxation.

3. Initiation of Penalty Proceedings:
The CIT(A) concluded that mere initiation of penalty proceedings does not cause prejudice against the assessee. The Tribunal considered this ground infructuous.

4. Deletion of Adjustments by the TPO:
The AO's appeal against the deletion of adjustments made by the TPO was dismissed. The Tribunal referred to the Bombay High Court's decision, which held that the royalty paid by the assessee to its Associated Enterprise (AE) was justified and should not be reduced due to bad debts. The Tribunal followed this precedent and decided the issue against the AO.

5. Addition on Account of Transfer Pricing Adjustment:
For AY 2005-06, the AO disallowed Rs. 17,61,155 as royalty payment to AE on bad debts. The Tribunal, following its earlier decision for AY 2004-05, decided this issue in favor of the assessee.

6. Addition on Account of Advance Billings:
The AO added Rs. 8,64,26,828 due to advance billings. The Tribunal, following its decision for AY 2004-05, upheld the addition. However, it allowed the assessee's claim for restricting the amount to Rs. 7,38,59,019 and for ensuring that the same income is not taxed in subsequent years.

Conclusion:
The appeals filed by the assessee were partly allowed, and the appeal of the AO was dismissed. The Tribunal provided detailed reasoning for each issue, ensuring that the principles of revenue recognition and matching costs were appropriately applied. The matters were remitted back to the CIT(A) for verification where necessary to ensure fair assessment and avoid double taxation.

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