TaxTMI 
TaxTMI 
2016 (2) TMI 1335
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....respect of Profits on sale/redemption of investments claimed as non-taxable by the Appellant. 2.2 Erred in invoking disallowance under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 in respect of exempt dividend income. Ground No 3 3.1 Erred in invoking disallowance of Rs. 62,67,76,979 under section 40(a)(i) of the Act in respect of reinsurance premium paid to Allianz Reinsurance Asia Pacific Branch, Singapore ('ARAP') Ground No 4 4.1 Erred in disallowing Risk Inspection charges of Rs. 11,91,11,201 for want of purchase orders. 4.2 Without prejudice to the above, the DRP erred in not admitting and allowing relief in respect of additional purchase orders of Rs. 68,07,042 filed during the course of DRP proceedings. Ground No 5 5.1 Erred in making addition of income from software consultancy charges of Rs. 3,01,25,934 offered to tax in AY 2009-10 5.2 Without prejudice to the above, the learned AO erred in not allowing foreign tax credit of Rs. 11,97,670 relating to aforesaid software consultancy charges. Ground No 6 6.1 Erred in disallowing amount collected towards....
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....d by the assessee, the TPO made an adjustment in the provision of software consultancy services. The TPO noted that the assessee had rendered certain software development services to its associated enterprises which were not significant in the context of overall business activity of BA General. The TPO further noted that the assessee operated as a routine service provider without undertaking any significant risks. As per the TP study, the Cost Plus Method (CPM) had been considered to be most appropriate method for analysing the arm's length nature of international transactions. The TPO further noted that BA General has earned gross profit margin of 169% from the activity of rendering software consultancy services to its associated enterprises. The weighted average gross profit margin (as a percentage of sales) of broadly comparable 25 companies range from 0.05% to 255.16% with an arithmetical mean of 49.93%. The TPO issued show cause notice to the assessee that in respect of software segment, it had adopted CPM method and had shown GP rate of 169% as compared with average of 50%. The TPO further noted that the segment operating income of Rs. 3.29 crores included Rs. 3.01 crores....
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....th." 5. The TPO thus, proposed an adjustment of Rs. 94,58,807/- on account of arm's length price margin of international transaction. 6. The second objection raised by the assessee before the TPO was that section 92CA of the Act was inapplicable to the insurance business since the profits and gains of insurance were computed in accordance with section 44 read with First Schedule to the Act and as per Rule 5 of the First Schedule. It was further proposed that section 44 overrides section 92CA of the Act and no adjustment to income could be made other than permitted as per Rule 5 of Schedule of Income Tax Act. The TPO was of the view that the Rule only lays down the starting point for the profit i.e. the profit as per the Profit & Loss Account submitted to Controller of Insurance (now IRDA) and only specific sections were excluded from the operation. As per the TPO, section 92CA of the Act was not excluded and the same applies to profit from specified international transactions. The TPO further observed that the income from part of software consultancy services was not insurance business. He further observed that the special provisions relating to the insurance business for....
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....ting the taxable income of BA General for assessment year 2008-09. The Assessing Officer vide para 4.4 of the draft assessment order observed that the submissions of assessee company could not be accepted. The Assessing Officer observed that where the assessee was engaged in the business of general insurance, the profit earned by it on account of sale of investments in shares of the company, was taxable by virtue of statutory provisions. The Assessing Officer further observed that the functions of the company were bifurcated into two distinct activities i.e. one of the insurance business and the other as public financial institution. As per the RBI guidelines, the income from non-banking activities of a financial institution had to be recognized as income. The Assessing Officer thus, of the view that the profit realized on sale of investment should be considered as business income of the public financial institution and not that of the insurance business to warrant exemption on the ground of Rule 5 of First Schedule, which in turn, deals with determination of income of insurance business. The Assessing Officer thus, proposed that for the year under consideration, the assessee was n....
