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.
