RED HAT INDIA PVT LTD,MUMBAI V. AADL/JT/DY/ACIT/ITO, MUMBAI

ITA 801/MUM/2022

AI Insights

The case involves Red Hat India Private Limited appealing against the final assessment order for the assessment year 2017-18, which included significant transfer pricing adjustments. The primary issues revolved around the selection and exclusion of comparables in the transfer pricing analysis and the correct application of financial adjustments. The Tribunal examined the functional, asset, and risk profiles of various comparables proposed by both the assessee and the tax authorities. It was found that some comparables were functionally dissimilar or did not meet the financial filters applied by the tax authorities, leading to their exclusion from the final list of comparables. The Tribunal also addressed the need for adjustments in working capital and other financial metrics to ensure a fair comparison.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 473727 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Assessment Year: 2017-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PANKAJ KUMAR
• Assessee Lawyers: AJIT JAIN AW NIKHILA
• Keywords: Business income; Opportunity of being heard; Transfer pricing; International transaction; Bad and doubtful debts; Depreciation; Period of limitation; Related party transaction; Working capital adjustments
• Section: 143(3); 143(2); 22; 13; 234B; 144C; 20; 101

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SMT. BEENA PILLAI (JUDICIAL MEMBER) AND SHRI OMKARESHWAR CHIDARA (ACCOUNTANT MEMBER) I.T.A. No. 801/Mum/2022 Assessment Year: 2017-18 Red Hat India Private Limited Red Hat India Private Limited, A-201, Supreme Business Park, Supreme City, Hiranandani Gardens, Powai, Mumbai – 400076 PAN: AABCR7097N Vs. Additional/Joint/ Deputy/Assistant Commissioner Of Income Tax/ Income Tax Officer National Faceless Assessment Centre Delhi (Appellant) (Respondent) Appellant by Shri. Ajit Jain a/w Ms. Nikhila Bhalla & Ms. Archita Singhal Respondent by Shri. Pankaj Kumar, CIT D.R. Date of Hearing 30.01.2025 Date of Pronouncement 28.02.2025 ORDER Per: Smt. Beena Pillai, J.M.: The Present appeal filed by the assessee arises out of final assessment order dated 28/02/2022 passed by NFAC Delhi for assessment year 2017-18 on following grounds of appeal: 2 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited “On the facts, and in the circumstances of the case, and in law, the Appellant craves to prefer an appeal against order dated 28 February 2022 passed by the Additional/ Joint/ Deputy/ Assistant Commissioner of Income tax/ Income-tax Officer, National Faceless Assessment Centre, Delhi (hereinafter referred to as the 'Ld. AO'), under Section 143(3) r.w.s 144C(13) read with Section 1448 of the Income-tax Act, 1961 ('the Act'), on the grounds as set out herein: 1. The Ld. AO, while passing the order with the addition of INR 25,29,89,726 on account of transfer pricing issues, erred in law in disregarding the impact of the Ld. Dispute Resolution Panel's ('Ld. DRP') directions passed under section 144C and not complying with the terms of Section 144C (10) and 144C (13) of the Act, thereby, rendering the assessment proceeding vitiated and invalid in law. 2. Grounds relating to Transfer Pricing Adjustment-INR 25,29,89,726 Adjustment relating to international transaction pertaining to payment of royalty and service fee (subscription segment)-INR 14,35,88,058 2.1 Without prejudice, the Ld. AO [along with the Learned Transfer Pricing Officer ('Ld. TPO')] under the directions of the Ld. DRP erred on facts and in law, in determining the arm's length price for payment of royalty and service fees under subscription segment and thereby, making an adjustment of INR 14,35,88,058 to the taxable income of the Appellant. 2.2 Without prejudice, the Ld. DRP DRP/Ld. AO/ Ld. TPO erred on facts and in law in modifying the economic analysis carried out by the Appellant in the Transfer Pricing Documentation (TP Documentation') and arbitrarily applying incorrect quantitative filters. 2.3 Without prejudice, the Ld. DRP/Ld. AO/ Ld. TPO erred on facts and in law in rejecting various comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 10B(2) of the Rules 3 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 2.4 Without prejudice, the Lid. DRIV Ld. AD L4. TPO erred on facts and in law in introducing additional companies without appreciating that such companies are functionally dissimilar to the Appellant and violating the provisions of Rule 108(2) of the Rules. 2.5 without prejudice, the Ld. DRP/Ld. AO/Ld. TPO erred in computing the incorrect net operating profit margin of comparables for arriving at the arm's length margin. 2.6 Without prejudice, the Ld. DRIV LA AO/ Ed. TPO erred in law in not allowing relevant adjustments as per the provisions of Rule 108(1) and Rule 108(3). 2.7 Without prejudice, Ld. AO/Ld. TPO erred in law in not granting and Ld. DRP in not adjudicating the claim of proportionate adjustment, thereby extending the quantum of transfer pricing adjustment to transactions with the non- associated enterprises also. Adjustment relating to international transaction pertaining to payment of royalty and service fees (services segment)-INK 163,93,614 2.8 The Ld. AO (along with the Ld. TPO) under the directions of Ld. DRP erred on facts and in law, in determining the arm's length price for payment of royalty and service fees under service segment and thereby making an adjustment of INR 1,63,93,614 to the taxable income of the Appellant. 2.9 Without prejudice, the Ld. DRP DRP/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 arbitrarily applying incorrect quantitative filters. 2.10 Without prejudice, the Ld. DRP/Ld. AO/Ld. TPO erred on facts and in law in rejecting various comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 108(2) of the Rules. 4 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 2.11 Without prejudice, the Ld. DRP/ Ld. AO/ Ld. TPO erred on facts and in law in introducing additional companies without appreciating that such companies are functionally dissimilar to the Appellant and violating the provisions of Rule 10B(2) of the Rules. 2.12 Without prejudice, the Ld. DRP/ Ld. AO/Ld. TPO erred in computing the incorrect net operating profit margin of comparables for arriving at the arm's length margin. 2.13 Without prejudice, the Ld. DRP/ Ld. AO/ Ld. TPO erred in law in not allowing relevant adjustments as per the provisions of Rule 10B(1) and Rule 10B(3). 2.14 Without prejudice, Ld. AO/ Ld. TPO erred in law in not granting and Ld. DRP in not adjudicating the claim of proportionate adjustment, thereby extending the quantum of transfer pricing adjustment to transactions with the non-associated enterprises also. Adjustment relating to international transactions pertaining to provision of software support services-INR 4,26,74,072 2.15 The Ld. AO (along with the Ld. TPO) under the directions of Ld. DRP erred on facts and in law, in determining the arm's length price for provision of software support services and thereby making an adjustment of INR 4,26,74,072 to the taxable income of the Appellant. 2.16 Without prejudice, the Ld. DRP DRP/ 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 arbitrarily applying incorrect quantitative filters. Other grounds 3.1 The Ld.AO erred in short granting credit of Taxes Deducted at Source to the extent of INR 8,46,48,696 while computing tax liability for the year. 5 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 3.2 The Ld.AO erred on facts and in law in levying interest under section 234B of the Act. 3.3 The Ld. AO erred on facts and in law in initiating penalty proceedings under Section 270A of the Act. The Appellant craves leave to add to, or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal.” Brief facts of the case are as under: 2. The assessee is accompanied and filed it return of income for year under consideration on 07/06/2018 declaring total income of ₹35,00,34,730/-. The case was selected for scrutiny and notice under section 143(2) was issued along with notice under section 142 (1) calling upon assessee to furnish various details. The representatives of the assessee appeared before the Ld.AO and filed the requisite information/details as called for through e-filing. 2.1 The Ld.AR observed that assessee had international transactions with its associated enterprise (hereinafter referred to as AE) during the year under consideration exceeding the threshold limit. Accordingly, the case was referred to the transfer pricing officer (hereinafter referred to as Ld.TPO) for determination of arms length price (hereinafter referred to as ALP) of the transactions entered into between the assessee and the associated enterprise. 2.2 On receipt of the reference, the Ld.TPO called upon assessee to furnish the economic details of the international transactions in Form 3 CEB. From the details filed the Ld.TPO noted that 6 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited assessee is a part of the Red Hat group and was ultimately held by the Red Hat USA. It was noted that assessee is engaged in the business of providing “open source” software to customers worldwide. It was submitted that the software being “open source”, the Red Hat group does not specifically charge its customers for the same. It was submitted that major revenue earned by the groups were from its subscriptions, with Red Hat Enterprise Linux as the primary source of the companies worldwide growth plan. 2.3 The 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. It was noted that the Red Hat group offers several types of such subscriptions with varying levels of support services and access to bug fixes and software updates. 