CA INDIA TECHNOLOGIES PVT. LTD., MUMBAI V. A.C.I.T. RG. 6(2), MUMBAI

ITA 8376/MUM/2011

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 2127 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 13-11-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 09-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: ARPIT AGARWAL; KANCHAN KAUSHAL DHANESH BAFNA
• Keywords: Gift; Transfer pricing; International transaction; Question of law; Initiation of penalty proceedings; Bad and doubtful debts; Commercial expediency; Revised return
• Section: 92C; 145

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI K BENCH . . , , , BEFORE S/SH. A.D. JAIN,JUDICIAL MEMBER & RAJENDRA,ACCOUNTANT MEMBER /.ITA NO.8376/MUM/2011, /ASSESSMENT YEAR-2004-05 CA (INDIA) TECHNOLOGIES PVT. LTD. GROUND FLOOR, VIBGYOR TOWER PLOT-C-62, G-BLOCK,BKC BANDRA (E)MUMBAI-400 051. PAN: AAACC 4971 D VS ACIT 10(1) AAYAKAR BHAVAN MUMBAI. /.ITA NO.8106/MUM/2011, /ASSESSMENT YEAR-2004-05 ACIT-CIR 10(1) MUMBAI. VS CA (INDIA) TECHNOLOGIES PVT. LTD. MUMBAI-400 051 /.ITA NO.8218/MUM/2010, /ASSESSMENT YEAR-2006-07 CA (INDIA) TECHNOLOGIES PVT. LTD. BANDRA (E)MUMBAI-400 051. VS ACIT 10(1) AAYAKAR BHAVAN,MUMBAI. ( / APPELLANT) ( / RESPONDENT) /ASSESSEE BY : S/SHRI KANCHAN KAUSHAL ,DHANESH BA FNA & ARPIT AGARWAL / REVENUE BY : SHRI N.K. CHAND -CIT / DATE OF HEARING : 03.08. 2015 / DATE OF PRONOUNCEMENT : 07.10 .2015 , 1961 1961 1961 1961 254 254 254 254( (( (1 11 1) )) ) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DATED OF THE CIT(A)- , MUM BAI,THE ASSESSING OFFICER(AO) AND THE ASSESSEE HAVE FILED CROSS APPEALS FOR THE AY.2004-0 5,WHEREAS FOR THE AY.2006-07,ONLY THE ASSESSEE HAS FILED APPEAL. ITA NO.8376/MUM/2011-AY.2004-05: THE ASSESSEE RAISED FOLLOWING GROUNDS OF APPEAL: I.DISALLOWANCE OF BAD DEBTS OF RS. 69,45,581: 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE COMMISSION R OF INCOME-TAX (APPEALS) ('CIT(A)') ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN NOT ALLOWING THE CLAIM OF BAD DEBTS MADE DURING THE ASSESSMENT AMOUNTING T O RS. 69,45,581 WHILE COMPUTING THE INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PR OFESSION'. 1.2 THE APPELLANT PRAYS THAT THE BAD DEBTS AMOUNTIN G TO RS. 69,45,581 BE ALLOWED AS DEDUCTION FOR THE YEAR UNDER CONSIDERATION. II. ADDITION OF RS. 19,96,50,209 ON ACCOUNT OF CHAN GE 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 RS. 19,96,50,209 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF CHANGE IN THE METHOD OF ACCOUNTING ADOPTED BY THE APPELLANT. 2.2 WITHOUT PREJUDICE TO GROUND NO. 2.1 ABOVE, THE HON'BLE CIT(A) ERRED IN FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN CONCLUDING THAT THE REVEN UE LOSS DUE TO CHANGE IN THE METHOD OF ACCOUNTING IS RS. 19,96,50,209 AND NOT RS. 13,97,55,146. 2.3THE APPELLANT PRAYS THAT THE CHANGE IN THE METH OD OF ACCOUNTING ADOPTED BY THE APPELLANT BE ACCEPTED AND THE ADDITION OF RS. 19,96,50,209 BE D ELETED. 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. 8218/10;8376/11 & 8106/11CA(INDIA) 2 3.2 THE APPELLANT PRAYS THAT THE PENALTY PROCEEDIN GS 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, DOCUMENTS AND PAPERS AS MAY BE CONSIDERED NECESSARY EITHER AT OR BEFORE THE TIME OF HEARING. ITA NO.8106/MUM/2011- AY.2004-05: GROUNDS FIELD BY THE AO READ AS UNDER: 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW,THE LD. CIT (A) ERRED IN DELETING THE ADJUSTMENTS DONE BY THE TPO AND CONSEQUENT ADDITION MADE BY THE A.O.' 2. THE APPELLANT PRAYS THAT THE ORDER OF CIT (A) ON THE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 3. THE APPELLANT CRAVES LEAVE TO AMEND 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. UND ER 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 RS.1 ,46,00,560. ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF RS.17,61,155 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, AND IN LAW, THE ADDITIONAL COMMISSIONER OF INCOME TAX TRANSFER PRICING -1 (2), MUMBAI (HEREINA FTER REFERRED TO AS 'THE LEARNED TPO'), THE LEARNED AO AND THE DRP AUTHORITIES HAVE ERRED IN CO NFIRMING THE ADDITION MADE BY THE AO OF RS 17,61,155 BY DISALLOWING THE ROYALTY PAYMENT TO ASS OCIATED ENTERPRISE ON THE AMOUNT WRITTEN OFF AS BAD DEBTS IN THE BOOKS OF ACCOUNTS FOR DETERMINING THE ARM'S LENGTH PRICE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, 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 FILE D IN FORM 36A. ADDITION ON ACCOUNT OF ADVANCE BILLINGS OF RS.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 HAVE ERRED IN MAKING ADDITION OF RS.8,6 4,26,828 ON ACCOUNT OF ADVANCE BILLING. 5 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AO AN D THE DRP AUTHORITIES HAVE ERRED IN NOT RESTRICTING THE AMOUNT TO RS.7,38,59,019 BEING THE ADVANCE BILLINGS RELATING TO FINANCIAL YEAR 2005-06 RELEVANT TO ASSESSMENT YEAR 2006-07. 6. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AO A ND THE DRP AUTHORITIES HAVE ERRED IN NOT CONCLUDING THAT WHILE COMPUTING THE INCOME OF THE A SSESSEE FOR THE SUBSEQUENT ASSESSMENT YEARS, 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 A ND THE DRP AUTHORITIES HAVE ERRED IN NOT ALLOWING THE DEDUCTION FOR ROYALTY AT 30% OF ADVANC E BILLINGS (PAYABLE IN ACCORDANCE WITH THE RELEVANT DISTRIBUTION AGREEMENT) CONSIDERED AS INCO ME FOR THE YEAR. THAT APPELLANT CRAVES LEAVE TO ADD, TO AMEND, TO SU BSTITUTE, TO WITHDRAW, TO MODIFY, TO ALTER AND/OR R E- INSTATE THE FOREGOING GROUNDS OF THE APPEAL AT OR B EFORE THE TIME OF HEARING. ASSESSEE-COMPANY,CA(INDIA)TECHNOLOGIES PRIVATE LIMI TED(CATPL),A COMPANY INCORPORATED IN INDIA,IS A WHOLLY-OWNED SUBSIDIARY OF COMPUTER A SSOCIATES INTERNATIONAL INC.(CAII)OF USA.IT IS PRIMARILY ENGAGED IN LICENSING MAINFRAME MIDRANGE AND SYSTEM INFRASTRUCTURE SOFTWARE PRODUCTS OF CAII(US),DEVELOPING SOFTWARE THAT CAN GENERALLY BE DEPLOYED UT OF BOX OR WITH CUSTOMER/INDUSTRY-SPECIFIC ADAPTATIONS AND DEVELOPING OF SOFTWARE THAT ALLOWS TECHNOLOGISTS AND PROGRAMMERS TO WRITE CUSTOM APPL ICATIONS AND CREATE NEW CATEGORIES OF PACKAGED APPLICATIONS.IT HAS ALSO ESTABLISHED A TEC HNICAL SUPPORT-CENTRE AT TIDEL PARK, A SOFTWARE TECHNOLOGY PARK (STP) UNIT IN CHENNAI AND THE PROFITS MADE BY THE STP UNIT ARE 8218/10;8376/11 & 8106/11CA(INDIA) 3 ELIGIBLE FOR TAX HOLIDAY UNDER SECTION 10A OF THE A CT.