TaxTMI 
TaxTMI 
2024 (12) TMI 856
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....g to determination of the arm's length price under Rule 10B of the Income-tax Rules, 1962 ('the Rules') 1.2 The Ld. TPO and Hon'ble DRP erred on facts and in law, in not appreciating the business model followed by the Appellant. In doing so, have grossly erred in: a) disregarding Hon'ble Mumbai ITAT's decision in Appellant's own case for AY 2012-13 and 2013-14 on the issue; b) disregarding the 'License and Service' Agreement justifying the arm's length nature of transaction of payment of 'Royalty' and 'Service fees'; c) misinterpreting the payment of 'service fees' as a payment of 'royalty' based on its own conjecture and surmises, and ignoring the explanations offered by the Appellant; d) disregarding the fact that the payment of 'service fee' was in connection with the support provided by AE directly to the end customers of the Appellant; e) disregarding the fact that the Appellant acts as a limited risk distributor and earns assured margins on revenue in 'Subscription segment'; f) disregarding the fact that due withholding taxes were deducted on the service payment made to the AE; and g) Disregarding the remand proceedings directed during DRP proceedings, wherein....
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....t in the Transfer Pricing documentation without providing any cogent reasons; b) rejecting various comparable companies selected by the Appellant in the Transfer Pricing Documentation and considering various comparable companies as comparable to the Appellant without appreciating that such comparable companies are functionally dissimilar to the Appellant; and c) disallowing relevant adjustments as per the provisions of Rule 10B(1) and Rule 10B(3) Additions on account of unearned revenue from subscription services of Rs. 21, 74, 74,822/- 2.1. The Ld. AO and Hon'ble DRP erred in not following the binding decision of this Hon'ble Income Tax Appellate Tribunal ('ITAT') vide order dated 10 April 2019 for A.Y. 2012-13 and A.Y. 2013-14 wherein on same set of facts, the Hon'ble ITAT has upheld the revenue recognition policy adopted by the Appellant in relation to revenue from subscription services; 2.2. The Ld. AO and Hon'ble DRP erred on facts and in law in making an addition of Rs. 21,74,74,822/- pertaining to subscription services and forming part of the 'unearned revenue", disclosed in the liabilities side of balance sheet of the Appellant, as inco....
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....service fees' payment as per the terms of the 'License and Service' agreement entered into by the Appellant with the AE and in view of the matching concept of accounting; Other grounds: 2.7. The Ld. AO erred in short granting credit of Taxes Deducted at Source to the extent of Rs. 2,31,921/- while computing the tax liability for the year; 2.8. The Ld. AO erred in not granting credit of advance tax paid amounting to Rs. 45,00,000/- while computing the tax liability for the year; 2.9. The Ld. AO erred on facts and in law in levying excess interest under section 234B of the Act; 2.10. The Ld. AO erred on facts and in law in levying the interest under section 234A and 234C of the Act; 2.11. The Ld. AO erred on facts and in law in initiating penalty proceedings under section 274 read with section 271(1)(c) of the Act. 3. At the outset Shri Ajit Kumar Jain Ld. AR mentioned that all the issues raised in the present appeal are covered by the orders of Hon'ble ITAT Mumbai in the case of assessee for A.Y. 2012-13, 2013-14, 2014-15 and 2016-17. 4. Brief facts necessary to adjudicate the controversy at hand is that Red Hat US is a provider of open-source solutions for....
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....ers to Appellant's customers RHIPL pays service fee to AE after recovering its entire cost along with an assured margin of 1.4% for subscription and 13.5% for services segment Provision of software support service Cost + 15% TNMM - Comparable engaged in rendering similar services Provision of sales &marketing support service Cost + 5% TNMM - Comparable engaged in rendering similar services 6. During the course of assessment proceedings, the Ld. TPO/Ld. AO made following adjustments to the income of the assessee: a. Disallowed the payment of service fees Rs. 46,96,83,748/- b. Adjustment under the sales & marketing support service segment Rs. 76,42,971/- c. Adjustment under the software support segment Rs. 2,94,32,376/- and d. Addition on account of unearned revenue Rs. 21,74,74,822/- The additions made by the Ld. TPO/Ld. AO were confirmed by the DRP. The assessee taken each addition/adjustment made by the Ld. AO/TPO in the following paragraphs. Ground 1.1 - 1.3: Adjustment on account of payment of service fees:- 7. Ld. AR pointed out that the issue is squarely covered by the orders of the coordinate bench in assessee's own case, wherein on identical facts, the....