2.4 The Ld.TPO noted that, the group provides various professional services such as training, consulting and engineering services. The assessee was involved distribution of Red Hat subscription and providing Red Hat products related training and consulting services to customers in Indian subcontinent it was also noted that, from 2011, assessee provided certain software development services and sales and marketing support services to Red Hat USA. From financial year 2013-14 onwards, the assessee started providing information technology enabled services(hereinafter referred to as ITeS) to Red Hat USA. 7 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 2.5 The 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 119,55,70,837 TNMM 2 Payment of royalty and service fee to Red Hat US for Services segment 7,55,81,437 TNMM 3 Provision services of software development/ETAX DEPAR 61,49,77,226 TNMM 4 Provision of IT enabled services 1,39,95,21,215 TNMM 5 Provision of sales and marketing support services 5,44,27,439 TNMM 6 Reimbursement for RSU granted to employees 22,42,62,466 Other method 7 Purchase of Assets and availing services** 4,61,19,300 CUP 8 Security features installation 4,21,73,438 Other method 2.6 The assessee submitted that, it is a distributor of Red Hat subscriptions in the Indian sub continent. It was submitted that 8 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited the customers purchase Red Hat subscription from the assessee and are entitled to avail support services for the “open source” software. The support services are provided by the AE to the assessee’s customers through the global support service. Centres operating around the world. The assessee submitted that it identifies customers in India and enters into a contract for a period of 1-3 years for sale of subscription. It was submitted vide letter dated 27/11/2020 that the assessee does not sign any agreement with the customers for sale of subscription. Assessee submitted that, once the customer purchases subscription, customer needs to accept the standard enterprise agreement in place as a click through the portal. It is submitted that, there is a standard format of enterprises agreement, which was provided to the assessee by its AE based on which assessee sell the Red Hat subscriptions in India which will entitle the customer to receive both the software and also services during the period of subscription. Thus for the purposes of sale/distribution of Red Hat subscription in India, it includes both software and related services by the assessee for which the assessee entered into a license and service agreement dated 01/04/2011 with the AE. The assessee submitted that this has been the consistent business model in the preceding assessment years. 2.7 The assessee submitted that, as per the agreement assessee is granted the right to use intangible properties of the AE like trademark, trade memes and domain names owned by Red Hat USA for which assessee is liable to pay royalty of 3% of its revenue from the segment to the AE. For the services rendered to the customers who has purchased subscriptions, the AE charges 9 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited a service fee which is an amount equal to the entire revenue of the assessee from this segment reduced by 1.4% of the revenue. 2.8 The learner TPO observed that assessee has bifurcated the segment into 2 parts as under: A. Payment of royalty and service fee (subscription segment) B. Payment of royalty and service fees (service segment) A. Payment of royalty and service fee (subscription segment) 2.9 The Ld.TPO observed that, the assessee in its TP study benchmarked the transaction by using transactional net margin method (hereinafter referred to as TNMM) and profit level indicator (hereinafter referred to as PLI ) by using operating profits to operating revenue( hereinafter referred to as OP/OR) at 1.4%. It was noted by the Ld.TPO that the assessee used following 10 comparable with an adjusted range having median - 0.42% and unadjusted median of 0.16%. The assessee thus considered its transaction with AE to be at arms length. Sr.No Name of the company Weighted average operating margin on operating revenue (%) 1 Unisys Software and Holding Industries Ltd -0.34% 2 Empower India Ltd -0.10% 3 Avance Technologies Ltd -0.05% 4 JMO Ventures Ltd 0.13% 5 PS IT Infrastructure & Services Ltd 0.20% 6 Dimension Data India Pvt Ltd 1.01% 10 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 7 Rashi Peripherals Pvt Ltd 1.39% 8 Compuage Infocom Ltd 1.76% 9 Savex Technologies Pvt Ltd 3.09% 10 Sonata Information Technology Ltd 3.18% Data Place Range OP/OR (5) 4 35th Percentile 0.13% 5 Median 0.61% 6 65th Percentile 1.39% 2.10 Dissatisfied with the comparable is selected by the assessee, the Ld.TPO rejected all the comparable of assessee and selected following 3 comparables with unadjusted margin of 12.01 % : S.No. Name of the Comparable Company Weighted average operating margin on operating revenue (OP/OR) (%) 1 K7 Computing Private Limited 8.40 2 Innovana Thinklabs Limited 13.45 3 Virtual Galaxy Infotech Private Limited 14.17 Mean 12.01 2.11 The Ld.TPO rejected the working capital adjustment to assessee. The Ld.TPO thus proposed an adjustment of Rs.14,35,88,058/- being the shortfall in the revenue. B. Payment of royalty and service fees (service segment) 2.12 The Ld.TPO observed that, the assessee in its TP study bench marked the transaction by using TNMM and PLI by using 11 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited OP/OR at 13.5%. It was noted by the Ld.TPO that the assessee used following 3 comparable with adjusted median of 2.71% and unadjusted median of 8.92%. The assessee thus considered its transaction with AE to be at arms length. Sr. No Name of the company Unadjusted Weighted average of operating profits on operating revenues (%) 1 Athena Eduspark Ltd 7.07% 2 Compucom Software Ltd (segment) 8.63% 3 Aptech Ltd. 11.06% Arithmetic mean 8.92% 2.13 Dissatisfied with the comparables selected by the assessee, the Ld.TPO rejected all comparables and selected following 8 comparables with unadjusted margin of 21.69 % : S.No. Name of the Comparable Company Weighted average operating margin on operating revenue (OP/OR) (%) 1 G D Goenka Pvt. Ltd. 15.43 2 Lakshya Educare Pvt. Ltd. 16.63 3 Compucom Software Ltd. 17.47 4 MT Education Services Pvt. Ltd. 19.30 5 Career Mosaic Pvt. Ltd. 24.07 6 Sarla Holdings Pvt. Ltd. 24.30 7 Merittrac Services Pvt. Ltd. 27.71 8 People Combine Educational 32.02 12 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Initiatives Pvt. Ltd. 35th Percentile 18.06 Median 21.69 65th Percentile 24.3 2.14 The Ld.TPO rejected the working capital adjustment to assessee. The Ld.TPO thus proposed an adjustment of Rs.1,63,93,614/- being the shortfall in the revenue. C. Provision of Software Development Service 2.15 The Ld.TPO noted that pursuant to the integration of operations of Gluster India into Red Hat India, assessee entered into an agreement with the AE on 01/04/2012 for provision of software development services. It was noted that, the services were preliminary in connection with the products of the Red Hat USA pursuant to acquisition of Gluster. The assessee was remunerated for the services on cost +15% markup basis for the services rendered to the AE. 2.16 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 following 16 comparables having median of unadjusted range at 9.20% and median of adjusted range at 5.33%. The assessee thus considered its transaction with AE to be at arms length. 13 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited SI.No. Name of the company Weighted average of operating profits/operating cost (%) 1. Maveric Systems Ltd -4.63% 2. Kals Information Systems Ltd -1.16% 3. Evoke Technologies Pvt LTD 1.77% 4. Sasken Communication Technologies Ltd 2.62% 5. Sagarsoft India Ltd 2.62% 6. Sankhya Infotech Ltd 2.70% 7. Cg-Vak Software and Exports Limited 3.80% 8. RS Software Ltd 4.48% 9. Harbinger Systems Pvt Ltd 6.18% 10. Jindal Intellicom Private Ltd 6.48% 11. Infomile Technologies Ltd 9.20% 12. Larsen & Toubro Infotech Ltd 14.79% 13. Puresoftware 15.74% 14. R Systems International Ltd 17.42% 15. SQS India BFSI Ltd (consol) 17.55% 14 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 16. Tata Elxsi Ltd 21.91% Arm's Length Range OP/OC (%) 35th Percentile 2.70% Median (Average of values at 8th and 9th Data place) 5.33% 65th Percentile 9.20% 2.17 Dissatisfied with the comparables selected by the assessee, the Ld.TPO rejected 10 comparable and introduced 8 new companies with unadjusted margin of 22.98 %. Following are the 14 comparables selected by the Ld.TPO : S.No. Name of the Comparables Weighted Average % (OP/OC) 1 Evoke Technologies Pvt. Ltd. 5.06 2 RS Software (India) Ltd. 8.00 3 CG-VA K Software & Exports Ltd 15.83 4 R Systems International Ltd. 18.79 5 Puresoftware Pvt. Ltd. 21.33 6 Nihilent Ltd. 22.03 7 Expleo Solutions Ltd. 22.61 8 Nihilent Analytics Ltd. 23.34 9 Infobeans Technologies Ltd 25.15 10 Kellton Tech Solutions Ltd. 25.27 11 Aspire Systems (India) Pvt. Ltd. 32.01 12 Cybercom Datamatics Information Solutions Ltd. 67.56 13 Interglobe Technology Quotient 75.99 15 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Pvt. Ltd 14 Dun & Bradstreet Technologies & Data Services Pvt. Ltd. 89.11 35th Percentile 21.33 Median 22.98 65th Percentile 25.27 2.18 The Ld.TPO also rejected the working capital adjustment to assessee. The Ld.TPO thus proposed an adjustment of Rs.4,26,74,072/- being the shortfall in the revenue. D. Provision of ITeS Services 2.19 The Ld.TPO noted that pursuant to the merger of Red Hat Software Services Pvt. Ltd. into Red Hat India, the support service agreement with Red Hat USA and Red Hat Ireland for the provision of support services was assigned to the assessee. As per the agreement the support services provided by the assessee included support to customers in relation to the Red Hat subscriptions, including the Red Hat Linux. It was noted that, assessee was remunerated on cost +15% model for the services. The Ld.TPO noted that, used TNMM as most appropriate method and had earned a net cost plus margin of 17.92%. It was noted that assessee used following 14 comparables with unadjusted median of 9.01% and adjusted median of 4.75%. The assessee thus held its transaction with AE to be at arms length. Sr. No Name of the company Weighted average of operating profits on operating cost (%) 16 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Informed Technologles Limited -16.55% Sundaram Business Services Limited -2.19% Cosmic Global Ltd -1.62% Allsec Technologies Ltd 2.13% Cyfuture India Pvt Ltd 2.14% ISN Global Solutions Private Limited 2.84% Jindal Intellicom Limited (Segmental) 3.09% R Systems International Limited (Segmental) 6.05% Microland Limited 14.16% Manipal Digital Systems Pvt Ltd 19.52% Vitae International Accounting Services Pvt Ltd 23.97% Datamatics Financial Services Limited 29.08% Suprawin Technologies Limited 17.66% CES Limited (Segmental) 24.22% Range OP/OC 35th percentile 2.14% Median (Average of values at 7th and 8th Data place) 4.57% 65th percentile 19.52% 2.20 Dissatisfied with the comparables selected by the assessee, the Ld.TPO rejected 9 comparable and introduced 2 new companies with unadjusted margin of 22.16 %. Following are the 7 comparables selected by the Ld.TPO : S.No. Name of the Comparables Weighted Average % (OP/OC) 1 Sundaram Business Services Ltd. 2.02 17 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 2 Microland Ltd. 10.05 3 R Systems International Ltd. 18.79 4 Tech Mahindra Business Services Ltd. 22.16 5 Datamatics Business Solutions Ltd. 23.66 6 Manipal Digital Systems Pvt. Ltd. [Merged] 25.37 7 MPS Ltd. 60.08 35th Percentile 18.79 Median 22.16 65th Percentile 23.66 2.21 The Ld.TPO rejected the working capital adjustment to assessee. The Ld.TPO thus proposed an adjustment of Rs.8,71,35,408/- being the shortfall in the revenue. 2.22 The Ld.TPO thus proposed total adjustment in the hands of the assessee as under: S.No. Issue Amount (in INR) 1 Payment of Royalty and Service Fees (Subscription Segment) 14,35,88,058/- 2 Payment of Royalty and Service Fees (Services Segment) 1,63,93,614/- 3 Provision of Software Development Services 4,26,74,072/- 4 Provision of IT enabled Services (ITeS) 8,71,35,408/- Total Adjustment 28,97,91,152/- 18 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 3. On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order on 30/04/2021 proposing addition in the hands of the assessee amounting to Rs.25,29,89,726/-. 