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 INCOME ASSESSMENT DT. ASSESSED INCOME DT. OF ORDERS OF CIT(A)/DRP 2004-05 31.10.2004 (-)21.16CRORE 27.12.2006 (-)3.98 CRORE 02.09.2011 2005-06 29.11.2006 (-)12.65CRORES 30.09.2010 1.46CR ORES 05.08.2010 ITA NO.8376/MUM/2011-AY.2004-05: 2. FIRST GROUND OF APPEAL IS ABOUT DISALLOWANCE OF BAD DEBTS OF RS.69,45,581/-.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESS EE HAD WRITTEN OFF BAD DEBTS OF RS.16.93 LAKHS. HE DIRECTED IT TO FILE DETAILS IN THAT REGAR D.IN RESPONSE TO THE DIRECTIONS THE ASSESSEE FILED DETAILS OF AGING ANALYSIS OF BAD DEBTS OF RS. 86.38 LAKHS AS AGAINST THE AMOUNT DEBITED TO P & L ACCOUNT OF RS.16.93LAKHS.THE AO HELD THAT THE ASSESSEE WAS NOT ENTITLED TO WRITE OFF SAID BAD DEBTS.HE ALSO REJECTED THE CLAIM MADE BY I T ABOUT THE BAD DEBTS OF RS.86,38,802/-. 2.1. DURING THE APPELLATE PROCEEDINGS,THE ASSESSEE,BEFOR E THE FIRST APPELLATE AUTHORITY(FAA) CONTENDED THAT DURING THE AY.UNDER APPEAL THE ASSES SEE HAD WRITTEN OFF BAD DEBTS OF RS.86.38 LAKHS, THAT OUT OF THE SAID SUM IT HAD DEBITED RS.1 6.93 CRORES UNDER SCHEDULE 15 AS BAD DEBTS WRITTEN OFF,THAT SAME WAS WRONGLY DISALLOWED BY THE AO,THAT IT HAD ALSO WRITTEN OFF DEBTS OF 69.45 LAKHS BY DEBITING THE SAME TO THE PROVISION F OR BAD AND DOUBTFUL DEBTS FOR THE YEAR UNDER CONSIDERATION,THAT THE PROVISIONS OF RS.68,88 ,882/-MADE IN EARLIER YEARS WAS REVERSED,THAT NET AMOUNT OF RS.56,699/- WAS REFLECT ED AS PROVISIONS FOR BAD AND DOUBTFUL DEBTS IN THE P & L ACCOUNT,THAT THE AMOUNT OF BAD D EBTS WRITTEN OFF OF RS.69,45,581/- WAS INADVERTENTLY NOT CLAIMED AS A DEDUCTION BY THE ASS ESSEE EITHER IN ORIGINAL OR THE REVISED RETURN OF THE INCOME,THAT IT REALIZED THE MISTAKE D URING ASSESSMENT PROCEEDINGS,THAT VIDE ITS LETTER DATED 22.11.2006 IT MADE THE ABOVE CLAIM. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND THE ASSESSMENT ORDER,THE FAA HELD THAT THAT THE ASSESSEE HAD WRITTEN OF BAD DEBTS TO THE E XTENT OF RS.16,93,221/- IN ITS BOOKS OF ACCOUNTS AND HAD CLAIMED THE SAME IN ITS P&L ACCOUN T,THAT SUCH DEBTS WHICH HAVE BEEN WRITTEN OFF WERE OFFERED TO TAX AND ARE OF REVENUE IN NATURE,THAT THE ACTION OF THE AO IN DISALLOWING SUCH CLAIM OF THE ASSESSEE ON THE GROUN D THAT IT HAD NOT BEEN ABLE TO DEMONSTRATE THAT SUCH DEBTS HAD BECOME REALLY BAD WAS NOT SUSTA INABLE.FOLLOWING THE DECISION OF THE HON'BLE APEXCOURT IN THE CASE OF TRFLIMITED (2010-T IOL-15-SC-IT),HE DIRECTED THE AO TO ALLOW THE CLAIM.WITH REGARD TO THE BALANCE BAD DEBT S,HE OBSERVED,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 (231CTR 2)AND HELD THAT THE ASSESSEE(S)WERE NOW REQUIRED NOT ONLY TO DEBIT THE PROFIT AND LOSS ACCO UNT 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 AS NET OF PROVISIONS FOR IMPUGNE D BAD DEBT,THAT DEBIT AT BOTH PLACES WAS ESSENTIAL TO MAKE CLAIM AND ALLOWANCE OF THE SAME U NDER SECTION 36(1) (VII) OF 1961 ACT.HE FURTHER DISCUSSED THE MATTER OF GOETZE INDIA LTD.(1 57 TAXMAN 1) AND HELD THAT SUCH CLAIM OF DEBIT TO THE PROVISIONS FOR DOUBTFUL DEBT ACCOUNT BY THE ASSESSEE COULD HAVE BEEN MADE IN THE RETURN FILED OR THE REVISED RETURN FILED BY IT, THAT THE ASSESSEE HAD NOT MADE CLAIM FOR SUCH DEDUCTION IN EITHER ITS RETURN OR IN THE REVISED RE TURN FILED,THAT FOR ANY FRESH CLAIM OF DEDUCTION THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF GOETZE INDIA LTD. WAS 8218/10;8376/11 & 8106/11CA(INDIA) 4 SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEE.AC CORDINGLY,THE ACTION OF THE AO WAS UPHELD TO THE EXTENT OF RS.69.45 LAKHS. 2.2. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)CONTENDE D THAT THE ASSESSEE HAD BY MISTAKE DID NOT MADE A CLAIM OF THE ENTIRE AMOUNT WRITTEN O FF DURING THE AY.UNDER APPEAL,THAT VIDE LETTER NO. 22.11.2006 THE ASSESSEE HAD MADE THE CLA IM,THAT THE AMOUNT WAS ACTUALLY WRITTEN OFF,THAT THE SAID AMOUNT WAS SHOWN AS PROVISION IN THE EARLIER YEAR,THAT AO AND THE FAA HAD NOT APPRAISED THE FACTS PROPERLY,THAT THE FAA SHOUL D HAVE ACCEPTED THE CLAIM MADE BY THE ASSESSEE EVEN THOUGH SAME WAS MADE DURING THE ASSES SMENT PROCEEDINGS FOR THE FIRST TIME.HE REFERRED TO THE PAGE NO.69 OF THE PAPER BOOK AND RE LIED UPON THE CASES OF PRUTHVI BROKERS AND SHARESHOLDERS(349 ITR336)AND JAI PARABOLIC SPRING L TD.(172TAXMAN258).DEPARTMENTAL REPRESENTATIVE (DR) SUPPORTED 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.L TD.(SUPRA). AN ASSESSEE IS ENTITLED TO RAISE NOT MERELY ADDITIO NAL LEGAL SUBMISSIONS BEFORE THE APPELLATE AUTHORITIES BUT IS ALSO ENTITLED TO RAISE ADDITIONA L CLAIMS BEFORE THEM. THE APPELLATE AUTHORITIES HAVE THE DISCRETION TO PERMIT SUCH ADDI TIONAL CLAIMS TO BE RAISED. THE APPELLATE AUTHORITIES HAVE JURISDICTION TO DEAL NOT MERELY WI TH ADDITIONAL GROUNDS, WHICH BECAME AVAILABLE ON ACCOUNT OF CHANGE OF CIRCUMSTANCES OR LAW, BUT WITH ADDITIONAL GROUNDS WHICH WERE AVAILABLE WHEN THE RETURN WAS FILED. THE WORDS COULD NOT HAVE BEEN RAISED MUST BE CONSTRUED LIBERALLY AND NOT STRICTLY. THERE MAY BE SEVERAL FACTORS JUSTIFYING THE RAISING OF A NEW PLEA IN AN APPEAL AND EACH CASE MUST BE CONSIDE RED ON ITS OWN FACTS. WHILE DECIDING THE MATTER THE HONBLE HIGH COURT HA D CONSIDERED THE JUDGMENT OF GOETZ INDIA LTD.(SUPRA).IT WAS CLAIMED THAT THE ASSESSEE HAD REVERSED THE ENTRY WITH REGARD TO THE AMOUNT WRITTEN OFF DURING THE YEAR I.E.IT HAD BROUG HT 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 INT EREST OF JUSTICE WE ARE REMITTING BACK THE MATTER TO THE FILE OF THE FAA FOR VERIFICATION PURP OSES.HE WOULD ALLOW THE CLAIM OF THE ASSESSEE WITH REGARD TO THE BAD DEBTS WRITTEN OFF D URING THE YEAR UNDER APPEAL AMOUNTING TO RS.69.45 LAKHS,IF SAME HAVE BEEN TRANSFERRED FROM T HE PROVISIONS OF BAD DEBTS TO BAD DEBTS.GROUND NO.1 IS DECIDED IN FAVOUR OF THE ASSES SEE,IN PART. 3. NEXT GROUND I.E. GROUND NO.2 IS ON ACCOUNT OF ADDIT ION OF RS.19,96,50,209/- ON ACCOUNT OF CHANGE IN THE METHOD OF ACCOUNTING.IN ORDER TO DETE RMINE ARMS 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 T HE ACT,WHO PASSED AN ORDER ON 05.12. 