The assessee, Red Hat India Private Limited, preferred an appeal against the order giving effect dated 31 December 2024 passed under section 143(3) read with section 254 of the Income-tax Act, 1961 for Assessment Year 2016-17. The impugned order was passed pursuant to directions issued by the Dispute Resolution Panel and arose in the second round of litigation, following partial remand by the Tribunal in the first round.

The assessee is a subsidiary of the Red Hat Group and is engaged in providing open-source software solutions. The group’s business model does not involve sale of software but monetises through subscription-based services, updates, and enterprise support. During the relevant year, the assessee entered into various international transactions with its Associated Enterprises, including payment of royalty and service fees, provision of software development services, and IT enabled services, all benchmarked under the Transactional Net Margin Method.

In the original proceedings, the Transfer Pricing Officer proposed an aggregate adjustment exceeding ₹30 crore. Upon appeal, the Tribunal, in the first round, categorically held that the assessee was entitled to working capital adjustment and proportionate adjustment, and directed the TPO to verify the computations furnished by the assessee and grant appropriate relief.

In the remand proceedings, the TPO proposed a revised adjustment, which was further restricted by the DRP to an amount of ₹4.23 crore relating only to payment of royalty and service fees under the subscription segment. The Assessing Officer accordingly passed the impugned order giving effect.

Before the Tribunal, the assessee contended that the lower authorities had failed to comply with the binding directions issued in the first round by again denying working capital adjustment on untenable grounds such as non-availability of daily balances. The Tribunal observed that once a specific direction is issued, the lower authorities are bound to follow it in letter and spirit and cannot re-examine the entitlement on extraneous considerations.

The Tribunal further noted that in the assessee’s own case for subsequent assessment years, working capital adjustment had consistently been allowed and that denial on impractical parameters had been repeatedly rejected by judicial forums. Upon granting working capital adjustment as directed, the assessee’s margin was found to be within the permissible arm’s length range prescribed under section 92C(2).

Accordingly, the Tribunal held that the sole surviving transfer pricing adjustment of ₹4.23 crore was unsustainable and deleted the same. As a result, the remaining grounds relating to validity of assessment proceedings and selection of comparables were rendered academic. The Tribunal further directed the Assessing Officer to verify and grant consequential relief relating to TDS credit, MAT credit, foreign tax credit, self-assessment tax, and interest, in accordance with law.

The appeal of the assessee was thus allowed.

Source Link- https://itat.gov.in/public/files/upload/1768288743-SatrGc-1-TO.pdf

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