RED HAT INDIA P. LTD,MUMBAI vs. ADDL/JT/DY/ASSTT/CIT/ITO, NFAC, , DELHI

The assessee reported to have entered into international transactions during the year under assessment as under:

The assessee in order to benchmark its international transactions qua subscription segment proceeded on the premise that the assessee is engaged purely in resale activities for these subscriptions and Red Hat US service segment by using its global support centers around the world directly provides maintenance, development and production support to the customer during the subscription period. The assessee in order to bench mark its international transactions chosen Transactional Net Margin Method (TNMM) with OP/OR as the Profit Level Indicator (PLI) for a subscription segment, selected 9 comparables with weighted average operating margin in the range of -0.51% to 20.78% with a margin of 0.68% after making a working capital adjustment (0.05% to 1.94% without working capital adjustment) and found its operating margin of 1.4% on operating revenue within arm’s length range. assessee chosen 6 comparables with weighed average operating profit on operating revenue in the range of 6.86% to 13.23% with a margin of 10.05% after making working capital adjustment of (15.45% to 15.54% without working capital adjustment) and found its operating margin of 13.50% on operating revenue within arms level range and treated its international transactions at arm’s length.

The assessee in order to benchmark its international transactions qua software development services again used TNMM as the most appropriate method as OP/OC as the PLI chosen 16 comparables with margin of 12.19% as against its own margin of 15% and found its transaction at arm’s length and found its margin within range.

The assessee in order to benchmark its international transaction qua Information Technology Enabled Services (ITES), assessee again used TNMM as the most appropriate method, chosen 14 comparables with margin of 10.83% as against operating margin of the assessee at 15.24% and found its international transactions at arm’s length.

The Assessing Officer (AO) / Disputes Resolution Panel (DRP) made addition of Rs.28,01,90,592/- and Rs.25,97,21,357/- Employee Stock Option Plan (ESOP) respectively. The AO also denied the deduction claim made by the assessee under section 80G of the Income Tax Act (for short ‘the Act’).

The assessee carried the matter before the Ld. DRP by way of filing objections who has disposed of the same. Pursuant to the adjustment proposed by the Transfer Pricing Officer (TPO) and directed by the Ld. DRP, the AO proceeded to frame the assessment order at total income of Rs.119,34,09,434/- under section 143(3) read with section 144C(13) read with section 144B of the Act. Feeling aggrieved, the assessee has approached the Tribunal by way of filing the present appeal.

We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.

The Ld. A.R. for the assessee challenging the impugned order relied upon its transfer pricing study and has also filed ground-wise chart, the copy of which was also supplied to Ld. D.R. passed by the Ld. TPO/DRP/AO.

The Ld. TPO proposed adjustment of Rs.17,14,07,494/- and Rs.2,74,51,259/- qua international transactions pertaining to payment of royalty and service fee (subscription segment) on account of payment of royalty and service fee (service segment) respectively by modifying the economic analysis made by the assessee by rejecting the comparables and introducing new comparable and thereby determined the arm’s length margin at 11.86% and 21.53% for subscription segment and service segment respectively.

Undisputedly, the assessee is into the sales and distribution of Red Hat Group’s subscription in the Indian subcontinent region for which it pays a royalty and service fee to Red Hat US in respect of the subscription sold by it. The assessee’s business model, analyzed in its transfer pricing documentation for the year under assessment, available at page 963 – 1640, paper book A, has been 14.02.2019 in and 7271/M/2017 for A.Y. 2012-13 and 2013-14 and found the assessee functioning as a limited risk reseller as it is into selling the Red Hat subscriptions and the maintenance support services are provided by Red Hat US support service center as the assessee doesn’t have the know-how to provide such support services. Red Hat US, the Associate Enterprise (AE) grants the assessee the right to use its intangible properties (trade marks, trade names and domain names) for which the assessee is liable to pay royalty at 3% of its revenue from subscription segment to the AE as per license and service segment dated 01.04.2011.

The AE, Red Hat US also provides services to the customers and users who purchase its subscription from the assessee, for which the AE charges the assessee service fee which is an amount equal to the entire revenue of the assessee from this segment -1.4% of its revenue from this segment and accordingly paid the amounts to its AE, Red Hat USA qua subscription segment as under:

So similarly in service segment also the assessee pays its AE a royalty @ 3% of its revenue and a service fees equal to entire revenue of the assessee from this segment -13.50, the detail of which is as under:

At the same time, under this plan the assessee is assured a margin of 1.4% of revenue earned from subscription segment and 13.50% of revenue earned from service segment.

The Ld. TPO aggregated transaction under the head ‘Royalty and service fees’ in each segment and considered the same as single transaction under the head ‘software distribution activity and computer training/education activity’ for the subscription segment and service segment respectively.

