TaxTMI 
TaxTMI 
2025 (8) TMI 1383
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....d Hat Enterprise Linux as the primary source of the company's worldwide growth plan. 3. In the transfer pricing proceedings, Ld. TPO observed that all the Red Hat group software products came with either an annual or multi-year service subscription that enables users of the Red Hat group products to avail various support services from Red Hat group. He noted that the Red Hat group offers several types of subscriptions with varying levels of support services and access to bug fixes and software updates. Ld. TPO also noted that, the group provides various professional services such as training, consulting and engineering services. The assessee was involved in distribution of Red Hat subscription and providing Red Hat products related training and consulting services to customers in Indian subcontinent. 4. Ld.TPO noted that, following were the international transactions of assessee with its AE's during the year under consideration: S.No. Nature of International Transaction Amount (in INR) Method used for determining ALP by the Assessee 1 Payment of royalty and service fee to Red Hat US for Subscription segment 144,45,83,056 TNMM 2 Payment of royalty....
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.... With respect to Government contracts, even though customer identification and approval for the subscriptions is undertaken by Red Hat India, the Company does not directly enter into contracts with the Government. Red Hat India sells the subscriptions to channel partners who have been awarded the contract by the Government. Once the customer purchases subscription from the assessee, the customer needs to accept the standard enterprise agreement in place as click through the portal. As per the Enterprises Agreement, the assessee sells the Red Hat Subscriptions in India, which will entitle the customer to receive both the 'Red Hat software' and/or 'services' during the period of the subscription (generally, one or three years). The services to the customers are provided through the Global support service centres. For the purpose of sale/distribution of the Red Hat Subscriptions in India that includes both 'software' and related 'services', the assessee has entered into a 'License and Service Agreement' dated 01/04/2014 with the AE Red Hat USA. A copy of the said Agreement was provided by the assessee during the on-going proceedings. Vide the Agreement, the AE Red Hat USA grants the a....
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....harges the assessee service fee in such a manner that the operating profit margin of the assessee is always equal to 13.5% of the revenue in this segment." 9. Ld. TPO observed that the assessee in its TP study benchmarked the transaction by using TNMM and PLI of the assessee by using OP/OR at 13.5%. It was noted by the Ld. TPO that the assessee used 5 comparables with adjusted arithmetic mean of (0.94%) and unadjusted arithmetic mean of 3.89%. The assessee thus considered its transaction with AE to be at arm's length. Ld. TPO rejected all the comparable of assessee on account of various reasons. After rejecting all the comparables selected by the assessee, Ld. TPO selected following 7 comparables with unadjusted margin of 20.49%: Sr.No Name of the company Weighted average (OP/OR) (%) 1 G D Goenka Pvt. Ltd. 14.88 2 Lakshya Educare Pvt. Ltd. 10.99 3 MT Education Services Pvt. Ltd. 23.72 4 Career Mosaic Pvt. Ltd. 20.49 5 Sarla Holdings Pvt. Ltd. 26.53 6 Merittrac Services Pvt. Ltd. 17.45 7 People Combine Educational Initiatives Pvt. Ltd. 30.32 35th Percentile 17.45 Median 20.49 ....
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....n in the hands of the assessee amounting to Rs. 44,67,17,609/-. On receipt of the draft assessment order, assessee preferred objections before the Ld. DRP. The Ld. DRP upheld the addition proposed by the Ld.TPO/.AO vide DRP Directions dated 15/06/2022. On receipt of the DRP directions, the Ld.AO passed the impugned order by making addition in the hands of the assessee amounting to Rs. 44,67,17,609/-. Aggrieved by the order of Ld.AO, assessee is in appeal before the Tribunal. 13. At the outset Ld.AR Shri Ajit Kumar Jain submitted that, assessee is not pressing Ground No.1 and 2, therefore they do not require any adjudication. Payment of Royalty and service fees under Subscription segment: 14. Ground No.3.1-3.4 seeking inclusion/exclusion of comparables under Payment of Royalty and Service fee (subscription segment): The Ld.AR filed his arguments in the form of the detailed chart, where the comparables have been sought for inclusion and exclusion. The assessee is seeking exclusion of following compatibles: 1. K7 Computing Pvt. Ltd 2. Virtual Galaxy Infotech Pvt.Ltd. 3. Innovana Think labs Ltd. And inclusion of following comparables: 1. Son....
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.... and equipments, owning no intangible assets, having no expenses on promotions and is not selling its product. So K7 is not a valid comparable vis-à-vis K7, hence ordered to be excluded." AY 2017-18 8. Virtual Galaxy Infotech Private Limited: The Ld.AR submitted that, this company is functionally not similar, as the entire sale proceeds are from manufactured goods. It is submitted that, this company is engaged in manufacturing goods as per description of services in the annual report. It is also submitted that, this company deals in digital automatic data processing machine. 8.1 The Ld.AR submitted that, this comparable deals in software products, solutions and specialised software services which indicates that company provides highly technical proprietary product comprising of core banking solution, ERP solutions etc. this also submitted that the company is involved in Services in the field of application development, big cartel, artificial intelligence, mobile computing etc. 8.2 The Ld.AR submitted that, the assessee on the contrary is only a reseller of subscription assuming limited risk. 8.3 On the contrary the Ld. DR....
