Assured-Margin Model: Nil Valuation of Real Services Leads to Double TP Adjustment

Red Hat India Private Limited Vs Assessment Unit (ITAT Mumbai)

TPO Cannot Value Real Services at Nil by Remote Control: Assured-Margin Model Makes Separate Line-Item Adjustment a Double Blow

The Mumbai ITAT has held that where an assessee operates under an assured-margin model & its overall segmental profitability is benchmarked under TNMM, an international transaction forming an integral part of the operating costs of that segment cannot ordinarily be benchmarked separately by determining its ALP at nil. Such a separate disallowance distorts the assured-margin arrangement & results in a double TP adjustment.

Open-Source Software—but Not a Free Business Model

Red Hat India distributed open-source software subscriptions & provided related training, consulting, software development and IT-enabled services.

Under its subscription segment, Red Hat India paid royalty at 3% of revenue to Red Hat USA for the use of trademarks, trade names & domain names. It also paid a service fee structured to ensure that Red Hat India earned an assured operating margin of 1.4% of subscription revenue.

Under the services segment, the fee arrangement ensured an assured operating margin of 13.5%. If Red Hat India’s profitability fell below the agreed margin, the AE was required to make a reverse payment to restore that margin.

For AY 2021-22, the TPO proposed cumulative TP adjustments of ₹97.12 crore relating to royalty & service fees, software development services, ITeS & back-office, sales and marketing support services. For AY 2022-23, the corresponding adjustments aggregated to ₹105.68 crore.

ALP of Support Services Determined at Nil

Red Hat India availed back-office, sales & marketing support services from Red Hat Singapore. These centrally provided services enabled group entities in the Asia-Pacific region to obtain specialised support & economies of scale.

The assessee aggregated these expenses with its subscription & services segments because they were inextricably linked with those operations. The TPO, however, segregated the transaction & determined its ALP at nil, resulting in adjustments of ₹33.87 crore for AY 2021-22 & ₹34.11 crore for AY 2022-23.

According to the assessee, it was already remunerated under an assured-margin model. Consequently, any variation in an individual expenditure ultimately altered the service fee or reverse charge payable between the assessee & its AE, while the assessee’s agreed profitability remained protected.

TNMM Subsumes Individual Operating Transactions

The ITAT accepted that when TNMM is properly applied at the segmental level & the overall margin is found to be at arm’s length, the benchmarking ordinarily subsumes the individual operating transactions forming part of that segment.

The support services were not isolated or unrelated payments. They formed part of the operating costs of the subscription & services segments and contributed directly to those activities.

Since the assessee’s return was predetermined under an assured-margin arrangement, separately valuing one cost item at nil would first disallow the expense & thereafter subject the already benchmarked segmental margin to another adjustment. This would amount to a double adjustment of the same economic result.

The Tribunal therefore held that the TPO erred both in law & on facts by determining the ALP of the services at nil on a standalone basis. The adjustments relating to back-office, sales & marketing support services were deleted.

Working Capital Adjustment Cannot Be Denied for Want of Impossible Data

The TPO had also rejected the assessee’s claim for working capital adjustment because daily balances of debtors & creditors were unavailable.

The ITAT observed that working capital adjustment is intended to neutralise differences in receivables, payables & inventory between the tested party and comparable companies. The same adjustment had been allowed in the assessee’s own cases for several earlier years.

Insistence on daily balances, particularly when such information about comparable companies is not available in the public domain, was held to be an impractical condition. The AO/TPO was directed to verify the assessee’s computation & grant the adjustment wherever working capital differences materially affected the margins.

Functional Similarity Wins Over Superficial Classification

The Tribunal also examined several comparable companies across the assessee’s business segments.

For software distribution, K7 Computing Pvt. Ltd. & Innovana Thinklabs Ltd. were excluded following earlier years. Companies engaged in product development or owning valuable intangibles could not be compared with a routine distributor.

For the training services segment, Sarla Holdings Pvt. Ltd., Knowledgehouse Ltd., Eduspark International Pvt. Ltd. & Akash Educational Services Ltd. were excluded because of functional differences or failure of applicable filters. Compucom Software Ltd. was directed to be included.

For software development services, Nihilent Ltd., Consilient Technologies Pvt. Ltd., Comviva Technologies Ltd., Cybage Software Pvt. Ltd. & Ksolves India Ltd. were excluded due to diversified activities, product revenue, ownership of intangibles or absence of reliable segmental information. Interglobe Technology Quotient Pvt. Ltd. was included consistently with earlier years.

For ITeS, MPS Ltd. & Integra Software Services Pvt. Ltd. were excluded because they provided high-end publishing and digital solutions materially different from the assessee’s routine support services.

For AY 2022-23, Moonfrog Labs Pvt. Ltd. was excluded since it developed & commercialised online gaming platforms, owned significant intangibles, earned diversified revenue without segmental breakup & assumed entrepreneurial risks.

The Tribunal repeatedly applied judicial consistency, noting that comparables accepted or rejected in earlier years on an unchanged functional profile should receive similar treatment unless Revenue demonstrates a material difference.

The AO was also directed to adopt the correct financial figures, grant appropriate TDS credit & recompute consequential interest. Both appeals were allowed.

The ruling recognises economic reality: once the whole segment is rewarded at an assured arm’s-length margin, the TPO cannot pluck out one operating expense, call its value nil & tax the same profitability all over again.

List of Cases Discussed / Relied Upon

• Red Hat India Private Limited Vs Additional/Joint/Deputy/ACIT/ITO (ITAT Mumbai)” Red Hat India Private Limited Vs Additional/Joint/Deputy/ACIT/ITO (ITAT Mumbai) — earlier-year Tribunal proceedings referred to for comparability and working-capital issues.
• Huawei Technologies India Pvt. Ltd. Vs ACIT (ITAT Bangalore)Huawei Technologies India Pvt. Ltd. Vs ACIT (ITAT Bangalore) — working-capital adjustment principles.
• EIT Services India Pvt. Ltd. Vs JCIT — cited in the supplied order for working-capital adjustment under Rule 10B.
• K7 Computing Pvt. Ltd. — referred to in the Tribunal’s earlier decisions in the assessee’s own case on functional comparability.
• Innovana Thinklabs Ltd. — referred to in the Tribunal’s earlier decisions in the assessee’s own case on functional comparability.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These two appeals filed by assessee are against the final assessment orders passed pursuant to the directions of ld. Dispute Resolution Panel-2, Mumbai (DRP) vide order Nos. ITBA/DRP/F/144C(5)/2025-26/1083116709(1), dated 28.11.2025 and ITBA/DRP/F/144C(5)/2024-25/1067819818, dated 21.08.2024 u/s. 144C(5) of the Income-tax Act (hereinafter referred to as the “Act”), for the Assessment Years 2022-23 and 2021-22, respectively.

2. Assessee has raised the following grounds of appeal:

ITA 2423/Mum/2026 (Assessment Year 2022-23)

Grounds relating to Transfer Pricing Adjustment – Rs. 105,68,63,846

1. Adjustment relating to international transaction pertaining to payment of royalty and service fee (Subscription Segment) – Rs. 23,77,70,822

1.1 ld. Assessing Officer and ld. TPO (under the directions of the Hon’ble DRP) erred on facts and in law, in making an addition of Rs. 23,77,70,822 to the Appellant’s taxable income by incorrectly determining the arm’s length price for payment of royalty and service fees under subscription segment.

1.2 Ld. AO/ Ld. TPO erred on facts and in law in adopting an arbitrary and adhoc approach and modifying the economic analysis carried out by the Appellant in the Transfer Pricing Documentation (‘TP Documentation’) and introducing new filters, without providing any cogent reasons.

1.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting various comparable companies selected by the Appellant in the TP Documentation and additional companies introduced by Appellant during the transfer pricing proceedings basis the provisions of Rule 10B(2) of the Rules.

1.4 Ld. AO/ Ld. TPO erred on facts and in law in introducing new comparable companies without appreciating that such companies are functionally dissimilar to the Appellant and violated the provisions of Rule 10B(2) of the Rules.

1.5 Ld. AO/ Ld. TPO erred in computing the arm’s length price based on incorrect computation of net operating profit margin of comparables.

1.6 (on a without prejudice basis) Ld. AO/ Ld. TPO erred in facts and in law in not reducing for cost of availing of back office, sales and marketing support services from the operating cost, despite the fact that Ld. AO/ Ld. TPO has made a separate disallowance.

1.7 Ld. AO erred in law and on facts in passing the assessment order without giving effect to the rectification order passed under section 154 of the Act by Ld. TPO.

2. Adjustment relating to international transactions pertaining to provision of software development services – Rs. 21,64,80,978

2.1 Ld. Assessing Officer and ld. TPO (under the directions of Hon’ble DRP) erred on facts and in law, in making an adjustment of Rs. 21,64,80,978 to the Appellant’s taxable income by incorrectly determining the arm’s length price for provision of software development services

2.2 Ld. AO/ Ld. TPO erred on facts and in law in adopting an arbitrary and adhoc approach and modifying the economic analysis carried out by the Appellant in the TP Documentation and introducing new filters, without providing any cogent reasons.

2.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting various comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 10B(2) of the Rules.

2.4 Ld. AO/ Ld. TPO erred on facts and in law in introducing new comparable companies without appreciating that such companies are functionally dissimilar to the Appellant and violated the provisions of Rule 10B(2) of the Rules.

2.5 Ld. AO/ Ld. TPO erred in computing the arm’s length price based on incorrect computation of net operating cost plus margin of comparables.

3. Adjustment relating to international transactions pertaining to provision of IT

3.1 Ld. Assessing Officer and ld. TPO (under the directions of Hon’ble DRP) erred on facts and in law, in making an adjustment of Rs. 26,15,55,451 to the Appellant’s taxable income by incorrectly determining the arm’s length price for provision of IT enabled services.