2006,U/S.92CA(3) OF THE ACT, MAKING AN ADJUSTMENT I N RESPECT OF THE ROYALTY PAYABLE TO ITS ASSOCIATED ENTERPRISE ('AE').ON COMPLETION OF THE S CRUTINY ASSESSMENT, AN ORDER U/S.143(3) OF THE ACT WAS PASSED,ASSESSING THE TOTAL LOSS OF T HE ASSESSEE AT RS.3,98,69,991/-AS AGAINST 24,40,44,974/-,AS STATED EARLIER.THE DISALLOWANCES/ ADJUSTMENTS INCLUDED TRANSFER PRICING ADJUSTMENT OF RS.18,57,454/-ON ACCOUNT OF ROYALTY P AYABLE TO CAII AND ADDITION OF RS.19,96,50,209/-ON ACCOUNT OF CHANGE IN METHOD OF ACCOUNTING FOR SALE OF SOFTWARE LICENSE. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT IN THE NOTES TO FINANCIAL STATEMENT THE AUDITORS HAD MADE QUALIFYING REMARK REGARDING THE C HANGE IN METHOD,THAT PRIOR TO AY.UNDER APPEAL THE ASSESSEE RECOGNISED ITS REVENUE DEPENDIN G ON THE YEAR IN WHICH THE PRODUCTS WERE SOLD,THAT EARLIER THE ENTIRE BILLING WAS SHOWN ASSESSEE IN THE FIRST YEAR OF THE SALE/ LICENSE,THAT DURING THE YEAR UNDER CONSIDERATION 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 PUR CHASED/LICENSED BUT ALSO THE MAINTENANCE OF THE SOFTWARE AND UNSPECIFIED FUTURE SOFTWARE PRODUCTS I.E.NEW RELEASE OF A 8218/10;8376/11 & 8106/11CA(INDIA) 5 PRODUCT,THAT UNDER TERMS OF THE AGREEMENT IT WAS RE QUIRED 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 CUSTOMER FREE OF COST,THAT SAME COUL D NOT BE ANTICIPATED BY IT AT THE COMMENCEMENT OF THE CONTRACT,THAT THE REVENUE TO BE EARNED BY THE ASSESSEE FROM THE AGREEMENT WITH THE CUSTOMER WAS DEFERRED ON A STRAI GHT LINE BASIS OVER THE TENURE OF THE CONTRACT, THAT IN THAT BACKGROUND IT WAS DECIDED TO CHANGE ITS ACCOUNTING METHOD.THE AO,WHILE PASSING THE ASSESSMENT ORDER HELD THAT THE CHANGE IN ACCOUNTING METHOD HAD PREJUDICIAL IMPACT ON REVEUE,THAT THE ASSESSEEHAD D EFERRED THE SALE OF SOFTWARE LICENCE AND HAD RECOGNISED ONLY RS.5.33 CRORES AS REVENUE ON AC COUNT OF LICENCE FEE OUT OF TOTAL AMOUNT OF INVOICES OF RS.25.29 CRORES,THAT IT RESULTED IN REVENUE LOSS OF RS.19.96 CRORES,THAT THE CHANGE HAD DILUTED THE INCOME OF THE ASSESSEE FOR T HE YEAR UNDER APPEAL.HE MADE AN ADDITION OF RS.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 A LKALI CHEMICALS AND FERTILISERS LTD.(227 ITR 172)AND HELD THAT AS DID NOT SUPERSEDE THE TAXING PROVISIONS. 3.1. BEFORE THE FAA,IT WAS ARGUED THAT THAT THE AO HAD F AILED TO APPRECIATE THE ENTIRE FACTS OF THE CASE,THAT UNTIL THE PREVIOUS YEAR,IT RECOGNI SED REVENUE ON STAND-ALONE MAINTENANCE CONTRACTS AND LICENSE FEES AS PER CONTRACT TERMS,TH AT IN THE CURRENT YEAR,IT HAD STARTED RECOGNISING REVENUE ON STAND-ALONE MAINTENANCE CON TRACTS ON A STRAIGHT LINE BASIS OVER THE PERIOD OF THE CONTRACT,THAT THE METHOD WAS ADOPTED IN ACCORDANCE WITH ACCOUNTING STANDARD 9 ON REVENUE RECOGNITION ISSUED BY THE IN STITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI),THAT FOR THE SALE OF LICENSES IT STAR TED 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 BI LLED IN EXCESS OF THE REVENUE ACCRUED ON A STRAIGHT LINE BASIS OVER THE CONTRACT PERIOD WERE R ECOGNISED AS ADVANCE BILLINGS, THAT THE CHANGE IN ACCOUNTING POLICY HAD BEEN MADE TO ENSURE A MORE APPROPRIATE PRESENTATION OF THE FINANCIAL STATEMENTS IN ACCORDANCE WITH GENERALLY A CCEPTED REVENUE RECOGNITION PRINCIPLES AND IS ALSO IN LINE WITH THE POLICY FOR REVENUE RE COGNITION IN RESPECT OF MAINTENANCE CONTRACTS AND LICENSE SALES FOLLOWED BY THE PARENT COMPANY, WHICH PREPARES ITS FINANCIAL STATEMENTS IN ACCORDANCE WITH THE REQUIREMENTS OF U S GENERALLY ACCEPTED ACCOUNTING PRINCIPLES,THAT THE BASIS OF THE CHANGE IN THE ACCO UNTING POLICY CONFORMEED TO THE REQUIREMENTS OF ACCOUNTING STANDARD 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 RS.13,97,55,146/- AND RESERVES AND SURPL US WERE LOWER BY RS.13,97,55,146/-,THAT THE DECISION RELIED UPON BY THE AO WAS DISTINGUISH ABLE TO THE PRESENT FACTS OF THE CASE,THAT IN THE ASSESSEE CASE UNDER CONSIDERATION,AS PER TE RMS OF THE CONTRACT,THE INCOME WAS ACCRUING TO IT OVER THE PERIOD OF THE CONTRACT AND THEREFORE IT HAD DECIDED TO DEFER IT IN ITS BOOK OF ACCOUNTS AND OFFER THE SAME IN THE SUBSEQU ENT YEARS BASED ON ITS ACCRUAL,THAT AS PER SECTION 211 OF THE COMPANIES ACT,1956,THE ASSESSEE ,BEING A PRIVATE LIMITED COMPANY,HAD TO MANDATORILY COMPLY WITH THE AS RECOMMENDED BY TH E ICAI,THAT IF ANY CHANGE IN THE METHOD OF ACCOUNTING WASS TO BE MADE SO AS TO COMPL Y WITH THE STATUTORY REQUIREMENTS IT COULD NOT BE CONSIDERED TO BE A MALAFIDE CHANGE AND A LOSS IN REVENUE. THE ASSESSEE REFERRED TO THE MATTER OF TAPARIA TOOL S 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 TH E RESULTANT LOSS TO THE REVENUE,THAT CHANGE IN THE METHOD OF ACCOUNTING WAS MADE TO REFLECT TRU E AND CORRECT PICTURE OF THE PROFITS,THAT HAD THIS CHANGE NOT BEEN MADE BY THE ASSESSEE THE S TATUTORY AUDITORS OF THE ASSESSEE MIGHT ALSO HAVE QUALIFIED THE AUDIT REPORT,THAT THE METHO D OF ACCOUNTING HAD BEEN FOLLOWED REGULARLY AND CONSISTENTLY BY THE ASSESSEE FROM AY. 2004-05 ONWARDS,THAT WITH THE CHANGE 8218/10;8376/11 & 8106/11CA(INDIA) 6 IN THE METHOD OF ACCOUNTING THE REVENUES HAD BEEN D EFERRED ON RATEABLE BASIS,THAT THE CHANGE IN THE METHOD OF ACCOUNTING WAS BONAFIDE AND LEGITIMATE AND WITHOUT ANY MALAFIDE INTENTION, THAT THE INCOME HAD ACCRUED TO THE ASSES SEE OVER THE PERIOD OF CONTRACT SINCE IT HAD AGREED WITH THE CUSTOMERS TO PROVIDE NOT ONLY T HE LICENSES BUT ALSO THE UPGRADES AND OTHER NEW PRODUCTS/NEW VARIATIONS IN THE PRODUCTS A T NO ADDITIONAL CONSIDERATION,THAT APPLYING THE ACCOUNTING STANDARDS FOR REVENUE RECOG NITION,ACCRUAL CONCEPT AND REVENUE V.COST CONCEPT THE INCOME ACCRUED TO THE ASSESSEE O VER 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 C ONTRACT,THAT IT WAS NOT JUST UP -GRADATION OR MAINTENANCE OF THE SOFTWARE THAT IT IS PROVIDIN G FOR, BUT IT WAS DEVELOPING ALTOGETHER NEW SOFTWARE FOR ITS CLIENTS,THAT IN ORDER TO BE COMPET ITIVE IN THE SOFTWARE INDUSTRY IT WAS REQUIRED TO INTRODUCE NEW AND INNOVATIVE PRODUCTS A T REGULAR INTERVALS,THAT GOING BY THE MATCHING CONCEPT, THE ASSESSEE HAD RECOGNISED ITS R EVENUE SPREAD OVER THE TERM OF THE CONTRACT IN ORDER TO MATCH THE REVENUE WITH THE COS T INCURRED FOR DEVELOPING NEW SOFTWARE. THE ASSESSEE RELIED UPON THE DECISION OF THE CHENNA I TRIBUNAI DATED MAY 26, 2010 IN THE CASES OF MAHINDRA HOLIDAYS AND RESORTS(2010-TIOL-26 2-ITAT-MAD-SB), SIFY E- LEARNING LTD(124 TTJ 331),GFA ANLAGENBAU GMBH(57 IT D 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 SU CH 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 COMMENCEMENT OF THE