TaxTMI 
TaxTMI 
2026 (8) TMI 1460
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....tment relating to international transaction pertaining to payment of royalty and service fee (Subscription Segment) - Rs. 23,77,70,822 1.1 ld. Assessing Officer and ld. TPO (under the directions of the Hon'ble DRP) erred on facts and in law, in making an addition of Rs. 23,77,70,822 to the Appellant's taxable income by incorrectly determining the arm's length price for payment of royalty and service fees under subscription segment. 1.2 Ld. AO/ Ld. TPO erred on facts and in law in adopting an arbitrary and adhoc approach and modifying the economic analysis carried out by the Appellant in the Transfer Pricing Documentation ('TP Documentation') and introducing new filters, without providing any cogent reasons. 1.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting various comparable companies selected by the Appellant in the TP Documentation and additional companies introduced by Appellant during the transfer pricing proceedings basis the provisions of Rule 10B(2) of the Rules. 1.4 Ld. AO/ Ld. TPO erred on facts and in law in introducing new comparable companies without appreciating that such companies are functionally dissimilar to ....
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.... in law in adopting an arbitrary and adhoc approach and modifying the economic analysis carried out by the Appellant in the TP Documentation and introducing new filters, without providing any cogent reasons. 3.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting various comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 10B(2) of the Rules. 3.4 Ld. AO/ Ld. TPO erred on facts and in law in introducing new comparable companies without appreciating that such companies are functionally dissimilar to the Appellant and violated the provisions of Rule 10B(2) of the Rules. 3.5 Ld. AO/ Ld. TPO erred in computing the arm's length price based on incorrect computation of net operating cost plus margin of comparables. 4. Grant of Working capital adjustment as per Rule 10B(1) and Rule 10B(3) for the segments mentioned in Ground no. 1 to 3 4.1. On facts and circumstances of the case and in contrary to law, Ld. AO/ Ld. TPO erred in rejecting the claim of working capital adjustment based on conjectures and surmises which is in contradiction to the settled principles laid down by various jud....
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....of Rs. 51,450,348 pertaining to service segment is not warranted. 5.3. Ld. AO/ Ld. TPO erred on facts and in law in rejecting the economic analysis conducted by Appellant in transfer pricing documentation and analyzing this transaction on stand-alone basis. 5.4. Ld. AO/ Ld. TPO erred on facts and in law in not appreciating the facts of the case, submissions and documentary evidence filed on record. 5.5. Ld. AO/ Ld. TPO erred on facts and in law in disregarding the commercial expediency for availing services from the associated enterprise and failed to appreciate the jurisprudence that ld. TPO/ Ld. AO can't go beyond his powers in questioning commercial decisions of the 8 Appellant. 5.6. Ld. AO/ Ld. TPO erred on facts in determining the arm's length of this transaction by not using any of the methods prescribed under section 92C(1) of the Act read with Rule 10B of the Rules prescribed. Other grounds 6. Ld. Assessing Officer erred in short granting of credit of Taxes Deducted and Collected at Source to the extent of Rs. 74,151 while computing the tax liability for the year. 7. The Ld.AO erred on facts and in law in calcul....
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....ssitated under the provisions of Rule 10B(1) and Rule 10B(3). 1.7 (On a without prejudice basis) Ld. AO/Ld. TPO erred in facts and in law in not reducing for cost of availing of back office, sales and marketing support services from the operating cost, despite the fact that Ld. AO/Ld. TPO has made a separate disallowance. 2. Adjustment relating to international transaction pertaining to payment of royalty and service fees (Service Segment) - Rs. 32,731,433 2.1 Ld. Assessing Officer along with ld. TPO (under the directions of Hon'ble DRP) erred on facts and in law, in making an addition of Rs. 32,731,433 to the Appellant's taxable income by incorrectly determining the arm's length price for payment of royalty and service fees under Service segment. 2.2 L.d. AO/Ld. TPO erred on facts and in law in modifying the economic analysis carried out by the Appellant in the TP Documentation and introducing new filters, without providing any cogent reasons. 2.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 10B(2) of the....