3.2 Ld. AO/ Ld. TPO erred on facts and in law in adopting an arbitrary and adhoc approach and modifying the economic analysis carried out by the Appellant in the TP Documentation and introducing new filters, without providing any cogent reasons.

3.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting various comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 10B(2) of the Rules.

3.4 Ld. AO/ Ld. TPO erred on facts and in law in introducing new comparable companies without appreciating that such companies are functionally dissimilar to the Appellant and violated the provisions of Rule 10B(2) of the Rules.

3.5 Ld. AO/ Ld. TPO erred in computing the arm’s length price based on incorrect computation of net operating cost plus margin of comparables.

4. Grant of Working capital adjustment as per Rule 10B(1) and Rule 10B(3) for the segments mentioned in Ground no. 1 to 3

4.1. On facts and circumstances of the case and in contrary to law, Ld. AO/ Ld. TPO erred in rejecting the claim of working capital adjustment based on conjectures and surmises which is in contradiction to the settled principles laid down by various judicial precedents. Thereby, contravening the provisions of Rule 10B(1) and Rule 10B(3) of the Rules. In doing so, grossly erred in:

• • Ignoring the detailed submissions and computation of working capital adjustment filed on record by the Appellant which clearly demonstrates that differences in the Appellant’s working capital vis-à-vis comparable companies has affected its profit margin;
  • Rejecting all the judicial precedents submitted by the Appellant in the above matter;
  • Rejecting grant of working capital adjustment on an ad-hoc basis citing reasons such as lack of information regarding daily balances of working capital, difference in cost of capital of companies and such similar reasons; and
  • Not appreciating that it was beyond the power of Appellant to obtain the information which is not available in public domain. If at all the said information was critical for grant of working capital adjustment, ld. TPO ought to have exercised its power u/s 133(6) of the Act to obtain such details from comparable companies.

5. Adjustment relating to international transactions pertaining to Availing of back office, sales and marketing support services – Rs. 34,10,56,595

5.1. Ld. Assessing Officer/ Ld. TPO erred on facts and in law, in determining the arm’s length price for availing of back office, sales and marketing support services as Nil and thereby making an adjustment of Rs. 34,10,56,595 to the Appellant’s

5.2. Ld. Assessing Officer/ Ld. TPO erred on facts and in law, in disallowing the expenditure incurred by the Appellant towards availing back-office, sales and marketing support services, without appreciating the fact that-

Appellant operates under an assured margin model in respect of its subscription and service segment;

• • Business model of the Appellant has been accepted by the Coordinate bench of this Tribunal in the Appellant’s own case for the preceding assessment years, and there has been no change in facts or circumstances for the year under appeal;
  • Individual line-item disallowances of expenses become tax-neutral and cannot give rise to transfer pricing adjustment once overall margin is shown to be arm’s length; and
  • Margin earned under the service segment has been accepted at arm’s length, thereby the disallowance to the extent of Rs. 51,450,348 pertaining to service segment is not warranted.

5.3. Ld. AO/ Ld. TPO erred on facts and in law in rejecting the economic analysis conducted by Appellant in transfer pricing documentation and analyzing this transaction on stand-alone basis.

5.4. Ld. AO/ Ld. TPO erred on facts and in law in not appreciating the facts of the case, submissions and documentary evidence filed on record.

5.5. Ld. AO/ Ld. TPO erred on facts and in law in disregarding the commercial expediency for availing services from the associated enterprise and failed to appreciate the jurisprudence that ld. TPO/ Ld. AO can’t go beyond his powers in questioning commercial decisions of the 8 Appellant.

5.6. Ld. AO/ Ld. TPO erred on facts in determining the arm’s length of this transaction by not using any of the methods prescribed under section 92C(1) of the Act read with Rule 10B of the Rules prescribed.

Other grounds

6. Ld. Assessing Officer erred in short granting of credit of Taxes Deducted and Collected at Source to the extent of Rs. 74,151 while computing the tax liability for the year.

7. The Ld.AO erred on facts and in law in calculating the total interest at Rs. 5,78,39,352, while alleged interest under the final assessment order comprises only of interest under section 234B of the Act at Rs. 3,73,22,460. The excess interest of Rs. 2,05,16,892 is without any basis and bad in law.

8. The Ld.AO erred on facts and in law in levying interest under section 234B of the Act.

9. Ld. Assessing Officer erred on facts and in law in granting short interest under section 244A(1) of the Act.

10. Ld. Assessing Officer erred on facts and in law in initiating penalty brings to your honors notice, all of the above-mentioned grounds of appeal are without prejudice to one another.

ITA 5800/Mum/2024 (Assessment Year 2021-22)

Grounds relating to Transfer Pricing Adjustment-Rs. 971,216,866

1. Adjustment relating to international transaction pertaining to payment of royalty and service fee (Subscription Segment) – Rs. 307,452,416

1.1 ld. Assessing Officer and ld. TPO (under the directions of the Hon’ble DRP) erred on facts and in law, in making an addition of Rs. 307,452,416 to the Appellant’s taxable income by incorrectly determining the arm’s length price for payment of royalty and service fees under subscription segment.

1.2 Ld. AO/Ld. TPO erred on facts and in law in modifying the economic analysis carried out by the Appellant in the Transfer Pricing Documentation (TP Documentation’), and introducing new filters, without providing any cogent reasons.

1.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 10B(2) of the Rules.

1.4 Ld. AO/Ld. TPO erred on facts and in law in introducing new companies without appreciating that such companies are functionally dissimilar to the Appellant and thereby, violated the provisions of Rule 10B(2) of the Rules. 1.5 Ld. AO/ Ld. TPO erred in computing the arm’s length price based on incorrect computation of net operating profit margin of comparables.

1.6 Ld. AO/Ld. TPO erred in law in not allowing working capital adjustment without appreciated that the detailed computation based on the OECD guidelines has been provided to ld. TPO/Ld. DRP and such adjustment as necessitated under the provisions of Rule 10B(1) and Rule 10B(3).

1.7 (On a without prejudice basis) Ld. AO/Ld. TPO erred in facts and in law in not reducing for cost of availing of back office, sales and marketing support services from the operating cost, despite the fact that Ld. AO/Ld. TPO has made a separate disallowance.

2. Adjustment relating to international transaction pertaining to payment of rovalty and service fees (Service Segment) – Rs. 32,731,433

2.1 Ld. Assessing Officer along with ld. TPO (under the directions of Hon’ble DRP) erred on facts and in law, in making an addition of Rs. 32,731,433 to the Appellant’s taxable income by incorrectly determining the arm’s length price for payment of royalty and service fees under Service segment.

2.2 L.d. AO/Ld. TPO erred on facts and in law in modifying the economic analysis carried out by the Appellant in the TP Documentation and introducing new filters, without providing any cogent reasons.

2.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 10B(2) of the Rules.

2.4 Ld. AO/ Ld. TPO erred on facts and in law in introducing new companies without appreciating that such companies are functionally dissimilar to the Appellant and thereby, violate the provisions of Rule 10B(2) of the Rules.

2.5 Ld. AO/Ld. TPO erred in computing the arm’s length price based on incorrect computation of net operating profit margin of comparables.

2.6 Ld. AO/Ld. TPO erred in law in not allowing working capital adjustment without appreciated that the detailed computation based on the OECD guidelines has been provided to ld. TPO/Ld. DRP and such adjustment as necessitated under the provisions of Rule 10B(1) and Rule 10B(3).

2.7 Ld. TPO erred in law in incorrectly computing the proportionate adjustment for the value of international transactions.

2.8 (On a without prejudice basis) Ld. AO/Ld. TPO erred in facts and in law in not reducing for cost of availing of back office, sales and marketing support services from the operating cost, despite the fact that Ld. AO/Ld. TPO has made a separate disallowance.

3. Adjustment relating to international transactions pertaining to provision of software development services – Rs. 70,995,486

3.1 Ld. Assessing Officer and ld. TPO (under the directions of Hon’ble DRP) erred on facts and in law, in making an adjustment of Rs. 70,995,486 to the Appellant’s taxable income by incorrectly determining the arm’s length price for provision of software development services.

3.2 Ld. AO/Ld. TPO erred on facts and in law in modifying the economic analysis carried out by the Appellant in the TP Documentation and introducing new filters, without providing any cogent reasons.

3.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 10B(2) of the Rules.

3.4 Ld. AO/ Ld. TPO erred on facts and in law in introducing comparable companies without appreciating that such companies are functionally dissimilar to the Appellant and violated the provisions of Rule 10B(2) of the Rules.

3.5 Ld. AO/ Ld. TPO erred in computing the arm’s length price based on incorrect computation of net operating cost plus margin of comparables.

3.6 Ld. AO/ Ld. TPO erred in law in not allowing working capital adjustment has been provided to ld. TPO/Ld. DRP and such adjustment as necessitated under the provisions of Rule 10B(1) and Rule 10B(3).

4 Adjustment relating to international transactions pertaining to provision of IT enabled services – Rs. 221,372,237

4.1 Ld. Assessing Officer and ld. TPO (under the directions of Hon’ble DRP) erred on facts and in law, in making an adjustment of Rs. 221,372,237 to the Appellant’s taxable income by incorrectly determining the arm’s length price for provision of IT enabled services.

4.2 Ld. AO/Ld. TPO erred on facts and in law in modifying the economic analysis carried out by the Appellant in the TP Documentation and introducing new filters, without providing any cogent reasons.

4.3 Ld. AO/ Ld. TPO erred on facts and in law in arbitrarily rejecting comparable companies selected by the Appellant in the TP Documentation basis the provisions of Rule 10B(2) of the Rules.

