Advance Income from AMC Contracts not Taxable Entirely on Invoicing: ITAT grants Relief to HP India Confirming Consistent Accounting Method, allows Proportionate TDS Credit [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore bench, ruled that income received in advance from annual maintenance contracts (AMC) should be recognized over the contract period in accordance with the mercantile system of accounting consistently followed by the assessee. The tribunal also directed that Tax Deducted at Source (TDS) credit must be allowed proportionately with the income recognized.

HP India Sales Pvt. Ltd. formerly Hewlett-Packard India Sales Pvt. Ltd., is engaged in the business of trading computer systems and rendering support services, filed its return of income for Assessment Year (AY) 2010–11 declaring ₹1,436,040,795 crore.

The return was scrutinized, and during the course of assessment, the Assessing Officer (AO) found that the assessee had raised invoices for AMC worth ₹5,193,828,624 but recognized only ₹. 16,26,70,559 in the accounts of the current year. The balance, ₹203,11,57,705, was shown as deferred income to be spread over subsequent years.

The Assessing Officer was of the view that once invoices were raised, the entire income had accrued in the relevant year and should be brought to tax. Accordingly, he added the deferred income back to the assessee’s total income.

The assessee went in appeal against the order of AO, where it produced detailed revenue recognized contract-wise out of the current year billing and from the opening balance of income received in advance and explained that income accrued only as and when services were rendered, not merely on invoicing.

It was also argued that this method of recognition had been consistently followed and accepted in earlier assessments particularly AY 2009-2010. The assessee also produced 30 sample AMC contracts and contract wise revenue recognition statements which were accepted as evidence.

The Commissioner of Income Tax (Appeals) [CITA(A)] agreed with the assessee’s position, holding that the method was consistent with mercantile accounting. The appellate authority directed the AO to grant credit of the TDS relevant to opening income received in advance balance which is offered for taxation during the year and also grant credit to only to the extent of income offered in this year by the assessee.

Aggrieved by the direction, the AO appealed stating that such grant of TDS credit is not proper as such appellate order is also pending before Tribunal. Therefore, the decision is premature as the issue has not become final

The Assessee represented by Percy Pardiwala, argued that the recognition of AMC income over the tenure of the contract was in line with accrual principles. He further argued similar addition has been deleted and TDS restrictions directed in the taxpayer's case for AY 2009-10 and in AY 2008-09. It was submitted that for AY 2008-09 no further appeal is filed by the taxpayer and revenue before ITAT.

The Revenue represented by Shivanand Kalakeri, failed to point out any infirmity in the method of accounting regularly followed by the assessee, or there is any qualification by the auditor or the directors.

The Bench consisting of Vice President, Prashant Maharishi and Judicial Member, Keshav Dubey, held that income accrues with the rendering of services under AMC, not merely on invoicing.The Tribunal the assessee had consistently followed this method, no addition could be sustained.

Therefore, the Income Tax Tribunal ruled that TDS credit is to be allowed proportionately with the recognition of income under Section 199 of the Income Tax Act, 1961 read with Rule 37BA.

Thus, the ground of appeal was dismissed by ITAT.

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