M/s Hiraco India Pvt.Ltd, GW 2050, Bharat Diamond Bourse, Bandra Kurla Complex, Babdra (E), Mumbai-400051 Vs. Dy.Commissioner of Income Tax-5(1), Aayakar Bhavan, M K Road, Mumbai-400020.
January, 21st 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "B" NEW DELHI
BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER
MS. SUCHITRA KAMBLE : JUDICIAL MEMBER
ITA no. 2359/Del/2011
Asstt. Yr: 2006-07
DCIT Circle-11(1), Vs. M/s E-enable Technologies Pvt. Ltd.
New Delhi. 34, Netaji Slubhash Marg,
Darya Ganj, New Delhi 110002.
PAN: AAACE 9909 K
( Appellant ) (Respondent)
Appellant by : Shri Amrit Lal Sr. DR
Respondent by : Shri Himanshu Sinha Adv.&
Sh. Satyam Rastogi CA
Date of hearing : 07/12/2015.
Date of order : 18/01/2016.
PER S.V. MEHROTRA, A.M:
This appeal, by the Revenue, is directed against CIT(A)'s order dated
15.02.2011 relating to AY 2006-07.
2. Brief facts of the case are that assessee company, in the relevant
assessment year, was engaged in the business of computer education/
training centre, software development, support and maintenance. It had filed
its return of income declaring total income at Rs. 69,96,748/-. The
assessment was completed at a total income of Rs. 1,11,51,637/-, inter alia,
making following disallowances:
(i) Capital expenses Rs. 3,30,195/-
(ii) Provision for sale and Rs. 33,61,059/-
Maintenance of software
3. Ld. CIT(A) allowed the assessee's appeal and deleted both these
additions. Being aggrieved, the department is in appeal before us and has
taken following two grounds of appeal:
"1. On the facts and circumstances of the case and in law,
the CIT(A) has erred in deleting the addition of Rs. 3,30,195/-
on account of software purchase.
2. On the facts and circumstances of the case and in law,
the CIT(A) has erred in deleting the addition of Rs. 33,61,059/-
on account of sales and maintenance of software."
4. Brief facts, apropos ground no. 1 are that the assessee had debited
software/ AMC to the extent of Rs. 50,80,754/-. The AO required the
assessee to explain why the said sum should not be treated as capital
expenses. The assessee pointed out that this sum represented the amount of
software purchases, annual maintenance contract (AMC) for hardware and
software and the expenses towards consultancy. As regards the software
purchases, the assessee submitted that they were to the extent of Rs.
8,25,488/-. The assessee further submitted that the software so purchased
had been sold out and it was only the trading activity of the assessee. The
assessee also submitted that the software purchases to the extent of Rs.
5,19,011/- had been sold for Rs. 9,59,924/-. The assessee filed the bills of
purchases as well as the sale vouchers. From these documents the AO
concluded that there was no co-relation between the purchase and sale of
software because the software purchased did not tally with the software sold
out. He, therefore, did not accept the assessee's contention that it was only a
trading transaction. He treated the sum of Rs. 8,25,488/- in capital field and
allowed depreciation @ 60%. Thus, made a disallowance of Rs. 3,30,195/-.
5. Before ld. CIT(A) it was submitted that the assessee was the
implementation partner of `Hyperion Software', which was installed to
evaluate performance of the employees. It was submitted that the assessee
undertook to devise systems for performance evaluation in organizations. In
the performance of these services, " hyperion software", which it purchased
from time to time after customizastion depending upon the needs of the
customers, the software was installed on the customer's system and
thereafter it was used by the customer. Once installed on the customer's
system, it was no longer available for use by the assessee. He, accordingly,
deleted the disallowance.
6. We have considered the submissions of both the partiers and find that
the findings of ld. CIT(A) that from the details and copies of purchase
invoices and sales of software invoices it was evident that software was
purchased and subsequently sold to customer and was not used by assessee,
have not been controverted by the department. We, accordingly, confirm the
order of CIT(A) on this issue.
7. Brief facts apropos ground no. 2 are that assessee had debited a sum
of Rs. 33,61,059/- as provision for sale and maintenance of software. The
AO required the assessee to explain as to how it was an ascertained liability.
The assessee submitted that it enters into AMC with customers while selling
the software for a period of one year. AMC is received and credited to the
P&L A/c. The provisions for sale and maintenance represented the AMC
received for the period beyond the financial year. The AO did not accept the
assessee's claim, inter alia, observing that it was not to be paid back or
accrued to assessee from day-to-day. He, therefore, denied the claim of Rs.
8. Before ld. CIT(A) the assessee reiterated his submissions and pointed
out that the total AMC in the year was bifurcated into amount for the year
and the amount received for services to be provided in the next year. This
bifurcation was made on time basis and, accordingly, the provision for sale
and maintenance of software of Rs. 33,61,059/- represented the unexecuted
portion of the AMJC income, which was received in advance. It was further
clarified that assessee was following mercantile system of accounting and,
therefore, the revenue recognizable for the year under consideration from
AMC sale was that which pertained to the period falling in the financial
year 2005-06 and which was covered by the AMC period. This accounting
treatment was as per accounting standard "AS-9" on revenue recognition as
prescribed by the Institute of Chartered Accountants of India. The assessee
further pointed out that it was consistently following this accounting policy.
The assessee relied on the decision of Hon'ble Allahabad High Court in the
case of CIT Vs. Hindustan Computer Ltd. 233 ITR 366, wherein under
similar facts the assessee's claim was upheld.
9. The ld. CIT(A) allowed the assessee's claim by observing as under:
"6.5. I have considered the assessment order as well as the
written submission of the appellant. The reason the AO did not
accept the contention of the appellant was because the AMC
has been received by the assessee at once and it is not to be
paid back. It appears that the AO has not understood the
accounting treatment being given to receipt of the AMC
consistently by the appellant. It is seen that provision for sale
and maintenance of software is the reversal of income to the
extent of ' unexecuted portion of contractual liability and
unexecuted portion of AMC is charged as income in the next
financial year. This method of accounting has been
consistently followed by the appellant in earlier years as well
as subsequent years and accepted by the department. If a
departure is made from this method this amount will be taxed
twice. I find that there is no reason why the AO should take a
different view when there is no change in the facts of the case. I
also find that the case law relied on by the appellant is squarely
applicable to the facts of the appellants case. In view of the
reasons above, the addition is directed to be deleted.
10. We have considered the rival submissions and have perused the record
of the case. The facts are not disputed. The assessee is following mercantile
system of accounting and as per accounting standard-9, the net effect of the
accounting treatment was for only that part of the AMC receipt was taken
into consideration which pertained to the year under consideration. This
method has consistently been followed by the assessee. We, therefore, do
not find any reason to interfere with the order of ld. CIT(A). Ground fails.
11. In the result, departmental appeal is dismissed.
Order pronouncement in open court on 18/01/2016.
(SUCHITRA KAMBLE) (S.V. MEHROTRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Copy of order to:
5. DR, ITAT, New Delhi.