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TMI Blog2017 (1) TMI 1631X X X X Extracts X X X X X X X X Extracts X X X X ..... ables is allowed and ground raised by the AO, against the order of the FAA about excluding four comparables, is dismissed. Disallowance of bad debts - Held that:- We find that incurring of expenditure by the assessee is not in doubt. If it cannot be allowed as bad debts it has to be allowed as business loss. Enhancement on account of change in method of accounting - Held that:- 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. [2009 (5) TMI 16 - SUPREME COURT OF INDIA] 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. In short, the argument of matching the revenue v/s. cost is missin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Royalty to CA Management Inc.USA 74,167,183 76082319 CUP 2. Commission from CA Management Inc., USA 22,053,507 32408445 TNMM 3. Call centre Services provided to CA Management Inc.,USA 165,438,736 184747465 TNMM 4. Software development services provided to computed associates, USA 84,806,590 810818654 TNMM 5. Support services received from associated enterprises 2,05,80,992 35976017 TNMM 6. Reimbursement of cost 1,63,78,199 81672755 At cost 7. Allocation of common cost 1,49,87,222 20729698 At cost TOTAL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VJIL Consulting Limited 6.68% 19. Visualsoft Technologies Limited 23.52% Arithmetic Mean 25.16% As the arithmetic mean of the 19 comparables was found to be at 25. 16% , so he made an adjustment of ₹ 6. 84crores. The AO after considering the order of the TPO made an addition of ₹ 6, 84, 74, 312/-to the value of IT. s. 3. Aggrieved by the order of the AO, the asessee preferred an appeal before the First Appellate Authority (FAA). Before him, it was argued that out of the 19 comparables 10 comparables were common to those selected by the assessee, that remaining 9 comparables should be rejected, that if only 10 comparabes were considered the ALP would work out to 15. 69% as against assessee s margin of 15. 41%. With regarding the remaining comparables, namely Exensys Software Solutions Ltd. (SN. 4), Third-ware Solutions Limited(SN. 16), Infosys(SN. 9) , Satyam computer Services Limited(SN. 15), Flextronics Software Solutions Limited(SN. 5), Compulink Systems Ltd. (SN. 3), Geometric Software Solutions Co. Ltd. (SN. 8), Four S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion of Infosys, Satyam Computer Services Ltd. Sankhya Infotech Ltd. and Geometric Software Solutions, the AR relied upon the order of the FAA and argued that same were excluded from the list of comparables in the cases of Intoto Software India(P. ) Ltd. (supra)and Textron Global technology Centre (P) Ltd. (supra). The DR argued that the FAA had not proved the functional dissimilarity of ESSL, that amalgamation had no impact on the margins of the assessee, that both the assessees were in the same business, that in the case Third Ware Solutions Ltd. the product account was for less than 10%, that RPT was not available, that sale of license was 2. 97 crores only out of the total sale of ₹ 29. 11 Crores, that in the case of Flextronics product sale was only 15%, while considering the matter of Compulink nomenclature of services should not be given importance. He referred to the pages 83, 93, 122, 119 of the PB. For the rest of the excluded/ included comparables, he relied upon the order of the TPO/FAA. 4. 1. We have heard the rival submissions and perused the material before us. In case of ESSL , we find that there was amalgamation of the company with Hollol India Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record, we find that there is no dispute that Assessee has accepted the Exensys Software Solutions Limited as one of the comparable companies when proposed by the TPO. However, the fact that there is an amalgamation of two companies i. e. , ( Exensys Software Limited and Holool India Limited, the results of which, has resulted in high operating margin cannot be lost sight for. It has been held in many cases by this Tribunal as well as the Higher Forums that to compare a company with another company, both the companies have to be brought on par with each other after making the necessary adjustments wherever necessary and possible. However, where there are extraordinary events such as this, then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event, then such company cannot be considered as a comparable. The objections to this company by Assessee are made for the first time before the Tribunal. The Tribunal being the final fact finding authority is bound to take note of the objections of Assessee. As the material relied upon by the learned Counsel for Assessee clearly denotes that there is an extraordinary event which has res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record as well as order of TPO it is clear that assessee is purely a software development service provider, that too to its AE only. Thus, assessee is a captive/contract service provider. As can be seen, comparability of aforesaid comparables were considered in cases of various other purely software development service providers like assessee for the same assessment year. Coordinate benches of this Tribunal in the above referred cases after examining different aspects have held these companies as uncomparable to a purely software development service provider. The finding of the coordinate bench in case of Ness Innovative Business (P. ) Ltd. (supra), with regard to some of the comparables for the same assessment year is extracted hereunder for ready reference: 5. Thirdware Solutions Ltd. : Ld. Counsel submitted that this company is functionally different for the following reasons: As per reply to notice issued u/s. 133(6), the company informed that it is engaged in implementation and customer services which include training, customized development and help desk services for ERP software and distribution of products of Quad Inc. and Hyperion Solutions corporation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y s revenue are principally from licenses sale of products, that the sale included AMC and license of ₹ 3. 02 crores, that no segmental are available about the sales. While deciding the case of Intoto Software India Ltd. , the Tribunal has excluded it from the list of comparables. 