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....stment without appreciated that the detailed computation based on the OECD guidelines has been provided to ld. TPO/Ld. DRP and such adjustment as necessitated under the provisions of Rule 10B(1) and Rule 10B(3). 4 Adjustment relating to international transactions pertaining to provision of IT enabled services - Rs. 221,372,237 4.1 Ld. Assessing Officer and ld. TPO (under the directions of Hon'ble DRP) erred on facts and in law, in making an adjustment of Rs. 221,372,237 to the Appellant's taxable income by incorrectly determining the arm's length price for provision of IT enabled services. 4.2 Ld. AO/Ld. TPO erred on facts and in law in modifying the economic analysis carried out by the Appellant in the TP Documentation and introducing new filters, without providing any cogent reasons. 4.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 10B(2) of the Rules. 4.4 Ld. AO/ Ld. TPO erred on facts and in law in introducing comparable companies without appreciating that such companies are functionally dissimilar to ....
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....y passing this consolidated order. We take appeal in ITA No.5800/Mum/2024 for AY 2021-22 as the lead case to draw the facts and make our observations and findings thereon which shall apply mutatis mutandis to the other appeal for AY 2022-23. Issue specific to AY 2022-23 shall be dealt separately while adjudicating appeal for this year. 4. Brief facts as culled out from the records are that assessee is engaged in the business of providing "open source" software to customers worldwide. Software being "open source", the Red Hat group does not specifically charge its customers for the same. Major revenues earned by the groups were from its subscriptions, with Red Hat Enterprise Linux as the primary source of the company's worldwide growth plan. 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 noted that the gro....
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.... A. Subscription Segment -Red Hat India identifies customers and enters into contracts with them for sale of the subscriptions. Generally, the contracts with customers are for 1-3 years. However, in case of Government contracts, the period of the contract ranges from 7-9 years. 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 assessee, the customer needs to accept the standard enterprise agreement in place as click through the portal. As per the Enterprises Agreement, 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 'so....
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....on of the Transaction -Pursuant to the integration of the operations of Gluster India into Red Hat India, Red Hat India entered into an Agreement with Red Hat USA dated 1 April 2012, for provision of software development services. The services are primarily in connection with the products of Red Hat USA pursuant to the acquisition of Gluster. Red Hat India is remunerated for these services on a cost plus 15% mark-up basis for these services. On this basis, assessee submitted that it received INR 1,61,67,28,877/- from its AE Red Hat USA for rending such services" 4.4. For the Provision of IT enabled Services, ld. TPO in his order at page no. 73 and 74 has narrated the functions of assessee under ITeS segment as under: "6.3.1. As regards provision of support services by Red Hat India to its AEs (i.e. Red Hat US and Red Hat Ireland), Red Hat India houses a team which is engaged in provision of CEE services. Customers that purchase the Red Hat Subscriptions are entitled to various support services. The AEs are responsible for providing such support services to the customer from its support centers across the globe. One of such support centers is Red Hat India's office in Pu....
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....panies. These services include Infrastructure support, Application Development, Local IT Infrastructure etc." 4.5. During the assessment year under consideration, assessee availed the back office, sales and marketing support services essential to the Subscription and Services segment where assessee is compensated at an assured targeted operating margin on its revenues. Since the transaction of availing administrative, sales and marketing support services is inextricably linked to the service and subscription segments of assessee, the arm's length nature of this transaction has been tested by aggregating this under service and subscription segments of assessee. However, ld. TPO determined the arm's length value of the said transaction as NIL citing various reasons resulting in addition of INR 338,665,294. 5. A draft assessment order under section 144C(1) read with section 144B was issued to assessee on 06.11.2023 proposing total assessed income of Rs. 2,09,82,92,576/-. Aggrieved, assessee filed objections before the Ld. DRP who vide directions dated 21.08.2024, affirmed the approach of ld. TPO on all five objections raised, without granting any relief to assessee. Pursuant the....
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....er book wherein K7's flagship products are K7 total security and K7 Enterprise Security. From annual report of K7 available at page A332 of the paper book it is apparent that the K7 owns and employs plant and equipment comprising 61% of its total tangible assets. Similarly, from its annual report i.e. note to the financial assets (fixed assets) available at page A332 it is proved on record that K7 owns significant intellectual property right of 91.5% of its total fixed assets. It is also apparent in the financials of K7 available at page A332 of the paper book that K7 incurred Rs. 15.75 crore on promotions which comes to 27.55% of the sale. 29. When we compare all these facts vis-à-vis assessee, we are of the considered view that assessee is a limited risk reseller having no plant 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." ii) AY 2017-18 (ITA No. 801/Mum/2022) "7.1 Admittedly there are no factual differences in FAR of assessee for the year under consideration vis-à-vis assessment year 2016....