3.1 On receipt of the draft assessment order, assess the preferred objections before the DRP. The DRP upheld the addition proposed by the Ld.TPO/.AO. 3.2 On receipt of the DRP directions, the Ld.AO passed the impugned order by making addition in the hands of the assessee amounting to Rs.28,97,91,152/-. Aggrieved by the order of the Ld.AR, assessee is on appeal before the Tribunal. 4. The Ld.AR submitted that there is a typo mistake repeated in Form 36. He submitted that inadvertently the date of impugned order is mentioned as 28/02/2021 instead of 28/02/2022. He submitted in lieu of this typo mistake the assessee was issued a defect memo by the registry. 4.1 On verification of record we found submissions of the Ld.AR to be correct. It is thus noted that the assessee has filed present appeal before this Tribunal is within the period of limitation. 5. Ld.AR submitted that, Ground No.1 is general in nature and do not require any adjudication. 6. Ground No.2.1-2.4 by the assessee seeking inclusion/exclusion of comparables under Payment of Royalty and Service fee (subscription segment). 6.1 The Ld.AR filed his arguments in the form of the detailed chart, where the comparables sought for inclusion and exclusion has been listed as under: The assessee is seeking inclusion of following compatibles 19 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 1. Sonata information technology Ltd 2. Unisys software and holding industries Ltd 3. JMD ventures Ltd 4. PS IT infrastructure and services Ltd 5. Advanced technologies Ltd 6. Empower India Ltd The assessee is also seeking exclusion of following compatibles 1. Innovana Thinkables Ltd 2. K7 Computing Pvt. Ltd 3. Virtual Galaxy Infotech Pvt. Ltd. 6.2 Before we undertake the compatibility analysis, it is sine qua non to understand the functions performed, assets owned and risks assumed by the assessee under this segment. 6.3 In the transfer pricing study report, the FAR analysis of assessee under this segment are as under: “4 Analysis of Transactions 4.1 Payment of Royalty and service fee to Red Hat US for Subscription Segment 4.1.1 Nature and terms Red Hat India undertakes the sales and distribution of Red Hat group's subscriptions in the Indian sub-continent region. Red Hat India pays a royalty and service fee to Red Hat US in respect of the subscriptions sold by it. 4.1.2 Functions performed The critical functions performed by Red Hat India and Red Hat US in relation towards sales and distribution of Red Hat group's subscriptions, are outlined below: a) Marketing Functions Red Hat India, under the guidance of its Red Hat US, is responsible for determining the marketing strategy to be adopted for promoting Red Hat 20 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited group's subscriptions in India. Most of the marketing content is developed by Red Hat US and the same is provided to Red Hat India. Red Hat India markets the group's subscriptions through various campaigns and provides sponsorships to various events. b) Interaction with government Since the Government of India is one of the largest end user of Red Hat subscriptions. Red Hat India on a continuous basis interacts with the e- Governance Department of Government of India. Red Hat India has a team which is engaged in building relationship with the Government. Their main effort is to get Red Hat subscriptions approved in the request for proposal (\"RFP\") floated by the Government. The time period involved in closing one RFP generally takes about 18 to 20 months. Red Hat US also interacts with the Government on a need basis. c) Customer identification Red Hat India is responsible for identifying potential customers for the group's subscriptions. d) Contracting with customers Red Hat India identifies customers and enters into contracts with them for sale of the subscriptions. Generally the contracts with customers are for 13 years. However, in case of Government contracts, the period of the contract ranges from 79 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. e) Pricing Red Hat India is responsible for setting the price of subscriptions sold to customers. The main factors impacting the price of subscription sold to customers in India are: \u0001 Competitive environment products: and The competitors are very aggressive while selling their 21 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited \u0001 Price escalation - Since the contract is valid for an average period of 5-7 years, Red Hat India faces a challenge while pricing its subscriptions as it needs to factor the price escalation in future years Red Hat India pays royalty and service fee to Red Hat US for the subscriptions purchased. f) Requisition Function Subsequent to an order placed by a customer/ channel partner on Red Hat India, Red Hat India sends a requisition to Red Hat US for purchase of the subscriptions. The requisition contains the exact specifications of the subscriptions required. g) Inventory Function Red Hat India purchases subscriptions only against confirmed orders placed by the customer/channel partner. Thus, Red Hat India does not maintain any inventory. h) Research and Development Red Hat US incurs significant research and development cost in developing new and latest technology products. Since, Red Hat India purchases subscriptions from Red Hat US, no research and development is undertaken by Red Hat India. i) Distribution function Red Hat India sells most of the subscriptions through channel partners. The channel partners are selected by Red Hat India after a detailed scrutiny as per the group's global guidelines. Red Hat India has over 50 channel partners for the subscriptions segment. Further, the Company also sells subscriptions directly to customers. Besides India, Red Hat India sells the group's subscriptions in Nepal, Sri Lanka, Pakistan and Bangladesh. A summary of the above analysis is as follows: Functions Red Hat India Red Hat US Marketing yes Limited Interaction with yes Limited 22 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited government Customer identification yes No Contracting with customer yes No Pricing yes Limited Purchase yes No Inventory no Limited Functions Red Hat India Red Hat US Research and development No Yes Distribution Yes No Except in respect of Government contracts where the agreement is entered into by the Channel partners 4.1.3 Risk Analysis a) Business risk/Market risk Market risk occurs when a firm is subjected to adverse sales conditions due to increased competition in the marketyla po adverse demand conditions within the market, the inability to develop markets or the inability to position products to service targeted customers. Difficulties in forecasting product demand cause budgeted prices and volumes to differ from actual prices and volumes, all of which require careful management planning and execution Red Hat India is responsible for marketing the subscriptions to ensure that the targeted sales volume is achieved. However, Red Hat India does not bear any significant market risk as it earns an assured return/mark-up on its costs. However, it does bear minimum market risk to the extent that any reduction in the demand for Red Hat subscriptions would impact the overall business of Red Hat India. Red Hat US bears the market risk since its business would be affected by the reduction in sales of Red Hat India. 23 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited b) Service liability/warranty risk Service liability/warranty risk is borne by a company when its products fail to perform at contractual standards and the company is required to correct defective product performance. Since Red Hat India sells the services directly to customers, the service liability risk is borne by Red Hat India. However, since the services are purchased by Red Hat India from Red Hat US, the service liability risk is passed on to Red Hat US. Thus, Red Hat US ultimately bear the service liability risk. c) Inventory risk This risk relates to the potential for losses associated with carrying product or component inventory. Given the ever changing technology the products get updated and specifications improve regularly. Stock can become obsolete due to the introduction of new products or uncompetitive pricing. Obsolete stocks are sold at a lower margin. Losses include obsolescence, shrinkage, or market collapse such that products are only saleable at prices that are inadequate to cover the company's product costs. Red Hat India does not face any inventory risk as it purchases subscriptions from Red Hat US only against confirmed orders. Since Red Hat US is responsible for developing the subscriptions, Red Hat US faces the risk of changing technology and hence bears the inventory risk. d) Credit and collection risk Credit risk is borne by a company when it supplies products or services to a customer and the customer's payment to the company for the goods is deferred to a mutually confirmed date. Since Red Hat US would receive royalty and service fee from Red Hat India, Red Hat US bears a limited credit and collection risk. in relation to payment due to Red Hat India from the end. customers/channel partners. Red Hat India bears the related credit and collection risks such as delay in collection of receivables, bad debts, etc. However, bad debts, if any, are included in the costs for the purpose of computing the 24 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited royalty and service fee payable to Red Hat US. Accordingly. the credit risk is indirectly passed on to Red Hat US e) Foreign exchange risk Foreign exchange risk, as defined in this study, occurs when purchases of products are denominated in one currency, while sales of such products are denominated in another currency. Red Hat US, would invoice Red Hat India in foreign currency for royalty and service fee to be paid to Red Hat US. Since this is different from the functional currency of Red Hat India, any loss arising from an adverse fluctuation between the foreign currency and the INR would be borne by Red Hat India. Thus. Red Hat India would bear the foreign exchange risk in relation to its transactions with its Red Hat US. The risk profile of Red Hat India and its Red Hat US with respect to the Subscription segment is summarised in the table given below Type of risks Red Hat India Red Hat US Market risk Limited Yes Product liability risk Limited Yes Inventory risk No Yes Credit and collection risk No Yes Foreign exchange risk Yes No 4.1.4 Assets employed Key tangible assets employed by Red Hat India after depreciation (as on 31 March 2017) are as follows: Tangible Assets Amount (INR) Computer Hardware 20,22,75,102 Furniture and Fixtures 5,66,27,599 Leasehold Improvements 11,51,39,138 Office Equipment 2,90,94,728 Total 40,31,36,567 25 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Tangible Assets Amount (INR) Softwar 4,15,134 Total 4,15,134 4.1.5 Entity characterization Based on the above, Red Hat India can be classified as a limited risk distributor in respect of the subscriptions sold to the clients.” 