ADDL.C.I.T. RG. 5(2), MUMBAI vs. C.A. INDIA TECHNOLOGIES PVT. LTD., MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य, राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार/ PER Rajendra A.M.- अनुसार Challenging the order of the CIT(A)-15,Mumbai dt.3.10.2011 the assessee and the Assessing Officer(AO)have filed cross appeals for the year under consideration.Assesse-company, engaged in the business of software services, filed return of income on 31.10.2005 declaring Loss of Rs.6,00,71,010/-.The AO completed the assessment on 24.12.2008,u/s.143(3)of the Act,determining its income at Rs.Nil.

1. Royalty to CA Management Inc.USA 74,167,183 76082319 CUP

2. Commission from CA Management Inc., USA 22,053,507 32408445 TNMM

3. Call centre Services provided to CA Management 165,438,736 184747465 TNMM Inc.,USA

17&341/M/12-CA India Technologies P.Ltd.

3.Aggrieved by the order of the AO,the asessee preferred an appeal before the First Appellate Authority (FAA).Before him,it was argued that out of the 19 comparables 10 comparables were common to those selected by the assessee,that remaining 9 comparables should be rejected,that if only 10 comparabes were considered the ALP would work out to 15.69% as against assessee’s margin of 15.41%.With regarding the remaining comparables,namely Exensys Software Solutions Ltd.(SN.4),Third-ware Solutions Limited(SN.16),Infosys(SN. 9) ,Satyam computer Services Limited(SN.15),Flextronics Software Solutions Limited(SN. 5),

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Compulink Systems Ltd.(SN.3),Geometric Software Solutions Co.Ltd.(SN. 8),Four Soft Ltd. (SN.6),Sankhay Infotech Ltd.(SN.12),the assessee raised objection and argued that same should be excluded from the list of the valid comparables.The FAA held that Infosys,Satyam computer Services Limited,Geometric Software Solutions Co. Ltd. and Sankhay Infotech Ltd.were not valid comparables.He held that remaining 15 comparables should be considered as valid comparables in the final list of comaparable.As the arithmetic mean of the said comparables was found 25.50%,so,he directed the AO/TPO to work out the amount of adjustment considering the above mentioned 15 comparables.The assessee has challenged the inclusion of five comparables whereas,the AO is aggrieved by the exclusion of four compa - rables.

4.During the course of hearing before us,with regard to Exensys Software Solutions Ltd. (ESSL),the Authorised Representative(AR)argued that ESSL had amalgamated with Hollol India Ltd.with retrospective effect for 01.04.2004,that amalgamation had an impact on the profit margins,.He referred to the performance review of the company wherein the directors had stated that the company earned an income of Rs.7.37 crores which consisted of an export turnover of Rs.6.91crores, that the figures for 2004-05 were combined figures of Hollol India Ltd.and the assessee.He also referred to the page No. 153 and 173 of the PB.He said that in the cases of B.D Shaw India Software(P)Ltd.(ITA/1302/Hyd./2010),Textrom Global Technol -ogies Centre (P).Ltd.(ITA/29/Bang/2012)and CNOIT Services(India)(P.)Ltd.(ITA/1280/Hyd /2010),it has been held that ESSL was not a valid comparable with a software development service provider. RegardingThirdwareSolution(SN.16),Foursoft(SN.6),Flextronics(SN.5),Compulink(SN.3)and Sankhya(SN.12),the AR submitted that those comparables were engaged in products and services,that they could not be held to be valid comparables for software development service provider,that the comparables had earned revenue from products as well as services,that segmental accounts in those cases were not available,that such comparables had to be excluded from the final list of valid comparables.He placed reliance on In Toto Software India(P.)Ltd.(ITA/1196/Hyd/2010&1197/Hyd./2012),AY.s.2005-06,2007-08,that the Hon'ble AP High Court had approved the order of the Tribunal.