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....t on record any new facts, materials or distinguishing features to deviate from the earlier findings of the Tribunal on the subject issue. Accordingly, following the reasoning adopted by this Tribunal in assessee's own cases for the preceding years, we hold that the same parity of treatment needs to be extended for the present year and hence, direct that (i) K7 Computing Pvt. Ltd., (ii) Virtual Galaxy Infotech Private Limited and (iii) Innovana Thinklabs Limited be excluded from the final set of comparables." 7.1. It is clear from the above that for AYs 2016-17, 2017-18, 2018- 19 and 2020-21, the Coordinate Bench had already examined the comparability of K7 Computing and directed its exclusion on account of functional differences. Assessee has placed on record the annual reports and functional charts to show that its FAR profile remains unchanged during the present year. On the other hand, the Ld. DR 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 before us. Respectfully following the consistent reasoning adopted by this Tribuna....
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....ee, who does not engage in any product innovation, but only distributes subscriptions of pre-developed Red Hat software on a limited-risk basis. The financial disclosures of Innovana Thinklabs also reinforce this distinction. The Profit and Loss statement reflects material consumption costs to the tune of Rs.101,895,942, a clear 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 innovationdriven 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 engagemen....
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....le and comparables in depth and has given categorical findings. The Ld. DR has not brought on record any new facts, materials or distinguishing features to deviate from the earlier findings of the Tribunal on the subject issue. Accordingly, following the reasoning adopted by this Tribunal in assessee's own cases for the preceding years, we hold that the same parity of treatment needs to be extended for the present year and hence, direct that (i) K7 Computing Pvt. Ltd., (ii) Virtual Galaxy Infotech Private Limited and (iii) Innovana Thinklabs Limited be excluded from the final set of comparables." 7.3. It is clear from the above that for AY 2018-19 and AY 2020-21, the Tribunal had already examined the comparability of Innovana Thinklabs and directed its exclusion on account of functional differences. Assessee has placed on record the annual reports and functional charts to show that its FAR profile remains unchanged during the present year. On the other hand, the Ld. DR 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. Respectfull....
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....l of working capital adjustment, as the same goes to the root of the sole surviving transfer pricing adjustment 11. It is an admitted and undisputed position that in the first round of litigation, the coordinate bench of this Tribunal unequivocally held that assessee is entitled to working capital adjustment. The Tribunal directed the learned TPO to verify the computation furnished by assessee in its transfer pricing study and the detailed working capital adjusted margin computation, and thereafter grant such adjustment in accordance with law. The relevant extract from the Tribunal's order, which is binding on the lower authorities, is reproduced hereunder. "64.....So we are of the considered view that assessee is entitled for working capital adjustment. The Ld. TPO is directed to verify the computation furnished in transfer pricing study and detailed working capital adjusted margin computation furnished by assessee and accordingly provide the working capital adjustment to assessee in view of the settled principle laid down by the Tribunal, in order to provide level playing field for assessee as well as comparable company. 12. Despite such clear and categ....
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....-18, AY 2018-19 and AY 2020-21, the Coordinate Bench had permitted WCA to assessee. Hence, following the above precedents we are of the considered view that the arguments raised by the Ld. CIT DR have already been considered by the coordinate benches of this tribunal and we hold that assessee is entitled to working capital adjustment, wherever the differences in working capital materially impact the margin computation of the comparables. Assessee shall furnish the requisite details before the ld. AO/TPO, who shall compute and grant such adjustments in accordance with law. Accordingly, ground no. 1.6 and additional ground 9 raised by the assessee are allowed for statistical purposes. 10. Ground no. 1.7 is not pressed and accordingly, dismissed as not pressed. 11. For ground nos. 2.1 to 2.4 also, ld. Counsel furnished a detailed chart. Assessee is seeking exclusion of following companies: (i) Sarla Holdings Pvt. Ltd., (ii) Knowledgehouse Ltd., (iii) Eduspark International Pvt. Ltd. (iv) Akash Educational Services Ltd.; (v) Varsity Education Mgmt. Pvt. Ltd. and (vi) Made Easy Education Pvt. Ltd. On the other hand, it is seeking inclusion of following companies: (i) Compucom Soft....
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....ng services, which is entirely distinct from the business model of assessee, who is engaged in the business of software subscription resale. The earlier coordinate benches of this Tribunal in assessee's own case have already examined these very comparables and come to the categorical conclusion that entities engaged in education and training cannot be equated with a limitedrisk software distributor, given the significant differences in functions performed, assets employed, and risks assumed. The activities of such education-based companies are not only different in nature, but also involve ownership of intangible assets like goodwill, brand value, and teaching methodologies, which make their margins incomparable to 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 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 fol....