The Ld. TPO modified the economic analysis of the assessee by rejecting comparables chosen by the assessee by introducing in subscription segment and 21.53% in service segment.

The Ld. TPO after rejecting the benchmarking made by the assessee, however, accepted the TNMM with OP/OR as PLIs and finally selected three comparables and computed the margin in subscription segment as under:

The Ld. TPO accordingly determined the arm’s length price of assessee qua provision of “subscription segment” as under:

By determining the margin of the comparable @ 21.53% the Ld. TPO determined the arm’s length price qua service segment as under:

Similarly, the assessee sought exclusion of MT Education Services Pvt. Ltd. as comparables and sought inclusion of 3 comparables viz. Compucom Software Ltd. (segment), Chitale’s Personalised Learning Pvt. Ltd. and Anthena Eduspark Ltd. qua the service segment.

Let us examine the suitability of these comparables sought to be excluded and included by the assessee for the purpose of benchmarking one by one as under:

The assessee challenged inclusion of Innovana Thinklabs Limited (for short Innovana) as a comparable on the grounds inter of the assessee’s turnover. This argument was also advanced before the Ld. DRP as per written submissions available at page A289 of the paper book wherein complete data on the basis of financials of Innovana is given as assessee’s segmental revenue for subscription segment is Rs.1,44,43,45,751/- as against Innovana’s turnover of Rs.6,60,95,449/-. We are of the considered view that when the Ld. TPO has himself applied this filter of turnover he cannot go against it and as such Innovana is not suitable comparable vis-à-vis assessee, hence ordered to be excluded.

The assessee challenged the inclusion of this comparable on the grounds inter alia that it is into selling its own proprietary IT security product “K7 Total Security” and “K7 Enterprises Security; that K7 owns and employs plant & equipments comprising 61% of its total tangible assets; that K7 owns significant intellectual property rights comprising 91.5% of the total fixed assets; and that K7 incurred Rs.15.75 crore on promotion i.e. 27.55% of sales during the year under consideration.

We have examined profile of the assessee company from its financials extracted at page A333 of the paper book wherein K7’s 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 comes to 27.55% of the sale.

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.

The Ld. A.R. for the assessee challenging the rejection of its comparables viz. Funny Software Ltd., Dynacons Technologies Ltd., Empower India Ltd., PS IT Infrastructure & Services Ltd., JMD Ventures Ltd. (formerly JMD Telefilms), Unisys Software & Holding Industries Ltd., Compuage Infocom Ltd., Sonata contended that the Ld. TPO has rejected these comparables on the sole ground that the word ‘royalty’ being introduced in the search process for comparables by the assessee gave absurd results and as such the assessee has not determined the price charged or paid in the international transactions in accordance with sub section 1 & 2 of the Act.

However, the Ld. A.R. taken us to the detail search strategies extracted at page A1056 of the paper book wherein the word ‘royalty’ doesn’t find a place in the search process for subscription segment. We are of the considered view that when the assessee’s business model has already been accepted by the Tribunal in assessee’s own case in earlier years by holding that the actual payment of royalty and service fee both under subscription and service segment are in accordance with agreement entered into between assessee and its AE the rejection of the comparable chosen by the assessee and its benchmarking rejected by the Ld. TPO/DRP is not sustainable. So we direct the Ld. TPO to reconsider the aforesaid 9 comparables chosen by the assessee for benchmarking its transactions qua subscription segment.

The Ld. A.R. sought exclusion of MT on the ground that it fails TPO’s own turnover filters as MT’s turnover is less than 10% of assessee’s turnover i.e. assessee’s segmental revenue from service segment is Rs.35,07,70,817/- as against MT’s turnover of Rs.232.10 lakhs. When this comparable does not qualify Ld. TPO’s own turnover filters it is not a valid comparable vis-à-vis assessee, hence, ordered to be excluded.

The assessee challenging the impugned rejection made by the Ld. TPO viz. Compucom Software Ltd. (segment), Chitale’s Personalised Learning Pvt. Ltd. and Anthena Eduspark Ltd. on the ground that the Ld. TPO has rejected these comparables without examining the same on the sole ground that the word ‘royalty’ being introduced in the search process for comparables by the assessee gives absurd results. The Ld. A.R. taken us to his detail search strategy available at page A1146 of the paper book where the word ‘royalty’ is not part of the search process. Moreover, when the assessee’s business morale has already been accepted by the Tribunal in assessee’s own case in earlier years rejecting comparable of the assessee without examining the same is not comparables for benchmarking the international transactions qua service segment by providing opportunity of being heard to the assessee.