With regard to exclusion of Infosys,Satyam Computer Services Ltd. Sankhya Infotech Ltd. and Geometric Software Solutions,the AR relied upon the order of the FAA and argued that 17&341/M/12-CA India Technologies P.Ltd. same were excluded from the list of comparables in the cases of Intoto Software India(P.) Ltd.(supra)and Textron Global technology Centre (P) Ltd.(supra).

The DR argued that the FAA had not proved the functional dissimilarity of ESSL,that amalgamation had no impact on the margins of the assessee,that both the assessees were in the same business,that in the case Third Ware Solutions Ltd.the product account was for less than 10%,that RPT was not available,that sale of license was 2.97 crores only out of the total sale of Rs.29.11 Crores,that in the case of Flextronics product sale was only 15%,while considering the matter of Compulink nomenclature of services should not be given importance.He referred to the pages 83,93,122,119 of the PB.For the rest of the excluded/ included comparables,he relied upon the order of the TPO/FAA.

4.1.We have heard the rival submissions and perused the material before us.In case of ESSL , we find that there was amalgamation of the company with Hollol India Ltd.with retros - pecttive effect.The directors,in the performance review,had claimed that the higher income for the year was possible because of the amalgamation. It is also a fact that ESSL acquired brand value(intangible)of Rs.5 crores during the year under consideration.We find that in the case of DE Shaw India Software (P.)Ltd.,the Tribunal has excluded ESSL as a valid comp - arable as it had an extraordinary event resulting into higher operating margin.We are reproducing the relevant portion of the said order and it reads as under : "7. As regards the Exensys Software Solutions Ltd., as seenfrom the paper book placed on record, there is a merger of Holool India Ltd. and in the director's report (PB-951), there is a clear mention that the company's income ofRs. 737.79 lakhs is possible with the amalgamation of Holool India Ltd. It was further mentioned that Assessee company has got benefit by advanced latest technical expertise on various technology domains of the transferor company. Further, that company has charged deferred expenditure and the amount claimed in this year is Rs. 1.22 crores as against Rs. 30.21 lakhs in earlier year. This was clearly stated in Notes that claim was with reference to the AS-14 and also due to amalgamation of two companies. Vide page 957 of paper book, it was seen that out of gross assets of Rs. 7-95 crores, Brands alone consist ofRs. 5 crores, therefore, intangible assets comprising of substantial part of this company's assets. Not only in the correspondence with the TPO that Assessee expressed its inability to furnish separate accounts for two amalgamated companies but also t" further it has clearly mentioned vide letter dated 26-04- 2007 to the TPO that there is a gap in the expenditure expected to incur and actual expenditure incurred which made the company record high operating margin on cost. These factors indeed support assessee's contention that this exceptional profit with the fact of amalgamation affected operating profit of the company and this cannot be taken as comparable. Other issues were also analysed and accepted in various cases as relied upon by the learned counsel. In the case of Intoto Software India Pvt. Ltd., (supra) this comparable case was analysed and held as under: "17- Having heard both parties and having considered the material available on record, we find that there is no dispute that Assessee has accepted the Exensys Software Solutions

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Limited as one of the comparable companies when proposed by the TPO. However, the fact that there is an amalgamation of two companies i.e., ( Exensys Software Limited and Holool India Limited, the results of which, has resulted in high operating margin cannot be lost sight for. It has been held in many cases by this Tribunal as well as the Higher Forums that to compare a company with another company, both the companies have to be brought on par with each other after making the necessary adjustments wherever necessary and possible. However, where there are extraordinary events such as this, then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event, then such company cannot be considered as a comparable. The objections to this company by Assessee are made for the first time before the Tribunal. The Tribunal being the final fact finding authority is bound to take note of the objections of Assessee. As the material relied upon by the learned Counsel for Assessee clearly denotes that there is an extraordinary event which has resulted in the high operating margin of the company, we deem it fit and proper to remand this issue to the file of the Assessing Ojficer/TPO for reconsideration. If it is found that there is an amalgamation of Exensys Software Limited and Holool India Limited and formed as one entity viz., Exensys Software Solutions Limited. during the relevant previous year and the financial result is the combined result of these two companies, then, we direct the Assessing Officer/Tl'O to exclude this company from the list of comparables."