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....ehouse Ltd. 26.1 We have carefully considered the submission of Ld. AR and examined the materials placed on record in relation to exclusion of Knowledgehouse Ltd. Ld. TPO has himself applied the filter of turnover and hence, he cannot go against it. It is clear from the facts on record that this comparable does not satisfy the turnover filter. Moreover, it is also seen that the company is engaged in the field of education activities through schools and hence, not a suitable comparable vis-à-vis assessee. We, accordingly, direct to exclude Knowledgehouse Ltd from the final list of comparable companies. Eduspark International Pvt. Ltd. 27.1 We have considered the facts of the case and the submissions of Ld. AR. When this comparable does not qualify the TPO's own RPT filter, it is not a valid comparable vis-à-vis assessee. Moreover, this company is functionally not comparable to assessee. Hence, we direct to exclude Eduspark International Pvt. Ltd. from final set of comparables. Akash Educational Services Ltd. 28.1 We have heard both sides and perused the materials placed before us. We find that Akash Educational Service L....
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....ment level and at the entity level during the relevant year. The segment revenue (Learning Solutions) increased from INR 719.32 million in FY 2019-20 to INR 830.37 million in FY 2020-21, while the entity-level revenue increased from INR 1,742.40 million to INR 2,334.20 million. Ld. Counsel also pointed out that this company was accepted as a comparable by the ld. TPO in assessee's own case for AY 2016-17, AY 2017-18 and AY 2020-21. Admittedly, there are no functional dissimilarities observed by the lower authorities in respect of this comparable. Accordingly, we direct the ld. AO/TPO to include this company in the final set of comparables. 11.5. In respect of the other comparables in this segment viz. (i) Varsity Education Mgmt. Pvt. Ltd, (ii) Made Easy Education Pvt. Ltd, (iii) Aptech Limited and (iv) Swiss Cert Private Limited, it was submitted that these comparables may be left academic to which there was no adverse objection from the other side. Hence, no directions are issued in respect of these companies. Accordingly, ground nos. 2.1 to 2.4 are allowed. 12. Ground no 2.5 and 2.6 are akin to ground no. 1.5 and 1.6. Our observation and finding as stated in the above parag....
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.... and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded." ii) AY 2017-18 (ITA No. 801/Mum/2022) "Kellton Tech Solutions Ltd., Nihilent Ltd.,Infobeans Technologies Ltd. 16.1 The Ld.AR submitted that for assessment 2016-17 on similar facts Kiliton Tech Solutions Ltd was excluded from the final list in the remand proceedings. He referred to page A 922 of the paper book in support of this submission. 16.3 The Ld.AR also placed reliance on decision of coordinate bench of this Tribunal in case of Varian Medical Systems International (India) Pvt. Ltd. Vs. DCT to in ITA No. 510/MUM/2022 for assessment in 2017-18 for exclusion of this company. Be that as it may, as this comparable has been verified by the Ld.AO/TPO in assessee's own case based on remand by this Tribunal in assessment in 2016-17,....
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....for the year under consideration vis-à-vis AYs 2016-17, 2017-18, 2018-19 and 2020-21. Ld. DR has not brought anything on record to distinguish the above observations of the Tribunal in assessee's own case. Hence, following the above view, we direct Nihilent Limited to be excluded from the final list of comparables. II. Consilient Technologies Pvt. Ltd. III. Comviva Technologies Ltd. IV. Cybage Software Pvt. Ltd. 15.3. Ld. Counsel submitted that Cybage Software Pvt. Ltd., Comviva Technologies Ltd. and Consilient Technologies Pvt. Ltd. have been excluded by the Tribunal in assessee's own case for AY 2020-21 in ITA No. 4065/Mum/2024, observing as under: i) AY 2020-21 (ITA No. 4065/Mum/2024) Cybage Software Pvt. Ltd. "38.1 We have heard the rival submission and perused the material placed on record with respect to inclusion of Cybage. The company Cybage is a product company unlike assessee which is a captive service provider providing routine software development services to its AE. Whereas, the company Cybage has developed a sophisticated data-science drawn platform ExcelShare and also incurring towards research & develop....