4.4 Ld. AO/ Ld. TPO erred on facts and in law in introducing comparable companies without appreciating that such companies are functionally dissimilar to the Appellant and thereby. violated the provisions of Rule 10B(2) of the Rules.

4.5 Ld. AO/ Ld. TPO erred in computing the arm’s length price based on incorrect computation of net operating cost plus margin of comparables.

4.6 Ld. AO/ Ld. TPO erred in law in not allowing working capital adjustment without appreciated that the detailed computation based on the OECD guidelines has been provided to ld. TPO/Ld. DRP and such adjustment as necessitated under the provisions of Rule 10B(1) and Rule 10B(3).

5. Adjustment relating to international transactions pertaining to Availing of back office, sales and marketing support services – Rs. 338,665,294

5.1. Ld. Assessing Officer/ Ld. TPO erred on facts and in law, in determining the arm’s length price for availing of back office, sales and marketing support services as Nil and thereby making an adjustment of Rs. 338,665,294 to the Appellant’s taxable income.

5.2. Ld. AO/Ld. TPO erred on facts and in law in not appreciating the facts of the case, submissions and documentary evidence filed on record.

5.3. L.d. AO/Ld. TPO erred on facts and in law in rejecting the economic analysis conducted by Appellant in transfer pricing documentation and analyzing this transaction on a stand-alone basis without even applying any of the methods prescribed under section 92C(1) of the Act read with Rule 10B of the Rules prescribed.

5.4. Ld. AO/ Ld. TPO erred on facts and in law in disregarding the commercial expediency for availing services from the associated enterprise and failed to appreciate the jurisprudence that ld. TPO/ Ld. AO can’t go beyond his powers in questioning commercial decisions of the Appellant.

6. Ld. Assessing Officer erred in short granting credit of Taxes Deducted at Source to the extent of Rs. 1,37,040.

7. The Ld.AO erred on facts and in law in levying excess interest under section 234A and 234B of the Act.

8. Ld. Assessing Officer erred on facts and in law in initiating penalty proceedings under Section 270A and 271AA of the Act.

The Appellant humbly brings to your honors notice, all of the above-mentioned grounds of appeal are without prejudice to one another.

3. Since identical grounds are raised in both the appeals, we find it proper to take up both the appeals together by passing this consolidated order. We take appeal in ITA No.5800/Mum/2024 for AY 2021-22 as the lead case to draw the facts and make our observations and findings thereon which shall apply mutatis mutandis to the other appeal for AY 2022-23. Issue specific to AY 2022-23 shall be dealt separately while adjudicating appeal for this year.

4. Brief facts as culled out from the records are that assessee is engaged in the business of providing “open source” software to customers worldwide. Software being “open source”, the Red Hat group does not specifically charge its customers for the same. Major revenues earned by the groups were from its subscriptions, with Red Hat Enterprise Linux as the primary source of the company’s worldwide growth plan. In the transfer pricing proceedings, Ld. TPO observed that all the Red Hat group software products came with either an annual or multi-year service subscription that enables users of the Red Hat group products to avail various support services from Red Hat group. He noted that the Red Hat group offers several types of subscriptions with varying levels of support services and access to bug fixes and software updates. Ld. TPO noted that the group provides various professional services involved in distribution of Red Hat subscription and providing Red Hat products related training and consulting services to customers in Indian subcontinent. Assessee filed its return of income on 15.03.2022 reporting a total income at Rs.1,12,70,75,710/-. The case was selected for scrutiny and a draft assessment order dated 06.11.2023 was issued with certain Transfer Pricing-based Arm’s Length Price Variation u/s. 92CA. Ld. TPO in the present case proposed a cumulative transfer pricing adjustment of Rs. 97,12,16,866/- on the following four international transactions:

S. No.	Nature of International Transaction	Amount (in INR)
1	Payment of royalty and service fee to Red Hat US for Subscription segment	307,452,416
2	Payment of royalty and service fee to Red Hat US for Services segment	32,731,433
3	Provision of software development services	70,995,486
4	Provision of IT enabled services	221,372,237
5	Availing of back office, sales and marketing support services	338,665,294
	Total Adjustment	971,216,866

4.1. Functional profile and benchmarking methodology adopted by assessee and ld. TPO is summarized below, as reproduced by ld. TPO in his order at page no. 3 and 4: –

“6.1.1. Description of Transaction The AE Red Hat USA is a provider of open- source solutions for internet computing. An open source software typically grants every user free access to the source code (upgrades, updates and bug fixes) and enables the customers to modify and customize the software to suit their requirements. Red Hat USA provides Red Hat Enterprise Linux, JBoss Enterprise Middleware & other software programs. Once an open source software is downloaded, software users may require access to modifications, additions or further enhancements and ongoing support services. The sale of ‘Red Hat Subscriptions’ enable the customers to avail and access the above-mentioned features and support services. Assessee Red Hat India distributes open source ‘Red hat Subscriptions’ to customers in India and also provides training related services to its customers. These business activities of assessee have been classified by it into two segments i.e.

i) Subscription Segment

ii) Services Segment

A. Subscription Segment –Red Hat India identifies customers and enters into contracts with them for sale of the subscriptions. Generally, the contracts with customers are for 1-3 years. However, in case of Government contracts, the period of the contract ranges from 7-9 years. With respect to Government contracts, even though customer identification and approval for the subscriptions is undertaken by Red Hat India, the Company does not directly enter into contracts with the Government.

Red Hat India sells the subscriptions to channel partners who have been awarded the contract by the Government. Once the customer purchases subscription from assessee, the customer needs to accept the standard enterprise agreement in place as click through the portal. As per the Enterprises Agreement, assessee sells the Red Hat Subscriptions in India, which will entitle the customer to receive both the ‘Red Hat software’ and/or ‘services’ during the period of the subscription (generally, one or three years). The services to the customers are provided through the Global support service centres. For the purpose of sale/distribution of the Red Hat Subscriptions in India that includes both ‘software’ and related ‘services’, assessee has entered into a ‘License and Service Agreement’ dated 01/04/2014 with the AE Red Hat USA. A copy of the said Agreement was provided by assessee during the on-going proceedings. Vide the Agreement, (i) the AE Red Hat USA grants assessee the right to use its intangible property (i.e. trademarks, trade names and domain names owned by Red Hat USA), for which assessee is liable to pay royalty at 3% of its revenue from this segment to the AE. (ii) Further, the AE Red Hat USA provides the services to the customers (end users) who purchased the Red Hat Subscriptions from assessee. For this service, the AE charges assessee service fee in such a manner that the operating profit margin of assessee is always equal to 1.4% of the revenue in this segment.”

4.2. Ld. TPO at page no. 5 of the order has narrated the functions of assessee under service segment as under:

“B. Services Segment –Under the Services Segment, assessee distributes training content to customers which primarily include Red Hat Global Learning Services (GLS) and provision of consultancy service. GLS refers to training courses designed to educate customers about Red hat Linux, including the Red hat Certified Engineer (RHCE) programme.

The training and examination courseware is provided by the AE Red Hat USA. For this service, the AE charges assessee service fee in such a manner that the operating profit margin of assessee is always equal to 13.5% of the revenue in this segment.

This arrangement of revenue split between assessee and the AE Red Hat USA ensures that assessee is assured of a margin of 1.4% of revenues earned from the subscription segment and 13.50% of revenues earned from the services segment. If assessee does not earn the assured margin under both the segments, assessee is not required to pay any royalty or service fee to the AE, but the AE would make payment to assessee to ensure that assessee earns the assured margin. Since Red Hat India’s profits in this segment for the year was lower than the minimum assured profits, there was a reverse service charge of Rs. 21,23,30,045/- payable by Red Hat Inc to Red Hat India”

4.3. For the Provision of Software Development Service, ld. TPO in his order at page no. 48 has narrated the functions of assessee under software development segment as under:

“6.2.1. Description of the Transaction -Pursuant to the integration of the operations of Gluster India into Red Hat India, Red Hat India entered into an Agreement with Red Hat USA dated 1 April 2012, for provision of software development services. The services are primarily in connection with the products of Red Hat USA pursuant to the acquisition of Gluster. Red Hat India is remunerated for these services on a cost plus 15% mark-up basis for these services. On this basis, assessee submitted that it received INR 1,61,67,28,877/- from its AE Red Hat USA for rending such services”

4.4. For the Provision of IT enabled Services, ld. TPO in his order at page no. 73 and 74 has narrated the functions of assessee under ITeS segment as under:

“6.3.1. As regards provision of support services by Red Hat India to its AEs (i.e. Red Hat US and Red Hat Ireland), Red Hat India houses a team which is engaged in provision of CEE services. Customers that purchase the Red Hat Subscriptions are entitled to various support services. The AEs are responsible for providing such support services to the customer from its support centers across the globe. One of such support centers is Red Hat India’s office in Pune where the CEE team provides 24/7 technical support to customers, maintains the Customer Portal (which is an online resource for customers to self analyze problems they encounter with Red Hat technology as a first level of troubleshooting) and provides customer management services. Further, certain back offices functions are centralized (to achieve overall synergies and efficiency) with certain identified entities across the world. Red Hat India houses a team which provides such centralized back office functions for its AE in the area of accounting, financial reporting, Performance Improvement (‘PI’), procurement, IT Helpdesk, etc. This team operates under the supervision, guidance and instructions of the AE.

A brief description of the nature of back office services provided by Red Hat India is given as under:

(i) Accounting: Predominantly comprises back-office support roles and operations such as consolidation, reconciliation of receivables and payables, project accounting, revenue accounting, invoicing, reporting, payroll functions etc. Further, linguistic support services are also rendered for overseas group entities.

(ii) Financial reporting: This team focuses on operations such as quota and performance management, weekly and daily financial reporting, commission analysis etc. This team analyzes data pertaining to customer purchasing patterns and work under the guidance of more experienced team members of the AE.

