RED HAT INDIA PRIVATE LIMITED,MUMBAI V. ASSISTANT COMMISSIONER OF INCOME TAX/ITO/ CIRCLE 15(3)(1), MUMBAI

ITA 2442/MUM/2022

AI Insights

The case involves Red Hat India Private Limited appealing against the final assessment order passed by the Assistant Commissioner of Income Tax, which was based on the transfer pricing adjustments made by the Transfer Pricing Officer. The adjustments were contested on grounds of the selection and exclusion of comparables used in the transfer pricing analysis. The Tribunal examined the functional profiles, financial data, and the application of filters to determine the appropriateness of the comparables. The Tribunal's decision included directions for the exclusion of certain comparables and the inclusion of others, based on their functional and financial similarities to Red Hat India.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 716419 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Assessment Year: 2018-2019
• Appeal Filed On: 23-09-2022
• Other Referred Cases: Varian Medical Systems International (India) Pvt. Ltd. Vs. DCT, Huawei Technologies India (P.) Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PANKAJ KUMAR
• Assessee Lawyers: AJIT JAIN; USING OPOR AT
• Keywords: Transfer pricing; International transaction; Rule of consistency; Working capital adjustments
• Section: 234B

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “J” BENCH : MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI ARUN KHODPIA, ACCOUNTANT MEMBER ITA No. 2442/Mum/2022 Assessment Year : 2018-19 Red Hat India Private Limited, A-201, Supreme Business Park, Supreme City, Hiranandani Gardens, Powai, Mumbai-400076. PAN : AABCR7097N vs. Asst. Commissioner of Income Tax/Income Tax Officer, Circle-15(3)(1), Mumbai. (Appellant) (Respondent) For Assessee : Shri Ajit Jain, For Revenue : Shri Pankaj Kumar, CIT-DR Date of Hearing : 13-08-2025 Date of Pronouncement : 22-08-2025 O R D E R PER AMIT SHUKLA, J.M : The aforesaid appeal has been filed by the assessee against the final assessment order dated 27/07/2022 passed by the ACIT, Circle 15(3)(1) Mumbai, u/s 144C(13) for the A.Y. 2018-19, in pursuance to the directions issued by the Dispute Resolution Panel-2, Mumbai-2, dated 15/06/2022 u/s 144C(5). 2. The brief facts apropos the case are that, the assessee company is a part of the Red Hat group and was ultimately held by the Red Hat USA. 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 revenue earned by the groups was from its subscriptions, with Red Hat Enterprise Linux as the primary source of the company’s worldwide growth plan. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 2 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 and service fee to Red Hat US for Services segment 8,68,03,178 TNMM 3 Provision services of software development 93,32,63,036 TNMM 4 Provision of IT enabled Services 1,82,27,37,689 TNMM 5 Provision of sales and marketing support Services 3,92,10,981 TNMM 6 Reimbursement for RSU granted to employees 27,35,71,026 Other method Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 3 5. Ld. TPO has made adjustment amounting to INR 44,67,17,609 to the value of international transactions pertaining to the following segments: S.No. Issue Amount (in INR) 1 Payment of Royalty and Service Fees (Subscription Segment) 36,38,47,496 2 Payment of Royalty and Service Fees (Services Segment) 3,34,88,325 3 Provision of Software Development Services 4,93,81,788 Total Adjustment 44,67,17,609 FAR and benchmarking of Payment of royalty and service fee (subscription segment): 6. In so far as Royalty segment, the functional profile of the assessee company as culled out by the Ld. TPO in his order at page number 4 of the TPO’s order reads as under:- ―5.1.1.1 The AE Red Hat USA is a provider of open-source solutions for internet computing. An opensource software typically grants every user free access to the source code (upgrades, updates and bug fixes) and enables the customers to modify and customize the software to suit their requirements. Red Hat USA provides Red Hat Enterprise Linux, JBoss Enterprise Middleware & other software programs. Once an open source software is downloaded, software users may require access to modifications, additions or further enhancements and ongoing support services. The sale of ‗Red Hat Subscriptions‘ enable the customers to avail and access the above-mentioned features and support services. The assessee Red Hat India distributes open source ‗Red hat Subscriptions‘ to customers in India and also provides training related services to its customers. These business activities of the assessee have been classified by it into two segments i.e. ‗Subscription Segment‘ and ‗Services Segment‘ respectively. 5.1.1.2. 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 notdirectly 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 Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 4 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 assessee the right to use its intangible property (i.e. trademarks, trade names and domain names owned by Red Hat USA), for which the assessee is liable to pay royalty at 3% of its revenue from this segment to the AE. Further, the AE Red Hat USA provides the services to the customers (end users) who purchased the Red Hat Subscriptions from the assessee. For this service, the AE charges the assessee service fee in such a manner that the operating profit margin of the assessee is always equal to 1.4% of the revenue in this segment.‖ 7. Ld.TPO observed that, the assessee in its TP study benchmarked the transaction by using transactional net margin method (TNMM) and by using operating profits to operating revenue (OP/OR) as profit level indicator (PLI). The OP/OR of the tested party being the assessee company was computed at 1.4%. It was noted by the Ld. TPO that the assessee used 11 comparable with an adjusted range having median (1.31%) and unadjusted median of 0.28%. 