CONTRACT,THAT TILL SUCH TIME THE ASSESSEE FULFILS ITS OBLIGATION THE ENTIRE CONTRACTUAL INCOME COULD NOT BE CONSIDERED TO HAVE ACCRUED TO THE ASSESSEE AND THE SAME HAD BEEN DEFERRED OVER THE TERM OF CONTRACT,THAT IN CASE THE ASSESSEE WERE TO CREDIT T HE ENTIRE RECEIPTS FROM THE SALE OF SOFTWARE LICENSE TO THE PROFIT & LOSS ACCOUNT IN THE FIRST Y EAR OF CONTRACT ITSELF THEN IT WOULD TANTAMOUNT TO TAKING CREDIT FOR INCOME OVER WHICH T HE RIGHT TO RECEIVE HAD NOT VESTED IN THE ASSESSEE,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 A SSESSEE,THAT THE PRIMARY CONSIDERATION IN SELECTION OF ACCOUNTING POLICIES ARE THAT THE FINAN CIAL STATEMENT PRESENTED SHOULD REPRESENT TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE E NTERPRISES,THAT IN EARLIER YEARS WHEN THE ASSESSEE WAS RECOGNISING ENTIRE SALE REVENUE IN TH E FIRST YEAR OF CONTRACT ITSELF,ITS CLAIM FOR BAD DEBTS WERE SUBSTANTIALLY HIGH.THE ASSESSEE EMPH ASIZED THAT THE CHANGE IN METHOD OF ACCOUNTING WAS REGULARLY FOLLOWED IN THE SUBSEQUENT YEARS,THAT CHANGE IN METHOD OF ACCOUNTING BASED ON THE ACCOUNTING STANDARDS ISSUED BY THE ICAI FOR TAX PURPOSES WAS BONAFIDE,THAT THE INCOME ACCRUED TO THE ASSESSEE WA S TAXABLE OVER THE ENTIRE TENURE OF THE CONTRACT. 3.1.A. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND THE ORDER OF THE AO,THE FAA HELD THAT PRIOR TO AY.UNDER APPEAL THE ASSESSEE WAS RECOGNISING ITS INCOME DEPENDING UPON THE YEAR IN WHICH PRODUCT WAS SOLD AND THE ENTIRE I NCOME 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 CHA RGING ANYTHING FROM THE CUSTOMERS,THAT IT HAD CLAIMED THAT IT WAS FOLLOWING MARKET PRACTICE.T HE FAA OBSERVED THAT IT WAS NOT THE MARKET PRACTICE OR TREND TO DEFER REVENUE ON THE ST RAIGHT LINE METHOD BASED ON SUCH FUTURE SERVICES / UPGRADES,THAT DURING THE ASSESSMENT PROC EEDINGS THE ASSESSEE WAS ASKED TO GIVE DETAILS AND EVIDENCES IN RESPECT OF GENERAL PRACTIC E FOLLOWED IN ACCOUNTING AND RECOGNISING REVENUE BY OTHER PLAYERS IN THE FIELD,THAT THE SUBM ISSION MADE BY THE ASSESSEE IN THAT REGARD PROVED THAT THE ASSESSEE HAD NOT BEEN ABLE TO GIVE ANYTHING IN SPECIFIC ABOUT THE PRACTICE OF 8218/10;8376/11 & 8106/11CA(INDIA) 7 REVENUE RECOGNITION BY THE OTHER DEALERS OF THE SA ME FIELD,THAT THE ASSESSEE HAD CITED EXAMPLE OF IBM INDIA PVT.LTD.,THAT IN THE CASE OF I BM THE CONTRACT WAS FOR A LONG PERIOD, THAT IT WAS NOT ABOUT SALE OF LICENCE OF THE SOFTWA RE 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 C OST WAS RECOGNISED AS WELL,THE ASSESSEE WAS FOLLOWING STRAIGHT LINE METHOD OF ACCOUNTING, T HAT IT WAS DEFERRING THE PROPORTIONATE REVENUE BASED ON THE NUMBER OF YEARS FOR THE LICENC E WAS VALID,THAT METHOD ADOPTED BY IT WAS NOT IN ACCORDANCE WITH MATCHING PRINCIPLES, THA T WHEN THE SOFTWARE LICENCE WAS SOLD OR WHEN THE SOFTWARE CONTRACT WAS COMPLETED THE ASSESS EE WOULD RECEIVE FULL REVENUE,THAT AT THAT POINT OF TIME THERE WOULD NOT BE SIGNIFICANT E XPENSES, THAT WOULD BE REQUIRED TO BE INCURRED BY IT EITHER FOR THE SERVICES OF SUCH LICE NCE SOFTWARE OR FOR PROVIDING UPGRADES.HE DIRECTED THE ASSESSEE,VIDE ORDER SHEET ENTRY 19.07. 2011,TO GIVE COST INCURRED BY IT FOR SUBSEQUENT UPDATE OF THE LICENCES WHICH WERE SOLD D URING THE YEAR AND FOR THE COMPLIANCE OF 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 T HE 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 TO TAX DURIN G THE YEAR UNDER APPEAL, THAT THE ASSESSEE HAD DEFERRED THE REVENUE FOLLOWING THE STRAIGHT LIN E METHOD FOR THE FUTURE YEARS, THAT SINCE AY.1999 IT WAS FOLLOWING ONE PARTICULAR METHOD OF A CCOUNTING,THAT THE ADOPTED BY IT WAS ACCEPTED BY THE DEPARTMENT,THAT DURING THE YEAR UND ER APPEAL IT CHANGED THE METHOD BY WHICH A SIZEABLE PORTION OF REVENUE,AMOUNTING TO RS .19.96 CRORES,WAS DEFERRED FOR THE FUTURE YEARS, THAT BY FOLLOWING THE CHANGE METHOD O F ACCOUNTING IT DEFERRED THE REVENUE 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 AVAILAB LE 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 DEVEL OPED 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 T BE GIVEN LIBERTY TO FOLLOW THE METHOD OF ACCOUNTING WHICH SUITS ITS REQUIREMENT TO POSTPONE SIZEABLE PORTION OF REVENUE TO THE FUTURE YEARS, THAT IT WAS FOLLOWING MERCANTILE OR ACCRUAL SYSTEM OF ACCOUNTING,THAT UNDER THE ACCRUAL METHOD ACCOUNTING TRANSACTIONS WERE RECOGNI SED AS THE UNDERLYING ECONOMIC EVENTS OCCUR REGARDLESS OF THE TIME RELATED CASH RECEIPTS AND PAYMENTS,THAT REVENUE WOULD BE RECOGNISED WHEN INCOME IS EARNED AND EXPENSES ARE R ECOGNISED WHEN LIABILITIES AROSE/WHEN RESOURCES WERE CONSUMED,THAT IN THE ACCRUAL SYSTEM OF ACCOUNTING RECOGNITION OF REVENUE RECEIVABLE COULD BE POSTPONED WHEN THE CONSIDERATIO N 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 AGREEMENT,THAT THE FUTURE EVENT WERE SUCH FOR NO LIABILITY HAD ACCURED ,THAT THE LIABILITY WAS NOT EVEN ASCERTAINABLE AT THE CLOSE OF THE ACCOUNTING PERIOD . WITH REGARD TO CHANGE OF METHOD BASED ON THE AS ISSUED BY THE ICAI, THE FAA HELD THAT ASS ESSEE WAS FOLLOWING PARTICULAR AS SINCE INCEPTION,THAT THE AS HAD NOT CHANGED IN THE YEAR U NDER APPEAL WARRANTING CHANGE IN THE METHOD OF ACCOUNTING, THAT THERE WAS NO JUSTIFICATI ON TO FOLLOW AND CHANGE THE METHOD OF ACCOUNTING IN SUCH A FASHION THAT WOULD POSTPONE MA JOR PORTION OF THE REVENUE TO THE FUTURE YEARS,THAT IT WAS NOT FOLLOWING PROPORTIONATE COMPL ETION METHOD OF ACCOUNTING WHERE 8218/10;8376/11 & 8106/11CA(INDIA) 8 RECOGNITION OF REVENUE COULD BE POSTPONED DUE TO UN CERTAINTIES, THAT ON BEING ASKED DETAILS OF COST INCURRED BY IT IN SUBSEQUENT YEARS PERTAINI NG TO THE PRODUCT SOLD DURING THE YEAR UNDER APPEAL IT HAD NOT FILED ANY DETAILS,THAT IT H AD ADMITTED THAT SUCH LICENSED BASED COSTING/PRODUCT BASED COSTING WAS NOT MAINTAINED BY IT, THAT POSTPONEMENT OF REVENUE ON A HYPOTHETICAL BASIS COULD NOT BE CONSIDERED A VALID REASON FOR CHANGE OF METHOD. CONSIDERING THE ABOVE,THE FAA HELD THAT WHEN ANY SP ECIFIC COST FOR THE UPDATES AND IMPROVEMENT TOWARDS THE LICENCE SOLD DURING THE YEA R WAS NOT ASCERTAINABLE THEN THE CONCEPT OF MATCHING THE REVENUE WITH COST WOULD NO T ARISE,THAT THE ASSESSEE HAD SUBMITTED SUCH AN EXPLANATION OF MATCHING REVENUE V/S.COST WI THOUT HAVING FOLLOWING SUCH PRINCIPLE IN ITS METHOD OF ACCOUNTING,THAT IT HAD SIMPLY FOLL OWED THE