(iii) PI team: The performance improvement team supports the global human resource team to a very limited degree with respect to some specific activities e.g. pre on-boarding procedures related to collation of documents and personal information of the employees. The team also supports employees across Red Hat entities to organize documentation needed for Visa applications. d) Procurement: The procurement function is carried out by a small team who operate under the guidance of the Red Hat’s Global Procurement team. Each team member specializes in a particular type of product procurement and interacts with certain identified vendors for procurement purposes. These interactions are governed by the delegation of authority guidelines/ limits set and the guidelines issued by the Global Procurement team.

(iv) IT Helpdesk Team: This team provides IT infrastructure helpdesk support to employees of Group companies. These services include Infrastructure support, Application Development, Local IT Infrastructure etc.”

4.5. During the assessment year under consideration, assessee availed the back office, sales and marketing support services essential to the Subscription and Services segment where assessee is compensated at an assured targeted operating margin on its revenues. Since the transaction of availing administrative, sales and marketing support services is inextricably linked to the service and subscription segments of assessee, the arm’s length nature of this transaction has been tested by aggregating this under service and subscription segments of assessee. However, ld. TPO determined the arm’s length value of the said transaction as NIL citing various reasons resulting in addition of INR 338,665,294.

5. A draft assessment order under section 144C(1) read with section 144B was issued to assessee on 06.11.2023 proposing total assessed income of Rs. 2,09,82,92,576/-. Aggrieved, assessee filed objections before the Ld. DRP who vide directions dated 21.08.2024, affirmed the approach of ld. TPO on all five objections raised, without granting any relief to assessee. Pursuant thereto, ld. TPO passed an effect order dated 28.08.2024, retaining the adjustment at Rs. 97,12,16,866/-, and ld. Assessing Officer passed the impugned final assessment order dated 11.09.2024 assessing total income at Rs. 2,09,82,92,576/-. Aggrieved, assessee is in appeal before the Tribunal.

6. We have heard the rival contentions, perused the orders of the authorities below. Ground no. 1, along with its various sub-grounds is in respect to the payment of Royalty and Service Fees. In the TP documentation, assessee had selected 4 comparables yielding an unadjusted arithmetic mean of 1.24% (adjusted mean 0.37%). Ld. TPO rejected all 4 comparables in entirety and, upon fresh search, retained/introduced 2 comparables yielding an unadjusted mean of 9.96%, resulting in the impugned adjustment. The comparables for which assessee seeks exclusion/inclusion are listed below:-

Assessee is seeking exclusion for-

I. K7 Computing Pvt. Ltd. and

II. Innovana Thinklabs Ltd.

Further assessee is seeking inclusion of

I. Compuage Infocom Limited

II. NTT India Private Limited

III. Informatics Technologies Private Limited and

IV. Team Computers Private Limited.

7. We shall undertake the comparability of the companies sought for inclusion/ exclusion by assessee.

I. K7 Computing Pvt Ltd

At the outset, ld. Counsel for the assessee submitted that K7 Computing Pvt Ltd, has been excluded by Coordinate Bench of ITAT, Mumbai in assessee’s own case for AY 2016-17 in ITA No. 1379/Mum/2021, for AY 2017-18 in ITA No. 801/Mum/2022, for AY 2018-19 in ITA No. 2442/Mum/2022 and for AY year 2020-21 in ITA No. 4065/Mum/2024 observing as under:

i) AY 2016-17 (ITA No. 1379/Mum/2021)

“K7 Computing Pvt. Ltd. (K7)

27. 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

28. We have examined profile of 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 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

29. When we compare all these facts vis-à-vis assessee, we are of the considered view that assessee is a limited risk reseller having no plant and equipments, owning no intangible assets, having no expenses on promotions and is not selling its product. So K7 is not a valid comparable vis-à-vis K7, hence ordered to be excluded.”

ii) AY 2017-18 (ITA No. 801/Mum/2022)

“7.1 Admittedly there are no factual differences in FAR of assessee for the year under consideration vis-à-vis assessment year 2016-17. 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.”

iii) AY 2018-19 ITA No. 2442/Mum/2022

“16. We have carefully considered the rival submissions and perused the material placed on record. Assessee has placed before us the compilation of its annual reports together with a detailed comparative chart, which clearly demonstrates that its functional profile has remained consistent and unchanged over the years. It is an admitted position that there is no variation in the functions performed, assets employed, or risks assumed (FAR) by assessee during the year under consideration, when compared with the assessment years 2016–17 and 2017–18. This Tribunal, in assessee’s own case for those years, had already examined the very same profile and comparables in depth, and rendered categorical findings. The learned Departmental Representative, has not brought on record any new facts, materials, or distinguishing features to deviate from the earlier binding precedent of the coordinate bench. In such circumstances, judicial
discipline demands that we must follow the earlier view. Accordingly, respectfully following the consistent reasoning adopted by this Tribunal in assessee’s own cases for the preceding years, we hold that the same parity of treatment should be extended for the present year as well, and direct that (i) Virtual Galaxy Infotech Private Limited and (ii) K7 Computing Pvt. Ltd. be excluded from the final set of comparables.”

iv) AY 2020-21 ITA No. 4065/Mum/2024

“18. We have heard both the parties and perused the materials on record. The Ld. AR has submitted the compilation of the annual reports together with a detailed comparative chart, which clearly demonstrates that its functional profile has remained unchanged over the years. There is no variation in the functions performed, assets employed or risks assumed (FAR) by assessee during the year under consideration, when compared with the AYs 2016–17, 2017–18 and 2018-

19. This Tribunal, in assessee’s own case for the said years, examined the very same profile and comparables in depth and has given categorical findings. The Ld. DR has not brought on record any new facts, materials or distinguishing features to deviate from the earlier findings of the Tribunal on the subject issue.

Accordingly, following the reasoning adopted by this Tribunal in assessee’s own cases for the preceding years, we hold that the same parity of treatment needs to be extended for the present year and hence, direct that (i) K7 Computing Pvt. Ltd.,

(ii) Virtual Galaxy Infotech Private Limited and (iii) Innovana Thinklabs Limited be excluded from the final set of comparables.”

7.1. It is clear from the above that for AYs 2016–17, 2017–18, 2018-19 and 2020-21, the Coordinate Bench had already examined the comparability of K7 Computing and directed its exclusion on account of functional differences. Assessee has placed on record the annual reports and functional charts to show that its FAR profile remains unchanged during the present year. On the other hand, the Ld. DR has not produced any fresh material or distinguishing fact to justify a departure from the settled position. In these circumstances, we see no reason to take a different view for the year under appeal before us. Respectfully following the consistent reasoning adopted by this Tribunal in assessee’s own cases for the preceding years, we hold that the same parity of treatment needs be extended for AY 2021-22 and hence, direct that K7 Computing Pvt. Ltd. be excluded from the final set of comparables.

II. Innovana Thinklabs Limited

7.2. At the outset, ld. Counsel for the assessee submitted that Innovana Thinklabs Limited has been excluded by Coordinate Bench of ITAT, Mumbai in assessee’s own case for AY 2018-19 in ITA No. 2442/Mum/2022 and for AY 2020-21 in ITA No. 4065/Mum/2024 observing as under:

i) AY 2018-19 ITA No. 2442/Mum/2022

“17. Innovana Thinklabs Limited – Ld. AR submitted that this company is functionally not similar, as the entire sale proceeds are from manufactured goods. It is submitted that this company is engaged in manufacturing/ developing new products as per the extracts in the annual report.Ld.AR submitted that this comparable has developed numerous products and these products have registered their presence. The product portfolio of Innovana consists of applications and software such as Ad-blocker, Disk Cleanup, Space Reviver, File Opener, Privacy Protector, etc.

18. We have carefully considered the submissions advanced by both parties and examined the material placed on record in relation to the inclusion of Innovana Thinklabs Limited as a comparable. Assessee has vehemently contended that this company is functionally dissimilar, as it is engaged primarily in the manufacturing and development of software products, whereas assessee’s business model is confined to being a limited-risk reseller of subscription-based software, without any activity of product development or ownership of intellectual property. From the extracts of the annual report, it emerges that Innovana Thinklabs has developed numerous products, which have established a market presence under its brand. Its product portfolio includes a suite of applications and software such as Ad-blocker, Disk Cleanup, Space Reviver, File Opener, and Privacy Protector. These are products innovated, developed, and maintained by the company itself. The disclosure in its management report further testifies to the fact that the company is in the constant pursuit of technological innovation, investing resources in developing new products which are thereafter registered in the market. Such a business model is wholly distinct from that of assessee, who does not engage in any product innovation, but only distributes subscriptions of pre-developed Red Hat software on a limited-risk basis.

The financial disclosures of Innovana Thinklabs also reinforce this distinction. The Profit and Loss statement reflects material consumption costs to the tune of ₹ 101,895,942, a clear indicator of manufacturing and developmental activity. Equally important is the fact that there are no purchases of stock-in-trade, thereby establishing that the company is not in the trading or distribution business. Rather, it operates as a product company, drawing value from its development activities and ownership of proprietary software. Other disclosures in the annual report anticipate growth in future years from newly developed products with promising market prospects, underscoring its entrepreneurial and innovation- driven profile. Moreover, as per Form MGT-9, the principal business activities of including the maintenance of websites and creation of multimedia presentations, in addition to product development. Its website also proclaims its constant engagement in technological advancement and innovation, enlisting a variety of proprietary products which it has designed and commercialised. Such characteristics are emblematic of a product company with ownership of intangibles, and thus render it functionally incomparable with a limited-risk distributor like assessee. In contrast, assessee’s role is narrowly confined to that of a reseller of subscriptions, operating under a limited-risk profile, without any involvement in innovation, product development, or creation of intellectual property. Assessee merely facilitates access to software developed by its parent company, without assuming risks or deploying resources towards R&D. To equate such a reseller with a product development company would be a distortion of functional comparability.