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....e Income Tax Rules, 1962 (Rules) at Rs. 7,98,28,536/- and allowing the credit of disallowance made by the assessee at Rs. 49,42,631/- + Rs. 41,101/-, the Assessing Officer proposed an addition of Rs. 7,48,44,804/-. 9. Another addition made in the hands of the assessee was on account of amount collected by the assessee on account of environment fund totalling Rs. 74,03,321/-. Since the assessee had not shown as to when and how the amount collected was ultimately paid out, the same having been received in the course of carrying on of insurance business, and merely because it was credited to a specific fund as per law, the Assessing Officer was of the view that the receipt did not lose its character of income. Accordingly, addition of Rs. 74,03,321/- was proposed by the Assessing Officer in the draft assessment order. 10. Another point noted by the Assessing Officer during the course of assessment proceedings was that the assessee had made payment on account of reinsurance premium of Rs. 62,67,76,979/- to Allianz Reinsurance Asia Pacific Branch Singapore (ARAP). The assessee had also made payment of survey fees to non-resident surveyors for Rs. 70,69,050/- during the year. The a....
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....e incriminating documents seized / impounded in the form of loose papers consisting of letter heads, bogus bills raised in the name of various companies/firms. He was also confronted with the statement recorded of Shri Dinanath Yadav, Shri Pradeep Prajapati, his employees on 24.06.2008 . Shri Sitani admitted that he was controlling the bank transactions of more than 25 companies, in which both of his employees were shown as directors for the purpose of issuing bogus bills on commission basis. In reply to question No.8 and then question No.9, Shri Sitani admitted that no books of account or copy of bills were kept by him and normally the bills were raised by the concerned party themselves suo moto, in the name of companies controlled by him. The bills were given to such parties, who desired the same. The rate of commission was also specified by him. In reply to question No.15, Shri Sitani admitted that the receipts and expenses shown in his returns were not genuine. In reply to question Nos.16 to 23, the modus operandi of the entire transactions were explained. Further examination of Shri Sandeep Sitani was done by ACIT, Circle-2, Thane. From the details given in the statement and a....
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....ction Survey Expenses Rs. 11,91,11,201/- 7 Income from Software consultancy charges as directed by DRP Rs. 3,01,25,934/- Total Rs. 76,26,53,028/- 13. The assessee is in appeal against the aforesaid additions made in the hands of the assessee. 14. The ground of appeal No.1 raised by the assessee is against the taxability of profits arising on sale / redemption of investments including amortization of securities totalling Rs. 53,11,07,601/-. 15. The learned Authorized Representative for the assessee at the outset pointed out that where the assessee was engaged in insurance business, wherein income was to be computed as per section 44 read with First Schedule, then all other provisions were to be given ago by. The learned Authorized Representative for the assessee further pointed out that the Tribunal in assessee's own case has allowed similar claim in the earlier years and admittedly, against the order of Tribunal, the appeals were pending before the Hon'ble High Court. 16. The learned Departmental Representative for the Revenue placed reliance on the order of Assessing Officer. 17. We have heard the rival contentions and perused the record.....
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....axable and even the loss on account of amortization of securities was to be reduced from the taxable income of the year, arose before the Tribunal in assessee's own case in assessment year 2003-04. The Tribunal in ITA No.144 7/PN/2007 relating to assessment year 2003-04 along with CO No.52/PN/2007, reported in 130 TTJ (Pune) 398 had considered the aforesaid issue and had held as under:- "8. A conclusion can be drawn on the basis of the above elaborate discussion that the deletion of sub rule (b) from Rule 5 of the First Schedule was with a specific purpose. This schedule not only prescribe the method of computation of income of Insurance Business in Part (A) but also prescribe the method of computation of other Insurance Business in Part (B). Rule 5 is within Part (B) and earlier it has prescribed the method of taxation of profit on sale of investments which was later on scrapped. Even by applying a reverse logic we must arrive at the same conclusion that had the impugned income was earlier taxable under one specific clause but even on its deletion no clause was introduced or replaced to prescribe the method of taxation of such income; therefore the Revenue Department has ....
