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2018 (5) TMI 252
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....g the arbitrary additions made by the Ld. AO to the returned income of the appellant. 2. That the Ld. CIT (A) grossly erred on facts and in law in upholding the ad-hoc disallowance of Rs. 45,88,72,590 being 35% of the operating expenses on the ground that the appellant did not produce the books of accounts without appreciating that books of account were maintained at a different city and still negligible time was provided to it thereby violating the principles of natural justice. 3. That the Ld. CIT(A) grossly erred on the facts and in circumstances of the case and in law in rejecting the additional evidence submitted by the appellant by solely relying on the first remand report of the Ld. AO and by disregarding the subsequent remand reports of the Ld. AO wherein the additional evidence (extracts of books of accounts and supporting documents) of the appellant were examined, accepted and approved by the Ld. AO. 4. That the Ld. CIT (A) grossly erred on the facts and circumstances of the case and in law in upholding the disallowance of bad and doubtful debts written off amounting to Rs. 9,47,27,677 which was claimed against the provision created in the previ....
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....43(1) of the Act were issued only on 6.12.2004 after the transfer of the assessee's case from Bangalore to Delhi. During the course of assessment proceedings, the assessee company was called upon by the AO on 3.3.2005 to produce its books of accounts on 10.3.2005. The assessee company did not produce books of accounts on 10.3.2005 and filed written submission stating therein as under:- "We refer to our hearing conducted on March 03, 2005 wherein honour had instructed the assessee to produce its books of account. In this connection and as submitted earlier, the books of account of the assessee company for the year under consideration were maintained at Bangalore and are still lying at Bangalore. Further, it is respectfully submitted that given the voluminous records, we request your honour to kindly specify the account head and the relevant period for which your honour would like to peruse, since it would not be practically possible to get the entire set of records for verification to Gurgaon." On 16.3.2005, the assessee company was again required by the AO to produce its books of accounts on 18.3.2005 and since the assessee company failed to comply with said requirement....
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....ssee company vide letter dated 22.2.2005 & 16.3.2005 has explained that warranty costs have been charged against the provision for warranty. Since assessee has failed to produce books of accounts & vouchers in support of his claim meaning thereby, assessee has failed to establish beyond doubt that warranty cost has actually been charged against the provisions for warranty, therefore, 'Warranty Expenses', are allowed. Bad Debts Written off:- Assessee has claimed bad debts written off against the provision and also replied the same vide letter dated 22.2.2005 and 16.3.2005. It is to state here that the debts outstanding have to be actually written off as irrecoverable during the year under consideration in the books of accounts. This claim is not confirmed in the absence of books of accounts and vouchers/bills. Therefore, alleged claim of the assessee is not accepted, and an amount of Rs. 9,47,27,677/- is added back to the income of the assessee. Bad Advances written off:- During the year under consideration, assessee has claimed an amount of Rs. 1,19,10,539/- been written off against the provisions for doubtful advances. Assessee vide letter dated 16.3.2005 has cla....
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....nd operating expenses have increased only by 7%. Further, there has been a steep fall in the finance expense also which have reduced by 42%. We are also enclosing as annexure-DI an analysis of increase / decrease in various expense heads with the income shown for FY 20001-02 as compared to FY 2000-01. It is to reiterate here that assessee company has failed to produce books of accounts and vouchers/bills. In view of this, assessee has failed to establish:- (a) That expenditure incurred is not an expenditure of the nature described in section 30 to 36. (b) That expenditure incurred is not a capital or personal expenditure of the assessee and that expenditure incurred is revenue in nature. (c) That expenditure incurred is expended wholly and exclusively for the purpose of the business. Therefore, all the prerequisites of allowing a claim under section 37(1) of the Act are not satisfied. Accordingly 35% expenses claimed under the head 'Operating Expenses' i.e. Rs. 45,88,72,550/- excluding already added back i.e. provisions for (i) bad and doubtful debts Rs. 78,708,470/- (ii) Loss on sale of fixed assets Rs. 28,146,992/- and (iii) Provision ....
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.... in view the difficulties specifically expressed by the assessee in the written submissions filed before the AO. He contended that this position was specifically brought to the notice of the learned CIT(A) by the assessee while seeking the admission of additional evidence, but he failed to appreciate the same. He submitted that besides Remand report dated 26.9.2007 submitted by the AO to the learned CIT(A), there were two more remand reports dated March 17, 2009 and March 09, 2011 that were submitted by the AO as per the direction of the learned CIT(A). He invited our attention to the copies of the said reports placed at page 129 and 124-125 of the paper book and submitted that the relevant books of account and other details furnished by the assessee were found to be in order by the AO. He contended that the learned CIT(A) however completely overlooked these two remand reports submitted by the AO and proceeded to refuse to admit the additional evidence by merely relying on the first remand report submitted by the AO. He contended that the action of the learned CIT(A) in denying to admit the additional evidence and deciding the relevant issues substantially against the assessee with....
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....ant facts of the case, we are of the view that the learned CIT(A) ought to have admitted the additional evidence filed by the assessee during the course of appellate proceedings before him especially when the same was relevant for deciding the issues involved in the assessee's case and there was no proper opportunity afforded by the AO to the assessee to produce the same during the course of assessment proceedings. It is relevant to note here that even after receiving the first remand report dated 26.9.2007 from the AO objecting to the admission of the additional evidence, the learned CIT(A) again sought remand reports from the AO in March, 2009 as well as in March, 2011 with specific comments on the relevant issues raised in the appeal of the assessee after due verification from the books of account and in the remand reports submitted to the learned CIT(A), the AO specifically reported that the relevant details and books of accounts produced by the assessee were found to be in order. It clearly shows that the learned CIT(A) himself was convinced with the relevance of the additional evidence filed by the assessee for deciding the relevant issues and accordingly had sought comments ....