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.... as per the extracts in the annual report.Ld.AR submitted that this comparable has developed numerous products and these products have registered their presence. The product portfolio of Innovana consists of applications and software such as Ad-blocker, Disk Cleanup, Space Reviver, File Opener, Privacy Protector, etc. The relevant extract from detailed chart is reproduced below- "Functionally dissimilar - Engaged in manufacturing/ developing new products - As per management report -The company has developed numerous products and these products have registered their presence, whereas Appellant does not develop any products of its own rather it is engaged in only reselling of Red Hat products. The product portfolio of Innovana consists of applications and software such as Ad-blocker, Disk Cleanup, Space Reviver, File Opener, Privacy Protector, etc. (Refer Annexure 4 of the Synopsis 2) As per P&L Statement - The cost of material consumed amounting to INR 101,895,942 depicts that the company is into development of new products. Further, there is no purchases of stock in trade, which clearly shows that company is not into trading business. (Refer Page....
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....ar indicator of manufacturing and developmental activity. Equally important is the fact that there are no purchases of stock-in-trade, thereby establishing that the company is not in the trading or distribution business. Rather, it operates as a product company, drawing value from its development activities and ownership of proprietary software. Other disclosures in the annual report anticipate growth in future years from newly developed products with promising market prospects, underscoring its entrepreneurial and innovation-driven profile. Moreover, as per Form MGT-9, the principal business activities of Innovana Thinklabs are described under the head "Other computer related activities," including the maintenance of websites and creation of multimedia presentations, in addition to product development. Its website also proclaims its constant engagement in technological advancement and innovation, enlisting a variety of proprietary products which it has designed and commercialised. Such characteristics are emblematic of a product company with ownership of intangibles, and thus render it functionally incomparable with a limited-risk distributor like the assessee. In contrast, ....
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....ing all the filters. It is also submitted that the said comparable stood accepted by the Ld.TPO for assessment year 2021-22. 9.1 The contrary, the Ld.DR relied on the orders passed by authorities below. However, it is submitted that, this comparable may be remanded to the Ld.TPO to verify if it satisfies the turnover filter of 10 times the assist turnover. We have perused the sausages at once outside the light of the records placed before us. 9.2 Admittedly there is no functional dissimilarities observed by the Ld.AR in respect of this comparable. The authorities below rejected this comparable only on the basis that it does not satisfy the turnover filter. It is noted at page B 26 of the paper book volume 2 that this company has total revenue from the operations at Rs. 1,34,14,81,275/-. During the year assessee has a turnover from subscription segment at Rs. 119,55,70,873/-. The turnover range of the assessee is 11,95,57,087 to 1195,57,08,730. Thus, it is clear that this comparable satisfies the turnover filter. Accordingly, we direct the Ld.AO/TPO to include this comparable in the finalist." 20. Having regard to the detailed discussion above,....
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....ding in software and hardware products and the segmental revenue earned by these comparable are more than 80% and therefore is functionally similar with that of assessing. 10.1 On the contrary the Ld. DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of the records placed before us. 10.2 It is noted that the Ld.TPO rejected these comparable at the threshold by holding it to be functionally not similar. On the face of it, when we look into the annual reports of these comparables, it is noted that, these are into a trading segment of sale of hardware and software. However, in respect of the other filters no verification has been carried out in order to determine the compatibility on qualitative basis. It is also not clear from the order of the Ld.TPO, regarding filters adopted by him in order ascertain the compatibility. 10.3 In the interest of justice, we therefore remit all these comparable to the Ld.AR/TPO to verify these comparables based on the filters applied for determining the compatibility with assessee. In case they pass through all the other filters, the same may be r....
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....rry out a fresh verification of these comparables-Unisys Software and Holding Industries Ltd., JMD Ventures Ltd., PS IT Infrastructure & Services Ltd., and Avance Technologies Ltd.-strictly in line with the directions issued by the coordinate bench for AY 2017-18. In the event these companies meet the prescribed filters, they may be included in the final set of comparables; otherwise, they shall stand excluded. 23. In respect of the comparables viz. (i) Empower (I) Limited, (ii) Rashi Peripherals Pvt Ltd., (iii) Compuage Infocom Ltd., (iv) Savex Technologies Pvt. Ltd., and (v) Informatics Technologies Private Limited, Ld. AR submitted that, these comparables may be left academic. Considering the submissions, no directions are issued in respect of these companies. Accordingly grounds No.3.1 to 3.4 stands partly allowed for statistical purposes as indicated herein above. 24. Ground No 3.5 is raised by the assessee seeking correction of errors computation in margin of comparables that would remain to determine arm's length margin of the transaction. We direct the Ld.AO/TPO to adopt the correct figures for computing the margins of the remaining comparables. 25. Ground Nos. 3.6....
