Income Tax Appellate Tribunal - Pune
Mithi Software Technologies Pvt. ... vs Income-Tax Officer,, on 6 April, 2017
आयकर अपील
य अ धकरण "बी" यायपीठ पण
ु े म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, PUNE
ी अ नल चतव
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, लेखा सद#य, एवं ी &वकास अव#थी, या यक सद#य के सम( ।
BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No. 1905/PUN/2014
नधा*रण वष* / Assessment Year : 2007-08
Mithi Software Technologies Pvt. Ltd.,
103, Mayfair Court, Dr. Pai Marg,
Baner Road, Pune - 411045
PAN : AABCM9352P
.......अपीलाथ / Appellant
बनाम/Vs.
Income Tax Officer,
Ward - 11(1), Pune
......
यथ / Respondent
Assessee by : Shri Nikhil Pathak and
Shri P.D. Kudwa
Revenue by : Shri Hitendra Ninawe
सन
ु वाई क तार ख / Date of Hearing : 03-04-2017
घोषणा क तार ख / Date of Pronouncement : 06-04-2017
आदे श / ORDER
PER VIKAS AWASTHY, JM :
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-I, Pune dated 28-03-2014 for the assessment year 2007-08.
2. In appeal, the assessee has assailed the findings of Commissioner of Income Tax (Appeals) in confirming the additions on account of :
2ITA No. 1905/PUN/2014, A.Y. 2007-08
i. Annual Maintenance Charges billed for unexpired period `7,84,204/-; and ii. Disallowance of bad debts `36,912/-.
3. The brief facts of the case as emanating from record are: The assessee company is engaged in development of software products and providing emailing solutions. The assessee is also provides messaging services, support/maintenance services etc. The assessee entered into Annual Maintenance Contract (AMC) with its clients for providing maintenance services for its software products. The assessee filed its return of income for the impugned assessment year on 13-10-2007 declaring total income as Nil after claiming set off of brought forward losses of earlier years. The case of the assessee was selected for scrutiny under CASS and accordingly statutory notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") was issued to the assessee on 17-09-2008. During scrutiny assessment proceedings, the Assessing Officer made certain additions / disallowances which inter alia includes receipts from AMC not offered to tax `7,84,204/- and bad debts written off `79,734/-.
Aggrieved by the assessment order dated 24-12-2009, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) upheld the additions of `7,84,204/- in respect of AMC receipts for unexpired period and partly allowed writing off of bad debts. The Commissioner of Income Tax (Appeals) confirmed disallowance of bad debts written off in respect of :
i. International ARC `3,240/-
ii. ICICI Onesource Ltd. `33,672/-
Total `36,912/-
3
ITA No. 1905/PUN/2014, A.Y. 2007-08
Aggrieved by the additions confirmed by the Commissioner of Income Tax (Appeals), the assessee is in second appeal before the Tribunal.
4. Shri Nikhil Pathak appearing on behalf of the assessee submitted that although the assessee receives entire AMC charges from its customers at the time of executing AMC agreements, but the AMC charges are treated as income only after the elapse of period mentioned in the agreement. Where annual maintenance services accrue in more than one accounting year, the AMC charges for unexpired period are credited to unexpired services account and are shown as Current Liabilities in the Balance Sheet. The amount credited to unexpired services in current year are transferred to revenue account in the next year. Referring to the AMC Agreement at pages 51 to 76 of the paper book, the ld. AR submitted that the assessee is under obligation to refund the AMC charges for unexpired period if the customer cancel the agreement midway and seek refund of the AMC charges paid. By paying AMC charges the customers are entitled for support and upgrade of software during the currency of AMC. The ld. AR contended that the assessee recognizes income from AMC only for the period which has elapsed. The AMC charges for unexpired period are not considered as income of the assessee. The ld. AR in support of his submissions placed reliance on the following decisions :
i. Deputy Commissioner of Income Tax Vs. TVS Electronics Limited;
52 SOT 287 (Chennai-Trib.), and ii. M/s. Career Launcher (India) Ltd. Vs. Assistant Commissioner of Income Tax in ITA Nos. 4924 & 4925/Del/2009 for the assessment years 2005-06 and 2006-07 decided on 27-12-2010.4 ITA No. 1905/PUN/2014, A.Y. 2007-08
4.1 The ld. AR submitted that the case of assessee is squarely covered by the decision of Chennai Bench of the Tribunal in the case of Deputy Commissioner of Income Tax Vs. TVS Electronics Limited (supra). The ld. AR further submitted that the Delhi Bench of the Tribunal in the case of M/s. Career Launcher (India) Ltd. Vs. Assistant Commissioner of Income Tax (supra) has held that where the tuition fee is received for the period of two years, the same shall be spread over total period of course i.e. two years. The ld. AR pointed that in the case of M/s. Career Launcher (India) Ltd. Vs. Assistant Commissioner of Income Tax (supra) the fees was non-refundable, still the Tribunal has allowed to spread tuition fee over total period of course. The case of assessee is on a better footing as under 'Refund Policy' of the agreement, the assessee is under obligation to refund pro-rata AMC charges for unexpired period, if customer terminates the contract in between.