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 11 companies selected by the assessee, Ld. TPO selected following 3 companies with unadjusted margin of 17.11%. Sr.No Name of the company Weighted average (OP/OR) (%) 1 K7 Computing Private Limited 13.31 2 InnovanaThinklabs Limited 23.45 3 Virtual Galaxy Infotech Private Limited 14.56 Mean 17.11 Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 5 Ld. TPO also rejected the working capital adjustment to assessee. The Ld.TPO thus proposed an adjustment of Rs.36,38,47,496/- being the shortfall in the revenue. FAR and benchmarking of Payment of royalty and service fees (Service segment) 8. In so far as Service segment, Ld. TPO vide page number 5 of its order has narrated the functions of the Assessee under service segment as under (pg. no. 5 and 6 of TP Order): ―5.1.1.3. Services Segment –Under the Services Segment, the assessee distributes training content to customers which primarily include Red Hat Global Learning Services (GLS) and provision of consultancy service. GLS refers to training courses designed to educate customers about Red hat Linux, including the Red hat Certified Engineer (RHCE) program. The training and examination courseware is provided by the AE Red Hat USA. For this service, the AE charges 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%: Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 6 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 65th Percentile 23.72 The Ld. TPO rejected the working capital adjustment to assessee. The Ld. TPO thus proposed an adjustment of Rs. 3,34,88,325/- being the shortfall in the revenue. FAR and benchmarking of Provision of Software Development Service 10. For the Provision of Software Development Service, Ld. TPO vide page number 48 of its order has narrated the functions of the Assessee under service segment as under: ―5.2.1. Description 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, the assessee submitted that it received INR93,32,63,036/- from its AE Red Hat USA for rending such services‖ 11. The Ld. TPO noted that the assessee computed its margin at 15% of the cost in the software development segment, by using TNMM as the most appropriate method. It selected 17 comparables having median of Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 7 unadjusted range at 9.81% and median of adjusted range at 5.90%. The assessee thus considered its transaction with AE to be at arm’s length. Ld. TPO rejected 13 comparable on account of various reasons. Further, Ld. TPO introduced 4 new companies and thus used set of following 8 companies with unadjusted margin of 21.085 %: Sr.No Name of the company Weighted average (OP/OC) (%) 1 Evoke Technologies Pvt. Ltd. 4.33 2 CG-VA K Software & Exports Ltd 13.53 3 R Systems International Ltd. 15.98 4 Nihilent Analytics Ltd. 21.09 5 Infobeans Technologies Ltd 26.89 6 Kellton Tech Solutions Ltd. 21.08 7 Interglobe Technology Quotient 69.28 8 Cybage Software Private Limited 56.84 35th Percentile 15.98 Median 21.085 65th Percentile 26.89 Ld.TPO also rejected the working capital adjustment to assessee. The Ld.TPO thus proposed an adjustment of Rs.4,93,81,788/- being the shortfall in the revenue. 12. On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order on 22/09/2021 proposing addition 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 Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 8 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. Sonata information technology Ltd 2. Unisys software and holding industries Ltd 3. JMD ventures Ltd 4. PS IT infrastructure and services Ltd 5. Advance technologies Ltd 6. Empower (I) Limited 7. Rashi Peripherals Private Limited 8. Compuage Infocom Limited 9. Savex Technologies Pvt. Ltd. 10. Informatics Technologies Private Limited Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 9 Based on the above, we shall undertake the compatibility of the companies sought for inclusion/exclusion by the assessee. 15. (i) K7 Computing Pvt Ltd and (ii) Virtual Galaxy Infotech Private Limited: Ld. AR submitted that K7 Computing Pvt. Ltd and Virtual Galaxy Infotech Private Limited have been excluded by coordinate of this Tribunal in assessee’s own case for assessment year 2016-17 in ITA No. 1379/M/2021 and assessment year 2017-18 being ITA No. 801/Mum/2022 observing as under: AY 2016-17 ―K7 Computing Pvt. Ltd. (K7) 27. The assessee challenged the inclusion of this comparable on the grounds inter alia that it is into selling its own proprietary IT security product \"K7 Total Security\" and \"K7 Enterprises Security; that K7 owns and employs plant &equipments comprising 61% of its total tangible assets; that K7 owns significant intellectual property rights comprising 91.5% of the total fixed assets; and that K7 incurred Rs. 15.75 crore on promotion i.e. 27.55% of sales during the year under consideration. 28. We have examined profile of the assessee company from its financials extracted at page A333 of the paper 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 andequipment 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 beexcluded.” Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 10 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 relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of the records placed before us. 8.4 It is noted that this comparable deals in software products, solutions. From the disclosure of general information about the company and page B17, it is noted that, this company belongs to commercial industry. At page B18, it shows that this company is into automatic data processing machine weighing less than 10 KG in the product services relates to personal computer laptop other digital automatic data processing machine etc. 8.5 In our considered view, the company is functionally not similar with that of the assessee. Accordingly, the Ld.AO/TPO is directed to exclude this comparable from the finalist.