The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the revenue recognition method adopted by Red Hat India Pvt ltd. cannot be disturbed when duly supported by the mandate of Accounting Standard-9.
The assessee, Red Hat India Pvt ltd (RHIPL) engaged in the business of marketing, promotion, and distribution of “Red Hat Subscriptions” to customers. The “Red Hat Subscription” enables the subscriber to avail support services for Red Hat Open-Source Software. Open-source software grants every user free access to the source code and enables the user to modify/customize the same to suit its requirements.
Assessee filed its return of income declaring NIL income after set-off of brought forward losses of Rs. 25,40,93,477/-. Thereafter, the assessee filed a revised return again at NIL, but after set-off of brought forward losses of Rs. 30,36,05,076/- Case of the assessee was selected for scrutiny.
It was observed by the Assessing Officer that out of a total revenue of Rs. 65,61,86,084/- assessee declared Rs. 35,53,56,525/- as the current year’s revenue and a balance amount of Rs. 30,08,29,559/- was being carried forward through balance sheet as “Unearned Revenue” for which the services would be rendered by the assessee in future years.
The Assessing Officer added this amount of “Unearned Revenue” to the total income of the assessee and the assessment was completed. But the Commissioner of Income Tax (Appeal) [CIT (A)], deleted the addition made by the Assessing Officer and allowed the appeal of the assessee vide his order passed under Section 250 of the Income Tax Act, 1961.
During the assessment proceedings, the assessee vide its submission confirmed that they are following the “completed service contract method” and relied upon the Accounting Standard-9, issued by the Institute of Chartered Accountants of India. Whereas vide para 12 of the CIT (A)’s order, it is mentioned that the “Appellant has never claimed Completed Service Contract Method” as an appropriate method to recognize revenue from subscription services. Rather, it is the Percentage Completion Method for recognition of revenue, which is applicable to the facts of the appellant.”
It was further stated that “Assessee has deferred its revenues, but has charged all the related expenses- training cost, marketing cost and other costs attributable to the sales without matching it with the revenue in the year of sale, which is in violation of “Matching Principle”.
The Two-member bench comprising of Amit Shukla (Judicial member) and Gagan Goyal (Accountant member) held that the Assessing Officer had clearly erred in changing the consistently followed method of revenue recognition adopted by the assessee. There were due merits of the revenue recognition adopted by the assessee which is duly supported by the mandate of AS-9.
There is a settled law that unless there is a change in the facts and circumstances or it can be said that the earlier adopted system was wrong, the revenue recognition method cannot be disturbed. Therefore, the order of the Assessing Officer was set aside and the addition was also deleted. Thus, the appeal of the revenue was dismissed.
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