6.4 Based on the above, we shall undertake the compatibility of the companies sought for inclusion/exclusion by the assessee. 7. At the outset the Ld.AR submitted that, Innovana Thinkable Ltd and K7 Computing Pvt Ltd has been excluded by coordinate of this Tribunal in assessee’s own case for assessment year 2016- 17 being Red Hat India (P.) Ltd. vs. ACI, National Faceless Assessment Centre, reported in (2022) 136 taxmann.com 52, observing as under: Innovana Thinklabs Ltd. 27. The assessee challenged inclusion of Innovana Thinklabs Limited (for short Innovana) as a comparable on the grounds inter alia that it fails TPO's own turnover filters which has less than 10% of the assessee's turnover. This argument was also advanced before the Ld. DRP as per written submissions available at page A289 of the paper book wherein complete data on the basis of financials of Innovana is given as assessee's segmental revenue for subscription segment is Rs. 1,44,43,45,751/- as against Innovana's turnover of Rs. 6,60,95,449/-. We are of the considered view that when the Ld. TPO has himself applied this filter of turnover he cannot go against it and as such Innovana is not suitable comparable vis-à-vis assessee, hence ordered to be excluded. K7 Computing Pvt. Ltd. (K7) 28. 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. 29. 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 and equipment 26 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 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. 30. 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. 7.1 Admittedly there are no factual differences in FAR of the assessee for the year 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 is assessee’s own case. Respectfully following the above view, we direct Innovana Thinkable Ltd and K7 Computing Pvt Ltd to be excluded from the final list. 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 27 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 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. 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 28 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 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. 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. 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 29 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 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 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 saga omitted to the Ld.AO/TPO with the above directions. Accordingly ground number 2.1 to 2.4 stands partly allowed for statistical purposes as indicated hereinabove. 30 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 11. Ground Nos. 2.5 to 2.7 is in respect of not granting working capital(hereinafter referred to as WCA) and proportionate adjustments claimed by the assessee, in order to iron out the differences between the comparables and the assessee for computing the margin. We have considered the submission of both sides in light of the records placed before us. 11.1 Working 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 31 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 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 be improved and reasonably accurate adjustments can be made. (See OECD 2017 Annex to Chapter III para 1) 11.4 In terms of Rule 10B(1)(e)(iii) of the I.T.Rules, the net margin arising in comparable uncontrolled transactions should into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. 11.5 The differences in working capital requirements of the international transactions and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by the Revenue Authorities working capital adjustment cannot be allowed to the profit margin, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Income Tax Rules. 32 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 11.6 We note that, this issue has been considered by Hon’ble Bangalore Tribunal in the case of Huawei 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)…… 33 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs. of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an 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: 1. 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. 2. 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 means that: • None of the differences (if any) between the situations being compared could materially affect the condition being examined in 34 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited the 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.\" 3. In Paragraph 13 to 16 of the aforesaid OECD guidelines, need for working capital 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. 14. 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. 15. 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) 16. 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.\" 14. 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 35 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 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 proportional adjustment 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 stands allowed for statistical purposes. 12. Grounds 2.8 to 2.11 by the assessee seeking inclusion/exclusion of comparables under Payment of Royalty and Service fee (Service segment). 12.1 The Ld.AR filed his arguments in the form of detailed chart, where the comparables sought for inclusion and exclusion has been listed as under: The assessee is seeking inclusion of following compatibles 1. MT Education Services Pvt.Ltd 2. Merittrac Services Pvt.Ltd 3. Sarala Holdings Pvt.Ltd 4. People combine Eductaional Initiatives Pvt.Ltd 5. Career Mosaic Pvt.Ltd 36 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 6. Lakshya Educare Pvt.Ltd 7. G D Goenka Pvt.Ltd The assessee is also seeking exclusion of following compatibles 1. Athena Eduapark Ltd. 2. Aptech Ltd. 12.2 Before we undertake the compatibility analysis, it is any corn onto understand the functions performed, assets owned and risks assumed by the assessee under the segment. 12.3 In the transfer pricing study report, the FAR analysis of assessee under this segment are as under: “4.2 Payment of royalty and service fee to Red Hat US for Services Segment 4.2.1 Nature and terms of the international transaction identified As mentioned earlier in the report, the GLS and GPS business of Red Hat India forms part of the services business segment of the Company. Under the services segment. Red Hat India pays royalty and service fee to Red Hat US for the education content provided by Red Hat US to Red Hat India for the GLS business. However, during the year, since Red Hat India's profits in this segment for the year were lower than the minimum assured profits, there was a reverse royalty and service fees charge payable by Red Hat Inc to Red Hat India of Rs 8,73.85,389. 4.2.2 Functions Performed The critical functions performed by Red Hat India and Red Hat US in relation to the payment of royalty and service fee by Red Hat India to Red Hat US for the education content provided by Red Hat US, are outlined below: a) Marketing Function Red Hat India, under the guidance of Red Hat US, is responsible for determining the marketing strategy to be adopted for promoting Red Hat 37 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited India's services. The marketing content is developed both locally and by the Red Hat US. b) Sales Function Red Hat India employs a small team to provide pre-sales support services for the GPS business. This team engages into technical discussions with potential customers and develops IT solutions for companies using Red Hat products and services. Further, for the GLS business, Red Hat India employs another team which is involved in building relationship with existing channel partners and also interacting with potential channel partners. c) Contracting with customers/ channel partners Red Hat India enters into contracts with customers/ channel partners for sale of services. With respect to GLS, Red Hat India enters into contracts with Red Hat Certified Training partners for sale of study material. However, for sale of the certification exam, Red Hat India enters into an arrangement directly with the students wanting to take the exam. In regard to GPS business, Red Hat India enters into direct contracts with the customers. d) Pricing Red Hat India is responsible for setting the price of services rendered to customers / channel partners. The pricing for the services of Red Hat India are as under: \u0001 GLS-Prices are fixed for the course content sold to Red Hat Certified Training partners and the certification exam fee charged from students through the Red Hat Certified Training partners: and \u0001 GPS - Contracts can be on a fixed fee basis, hourly rate basis or retainership basis. Red Hat India pays royalty and service fee to Red Hat US for the education content purchased by Red Hat India from Red Hat US. e) Research and development Red Hat US incurs significant research and development cost in developing new and latest training course contents for students. 