‖ 16. We have carefully considered the rival submissions and perused the material placed on record. The assessee has placed before us the compilation of its annual reports together with a detailed comparative chart, which clearly demonstrates that its functional profile has remained consistent and unchanged over the years. It is an admitted position that there is no variation in the functions performed, assets employed, or risks assumed (FAR) by the assessee during the year under consideration, when compared with the assessment years 2016–17 and 2017–18. This Tribunal, Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 11 in assessee’s own case for those years, had already examined the very same profile and comparables in depth, and rendered categorical findings. The learned Departmental Representative, has not brought on record any new facts, materials, or distinguishing features to deviate from the earlier binding precedent of the coordinate bench. In such circumstances, judicial discipline demands that we must follow the earlier view. Accordingly, respectfully following the consistent reasoning adopted by this Tribunal in assessee’s own cases for the preceding years, we hold that the same parity of treatment should be extended for the present year as well, and direct that (i) Virtual Galaxy Infotech Private Limited and (ii) K7 Computing Pvt. Ltd. be excluded from the final set of comparables. 17. Innovana Thinklabs Limited: 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/ developing new products 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. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 12 Further, there is no purchases of stock in trade, which clearly shows that company is not into trading business. (Refer Page B34 of AR compendium) As per Other information in annual report – The company‘s profits will increase in the coming years as it has developed new product which has a good market. (Refer Page BB44(A) of AR compendium) As per Form MGT-9 – The principal business activities of the company are ‗Other computer related activities (for example maintenance of websites of Other firms/ creation of multimedia presentations for other firms etc.)‘ (Refer Page B31 of AR compendium) Innovates new products – The website of the company states that it engages in constant innovation to develop new technologies and enlists various products and software offered by the company such as Ad-blocker, space reviver, file opener, privacy protector etc. (Refer Page A749 of factual paper- book)‖ 18. We have carefully considered the submissions advanced by both parties and examined the material placed on record in relation to the inclusion of Innovana Thinklabs Limited as a comparable. The assessee has vehemently contended that this company is functionally dissimilar, as it is engaged primarily in the manufacturing and development of software products, whereas the assessee’s business model is confined to being a limited-risk reseller of subscription-based software, without any activity of product development or ownership of intellectual property. From the extracts of the annual report, it emerges that Innovana Thinklabs has developed numerous products, which have established a market presence under its brand. Its product portfolio includes a suite of applications and software such as Ad-blocker, Disk Cleanup, Space Reviver, File Opener, and Privacy Protector. These are products innovated, developed, and maintained by the company itself. The disclosure in its management report further testifies to the fact that the company is in the constant pursuit of technological innovation, investing resources in developing new products which are thereafter registered in the market. Such a business model is wholly distinct from that of the assessee, who does not engage in any product innovation, but only distributes subscriptions of pre-developed Red Hat software on a limited-risk basis. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 13 The financial disclosures of Innovana Thinklabs also reinforce this distinction. The Profit and Loss statement reflects material consumption costs to the tune of ₹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 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, the assessee’s role is narrowly confined to that of a reseller of subscriptions, operating under a limited-risk profile, without any involvement in innovation, product development, or creation of intellectual property. The assessee merely facilitates access to software developed by its parent company, without assuming risks or deploying resources towards R&D. To equate such a reseller with a product development company would be a distortion of functional comparability. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 14 We also note that in earlier parts of this order we have directed the exclusion of Virtual Galaxy Infotech Pvt. Ltd. on similar grounds, namely that it was engaged in development activities and therefore functionally dissimilar. The same reasoning applies with equal force to Innovana Thinklabs. Consistency of approach demands that we apply the same functional filter, for judicial discipline requires that parity of treatment be maintained across comparables that are similarly placed. In light of the foregoing analysis, we are of the considered view that Innovana Thinklabs Limited cannot be considered as a valid comparable for benchmarking the international transactions of the assessee. Its functional profile as a full-fledged product development and innovation-driven company is entirely at variance with that of the assessee, who is merely a limited-risk reseller. Accordingly, we direct the Ld. AO/TPO to exclude Innovana Thinklabs Limited from the final set of comparables. 19. Sonata Information Technology Limited Ld. AR submitted that Sonata Information Technology Limited has been accepted as a good comparable by coordinate of this Tribunal in assessee’s own case for assessment year 2017-18 being ITA No. 801/Mum/2022 observing as under: ―9. Sonata Information Technology Ltd The Ld.AR submitted that, this comparable is engaged primarily in the business of reselling products of companies such as Microsoft, IBM and Oracle except to its customers in India. It is submitted that, this comparable was accepted for inclusion by coordinate of this Tribunal in assessee‘s own case, for assessment year 2016-17. This Tribunal remitted this comparable to the Ld.TPO to verify the turnover filter, if it fits within the range of 10 times of the assessee‘s turnover for assessment in 2016-17. It is submitted that in the remand proceedings the Ld.TPO accepted this comparable as satisfying all the filters. It is also submitted that the said comparable stood accepted by the Ld.TPO for assessment year 2021-22. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 15 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, it is manifest that Sonata Information Technology Limited is functionally similar to the assessee, being engaged in the business of reselling software products without any activity of product development or ownership of intangibles. We have already noted, on the strength of the material placed before us, that its turnover for the year under consideration falls within the permissible 10x range when compared to that of the assessee, thereby satisfying the turnover filter. The only objection of the lower authorities—that this comparable fails the turnover test—has been found to be factually untenable. Once this objection falls, nothing survives to exclude this company from the final set. It is further pertinent to observe that in assessee’s own cases for the earlier assessment years 2016–17 and 2017–18, this Tribunal has consistently accepted Sonata as a valid comparable, and even in AY 2021–22 the TPO himself has retained it. In the absence of any change in the functional profile of either the assessee or Sonata, there is no justification to deviate from the settled position. Judicial consistency demands that we follow the same reasoning. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 16 Respectfully following the above view, and for parity of reasoning as recorded in para 19, we direct that Sonata Information Technology Limited be included in the final set of comparables. 21. (i) Unisys software and Holding industries Ltd., (ii) JMD ventures Ltd., (iii) PS IT Infrastructure & Services Ltd. and (iv) Avance Technologies Ltd. Ld. AR submitted that, Unisys software and Holding industries Ltd., JMD ventures Ltd., PS IT Infrastructure & Services Ltd. and Avance Technologies Ltd. have been remitted by the coordinate bench of this Tribunal to the Ld.AO/TPO to verify these comparables based on the filters applied for determining the compatibility with assessee, in assessee’s own case for assessment year 2017-18 being ITA No. 801/Mum/2022 observing as under: ―Unisys software and holding industries Ltd., JMD ventures Ltd.,PS IT Infrastructure & Services Ltd., Advance Technologies 10. It is submitted that all these comparable were rejected by the Ld.TPO for being functionally not similar with that of assessee. It is also submitted that the Ld.AR challenged the search criteria for each of these comparable as not proper. However, the Ld.AR submitted that all these comparable are trading 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 Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 17 determining the compatibility with assessee. In case they pass through all the other filters, the same may be retained as comparable is in the finalist. Accordingly, these comparable sagas omitted to the Ld.AO/TPO with the above directions.‖ 22. We have carefully considered the rival submissions and examined the material placed before us in light of the earlier directions of the coordinate bench. It is evident from the record that in Assessment Year 2017–18, this Tribunal had specifically remitted the comparables, namely (i) Unisys Software and Holding Industries Ltd., (ii) JMD Ventures Ltd., (iii) PS IT Infrastructure & Services Ltd., and (iv) Avance Technologies Ltd., to the file of the Ld. AO/TPO for the limited purpose of verifying their suitability based on the filters prescribed for determining comparability with the assessee. The Tribunal had observed that while the Ld. TPO had rejected these companies at the threshold by dubbing them functionally dissimilar, such rejection was not preceded by any meaningful verification of their business activities or application of filters on a qualitative basis. From the annual reports placed before us, it is discernible that these companies are engaged in segments relating to trading in software and hardware. Prima facie, their activities cannot be brushed aside without a proper examination against the prescribed filters, including functional similarity, risk profile, turnover thresholds, and segmental reporting, wherever applicable. The earlier coordinate bench had thus remitted the matter in the interest of justice, directing the Ld. AO/TPO to re-examine these comparables comprehensively and to retain them in the final set only if they satisfy the relevant filters. The assessee has now furnished before us annual report compilations along with a detailed chart demonstrating that its functional profile has remained unchanged vis-à-vis the earlier years. There are admittedly no differences in its FAR profile when compared to AY 2017–18. On the other hand, the Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 18 Revenue has not brought on record any new material or distinguishing fact that could justify a departure from the earlier coordinate bench’s directions. Judicial propriety and discipline demand that we adhere to the view consistently taken in assessee’s own case in the preceding year. In view of the above, we see no reason to deviate from the earlier order of this Tribunal. Respectfully following the precedent, we direct the Ld. AO/TPO to carry 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, 3.7 and additional ground No. 5 is in respect of not granting working capital (hereinafter referred to as WCA) and Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 19 proportionate adjustments claimed by the assessee, in order to iron out the differences between the comparables and the assessee for computing the margin. We find that the Co-ordinate Bench of this Tribunal in assessee's own case for A.Y. 2016-17 and A.Y. 2017-18 has also granted working capital adjustment as well as proportionate adjustment to the assessee in respect of difference in working capital levels between the comparable companies and the assessee. The same are reproduced below- AY 2017-18 ―11.1Working capital represents the funds of a company used to finance their accounts payable, receipts and inventory purchases. As short-term finance comes at a cost to the business more or less, working capital can lead to either increase of or reduce the interest costs. So managing working capital is a means of managing the firm‘s costs and managing its margins. More working capital can impact revenues as some companies set beneficial payment terms and have high stock levels to encourage sales. Whether or not the firm is advantaged or disadvantaged by its working capital strategies therefore will depend on whether suppliers or customers respond to different payment terms, whether price premiums or discounts are actually available from customers or suppliers in practice, and also the extent to which the firm has control over their receivables, payables and inventory levels. 