2023 (1) TMI 158 - AT - Income Tax

Unearned revenue like subscription services - assessee has been following consistent method of percentage completion as per the AS-9-Revenue Recognition whereby income is recognized over a period of time following the matching concept of accounting - CIT (A) too has confirmed the reasoning of the AO and independently referred to the Reseller Agreement between assessee and Singapore entity - After referring to AS-9 observation, he held that assessee is selling the access code only, therefore it does not hold merit. Accordingly, the entire revenue recognized by the assessee in the year of sale and not deferred over the period of contract - HELD THAT - Tribunal in AY 2016-17 2022 (2) TMI 1283 - ITAT MUMBAI following the assessee s own case for AY 2012-13 order has accepted the assessee s contention and held when due taxes have been deducted and paid to the Income Tax Authorities while making such payment to Red Hat US in terms of the agreement entered into between the assessee and the Red Hat US in accordance with the consistent revenue recognition policy adopted by the assessee, upheld by Tribunal in assessee s own case for earlier years, addition made by the Ld. AO/DRP on account of unearned revenue qua subscription services is not sustainable in the eyes of law. TDS u/s 195 - assessee has made remittance to Red Hat Singapore for the import of software and according to him, the said payment is in the nature of Royalty‟ not only under the provisions of section 9(1)(vi) and also Fees for Technical Services‟ u/s 9(1)(vii); but as well as under Article 12 of India-Singapore DTAA - HELD THAT - As already noted the facts as above. It is evident that the Red Hat Subscriptions is purely for support services and it is open source software which is freely available after downloading from variety of website and no licence fees for the use of right to such software is charged. In fact no where it is discernable from records whether there was any kind of licence agreement for open source use of software. It is also not the case of AO that there is some kind of license which subscriber has to agree. In fact the software is available for free. There is no subscription for the use of software by the subscribers either to the assessee or Red Hat Singapore. The payments in question is made by the user of the Red Hat Subscriptions for the purpose of availing convenient installation, ongoing maintenance and support services provided by Red Hat engineers to the users of Red Hat Subscriptions and not towards Red Hat software. Thus, the payment does not towards sale of software which is freely available in the public domain. Therefore, in terms of Article 12(3) of India- Singapore DTAA it is not recognized royalty. Payment cannot be brought under the purview of Article 12(4). Thus, we agree with the reasoning and findings of Ld. CIT(A) that the transaction involved is free sale and the amount paid to Red Hat Singapore for supply of Red Hat Subscriptions is the price of maintaining and support services and not the price of any kind of licence granted. Nowhere the Red Hat Singapore has granted the right or permiting to download the software and there is no licence is payable to use as subscription. Thus, the order of Ld. CIT (A) is confirmed and the ground raised by the revenue is dismissed.

Issues Involved:
1. Taxability of unearned revenue disclosed in the balance sheet.
2. Levy of interest under sections 234A, 234B, 234C, and 234D.
3. Liability of education cess.
4. Validity of reopening under section 147.
5. Whether payment made by the assessee to its AE for purchase of subscription services for reselling constitutes "royalty" under section 9(1)(vi).

Detailed Analysis:

1. Taxability of Unearned Revenue
The primary issue in the assessee's appeal was the taxability of unearned revenue disclosed in the balance sheet as income of the current year. The assessee followed the percentage completion method as per AS-9, recognizing revenue over time. However, the AO contended that the assessee, being merely a distributor, should recognize revenue at the time of sale of subscription rights. The AO added Rs. 19,80,033/- as income, arguing the assessee violated the matching concept by deferring revenue recognition while charging all expenses in the year of sale. The CIT(A) confirmed this view, but the Tribunal, referencing its own decision for AY 2016-17 and earlier years, upheld the assessee's consistent revenue recognition method under AS-9. The Tribunal found that the AO erred in changing the method without any change in facts or circumstances, thus deleting the addition.

2. Levy of Interest under Sections 234A, 234B, 234C, and 234D
The assessee challenged the levy of interest under sections 234A, 234B, 234C, and 234D, which were considered consequential in nature. The Tribunal dismissed these grounds as they were dependent on the outcome of the primary issue of unearned revenue.

3. Liability of Education Cess
An additional ground regarding the liability of education cess was raised but not pressed during the hearing. Consequently, this ground was dismissed as not pressed.

4. Validity of Reopening under Section 147
For AY 2006-07, the assessee challenged the validity of reopening under section 147, which was also not pressed during the hearing. Hence, this ground was dismissed as not pressed.

5. Payment to AE for Subscription Services as "Royalty"
The revenue's appeal questioned whether payments made by the assessee to its AE for subscription services constituted "royalty" under section 9(1)(vi) and Article 12 of the India-Singapore DTAA. The AO classified these payments as royalty and disallowed them under section 40(a)(i) due to non-deduction of TDS. The CIT(A), however, concluded that the payments were for support services related to open-source software, freely available in the public domain, and not for the use of any copyright. Therefore, these payments did not constitute "royalty" or "fees for technical services" under the DTAA or the Act. The Tribunal upheld the CIT(A)'s decision, noting that the payments were for maintenance and support services, not for any license or right to use software, thus confirming the non-applicability of royalty provisions.

Conclusion:
The Tribunal allowed the assessee's appeals regarding the taxability of unearned revenue and dismissed the revenue's appeals concerning the classification of payments as royalty. The decisions were consistent with prior rulings and upheld the assessee's accounting practices and revenue recognition methods. The issues of interest levy, education cess, and reopening under section 147 were dismissed as either not pressed or consequential.

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