9911796707
TMI Blog2025 (4) TMI 642X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Documenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit 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 Deducte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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% 7 Rashi Peripherals Pvt Ltd 1.39% 8 Compuage Infocom Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company Weighted average of operating profits on operating cost (%) 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 Sundara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een listed as under: The assessee is seeking inclusion of following compatibles 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 relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olete 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 royalty and service fee payable to Red Hat US. Accordingly. the cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Put. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is. 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. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed to the profit margin, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Income Tax Rules. 11.6 We note that, this issue has been considered by Hon'ble Bangalore Tribunal in the case of 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)... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 guid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 India& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 The functional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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 Put. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee provides course content to the students and also supervises the examination carried out at various channel partner locations. The present comparable is said to be conducting commercial training, coaching/tutorial classes and activities incidental and ancillary date thereto as per page B 65 referred to by the Ld.AR. We therefore do not find that the 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 Rs.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 detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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.A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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: * Sales and marketing fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fically, 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 function No Yes 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: * 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. * Service liability risk Since the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Put. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged 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. Dun and Bradstreet Technologies & Data Services Put. 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) Put. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erprise 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. * 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. * Red Hat Systems Management: It automates the Linux environment for customers and deploys IT applications anywhere, anytime. The Red Hat system management has the potential to boost up the IT systems and staff for customers. * 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 * 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 pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: * Global Support Services (Technical Support) (GSS); * In house support and maintenance of Red Hat's internal applications: * Customisation i.e. Localisation (UON) and Internalisation (USN); and * 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 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 Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veloping the web portals of Red Hat Group: * Assisting in maintaining various administrative functioning tools used within Red Hat US; * Assisting in the upgrade/ redesign of the existing tools: and * 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. * 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. * 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. * Human Resource Management Funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earch 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 vie ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