4. 1. c. In case of Flextronics Ltd. it is found that the company is an end to end provider of communication products, services and solutions to network equipment providers, that it had incurred expenditure of ₹ 26. 30 crores under the head R D, that segmentals of the company are not available. Considering it functionally different, the Tribunal has excluded it from the list of valid comparables in the cases of Intoto Software India (P. ) Ltd. (supra), DE Shaw India Software(P. )(India)Ltd. (supra). 4. 1. d. Finally, we would deal with the last comparable objected to by the assessee, i. e. Compulink System Ltd. . It is found that Compulink had reported revenue from services and products. However, in the financials segmentals were not provided by it. It is also found that company is engaged into providing software development services project management training and consultancy services, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is dismissed. 5. Next Ground of appeal, raised by the assessee is about disallowance of bad debts of ₹ 8. 74 lakhs. During the assessment proceedings, the AO found that the assessee had written off bad debts amounting to ₹ 63. 88 lakhs. He directed the assessee to file details of debtors amounts written and the reasons for writing it off. Vide its letter dated 10. 12. 2008 the assessee filed the details in that regard. After considering the same, he observed that the assessee had written off bad debts in the companies like WIPRO, TCS, L T Infotech, which were cash rich companies, that the assessee had failed to establish that debts had become bad. 5. 1. Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority(FAA). Before him, it was argued that it had written off bad debts of ₹ 63, 88, 690/- , that it had debited the same under the Schedule-13 of the P L Account as bad debts written off, that after writing off the assessee was entitled to claim deduction . It relied upon cases of TRF Ltd. (2010-TIOL-15-SC-IT)and Oman International Bank (313 ITR 128), that mere writing off of bad debts was sufficient for claiming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. The fact that conditions for deduction as bad debt were not satisfied by the assessee would not prevent him from claiming deduction as a business loss. Respectfully, following the above and accepting the alternate plea of the assessee, we decided the second effective ground of appeal in its favour. 6. Third Ground of appeal, raised by the assessee, is about enhancement of ₹ 1. 25crores on account of change in method of accounting. It was brought to our notice that identical issue was deliberated upon by the Tribunal, while deciding the appeal for the earlier years(ITA. s 8376-8106/Mum/2011 and8218/Mum/2010- AY. s. 2004-05 and 2006-07, dt. 2015). We would like to reproduce the relevant portion of the said order of the Tribunal and it reads as under:- 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, makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tuticorin Alkali Chemicals and Fertilisers Ltd. (227 ITR 172)and held that AS did not supersede the taxing provisions. 3. 3. We have heard 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 ₹ 5, 98, 95, 063/-was considered as Prepaid royalty under the head Loans and Advances in the Balance Sheet, that deferred revenue was offered to tax in subsequent year/s depending upon the tenure of the contracts. The assessee claimed that it had changed method of accounting for recognising revenue from license fees and maintenance contracts as per and in accordance with the AS-9, that as a result the revenue was deferred rateably over the period of contract, that the changed method of accounting was regularly followed by the assessee on and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lished accounts of the companies it was very difficult to ascertain whether the factors on the basis of which accounting for revenue from software are determined are similar to the case of appellant. However considering the competitive business of software the assessee had enclosed the accounts of IBM India Pvt. Ltd. (One of the competitors of the appellant) attached as Annexure-I. You would observe in the notes to the Financials of IBM India Pvt. Ltd. that revenue from the term contract is recognized over the contract term base of percentage of services that are provided during the period 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 not produced by the assessee before the FAA or us. We have gone through the contracts entered in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anything with the matching cost. For applying the 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 software licence was sold or when the software contract was completed it used to receive full revenue. It wants to defer the income of the year to subsequent years. But, in our opinion, to talk about matching principle without furnishing the details about the expenditure actually incurred does not serve any useful purpose. Straight line method, matching-principle and principles governing AS cannot be applied in air-their application needs hard facts. In the case before us, the assessee has raised several theoretical issues, but has not proved as to how the theory, relied upon by it, was applicable to facts. Paying of taxes in subsequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (supra), it was found that the assessee was following project completion method, whereas 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 FAA 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. Confirming, his order, we decide ground no. 2. 1. against the assessee. Respectfully, following the above order of the Tribunal, we decide third ground against the assessee. 7. We find that rest of the Ground raised by the assessee are consequential in nature and hence are not being decided. 8. Second effective ground of appeal, raised by the AO is about payment of royalty by the assessee to its AE, amounting to ₹ 15. 88 lakhs. During the assessment proceedings the AO found that CA Management Inc. had entered into software distribution agreement with CA India, that as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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