Case Law Details
DCIT Vs Red Hat India Pvt. Ltd. (ITAT Mumbai)
Introduction: The case of DCIT vs. Red Hat India Pvt. Ltd. before ITAT Mumbai revolves around the intricate matter of revenue recognition and compliance with Accounting Standard-9 (AS-9).
Detailed Analysis: Red Hat India Pvt. Ltd. (RHIPL) operates in the business of marketing, promotion, and distribution of “Red Hat Subscriptions” that offer support services for Red Hat Open-Source Software. These subscriptions enable customers to access and modify the source code as per their needs. The dispute in this case pertains to the assessment year 2011-12.
The Assessing Officer (AO) observed that out of the total revenue generated by RHIPL, a significant portion was declared as “Unearned Revenue.” This unearned revenue was to be recognized in subsequent years when RHIPL would provide the associated services. The AO added this unearned revenue to RHIPL’s total income, leading to an assessment.
In response to the AO’s actions, RHIPL contended that they followed the “completed service contract method” of revenue recognition, aligning with Accounting Standard-9 (AS-9) issued by the Institute of Chartered Accountants of India (ICAI). They argued that the practice of recognizing revenue as unearned was in line with AS-9, which allows for revenue to be recognized either on a straight-line basis over a specified period or when significant uncertainties exist about the amount of consideration to be derived.
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