During the year under assessment assessee provided software development services (SDS) to its AE, Red Hat USA pursuant to the acquisition of Gluster India into Red Hat India and remunerated for these services on a cost + 15% markup basis. The assessee claimed to have received Rs.55,82,40,145/- from its AE Red Hat USA for rendering these services.

The assessee in order to benchmarking its international transactions used TNMM as the most appropriate method with OP/OC as PLIs chosen 16 comparables with margin of 12.19% as against own margin of 15% and found its transactions at arm’s length.

However, the Ld. TPO retained only 5 comparables of the assessee by rejecting remaining 11 and introduced 7 new comparables. The list of final comparable with weighted average OP/OC is as under:

The Ld. TPO determined the arm’s length price of SDS segment on the basis of margin of the comparables at 32.64% vis-à- vis 15% of the assessee at Rs.8,56,29,184/-.

The Ld. A.R. for the assessee challenging the impugned adjustment on account of arm’s length price qua SDS segment compressed the controversy by seeking exclusion of 7 comparables viz. Aspire Systems (India) Pvt. Ltd., Interglobe Technology Quotient Pvt. Ltd., Kelton Tech Solutions Ltd., Nihilent Analytics Ltd., Nihilent Limited, Dun & Bradstreet Technologies & Data Services Pvt. Ltd. and Infobeans Technologies Ltd. Systems Ltd. & SagarSoft India Limited. For benchmarking its international transactions qua SDS segment, let us examine the suitability of the aforesaid comparable challenged by the assessee one by one as under:

The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the ground that it fails Related Party Transaction (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providing opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh.

The assessee sought exclusion of Interglobe from the final set of comparable on the grounds that it fails TPO’s employee cost filter with employee cost to revenue ratio of 6.68% and employee cost to total cost ratio of 11.91%. When the assessee has challenged filter applied by the Ld. TPO it has to be considered in the light of the financials of Interglobe by providing an opportunity back to the Ld. TPO to decide afresh.

The assessee sought to exclude Kelton as a comparable on the ground that it fails the Ld. TPO’s exports filter with export sales to total sales ratio of 46.43%. This plea was also taken before the Ld. DRP who have upheld the order passed by the Ld. TPO.

The Ld. TPO as well as the Ld. DRP have rejected this comparable on the ground that this is assessee’s own comparable but we are of the considered view that since there is a no estopple against the statute the assessee can challenge its own comparable if wrongly chosen inadvertently. Since this comparable fails TPO’s own filter of export sales to total sales ratio it needs to be reconsidered by the Ld. TPO after providing opportunity of being heard to the assessee. So this comparable is also remitted back to the Ld. TPO to decide afresh after providing opportunity of being heard to the assessee.

The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc.

Perusal of the disclosure of enterprise’s reportable segment explanatory available at page No.A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No.A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absence of segmental financials, as it is into diversified business, this company cannot be a valid comparable vis-à-vis assessee, who is a low risk entity working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable.

The 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. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent 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.

The assessee sought to exclude Dun & Bradstreet as a comparable on the ground that it is functionally dissimilar being into providing predictive analysis, software development and related technology services and solution and on the ground that this company earns abnormally high margin of 58.19% during the relevant year. This objection was raised by the assessee both before the Ld. TPO as well as Ld. DRP but they have rejected the contention of the assessee by simply recording that “the company is functionally similar and as such assessee’s contention is rejected.”

We have perused a transfer pricing study of the assessee available at page A305, A412 & A413 of the paper book supported with relevant financials. Dun & Bradstreet is into providing vide area of sources such as D&B analytic services, risk management solutions, sales and marketing solution services, supply management solution etc. It has also come on record that the assessee has earned abnormally high margin of 58.19% as is evident from the annual report of Dun & Bradstreet and as such is not a valid comparable vis-à-vis assessee who is a routine software development service provider to its AE working on cost + markup model, hence order to be excluded.

The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing Development (CAM), enterprise mobility and Big Data Analytics (BDA).

Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee.

The Ld. TPO rejected this comparable being functionally dissimilar to the assessee and it fails turnover filters which has been upheld by the Ld. DRP. The Ld. A.R. for the assessee contended that the company is similar to the assessee being into the business of software testing within India and outside India and it passes turnover filter in the relevant latest years. The Ld. TPO is directed to reconsider Maveric as a comparable in view of its segmental reporting and by bifurcating the turnover between product or service categories by providing opportunity of being heard to the assessee.

The Ld. TPO rejected this comparable on the ground that this company was non comparable for F.Y. 2012-13 and it means this company is a new venture as far as software development functions are concerned. This is reported as a loss making company in its first year of comparable and as such its PLI cannot be compared with the assessee which is well established old company of more than 10 years.