4.1.a.It is found that in the case of Thirdware Solutions Ltd.,the company had reported export at Rs.14.74 crores and that no details were available about the nature of the exports. Besides, as per the notes on accounts it was engaged in trading and development of software. Segmentals of the company,were not available in the financials and the sale figures include sale of license amounting to Rs.2.72 crores.In short,it is functionally different from the assessee under consideration.In the case of DE Shaw India Software (P.) Ltd. (supra), the Tribunal has held as under:- “9. Having considered the submissions of the parties and examined the record, we find merit in the submissions of learned AR with regard to non-comparability of various comparable companies selected by the TPO. On a perusal of the facts on record as well as order of TPO it is clear that assessee is purely a software development service provider, that too to its AE only. Thus, assessee is a captive/contract service provider. As can be seen, comparability of aforesaid comparables were considered in cases of various other purely software development service providers like assessee for the same assessment year. Coordinate benches of this Tribunal in the above referred cases after examining different aspects have held these companies as uncomparable to a purely software development service provider. The finding of the coordinate bench in case of Ness Innovative Business (P.) Ltd. (supra), with regard to some of the comparables for the same assessment year is extracted hereunder for ready reference: 5

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4.1.b.From the Directors Report of Foursoft Ltd. it is found that it was engaged in develop - ing innovative software products, providing consultancy services to the logistic and supply chain management market place using advance Web Technology, that the company’s revenue are principally from licenses sale of products, that the sale included AMC and license of Rs.3.02 crores, that no segmental are available about the sales.While deciding the case of Intoto Software India Ltd.,the Tribunal has excluded it from the list of comparables.

4.1.c.In case of Flextronics Ltd.it is found that the company is an end to end provider of communication products,services and solutions to network equipment providers,that it had incurred expenditure of Rs.26.30 crores under the head R&D, that segmentals of the company

17&341/M/12-CA India Technologies P.Ltd. are not available.Considering it functionally different,the Tribunal has excluded it from the list of valid comparables in the cases of Intoto Software India (P.) Ltd.(supra),DE Shaw India Software(P.)(India)Ltd.(supra).

4.1.d.Finally,we would deal with the last comparable objected to by the assessee, i.e. Compulink System Ltd..It is found that Compulink had reported revenue from services and products.However,in the financials segmentals were not provided by it.It is also found that company is engaged into providing software development services project management training and consultancy services,that it was also earning income from software licences. Therefore,in the absence of segmental accounts,Compulink cannot be taken as a comparable.

4.1.e.We find that Infosys Technologies Ltd. and Satyam Computer Services Ltd. were excluded from the list of comparables in the cases of Intoto Software India(P.)Ltd.(supra) and Textron Global technology Centre(P)Ltd.(supra).As far as Sankhya Infotech Ltd. and Geo - metric Software Solutions are concerned,we find that Tribunal had held,in the matters relied upon by the AR,that both were functionally different from the assessee and in both the cases segmentals were not available.In this regard we would like to refer to the cases of DE Shaw Software(supra)and SAP LABS India)(P.)Ltd.(44SOT156).Considering the above,we are of the opinion,that FAA had rightly excluded the above mentioned four comparables from the final list of comparables.

4.2.In our opinion working capital adjustment had to be considered for selecting the valid comparables.In the cases of Capgemini India(P.)Ltd.(ITA/540/Mum/2014) and Mersk Global Services India (P) Ltd.the Tribunal has held that for a valid comparability working capital adjustment is a pre-condition.Therefore,we are of the opinion that FAA was not justified in not giving working capital adjustment while deciding the appeal.