38 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Further, it also develops the course for the certified examination. Red Hat India is provided the course content and the examination content from Red Hat US. No research and development is undertaken by Red Hat India. f) Provision of services With regard to GPS, Red Hat India provides on-site as well as off-site support services to its customers. The company is involved in implementation of projects, providing annual support services and undertaking project management activities. With regard to GLS, Red Hat India sells Red Hat course kits to channel partners who provide education and training to students on Red Hat software. Further, Red Hat India certifies students as RHCE after clearing the certified examination held by the channel partners on behalf of Red Hat India. The employees of Red Hat India supervise the certified examination being carried out at various channel partner locations. g) Distribution function Red Hat India sells the GLS through Red Hat Certified Training partners. The Red Hat Certified Training partners are selected by Red Hat India after a detailed scrutiny as per the group's global guidelines. Red Hat India has over 110 Red Hat Certified Training partners providing the Red Hat training programme. Besides India, Red Hat India also has Red Hat Certified Training partners in Nepal, Sri Lanka, Pakistan and Bangladesh. With respect to GPS, Red Hat India provides the services directly to customers. h) Quality Control function Red Hat I students/ Res quality control procedures to the services provided to customers/students/ Red Hat Certified Training pures with respect to the services prouded Red Hat India with guidelines on the by Red Hat India quality control procedures to be adopted for the services rendered 39 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited The functional analysis for the services segment has been summarized below. Type of functions Red Hat India Red Hat US Marketing Yes Limited Sales Yes No Contracting with customers / channel partners Yes No Pricing Yes No Research and development No Yes Provision of services Yes No Distribution Yes No Quality control Yes No 4.2.3 Risk Analysis Briefly summarized below are some of the key risks faced by Red Hat India and Red Hat US in relation to the services segment of Red Hat India. a) Market risk Red Hat India is responsible for marketing the services to ensure that the targeted volume is achieved. However, Red Hat India does not bear any significant market risk as it earns an assured return/mark-up on its costs. However, it does bear minimum market risk to the extent that any reduction in the demand for Red Hat services would impact the overall business of Red Hat India. b) Service liability risk Since Red Hat India sells services to customers, any liability arising on account of the services rendered is borne by Red Hat India. However, since Red Hat India earns an assured return/mark-up on its costs, this risk is indirectly passed onto Red Hat US. c) Credit and collection risk Since Red Hat US would receive royalty from Red Hat India, Red Hat US bears a limited credit and collection risk. In relation to payment due to Red Hat India from the end-customers / channel partners, Red Hat 40 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited India bears the related credit and collection risks such as delay in collection of receivables, bad debts, etc. However, bad debts, if any, are included in the costs for the purpose of computing the royalty and service fee payable to Red Hat US. Accordingly, the credit risk is indirectly passed on to Red Hat US. d) Foreign exchange risk Red Hat US would invoice Red Hat India in foreign currency fency of Red Hat India, any o be paid to Red Hat US would invoice Red Hat from the functional current the would be my loss arising from an adverse. Since this is different from the foreign currency and the relation would be borne by Red Hat India. Thad verse fluctuation bald bear the foreign exchange risk in relation to its transactions with Red Hat US The risk profile of Red Hat India and Red Hat US with respect to its services segment is summarised in the table given below: Type of risks Red Hat India Red Hat US Market risk Limited Yes Service liability risk No Yes Credit and collection risk No Yes Foreign exchange risk Yes No 4.2.4 Assets Employed The asset profile of Red Hat India and its AE with respect to the above international transaction is the same as mentioned in para 4.1.4 above. 4.2.5 Entity characterization Based on the above, Red Hat India can be classified as a limited risk service provider in respect of the training services provided to the clients.” Based on the above, we shall undertake the compatibility of the companies sought for inclusion/exclusion by the assessee. 41 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited A. MT Education Services Pvt.Ltd A.1 At the outset the Ld.AR submitted that MT Education Services Pvt.Ltd is excluded by coordinate of this Tribunal in assessee’s own case for assessment year 2016-17 in Red Hat India (P.) Ltd. vs. ACI, National Faceless Assessment Centre,(supra) by observing as under: “MT Education Services Pvt. Ltd. (MT) 33. The Ld. A.R. sought exclusion of MT on the ground that it fails TPO's own turnover filters as MT's turnover is less than 10% of assessee's turnover i.e. assessee's segmental revenue from service segment is Rs. 35,07,70,817/- as against MT's turnover of Rs. 232.10 lakhs. When this comparable does not qualify Ld. TPO's own turnover filters it is not a valid comparable vis-à-vis assessee, hence, ordered to be excluded.” A.2 On the contrary, the Ld.DR, relied on orders passed by authorities below. We have considered the submission of both sides in light of the records placed before us. A.3 In the present facts, for year under consideration, the turnover of this comparable is Rs.237.24 lakhs, whereas the assessee has turnover under this segment at Rs.7,55,81,437/-, which is less that assessee’s turnover. A.4 Admittedly, there are no factual differences in FAR of the assessee for the year 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. B. Merittrac Services Pvt.Ltd 42 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 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 43 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited the 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. C. 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. 44 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Accordingly we remit Merittrac Services Pvt.Ltd and Lakshya Educare Pvt. Ltd. back to the Ld.AO to verify as per the above directions. D. 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. E. 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. F. Career Mosaic Pvt. Ltd. It is submitted that, this company, is engaged in providing services related to career counseling and placement services. It is submitted that, as per corporate information of this company in the annual report, it is engaged in providing education, coaching classes for GMAT, GRE, TOEFL, IELTS. It is a submitted that, the services rendered by this company is not similar with the training provided and certification issued by assessee to its students under the segment. The Ld.AR thus prayed for exclusion of this comparable from the finalist. 45 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited G. 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. H. 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. 46 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited We accordingly direct the Ld.AO/TPO to consider this comparable in the finalist. I. Aptech Ltd It is submitted that this company is functionally similar with that of assessee as it provide services in training, education services and testing service operations. I.1 It is noted that we have already remitted Merittrac Services Pvt.Ltd and Lakshya Educare Pvt. Ltd. back to the Ld.AO to verify as per the directions herein above. Respectfully following the same, we direct the Ld.AO/TPO to verify compatibility of Aptech Ltd., based on similar parameters and to consider it accordingly. Accordingly grounds 2.8 - 2.11 raised by the assessee stands partly allowed as indicated hereinabove. 13. Ground No 2.12 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 Ld.AO/TPO to adopt the correct figures for computing the margins of the remaining comparables. Accordingly grounds 2.12 is by the assistance partly allowed for statistical purposes. 14. Ground 2.13- 2.14 raised by the assessee is towards non- granting of working capital and other proposed made adjustments for computing the margin of the comparables. 14.1 We have already considered the issue while deciding Grounds 2.6-2.7 hereinabove. Applying the same mutatis mutandis, we direct the Ld.AO/TPO to provide for working capital 47 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited adjustment and other proportionate adjustments to iron out the differences between the assessee and the comparables for computing margins. Accordingly grounds 2.13-2.14 stands partly allowed for statistical purposes. 15. Grounds 2.15 to 2.18 by the assessee seeking inclusion/exclusion of comparables under Provision of Software Development Service Segment. 15.1 The Ld.AR filed his arguments in the form of the detailed chart, where the comparables sought for inclusion and exclusion has been listed as under: The assessee is seeking inclusion of following compatibles 1. Akshay software technologies Ltd 2. Sagarsoft India Ltd. 3. Maverick Systems Ltd., 4. Sankhya Infotech Ltd (segmental) The assessee is also seeking exclusion of following compatibles 1. Dun & Bradstreet Technologies & Data Services Pvt.Ltd, 2. Nihilent Ltd., 3. Nihilent Analytics Ltd., 4. Infobeans Technologies Ltd., 5. Interglobe technology quotient Pvt. Ltd., 6. Aspire Systems (India) Ltd. 7. Kiliton Tech Solutions Ltd 8. Cybercom Datamatics Information Solutions Ltd 48 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 15.2 Before we undertake the compatibility analysis, it is any corn onto understand the functions performed, assets owned and risks assumed by the assessee under the segment. In the transfer pricing study report, the FAR analysis of assessee under the segment are as under: 4.3.1 Nature and terms Pursuant to the integration of the operations of Gluster India into Red Hat India, Red Hat India entered into an agreement with Red Hat US dated 1 April, 2012, for provision of software development services. The services are primarily in connection with the cloud / data storage services provided by Red Hat US pursuant to the acquisition of Gluster. Red Hat India is remunerated for these services on a cost plus 15 percent mark-up basis. 4.3.2 Functions performed The critical functions performed by Red Hat India and Red Hat US in relation to this transaction are outlined below: \u0001 Sales and marketing function The sales and marketing function includes developing long / medium term marketing strategy. undertaking advertising campaigns, monitoring performance of the marketing activities, identifying potential clients, identifying new opportunities with existing clients and undertaking a broad level review of the same. Red Hat US entirely leads and manages the sales and marketing activities for its cloud / data storage services. \u0001 Solution Architecture The solution architecture function includes evaluation of client opportunities from a technical and financial standpoint, time-cost estimation for execution of the project, evaluating project viability. choosing appropriate delivery center, preparing of detailed plans and proposals, etc. The solution architecture is managed entirely by Red Hat US: \u0001 Negotiation and contracting with clients 49 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited This function involves negotiating the terms of the contract, scope of work and terms of reference for signing the contracts with the end clients. The entire negotiation process with the clients is undertaken by Red Hat US. The final decision for accepting/rejecting the client engagement and related commercials rests entirely with Red Hat US \u0001 Client relationship management This function involves performing lead management activities, handling day to day client operations, obtaining feedback on client satisfaction, replying to client queries, etc. The client relationship management is primarily undertaken by Red Hat US. Red Hat India does not have