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....the expenses attributable to the investment activity should be apportioned between taxable and non-taxable income. The Assessing Officer also noted that the assessee itself had worked out the expenses disallowable under section 14A of the Act at Rs. 49,42,631/-. The Assessing Officer rejecting the claim of the assessee worked out the disallowance under section 14A of the Act read with Rule 8D of the Rules in view of the ratio laid down by the Hon'ble Bombay High Court in Gods... (2010) 324 ITR 1 (Bom) and computed the disallowance under section 14A of the Act at Rs. 7,98,28,536/- and after allowing credit of disallowance made by the assessee, balance addition in the hands of assessee was made at Rs. 7,48,44,804/-. 21. The DRP had upheld the order of Assessing Officer only to keep the issue alive before the higher judicial forums. 22. The learned Authorized Representative for the assessee before us pointed out that the provisions of section 14A of the Act are not applicable to the computation of income in the hands of assessee, where such computation was made under section 44 of the Act. Our attention was drawn to the order of Tribunal relating to assessment year 2003-04 (supr....
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.... by the Hon'ble Apex Court in the case of General Insurance Corporation of India vs. CIT 240 ITR 139 which says in clear terms that sec. 44 is a special provision governing computation of taxable income earned from business of insurance. For ready reference relevant held portion is reproduced below:- "Section 44 of the Income-tax Act, 1961, is a special provision governing computation of taxable income earned from business of insurance. It opens with a non-obstante clause and thus has an overriding effect over other provisions contained in the Act. It mandates the assessing authorities to compute the taxable income for business of insurance in accordance with the provisions of the First Schedule. A plain reading of rule 5(1) of the First Schedule. There is another approach to the same issue. Section 44 of the Income-tax Act read with the Rules contained in the First Schedule to the Act lays down an artificial mode of computing the profits and gains of insurance business. For the purpose of income-tax, the figures in the accounts of the assessee drawn up in accordance with the provisions of the First Schedule to the income-tax Act and satisfying the requirements of....
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....next lines that was not confirmed. The factual position is that while dealing with this issue the respected co ordinate Bench has stated that they had not accepted the argument of applicability of Chapter III of the Act. Rather the Respected Bench has said that there was no conflict between Chapter III and sec. 14A. It was further clarified that the provisions of sec. 14A cannot be considered defunct or redundant for the reason only that these provisions should have been inserted in Chapter III and not in Chapter IV, after all both Chapter III and Chapter IV are integral part of the same enactment. For ready reference para 108 is reproduced verbatim below :- "108. The main provision of s. 14A inserted by the Finance Act, 2001, with retrospective effect from 1st April 1962 reads as under: "14A For the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act:" On a plain reading of the above quoted provisions, we find that if any part of the expenditure claimed by the assessee as deduction again....
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....e provisions should have been inserted in Chapter III and not Chapter IV. After all both Chapter III and Chapter IV are integral part of the same enactment. We also do not agree with the arguments of the assessee that it amounts to artificial enhancement of sale price by the amount of dividend. The case of Revenue is based on disallowance of expenditure (purchase price), not enhancement of sale proceeds. We also do not see proviso to s. 14A having any application. It is not the case of reopening any closed matter. It is, therefore, open to us to take note of the retrospect provisions of s. 14A." Respectfully following the verdict of the Respected Five Member Special Bench we hereby disapprove the argument of Ld. AR that the provisions of sec. 14A are applicable only in respect of income fall within the purview of Chapter III of I. T. Act. 17. Finally the question to be answered is about the applicability of sec. 14A in respect of sale of investment which is not taxed under the special circumstances of deletion of a sub rule from the statute. It is not questioned that the impugned profit was non-taxable per-se, rather the accepted legal position is that the impugne....
