Red Hat India Private Limited Vs Additional/Joint/Deputy/ACIT/ITO (ITAT Mumbai)
Red Hat India Pvt. Ltd. appealed against the assessment order passed under Section 143(3) read with Sections 144C(13) and 144B of the Income-tax Act, 1961 for AY 2016-17. The assessee challenged transfer pricing adjustments concerning royalty and service fees in the subscription and service segments, software development services, IT-enabled support services, addition of unearned subscription revenue, disallowance of Employee Stock Option Plan (ESOP) expenses, denial of deduction under Section 80G, interest under Section 234B and initiation of penalty proceedings.
The assessee, a subsidiary of Red Hat Ltd., USA, operated through four segments: Subscription, Services, Software Support Services and IT Enabled Support Services.
The TPO proposed adjustments of Rs.17,14,07,494 for the subscription segment and Rs.2,74,51,259 for the service segment after modifying the assessee’s benchmarking analysis and selecting different comparables.
For the subscription segment, the Tribunal excluded Innovana Thinklabs Ltd. because its turnover was below the TPO’s own turnover filter. K7 Computing Pvt. Ltd. was also excluded because it owned substantial plant and equipment and intellectual property, incurred significant promotional expenditure and sold proprietary products, whereas the assessee was treated as a limited-risk reseller without such characteristics.
The Tribunal directed the TPO to reconsider nine comparables proposed by the assessee, including Funny Software Ltd., Dynacons Technologies Ltd., Empower India Ltd., PS IT Infrastructure & Services Ltd., JMD Ventures Ltd., Unisys Software & Holding Industries Ltd., Compuage Infocom Ltd., Sonata Information Technology Ltd. and Advance Technologies Ltd.