4.2 In respect of second issue raised in appeal relating to bad debts written off, the ld. AR submitted that the assessee has written off receivables from International ARC and ICICI Onesource Ltd. as bad debts as the same had become irrecoverable. The assessee in order to maintain healthy business relations with its customers did not want to enter into any legal battle with its customers. The Hon'ble Supreme Court of India in the case of T.R.F. Ltd. Vs. Commissioner of Income Tax reported as 323 ITR 397 has held that the assessee is under no obligation to establish that the debt had in fact become bad. The assessee is only required to state that the debt has become irrecoverable and has written off the same in the books. The claim of 5 ITA No. 1905/PUN/2014, A.Y. 2007-08 the assessee is in line with principle laid down by the Hon'ble Apex Court.
The authorities below have erred in rejecting the claim of assessee on the ground that the assessee has continued to have business transaction with the aforesaid entities even after the assessee has failed to recover the outstanding amounts from them and had declared the receivables from the said entities as bad debts.
5. On the other hand Shri Hitendra Ninawe representing the Department vehemently defended the findings of Commissioner of Income Tax (Appeals) in confirming the additions on account of Annual Maintenance Charges billed for unexpired period and disallowance of bad debts written off. The ld. DR referring to the findings of Commissioner of Income Tax (Appeals) in para 4.3 of the impugned order submitted that the assessee has adopted straight line method of accounting for recognizing income from AMC charges only with the intention of postponing tax liability. There has been no single instance where the assessee has refunded any part of Annual Maintenance Charges for cancellation of agreement. The ld. AR further submitted that the method adopted by the assessee in treating the annual maintenance charges by spreading it over the total period of annual maintenance contract is against the concept of matching cost and revenue and Accounting Standard-9 (AS-9). The ld. DR pointed that the matching principle of cost and revenue is not satisfied as the receipts are postponed on the basis of number of months remaining in the unexpired period of AMC but the software expenses which are part of AMC are not postponed or spread over the period of AMC. The entire 6 ITA No. 1905/PUN/2014, A.Y. 2007-08 expenditure and other expenses required for software upgradation are claimed in the year in which they are incurred.
5.1 In respect of ground No. 2 relating to writing off of bad debts, the ld. DR submitted that the assessee has not been able to show from records that the debtors were not in a financial position to pay the debts or has refused to pay or has disputed the liability. On the contrary, the assessee is still carrying on business with the said debtors. The assessee unilaterally in an arbitrary manner has written off the amount as bad debts on the ground that the AMC charges were not paid by the debtors due to dissatisfaction for the services, unresolved complaints etc. No material has been placed on record by the assessee to substantiate such contentions. Before the Assessing Officer the assessee has made statement that amount has been written off as bad debts to maintain business relations and generate business revenue. Such vague explanation cannot be accepted to allow writing off of bad debts.
6. Controverting the submission forwarded on behalf of the Department, the ld. AR contended that the customers have so far not cancelled any of the AMC agreements, as the assessee is promptly and efficiently resolving the problems faced by its customers. The assessee should not be penalized for its efficient services. However, if the eventuality arises the assessee has to refund the pro-rata amount for unexpired period of AMC.
7. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decisions and AMC Agreement referred to by 7 ITA No. 1905/PUN/2014, A.Y. 2007-08 the ld. AR during the course of making submissions. The assessee in appeal has assailed the findings of Commissioner of Income Tax (Appeals) on two grounds :
i. Disallowance of Annual Maintenance Charges billed for unexpired period `7,48,204/-, and ii. Disallowance of bad debts written off `36,912/-.
8. The assessee is engaged in software development and is also undertaking annual maintenance contracts in respect of software products developed by it. The assessee receives annual maintenance charges at the time of execution of AMC and spread the amount over the contract period for recognition of profit. If the contract is taken in the middle of the year, the assessee recognizes the income from the contract only to the extent of period expired up to end of the financial year. The remaining amount for the unexpired period of AMC is reflected in the subsequent financial year. The reasons for giving such accounting treatment to the AMC receipts is that the assessee is under obligation to refund AMC charges for the unexpired period on pro-rata basis if the customer terminates the contract for deficiency in service. The ld. AR of the assessee has pointed that in the earlier assessment years the assessee has been giving similar treatment to the AMC charges. No objection was raised by the Revenue. It would be relevant to mention here that in the earlier assessment years no scrutiny assessment was made in the case of assessee.
