Revenue recognition for subscription receipts and open-source support payments: no royalty or fees for technical services absent copyright transfer or know-how.

Subscription receipts for services to be performed over a future period were to be recognised under the assessee's consistently followed revenue recognition policy, supported by AS-9 and the percentage completion method; because that method had been accepted in earlier years and no defect or change in facts was shown, the addition for unearned revenue was not sustainable. Payments for Red Hat subscriptions were not royalty or fees for technical services under the Act or the India-Singapore DTAA, because the arrangement covered open-source subscription support and did not transfer any copyright, licence, or right to exploit software, nor did it make available technical knowledge, skill, experience, process, or know-how.

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Issues: (i) whether unearned revenue from subscription services was taxable in the year of receipt instead of being recognised over the subscription period; (ii) whether payments made for Red Hat subscriptions for resale were royalty or fees for technical services under the Act and the India-Singapore DTAA.

Issue (i): whether unearned revenue from subscription services was taxable in the year of receipt instead of being recognised over the subscription period.

Analysis: The assessee had consistently followed a revenue recognition policy under which subscription receipts relating to services to be performed in future years were carried as unearned revenue and recognised over the subscription term. The accounting treatment was supported by Accounting Standard 9 and the percentage completion method, and the facts showed that services such as maintenance, troubleshooting, updates, and support continued throughout the subscription period. The tax authorities treated the entire receipt as accrued income in the year of sale, but the Tribunal noted that the method had been regularly followed and had already been accepted in the assessee's own earlier years. In the absence of a change in facts or a demonstrated defect in the method, the revenue recognition adopted by the assessee could not be disturbed.

Conclusion: The addition on account of unearned revenue was not sustainable and the issue was decided in favour of the assessee.

Issue (ii): whether payments made for Red Hat subscriptions for resale were royalty or fees for technical services under the Act and the India-Singapore DTAA.

Analysis: The Tribunal found that the underlying software was open source and freely available, and that the payment was for subscription support services rather than for any copyright, licence, or right to use software. The subscription arrangement did not transfer any copyright or permit exploitation of a copyrighted work; at most, it enabled customers to obtain installation, maintenance, troubleshooting, and related support. The foreign supplier did not make available technical knowledge, skill, experience, process, or know-how to the assessee or its customers. On that basis, the payment did not fall within the definition of royalty under the DTAA or the Act, and it also did not constitute fees for technical services.

Conclusion: The payment was not royalty or fees for technical services and the revenue's challenge failed.

Final Conclusion: The assessee succeeded on the core controversy concerning deferred subscription revenue and the revenue's appeal on royalty/FTS treatment failed, resulting in a partial allowance of the assessee's cross appeals and dismissal of the revenue's cross appeals.

Ratio Decidendi: Where subscription receipts relate to services to be rendered over a future period, income is to be recognised in accordance with the consistently followed and supportable revenue recognition method, and payment for access to freely available open source subscription support does not amount to royalty or fees for technical services absent any transfer of copyright or making available of technical knowledge.

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