interactions directly with the clients. \u0001 Conceptualization and design This function involves problem definition, conceptualization and design of software, functional specification and requirement analysis. This function is entirely undertaken by the technical teams in Red Hat US in consultation with the teams in Red Hat India. \u0001 Coding and development/maintenance This function involves the actual coding and development of the software and undertaking regular maintenance of the same. The above activities are largely undertaken by Red Hat India, with limited involvement of Red Hat US in terms of integrating the module developed into the whole product. \u0001 Quality control and testing As regards the quality control and testing, the same is initially undertaken by the quality division of Red Hat India and subsequently by the teams in the AES. Specifically, the processes or steps involved in the provision of IT services are tabulated below: Type of functions Red Hat India Red Hat US Sales and marketing No Yes 50 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited function Solution Architecture No Yes Type of functions Red Hat India Red Hat US Negotiating and contracting with clients No Yes Client relationship management No Yes Conceptualisation and design Limited Yes Coding and development Yes Limited Quality control and testing Limited Yes 4.3.3 Risk Analysis The typical risks assumed by Red Hat India in providing the above services to Red Hat US are discussed below: \u0001 Market risk Red Hat India renders software development services to its AEs. Further, it is compensated for all agreed costs with an appropriate mark-up. Therefore, Red Hat India does not bear any significant market risks for transactions with its AEs and all such risks are borne by the AEs. However, limited market risk is also borne by Red Hat India to the extent that any adverse market conditions impacting overall demand of the AE's business may also impact the volume of services availed by the AEs from Red Hat India. \u0001 Service liability risk Since the agreements with the end customers are entered into by the AEs, they are responsible for any service liability risks associated with the services rendered not meeting the expected standards 51 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Red Hat India does not bear any service liability risk so long as its services are in line with the standards agreed with its AES. \u0001 Foreign exchange risk Red Hat India invoices its AEs for the services in US dollars. Hence, the risk arising out of exchange rate fluctuations is debited to the profit and loss account of Red Hat India. Accordingly, Red Hat India bears the foreign exchange risk. \u0001 Credit and collection risk Red Hat India does not assume any credit and collection risk since it raises its invoices on its AEs which are its group companies. Further, Red Hat India would be remunerated for the services rendered irrespective of whether or not AEs have realized their invoices from the end customers. \u0001 Idle capacity risk Red Hat India is remunerated for its services based on its entire costs, including costs of infrastructure, employees, etc, irrespective of whether they are fully utilized along with an appropriate mark- up. Hence, idle capacity risk is borne by the AEs. A summary of the above analysis is as follows: Nature of Risks Red Hat India Red Hat US Market risk Limited Yes Service Liability risk No Yes Foreign exchange risk Yes No Credit and collection risk No Yes Idle capacity risk No Yes 4.3.4 Assets employed For the provision of the above services, Red Hat India employs routine assets such as computers. office infrastructure and other related assets. 4.3.5 Entity characterization 52 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Based on the above, Red Hat India can be classified as a limited risk service provider in respect of the software development services provided to Red Hat US. Based on the above, we shall undertake the compatibility of the companies sought for inclusion/exclusion by the assessee. 16. Dun & Bradstreet Technologies & Data Services Pvt.Ltd, Nihilent Ltd., Nihilent Analytics Ltd., Infobeans Technologies Ltd., Interglobe technology quotient Pvt. Ltd., and Aspire Systems (India) Ltd. 16.1 At the outset the Ld.AR submitted that above comparables has considered by coordinate of this Tribunal in assessee’s own case for assessment year 2016-17 reported Red Hat India (P.) Ltd. vs. ACI, National Faceless Assessment Centre,(supra) by observing as under: Aspire System India Pvt. Ltd. (Aspire) 40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the ground that it fails Related Party Transaction (RPT) filters as its RPT/sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providing opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh. Interglobe Technology Quotient Pvt. Ltd. (Interglobe) 41. The assessee sought exclusion of Interglobe from the final set of comparable on the grounds that it fails TPO's employee cost filter with employee cost to revenue ratio of 6.68% and employee cost to total cost ratio of 11.91%. When the assessee has challenged filter applied by the Ld. TPO it has to be considered in the light of the financials of Interglobe by providing an opportunity of being heard to the assessee. This comparable is also remitted back to the Ld. TPO to decide afresh. Kelton Tech Solutions Ltd. (Kelton) 42. The assessee sought to exclude Kelton as a comparable on the ground that it fails the Ld. TPO's exports filter with export sales to total 53 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited sales ratio of 46.43%. This plea was also taken before the Ld. DRP who have upheld the order passed by the Ld. TPO. 43. The Ld. TPO as well as the Ld. DRP have rejected this comparable on the ground that this is assessee's own comparable but we are of the considered view that since there is a no estopple against the statute the assessee can challenge its own comparable if wrongly chosen inadvertently. Since this comparable fails TPO's own filter of export sales to total sales ratio it needs to be reconsidered by the Ld. TPO after providing opportunity of being heard to the assessee. So this comparable is also remitted back to the Ld. TPO to decide afresh after providing opportunity of being heard to the assessee. Nihilent Analytics Ltd. (Nihilent) 44. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No. 405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc. 45. Perusal of the disclosure of enterprise's reportable segment explanatory available at page No. A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No. A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absence of segmental financials, as it is into diversified business, this company cannot be a valid comparable vis-à-vis assessee, who is a low risk entity working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable. Nihilent Ltd. 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, 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. 54 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Dun and Bradstreet Technologies & Data Services Pvt. Ltd. (Done & Bradstreet) 47. The assessee sought to exclude Dun & Bradstreet as a comparable on the ground that it is functionally dissimilar being into providing predictive analysis, software development and related technology services and solution and on the ground that this company earns abnormally high margin of 58.19% during the relevant year. This objection was raised by the assessee both before the Ld. TPO as well as Ld. DRP but they have rejected the contention of the assessee by simply recording that \"the company is engaged in technology based solution and analytic sales, hence it is functionally similar and as such assessee's contention is rejected.\" 48. We have perused a transfer pricing study of the assessee available at page A305, A412 & A413 of the paper book supported with relevant financials. Dun & Bradstreet is into providing vide area of sources such as D&B analytic services, risk management solutions, sales and marketing solution services, supply management solution etc. It has also come on record that the assessee has earned abnormally high margin of 58.19% as is evident from the annual report of Dun & Bradstreet and as such is not a valid comparable vis-à-vis assessee who is a routine software development service provider to its AE working on cost + markup model, hence order 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. 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. 55 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 16.2 In respect of Aspire Systems (India) Pvt. Ltd and Interglobe Technology Quotient Pvt. Ltd, it is noted that, in the remand proceedings, this comparable was retained as related was 23.55%. In support Ld.AR placed the reliance on page A 927 of the paper book. 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., 17. Cybercom Datamatics Information Solutions Ltd Ld.AR submitted that this company is engaged in providing consultancy on information/Internet systems and surveyors of information services, perform development, testing implementation, migration of home grown and other applications, manufactures IT products and provides services, software and hardware products. The Ld.AR referred to page B 134 of the paper book, wherein the annual report of this comparable is 56 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited placed that shows that, no segmental details are available in respect of the diversified business activities undertaken by this company. 17.1 It is submitted that this comparable was rejected by the DRP in assessee’s own case assessment in 2017-18, and 2020- 21. 17.2 On the contrary, the Ld.DR relied on orders passed by the authorities below. We have perused the submissions advanced by both sides of the light of the records placed before us. 17.3 Admittedly, segmental details are not available in respect of the diversified business activities undertaken by this company. This alone is sufficient to eliminate this company from the finalist. It is also noted that, the DRP had directed exclusion of this comparable, which was not been followed by the Ld.AO/TPO while giving effect to DRP directions. Accordingly we direct this comparable to be excluded from the final list. 18. Akshay Software Technologies Ltd It is submitted that, the DRP. Accepted this comparable to be valid in the earlier years and following the same principle of consistency the directions of the DRP for this year was to include it in the final list. The Ld.AR submitted while giving effect to the directions of the DRP, this comparable stood excluded. Based on the above submissions and observing the directions of the DRP at page 337 -338 of appeal memo, we direct inclusion of this comparable to the finalist. 19. Sagarsoft India Ltd. 57 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 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. 