4.3.We find that if the five comparables objected to by the assessee are taken out of the list of comparables and four comparables namely Infosys,Satyam,Sankhay and Geometric are excluded from the list,the margin would be 14.70%.The margin shown by the assessee is 15.41% for the year under consideration.Therefore,we hold that the transaction entered into by it was at arm’s length.Accordingly,reversing the order of the FAA,we hold that out of the final list of comparables five comparables,namely ESSL,Thirdware Solutions Ltd.,Foursoft, Flextronics Ltd. and Compulink System Ltd.have to be excluded.We also hold that the FAA 7

17&341/M/12-CA India Technologies P.Ltd. had rightly excluded four comparable i.e. Infosys Technologies Ltd. and Satyam Computer Services Ltd.,Sankhya Infotech Ltd.and Geometric Software Solutions from the final list of valid comparables. Accordingly,effective ground of appeal,raised by the assessee with regard to comparables is allowed and ground raised by the AO,against the order of the FAA about excluding four comparables,is dismissed.

5.Next Ground of appeal,raised by the assessee is about disallowance of bad debts of Rs.8.74 lakhs.During the assessment proceedings, the AO found that the assessee had written off bad debts amounting to Rs.63.88 lakhs.He directed the assessee to file details of debtors amounts written and the reasons for writing it off. Vide its letter dated 10.12.2008 the assessee filed the details in that regard.After considering the same, he observed that the assessee had written off bad debts in the companies like WIPRO,TCS, L&T Infotech,which were cash rich companies, that the assessee had failed to establish that debts had become bad.

5.1.Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority(FAA).Before him, it was argued that it had written off bad debts of Rs.63,88,690/- ,that it had debited the same under the Schedule-13 of the P&L Account as bad debts written off,that after writing off the assessee was entitled to claim deduction .It relied upon cases of TRF Ltd.(2010-TIOL-15-SC-IT)and Oman International Bank (313 ITR 128),that mere writing off of bad debts was sufficient for claiming deduction u/s.36(1)(viii). After considering the assessment order and the submission of the assessee,he held that the assessee had written off bad debts in its books of account,that the AO had not disputed the said fact.Following the decision of the Hon'ble Apex Court in the case of TRF Ltd., he held that claim made by the assessee was allowed. However, he held that the amount of bad debts also included an amount of Rs.8.74 lakhs and the said amount pertained to non receipt of C- Forms from the customers, the assessee had not mentioned that while raising the Debit Notes it had offered the corresponding amount for taxation.Finally,he held that bad debts written off to the extent of Rs.8.74 lakhs was not allowable.

5.2.During the course of hearing before us, the Authorized Representative relied upon the cases of Harshad J. Choksi(349ITR250);Smita Conductors(152ITD417)and argued that the assessee would pay on behalf of the customers,that it has raised Debit Notes,that the expen -

17&341/M/12-CA India Technologies P.Ltd. diture was incurred for carrying out business.Alternatively,it was argued that expenditure should be allowed as business loss.The DR relied upon the order of the FAA.

5.3.We have heard the rival submissions and perused the material on record.We find that incurring of expenditure by the assessee is not in doubt.If it cannot be allowed as bad debts it has to be allowed as business loss.In the case of Harshad Choksi(supra),the Hon’ble Bombay High Court has held as under: “Section 28 of the Income-tax Act, 1961, imposes a charge on the profits or gains of business or profession. The expression “profits and gains of business or profession” is to be understood in its ordinary commercial meaning and does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Supreme Court in the matter of BADRIDAS DAGA v. CIT [1958] 34 ITR 10has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. There is no bar in claiming a loss as a business loss, if it is incidental to carrying on of a business. The fact that conditions for deduction as bad debt were not satisfied by the assessee would not prevent him from claiming deduction as a business loss.” Respectfully,following the above and accepting the alternate plea of the assessee,we decided the second effective ground of appeal in its favour.

