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TMI Blog2024 (12) TMI 856X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO. Comparable selection - Axis Integrated Systems Limited - Considering that this issue has been examined and decided in favor of the assessee in its own case of A.Y. 2014-15 [ 2021 (11) TMI 851 - ITAT MUMBAI] and the fact that there has been no change in the functions, assets, and risk profile of Axis Integrated Systems Limited in the impugned year vis- -vis previous year, we are of the considered view that this comparable should be removed from the final set of comparables. Adjustment on account of provision of sales and marketing support services - revenue recognition policy has been consistently being followed by the assessee over the years. This identical issue has also been dealt with by the Hon ble Delhi High Court in the case of CIT vs. Dinesh Kumar Goel [ 2010 (10) TMI 287 - DELHI HIGH COURT] by relying upon the decision of E.D. Sassoon Co. Ltd. [ 1954 (5) TMI 2 - SUPREME COURT] wherein the issue whether the customer had paid entire fee in advance on which services remained due to be rendered in succeeding years, such receipts could not be considered as income accrued in the year of receipts has been decided as there must be the right to receive the income on a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) disregarding the License and Service Agreement justifying the arm s length nature of transaction of payment of Royalty and Service fees ; c) misinterpreting the payment of service fees as a payment of royalty based on its own conjecture and surmises, and ignoring the explanations offered by the Appellant; d) disregarding the fact that the payment of service fee was in connection with the support provided by AE directly to the end customers of the Appellant; e) disregarding the fact that the Appellant acts as a limited risk distributor and earns assured margins on revenue in Subscription segment ; f) disregarding the fact that due withholding taxes were deducted on the service payment made to the AE; and g) Disregarding the remand proceedings directed during DRP proceedings, wherein the benchmarking was conducted based on the TNMM as the most appropriate method. 1.3 The Ld. AO and Hon ble DRP confirming the Ld. TPO s action erred on facts and in law in disregarding the Transactional Net Margin Method ( TNMM ) as the most appropriate method for determining the arm s length price of payment of service fees and applying the Other Method in contravention of Rule 10B of the Rules Adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) and Rule 10B(3) Additions on account of unearned revenue from subscription services of Rs. 21, 74, 74,822/- 2.1. The Ld. AO and Hon'ble DRP erred in not following the binding decision of this Hon'ble Income Tax Appellate Tribunal ('ITAT') vide order dated 10 April 2019 for A.Y. 2012-13 and A.Y. 2013-14 wherein on same set of facts, the Hon'ble ITAT has upheld the revenue recognition policy adopted by the Appellant in relation to revenue from subscription services; 2.2. The Ld. AO and Hon'ble DRP erred on facts and in law in making an addition of Rs. 21,74,74,822/- pertaining to subscription services and forming part of the 'unearned revenue , disclosed in the liabilities side of balance sheet of the Appellant, as income of the current year, without appreciating the fact that the impugned amount is in the nature of receipt of advance and is not chargeable to tax in the current year; 2.3. The Ld. AO has erred in observing that till A.Y. 2014-15, the Appellant was following completed service contract method and has changed its revenue recognition policy to percentage completion method for the subject year without taking cognizance of the fact that erstwh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the tax liability for the year; 2.9. The Ld. AO erred on facts and in law in levying excess interest under section 234B of the Act; 2.10. The Ld. AO erred on facts and in law in levying the interest under section 234A and 234C of the Act; 2.11. The Ld. AO erred on facts and in law in initiating penalty proceedings under section 274 read with section 271(1)(c) of the Act. 3. At the outset Shri Ajit Kumar Jain Ld. AR mentioned that all the issues raised in the present appeal are covered by the orders of Hon ble ITAT Mumbai in the case of assessee for A.Y. 2012-13, 2013-14, 2014-15 and 2016-17. 4. Brief facts necessary to adjudicate the controversy at hand is that Red Hat US is a provider of open-source solutions for internet computing. Open-source software typically grants every user free access to the source code and enables the customers to modify and customize the software to suit their requirements, unlike proprietary software where source codes are owned by developers. Once open-source software is downloaded, software users may require access to ongoing support services. The sale of 'Red Hat subscriptions' enable the customers to directly avail and access 24*7*365 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the income of the assessee: a. Disallowed the payment of service fees Rs. 46,96,83,748/- b. Adjustment under the sales marketing support service segment Rs. 76,42,971/- c. Adjustment under the software support segment Rs. 2,94,32,376/- and d. Addition on account of unearned revenue Rs. 21,74,74,822/- The additions made by the Ld. TPO/Ld. AO were confirmed by the DRP. The assessee taken each addition/adjustment made by the Ld. AO/TPO in the following paragraphs. Ground 1.1 - 1.3: Adjustment on account of payment of service fees:- 7. Ld. AR pointed out that the issue is squarely covered by the orders of the coordinate bench in assessee s own case, wherein on identical facts, the Hon'ble Mumbai ITAT has deleted the entire adjustment on account of payment of service fees. There has been no change in the functions, assets, and risk profile of the assessee in the impugned year and preceding three years viz. A.Y. 2012-13 (ITA No.1456/Mum/2017), A.Y. 2013-14(ITA No.727I/Mum/2017) and A.Y. 2014-15 (ITA No. 7210/Mum/2018). Ld. AR pointed out that the relevant judgments are available at Page No. 1520 and 1558 of the factual paper book filed by the assessee. The relevant extracts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aside the matter to Ld. TPO. Accordingly, we decline the request made by the Ld. DR. A.Y. 2014-15 ITA No. 7210/Mum/2018 5. As regards, ground No.1-1.3 adjustment relating to international transactions pertaining to payment of royalty and service fee. It is noted that identical issue was decided by this Tribunal in Assessee s own case for A.Y. 2012-13 and 2013-14. No distinguishing feature in the facts in the present year was pointed out by the revenue. It is also not the case that Hon ble jurisdictional High Court has reversed the order of the ITAT. In this view of the matter following the decision of the co-ordinate bench in Assessee s own case, we set aside the Transfer Pricing Adjustment (TPA), in this regard and direct the same to be deleted. 