We also note that in earlier parts of this order we have directed the exclusion of Virtual Galaxy Infotech Pvt. Ltd. on similar grounds, namely that it was engaged in development activities and therefore functionally dissimilar. The same reasoning applies with equal force to Innovana Thinklabs. Consistency of approach demands that we apply the same functional filter, for judicial discipline requires that parity of treatment be maintained across comparables that are similarly placed. In light of the foregoing analysis, we are of the considered view that Innovana Thinklabs Limited cannot be considered as a valid comparable for benchmarking the international transactions of assessee. Its functional profile as a full-fledged product development and innovation-driven company is entirely at variance with that of assessee, who is merely a limited-risk reseller. Accordingly, we direct the Ld. AO/TPO to exclude Innovana Thinklabs Limited from the final set of comparables.”

ii) AY 2020-21 ITA No. 4065/Mum/2024

“18. We have heard both the parties and perused the materials on record. The Ld. AR has submitted the compilation of the annual reports together with a detailed comparative chart, which clearly demonstrates that its functional profile has remained unchanged over the years. There is no variation in the functions performed, assets employed or risks assumed (FAR) by assessee during the year under consideration, when compared with the AYs 2016–17, 2017–18 and 2018-19. This Tribunal, in assessee’s own case for the said years, examined the very same profile and comparables in depth and has given categorical findings. The Ld. DR has not brought on record any new facts, materials or distinguishing features to deviate from the earlier findings of the Tribunal on the subject issue. Accordingly, following the reasoning adopted by this Tribunal in assessee’s own cases for the preceding years, we hold that the same parity of treatment needs to be extended for the present year and hence, direct that (i) K7 Computing Pvt. Ltd., (ii) Virtual Galaxy Infotech Private Limited and (iii) Innovana Thinklabs Limited be excluded from the final set of comparables.”

7.3. It is clear from the above that for AY 2018-19 and AY 2020-21, the Tribunal had already examined the comparability of Innovana Thinklabs and directed its exclusion on account of functional differences. Assessee has placed on record the annual reports and functional charts to show that its FAR profile remains unchanged during the present year. On the other hand, the Ld. DR has not produced any fresh material or distinguishing fact to justify a departure from the settled position. In these circumstances, we see no reason to take a different view for the year under appeal. Respectfully following the consistent reasoning adopted by this Tribunal in assessee’s own cases for the preceding years, we hold that the same parity of treatment needs be extended for AY 2021-22 and hence, direct that Innovana Thinklabs Limited be excluded from the final set of comparables.

7.4. In respect of the comparables (i) NTT India Private Limited, (ii) Compuage Infocom Limited, (iii) Informatics Technologies Private Limited, and (iv) Team Computers Private Limited, ld. Counsel for assessee submitted that these comparables may be left as academic in nature. Ld. DR did not raise any objection on the same. Considering the submissions, no directions are issued for these remaining comparable companies. Accordingly, ground nos. 1.1 to 1.4 are allowed.

8. Through ground no 1.5, assessee seeks correction of errors in computing margin of comparable companies that would remain to determine arm’s length margin of the transaction. We direct the ld. AO/TPO to adopt correct figures for computing the margins of the remaining comparables. This ground is thus, allowed for statistical purposes.

9. Ground no. 1.6 and additional ground no. 9 is in respect of not granting working capital adjustment (in short, ‘WCA’) claimed by assessee so as to iron out the differences between the comparables and assessee for computing the margin. Ld. Counsel for assessee has pointed out that the issue is covered by the directions of the Coordinate Bench of ITAT in earlier years. However, ld. DR vehemently argued that WCA should not be allowed since the monthly balances of the sundry debtors and sundry creditors are not available. We find that the Co- ordinate Bench of ITAT, Mumbai in assessee ‘s own case for AY 2016-

17 has granted working capital adjustment to assessee in respect of difference in working capital levels between the comparable companies and assessee. Further, the Coordinate Bench has also given categorical findings on the methodology for computing working capital adjustment. The same is reproduced below:-

i) AY 2016-17 (ITA No. 3853/Mum/2025)

“10. We have carefully considered the rival submissions, perused the material available on record, and examined the impugned order in the context of the binding directions issued by this Tribunal in the earlier round. At the outset, we consider it appropriate to first adjudicate Ground No. 10 relating to denial of working capital adjustment, as the same goes to the root of the sole surviving transfer pricing adjustment

11. It is an admitted and undisputed position that in the first round of litigation, the coordinate bench of this Tribunal unequivocally held that assessee is entitled to working capital adjustment. The Tribunal directed the learned TPO to verify the computation furnished by assessee in its transfer pricing study and the detailed working capital adjusted margin computation, and thereafter grant such adjustment in accordance with law. The relevant extract from the Tribunal’s order, which is binding on the lower authorities, is reproduced hereunder.

“64…..So we are of the considered view that assessee is entitled for working capital adjustment. The Ld. TPO is directed to verify the computation furnished in transfer pricing study and detailed working capital adjusted margin computation furnished by assessee and accordingly provide the working capital adjustment to assessee in view of the settled principle laid down by the Tribunal, in order to provide level playing field for assessee as well as comparable company.

12. Despite such clear and categorical directions, the lower authorities have once again declined to grant working capital adjustment, citing reasons such as non- availability of daily working capital balances, differences in cost of capital, and other generalized considerations. In our considered view, such an approach is wholly unsustainable. Once this Tribunal has laid down the principle and issued a specific direction, the lower authorities are duty-bound to carry it out in letter and spirit. The objections raised by ld. TPOare neither new nor insurmountable and have repeatedly been rejected by judicial forums.

13. We further note that in assessee’s own case for Assessment Year 2018–19, the coordinate bench of this Tribunal has reiterated and reinforced the principle that working capital adjustment must be granted to neutralise differences arising from varying levels of receivables, payables, and inventory between assessee and comparable companies. The Tribunal, after detailed analysis, also placed reliance on the decision of the Bangalore Bench in Huawei Technologies India (P.) Ltd., wherein the methodology for computing working capital adjustment has been elaborately examined. The relevant observations are reproduced hereunder…

14. Respectfully following the binding precedents in assessee’s own case for earlier assessment years, and in the absence of any distinguishing facts brought on record by the Revenue, we hold that assessee is clearly entitled to working capital adjustment. The insistence on impractical parameters such as daily balances, particularly when data is not available in the public domain, cannot be a ground to deny a legitimate adjustment which is otherwise warranted to ensure comparability.

15. We further observe that once the working capital adjustment is granted in accordance with the methodology already furnished by assessee and verified by the lower authorities, the margins of the comparable companies, as adjusted, fall within the permissible tolerance range prescribed under section 92C(2) of the Act…

…

17. Accordingly, Ground No. 10 raised by assessee is allowed and the adjustment of INR 4,23,90,382 is hereby deleted.”

9.1. It is thus, clear that WCA to assessee is allowed by the Tribunal. Ld. Counsel for assessee also submitted that in assessee’s own case for AY 2016-17 (first round of proceeding), AY 2017-18, AY 2018-19 and AY 2020-21, the Coordinate Bench had permitted WCA to assessee. Hence, following the above precedents we are of the considered view that the arguments raised by the Ld. CIT DR have already been considered by the coordinate benches of this tribunal and we hold that assessee is entitled to working capital adjustment, wherever the differences in working capital materially impact the margin computation of the comparables. Assessee shall furnish the requisite details before the ld. AO/TPO, who shall compute and grant such adjustments in accordance with law. Accordingly, ground no. 1.6 and additional ground 9 raised by the assessee are allowed for statistical purposes.

10. Ground no. 1.7 is not pressed and accordingly, dismissed as not pressed.

11. For ground nos. 2.1 to 2.4 also, ld. Counsel furnished a detailed  chart. Assessee is seeking exclusion of following companies: (i) Sarla Holdings Pvt. Ltd., (ii) Knowledgehouse Ltd., (iii) Eduspark International Pvt. Ltd. (iv) Akash Educational Services Ltd.; (v) Varsity Education Mgmt. Pvt. Ltd. and (vi) Made Easy Education Pvt. Ltd. On the other hand, it is seeking inclusion of following companies: (i) Compucom Software Ltd (segmental), (ii) Aptech Limited and (iii) Swiss Cert Private Limited. We shall undertake the comparability of the companies sought for inclusion/ exclusion by assessee.

I. Sarla Holdings Pvt. Ltd.: It was submitted that this company has been excluded by the Coordinate Bench in assessee’s own case for AY 2017- 18 in ITA No. 801/Mum/2022, for AY 2018-19 in ITA No. 2442/Mum/2022 and for AY 2020-21 in ITA No. 4065/Mum/2024 observing as under:

i) AY 2017-18 (ITA No. 801/Mum/2022)

“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 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. G.2 Admittedly, these companies are engaged in running schools which is not functionally similar with the training and coaching activities carried on by 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 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.”

ii) AY 2018-19 (ITA No. 2442/Mum/2022)

“29. We have carefully considered the submissions of the Ld. AR and perused the material placed on record. It is an admitted position that the functional profile of assessee has remained unchanged vis-à-vis the earlier assessment years, and assessee has also furnished before us a compilation of annual reports along with a detailed functional analysis chart of the comparables. On perusal thereof, we find that companies such as Career Mosaic Pvt. Ltd., People Combine Educational Initiatives Pvt. Ltd., Sarla Holdings Pvt. Ltd., and G.D. Goenka Pvt. Ltd. are primarily engaged in the field of education, training, and allied activities. Their business model revolves around rendering of educational and coaching services, which is entirely distinct from the business model of assessee, who is engaged in the business of software subscription resale.

