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2021 (5) TMI 658 - AT - Income TaxAddition of low Gross Profit - non rejection of books of accounts - HELD THAT - AO has failed to point out any serious defect in maintenance of books of accounts except comparing Gross Profit Ratio of preceding years and making fall in GP ratio as main basis for rejection of books results. CIT(A) has also held that there was no change in method of accounting and it is settled law that AO cannot doubt the genuineness of books of accounts merely because there has been reduction in Gross Profit Ratio in comparison to earlier years. The Ld. CIT(A) has relied upon the decision of Hon ble Gujarat High Court in the case of CIT Vs. Vikram Plastics Others 1998 (8) TMI 43 - GUJARAT HIGH COURT wherein it was held that if there was no discrepancy or defect pointed out in the books of accounts and if there is no material brought on record that purchases and expenses were inflated or sales suppressed then books of accounts cannot be rejected. The Ld. CIT(A) has also discussed that the product - service mix in A.Y.2012-13 was 42 58 which was 86 14 in A.Y.2014-15, obviously the GP ratio would be on lower side as compared to A.Y.2012-13. The Ld. CIT(A) has also held that the AO could not cite any comparable case from the same line of business to prove that assessee's profit margins is on lower side. Based on the facts narrated above, we note that ld CIT(A) has reached on right conclusion therefore we are constrained to agree with the findings of the ld CIT(A). Thus, this ground of appeal raised by the Revenue is dismissed. TDS u/s 195 - Disallowance u/s 40(a)(ia) - assessee company had purchased software called pacor clients software with hasp key note from Computer system and Networking (foreign supplier of the software) - HELD THAT - CIT(A) held that impugned payment was not made for acquiring any copyright but copyrighted material and payment was for purchase of goods and not towards Royalty. Hence, the assessee was not having any liability to deduct tax u/s195 of the Act. Accordingly, ld CIT(A) deleted the addition correctly. - Decided against revenue.
Issues Involved:
1. Deletion of the addition of Gross Profit (G.P) of ?2,86,01,036/-. 2. Deletion of the disallowance of ?9,12,600/- under section 40(a)(ia) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Deletion of the Addition of Gross Profit of ?2,86,01,036/-: The Revenue raised the issue of whether the CIT(A) was justified in deleting the addition of G.P without appreciating that the assessee failed to prove the reasons for the fall in G.P with supporting evidence. During the assessment proceedings, the assessee provided a comparative chart of G.P and N.P ratios for the last three years, indicating a notable variation. The gross profit for the year was ?2.77 crores compared to ?6.15 crores and ?4.03 crores in the preceding two years. The net profit for the year was ?20.14 lakhs compared to ?2.74 crores and ?2.59 crores in the preceding two years. The G.P ratio showed a negative growth, and the N.P ratio also showed a significant decline. The assessee attributed the fall in G.P and N.P ratios to a drastic fall in revenues, increased fixed costs, and a reduction in other income. The Assessing Officer (AO) did not accept the explanation, noting a continuous fall in G.P and N.P ratios over the last three years and discrepancies in the books of the assessee. The AO rejected the book results under section 145(3) of the Act and estimated the G.P based on the average G.P of the last three years, adding ?2,86,01,036/- to the total income of the assessee. The CIT(A) deleted the addition, stating that the AO failed to point out any serious defect in the maintenance of books of accounts except for comparing G.P ratios of preceding years. The CIT(A) held that a mere reduction in G.P ratio does not justify doubting the genuineness of books of accounts. The CIT(A) relied on the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Vikram Plastics & Others, which stated that books of accounts cannot be rejected if no discrepancy or defect is pointed out. The CIT(A) also noted that the product-service mix had changed, leading to a lower G.P ratio. The Tribunal upheld the CIT(A)'s decision, agreeing that the AO failed to provide a comparable case from the same line of business to prove lower profit margins. 2. Deletion of the Disallowance of ?9,12,600/- under Section 40(a)(ia) of the Act: The Revenue questioned whether the CIT(A) was justified in deleting the disallowance of ?9,12,600/- for non-deduction of TDS on payment made to a non-resident for the purchase of software. The AO noted that the assessee purchased software from a foreign supplier for ?9,12,600/- without deducting TDS, considering it as 'royalty' under section 9 of the Act, based on the Hon'ble Karnataka High Court's decision in CIT Vs. P.S.I. Data System Ltd. The assessee argued that the payment was for the purchase of a product, not for the transfer of intellectual property, and cited the Hon'ble Delhi High Court's decision in DIT v. M/s Nokia Networks, which distinguished between acquiring a "copyright right" and a "copyrighted article." The CIT(A) agreed with the assessee, stating that the payment was for the purchase of a product, not royalty, and relied on the Hon'ble Supreme Court's decision in Tata Consultancy Service Vs. State of Andhra Pradesh, which held that software incorporated on media is goods and liable to sales tax. The Tribunal upheld the CIT(A)'s decision, noting that the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Limited Vs. CIT upheld the view that payment for software is not royalty but for the purchase of goods. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions to delete the addition of ?2,86,01,036/- on account of low G.P and the disallowance of ?9,12,600/- under section 40(a)(ia) of the Act. The Tribunal agreed with the CIT(A) that the AO failed to provide substantial evidence to justify the additions and disallowances.
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