8. It is also pointed out by the Ld. AR that the revenue has not preferred any appeal before the Bombay High Court on the above issue and therefore the order of Hon ble ITAT has become final. Ld. DR could not controvert the findings of the coordinate bench as reproduced above. 9. We have considered the facts of the current year and the decision of the coordinate bench in assessee s own case as reproduced above. Since there are no distingu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the controversy involved in the present appeal is confined to ground number 1.7(c) granting of working capital adjustment and ground number 1.7(b) rejection of one of selected comparable company i.e., Axis Integrated Systems Limited. In this regard, reliance was placed on the Hon'ble Mumbai ITAT judgment in assessee s own case A.Y. 2016-17 ITA No. 1379/Mum/2021 placed in the case law compilation at page number 1, wherein on identical facts, the Hon'ble Mumbai ITAT has granted the working capital adjustment to the assessee under all 4 segments. The relevant extract is as under: 64 So we are of the considered view that the assessee is entitled for working capital adjustment. The Ld. TPO is directed to verify the computation furnished by the Assessee and accordingly provide the working capital adjustment to the Assessee in view of the settled principle laid down by the Tribunal, in order to provide level playing field for Assessee as well as comparable company 15. Considering that this issue has been examined and decided in favor of the assessee in its own case of A.Y. 2016-17 ITA No. 1379/Mum/2021 and the fact that there has been no change in the functions, ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We have perused the afore-mentioned orders passed by the co-ordinate Bench of the Tribunal in assessee s own case wherein the issue in question has been decided in favor of the assessee. The findings of the coordinate bench are reproduced below:- 61. Upon careful consideration we find that assessee has been following consistent system of revenue recognition. The assessee is inter alia engaged in the business of marketing, promotion and sale of 'Red Hat subscriptions' to customers in Indian sub-continent to avail support services that are for the open-source software system during the subscription period ranging from one to seven year, which is established by the special services agreement or contract. As per the consistent policy of revenue recognition, the assessee accounts for the revenue for service which would be performed in future year in its books as unearned revenue. Assessee's claim is that this practice by the assessee in respect of accounting for the sale of subscription is in accordance with Accounting Standard- 9 issued by ICA1. In support of this it is submitted that for rendering of service AS-9 provides that revenue should either be recognized on strai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognition method cannot be disturbed. We note that no such case exists here. In these circumstances, we set aside the order of the Assessing Officer and delete the addition in this regard. 20. The same view has been upheld by the tribunal in Assessee s own case via order dated 29.06.2021 for A.Y. 2014-15 and order dated 25.02.2022 for A.Y. 2016-17. 21. Moreover, revenue recognition policy has been consistently being followed by the assessee over the years. This identical issue has also been dealt with by the Hon ble Delhi High Court in the case of CIT vs. Dinesh Kumar Goel (197 Taxman 375) by relying upon the decision rendered by the Hon ble Supreme Court in the case of E.D. Sassoon Co. Ltd. vs. CIT (1954) 26 ITR 27, wherein the issue whether the customer had paid entire fee in advance on which services remained due to be rendered in succeeding years, such receipts could not be considered as income accrued in the year of receipts , has been decided by the Hon ble High Court by returning the following findings: Reading of the accounting standard makes it clear that the revenue is recognized only when the services are actually rendered. If the services are rendered partially, revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - which has not been granted in the Assessment Order. The assessee had filed an application under section 154 of the Act on 07 January 2020, which is pending disposal. Therefore, the AO is directed to decide this issue on the basis of evidence brought on record by the assessee by providing opportunity of being heard to the assessee. Consequently, the ground No.2.8 is decided for statistical purposes in favour of the assessee. Ground No. 2.9 25. The assessee has challenged the levying of interest under section 234B of the Act. Since this ground is consequential in nature, the AO is directed to deal with the issue in accordance with the law and ground is allowed for statistical purposes. Ground No. 2.10 26. The Assessee has challenged the levying of interest under section 234A of the Act. As per the facts mentioned by the assessee, it had filed its return of income ROI on 28.11.2015, which is within the statutory timelines as per section 139(1) of the Act. However, an interest of INR 29, 41,649/- has been charged as per the Assessment Order. The Assessee has also challenged the levying of interest under section 234C of the Act. As per the facts mentioned by the assessee, it had paid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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