STRAIGHT LINE METHOD TO RECOGNIZE THE REVENUE OVER THE PERIOD OF LICENCE/CONTRACT WIT HOUT HAVING TO DO WITH ANYTHING WITH MATCHING COST,THAT WHEN THE LICENCE OF SOFTWARE/PRO DUCT WAS SOLD THE MAJOR PORTION OF EXPENSES OF MARKETING AND DISTRIBUTION INCLUDING PA YMENT OF ROYALTY WERE INCURRED,THAT IT WOULD RECEIVE THE REVENUE IN RESPECT OF THOSE DELIV ERABLE,THAT HAD THERE BEEN ANY SITUATION OF SUCH KIND THAT EITHER A HIGH COMMITTED COST/FURT HER DELIVERABLE THE CUSTOMERS WOULD HAVE WITHHELD CERTAIN PORTION OF SUCH SALE CONSIDERATION PAYABLE,THAT THE ASSESSEE WAS NOT JUSTIFIED IN POSTPONING SUCH REVENUES TO THE FURTHE R YEARS FOLLOWING THE HYPOTHETICAL STRAIGHT LINE METHOD,THAT BAD DEBTS WERE COMMON IN BUSINESS, THAT SAME WERE ALLOWABLE AS PER THE PROVISIONS OF LAW,THAT ASSESSEE SHOULD FOLLOW A MET HOD THAT WOULD PRODUCE A REALISTIC POSITION OF PROFIT/LOSS,THAT A METHOD OF ACCOUNTING SHOULD NOT BE BASED ON SUCH PRINCIPLES THAT WOULD NOT HAVE ANY CORRELATION BETWEEN REVENUE AND COST,THAT FOR THE AY.S 2003-04 AND 2004-05 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 I TS REVENUE. WITH REGARD TO ALTERNATE GROUND OF ALLOWING THE CON SEQUENTIAL RELIEF FOR THE SUBSEQUENT YEARS THE FAA HELD THAT THOSE YEARS WERE NOT BEFORE HIM,T HAT SUCH DIRECTIONS COULD NOT BE GIVEN. THE ASSESSEE HAD ALSO MENTIONED THAT THE REVENUE LO SS DUE TO CHANGE IN METHOD WAS 13.97 CRORES AND NOT 19.96 CRORES BECAUSE OF PREPAID ROYA LTY OF RS.5.98 CRORES,THAT THE ASSESSEE HAD CLAIMED THE EXPENSE FOR THE FUTURE YEARS,THAT I T HAD NOT WITHDRAWN ITS CLAIM ON ACCOUNT OF ROYALTY FOR SUBSEQUENT YEARS,THAT THE CLAIM MADE BY IT WAS NOT BASED ON FACTS.FINALLY,THE FAA DISMISSED THE VARIOUS GROUNDS RAISED BY THE ASS ESSEE WITH REGARD TO CHANGE OF METHOD OF ACCOUNTING.THE FAA DISTINGUISHED THE FACTS OF TH E CASE UNDER APPEAL WITH THE FACTS OF THE MATTERS OF MAHINDRA HOLIDAYS RESORTS(SUPRA),SIFY E- LEARNING LTD(SUPRA),GFA ANLAGENBAU GMBH(SUPRA)AND K K KHULLAR. 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 O VER 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 CONSIDERATION HAD BEEN REGULARLY FOLLOWED BY THE ASSESSEE IN THE SUBSEQUENT YEARS,TH AT IN THE INSTANT CASE THE ASSESSEE HAD CHANGED ITS TERMS OF CONTRACTS WITH THE CUSTOMERS AND HENCE, IT WAS IMPERATIVE FOR IT TO CHANGE THE METHOD OF ACCOUNTING, THAT THE ASSESSEE WAS JUSTIFIED IN CHANGING ITS ACCOUNTING METHOD TO CORRECTLY REFLECT ITS FINANCIAL POSITION, THAT THE CHANGE IN ACCOUNTING POLICY HAD BEEN MADE TO ENSURE A MORE APPROPRIATE PRESENTATION OF THE FINANCIAL STATEMENTS OF THE ASSESSEE IN ACCORDANCE WITH THEGENERALLY ACCEPTED PRINCIPLES OF REVENUE RECOGNITION, THAT IT WAS ALSO IN LINE WITH THE REVENUE RECOGNITION POLIC Y IN RESPECT OF MAINTENANCE CONTRACTS AND LICENSE SALES FOLLOWED BY THE PARENT COMPANY,THAT T HE STATUTORY AUDITORS HAVE ALSO CERTIFIED ASSESSEE REFLECTS TRUE AND FAIR VIEW AND PRINCIPLE S GENERALLY ACCEPTED IN INDIA,THAT WHILE 8218/10;8376/11 & 8106/11CA(INDIA) 9 PASSING THE ASSESSMENT ORDER, THE AO DISREGARDED TH E ABOVE BONAFIDE REASONS FOR CHANGE IN METHOD OF ACCOUNTING.HE RELIED UPON THE CASES OF SN OW WHITE FOOD PRODUCTS CO. LTD.(141 ITR 847),H. P. STATE CIVIL SUPPLIES CORPORATION LTD . (309ITR 102),THE BANK OF RAJASTHAN (20 DTR-TRIB,260),VENUS WIRE INDUSTRIES LTD.(1 SOT8 36),MARG MARKETING & RESEARCH GROUP (91TTJ813),GEORGE OAKES LTD.(303 ITR357),UNIF LEX INDUSTRIES (P) LTD.(15 SOT246),EASTERN BENGAL JUTE(112 ITR 575),ANDHRA PRA DESH IRF(236 ITR 648),HARYANA MINERALS(242 ITR 704),TRAVANCORE COCHIN CHEMICALS L TD.(243 ITR 284).DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 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 TOTA L INVOICES AMOUNTING TO RS.25,29,99,544/- TOWARDS LICENSE FEES ISSUED,THE ASSESSEE RECOGNISED RS.5, 33,49,335/-AS REVENUE-LICENSE FEES IN THE PROFIT AND LOSS ACCOUNT AND THE BALANCE AMOU NT OF RS.19,96, 50,209/-WAS REFLECTED AS ADVANCE BILLINGS UNDER THE HEAD CURRENT IN THE BALA NCE SHEET,THAT THE CORRESPONDING ROYALTY(RELATED TO SUCH ADVANCE BILLINGS)OF RS.5,98 ,95,063/-WAS CONSIDERED AS PREPAID ROYALTY UNDER THE HEAD LOANS AND ADVANCES IN THE BALANCE SH EET,THAT DEFERRED REVENUE WAS OFFERED TO TAX IN SUBSEQUENT YEAR/S DEPENDING UPON THE TENU RE OF THE CONTRACTS.THE ASSESSEE CLAIMED THAT IT HAD CHANGED METHOD OF ACCOUNTING FOR RECOGN ISING 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 FROM AY.2 004-05 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 P ERIOD 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 PAI D TO CAII IN RESPECT OF THE REVENUES CONSIDERED FOR THE YEAR ONLY AND THE BALANCE ROYALT Y WAS CONSIDERED AS PREPAID ROYALTY UNDER THE HEAD LOANS AND ADVANCES,THAT METHOD OF ACCOUNTI NG WAS CHANGED TO CONVERGE WITH THE AS PRESCRIBED BY THE ICAI.THE FAA HELD THAT THE CHA NGE IN METHOD OF ACCOUNTING WAS NOT GENUINE AND THE ASSESSEE HAD IN THE GARB OF CHANGE HAD POSTPONED 79%OF ITS REVENUE. WE ARE OF THE OPINION THAT THE PRIMARY ISSUE TO BE DECIDED IS WHETHER THE CHANGE IN METHOD OF ACCOUNTING CAN BE ALLOWED CONSIDERING THE FACTS OF THE CASE.UNDISPUTED FACTS ARE THAT THE ASSESSEE IS SELLING THE SOFTWARE OF THE PARENT COMP ANY IT PAID ROYALTY TO THE CIIA,THAT IT WAS FOLLOWING A PARTICULAR METHOD OF ACCOUNTING FROM IN CEPTION AND WAS RECOGNSING THE INCOME ON SALE OF SOFTWARE FOR THAT PARTICULAR YEAR,THAT D URING THE YEAR UNDER APPEAL IT STARTED RECONGNISING ITS INCOME ON STRAIGHT LINE METHOD.THE RE IS NO DOUBT THAT THE CHANGE IN METHOD OF ACCOUNTING FOR BONA FIDE PURPOSE HAS BEEN ACCEPT ED AND ALLOWED BY THE COURTS FROM VERY BEGINNING.THE AO HAS BEEN GIVEN POWER,U/S.145(3)OF THE ACT TO REJECT THE CHANGE IF HE IS OF THE OPINION THAT THE METHOD OF ACCOUNTING ADOPTED I S SUCH THAT TRUE PROFIT CANNOT BE DEDUCED THEREFROM.IT IS SAID THAT THE DUTY OF THE AO IS TO ADMINISTER THE PROVISIONS OF THE ACT IN THE INTEREST OF PUBLIC REVENUE AND TO PREVENT EVASION O R ESCAPEMENT OF TAX LEGITIMATELY DUE TO THE STATE.IN THE CASE UNDER CONSIDERATION WE FIND THAT AO HAD DISALLOWED THE CHANGE OF METHOD OF ACCOUNTING AS HE WAS NOT CONVINCED ABOUT THE BON A FIDE OF THE CHANGE.BEFORE THE FAA,IT WAS CONTENDED THAT CHANGE WAS MADE IN ACCORDANCE WI TH 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 FIE LD. IN RESPONSE TO THE SAME THE ASSESSEE