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.... only 50% of the management expenses by invoking the provisions of Sec. 14A of the Act. The addition is made by the AO on the plea that the provisions of Section 14A was inserted by Finance Act 2001 with effect from 1-4-1962. It is stated that the investments made by the assessee are both taxable as well as tax free. An estimated disallowance of 50% out of the management expenses incurred and as claimed in the P & L A/c is treated as expenses incurred in connection with the looking after tax free investment. 19. The learned counsel for the assessee vehemently argued that the income of the assessee is to be computed u/s 44 read with Rule 5 of schedule 1 of the IT. Act Section 44 is a non-obstante clause and applies notwithstanding anything to the contrary contained within the provisions of the Income-tax Act relating to computation of income chargeable under different heads, other than the income to be computed under the head "Profit and gains of Business or profession". For computation of profits and gains of business or profession the mandate to the AO is to compute the said income in accordance with the provisions of section 28 to 43B of the Act. In the case of the compu....
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....n called for while computing the income u/s 44 of the Act in the case of a insurance company. The income of the business of insurance is essentially to be at the amount of the balance of profits disclosed by the annual accounts as furnished in the Controller of Insurance, The actual computation of profits and gains of insurance business will have to be computed in accordance with Rule 5 of the First Schedule. In the light of these Special provisions coupled with not obstante clause the AO is not permitted to travel beyond these provisions. 24. Section 14A contemplates an exception for deductions as allowable under the Act are those contained u/s 28 to 43B of the Act. Section 44 creates Special application of these provisions in the cases of insurance companies. We therefore, agree with the assessee and delete the act as according to us, it is not permissible to the AO to travel beyond section 44 and First Schedule of the Income-tax Act." 18. It may not be out of place to mention that the Respected co ordinate Bench has duly taken the note of an earlier decision of that very Bench decided in the case of that very assessee vide order dated 29th September 2004 bearin....
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....nvoking the provisions of section 40(a)(i) of the Act. 27. The Assessing Officer and DRP had made the disallowance on account of payment made to Allianz Reinsurance Asia Pacific Branch Singapore (ARAP) on account of re-insurance premium of Rs. 62,67,76,979/-. Another payment of survey fees was also paid to non-resident surveyors of Rs. 70,69,050/- during the year. Since the assessee had failed to deduct the tax at source from the aforesaid payments, the Assessing Officer in view of the provisions of section 195(2) of the Act, was of the view that the obligation was upon the assessee to deduct tax at source and in the absence of the same, the provisions of section 40(a)(i) of the Act were attracted and the said payments made to non-resident totalling Rs. 63.38 crores were not to be allowed in the hands of assessee. 28. The learned Authorized Representative for the assessee in this regard pointed out that the assessee had paid re-insurance charges to Allianz SE, on which no tax was deductible and hence, there was no violation of section 40(a)(i) of the Act. Our attention was drawn to the observations of Assessing Officer at pages 11 to 13 and observations of DRP at page 18 in p....
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....allowance under section 40(a)(i) of the Act merely because no application was filed under section 195(2) of the Act. He placed reliance on the ratio laid down by the Hon'ble Supreme Court in GE India Technology Centre P. Ltd. Vs. CIT and Another (2010) 327 ITR 456 (SC). 29. The second aspect pointed out by the learned Authorized Representative for the assessee was that the Assessing Officer had made reference to section 195(2) of the Act. 30. The learned Authorized Representative for the assessee further referred to the observations of DRP in para 2.4.15, wherein it was pointed out by the assessee that all the foreign remittances including re-insurance premium payments were subject to assessment under section 201(1) of the Act dated 31.12.2008 and after evaluating the said transactions, the Asst. Director of Income Tax (International Taxation) - II, had passed the consolidated order for assessment years 2005-06 to 2009-10, wherein it has been concluded that the taxes were required to be withheld only on payment of certain survey fees paid to the non-residents. The DRP had held the amounts to be taxable in the hands of assessee by adopting "look through approach", since the Si....