11.2 Differences in working capital may suggest differences in comparability and thus WCA could neutralize the effects of different trade terms and inventory levels. In the transfer pricing context, the tested party and comparables can have different working capital strategies and use different prices or generate different profits accordingly. Working capital adjustments are therefore an attempt to arrive at adjusted comparables as the basis of determining their profit level indicators or comparable uncontrolled prices. 11.3 The OECD‘s standard of comparability emphasis that if there are material differences between the controlled and uncontrolled transactions, adjustments should be made, provided the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results. The OECD re-iterates that working capital adjustments should only be considered when the reliability of the comparables will beimproved, 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 Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 20 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 ofHuawei Technologies India (P.) Ltd. Reported in (2019) 101 taxmann.com 313 wherein, it was held as under: '10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival Submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:-- (a) to (d)…………. (e) transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by 'the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable. uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the, international transaction [or the specified domestic transaction]; (f) …… (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:— Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 21 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 international transaction [or a specified domestic transaction] if - (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences: A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take 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. 1. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the \"TPG\") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that where applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable meansthat: • None of the differences (if any) between the situations being compared could materially affect the condition being examinedinthe methodology (e.g. price or margin), or • Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called \"comparability adjustments.\" 2. In Paragraph 13 to 16 of the aforesaid OECD guidelines, need for working capital Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 22 adjustment has been explained as follows: \"13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 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 structure (e.g. where the purchase of inventory is partly funded by equity) of by the risk associated with holding specific types of inventory) Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: • A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) • This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers — (less) the period granted to pay debts to suppliers.\" 3. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 11.7 We find that the Co-ordinate Bench of this Tribunal in assessee's own case for A.Y. 2016-17 in Red Hat India (P. Ltd.) v. ACIT (supra) also granted working capital adjustment at well as proportionate adjustment Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 23 to the assessee in respect of difference in working capital levels between the comparable companies and the assessee. Based on the above discussions and respectfully following the decision of coordinate bench of this Tribunal in assessee’s own case, we direct Ld.AO/TPO to grant WCA and any other proportionate adjustment that would materially affect the margin computation for the purposes of comparability analysis. 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 Technologies India (P.) Ltd. v. JCIT [(2019) 101 taxmann.com 313], have affirmed that proportionate working capital adjustments are a legitimate part of transfer pricing analysis to ensure a level playing field between tested party and comparables. Respectfully following the aforesaid binding precedents, and in the absence of any distinguishing feature brought on record by the Revenue, we hold that the assessee is entitled to working capital adjustment, along with any other proportionate adjustment, wherever the differences in working capital materially impact the margin computation of the comparables. The assessee Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 24 shall furnish the requisite details before the Ld. AO/TPO, who shall compute and grant such adjustments in accordance with law. Accordingly, Grounds 3.6, 3.7 and 5 raised by the assessee are allowed for statistical purposes. Payment of Royalty and service fees under Service segment 27. Grounds 3.8 to 3.11 by the assessee seeking inclusion/exclusion of comparables under Payment of Royalty and Service fee (Service segment): Ld.AR filed his arguments in the form of detailed chart. The assessee is seeking exclusion of following compatibles: 1. Career Mosaic Pvt. Ltd. 2. People Combine Educational Initiatives Pvt. Ltd. 3. Sarla Holdings Pvt. Ltd. 4. G D Goenka Pvt. Ltd. 5. M T Education Services Pvt. Ltd. 6. Merittrac Services Pvt. Ltd. 7. Lakshya Educare Pvt. Ltd. The assessee is also seeking inclusion of following compatibles: 1. Compucom Software Ltd 2. Athena Eduspark Ltd. 3. Aptech Ltd. 4. Swiss Cert Private Limited 5. Integrated Quality Certification Private Limited 28. (i) Career Mosaic Pvt. Ltd, (ii) People Combine Educational