SUBMITTED AS UNDER : YOU WOULD APPRECIATE THAT THE ACCOUNTING FOR SOFT WARE LICENSES AND MAINTENANCE SUPPORT DEPENDS UPON VARIOUS FACTORS.FURTHER, IN THE PUBLISHED ACCO UNTS 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. HO WEVER CONSIDERING THE COMPETITIVE BUSINESS OF 8218/10;8376/11 & 8106/11CA(INDIA) 10 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 RECOGNI ZED OVER THE CONTRACT TERM BASE OF PERCENTAGE OF SERVICES THAT ARE PROVIDED DURING THE PERIOD COMPAR ED 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 TH E PARENT COMPANY AND SUPPLIES UPDATES TO THE CUSTOMERS DURING THE PERIOD OF LINENCE.IN THE F AST 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 CONTR ACTS ENTERED IN TO BY THE ASSESSEE AND WE DO NOT FIND THAT SAME IS OF THE NATURE WHICH COU LD BE HELD TO A CONTRACT WHERE REVENUE DEPENDS UPON COMPULSORY SUPPLY OF SOME INGREDIENTS IN SUBSEQUENT YEARS OF THE SALE OF THE PRODUCT.DEFINITELY THE ASSESSEE IS BOUND FOR FUTURE SERVICE/UPGRADE OF THE SOFTWARE.BUT.IT IS NOT PREPARING THE SOFTWARE,SO,IT WAS DUTY OF THE AS SESSEE TO PROVE THAT IT HAD ACTUALLY INCURRED SOME EXPENSES ON ACCOUNT OF SUCH SERVICE/ UPGRADE.IF ANY EXPENDITURE HAS BEEN INCURRED,IT HAS BEEN INCURRED BY THE PARENT COMPANY WHO DEVELOPS THE SOFTWARE AS WELL AS UPGRADES IT.WE FIND THAT DURING THE APPELLATE PROCE EDINGS,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 0 2.08.2011.AS PER THE FAA THE ASSESSEE DID NOT FURNISH REQUIRED DETAILS.HE AGAIN DIRECTED IT TO FILE NECESSARY DETAILS AND ADJOURNED THE MATTER TO 16.08.20 11.BUT,THE DETAILS WERE NOT MADE AVAILABLE TO HIM.HE AGAIN DIRECTED THE ASSESSEE TO COMPLY THE DIRECTIONS AND ON 27.08. 2011,THE ASSESSEE SUBMITTED AS UNDER: AS YOU ARE AWARE THAT DURING THE YEAR UNDER CONSI DERATION, THE APPELLANT HAD CHANGED ITS METHOD OF ACCOUNTING FOR RECOGNIZING REVENUE FROM L ICENSE FEE AND MAINTENANCE CONTRACT TO STRAIGHT LINE BASIS SUCH THAT REVENUE WAS RECOGNIZE D RATEABLY OVER THE PERIOD OF CONTRACT. AS PER THE CONTRACT OF SALE OF SOFTWARE WITH THE CUSTO MERS THE APPELLANT WAS REQUIRED TO PROVIDE ACTIVE MAINTENANCE CHARGES CONSISTING OF OPERATIONA L SUPPORT AND ASSISTANCE FOR UPDATED VERSIONS, IMPROVISATION AND ENHANCEMENT TO THE PROD UCT AT NO EXTRA COST TO THE CUSTOMERS,AS REGARDS THE SPECIFIC COSTS INCURRED BY THE APPELLAN T FOR THE SUBSEQUENT UPGRADES OF THE LICENSE SOLD DURING THE YEAR, IT IS SUBMITTED THAT THE APPE LLANT DOES NOT MAINTAIN PROJECT/CONTRACT WISE ACCOUNTING RECORDS. THEREFORE, ANY COSTS SPECIFIC T O THE UPDATE OF THE CONTRACT AND AN IMPROVEMENT WAS NOT ASCERTAINABLE. (EMPHASIS SUPPLI ED) FROM THE ABOVE REPLY,IT IS CLEAR THAT THE SPECIFIC COST FOR THE UPGRADE AND IMPROVISATION OF THE LICENSE SOLD DURING THE YEAR WAS NOT ASCERTAINABLE. IN THESE CIRCUMSTANCES IT CAN SAFELY BE HELD THAT THE CONCEPT OF MATCHING REVENUE WITH THE COST DID NOT ARISE AND THAT THE ASSESSEE HAD FOLLOWED STRAIGHT LINE METHOD TO RECOGNISE THE REVE NUE OVER A PERIOD OF TIME WITHOUT HAVING TO DO ANYTHING WITH THE MATCHING COST.FOR APPLYING THE CONCEPT OF MATCHING COST, IT IS IMPERATIVE THAT INCURRING OF EXPENDITURE WITH REGAR D 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 P ROVED.IN THE NAME OF APPLYING AS, REVENUE EARNED OR ACCRUED IN A PARTICULAR YEAR SHOU LD 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 PRINCIPL E WITHOUT FURNISHING THE DETAILS ABOUT THE EXPENDITURE ACTUALLY INCURRED DOES NOT SERVE ANY US EFUL PURPOSE. STRAIGHT LINE METHOD, MATCHING-PRINCIPLE AND PRINCIPLES GOVERNING AS CANN OT 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,W AS APPLICABLE TO FACTS. PAYING OF TAXES IN 8218/10;8376/11 & 8106/11CA(INDIA) 11 SUBSEQUENT YEARS OR SHOWING CORRESPONDING ROYALTY P AYMENT 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 PRINCIPLE S,CULLED OUT FROM VARIOUS JUDGMENTS, REGARDING ACCRUAL OF INCOME AND METHOD OF ACCOUNTIN G: I. IT IS UNIVERSALLY ACCEPTED THAT INCOME-TAX IS A LEV Y ON INCOME. THOUGH THE ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY T O TAX IS ATTRACTED, VIZ., THE ACCRUAL OF THE INCOME OR ITS RECEIPT,YET THE SUBSTANCE OF THE MATT ER IS THE INCOME. II. PROFITS DO NOT ACCRUE FROM DAY TO DAY OR EVEN FROM MONTH TO MONTH AND HAVE TO BE ASCERTAINED BY A COMPARISON OF ASSETS AT TWO STATED POINTS. UNLESS THE RIGHT TO PROFITS COMES INTO EXISTENCE, THERE IS NO ACCRUAL OF PROFITS 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 RECEI PT.UNDER THIS SYSTEM, CREDIT ENTRIES ARE MADE IN RESPECT OF AMOUNTS DUE IMMEDIATELY THEY BECOME L EGALLY DUE AND BEFORE THEY ARE ACTUALLY RECEIVED. SIMILARLY, THE EXPENDITURE ITEMS FOR WHIC H LEGAL LIABILITY HAS BEEN INCURRED ARE IMMEDIATELY DEBITED EVEN BEFORE THE AMOUNTS IN QUES TION ARE ACTUALLY DISBURSED. WHERE ACCOUNTS ARE KEPT ON THE MERCANTILE BASIS, THE PROF ITS OR GAINS ARE CREDITED THOUGH THEY ARE NOT ACTUALLY REALISED, AND THE ENTRIES THUS MADE REALLY SHOW NOTHING MORE THAN AN ACCRUAL OR ARISING OF THE SAID PROFITS AT THE MATERIAL TIME. I N OTHER WORDS, THE BASIC CONCEPTION OF THE ACCRUAL OF INCOME IS THAT THE ASSESSEE MUST HAVE AC QUIRED A RIGHT TO RECEIVE IT. IT WOULD NOT MATTER THAT THE VALUATION OF THE INCOME IS POSTPONE D OR THAT THE MATERIALISATION OF THE INCOME DEPENDS ON SOME OTHER CONTINGENCY. IV. THE QUESTION OF ACCRUAL OR NON- ACCRUAL OF INCOME A ND THE SUBSIDIARY QUESTION OF THE TIME OF ACCRUAL OF INCOME HAVE GOT TO BE DECIDED ON FISC AL 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 CONCRETE CONCEPT. THE ACT DOES NOT DEAL WITH ABSTRACTIONS.IT DEALS WITH INCOME. TH EREFORE, WHEN FOR THE PURPOSE OF INCOME-TAX ACCRUAL OF INCOME IS SPOKEN OF, IT IS NO T ACCRUAL IN THE ABSTRACT OR OF INCOME IN THE ABSTRACT.THE TALK OF ACCRUAL AND OF INCOME WOULD MA KE SENSE ONLY WHERE ACCRUAL IN A GIVEN PERIOD OF TIME OR OF INCOME OF A GIVEN AMOUNT IS DE ALT WITH. V. THE ACCRUAL OF INCOME MUST BE REAL. WHAT HAS REALLY ACCRUED TO THE ASSESSEE HAS TO BE FOUND OUT AND WHAT HAS ACCRUED MUST BE CONSIDERED FROM TH E POINT OF VIEW OF REAL INCOME TAKING THE PROBABILITY OR IMPROBABILITY OF REALISATION IN A RE ALISTIC MANNER IN THE MATTER OF S. K.G.SUGAR LTD.