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....are of the Assessee's arguments however there is no whisper by the authorities below of any shortcoming in this aspect. The Ld. DR has also not been able to point out any defect therein on the basis of the documents on record and the submissions of the Assessee. It is neither the case that revenue has pointed out any defect in the documentation nor there is a case made out that there is a shortcoming in the selection of the comparables or the search process. In these circumstances, we do not find any reason to set aside the matter to Ld. TPO. Accordingly, we decline the request made by the Ld. DR." A.Y. 2014-15 ITA No. 7210/Mum/2018 "5. As regards, ground No.1-1.3 adjustment relating to international transactions pertaining to payment of royalty and service fee. It is noted that identical issue was decided by this Tribunal in Assessee's own case for A.Y. 2012-13 and 2013-14. No distinguishing feature in the facts in the present year was pointed out by the revenue. It is also not the case that Hon'ble jurisdictional High Court has reversed the order of the ITAT. In this view of the matter following the decision of the co-ordinate bench in Assessee's own case, we set aside the Tr....
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....tal adjustment. The TPO/AO is directed to grant the working capital adjustment to the assessee on the final set of comparables used by the TPO. Ground 1.6 - 1.7: Adjustment on account of provision of sales and marketing support services. 13. During A.Y. 2015-16, the assessee was engaged in providing sales and marketing support services, for which it was remunerated at a cost plus mark-up of 5%. The Ld. TPO, as confirmed by the Hon'ble DRP, re-computed the arm's length mark-up and made an adjustment of INR 7,642,971/-. 14. Ld. AR submitted that the controversy involved in the present appeal is confined to ground number 1.7(c) granting of working capital adjustment and ground number 1.7(b) rejection of one of selected comparable company i.e., Axis Integrated Systems Limited. In this regard, reliance was placed on the Hon'ble Mumbai ITAT judgment in assessee's own case A.Y. 2016-17 - ITA No. 1379/Mum/2021 placed in the case law compilation at page number 1, wherein on identical facts, the Hon'ble Mumbai ITAT has granted the working capital adjustment to the assessee under all 4 segments. The relevant extract is as under: "64... So we are of the considered view tha....
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....marketing support services 18. The Ld. AO/DRP has made an addition of Rs. 21, 74, 74,822/- on account of unearned revenue from subscription services. The Ld. A.R. for the assessee submitted that issue is squarely covered by the orders passed by the Tribunal in assessee's own case for A.Y. 2012-13 and 2013-14 dated 10.04.2019 (ITA No. 1456/Mum/2017, ITA No. 727I/Mum/2017), for A.Y. 2014-15 dated 29.06.2021 (ITA No. 7210/Mum/2018) and for A.Y. 2016-17 dated 25.02.2022 (ITA No. 1379/Mum/2021). This factual position has not been controverted by the Ld. D.R. for the Revenue. 19. We have perused the afore-mentioned orders passed by the co-ordinate Bench of the Tribunal in assessee's own case wherein the issue in question has been decided in favor of the assessee. The findings of the coordinate bench are reproduced below:- "61. Upon careful consideration we find that assessee has been following consistent system of revenue recognition. The assessee is inter alia engaged in the business of marketing, promotion and sale of 'Red Hat subscriptions' to customers in Indian sub-continent to avail support services that are for the open-source software system during the subscription pe....
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....ent. In the light of the above submissions in our considered opinion the Assessing Officer has clearly erred in changing consistently followed method of revenue recognition adopted by the assessee. In the facts and circumstances elaborately dealt with above, we find due merits of the revenue recognition adopted by the assessee which is duly supported by mandate of AS-9 and other parameters referred above. 63. We also note that it is also a settled law that unless there is change in the facts and circumstances or that it can be said that earlier adopted system was wrong, revenue recognition method cannot be disturbed. We note that no such case exists here. In these circumstances, we set aside the order of the Assessing Officer and delete the addition in this regard." 20. The same view has been upheld by the tribunal in Assessee's own case via order dated 29.06.2021 for A.Y. 2014-15 and order dated 25.02.2022 for A.Y. 2016-17. 21. Moreover, revenue recognition policy has been consistently being followed by the assessee over the years. This identical issue has also been dealt with by the Hon'ble Delhi High Court in the case of CIT vs. Dinesh Kumar Goel (197 Taxman 375) by relying ....
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....granted in the Assessment Order issued under section 144C(13) read with section 144 (13C) of the Act dated 29 November 2019. The assessee had filed an application under section 154 of the Act on 07 January 2020, which is pending disposal. Therefore, the AO is directed to decide this issue on the basis of evidence brought on record by the assessee by providing opportunity of being heard to the assessee. Consequently, the ground No. 2.7 is decided for statistical purposes in favour of the assessee. Ground No. 2.8 24. The assessee filed its 'ROI' on 28.11.2015, claiming an advance tax credit of INR 4,50,00,000/- which has not been granted in the Assessment Order. The assessee had filed an application under section 154 of the Act on 07 January 2020, which is pending disposal. Therefore, the AO is directed to decide this issue on the basis of evidence brought on record by the assessee by providing opportunity of being heard to the assessee. Consequently, the ground No.2.8 is decided for statistical purposes in favour of the assessee. Ground No. 2.9 25. The assessee has challenged the levying of interest under section 234B of the Act. Since this ground is consequential in nature, the....