Project completion method and bandwidth service payments: deferred income treatment and no TDS on service-based connectivity charges.

Revenue is recognised under the project completion method only on delivery or completion where that method is consistently followed and in conformity with section 145(2); invoices raised before services are rendered are therefore treated as deferred income, not accrued income, and the corresponding addition is not sustained. Payments for networking or bandwidth connectivity services, when made for services rather than for the right to use equipment, do not constitute royalty-related consideration and are not subject to tax withholding under the cited TDS provision; the related disallowance is therefore not sustainable.

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Issues: (i) Whether the addition made on account of invoices raised for services not yet rendered was rightly deleted by treating the receipts as deferred income under the project completion method. (ii) Whether the disallowance under section 40(a)(ia) for networking costs was rightly deleted on the ground that the payments were not subject to deduction of tax at source.

Issue (i): Whether the addition made on account of invoices raised for services not yet rendered was rightly deleted by treating the receipts as deferred income under the project completion method.

Analysis: The assessee followed the project completion method for software and consultancy income, with revenue recognised on delivery and completion of the project. The invoices were linked to payment milestones, while the income was recognised only when the relevant modules or services were delivered. The earlier decision in the assessee's own case had accepted that this method was a recognised method of accounting and was in conformity with section 145(2) of the Income-tax Act, 1961. The amount was also carried forward and taken into account in the subsequent assessment year, supporting the treatment as deferred income rather than accrued income.

Conclusion: The deletion of the addition was upheld and the issue was decided against the Revenue.

Issue (ii): Whether the disallowance under section 40(a)(ia) for networking costs was rightly deleted on the ground that the payments were not subject to deduction of tax at source.

Analysis: The payments were for networking or bandwidth connectivity services and the Tribunal had already held in the assessee's own case that such remittances were for services and did not amount to royalty or consideration for the right to use equipment. On the same reasoning, the TDS provisions were held not to apply to the impugned payments. Following the earlier coordinate bench decision and maintaining consistency, the disallowance could not be sustained.

Conclusion: The deletion of the disallowance was upheld and the issue was decided against the Revenue.

Final Conclusion: The Revenue's appeal failed in full, and the assessment order was not restored on either disputed ground.

Ratio Decidendi: Income is not to be brought to tax before accrual where the assessee, following a recognised project completion method consistently and in conformity with section 145(2) of the Income-tax Act, 1961, recognises revenue only on delivery or completion; and payments for bandwidth or networking services, when made for services and not for the right to use equipment, do not attract TDS as royalty-related payments.

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