The earlier coordinate benches of this Tribunal in assessee’s own case have already examined these very comparables and come to the categorical conclusion that entities engaged in education and training cannot be equated with a limited- risk software distributor, given the significant differences in functions performed, assets employed, and risks assumed. The activities of such education-based companies are not only different in nature, but also involve ownership of intangible assets like goodwill, brand value, and teaching methodologies, which make their margins incomparable to assessee’s business model. It is also pertinent to note that the Ld. DR has not brought on record any new facts or material that could persuade us to depart from the earlier binding precedent. In the absence of any distinguishing feature either in the profile of assessee or in that of these comparables, judicial consistency mandates that the same view be followed in the present year as well.

In view of the above discussion, and respectfully following the earlier decisions of this Tribunal in assessee’s own case, we direct that (i) Career Mosaic Pvt. Ltd., (ii) People Combine Educational Initiatives Pvt. Ltd., (iii) Sarla Holdings Pvt. Ltd., and (iv) G.D. Goenka Pvt. Ltd. be excluded from the final set of comparables. ”

iii) AY 2020-21 (ITA No. 4065/Mum/2024)

“25. We have carefully considered the rival submissions and perused the materials placed on record. The Ld. AR has filed the compilation of annual reports together with a detailed comparative chart, which clearly demonstrates that functional profile of assessee has remained unchanged over the years. There is no variation in FAR by assessee during the year under consideration, as compared with the AYs 2017-18 and 2018-19. The Tribunal, in assessee’s own case for those years, had examined the very same profile and comparables and has given categorical finding. The Ld. DR has not brought on record any new facts, materials, or distinguishing features to deviate from the earlier findings of the Tribunal. Hence, following the decision united supra, we direct (i) Career Mosaic Pvt. Ltd, (ii) People Combine Educational Initiatives Pvt. Ltd. and (iii) Sarla Holdings Pvt. Ltd. to be excluded from the final list.”

11.1. It is clear from the above that for AY 2017-18, AY 2018-19 and AY 2020-21, Coordinate Bench had already examined the comparability of Sarla Holding Pvt. Ltd. and directed its exclusion on account of functional dissimilarity. Assessee has placed on record the annual reports and functional charts to show that its FAR profile remains unchanged during the present year. On the other hand, the ld. DR has not produced any fresh material or distinguishing fact to justify a departure from the settled position. In these circumstances, we see no reason to take a different view for the year under appeal.

Accordingly, following the reasons given in assessee’s own case, we direct to exclude Sarla Holding Pvt. Ltd. from the final set of comparables.

II. Knowledge house Ltd.,

III. Eduspark International Pvt. Ltd.

IV. Akash Educational Services Ltd

11.2. Ld. Counsel for the assessee submitted that the above companies have been excluded by the Coordinate Bench in assessee’s own case for AY 2020-21 in ITA No. 4065/Mum/2024, observing as under:

i) AY 2020-21 (ITA No. 4065/Mum/2024)

“Knowledgehouse Ltd.

26.1 We have carefully considered the submission of Ld. AR and examined the materials placed on record in relation to exclusion of Knowledgehouse Ltd. Ld. TPOhas himself applied the filter of turnover and hence, he cannot go against it. It is clear from the facts on record that this comparable does not satisfy the turnover filter. Moreover, it is also seen that the company is engaged in the field of education activities through schools and hence, not a suitable comparable visà- vis assessee. We, accordingly, direct to exclude Knowledgehouse Ltd from the final list of comparable companies. Eduspark International Pvt. Ltd.

27.1 We have considered the facts of the case and the submissions of Ld. AR. When this comparable does not qualify the TPO’s own RPT filter, it is not a valid comparable vis-à-vis assessee. Moreover, this company is functionally not comparable to assessee. Hence, we direct to exclude Eduspark International Pvt. Ltd. from final set of comparables. Akash Educational Services Ltd.

28.1 We have heard both sides and perused the materials placed before us. We find that Akash Educational Service Ltd. is primarily engaged in the field of coaching education and Franchisee and sale of products. Their business model revolves around rendering of educational and coaching services, which is separate from the business model of assessee. This Tribunal in assessee’s own case had earlier examined similar comparables and come to the conclusion that entities engaged in education services cannot be equated with a limited-risk distributor, given the significant differences in functions performed, assets employed and risks assumed. The activities of such education-based companies are not only different in nature, but also involve ownership of intangible assets, which make their margins incomparable to assessee’s business model. In light of the foregoing analysis, we are of the considered view that Akash Educational Services Ltd. is not a suitable comparable vis-à-vis assessee, hence it is ordered to be excluded.

11.3. We have carefully considered the rival submissions and perused the material on record. Assessee has placed before us the compilation of its annual reports together with a detailed comparative chart which clearly demonstrates that its functional profile has remained and unchanged over the years. It is an admitted position that there is no variation in FAR by assessee during the year under consideration, when compared with the AY 2020-21. Coordinate Bench of ITAT, Mumbai, in assessee’s own case for AY 2020-21, had already examined the very same profile and comparables in depth and rendered categorical findings. Ld. DR has not brought on record any new facts, materials, or distinguishing features to deviate from the earlier binding precedent of the coordinate bench. In such circumstances, judicial discipline demands that we follow the earlier view. Respectfully following the same, we direct (i) Knowledge house Ltd, (ii) Eduspark International Pvt. Ltd. and (iii) Akash Educational Services Ltd. to be excluded from the final list of comparables.

V. Compucom Software Ltd

11.4. Assessee seeks inclusion of this company. The authorities below rejected this comparable on the ground that the company had witnessed a significant decline in revenue due to completion of certain projects and therefore, treated it as an extraordinary event. However, it is seen from the audited financials that the company’s revenue has, in fact, increased both at the segment level and at the entity level during the relevant year. The segment revenue (Learning Solutions) increased from INR 719.32 million in FY 2019–20 to INR 830.37 million in FY 2020–21, while the entity-level revenue increased from INR 1,742.40 million to INR 2,334.20 million. Ld. Counsel also pointed out that this company was accepted as a comparable by the ld. TPO in assessee’s own case for AY 2016-17, AY 2017–18 and AY 2020-21. Admittedly, there are no functional dissimilarities observed by the lower authorities in respect of this comparable. Accordingly, we direct the ld. AO/TPO to include this company in the final set of comparables.

11.5. In respect of the other comparables in this segment viz. (i) Varsity Education Mgmt. Pvt. Ltd, (ii) Made Easy Education Pvt. Ltd, (iii) Aptech Limited and (iv) Swiss Cert Private Limited, it was submitted that these comparables may be left academic to which there was no adverse objection from the other side. Hence, no directions are issued in respect of these companies. Accordingly, ground nos. 2.1 to 2.4 are allowed.

12. Ground no 2.5 and 2.6 are akin to ground no. 1.5 and 1.6. Our observation and finding as stated in the above paragraphs apply accordingly. These grounds are allowed for statistical purposes.

13. Ground no. 2.7 pertains to incorrect computation of proportionate adjustment done by the ld. TPO/AO for the value of international transactions. It was submitted that ld. TPO has incorrectly computed the proportionate adjustment and not followed the approach agreed to in the preceding years i.e., in TPO’s order giving effect to order passed by ITAT in assessee’ case for AY 2016-17. We direct the ld. AO/TPO to provide relief in line with the approach in preceding years pursuant to the directions of the Coordinate Bench.

14. Ground no. 2.8 is not pressed and the same is accordingly dismissed as not pressed.

15. Ground nos. 3.1-3.4 relates to inclusion/exclusion of comparables  under provision of software development services. A detailed chart by the ld. Counsel is placed on record in this regard. Exclusion is sought of (i) Nihilent Ltd. (ii) Consilient Technologies Pvt. Ltd. (iii) Comviva Technologies Ltd. (iv) Cybage Software Pvt. Ltd. (v) Ksolves India Ltd. (vi) Interglobe Technology Quotient Pvt. Ltd. On the other hand, inclusion is sought of only one comparables i.e. Batchmaster Software Pvt Ltd. Based on the above, we shall undertake the comparability of the companies sought for inclusion/ exclusion by assessee.

I. Nihilent Ltd.

15.1. At the outset, it was submitted that Nihilent Ltd has been excluded by the Coordinate Bench in assessee’s own case for AY 2016- 17 in ITA No. 1379/Mum/2021, for AY 2017-18 in ITA No. 801/Mum/2022, for AY 2018-19 in ITA No. 2442/Mum/2022 and for AY 2020-21 in ITA No. 4065/Mum/2024, observing as under:

i) AY 2016-17 (ITA No. 1379/Mum/2021)

“Nihilent Ltd.

46. 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. 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.”

ii) AY 2017-18 (ITA No. 801/Mum/2022)

“Kellton Tech Solutions Ltd., Nihilent Ltd.,Infobeans Technologies Ltd.

16.1 The Ld.AR submitted that for assessment 2016-17 on similar facts Kiliton Tech Solutions Ltd was excluded from the final list in the remand proceedings. He referred to page A 922 of the paper book in support of this submission.