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....aj General. As per explanation filed by Allianz SE during the course of assessment proceedings relating to assessment year 2008-09, dated 26.12.2011, before the DDIT (International Taxation)-I, Pune, it was pointed out that Allianz group was primarily engaged in insurance business worldwide and Allianz SE was holding company of the group, which also provide re-insurance services. The term 're-insurance' has not been defined under the Act as well as under the Insurance Act, 1938. The explanation of non-resident company vis-a-vis term 're-insurance' was as under:- "The term 'reinsurance' stands for the practice whereby a re-insurer, in return of a premium paid to it, indemnifies another company for a portion or all of the liability taken up by the latter due to a policy of insurance that it has issued. Reinsurance is a type of risk management involving transfer of risk from insurer to re-insurer. The re-insurer provides insurance for the insurers on the basis of a contract of indemnity. In this process, the insurer gives the reinsurer a portion of the premium it collects from the insured and in return is covered for losses above a particular limit. Conceptually, under a rein....
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....d also did not have any business connection in India. As per provisions of section 9(1)(i) of the Act, it was also pointed out that IRDA did not permit a non-resident company to operate in India on standalone basis. Where ARAP did not have any business connection in India, it was claimed that re-insurance premium payment by BA life / BA general had not accrued in India and hence, were not taxable in India. Further, reference was made to the Treaty between India and Germany and it was pointed out that since ARAP was Singapore Branch of Allianz SE it was taxed resident of Germany. The provisions of India Germany Tax Treaty were applicable and under the said Tax Treaty, there was no specific Article which covers the taxation of reinsurance premium and hence, re-insurance premium could not be covered under Article 7 : business profits. The Article 7(1) of India Germany Tax Treaty lays down two principles i.e. the business profit of an enterprise of a person resident in Germany should be taxed in India only if the business was carried on through PE situated in India and only such profits should be taxed in India which are attributable to PE. The non-resident company i.e. Allianz SE stre....
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....ect of payment of aforesaid re-insurance premium by the assessee to Allianz SE. Where the said receipt was not taxable in the hands of recipient, whether the person making the aforesaid payment was liable to deduct tax at source while making the aforesaid remittances. As referred to by us in the paras hereinabove, the assessment of income chargeable under the provisions of the Act in India in the hands of Allianz SE i.e. non-resident company to whom the assessee had paid re-insurance charges, has been determined by the Revenue authorities while passing the assessment order under section 143(3) r.w.s. 144C(13) of the Act. The Assessing Officer while computing income of the said nonresident company in India for assessment year 2008-09 had computed income on account of transactions under the software licence agreement i.e. on account of royalty and software licence fees. The payments received on account of re-insurance transactions were not held to be chargeable to income tax by the Assessing Officer while completing assessment in the hands of nonresident company as income arising in India. Where the payment has been made to a non-resident company and the same is not liable to tax in ....
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....(1) of the Act are not attracted and further the provisions of section 40(a)(i) of the Act are not to be applied. 37. The second aspect of the issue is the observation of the Assessing Officer that the payment of re-insurance premium to ARAP is not to be allowed in the hands of assessee as the assessee had not made any application under section 195(2) of the Act. Under sub-section (2) to section 195 of the Act, it is provided that where any person is responsible for paying any sum chargeable under this Act to a non-resident company, considers that the whole of such amount would not be income chargeable in the case of recipient, then he may make an application to the Assessing Officer to determine the appropriate portion of such sum which is so chargeable and upon such determination, the tax shall be deducted under sub-section (1) only. The reading of sub-section itself show that the provisions of the said sub-section are applicable where the person who is responsible for making the payment to a non-resident is sure that such sum was chargeable under the Act. The first step to be fulfilled is that the payment paid to non-resident company is chargeable under the Act. We have alrea....
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....espect to taxes on income. Article 5 dealing with Permanent Establishment and under para 5 lays down as under:- "5. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 6 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if this person,-] (a) has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) has no such authority, but habitually maintains in the firstmentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise." 40. In order to fulfil the conditions of having P....