6.Third Ground of appeal,raised by the assessee,is about enhancement of Rs.1.25crores on account of change in method of accounting. It was brought to our notice that identical issue was deliberated upon by the Tribunal,while deciding the appeal for the earlier years(ITA.s 8376-8106/Mum/2011 and8218/Mum/2010- AY.s.2004-05 and 2006-07,dt. 2015).We would like to reproduce the relevant portion of the said order of the Tribunal and it reads as under:- “3.Next ground i.e. ground no.2 is on account of addition of Rs.19,96,50,209/- on account of change in the method of accounting.In order to determine Arm’s 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 the Act,who passed an order on 05.12. 2006,u/s.92CA(3) of the Act, making an adjustment in respect of the Royalty payable to its Associated Enterprise ('AE').On completion of the scrutiny assessment, an order u/s.143(3) of the Act was passed,assessing the total loss of the 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 payable 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 change in method,that prior to AY.under appeal the assessee recognised its revenue depending 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 purchased/licensed but also the 9

17&341/M/12-CA India Technologies P.Ltd. maintenance of the software and unspecified future software products i.e.new release of a product,that under terms of the agreement it was required 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 could 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 straight 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 deferred the sale of software licence and had recognised only Rs.5.33 Crores as revenue on account 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 the 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 Alkali Chemicals and Fertilisers Ltd.(227 ITR 172)and held that AS did not supersede the taxing provisions. 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 total 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 amount of Rs.19,96, 50,209/-was reflected as Advance Billings under the head Current in the Balance 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 Sheet,that deferred revenue was offered to tax in subsequent year/s depending upon the tenure of the contracts.The assessee claimed that it had changed method of accounting for recognising 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.2004-05 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 period 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 paid to CAII in respect of the revenues considered for the year only and the balance royalty was considered as Prepaid Royalty under the head Loans and Advances,that method of accounting was changed to converge with the AS prescribed by the ICAI.The FAA held that the change 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 company it paid royalty to the CIIA,that it was following a particular method of accounting from inception and was recognsing the income on sale of software for that particular year,that during the year under appeal it started recongnising its income on straight line method.There is no doubt that the change in method of accounting for bona fide purpose has been accepted 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 is 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 or 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 bona fide of the change.Before the FAA,it was contended that change was made in accordance with 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 field. In response to the same the assessee submitted as under : “You would appreciate that the accounting for software licenses and maintenance support depends upon various factors.Further, in the published accounts of the companies it was very

17&341/M/12-CA India Technologies P.Ltd. 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. However considering the competitive business of 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 recognized over the contract term base of percentage of services that are provided during the period compared 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 the parent company and supplies updates to the customers during the period of linence.In the fast 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 contracts entered in to by the assessee and we do not find that same is of the nature which could 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 assessee 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 proceedings,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 02.08.2011.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 consideration, the appellant had changed its method of accounting for recognizing revenue from license fee and maintenance contract to Straight Line basis such that revenue was recognized rateably over the period of contract. As per the contract of sale of software with the customers the appellant was required to provide active maintenance charges consisting of operational support and assistance for updated versions,improvisation and enhancement to the product at no extra cost to the customers,as regards the specific costs incurred by the appellant for the subsequent upgrades of the license sold during the year, it is submitted that the appellant does not maintain project/contract wise accounting records.Therefore,any costs specific to the update of the contract and an improvement was not ascertainable. (emphasis supplied) 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 revenue 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 regard 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 proved.In the name of applying AS, revenue earned or accrued in a particular year should 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 principle without furnishing the details about the expenditure actually incurred does not serve any useful purpose. Straight line method, matching-principle and principles governing AS cannot be applied in air-their application needs hard facts.In the case before us,the assessee has raised