16.3 The Ld.AR also placed reliance on decision of coordinate bench of this Tribunal in case of Varian Medical Systems International (India) Pvt. Ltd. Vs. DCT to in ITA No. 510/MUM/2022 for assessment in 2017-18 for exclusion of this company. Be that as it may, as this comparable has been verified by the Ld.AO/TPO in assessee’s own case based on remand by this Tribunal in assessment in 2016-17, 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.,”

iii) AY 2018-19 ITA No. 2442/Mum/2022

“40. We note that in earlier years, namely AYs 2016–17 and 2017–18, this Tribunal had already examined the comparability of Nihilent Ltd., Infobeans Technologies Ltd., and Kellton Tech Solutions Ltd., and directed their exclusion on account of functional differences and failure to satisfy the requisite filters, including the export revenue filter in the case of Kellton Tech Solutions Ltd. Assessee has placed on record the annual reports and functional charts to show that its FAR profile continues unchanged during the present year. On the other hand, the Revenue has not produced any fresh material or distinguishing fact to justify a departure from the settled position. In these circumstances, we see no reason to take a different view for the year under appeal. Accordingly, following the consistent approach adopted in assessee’s own case, we direct that (i) Nihilent Ltd., (ii) Infobeans Technologies Ltd., and (iii) Kellton Tech Solutions Ltd. stand excluded from the final set of comparables.”

iv) AY 2020-21 ITA No. 4065/Mum/2024

“35.1 It is clear from the above that for AYs 2016–17, 2017–18 and 2018-19, the Tribunal had already examined the comparability of Nihilent Ltd. and directed its exclusion on account of functional differences. Assessee has placed on record the annual reports and functional charts to show that its FAR profile continues unchanged during the present year. On the other hand, the Ld. DR has not produced any fresh material or distinguishing fact to justify a departure from the settled position. In these circumstances, we see no reason to take a different view for the year under appeal. Accordingly, following the reasons given in assessee’s own case, we direct that Nihilent Ltd. shall be excluded from the final set of comparables.”

15.2. Admittedly, there are no factual differences in FAR of assessee and Nihilent Limited for the year under consideration vis-à-vis AYs 2016-17, 2017-18, 2018-19 and 2020-21. Ld. DR has not brought anything on record to distinguish the above observations of the Tribunal in assessee’s own case. Hence, following the above view, we direct Nihilent Limited to be excluded from the final list of comparables.

II. Consilient Technologies Pvt. Ltd.

III. Comviva Technologies Ltd.

IV. Cybage Software Pvt. Ltd.

15.3. Ld. Counsel submitted that Cybage Software Pvt. Ltd., Comviva Technologies Ltd. and Consilient Technologies Pvt. Ltd. have been excluded by the Tribunal in assessee’s own case for AY 2020-21 in ITA No. 4065/Mum/2024, observing as under:

i) AY 2020-21 (ITA No. 4065/Mum/2024)

Cybage Software Pvt. Ltd.

“38.1 We have heard the rival submission and perused the material placed on record with respect to inclusion of Cybage. The company Cybage is a product company unlike assessee which is a captive service provider providing routine software development services to its AE. Whereas, the company Cybage has developed a sophisticated data-science drawn platform ExcelShare and also incurring towards research & development and AMP related expenses unlike assessee. Therefore, Cybage cannot be treated as a valid comparable to assessee. Hence, the TPO/AO is directed to exclude said company for the list of comparables.”

Comviva Technologies Ltd.

“37.1 We have heard the rival submissions and perused the materials placed on record. The company is engaged in diversified activities such as license fees with implementation & other services (60% of total turnover), revenue sharing arrangements (11% of total turnover), annual maintenance contract services (27% of total turnover) and Sale of equipment and software licenses (16% of total turnover). However, no separate segment for purely software development service is available in the annual report. From the extract of annual report, it also emerges that the Comviva incurs research and development expenditure of approximately 5% of total turnover which consists of activities & new innovative MVPs such as New products development; Creating new features and u pgrades / version of existing products and development work by the core engineering team called as SET on the re-usable common components, engineering practices and innovative prototypes that are utilized as part / addition to products developed by the various domain specific product units instrumental in building client traction for new market capabilities including Factoreal, Yabx, MobiLytix, Mobiquity, CMS (Content) and Data Platforms. It also owns intangible assets in the nature of copyrights, patents, intellectual property and other operating rights unlike assessee.

37.2 In light of the above facts, we are of the considered view that Comviva Technologies Ltd. cannot be considered as a suitable comparable for benchmarking the international transaction of assessee since its functional profile is entirely at variance with that of assessee. Accordingly, we direct the Ld. AO/TPO to exclude Comviva Technologies Ltd. from the final set of comparables.” Consilient Technologies Pvt. Ltd.

“36.2 We have heard both parties and perused the material on record. When ld. TPOhas himself applied the filters of turnover and export, he cannot go against it. From the records, it is clear that this comparable does not satisfy the turnover and export filter. Moreover, upon going through the functional profile of this company which is enclosed at Page B922 and A599-A601 of the paper book, it could be noted that, the company is not exclusively into software development and the provision of its services is diversified than the SWD services provided by assessee. In light of the foregoing analysis, we are of the considered view that Consilient Technologies Pvt. Ltd. is not a suitable comparable vis-à-vis assessee and, hence, it is ordered to be excluded.”

15.4. Admittedly there are no factual differences in FAR of assessee and above companies for the year under consideration vis-à-vis AY 2020-21. Ld. DR has not brought anything on record to distinguish the above observations of the Tribunal in assessee’s own case. Hence, following the above view, we direct (i) Cybage Software Pvt. Ltd., (ii) Comviva Technologies Ltd. and (iii) Consilient Technologies Pvt. Ltd. to be excluded from the final list of comparables.

16. Interglobe Technology Quotient Pvt Ltd. – This company has been included by the Coordinate Bench in assessee’s own case for AY 2017- 18 in ITA No. 801/Mum/2022, observing as under:

‘…Accordingly, we direct inclusion of Aspire Systems (India) Pvt. Ltd., and Interglobe technology quotient Pvt. Ltd. And exclusion of Kiliton Tech Solutions Ltd., Dun & Bradstreet Technologies & Data Services Pvt.Ltd, Nihilent Ltd., Nihilent Analytics Ltd., Infobeans Technologies Ltd.’

16.1 We have carefully considered the rival submissions and perused the material on record. Assessee has placed before us the compilation of its annual reports together with a detailed comparative chart, which clearly demonstrates that its functional profile has remained unchanged over the years. It is an admitted position that there is no variation in the functions performed, assets employed, or risks assumed (FAR) by assessee during the year under consideration, when compared with AY 2017–18. This Tribunal, in assessee’s own case for that year, had already examined the very same profile, comparable in depth and rendered categorical findings. In such circumstances, judicial discipline demands that we must follow the earlier view. Accordingly, respectfully following the consistent reasoning adopted by this Tribunal in assessee’s own case for the preceding year, we hold that the same parity of treatment should be extended for the present year as well, and direct that Interglobe Technology Quotient Pvt Ltd be included in the final set of comparables.

16.2. In respect of Ksolves India Ltd., it was submitted that the company is functionally dissimilar as it is engaged in both software services and product-based offerings across multiple divisions, including Software Services, Products, Big Data, and Mobile Development. Further, company operates across various technology domains such as Salesforce, Machine Learning, Artificial Intelligence, DevOps, Big Data, and Mobile Applications, and also develops and markets proprietary products such as Odoo Apps, Magento Apps, and Salesforce Apps. Further, the company derives its revenue from diverse technology segments, including Salesforce Cloud, Big Data and AI, Web Applications, Odoo, and Mobile Applications, reflecting a multi- technology service delivery model. It was further submitted that the company provides end-to-end customized technology solutions and has entered into technology partnerships with platforms such as Salesforce, Magento (Adobe), and Odoo, indicating a different functional and business model compared to assessee. Additionally, the company earns revenue from both product sales and services, however, no segmental information is available to segregate the same. Accordingly, it was submitted that the functional profile of the company is completely distinct from that of assessee, which is a routine service provider.

16.3. We have heard rival submissions and perused the material available on record. It is observed that Ksolves India Ltd. is engaged in diversified activities involving software development services and proprietary product development across multiple technology platforms, along with generating revenue from both products and services without segmental bifurcation. In view of the diversified functional profile and absence of segmental information, the company cannot be considered comparable with assessee. In light of these facts, we are of the considered view that Ksolves India Ltd. cannot be considered comparable for benchmarking the international transaction of assessee since its functional profile is at variance with that of assessee. Accordingly, we direct the ld. AO/TPO to exclude Ksolves India Ltd. from the final set of comparables.

16.4 For the comparable Batchmaster Software Private Limited, it was submitted to be left academic for which ld. DR did not have any remarks on such contention. Hence, no directions are issued in respect of this company. Accordingly, ground nos. 3.1 to 3.4 are partly allowed for statistical purposes.

17. Ground no 3.5 and 3.6 are also akin to ground nos. 2.5, 2.6, 1.5 and 1.6 already dealt in the above paragraphs and are accordingly, disposed of in terms of our stated observation and finding.

18. Through ground nos. 4.1 to 4.4, assessee seeks exclusion of (i) M P S Limited (ii) Integra Software Services Pvt. Ltd. (iii) Sutherland Global Services Pvt. Ltd. (iv) T T E C India Customer Solutions Pvt. Ltd. and (v) Envecon Global Solutions Pvt. Ltd. We shall undertake the comparability of the companies sought for exclusion by assessee.

I. M P S Limited

18.1. It was submitted that M P S Limited is excluded by coordinate bench of Tribunal in assessee’s own case for AY 2016-17 in ITA No.1379/Mum/2021, for AY 2017-18 in ITA No. 801/Mum/2022 and for AY 2020-21 in ITA No. 4065/Mum/2024, observing as under:

i) AY 2016-17 (ITA No. 1379/Mum/2021) “MPS Ltd. (MPS)

57. Assessee sought exclusion of MPS on the ground that MPS is functionally dissimilar to 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 assessee in the preceding para which are not comparable to 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.”

ii) AY 2017-18 (ITA No. 801/Mum/2022)

“24.4 Admittedly, there are no factual differences in FAR of 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.”

iii) AY 2020-21 (ITA No. 4065/Mum/2024)

“46.1 Admittedly there are no factual differences in FAR of assessee for the year under consideration vis-à-vis assessment year 2016-17 and 2017-18. The Ld. DR has not brought anything on record to distinguish the above observations of the Tribunal in assessee’s own case. Hence, following the above view, we direct M P S Limited to be excluded from final list.”