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....OECD re-iterates that working capital adjustments should only be considered when the reliability of the comparables will be improved, and reasonably accurate adjustments can be made. (See OECD 2017 Annex to Chapter III para 1) 11.4 In terms of Rule 10B(1)(e)(iii) of the I.T.Rules, the net margin arising in comparable uncontrolled transactions should into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. 11.5 The differences in working capital requirements of the international transactions and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by the Revenue Authorities working capital adjustment cannot be allowed to the profit margin, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Income Tax Rules. 11.6 We note that, this issue has been considered by Hon'ble Bangalore Tribunal in the case of H....
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.... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- a) the specific characteristics of the property transferred or services provided in either transaction; b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs. of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an internationa....
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.... 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest sate July 2010 Page 6 might be affected by the funding....
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.... The assessee is directed to furnish details with the Ld.AO/TPO for assisting the authorities to compute the adjustments. Accordingly, Grounds 2.5 to 2.7 are allowed for statistical purposes." 26. We have given our thoughtful consideration to the rival submissions and perused the material available on record. It is noted that in assessee's own case for Assessment Years 2016-17 and 2017-18, the coordinate benches of this Tribunal have already accepted the principle that working capital adjustment (WCA) ought to be granted to the assessee, so as to neutralise the differences arising on account of varying levels of receivables, payables, and inventory maintained by the assessee vis-à-vis the comparables. Such adjustments are in recognition of the fact that differences in working capital deployment can materially affect profit margins, thereby distorting comparability unless neutralised through appropriate adjustments. It is further relevant to note that not only has this Tribunal in assessee's own earlier years consistently upheld the claim of working capital adjustment, but even other judicial forums, including the Hon'ble Bangalore Tribunal in the case of Huawei Technol....
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....akin to providing training activities and issuing certification by the assessee etc. It is submitted that, this company is a full-fledged entrepreneur engaged in providing education by running schools at various locations. The Ld.AR thus prayed for this comparable to be excluded. People Combine Educational Initiatives Pvt. Ltd. The Ld.AR submitted that, this company is functionally not similar with assessee as it provides support services to schools. It is submitted that, this company owns its revenues from fee receipts, service incomes, sale of books, stationery, uniform etc. Career Mosaic Pvt. Ltd. It is submitted that, this company, is engaged in providing services related to career counseling and placement services. It is submitted that, as per corporate information of this company in the annual report, it is engaged in providing education, coaching classes for GMAT, GRE, TOEFL, IELTS. It is a submitted that, the services rendered by this company is not similar with the training provided and certification issued by assessee to its students under the segment. The Ld.AR thus prayed for exclusion of this comparable from the finalist. G.....
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.... margins incomparable to the assessee's business model. It is also pertinent to note that the Ld. DR has not brought on record any new facts or material that could persuade us to depart from the earlier binding precedent. In the absence of any distinguishing feature either in the profile of the assessee or in that of these comparables, judicial consistency mandates that the same view be followed in the present year as well. In view of the above discussion, and respectfully following the earlier decisions of this Tribunal in assessee's own case, we direct that (i) Career Mosaic Pvt. Ltd., (ii) People Combine Educational Initiatives Pvt. Ltd., (iii) Sarla Holdings Pvt. Ltd., and (iv) G.D. Goenka Pvt. Ltd. be excluded from the final set of comparables. 30. (i) Merittrac Services Pvt. Ltd. And (ii) Lakshya Educare Pvt. Ltd. Ld. AR submitted that the Merittrac and Lakshya have been remitted by the Co-ordinate Bench of this Tribunal to Ld. AR/TPO with the direction to verify the segmental details in respect of the revenue earned by providing training/tutorial classes, and if such segmental details are available and the filters applied by the Ld.AO/TPO stand satisfied, the ....
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....as per note 13, amounting to Rs. 237.24 lakhs. B.5 In the interest of justice, we remit this comparable back to the Ld.AO/TPO with the direction to verify the segmental details of this comparable in respect of revenue earned by providing training coaching/tutorial classes. If such segmental details are available and the filters applied by the Ld.TPO stand satisfied, then it is to be considered in the final list. Lakshya Educare Pvt. Ltd. It is submitted that, this company is engaged in business of conducting commercial training, coaching/tutorial classes and activities incidental thereto. As we have remitted Merritrac Services Pvt.Ltd., with certain directions to the Ld.AO/TPO, this comparable is also remitted with the direction to verify the segmental details in respect of the revenue earned by providing training/tutorial classes. If such segmental details are available and the filters applied by the Ld.AO/TPO stand satisfied, the same maybe retained in the final list Accordingly, we remit Merittrac Services Pvt.Ltd and Lakshya Educare Pvt. Ltd. back to the Ld.AO to verify as per the above directions." 31. We note that in assessee's ....