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....dian subsidiary was considered as place of business. However, facts of the case in hand clearly show that the employees of the SRSIPL has only provided services to SRSIPL and there is no noting on record to prove that the employees had provided services to the assessee or the assessee is paying their salaries or perquisites. The decision of the Hon'ble Supreme Court in the case of DIT(IT) Vs. Morgan Stanley & Co. (2007) 292 ITR 416 (SC) has been duly considered by the Hon'ble Delhi High Court in the case of DIT Vs. E-Funds IT Solutions (2014) 42 taxmann.com 50 (Delhi). The decision in the case of Jebon Corporation of India Vs. CIT (Int. Tax) (2012) 206 Taxman 7 (Kar) is not at all relevant on the facts of the case in hand." 42. Further, Mumbai Bench of Tribunal in ICICI Lumbard General Insurance Co. Ltd. Vs. ACIT (supra) had laid down the similar proposition. Where the conditions laid down in Article 5 of German Treaty are not fulfilled, the Indian Entity i.e. assessee before us, is not the PE of foreign company in India. 43. In the entirety of the above said facts and circumstances, we find no merit in the approach of DRP of 'look through' to hold that Allianz SE had a PE in....
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....dmitted that he was controlling the bank transactions of more than 25 companies for the purpose of issuing bogus bills on commission basis. The said person admitted that he did not maintain any books of account or copies of bills and he claimed that the bills were raised by the concerned parties in the name of the companies controlled by him, themselves. He also explained the modus operandi of entire transactions. From the details given in the statement and the accounts of the assessee, the bank accounts with Corporation Bank, Bhayander Branch, Mumbai, of the companies reflected certain payments received from assessee. The tabulated details of the payments totalling Rs. 1,08,31,171/- are provided under para 8.1 at page 14 of the draft assessment order passed under section 143(3) r.w.s. 144C(1) of the Act. Thereafter, Mr. Sandeep Sitani was also examined on 15.10.2008 by the ACIT, Circle-2, Thane. During the course of assessment proceedings of two companies in the name of which accommodation entries were being issued to beneficiaries to inflate their expenses, including the assessee. He confirmed that the companies were issuing bogus bills for services, contracts, material purchased....
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....led to furnish purchase orders and the assessee having failed to fully discharge the onus to substantiate the expenditure claimed by it, the order of Assessing Officer was upheld. 47. The learned Authorized Representative for the assessee before us pointed out that the assessee had incurred cost totalling Rs. 14.62 crores, details of which are available at page 188 of the Paper Book. The learned Authorized Representative for the assessee further pointed out that it had revised its claim by withdrawing sum of Rs. 32,67,497/-. Our attention was drawn to the documents filed in this regard i.e. debit note and risk inspection report placed at pages 247 to 249 of the Paper Book and it was pointed out by the learned Authorized Representative for the assessee that the test applied by DRP was wrong. The observation made by the DRP was held to be not relevant to the risk inspection charges. It was pointed out that the charges may be paid when the policy was being finalized as the insurer was not bothered whether the assessee had carried on risk inspection, since the said inspection was for the satisfaction of the assessee, there was no merit in saying that the purchase order was relevant.....
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....nd bank account with Corporation Bank, Bhayander Branch, Mumbai, of the said companies reflected various payments received from assessee, on different dates as tabulated at page 14 of the draft assessment order, totalling Rs. 1,08,31,179/-. The assessee was given an opportunity to produce the documents to establish its claim of risk inspection charges of Rs. 14,62,61,001/-. Before the Assessing Officer, the assessee furnished evidence of payment of Rs. 2,71,49,800/- only. However, no evidence with regard to balance amount of expenditure of Rs. 11.91 crores was produced. However, the assessee by way of revised return had withdrawn the claim to the extent of Rs. 32,67,497/-. Before the DRP, the assessee further furnished additional evidence of purchase orders totalling Rs. 68,07,042/- and claimed that the same should be allowed as deduction. Before us, the learned Authorized Representative for the assessee has referred to the sample copies of risk inspection invoices along with purchase orders filed before the lower authorities placed at pages 225 to 248 of the Paper Book. The list of parties for whom additional purchase orders were filed before the DRP along with sample copies of pu....