18.2. Admittedly, there are no factual differences in FAR of assessee and M P S Ltd. for the year under consideration vis-à-vis AYs 2016-17 2017-18 and 2020-21. Ld. DR has not brought anything on record to distinguish the above observations of the Tribunal in assessee’s own case. Hence, following the above findings, we direct M P S Limited to be excluded from the final list of comparables.

II. Integra Software Services Pvt. Ltd.

18.3. In this respect, it is submitted that the company is functionally dissimilar as it is engaged in high-end publishing technologies primarily catering to the international publishing market. It was submitted that the company provides end-to-end content and digital solutions across industries such as publishing, education, and enterprise learning and development. Company owns and develops proprietary cloud-based publishing products, tools, and platforms such as iAuthor, iNLP, iRights, iPMP, iLancer, and iPubEdit. It also undertakes significant research and development activities towards development of its products and platforms, including initiatives such as iPubEdit 2.0 and workflow management systems (WMS). Further, the company incurs expenditure on advertising and brand promotion as well as contracting expenses, which indicate involvement in diversified and value-added activities. The company follows an expansion strategy driven by development of new platforms and technology-based solutions, including AI-based editing tools. Accordingly, the company operates as a full-fledged entrepreneurial entity with ownership of intangibles and involvement in product development, unlike assessee which is a routine service provider. Ld. DR relied on the orders of the authorities below.

18.4. We have heard rival submissions and perused the material available on record. It is observed that Integra Software Services Pvt. Ltd. is engaged in providing high-end publishing and digital solutions, along with ownership of proprietary products and platforms, and undertaking significant R&D and marketing activities. The company assumes higher risk and develops intangibles, which distinguishes it from assessee. In light of these facts, we are of the considered view that Integra Software Services Pvt. Ltd. cannot be considered comparable for benchmarking the international transaction of assessee since its functional profile is at variance with that of assessee. Accordingly, we direct the Ld. AO/TPO to exclude Integra Software Services Pvt. Ltd. from the final set of comparables.

18.5. In respect of comparables (i) Sutherland Global Services Pvt. Ltd., (ii) T T E C India Customer Solutions Pvt. Ltd. and (iii) Envecon Global Solutions Pvt. Ltd., it was submitted that these may be left academic. Ld. DR did not put forth any objection on the same. Considering the submissions, no directions are issued in respect of these companies. Accordingly, ground nos. 4.1 to 4.4 are allowed.

19. Ground no 4.5 and 4.6 are akin to ground nos. 1.5 and 1.6, 2.5 and 2.6 and 3.5 and 3.6 and therefore, are disposed of in terms of our observation and findings already noted in the above paragraphs. The same are accordingly, allowed for statistical purposes.

20. Ground nos. 5.1 to 5.4 are towards adjustment made in respect of assessee availing back office, sales and marketing support services. Assessee has availed back office, sales and marketing support services essential to the Subscription and Services segment where it is compensated at an assured targeted operating margin on its revenues. It was submitted that AE of assessee i.e., Red Hat Singapore renders sales and marketing support functions to Red Hat Group entities in APAC region and by centralizing the Group’s sales, marketing support and consultancy function in the APAC region, assessee gained economies of scale through efficient execution of these functions. Thus, the intra-group services rendered by Red Hat Singapore to Red Hat entities in APAC region, including assessee enhances the efficiency of sales and marketing related services and get access to expertise that is available within the Group. Since the transaction of availing administrative, sales and marketing support services is inextricably linked to the service and subscription segments of assessee, the arm’s length nature of this transaction has been tested by aggregating this under service and subscription segments of assessee. Ld. TPO determined the arm’s length value of the said transaction as ‘NIL’, thereby arbitrarily deciding that no uncontrolled enterprise would have paid any amount for such services as for what assessee is paying.

21. Ld. Counsel submitted that since it operates under an assured margin model in respect of its Subscription and Services segment (earning assured margin of 1.4% and 13.5% under subscription and service segment respectively), any disallowance of individual line items of expenditure becomes tax neutral. Accordingly, no transfer pricing adjustment should arise once the overall margins of the segment are demonstrated to be at arm’s length. Further, it was submitted that the objective of any transfer pricing adjustment is to align the price of an international transaction with its arm’s length value. In the present case, the impugned transaction forms an integral part of the operating cost of assessee’s Subscription and Services segment.

22. It is a settled principle in transfer pricing jurisprudence that where TNMM is applied and the overall margins are found to be at arm’s length, such benchmarking adequately subsumes all individual transactions forming part of the said segment. Accordingly, TNMM ought to be regarded as the most appropriate method for benchmarking the impugned international transactions in a case where assessee operates under an assured margin model. In such circumstances, any separate benchmarking of individual transactions (line items) becomes unwarranted and legally unsustainable, particularly when assessee’s profitability remains unaffected due to the assured margin arrangement. Therefore, determination of the arm’s length price of the impugned transaction at Nil, in isolation, is erred both in law and on facts. Also, it was submitted that the business model of assessee, including the assured margin/limited risk distributor arrangement has already been examined and accepted by the Coordinate Bench in assessee’s own case for preceding assessment years i.e., AY 2012-13 to AY 2020-21. There has been no change in the underlying facts, business operations or functional profile during the year under appeal.

23. Assessee sought direction from the Coordinate Bench that since assessee functions under an assured margin/limited risk model, wherein its return is pre-determined and insulated from fluctuations in individual cost variations, thereby once the overall segmental margins are established to be at arm’s length under TNMM, any separate evaluation of individual transactions is irrelevant and devoid of legal basis. We find ourselves in agreement with the submissions made by the assessee, more particularly when assessee’s profitability remains unaffected due to the assured margin arrangement and the impugned transaction forms an integral part of the operating cost of assessee’s Subscription and Services segment. Treatment given by the ld. TPO by taking its ALP at Nil on stand-alone basis leads to double adjustment in the hands of the assessee. Accordingly, no transfer pricing adjustment should arise once the overall margins of the respective segments are demonstrated to be at arm’s length. In the present case, for the respective segments which have already been dealt by us in the above paragraphs, in terms of our observations and findings for the same, we hold that no adjustment is called for in respect of assessee availing back office, sales and marketing support services. Accordingly, ground nos. 5.1 to 5.4 are allowed.

24. Ground nos. 6, 7 and 8: Given the facts, we are of the view that no interest under Section 234A of the Act should be levied and further credit towards TDS should be allowed. Ld. AO is directed to recompute the tax payable / refund due to assessee including the TDS credit and without said interest. Further, with respect to levying of interest under section 234B, ground is consequential in nature, therefore ld. AO is directed to deal with the issue in accordance with the law. Ground no. 8 pertaining to levy of penalty is premature and consequential in nature, hence needs no separate finding. Consequently, ground nos. 6 and 7 are decided for statistical purposes in favor of assessee.

25. Facts for the appeal for AY 2022-23 remains similar. Our observations and findings apply for each of the issues dealt by us in appeal for AY 2021-22. Issue specific to AY 2022-23 shall be dealt by us separately in the below mentioned paragraphs, rest applies mutatis mutandis.

26. For AY 2022-23, ld. TPO has made adjustments to the value of international transactions pertaining to the following segments as Nature of International Transaction Amount

S. No.	Nature of International Transaction	Amount (in INR)
1	Payment of royalty and service fee to Red Hat US for Subscription segment	237,770,822
2	Payment of royalty and service fee to Red Hat US for Services segment	Determined at Arm’s length by TPO
3	Provision of software development services	216,480,978
4	Provision of IT enabled services	261,555,451
5	Availing of back office, sales and marketing support services	341,056,595
	Total Adjustment	1,056,863,846

27. For the issue raised through ground nos. 2.1 to 2.4, whereby assessee seeks exclusion of comparables under provision of software development services, the specific case for this assessment year relates to comparable of Moonfrogs Labs Private Limited.

27.1. In respect of Moonfrog Labs Pvt. Ltd., it is submitted that the company is functionally dissimilar as it is engaged in animation services, including online game development services. It is involved in developing, marketing and operating games and gaming infrastructure, including sale of gaming chips to distributors/hosting platforms, and also earns revenue from advertisement published on its gaming platforms. Revenue streams of the company include sale of virtual currencies (through hosting sites and distributors), advertisement income, and royalty income. However, no segmental information is available to segregate these diverse streams of revenue. Further,  company incurs significant expenses towards platform hosting, payment gateway, and facilitation charges, which account for a substantial portion of total expenses. Also, company owns significant intangible assets in the nature of intellectual property rights. Accordingly, it is submitted that it operates as a full-fledged entrepreneurial entity with ownership of intangibles and diversified revenue streams, unlike assessee which is a routine service provider. Ld. DR relied on the orders of the authorities below.

28. We have heard rival submissions and perused the material available on record. It is observed that Moonfrog Labs Pvt. Ltd. is engaged in online gaming and related activities, involving development, operation, and commercialization of gaming platforms and associated infrastructure, along with ownership of significant intangibles. The company also earns income from multiple streams without segmental breakup. Further, the company incurs substantial platform-related expenses and assumes entrepreneurial risks. In light of the above facts, we are of the considered view that Moonfrog Labs Pvt. Ltd. cannot be considered as a comparable for benchmarking the international transaction of assessee since its functional profile is at variance with that of assessee. Accordingly, we direct the ld. AO/TPO to exclude Moonfrog Labs Pvt. Ltd. from the final set of comparables. Accordingly, ground nos. 2.1 to 2.4 are allowed for statistical purposes.

29. In the result, both the appeals filed by the assessee are allowed.

Order is pronounced in the open court on 17 August, 2026