20. In respect of Maverick Systems Ltd and Sankhya Infotech Ltd (segmental), the Ld.AR submitted that, these comparable is maybe left academic the stage though Maverick Systems Ltd was accepted by the Ld.AO for assessment to 2021-22. Considering the submissions, no directions are issued in respect of these 2 companies. Accordingly grounds numbers 2.15-2.18 stands partly allowed as indicated hereinabove. 21. Ground No 2.19 is raised by the assessee seeking correction of computational errors of comparables margine. Accordingly, we direct the Ld.AO/TPO to adopt the correct figures for computing the margins of the remaining comparables. 22. Ground 2.20 raised by the assessee is towards non- granting of working capital and other proportionate adjustments for computing the margin of the comparables. 22.1 We have already considered the issue while deciding Grounds 2.6-2.7 hereinabove. Applying the same mutatis 58 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited mutandis, we direct the Ld.AO/TPO to provide for working capital adjustment and other proportionate adjustments to iron out differences between the assessee & there comparables. Accordingly grounds 2.20 stands partly allowed for statistical purposes. 23. Grounds 2.15 to 2.18 by the assessee seeking inclusion/exclusion of comparables under Provision of IT enabled Service Segment. 23.1 The Ld.AR has filed his arguments in the form of the detailed chart, where the comparables sought for inclusion and exclusion has been listed as under: The assessee is also seeking exclusion of following compatibles 1. MPS Ltd 2. Tech Mahendra Business Services Ltd 23.2 Before we undertake the compatibility analysis, it is sine qua non to understand the functions performed, assets owned and risks assumed by the assessee under the segment. In the transfer pricing study report, the FAR analysis of assessee under the segment are as under: “4.4 Provision of IT enabled services Pursuant to the merger of Red Hat Software Services Private Limited into Red Hat India, the Support Services Agreement with Red Hat US and Red Hat Ireland for the provision of support services was assigned to Red Hat India. As per the agreement, the support services provided by Red Hat India include support to customers in relation to the Red Hat subscriptions, including Red Hat Linux and Red Hat Enterprise Linux. Red Hat India is remunerated on a cost plus 15% model for these services. 4.4.1 Functions performed 59 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited A summary of the functions performed and risks assumed by Red Hat India in relation to international transaction, as we have been given to understand by Red Hat India is given below: Functions performed by Red Hat US Red Hat US is a premier provider of Linux and open source solutions, making high-quality, low-cost technology accessible. Red Hat US provides operating system platforms along with middleware, applications, and management solutions, as well as support, training and consulting services to customers worldwide and through top-tier partnerships. Red Hat US' open source strategy offers customers a long- term plan for building infrastructures that are based on open source technologies with a focus on security and ease of management. With its open source solutions, Red Hat US enables enterprises to integrate their operating system, middleware and hardware to develop an operating platform which is stable, secure and scalable. Red Hat US develops solutions using open source code technology and provides the same to its customers through a subscription model (i.e. customers have access to certain source codes available in the community after they buy subscriptions from the Red Hat Group companies). The services and products provided by Red Hat US are as follows: \u0001 Red Hat Enterprise Linux: Red Hat Enterprise Linux is the leading platform for open source computing. It is sold by subscription, delivers continuous value and is certified by top Enterprise hardware and software vendors. From the desktop to the datacenter, Enterprise Linux couples the innovation of open source technology and the stability of a true enterprise-class platform. \u0001 Red Hat Enterprise Messaging, Real time Grid ('MRG): Red Hat Enterprise MRG is a next-generation IT infrastructure incorporating Messaging. Realtime, and Grid functionality. It offers increased performance, reliability, interoperability, and faster computing for enterprise customers. \u0001 Red Hat Systems Management: It automates the Linux environment for customers and deploys IT applications anywhere, anytime. The 60 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Red Hat system management has the potential to boost up the IT systems and staff for customers. \u0001 Red Hat Network: It manages thousands of systems as easily as managing a single system. The distinct features are one-click provisioning, quick set-up, flexible implementation and simple interface. Red Hat Network makes Linux deployable, scalable and manageable. \u0001 Red Hat Global Support Services: It is an around-the-clock around- the-world network of the most experienced, motivated and knowledgeable Linux and open source software support engineers. It allows customers to plan, deploy and scat with confidence that the systems have the resources behind them. Red Hat Group serves organisations that are increasingly looking to Linux and open source technologies and standard to deliver the cost savings. security, capabilities, performance, portability and stability they need to compete in today's market. Red Hat Group is the world's foremost expert in Linux and open source and has accumulated staff knowledge and experience around delivering and supporting those technologies. Red Hat Global Support Services allows customers to virtually extend their in-house expertise and deploy Linux with confidence. \u0001 Red Hat Training Programs: Red Hat training programs offer the most current and accurate hands-on training courses and the most respected certifications in the Linux space. \u0001 Red Hat Consulting Services: The employees and engineers of Red Hat US and its affiliates bring substantial experience and expertise in a number of areas to enable solutions that leverage Red Hat Enterprise Linux. Red Hat Global Professional Services ('GPS') offers a full set of consulting services for each phase of an IT deployment from assessment and implementation right through to upgrade planning. GPS also offers custom engineering and support services for a wide range of technologies, including the GNU Pro suite of 61 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited development tools, the Cygwin Linux emulation package, and custom embedded Linux solutions for a variety of target platforms. \u0001 Red Hat Industry Solutions: Red Hat US provides industry specific solution to boost the application of open source tools and products. Red Hat US is a leader in open source solutions for Financial Services companies, supports open source architecture, provides security offerings, etc. Red Hat US provides specific solutions to the Government department, in the education field, telecommunication and other industries. To summarise, Red Hat US is engaged in developing solutions using open source code technologies, providing consulting services with respect to the products and solutions developed and training programs. Pursuant to the subscription, Red Hat US offers subscribers the support for the Red Hat Group solutions or products. Red Hat US has outsourced the process of rendering the support services (pursuant to the subscription) to Red Hat India in accordance with the Support Services Agreement Red Hat India also provides IT enabled support services to Red Hat Ireland as per the support service agreement. Red Hat Ireland is a subsidiary of Red Hat US, and is engaged in the business of trading of Red Hat products and providing learning and support services. Functions performed by Red Hat India Red Hat India and its resources are divided into the following groups depending on the nature of operations: \u0001 Global Support Services (Technical Support) (GSS); \u0001 In house support and maintenance of Red Hat's internal applications: \u0001 Customisation i.e. Localisation (UON) and Internalisation (USN); and \u0001 Miscellaneous Support, which includes Customer Support/ Facility Support/ Human Resources/Administration Support Under the GSS, Red Hat India provides customer support and solutions to customer queries as part of every Red Hat US's software 62 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited subscription. Red Hat India also provides additional services such as Technical Account Managers (TAMs) and Developer Support Packages. Red Hat India works on an offshore delivery model and there are no onsite projects during the period under review. Red Hat India provides IT enabled support to the worldwide customers of Red Hat US and Red Hat Ireland by handling the queries posted by the customers on the website of Red Hat. The customers interact through phone or the web and post their queries on the website of Red Hat. which is accessible to all the engineers worldwide. This is called \"WebQ. The engineers of Red Hat India give/ post solutions to the queries posted on the web. Currently, no queries are responded by Red Hat India over the telephone ie, there is no call center in Red Hat India. There are 3 levels of engineers-L1, L2 & L3. The L1 engineers are into primary interface. Their work is purely related to \"Known problem Known Solution\". If L1 level engineers are unable to solve the problems then they are sent to L2 level engineers who are the 'Specialists. The L3 level engineers are devoted to fixing the bugs in the system. They create a patch (or hot-fix) in the system for countering the bug. None of the employee of Red Hat India go to the customer's place for the delivery of solutions. Even the patches/hot fixes are delivered to the System Administrators of the customers. Hence, the business mode of Red Hat India is a pure offshore model. Any problem which is not routine in nature and requires significant technical expertise is escalated by Red Hat India to the technical team of Red Hat US. The customisation division of Red Hat India has been engaged in localisation (LION') of the Red Hat solutions with a focus on \"Indianisation\". Localisation is a process of creating documentation in various languages as required by the customer to enhance the usage of the product. Red Hat India carries out localisation of the Group solutions that are developed by other group entities. These functions are carried out exclusively as a support function for the overall Group solutions and product development process. 