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....lish its claim in view of the information received by the Assessing Officer pursuant to the search conducted upon Shri Sandeep Sitani, CA. However, the information received by the Assessing Officer was limited to the extent of part of the risk inspection charges paid by the assessee. No further information was collected by the authorities below to disprove the claim of the assessee. In the totality of the above said facts and circumstances and considering the explanation of the assessee, we find no merit in rejection of the claim of the assessee on the ground that the assessee had failed to produce the evidence in the form of purchase orders with respect to the risk inspection charges totalling Rs. 14.62 crores. The assessee has explained and it is an admitted position that the risk inspection itself would not result in policy being issued by the assessee for insuring the companies businesses. However, the carrying on of such risk inspection by the assessee was necessary as it was in the business of providing general insurance to its clients and it had to be sure that the companies to whom it was providing the services was the correct decision of its business. As we are aware that ....
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.... the software consultancy services included projects which had to be completed in various stages and while doing so, the substantial cost was incurred during initial stages of the said projects. It was further pointed out by the assessee that the total income from such projects was booked in the year of substantial completion. The next contention of the assessee in this regard was that although the income in relation to the on-going projects was booked in the subsequent year, but substantial cost in connection with such projects was booked as part of overall cost during the assessment year 2008-09. The DRP vide para 2.8.4 took note of the fact that the assessee had submitted segmental profitability statement before the Assessing Officer, in which the assessee had also considered Rs. 3,01,25,934/- as part of operating revenue based on matching principle. The said amount was reported as income in the financial statement of the subsequent year i.e. assessment year 2009-10. In view of the revised profitability, the contention of the assessee was that the operating profit earned by the assessee was 169%, whereas arithmetic mean of the comparable companies was 42.30% and thus, the intern....
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.... the software segment. The DRP observed that the assessee's contention was that it follows project completion method for accounting, was only the convenience explanation than what is being followed in the industry. The DRP further observed that a person is required to recognize the income when it accrues and not when chooses to show it, it is accrued to it, by following certain method of accounting. It also noted that in all contracts, certain percentage of total project income accrues to the contractor on completion of certain projects and no enterprise undertaking long duration projects could afford to hamper cash flow and increase risk of realization till the last invoices. The DRP thus, held that the project completion method without periodical recognition of revenue was against the accounting standards as well as against the basic provisions of income recognition under Income-tax Act. The DRP thus, accepted the alternate plea as argued by the assessee and as shown by the assessee in table in para 2.8.5 of the order of DRP and the Assessing Officer was directed to consider the revenue of Rs. 3.01 crores as income of assessment year 2008-09, this would be in addition to Rs. 27,9....
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....re are some contrasts in the last two paras in the order of DRP. 57. We have heard the rival contentions and perused the record. The issue before the Assessing Officer was in respect of international transactions undertaken by the assessee. The assessee had during the year shown international transactions with its associated enterprises on account of provision of software consultancy charges. The TPO while benchmarking the international transactions of the assessee found it not to be at arm's length in view of the arithmetic mean of the comparable companies taken at 42.30% and proposed an addition of Rs. 94,58,807/-. While explaining the modus of recognition of revenue by the assessee vis-a-vis its international transactions of providing software consultancy, the assessee explained that it was following project completion method and though income in relation to the on-going projects was booked in the subsequent year, but the cost in connection with such projects was booked as part of overall cost during the assessment year 2008-09. The assessee claimed that it had reported the income in the subsequent assessment year 2009-10. However, while benchmarking the international transac....
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....to be added as income in the hands of the assessee, then in the absence of any enhancement notice, no addition could be made in its hands. From the perusal of the orders of authorities below and after considering the facts and circumstances in entirety, we find that the start point of the issue was the reference made to the TPO to determine whether the international transactions undertaken by the assessee were at arm's length. Though the TPO found the said transactions to be not arm's length, before the DRP, submissions were made to e xplain the nature of the transaction, the time of recognition of revenue by the assessee by following project completion method and corresponding allowance of cost against them. The DRP accepted the plea of the assessee that the receipts of Rs. 3.01 crores which have been reported as income in the subsequent year if considered against the international transactions undertaken by the assessee for the captioned assessment year, then no adjustment is to be made in the hands of assessee on account of aforesaid international transactions. The said transactions were found to be at arm's length. The issue before us is whether the Assessing Officer while givi....