17&341/M/12-CA India Technologies P.Ltd. several theoretical issues,but has not proved as to how the theory,relied upon by it,was applicable to facts. Paying of taxes in subsequent years or showing corresponding royalty payment made to the parent company cannot be the basis for deferring the revenue from the year under appeal to subsequent years. 3.b.In the case under appeal,the receipt of income as well 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 improvisation of software - it was not warranty. Even in the matter of warranty,after the case of Rotork Controls India P.Ltd. (314ITR62)things have become very clear-it talks of historical trend.During the course of hearing before us.the assessee had not given any indication about the expenditure incurred 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 adopted by it would fall in the category which 'tends to distort the picture for the purpose of taxable income 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 could 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 the member for one week every year till the currency of membership. We find that in the case under appeal there was tenure of license/product but there was no certainty that in every subsequent year some determinate service had to be provided by it,that there was no determined/committed expenditure which the assessee was required to incur in the future years towards the corresponding share of revenue,that the indeterminate event of providing of updates and services as and when the they were developed which had been in keeping with the industrial norm.The assessee had no right to postpone 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 assessee was following project completion method,whereas in the case under appeal the assessee had changed method of accounting deferring more than 75% of its revenue to future period perpetually. 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 facts of the case under consideration are different from those cases.We agree with him.Therefore,we hold 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.” Respectfully,following the above order of the Tribunal,we decide third ground against the assessee. 7.We find that rest of the Ground raised by the assessee are consequential in nature and hence are not being decided.

8.Second effective ground of appeal,raised by the AO is about payment of royalty by the assessee to its AE,amounting to Rs.15.88 lakhs.During the assessment proceedings the AO found that CA Management Inc.had entered into software distribution agreement with CA India,that as per the agreement CA India was required to pay an annual royalty on all amounts invoiced at a rate of 30% of the invoiced amounts, that during the year under 17&341/M/12-CA India Technologies P.Ltd. consideration royalty was computed at Rs.7.60 crores,that for computing the ALP the assessee had used a US Research data base and assigned a rate of royalty for sale of software products in the selected agreements range of 40% to 80%. Before the TPO it was argued that CAMI had entered into a similar distribution agreements with Group companies in the various countries, that such agreements provided for royalty rate of 30% .After considering the submission of the assessee the TPO made an adjustment of Rs.15.88 lakhs with regard to payment of royalty.

8.1.During the appellate proceedings,the assessee made elaborate submissions before the FAA and referred to the order of the Tribunal delivered for AY.s 2002-03 and 2003-04.After considering the same,the FAA held that there was no justification for the addition made by AO for royalty payment in view of the order of the Tribunal for the earlier years.

8.2.Before us the DR stated that matter could be decided on merits.The AR supported the order of the FAA. We find that the Tribunal had decided the issue of royalty as under : “xx.That the Appellant contends that write off of the, bad debts cannot be the subject matter for determining the arm's length price; as to the power of TPO is concerned. Merely because the royalty payments,were relating to the product sold by the Appellant to its clients for which payment could not be recovered cannot be the consideration before the TPO for determining the arm's length price of international transaction. xxxi. That the above view has been upheld by the Hon'be ITAT in the Appellant's case for AY 2002-03 and AY 2003-04 on similar facts has deleted the additions made by the TPO and ruled in favour of the Appellant. The relevant extract of the order is reproduced as under: "The manner in which the ALP is to be determined by any of the method prescribed under Sec.92C is provided in Rule l0B of the I.T. Rules, 1962. After examining parameters in Rule l0B, it can be seen that bad debts written off cannot be factor to determine the arm's length price of any international transaction.In our opinion,TPO has exceeded his limitation by following the method which is not authorized under the Act or rules. We, therefore, hold that Arms Length Price determined by the TP adopted by the Assessing Officer to the extent of royalty payable to the Ca Inc Management, USA is not as per the procedure prescribed and same cannot be sustained.We,therefore,direct the Assessing Officer to adopt the Arms Length Price of the royalty payable to CA Inc management, USA as declared by the assessee in both the years.” xxii.Accordingly,it has been contended that the book value of the said international transactions be held to be the arm's length price of the transaction, and the additions

17&341/M/12-CA India Technologies P.Ltd.