63 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Red Hat India translates the Red Hat solutions in Indian languages such as Hindi, Guajarati, Punjabi, Tamil and Bangla (i.e. the English contents are translated into these languages). These services are provided under the extensive guidance and support of Red Hat US. In addition to the GSS and translation activities as mentioned above, Red Hat India is also engaged in providing in-house support and maintenance services and non-technical support services to Red Hat US. The in-house support and maintenance services include: \u0001 Assisting in updating/developing the web portals of Red Hat Group: \u0001 Assisting in maintaining various administrative functioning tools used within Red Hat US; \u0001 Assisting in the upgrade/redesign of the existing tools: and \u0001 Any other services as requested by Red Hat Group. General Management Functions The functions addressed below are common functions that are carried out by any business, irrespective of their size and type. These functions are drivers of every business and are indispensable in the economic environment. \u0001 Corporate Strategy Determination: Generally, all policies within Red Hat India are determined by its own management which continuously monitors the economic environment surrounding the Indian entity, assesses their strategic position within the industry and targets to achieve its corporate objective with guidance from Red Hat US. \u0001 Finance, Accounting, Treasury and Legal Function: The management in Red Hat India is responsible for managing the finance, treasury, legal and accounting functions. In certain areas, wherever necessary, Red Hat India is guided by Red Hat US. Red Hat India is also responsible for all local statutory compliance. \u0001 Human Resource Management Function: The HR function at Red Hat India is coordinated by its management, which is responsible 64 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited for recruitment, development and training of the personnel including the emolument structure. In this respect, where appropriate, it is guided by Red Hat US. 4.4.2 Risk Analysis Briefly summarised below are some of the key business risks, which would be applicable to Red Hat India and its AEs, in relation to the IT enabled support services provided by Red Hat India. ►Business/Market, risk Red Hat India does not have any significant exposure to this risk, because it renders the support services only to Group companies. Red Hat US and Red Hat Ireland. Also, Red Hat India follows a fixed billing model of cost plus a mark-up for rendering these services. Therefore, any direct pricing pressure scenarios are mitigated. All market risks with respect to the product including customer acceptance are borne by the AEs. Any loss of subscription due to changes in customer's preferences or requirement affects the AEs. However, limited/ indirect market risk is also borne by Red Hat to the extent that any adverse market conditions impacting overall business of the Group may also impact the volume/ extent of services availed by the AEs from Red Hat India. ► Foreign exchange risk Red Hat India invoices its AEs for the services in US dollars. Hence, the risk arising out of exchange rate fluctuations is debited to the profit and loss account of Red Hat India. Accordingly, Red Hat India bears the foreign exchange risk. ►Credit and collection risk Red Hat India faces minimal risk in this regard as all invoices are raised on Red Hat US or Red Hat treland. Red Hat US and Red Hat Ireland operate on a subscription model and have limited credit risk on account of defaults by customers, as the access to the technology solutions are denied to the defaulting customers. However, they are responsible for monitoring their accounts receivables. ► Research and Development risk 65 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Red Hat India does not carry out any research and development in respect of new products and technologies. Red Hat Inc invests substantially in R&D activities to develop new technologies and products, which would generate future revenue. However, it is possible that these costs may not be recovered if the R&D projects are not able to come to fruition. Red Hat Ireland also does not carry out any research and development in respect of new products and technologies. ► Product/Service liability risk While providing its services, Red Hat India is required to adhere to the quality standards laid down by the AEs. However, Red Hat India has minimal exposure, because in case of rework, additional costs incurred, is factored in the service fee. The AEs are responsible for any claims that may arise due to the non-performance of products maintained or customized by them. They are responsible for managing these claims and all expenses incurred for mitigating this risk. ►Manpower Risk Red Hat India is required to ensure that its obligations under the Support services Agreement are carried out by sufficient number of appropriately qualified, trained and experienced persons. Accordingly. Red Hat India maybe regarded as exposed to the manpower risk as its business is largely dependent on quality personnel. The AEs face indirect risk on account of manpower attrition faced by Red Hat India. However, with regard to the performance of its own operations also, it faces similar risks. The risks assumed by Red Hat India and the AEs are tabulated below: Type of risks Red Hat India AEs Market risk Yes* Yes Foreign exchange risk No Yes Credit and collection risk No Yes Research and development risk No Yes Product/Service liability risk No Yes 66 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited Type of risks Red Hat India AEs Manpower risk Yes Yes \"Limited 4.4.3 Assets Employed The asset profile of Red Hat India and its AE with respect to the above international transaction is the same as mentioned in para 4.1.4 above. 4.4.4 Characterization of entity Based on the results of the functional, risk and asset analysis, it is concluded that Red Hat India can be characterized as sa limited risk bearing captive IT enabled support service provide” 23.3 Based on the above, we shall undertake the compatibility of the companies sought for inclusion/exclusion by the assessee. 24. MPS Ltd The Ld.AR submitted that this comparable is functionally not similar with that of assessee as it is engaged in end to end publishing solutions and provides services including content development, print and digital publishing services etc. It is submitted that this comparable also undertakes R&D for development of tools and enhancement of cloud based digital publishing platform. 24.1 The Ld.AR submitted that, this comparable owns intangibles in the form of computer software and therefore it cannot be considered to be a back end ITeS service provider. Further it is submitted that during the assessment years 2013- 14 to 2018-19, this comparable undertook six acquisitions thereby announcing itself to be a full-fledged entrepreneur. 24.2 At the outset the Ld.AR submitted that above comparables was excluded by coordinate of this Tribunal in assessee’s own case for assessment year 2016-17 in Red Hat India (P.) Ltd. vs. 67 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited ACI, National Faceless Assessment Centre,(supra) by observing as under: MPS Ltd. (MPS) 57. The assessee sought exclusion of MPS on the ground that MPS is functionally dissimilar to the assessee being into diversified business of providing publishing solutions i.e. type setting and data digitalization services for overseas publishers and supports international publishers through every stage of the author to reader publishing process. This company also provides digital first strategy for publishers across content production, enhancement and transformation, delivery and customer support and it is also engaged in research and development activities. 58. We have perused the annual report of MPS available at page A458- A460 of the paper book which shows the diversified functions being performed by MPS as contended by the assessee in the preceding para which are not comparable to the assessee who is a routine ITES service provider working on cost + model. 59. Moreover, the co-ordinate Bench of the Tribunal in the case of Credence Resource Management (P.) Ltd. v. Asstt. CIT [IT Appeal No. 133 (PUN) of 2021, dated 18-6-2021] held that the activities of MPS are akin to a IT service provider and not an ITES service provider. So we direct to exclude MPS from the final set of comparables. 24.3 On the contrary, the Ld.DR, relied on orders passed by authorities below. We have considered the submission of both sides in light of the records placed before us. 24.4 Admittedly, there are no factual differences in FAR of the assessee for the year 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. 25. Tech Mahindra Business Services Ltd. 68 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited The Ld.AR submitted that this company is engaged in providing voice-based call centre services. Referring to page the 259 of the people booked he submitted that, this comparable is one of India’s largest international telecom, people use with decade of existence. He submitted that, this company owns huge brand and high premium in the market and therefore is not comparable with the captive service provider like assessee. 25.1 The Ld.DR on the contrary reliance on orders passed by the authorities below. We have perused submissions advanced by both sides in the light of the records placed before us. 26. It is noted that, this company has scored huge brand value and also does not have segmental details. Further the functions of this comparable is not similar with that of the assessee who is a captive service provider. Under such circumstances we do not find it appropriate to include this company in the final list. Accordingly the Ld.AO/TPO is directed to exclude this comparable from the final list. Accordingly grounds 2.21-2.24 trees by the assessee stands allowed. 26. Ground No 2.25 is raised by the assessee seeking correction in computation of margin of comparables that would remain to determine arms length margin of the transaction. Accordingly, we direct the Ld.AO/TPO to adopt the correct figures for computing the margins of the remaining comparables. 27. Ground 2.26 raised by the assessee is towards non- granting of working capital and other proposed made adjustments for computing the margin of the comparables. 69 ITA No. 801/Mum/2022; A.Y. 2017-18 Red Hat India Private Limited 27.1 We have already considered the issue while deciding Grounds 2.6-2.7 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 their differences with assessee for computing the margins of the comparables. Accordingly grounds 2.20 stands partly allowed for statistical purposes. In the result appeal filed by the assessee stands partly allowed as indicated hereinabove. Order pronounced in the open court on 28/02/2025 Sd/- Sd/- (OMKARESHWAR CHIDARA) (BEENA PILLAI) Accountant Member Judicial Member Mumbai: Dated: 28/02/2025 Poonam Mirashi/Dragon Stenographer Copy of the order forwarded to: (1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T. True Copy By order (Asstt. Registrar) ITAT, Mumbai "