Initiatives Pvt. Ltd., (iii) Sarla Holdings Pvt. Ltd. and (iv) G D Goenka Pvt. Ltd Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 25 Ld. AR submitted that the above-mentioned companies have been excluded by the Co-ordinate Bench of this Tribunal in assessee’s own case for assessment year 2017-18 being ITA No. 801/Mum/2022 observing as under: ―Sarala Holdings Pvt. Ltd. The Ld.AR submitted that; this company is engaged in providing education in school under the name ―Pathways World School‖ situated at Gurugram Haryana. It is submitted that, the revenue earned by this company from educational activities and running schools is not 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 submittedthat, 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.D.Goenka Pvt. Ltd. The Ld.AR submitted that, this company is involved in providing education through schools and owns significant intangibles and fixtures. The Ld.AR thus prayed for this comparable to be excluded. G.1 On the contrary the Ld.DR relied on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of the records placed before us. G.2 Admittedly, these companies are engaged in running schools which is not functionally similar with the training and coaching activities carried on by the assessee. It will not be out of place to note that, these companies have different business model of rendering education which is not similar with training activities carried on by the assessee. Accordingly, we direct the Ld.AO/TPO to exclude Sarala Holdings Pvt. Ltd. People Combine Educational Initiatives Pvt. Ltd., Career Mosaic Pvt. Ltd. And G.D.Goenka Pvt. Ltd from the final list.‖ Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 26 29. We have carefully considered the submissions of the Ld. AR and perused the material placed on record. It is an admitted position that the functional profile of the assessee has remained unchanged vis-à-vis the earlier assessment years, and the assessee has also furnished before us a compilation of annual reports along with a detailed functional analysis chart of the comparables. On perusal thereof, we find that companies such as Career Mosaic Pvt. Ltd., People Combine Educational Initiatives Pvt. Ltd., Sarla Holdings Pvt. Ltd., and G.D. Goenka Pvt. Ltd. are primarily engaged in the field of education, training, and allied activities. Their business model revolves around rendering of educational and coaching services, which is entirely distinct from the business model of the 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 limited-risk 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 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 Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 27 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 same maybe retained in the final list, in assessee’s own case for assessment year 2017-18 being ITA No. 801/Mum/2022 observing as under: ―Merittrac Services Pvt. Ltd. B.1 The Ld.AR submitted that, this comparable is engaged in the business of conducting commercial training, coaching/tutorial classes and activities incidental and ancillary thereto. Placing reliance on the annual reports at page B 65 of the paper book, the Ld.AR submitted that, this company is not functionally similar with that of rendering support services to its customers in respect of project implementation on site as well as off-site. The Ld.AR submitted that, though assessee provide education and training to students on Red Hat Software and issue certification to such students. However, it is not similar with that of training activities carried out by this company. B.2 The Ld.AR submitted that, this company owns significant intangibles comprising 23% of total fixed assets and also incurs expenses which are in the nature of examination hall expenses and test administrators‘ expenses etc. He has prayed for exclusion of this comparable. On the contrary the Ld.DR relied on orders passed by authorities below. The submissions advanced by both sides in the light of the records placed before us. B.3 There is no doubt that, the assessee is also in training students and issuing certification by conducting examination. It is also an admitted fact that the assessee provides course content to the students and also supervises the examination carried out at various channel partner locations. The present comparable is said to be conducting commercial training, coaching/tutorial classes and activities incidental and ancillary date thereto as per page B 65 referred to by the Ld.AR. We therefore do not find that the Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 28 company is functionally different from assessee under the segment more so as the method adopted for computing the margin is TNMM. B.4 On perusal of audited accounts of the assessee placed at A 22 of the paper book, it is noted that, the assessee is earning certification fee of ₹131,864,115/- training program fees amounting to Rs.127,985,936/-. The assessee did place entire statement of profit and loss account relating to this company. We are therefore not able to discern segmental details of revenue earned from various operations 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 own case for AY 2017–18, this Tribunal had remitted Merittrac Services Pvt. Ltd. and Lakshya Educare Pvt. Ltd. to the file of the Ld. AO/TPO for verifying segmental details of revenue earned from training/tutorial classes. The direction was that only if reliable segmental data is available and the prescribed filters are satisfied, these companies may be retained in the final list; otherwise, they should be excluded. Since the assessee’s functional profile remains unchanged and the Revenue has not brought any distinguishing facts, we see no reason to deviate. Accordingly, we remit Merittrac Services Pvt. Ltd. and Lakshya Educare Pvt. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 29 Ltd. back to the file of the Ld. AO/TPO for verification in line with the Tribunal’s directions for AY 2017–18. 