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....ition. Accordingly, following the principle of consistency, we direct that Athena Eduspark Ltd. be included in the final set of comparables. 34. Compucom Software Ltd. We have examined the submissions of the Ld. AR as well as the material placed before us. It emerges that Compucom Software Ltd. carries on diversified activities in the fields of Business Software and E-governance Services, Learning Solutions, and Wind Power Generation. For the purpose of comparability, only the Learning Solutions segment is relevant, which essentially comprises computer education and training services. It has further been pointed out that this company has not been a persistent loss-maker and, in fact, was accepted as a comparable by the Ld. TPO in assessee's own case for AY 2017-18. The assessee has also furnished the annual report and a detailed chart to demonstrate that its own FAR profile continues to be identical to that of the earlier year. This position has not been controverted by the Revenue; indeed, no fresh fact or distinguishing feature has been brought on record to persuade us to deviate from the earlier view of the coordinate bench. In these circumstances, we see no reason t....
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....xclusion by the assessee: 39. (i) Nihilent Ltd., (ii) Infobeans Technologies Ltd and (iii) Kellton Tech Solutions Ltd Ld. AR submitted that Nihilent Ltd, Infobeans Technologies Ltd and Kellton Tech Solutions Ltd has been excluded by coordinate of this Tribunal in assessee's own case for AY 2016-17 and AY 2017-18 observing as under: AY 2016-17 "Nihilent Ltd. 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305....
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.... & Data Services Pvt.Ltd, Nihilent Ltd., Nihilent Analytics Ltd., Infobeans Technologies Ltd.," 40. We note that in earlier years, namely AYs 2016-17 and 2017-18, this Tribunal had already examined the comparability of Nihilent Ltd., Infobeans Technologies Ltd., and Kellton Tech Solutions Ltd., and directed their exclusion on account of functional differences and failure to satisfy the requisite filters, including the export revenue filter in the case of Kellton Tech Solutions Ltd. The assessee has placed on record the annual reports and functional charts to show that its FAR profile continues unchanged during the present year. On the other hand, the Revenue has not produced any fresh material or distinguishing fact to justify a departure from the settled position. In these circumstances, we see no reason to take a different view for the year under appeal. Accordingly, following the consistent approach adopted in assessee's own case, we direct that (i) Nihilent Ltd., (ii) Infobeans Technologies Ltd., and (iii) Kellton Tech Solutions Ltd. stand excluded from the final set of comparables. 41. Sagarsoft India Limited Ld.AR submitted that, Sagarsoft India Limited has been a....
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....orts and a detailed functional chart to show that its FAR profile continues unchanged in the present year. The Revenue has not placed before us any material to indicate that the facts are different, or that there is any reason to depart from the consistent view adopted in earlier years. In these circumstances, we find no justification to take a divergent approach. Accordingly, we direct the Ld. AO/TPO to examine the functional profile of Harbinger Systems Pvt. Ltd. vis-à-vis AYs 2020-21 and 2021-22, and if the FAR remains the same, to include it in the final set of comparables. 45. Sasken Communication Technologies Limited We have carefully considered the submissions of the learned Authorised Representative and the material placed on record. It is noted that Sasken Communication Technologies Ltd. is engaged in the sale of software services, computer programming, consultancy, and allied activities. The said concern has already been accepted as a valid comparable by the TPO in assessee's own case for the earlier assessment years 2014-15 and 2015-16. The functional profile of the assessee and Sasken, as demonstrated through the annual reports and detailed functional an....
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....020-21. The assessee has furnished the annual reports along with a detailed functional analysis to establish that there has been no departure in the functional profile of either party from the earlier year. The Department has not placed on record any contrary evidence to dislodge this position. In view of the parity of circumstances and the coordinate bench's earlier observations, we direct the learned AO/TPO to verify the functional comparability of this entity with reference to AY 2020-21, and if the FAR is found to be consistent, to include Expleo Solutions SQS India BFSI Limited in the final set of comparables. 48. In respect of the comparables (i)Interglobe Technology Quotient Private Limited, (ii) Sankhya Infotech Limited and (iii) Jindal Intellicom Limited, Ld. AR submitted that, these comparables may be left academic. Considering the submissions, no directions are issued on respect of these companies. 49. Ground No 3.19 is raised by the assessee seeking correction of errors computation in margin of comparables that would remain to determine arm's length margin of the transaction. We direct the Ld.AO/TPO to adopt the correct figures for computing the margins of the rem....