(96ITR194),THE HO N'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 CAS H RECEIPT OF INCOME IS NOT NECESSARY FOR THE PURPOSE OF TAXING A PARTICULAR ITEM AS INCOME; IT I S SUFFICIENT IF THE INCOME HAS ACCRUED DURING THE PERIOD IN QUESTION. SIMILARLY, IF THE LIABILITY FOR A PARTICULAR SUM HAS BEEN INCURRED DURING THE ACCOUNTING YEAR AND IF OTHERWISE THE SUM IS ALL OWABLE AS A REVENUE EXPENSE THEN WHETHER THE SUM HAS BEEN ACTUALLY PAID OR NOT IS IMMATERIAL AND THE LIABILITY SO INCURRED HAS GOT TO BE ALLOWED AS A REVENUE EXPENSE. (2) IF, AFTER THE ACCRUAL OF THE INCOME OR INCURRIN G OF THE LIABILITY, ANY PARTY FORGOES THE SUM BY WAY OF GIFT, CHARITY OR THE LIKE AND VOLUNTARILY, W HICH CANNOT BE CHARACTERISED AS A REMISSION ON GROUNDS OF COMMERCIAL EXPEDIENCY, THEN SUCH FORGOIN G 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. 8218/10;8376/11 & 8106/11CA(INDIA) 12 (3) MERE BOOK ENTRIES ARE NOT DECISIVE OF THE MATTE R. 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 W ELL 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 IM PROVISATION OF SOFTWARE - IT WAS NOT WARRANTY. EVEN IN THE MATTER OF WARRANTY,AFTER THE CASE OF RO TORK CONTROLS INDIA P.LTD.(314ITR62)THINGS HAVE BECOME VERY CLEAR-IT TALKS OF HISTORICAL TREND .DURING THE COURSE OF HEARING BEFORE US.THE ASSESSE E HAD NOT GIVEN ANY INDICATION ABOUT THE EXPENDITURE INCU RRED 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 ADOPT ED BY IT WOULD FALL IN THE CATEGORY WHICH 'TENDS TO DISTORT THE PICTURE FOR THE PURPOSE OF TAXABLE INCO ME 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 THAT THE ASSESSEE HAD TO CONTRIBUTE TO ITS ACQUIRING OR ARISING BY RENDERING SERVICES OR OTHERWISE THE DEBT WAS CREATED IN FAVOUR OF THE ASSESSEE,THAT IT COUL D NOT BE SAID THAT THE ASSESSEE HAD FULLY CONTRIBUTED TO ITS ACCRUING BY RENDERING SERVICES,THAT IT HAD A CONTINUING OBLIGATION TO PROVIDE ACCOMMODATION TO T HE MEMBER FOR ONE WEEK EVERY YEAR TILL THE CURRENCY OF MEMBERSHIP. WE FIND THAT IN THE CASE UN DER APPEAL THERE WAS TENURE OF LICENSE/PRODUCT BUT THERE WAS NO CERTAINTY THAT IN EVERY SUBSEQUENT YEA R SOME DETERMINATE SERVICE HAD TO BE PROVIDED BY IT,THAT THERE WAS NO DETERMINED/COMMITTED EXPENDITU RE WHICH THE ASSESSEE WAS REQUIRED TO INCUR IN THE FUTURE YEARS TOWARDS THE CORRESPONDING SHARE OF REV ENUE,THAT THE INDETERMINATE EVENT OF PROVIDING OF UPDATES AND SERVICES AS AND WHEN THE THEY WERE DEVE LOPED WHICH HAD BEEN IN KEEPING WITH THE INDUSTRIAL NORM.THE ASSESSEE HAD NO RIGHT TO POSTPO NE THE REVENUE.INSPITE OF ADEQUATE OPPORTUNITIE,THE ASSESSEE HAD NOT FILED ANY FACTS BEFORE THE FAA OR US,AS STATED EARLIER,IN THAT REGARD.LN THE CASE OF SIFY E-LEARNING LTD.(SUPRA),IT WAS FOUND THAT THE ASSESS EE WAS FOLLOWING PROJECT COMPLETION METHOD,WHEREAS IN THE CASE UNDER APPEAL THE ASSESSE E HAD CHANGED METHOD OF ACCOUNTING DEFERRING MORE THAN 75% OF ITS REVENUE TO FUTURE PERIOD PERPE TUALLY. 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 FAC TS OF THE CASE UNDER CONSIDERATION ARE DIFFERENT FROM THOSE CASES.WE AGREE WITH HIM.THEREFORE,WE HOL D 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 L IKE TO STATE THAT WHILE DETERMINING THE INCOME OF AN ASSESSEE FOR A PARTICULAR INCOME ALL THE NECE SSARY FACTS HAVE TO CONSIDERED. INCOME OFFERED BY A N ASSESSEE CANNOT BE TAXED TWICE I.E.SAME INCOME CANN OT 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. GROUND NO.2.2. IS ALLOWED IN FAVOUR OF THE ASSESSEE,IN PART. 5. GROUND NO.3,PERTAINING TO INITIATION OF PENALTY U/S .271 (1)( C ),IS CONSIDERED TO BE INFRUCTOUS. ITA NO.8106IMUMI2011- A Y.2004-05: 6. GROUNDS FIELD BY THE AO IS ABOUT DELETING THE ADJUS TMENTS DONE BY THE TPO AND CONSEQUENT ADDITION MADE BY HIM. DURING THE ASSESSMENT PROCEED INGS,THE AO HELD THAT THE ROYALTY SHOULD NOT BE ALLOWED TO BE WRITTEN OFF TO THE EXTENT OF THE UNPA ID 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 CONFIRMED THE ORDER ON 03.07. 2012 (ITA NO.20 OF2011-).WE FIND THAT THE COURT HAS DEALT THE MATTER AS UNDER: 2. THE APPEAL IS ADMITTED AND WITH THE CONSENT OF T HE PARTIES HEARD FINALLY ON THE FOLLOWING SUBSTANTIAL QUESTION OF LAW :- 8218/10;8376/11 & 8106/11CA(INDIA) 13 'WHETHER ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND. IN LAW, THE ITAT WAS JUSTIFIED IN DELETING THE DISALLOWANCE MADE OF ROYALTY PAID BY T HE ASSESSEE TO CA. MANAGEMENT INC. USA FOR DISTRIBUTION OF SOFTWARE PRODUCTS IN INDIA WITH OUT APPRECIATING THAT THE ROYALTY HAD BEEN PAID ON THE AMOUNT OF BAD DEBTS EVEN WHERE THE SOFT WARE HAD NOT WORKED AT ALL ?' 3. THE RESPONDENT HAD ENTERED INTO A SOFTWARE DISTR IBUTION 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. UNDE R 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- 2003 DECLARING A LOSS OF ABOUT RS.14,55,99,3401-. THE ASSESSING OFFICER (AO) REFER RED THE MATTER TO THE TRANSFER PRICING OFFICER (TPO) UNDER SECTION 92A(I) OF THE ACTFOR DE TERMINING THE ARM'S LENGTH PRICE (ALP) IN RESPECT OF THE ROYALTY PAID BY THE RESPONDENT TO CA MI THE RESPONDENT CLAIMED THE ALP AT THE CONTRACTUAL VALUE OF ABOUT RS.7.43 CRORES. THE AO C OMPUTED THE ALP OF THE ROYALTY AT ABOUT RS.5.85 CRORES RESULTING IN A REDUCTION OF LOSS OF ABOUT RS.I.50 CRORES. 5. THE RESPONDENT'S APPEAL WAS REJECTED BY THE CIT (A). 6. IT IS PERTINENT TO NOTE THAT THE TPO BY THE ORDE R UNDER SECTION 92CA(3) OBSERVED THAT THE RESPONDENT'S CONTENTION REGARDING THE RATE OF ROYAL TY BEING JUSTIFIED WAS NOT RELEVANT, AS THERE WAS NO DISPUTE REGARDING THE SAME BUT THAT THE ISSU E WAS WHETHER THE ROYALTY SHOULD BE ALLOWED TO BE WRITTEN OFF TO THE EXTENT OF THE UNPAID INVOI CES DURING THE YEAR ITSELF. THIS, WE PRESUME, REFERS TO THE BAD DEBTS IN RESPECT OF SOME OF THE I NVOICES RAISED BY THE RESPONDENT ON ITS CUSTOMERS. THE CIT (A) MADE A SIMILAR OBSERVATION I N THE ORDER DATED 27.7.2006, DISMISSING THE RESPONDENT'S APPEAL. THE CIT (A) HELD THAT THE RESPONDENT'S CONTENTIONS THAT IT HAD PAID ROYALTY AT A LOWER RATE THAN IN THE COMPARABLE TRAN SACTIONS WAS IRRELEVANT 'BECAUSE THE RATE OF ROYALTY IS NOT IN DISPUTE '. IT IS THEREFORE, CLEAR THAT THE ALP WAS NOT DISPUTE D BY THE DEPARTMENT AND THE CIT (A) DID NOT QUESTION THE CORRECTNESS OF THE SAME EITHER. THE ON LY 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 ACCOUNT. 