32. Athena Eduspark Ltd. Ld.AR submitted that Athena has been included by coordinate of this Tribunal in assessee’s own case for assessment year 2017-18 being ITA No. 801/Mum/2022 observing as under: ―Athena Endspark Ltd. It is submitted that this company was remanded by coordinate of this Tribunal in assessee own case for assessment year 2016-17 as a Ld.AO/TPO therein did not look into its financials. The Ld.AR placing reliance on the order giving effect to the decision of this Tribunal for A.Y. 2016-17 admitted that, this comparable is accepted by the Ld.AO/TPO in the remand report. He drew our attention at page A 914- A 916 of the paper book wherein the Ld.TPO accepted this comparable to be functionally similar with that of the assessee. We accordingly direct the Ld.AO/TPO to consider this comparable in the final list‖ 33. We find merit in the submissions of the Ld. AR. The assessee has placed on record the annual report compilation and a detailed functional chart, which clearly show that its functional profile continues to remain the same as in earlier years. It is also an admitted position that there are no variations in the FAR analysis of the assessee for the year under consideration when compared with AY 2017–18. In fact, this very comparable, Athena Eduspark Ltd., had been accepted by the coordinate bench in assessee’s own case for AY 2017–18. The Ld. DR has not advanced any fresh material or distinguishing fact to take a different view from what has already been held. In the absence of any change in facts or law, there is no justification to depart from the settled position. Accordingly, following the principle of consistency, we direct that Athena Eduspark Ltd. be included in the final set of comparables. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 30 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 to take a different approach. We, therefore, direct the Ld. AO/TPO to re-examine the functional profile of Compucom Software Ltd. vis-à-vis AY 2017–18, and if the FAR analysis is found consistent, to retain this company in the final set of comparables. 35. In respect of the comparables (i) M T Education Services Private Limited, (ii) Aptech Ltd, (iii) Swiss Cert Pvt Ltd. and (iv) Integrated Quality Certification Pvt. Ltd., Ld. AR submitted that, these comparables may be left academic. Considering the submissions, no directions are issued on respect of these companies. 36. Ground No 3.12 is raised by the assessee seeking correction of errors computation in margin of comparables that would remain to determine arms length margin of the transaction. We direct the Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 31 Ld.AO/TPO to adopt the correct figures for computing the margins of the remaining comparables. 37. Ground No. 3.13 and 3.14 raised by the assessee is towards non granting of working capital and other proportionate adjustments for computing the margin of the comparables. We have already considered the issue while deciding Grounds 3.6-3.7 hereinabove. Applying the same mutatis mutandis, we direct the Ld.AO/TPO to provide for working capital adjustment and other proportionate adjustments to iron out the differences between the assessee and the comparables for computing margins. Accordingly, grounds 3.13 - 3.14 stands partly allowed for statistical purposes. Provision of software development services 38. Ground No. 3.15-3.18 by the assessee seeking inclusion/exclusion of comparables under Provision of software development services.Ld.AR filed his arguments in the form of the detailed chart. The assessee is seeking exclusion of following comparables- 1. Nihilent Ltd. 2. Infobeans Technologies Ltd. 3. Kellton Tech Solutions Ltd. 4. Interglobe Technology Quotient Pvt. Ltd. The assessee is seeking inclusion of following comparables- 1. Sagarsoft India Limited 2. Maveric Systems Limited 3. Harbinger Systems Private Limited 4. Sasken Communication Technologies Limited 5. Virinchi Limited 6. Expleo Solutions SQS India BFSI Limited 7. Sankhya Infotech Limited 8. Jindal Intellicom Limited Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 32 Based on the above, we shall undertake the compatibility of the companies sought for inclusion/exclusion 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 ofNihilent 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, 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. Infobeans Technologies Ltd. (Infobeans) 49. The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA). 50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services, but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee.‖ Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 33 AY 2017-18 ―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, it would be more appropriate to follow assessee‘s own case rather than another assessee whose FAR analysis would be different with that of assessee. Accordingly, we direct inclusion of Aspire Systems (India) Pvt. Ltd., and Interglobe technology quotient Pvt. Ltd. And exclusion of Kiliton Tech Solutions Ltd., Dun & Bradstreet Technologies & 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. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 34 41. Sagarsoft India Limited Ld.AR submitted that, Sagarsoft India Limited has been accepted as a good comparable by coordinate of this Tribunal in assessee’s own case for assessment year 2017-18 being ITA No. 801/Mum/2022 observing as under: AY 2017-18 ―19. Sagarsoft India Ltd. It is submitted that, this comparable was initially remanded by coordinate bench of this Tribunal for assessment to 2016- 17(supra). Subsequently, the Ld.AO/TPO while passing remand order accepted the said comparable. The Ld.AR placed reliance on page 922 of the paper book in support of the submissions. 19.1 We have perused relevant observations of the remand report and found that the Ld.AO/TPO accepted this comparable for assessment 2016-17. Accordingly, we direct this comparable to be included in the finalist.‖ 42. On a careful consideration of the material placed before us, we note that the coordinate bench in assessee’s own case for AY.2017–18 had already accepted Sagarsoft India Ltd. as a comparable. The assessee has shown that its FAR profile continues to be the same in the present year, and the annual report compilation placed on record supports this position. No contrary evidence has been brought forward by the Revenue to indicate any change in facts or circumstances. In view of the above, and applying the rule of consistency, we hold that Sagarsoft India Ltd. qualifies as a valid comparable and direct the Ld. AO/TPO to include it in the final list. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 35 43. Maveric Systems Limited We note that Maveric Systems Limited is engaged in software programming and testing services, which fall within the definition of software development services under Rule 10TA of the Income-tax Rules, 1962. This company was accepted as a comparable in AY 2021–22, and the assessee’s FAR profile remains unchanged for the present year. The Revenue has not brought any contrary material to justify exclusion. Accordingly, we direct the Ld. AO/TPO to verify the functional profile vis-à- vis AY 2021–22, and if the FAR remains the same, to include Maveric Systems Limited in the final list of comparables. 44. Harbinger Systems Private Limited We have considered the rival submissions and perused the record. It is seen that Harbinger Systems Pvt. Ltd. is engaged in software development services and has already been accepted as a comparable in assessee’s own case for AYs 2020–21 and 2021–22. The assessee has also placed on record annual reports 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. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 36 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 analysis chart, has remained consistent across the relevant years. There is no material placed on record by the learned Departmental Representative to establish any factual distinction in the FAR analysis for the year under appeal as compared to the earlier years. In these circumstances, and following the principle of consistency, we consider it just and proper to direct the learned AO/TPO to verify the functional comparability of this company with reference to AYs 2014–15 and 2015–16, and if the FAR continues to remain unaltered, to include Sasken Communication Technologies Ltd. in the final set of comparables. 46. Virinchi Limited We have given our thoughtful consideration to the rival submissions and the material brought on record. It is an undisputed position that Virinchi Limited is engaged in IT products and services, providing customised solutions to its clientele, and is also rendering software development services. The relevant segmental data for software services is duly available and has consistently been relied upon for the purpose of comparability. It is further noted that the said concern has already been accepted by the learned TPO as a valid comparable in the assessee’s own case for assessment years 2020–21 and 2022–23. The functional profile of the assessee and that of Virinchi Limited, as substantiated through the Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 37 annual reports and detailed charts filed, remains unaltered. No material has been placed before us by the learned Departmental Representative to show any divergence in the FAR analysis for the year under appeal when compared to the earlier years. In view of the above, and guided by the principle of consistency, we direct the learned AO/TPO to examine the functional comparability of this company with reference to assessment years 2020–21 and 2022–23, and if the FAR continues to remain similar, to include Virinchi Limited in the final set of comparables. 47. Expleo Solutions SQS India BFSI Limited On a thoughtful appraisal of the material placed before us, it emerges that Expleo Solutions SQS India BFSI Limited is primarily engaged in rendering software testing services. In terms of Rule 10TA of the Income-tax Rules, 1962, such testing activities are to be regarded as part of software development services. It is an undisputed fact that this company was accepted as a comparable by the TPO in the assessee’s own case for AY 2020-21. 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 Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 38 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 remaining comparables. 50. Ground No. 3.20 raised by the assessee is towards non granting of working capital adjustment for computing the margin of the comparables. We have already considered the issue while deciding Grounds 3.6-3.7 hereinabove. Applying the same mutatis mutandis, we direct the Ld.AO/TPO to provide for working capital adjustment and other proportionate adjustments to iron out the differences between the assessee and the comparables for computing margins. Accordingly, Ground No. 3.20 stands partly allowed for statistical purposes. 51. Ground No. 4.1 raised by the assessee is towards challenge on levying of interest under section 234A of the Act even when return of income was filed within the due date. As per the facts mentioned by the assessee, it had filed its return of income ROI on 29/11/2018, which is within the statutory timelines as per section 139(1) of the Act. However, an interest of Rs. 23,03,438/- has been charged as per the Assessment Order. Given the facts, we are of the view that no interest under Section 234A of the Act should be levied. The Ld. AO is directed to re-compute the tax payable / refund due to the assessee without said interest. Consequently, the Ground No. 4.1 is decided for statistical purposes in favour of the assessee. Printed from counselvise.com ITA No. 2442/Mum/2022 Red Hat India Private Limited 39 52. Ground No. 4.2 raised by the assessee is towards challenge on levying of interest under section 234B of the Act. Since this ground is consequential in nature, the AO is directed to deal with the issue in accordance with the law and ground is allowed for statistical purposes. 53. Ground No. 4.3 is in relation to initiation of penalty and the same is premature and consequential in nature, hence need no finding and dismissed. 54. In the result, the appeal of the assessee is treated as partly allowed for statistical purposes. Order pronounced in the open court on 22-08-2025 Sd/- Sd/- [ARUN KHODPIA] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 22-08-2025 TNMM Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, ITAT, Mumbai 5) Guard file By Order Dy./Asst. Registrar I.T.A.T, Mumbai Printed from counselvise.com "