9. We find that the Chennai Bench of the Tribunal in the case of Deputy Commissioner of Income Tax Vs. TVS Electronics Limited (supra) under similar circumstances had allowed the claim of assessee. 8 ITA No. 1905/PUN/2014, A.Y. 2007-08 In the said case, the assessee was engaged in manufacturing and sale of computer peripherals and had entered into Annual Maintenance Contracts with various customers. The assessee had shown income only with respect to that part of revenue from AMCs which fall within the relevant previous year i.e. the pro-rata revenue for the period falling outside the previous year was not offered as income. The Assessing Officer rejected the method of accounting adopted by the assessee and made addition of the entire amount received on annual maintenance charges. In first appeal, the Commissioner of Income Tax (Appeals) upheld the findings of Assessing Officer. In second appeal by the assessee before the Tribunal, the Tribunal held :
"6. We have perused the orders and heard the rival submissions. There is no dispute that income not offered by the assessee pertained to unexpired period of AMC falling outside the end of the relevant previous year. There is also no dispute that a part of unexpired period always fell outside the relevant previous year, going into the subsequent year. There is also no dispute that assessee had recognized its income on pro rata basis for the duration of the AMC contracts in the relevant previous year. The clients of the assessee could at any point cancel the contract and get a refund for the unexpired period. This itself meant that the amount received by the assessee at the point of time it entered into an AMC was nothing but an advance, which on the progress of each day got converted into revenue. The income was accruing on a day-to-day basis based on the progress of time and it did not accrue on the day of entering into the contract. An obligation was there on the assessee to refund the unexpired value of AMC, if the AMC was cancelled by its customers. So, we cannot say that whole of the income had accrued to the assessee at the point of time it entered into the AMC. The obligation arising out of the contract as well as earning of the income ran side by side and progressed simultaneously. Therefore, contention of the assessee that it could not recognize revenue for the unexpired period of AMC is on strong footing. Principle of matching concept of income and expenses, comes to the aid of the assessee in such a situation. Assessee, in our opinion, was justified in its claim that income relatable to the unexpired period of AMC could be considered only in the subsequent year and not in the relevant previous year. CIT(Appeals), in our opinion, had taken a correct decision which does not require any interference."9 ITA No. 1905/PUN/2014, A.Y. 2007-08
We find that facts in the present case are similar. Following the ratio laid down in the case of Deputy Commissioner of Income Tax Vs. TVS Electronics Limited (supra) we accept the contention of the assessee.
10. The ld. AR also placed reliance on the decision of Delhi Bench of the Tribunal in the case of M/s. Career Launcher (India) Ltd. Vs. Assistant Commissioner of Income Tax (supra). In the said case the dispute was with regard to assessment year in which income generated from receipts of tuition fee for that the entire course of two years has to be recognized. The relevant extract of the findings of Tribunal are as under :
"13.3 We have considered the facts of the case and submissions made before us. The facts are that the assessee received non-refundable fees in this year. The coaching was to be given in this year as well as in the subsequent year. This means that the attendant obligation was to be discharged in two accounting years. The assessee booked a part of the fees in this year and a part thereof in the subsequent year. As held in the case of K.K. Khullar (supra), a distinction has to be made between the terms "receipt" and "income". What is liable to be taxed is income and not the receipt. Therefore, only that amount which is received as income can be brought to tax."
Thus, in view of the facts of the case and the aforesaid decisions, we direct the Assessing Officer to delete the addition in respect of Annual Maintenance Charges billed for unexpired period.
11. The second issue in appeal is with regard to disallowance of bad debts written off. The assessee had declared receivables from two parties to whom it had supplied software as bad debts. Undisputedly, with both the said parties, the assessee had business transactions 10 ITA No. 1905/PUN/2014, A.Y. 2007-08 subsequent to assessee's failure to recover the amount for supply of software. Continuing business with such parties would not be impediment for writing off of bad debts which are in relation to some earlier business transaction. The assessee declared the amount as bad debts and has written off the same in the books of account is sufficient to claim writing off of bad debts.
The Hon'ble Supreme Court of India in the case of T.R.F. Ltd. Vs. Commissioner of Income Tax (supra) has held that it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In the present case, it is not disputed by the revenue that the assessee has not written off the amount as bad debts in its books. Once, the assessee has written off the amount as bad debts in its books of account, no further reasoning is required to be given by the assessee for declaring such amount as irrecoverable bad debts. The claim of the assessee is in accordance with the well settled principle of law expounded by the Hon'ble Apex Court. Therefore, the claim of the assessee relating to writing off of bad debts deserves to be allowed.
12. In the result, the appeal of the assessee is allowed.
Order pronounced on Thursday, the 06th day of April, 2017.
Sd/- Sd/-
(अ नल चतव
ु द
/ Anil Chaturvedi) ( वकास अव!थी / Vikas Awasthy)
लेखा सद!य / ACCOUNTANT MEMBER #या यक सद!य / JUDICIAL MEMBER
पुणे / Pune; $दनांक / Dated : 06th April, 2017
RK
11
ITA No. 1905/PUN/2014, A.Y. 2007-08
आदे श क- . त/ल&प अ0े&षत / Copy of the Order forwarded to :
1. अपीलाथ / The Appellant.
2. यथ / The Respondent.
3. आयकर आयु'त (अपील) / The CIT(A)-I, Pune
4. आयकर आयु'त / The CIT-I, Pune
5. वभागीय त न,ध, आयकर अपील य अ,धकरण, "बी" ब/च, पण ु े / DR, ITAT, "B" Bench, Pune.
6. गाड1 फ़ाइल / Guard File //स या पत त // True Copy// आदे शानुसार / BY ORDER, सहायक पंजीकार / Assistant Registrar, आयकर अपील य अ,धकरण, पुणे / ITAT, Pune