7. THE ITAT BY THE IMPUGNED ORDER, RIGHTLY CAME TO THE CONCLUSION THAT MERELY BECAUSE THE RESPONDENT HAD PAID THE ROYALTY EVEN IN RESPECT OF THE PRODUCTS SOLD BY IT TO THE CLIENTS, WHO AS FAR THIS QUESTION IS CONCERNED, THE CONTENTION R AISED ON BEHALF OF THE REVENUE IS THAT THE UNIT HAVING BEEN SET UP DURING THE ASSESSMENT YEAR 1984-85, A PERIOD OF 7 YEAR TO CLAIM BENEFIT UNDER SECTION 80-I OF THE ACT, WOULD EXPIRE IN THE ASSESSMENT YEAR 1991-92 AND DURING THE YEAR IN QUESTION, THE ASSESSEE WILL NOT BE ENTI TLED 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 LEA RNED 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 THOUGH THE PRESENT APPEAL WAS FILED THEREAFTER, THIS FACT HAS NOT BEEN DISCLOSED IN THE PRESENT APPEAL. HE FURTHER STATES AS PER THE SPIRIT OF THE ACT, AN ASSESSEE IS ENTITLED TO BENEFIT OF THE DEDUCTIONS UNDER SECTION 80-I OF THE ACT FOR 7 YEARS AND THE ASSESSE E IN THE PRESENT CASE IS ALSO CLAIMING THE SAME FOR THE PERIOD PERMISSIBLE. AS FAR AS THE DISP UTE REGARDING THE ASSESSMENT YEAR 1984-85 IS CONCERNED, COUNSEL FOR THE ASSESSEE REFERRED TO AND RELIED UPON THE FINDINGS RECORDED BY THE TRIBUNAL WHILE DEALING WITH THE RECTIFICATION A PPLICATION 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 INVEST MENT IN MACHINERY AMOUNTING TO RS. 5.70 CRORES, IT WAS ONLY ABOUT RS. 1.09 CRORES WHICH WAS SPENT DURING THE ASSESSMENT YEAR 1984-85 8218/10;8376/11 & 8106/11CA(INDIA) 14 AND THE FACT TO WHICH THE REVENUE IS TERMING TO BE PRODUCTION WAS MERE RECEIPT OF A SUM OF ABOUT RS. 1 LAKH ON ACCOUNT OF JOB CHARGES WHICH WE RE RECOVERED DURING THE PROCESS OF TESTING OF SOME MACHINES INSTALLED. THIS CANNOT IN ANY MANNER BE TERMED TO BE SETTING UP OF THE PLANT AND START OF MANUFACTURING THEREFROM. IT IS FURTHER SUBMITTED THAT TO ENABLE THE ASSESSEE TO START PRODUCTION, INDUSTRIAL LICENCE WA S REQUIRED WHICH ITSELF WAS RECEIVED BY THE ASSESSEE ON MARCH 23, 1985, RELEVANT TO THE ASSESSM ENT YEAR 1986-87. TO SUM UP, HE SUBMITTED THAT ONCE SETTING UP OF THE PLANT ITSELF WAS COMPLETED IN THE ASSESSMENT YEAR 1986- 87 AND LICENCE TO MANUFACTURE WAS ALSO GRANTED DURI NG THAT YEAR, THERE IS NO REASON TO DENY THE BENEFIT OF SECTION 80-I OF THE ACT TO THE ASSES SEE FOR 7 YEARS STARTING THEREFROM. 10. WE FIND THE CONTENTION RAISED BY COUNSEL FOR TH E ASSESSEE, SUPPORTED BY THE FACTS AS NARRATED ABOVE, TO BE PERSUASIVE. SECTION 80-I OF T HE ACT APPLIES TO ANY INDUSTRIAL UNDERTAKING WHICH FULFILS FOUR CONDITIONS AS LAID DOWN IN SUB-S ECTION (2) THEREOF AND ONE OF THEM BEING THE ACT TO MANUFACTURE OR PRODUCE ARTICLES. IT IS NOT I N DISPUTE THAT THE INDUSTRIAL UNDERTAKING COULD START MANUFACTURING ONLY AFTER INDUSTRIAL LIC ENCE IS GRANTED AND IN FACT STARTED MANUFACTURING THEREAFTER. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE CLAIMED DEDUCTION UNDER SECTION 80-I OF THE ACT ONLY DURING THE YEAR 1985-8 6 FOR THE FIRST TIME AND NOT BEFORE THAT AND CALCULATING THEREFROM, THE PRESENT ASSESSMENT YEAR WILL BE THE SEVENTH YEAR. THIS BEING THE ADMITTED POSITION, WE DO NOT FIND ANY REASON TO DIF FER WITH THE VIEW TAKEN BY THE TRIBUNAL. ACCORDINGLY, WE DISMISS THE APPEAL OF THE REVENUE O N THIS ISSUE. HAD NOT PAID FOR THE SAME, IT WOULD MAKE NO DIFFERE NCE 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 TH E ALP IN RELATION TO INTERNATIONAL TRANSACTIONS. IT DOES NOT EITHER EXPRESSLY OR IMPLI EDLY CONSIDER FAILURE OF THE RESPONDENT'S CUSTOMERS TO PAY FOR THE PRODUCTS SOLD TO THEM BY T HE RESPONDENT TO BE A RELEVANT FACTOR IN DETERMINING THE ALP. INDEED IN THE ABSENCE OF ANY S TATUTORY PROVISION OR THE TRANSACTIONS BEING COLOURABLE BAD DEBTS ON ACCOUNT OF PURCHASERS REFUS ING TO PAY FOR THE GOODS PURCHASED BY THEM FROM THE ASSESSEE CAN NEVER BE A RELEVANT FACTOR WH ILE DETERMINING THE ALP OF THE TRANSACTION BETWEEN THE ASSESSEE AND ITS PRINCIPAL. ONCE IT IS ACCEPTED THAT THE ALP OF THE ROYALTY IS JUSTIFIED, THERE CAN BE NO REDUCTION IN THE VALUE T HEREOF ON ACCOUNT OF THE ASSESSEE'S CUSTOMERS FAILING TO PAY THE ASSESSEE FOR THE PRODUCT PURCHAS ED 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 WHI CH 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 VE NDOR / LICENSOR IS NOT DEPENDENT UPON ITS RECOVERING THE PRICE OF THE PRODUCTS FROM ITS CLIEN TS. 10. IN THE PRESENT CASE THE TRANSACTIONS BETWEEN TH E RESPONDENT AND CAMI ARE UNRELATED TO THE TRANSACTIONS BETWEEN THE RESPONDENT AND ITS CLIENTS I.E. PURCHASERS OF THE PRODUCTS FROM THE RESPONDENT. CAMI WAS NOT CONCERNED WITH THE RESPOND ENT'S INABILITY TO RECOVER THE CONSIDERATION FROM ITS CLIENTS. IT IS NOT SUGGESTED THAT THE TRANSACTIONS IN THIS CASE EITHER BETWEEN THE RESPONDENT AND CAMI OR THE RESPONDENT A ND ITS CLIENTS ARE COLOURABLE. 11. THE QUESTION IS THEREFORE, ANSWERED IN THE AFFI RMATIVE IN FAVOUR OF THE RESPONDENT - ASSESSEE. RESPECTFULLY,FOLLOWING THE ABOVE JUDGMENT,WE DECIDE THE EFFECTIVE GROUND OF APPEAL AGAINST THE AO. ITA NO.8218/MUM12010- AY.2005-06: 8218/10;8376/11 & 8106/11CA(INDIA) 15 7. FIRST THREE GROUND OF APPEAL DEAL WITH CONFIRMING T HE ADDITION MADE BY THE AO OF RS 17,61,155/-BY DISALLOWING THE ROYALTY PAYMENT TO AE ON THE AMOUNT WRITTEN OFF AS BAD DEBTS IN THE BOOKS OF ACCOUNTS FOR DETERMINING THE ARM'S LENGTH PRICE. 7.1. WHILE ADJUDICATING THE APPEAL FILED BY THE AO, FOR THE A Y.2004-05,WE HAVE DECIDED THE ISSUE AGAINST THE AO.DURING THE YEAR UNDER APPEAL THE ASS ESSEE HAS RAISED THE IDENTICAL ISSUE. FOLLOWING EARLIER PART OF OUR ORDER(PARAGRAPH 6 OF THE ORDER),WE DECIDE GROUNDS NO.1-3 IN FAVOUR OF THE ASSESSEE. 8. NEXT GROUND OF APPEAL(GOA-4T06)DEALS WITH ADDITION ON ACCOUNT OF ADVANCE BILLINGS OF RS.8,64,26,828/-.WHILE DECIDING GROUND NO.2 OF THE APPEAL FILED BY THE ASSESSEE FOR THE AY. 2004- 05,WE HAVE DECIDED THE ISSUE AGAINST THE ASSESSEE(P ARAGRAPH NO. 30UR ORDER) .FOLLOWING THE SAME,WE DECIDE GROUND NO.4 AGAINST IT. 8.1. WITH REGARD TO GROUND NO.5-6 WE WOULD LIKE TO MENTI ON THAT THE AO SHOULD FOLLOW OUR DIRECTIONS GIVEN WITH REGARD TO GROUND NO.2.2. OF THE A Y'2004 -05(PARAGRAPH NO.4 OUR ORDER AT PG.NO.12).GROUNDS NO.5-6 ARE ALLOWED,IN PART. AS A RESULT,APPEALS FILED BY THE ASSESSEE STAND PAR TLY ALLOWED AND THE APPEAL OF THE AO STANDS DISMISSED. . ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH OCTOBER ,2015. 7. ,2015 SD/- SD/- ( . . /A.D. JAIN) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /MUMBAI, /DATE: 7 .10.2015 . . . .. . JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.