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....2 and A599-A601 of the paper book, it could be noted that, the company is not exclusively into software development and the provision of its services is diversified than the SWD services provided by assessee. In light of the foregoing analysis, we are of the considered view that Consilient Technologies Pvt. Ltd. is not a suitable comparable vis-à-vis assessee and, hence, it is ordered to be excluded." 15.4. Admittedly there are no factual differences in FAR of assessee and above companies for the year under consideration vis-à-vis AY 2020-21. Ld. DR has not brought anything on record to distinguish the above observations of the Tribunal in assessee's own case. Hence, following the above view, we direct (i) Cybage Software Pvt. Ltd., (ii) Comviva Technologies Ltd. and (iii) Consilient Technologies Pvt. Ltd. to be excluded from the final list of comparables. 16. Interglobe Technology Quotient Pvt Ltd. - This company has been included by the Coordinate Bench in assessee's own case for AY 2017- 18 in ITA No. 801/Mum/2022, observing as under: '...Accordingly, we direct inclusion of Aspire Systems (India) Pvt. Ltd., and Interglobe technology quotient Pvt. Ltd....
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....available to segregate the same. Accordingly, it was submitted that the functional profile of the company is completely distinct from that of assessee, which is a routine service provider. 16.3. We have heard rival submissions and perused the material available on record. It is observed that Ksolves India Ltd. is engaged in diversified activities involving software development services and proprietary product development across multiple technology platforms, along with generating revenue from both products and services without segmental bifurcation. In view of the diversified functional profile and absence of segmental information, the company cannot be considered comparable with assessee. In light of these facts, we are of the considered view that Ksolves India Ltd. cannot be considered comparable for benchmarking the international transaction of assessee since its functional profile is at variance with that of assessee. Accordingly, we direct the ld. AO/TPO to exclude Ksolves India Ltd. from the final set of comparables. 16.4 For the comparable Batchmaster Software Private Limited, it was submitted to be left academic for which ld. DR did not have any remarks on such conten....
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....ar under consideration vis-à-vis assessment year 2016-17. The Ld.DR has not brought anything on record to distinguish the above observations of the coordinate bench of this Tribunal in assessee's own case. We therefore do not find any reason to uphold this comparable. Respectfully following the view taken by this Tribunal in assessee's own case for AY 2016-17, we direct this comparable to be excluded from the final list." iii) AY 2020-21 (ITA No. 4065/Mum/2024) "46.1 Admittedly there are no factual differences in FAR of assessee for the year under consideration vis-à-vis assessment year 2016-17 and 2017-18. The Ld. DR has not brought anything on record to distinguish the above observations of the Tribunal in assessee's own case. Hence, following the above view, we direct M P S Limited to be excluded from final list." 18.2. Admittedly, there are no factual differences in FAR of assessee and M P S Ltd. for the year under consideration vis-à-vis AYs 2016-17 2017-18 and 2020-21. Ld. DR has not brought anything on record to distinguish the above observations of the Tribunal in assessee's own case. Hence, following the above findings, we direct M....
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....these may be left academic. Ld. DR did not put forth any objection on the same. Considering the submissions, no directions are issued in respect of these companies. Accordingly, ground nos. 4.1 to 4.4 are allowed. 19. Ground no 4.5 and 4.6 are akin to ground nos. 1.5 and 1.6, 2.5 and 2.6 and 3.5 and 3.6 and therefore, are disposed of in terms of our observation and findings already noted in the above paragraphs. The same are accordingly, allowed for statistical purposes. 20. Ground nos. 5.1 to 5.4 are towards adjustment made in respect of assessee availing back office, sales and marketing support services. Assessee has availed back office, sales and marketing support services essential to the Subscription and Services segment where it is compensated at an assured targeted operating margin on its revenues. It was submitted that AE of assessee i.e., Red Hat Singapore renders sales and marketing support functions to Red Hat Group entities in APAC region and by centralizing the Group's sales, marketing support and consultancy function in the APAC region, assessee gained economies of scale through efficient execution of these functions. Thus, the intra-group services rendered by R....
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.... has already been examined and accepted by the Coordinate Bench in assessee's own case for preceding assessment years i.e., AY 2012-13 to AY 2020-21. There has been no change in the underlying facts, business operations or functional profile during the year under appeal. 23. Assessee sought direction from the Coordinate Bench that since assessee functions under an assured margin/limited risk model, wherein its return is pre-determined and insulated from fluctuations in individual cost variations, thereby once the overall segmental margins are established to be at arm's length under TNMM, any separate evaluation of individual transactions is irrelevant and devoid of legal basis. We find ourselves in agreement with the submissions made by the assessee, more particularly when assessee's profitability remains unaffected due to the assured margin arrangement and the impugned transaction forms an integral part of the operating cost of assessee's Subscription and Services segment. Treatment given by the ld. TPO by taking its ALP at Nil on stand-alone basis leads to double adjustment in the hands of the assessee. Accordingly, no transfer pricing adjustment should arise once the overall ....