2015 (4) TMI 709 - AT - Income Tax

Ad-hoc addition on account of advance billing / deferred revenue - Tribunal deleted such additions in earlier years - Foreign exchange loss recongnised on capitalised assets i.e. computer software - Held that - There is nothing like device to defer payment of taxes due but as per the recognized method of accounting of matching revenue with cost, the income accrues only in the subsequent year when such services are provided. This is in form of a provision for warranty claims which is also recognized by Hon ble Delhi High Court in the case of Vintex Corporation P. Ltd. 2005 (5) TMI 54 - DELHI High Court , wherein it was held that provision for warranties embedded in the sale price is an ascertained liability and to that extent, revenue need not be recognized.We find no good reason to deviate from the view taken as facts remain the same. Accordingly following the precedent, we hold that the amount treated as deferred revenue is not to be brought to tax in the year under consideration and is to be taxed in the year when such services are rendered or recognised as income by the assessee. Foreign Exchange loss - Held that - since the amount payable is in foreign currency and not in India rupees, therefore, loss occasioned due to upward revision in the rate of exchange was to be borne by the assessee was allowable. On the reading of the agreement, we find that it is rightly interpreted by the Tribunal and, therefore, no questions of law arises. - Decided in favour of assessee.

Summary

Issues Involved:
1. Ad-hoc addition of Rs. 4,08,32,659 on account of income from maintenance enhancement and support services (Advance Billing / Deferred Revenue).
2. Disallowance of Rs. 1,08,33,210 on account of Foreign Exchange Loss incurred on restatement of trading liability.

Issue-wise Detailed Analysis:

1. Ad-hoc Addition of Rs. 4,08,32,659 on Account of Income from Maintenance Enhancement and Support Services (Advance Billing / Deferred Revenue):

The Assessee contested the ad-hoc addition of Rs. 4,08,32,659 made by the A.O. for the Assessment Year 2007-08. The A.O. had treated the advance billing shown as a liability as income for the current year, arguing that there is no provision for deferred income. The Assessee explained that revenue from maintenance, enhancement, and support services is recognized over the period on a monthly basis, in accordance with accounting principles and standards. The Assessee's method of recognizing revenue from such services has been consistent, and similar additions in earlier years were deleted by the Tribunal.

The Tribunal, considering the precedent set in earlier years (A.Y. 2001-02 to 2003-04), found that the Assessee's method of recognizing revenue over the period of the contract was appropriate. The Tribunal referenced the Delhi High Court case of Uttam Singh Duggal & Co. Vs CIT, which recognized the principle of matching revenue with cost. The Tribunal held that the amount treated as deferred revenue should not be taxed in the year under consideration but in the year when services are rendered or recognized as income by the Assessee. Consequently, the Tribunal allowed the Assessee's ground and deleted the addition.

2. Disallowance of Rs. 1,08,33,210 on Account of Foreign Exchange Loss:

The A.O. disallowed the foreign exchange loss of Rs. 1,08,33,210, treating it as capital expenditure because it was incurred on the purchase of computer software, which was capitalized by the Assessee. The DRP upheld this addition. The Assessee argued that this issue had been decided in its favor in earlier years, referencing the Tribunal's consolidated order for A.Y. 2001-02 to 2003-04 and the Delhi High Court's decision.

The Tribunal noted that the Assessee's agreement specified that the purchase price for computer software was to be paid in foreign currency, and the loss due to exchange rate fluctuations was allowable. The Tribunal referenced the Delhi High Court's decision, which confirmed that the agreement was correctly interpreted by the Tribunal and that the foreign exchange loss was allowable. Therefore, the Tribunal allowed the Assessee's claim and deleted the disallowance.

Conclusion:

The Tribunal allowed the appeal of the Assessee, deleting both the ad-hoc addition of Rs. 4,08,32,659 on account of deferred revenue and the disallowance of Rs. 1,08,33,210 on account of foreign exchange loss. The order was pronounced in the Open Court on 13 March 2015.