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May 5, 2022

Advance for DTH services to be taxed when services are rendered

by CA Shivam Jaiswal in Income Tax

Advance for DTH services to be taxed when services are rendered

Facts and Issue of the case

The appeals by Revenue for Assessment Years [AY] 2011-12 to 2014-15 arises out of common order dated 27.04.2018 passed by learned Commissioner of Income Tax (Appeals)-14, Chennai in the matter of assessments framed by Ld. AO u/s 143(3). The facts as well as issues are common and the impugned order is also common. The grounds taken by the revenue in AY 2011-12.

The facts in case record for AY 2011-12 are that the assessee being resident corporate assessee is stated to be engaged as ‘Direct To Home’ (DTH) satellite platform operator and offers DTH services in India. During assessment proceedings, it transpired that the assessee has shown deferred income of Rs.13586.11 Lacs under the head ‘current liabilities’. It was explained that the assessee, as DTH service provider, is engaged in aggregation of various broadcast content and providing DTH services enabling the customers to view channels / services uninterruptedly directly at home. For the said purpose, broadcast signals are downloaded from various satellites from where they are transmitted, aggregated, encrypted and uplinked through a single stream to be downloaded through an individual dish at the customer premises. The signals are then decoded with the help of a set-top box which is authorized to receive the channels that the customers subscribe.

It was further submitted that the business model predominantly operate under prepaid model. The assessee receives subscription income from various customers in advance which would be on quarterly / half-yearly or annual basis based on the needs of the subscribers. The assessee, following consistent method of accounting since the commencement of business operations in AY 2008-09, recognizes the revenue based on the period i.e., up-to the end of the financial year and not on the basis of collection. The amount collected in advance is accounted as ‘deferred income’. If the broadcast does not happen then the advance money paid would be adjusted against future telecasts. When the assessee receives the amount, the same is credited to ‘deferred income account’ and thereafter, on daily basis, the income pertaining to that day is transferred from ‘deferred income account’ to the ‘subscription income account’ which is offered to tax in the Profit & Loss account. Thus, the amount outstanding in ‘deferred income account’, at any given point of time, represents only subscription relating to period beyond that date. The said accounting treatment was stated to be in line with the requirement of Accounting Standard-9 (AS-9) on ‘Revenue Recognition’ issued by The Institute of Chartered Accountants of India. This standard provide that the revenue received or billed should be deferred and recognized over a period of time where the items delivered vary in value from period to period.

Another plea was that the deferred income was unearned revenue. To offer the income, the income should have been accrued to the assessee during the previous year itself. The company’s right to receive the revenue arises only when the company is able to provide uninterrupted DTH signal. To ensure the same, the assessee would incur various costs such as content, entertainment, commissions, royalty, WPC licensing charges, NOCC charges and transponder fees to various agencies without which the assessee could not provide these services. These expenditures are booked and recognized only to the extent of that period for which the services are recognized and provided to the customers. Thus, the deferred revenue would accrue only when the assessee incurs the related input costs. However, rejecting the same, Ld. AO held that there was no liability for the assessee to refund the amount to the customers / subscribers and therefore, the income had accrued to the assessee during this year itself. Accordingly, the deferred income of Rs.13586.11 Lacs was added to the income of the assessee. Aggrieved, the revenue is in further appeal here.

Observation of the Court

After due consideration of factual matrix as enumerated by court in the preceding paragraphs, the undisputed fact that emerges are that the assessee provide DTH services to various subscribers. The assessee receives subscription amount on quarterly / half-yearly / annual basis and credit the same to ‘deferred income account’. From this account, the revenue earned, for each day, are transferred to subscription account which is offered to tax by way of credit to Profit & Loss Account. This method of accounting has consistently been followed by the assessee since commencement of business in AY 2008-09. The said method is also in line with the requirement of AS-9 issued by ICAI. The assessee follows the same treatment to input costs. The cardinal principal of taxing the income under mercantile basis of accounting is that the income should have accrued to the assessee. Mere advances could not be brought to tax. The amount lying in ‘deferred income account’, in assessee’s case, is nothing but advances received for rendering services in future period. Unless these receipts are held to be taxable under the statute, the same could not be brought to tax since only those incomes could be taxed which has accrued to the assessee during the year. In assessee’s case, these are unearned revenue and mere advances. The income would accrue to the assessee in future. To clothed the same as the income of the assessee during this year, is bereft of any merits. The argument that the money is never refunded to the subscribers, is not much germane to the issue since the subscription money paid by the subscribers is governed by the contractual terms between the assessee and the subscribers. Nevertheless, the said fact would not alter the position that this income was nothing but mere advances for rendering of services in future. Therefore, the impugned order could not be faulted with.

Court finds that similar is the view of the co-ordinate bench in the case of ACIT V/s M/s Sun TV Network Ltd. [ITA Nos.1515 & ors/Mds/2013 dated 31.10.2013; as relied on by Ld. CIT(A)]. The coordinate bench dismissed revenue’s appeal, under similar factual matrix, by observing that there was no illegality or irregularity in methodology adopted by the assessee in registering the revenue in the year of telecast. This decision has been followed by another coordinate bench in ITA No.1309/Mds/2017 dated 14.08.2017 for AY 2012-13 in the case of same assessee. The same has subsequently been followed in another order for AY 2013-14 also (ITA No.1243/Chny/2018 dated 20.11.2018). The copies of all these orders are on record. Court finds that same principal, as followed by us, has been followed by various benches of Tribunal in those cases.

The Ld. CIT-DR has sought distinction in the facts of the assessee as well as in the case of its sister concern. However, upon perusal of para- 11 of Tribunal’s decision in ITA No.1515 & ors/Mds/2013 dated 31.10.2013, we find that in that case the assessee was collecting fees towards sale of time slots in advance and recognized revenue only when the programs were broadcasted. It was the submissions of the revenue that the bills were raised and the monies were received by the assessee and therefore the receipts should have been offered to tax under mercantile system of accounting. However, rejecting the same, the bench held that the income generated by the assessee was offered as income in the year of broadcasting / airing the programs. The monies received were shown as deferred revenue in the year of receipt and offered as income in the year when the program is aired. Therefore no illegality or irregularity could be found in the methodology adopted by the assessee in registering the revenue in the year of telecast of programme. We find that the facts in the case of present assessee are quite similar. The subscription monies received in advance are treated as deferred income and offered to tax on day to day basis which is correct methodology of revenue recognition under mercantile system of accounting. Therefore, the submissions that this case law would not apply to the case of the assessee, could not be accepted.


On the given facts and circumstances, finding no infirmity in the impugned order, court dismissed the revenue’s appeal for all the years.


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