TMI Blog2023 (1) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subscr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge completion as per the AS-9-Revenue Recognition whereby income is recognized over a period of time following the matching concept of accounting. Besides this, assessee has also challenged levy of interest u/s 234A, 234B, 234C and 234D, which at the time of hearing Ld. Counsel submitted that are consequential in nature. 4. Apart from that, additional ground has also been filed by the assessee regarding the liability of education cess which again at the time of hearing has not been pressed. In AY 2006-07, assessee has also challenged the validity of reopening u/s 147 of the Act which too has not been pressed at the time of hearing; therefore, the same are dismissed as not pressed. 5. The effective issue in all the appeals pertains to taxability of the unearned revenue during the year; whereas in revenue s appeals, the sole issue raised is that Ld. CIT (A) has erred in allowing the assessee by holding that payment made by assessee to its AE for purchase of subscription services for reselling is not royalty‟ within the meaning of section 9(1)(vi). 6. As a lead case, we are taking up cross appeals for AY 2006-07 and our findings given therein will apply mutatis mutandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices, AS-9 provides that revenue should either be recognized on a straight line basis over the period in which the services are proposed to be rendered or in the event where the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts, revenue should be recognized when the sole or final act takes place and the service becomes chargeable. 11. The assessee enters into contracts with the customers to sell Red Hat Subscriptions. These subscriptions enable the customers to avail the services over a period of time as may be specifically agreed with its customers in the agreement. The primary responsibility to ensure that the end users receive the services under the Red Hat subscriptions dwells on the assessee. While the assessee may engage and compensate another party to perform the services, the assessee records the revenue from the subscription. In the event of any deficiency of services /non provision of services, the assessee would be liable to pay pro rata refund for unexpired period of subscription /re-performance of the services to its customers. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting standard requires that even in the case of guaranteed sale the revenue be recognized at the time of sale. AS-9 on Retail Sale- In the case of retail sales offering a guarantee of money back if not completely satisfied it may be appropriate to recognize the sale but to make a suitable provision for returns based on previous experience Even if, some expenditure are required to be done by RHIPL to perform its obligation as reseller, the same can be easily estimated. Further, there is no definite liability on the assessee as a reseller of the Subscription services. 6.19 In view of the above discussions, it is established that the assesses's method of accounting is not correct. Income is accrued to the assessee at the time of sale of access code. He is required to recognize the full revenue, immediately after his performance to the sale transaction is over i.e after the training of user and activation of access code. 6.20 By deferring the revenue recognition over many years and by charging the entire expenses corresponding to this revenue in the year of sale, the assessee has evaded its tax liability by reducing its Revenue and Profit. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bscription services are offered to tax on straight line basis under Long term basis and other current liabilities and is offered as income in the profit loss account in subsequent years and accordingly offered to tax. 75. For this subscription services the assessee also claimed to have entered into agreement with Red Hat US under which it is required to pay royalty and services fee to Read Hat US, computed as specific percentage of revenue recorded in profit loss account of the assessee for the respective years, available at page B239, B252 of the paper book of volume-2. At the same time due taxes have been deducted and paid with Income Tax Authority while making such payment to Read Hat US. 76. However, the AO treated such advances received (unearned revenue) as income of the year under assessment by rejecting the revenue recognition policy followed by the assessee. 77. We have perused the order passed by the co-ordinate Bench of the Tribunal in assessee s own case available at page B22 to B57 wherein this issue has been decided in favour of the assessee by returning the following findings: 61. Upon careful consideration we find that assessee has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that subscription package agreed may involve various support services which cannot be predeterminate. Recipient of service can raise queries numerous times during the tenure of agreement. Similarly, any correction bug fixes etc. can be required by the customers any time during the duration of the agreement. In the light of the above submissions in our considered opinion the Assessing Officer has clearly erred in changing consistently followed method of revenue recognition adopted by the assessee. In the facts and circumstances elaborately dealt with above, we find due merits of the revenue recognition adopted by the assessee which is duly supported by mandate of AS-9 and other parameters referred above. 63. We also note that it is also a settled law that unless there is change in the facts and circumstances or that it can be said that earlier adopted system was wrong, revenue recognition 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. 78. Moreover, revenue recognition policy has been consistently being followed by the assessee over the years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 17. Accordingly, following the aforesaid decision of Tribunal, we hold that addition made by the AO and confirmed by Ld. CIT (A) on account of unearned revenue like subscription services is not sustainable. Hence, Ground no. 2, 3, 4 is allowed. 18. The other grounds of revenue on account of levy of interest u/s 234A, 234B, 234C and 234D are consequential in nature, therefore the same are dismissed. 19. In other appeals of assessee for AY 2009-10 and 2010-11 also are exactly similar grounds, therefore, our decision as above are also applicable to these appeals as well. Therefore, these appeals are also allowed. 20. In so far as revenue appeal is concerned, the facts in brief are that AO noted that assessee has made remittance of Rs. 3,62,03,442/- 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the software has not been shared by the assessee with the Indian customers. The assessee has contended that this is a freely shared software and hence, the assessee has not charged any license fees for the use of or right to use such a software. The assessee has primarily charged for availing convenient installation, ongoing maintenance and support services. 6.5.2 It is important to note here that as the software under question is freely shared, the said software does not provide a right in the copyright to the users. The Red Hat subscriptions purchased by the assessee from Red Hat Singapore are facilitated with the subscription keys which facilitate in the recognition/identification of an eligible subscriber/end user to avail the support services. Any modification, customization, correction or updates are also provided by the assessee to the customers. 6.5.3 As per section 9(1)(vi) of the Act and Article 12 of the DTAA, payments of any kind in consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work is deemed to be royalty . Under the Copyright Act, 1957, a software programme constitutes a copyright . A right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayee (i.e. Red Hat Singapore), there cannot be any liability for withholding taxes on the payer (i.e. the assessee). This ground of appeal is allowed 23. We have heard both the parties at length and also perused the relevant material placed on record. We have 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. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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