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.... of 5% as against the OP / TC shown by the assessee, at 5.81% the consideration received for software development services from AE was claimed to be as at arm's length. 11. The five entities taken as comparables in the TP study report submitted by the assessee with their margins were as under:- Name of the company Profit margin on costs (weighed average for the f. Yrs 2000 and 2001) in % terms 1. Kushagra Software Ltd. -.47 2. Saroh Infotech Ltd. 4.95 3. Zigma Software Ltd. 14.69 4. Visu Cybertech Ltd. 16.98 5. VJIL Consulting Ltd. 19.13 Arithmetic Mean 11.06 12. The TPO for the reasons given in his order rejected the first three comparables selected by the assessee. He accordingly selected a set of two comparables arrived at by applying the strict norms of comparability on the set of comparables furnished by the assessee in the TP study report with their average OP / TC at 18.05%. He also selected a second set of 60 companies that were a degree functionally closure to the assessee in quantitative terms with average OP / TC at 19.17%. He further selected a third set of four companies which ....
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....onsideration, the average operating profile of the said two entities would come 1.27% and the assessee's operating profile at 5.81% being more than the same, the relevant international transactions were entered into with its AE at arm's length. Although learned CIT(A) did not dispute the average profit margin of two entities finally taken as comparables by the TPO at 1.27% as worked out by the assessee on the basis of financial data for the relevant financial year, he held that a set of two comparables could not properly determine the arm's length price. Relying on the various judicial pronouncements, he held that arm's length price should be computed by using a broader set of comparables. Accordingly, he adopted the set of 60 comparables selected by the TPO in supplementary search and required the assessee to furnish the FAR analysis to show as to whether the said entities could be considered as comparables or not. Accordingly, a detailed analysis was furnished by the assessee on consideration of which the learned CIT(A) found that out of total 60 entities, 44 entities were comparables. Accordingly, he worked out the average profile margin of the said 44 comparables at 14.92% and ....
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..... We are unable to accept this contention of the learned counsel for the assessee. In the two cases cited by him in support of the assessee's case on this issue, a sizable number of comparables was initially selected by the TPO and after the process of exclusion, only one comparable was finally left. The situation thus had arisen where there was not more than one comparable left for consideration and under these compelling circumstances, the Tribunal held that one comparable company could be taken for bench marking the arm's length price. The Tribunal, however, observed specifically in the case of J.P. Morgan India Private Limited (supra) that if there are more than one comparables then various comparability factors can be examined and it may lead to a proper examination of ALP because many factors and differences get weed out making bench marking the margin of nearest comparables. It is pertinent to note here that in the present case, three different sets of comparables were selected by the TPO and since the first set of five comparables selected by him was finally left with only two comparables, we find no infirmity in the action of the learned CIT(A) to adopt the second set of c....
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....e company. He has contended that the same therefore is rightly selected as comparable being functionally similar to the assessee company. It is, however, observed from the Chairman's report that the said entity is not regarded as another I.T. Company keeping in view the domain expertise established by it in the area of operation, creation of the required infrastructure and building of strong and efficient business process to offer a strong value proposition. Moreover, it is specialised in weaving its solutions into customer environments with the ability to extract learning from one business and create speciality in another. It is pioneer in CAD/CAM/GIS providing I.T. Solutions which address customers' total requirement of engineering and their e-enablement. The assessee company, on the other hand, is a captive service provider which generally operates on cost plus mark up basis. Rolta, also has a wide base of customers in India as well as outside India for whom I.T. Solutions are provided by Rolta. In our opinion, Rolta therefore, cannot be said to be functionally similar to the assessee company. Moreover, as mentioned in the Chairman's report, Rolta's Human Resources were valued a....
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....by the Bench, he however, has admitted that segmental details are maintained by Infotech and the same are provided at page no. 2015 of the paper book. A perusal of the said details shows that net margin of 7.80% is shown by Infotech Enterprises from the segment of Software Development Services. Since the functions of this segment are similar to the assessee company, we do not find merit in the case of the learned counsel for the assessee for exclusion of the same from the set of final comparables. The alternative contention of the learned counsel for the assessee for consideration of the segmental margin however is accepted and the TPO accordingly is directed to consider only the net margin of the relevant segment which is comparable to the assessee company for comparability analysis. 20. Quintegra Solutions Limited (Sofia Software Limited):- The learned counsel for the assessee has contended that this entity is also engaged in diversified business. He has also contended that this entity is engaged in Software Product Development and owns branded software products. The relevant portion of the annual report of the said company placed at page no. 2042 to 2050 of the paper book sho....
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.... annual report as well as the main source of its Revenue generation, we are of the view that this company is functionally similar to that of the assessee company and it is rightly selected as comparable by the TPO. 22. Geodesic Information Systems Limited:- The learned counsel for the assessee has submitted that this entity is engaged in diversified business and besides rendering Software and Development allied Services, it is also carrying on the business of trading / hamara shop. He has also contended that this entity has developed various products and it is, therefore, not entirely engaged in software development services. However, as rightly pointed out by learned DR from the relevant portion of the annual report of the said entity on page no. 2005 of the paper book, the relevant financial details in respect of the concerned segment of software development and allied services are available in public domain and since the said segment is functionally similar to the assessee company, the same can be considered for comparability analysis. Accordingly, we find no justifiable reason to exclude this entity from the list of final comparables and upholding the action of the TPO to se....