However, Ld. A.R. sought to include this company as a comparable on the ground that functional comparable prevails over profit results, since principal business activities of the company is software development consultancy services comprising 100% of the total turnover and it earns weighted average margin of 1.41% and as such cannot be considered as a loss making company.

We have perused the computation given by the assessee at page A381 and A427 of the paper book. Since it is a factual aspect, which needs to be examined at initial level, Ld. TPO may verify the same to reconsider SagarSoft as a comparable after providing opportunity of being heard to the assessee.

The assessee challenged the adjustment made by the Ld. TPO/DRP/AO in ITES segment only by challenging the comparables chosen by the Ld. TPO for benchmarking the international transactions viz. Manipal Digital Systems Pvt. Ltd. and MPS Ltd. We would examine the suitability of both the comparables one by one.

The assessee sought to exclude this company as a comparable on the ground that from the website of the company which is extracted at page A457 it has come on record that it is into providing wide range of services i.e. graphic solutions, packaging brand management services, learning solutions, digital publishing solutions and technology solutions, web development and other services but its segmental financials are not available. Since the assessee has relied upon information drawn from the website of the assessee and has not brought on record complete annual reports we direct the Ld. TPO to re-examine this comparable in the light of the objections raised by the assessee by providing opportunity of being heard to the assessee.

The assessee sought exclusion of MPS on the ground that MPS is functionally dissimilar to the 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.

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 the assessee in the preceding para which are not comparable to the assessee who is a routine ITES service provider working on cost + model.

Moreover, the co-ordinate Bench of the Tribunal in the case of Credence Resource Management Pvt. Ltd. vs. ACIT, Pune (ITA No.133/PUN/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. four segments viz. viz. Subscription Segment, Services Segment, Software Support Service Segment & IT Enabled Support Services, denied by the Ld. TPO/DRP/AO. The Ld. TPO/DRP denied the working capital adjustment primarily on the ground that the assessee has failed to demonstrate it as to how the difference in working capital, if any, has impacted profits because no analysis has been made as to how the comparable companies have financed their own working capital and as to whether any working capital cost had impacted on the margin of the comparable.

However, the Ld. A.R. for the assessee taken us to the computation made in its transfer pricing study and detail working capital adjustment margin computation with submissions made in a tabulated form as under:

We have perused the aforesaid computation and working capital adjusted margin computation furnished before the Ld. TPO which is a complete detail to arrive at differences between comparables vis-à-vis assessee qua working capital cost as provided under rule 10B(1)(e)(iii) of the Income Tax Rules which certainly effects profit margin of every company. Because every company is working in a different business environment on the basis of funds available with them and many other companies ought to borrow money to fund its business activities. Many companies are benefiting from a long period to pay its supplier which would reduce its borrowing components.

The assessee also sought grant of claim for proportionate adjustment for the value of international transactions thereby extending the quantum of transfer pricing adjustment to transactions with non AE also for two segments namely; “Subscription segment” and “Service segment” by relying upon the decision rendered by the Hon’ble Bombay High Court in the case of Hindustan Unilever Ltd. vs. CIT, Mumbai (Income Tax Appeal No.1873 of 2013) against which special leave petition has also been the Hon’ble Bombay High Court in the case of Tara Jewels Exports Pvt. Ltd. vs. CIT, Mumbai (Income Tax Appeal No.1814 of 2013).

We have perused the judgments rendered by the Hon’ble Bombay High Court in the case of Hindustan Unilever Ltd. (supra) and Tara Jewels Exports Pvt. Ltd. (supra) relied upon by the Ld. A.R. for the assessee which are on the identical issue. This settled legal position has not been controverted by the Ld. D.R. for the Revenue having been decided against the Revenue in number of cases by the Hon’ble Bombay High Court. The ratio of the judgment (supra) is “margin arrived at by the Ld. TPO to be applied to determine the arm’s length price also applied to the transactions entered by the assessee with non AE also, leading to the enhancement of sale consideration qua the transactions with non AE also which is not a level playing field”. So in order to arrive at the correct result proportionate adjustment needs to be extended to the AEs. So the Ld. TPO is directed to grant the proportionate adjustment in view of the judgment rendered by the Hon’ble Bombay High Court in the case of Hindustan Unilever Ltd. (supra) and Tara Jewels Exports Pvt. Ltd. (supra). that the Ld. TPO has computed incorrect adjustment while giving effect to the direction dated 26.03.2021 given by the Ld. DRP and given the correct working of adjustment for subscription and service segment as under:

Before proceedings with his argument the Ld. A.R. for the assessee brought to the notice of the Bench that he has already moved an application under section 154 of the Act with Ld. TPO which is pending adjudication to record the correct adjustment. In these circumstances, we are of the considered view that the Ld. TPO shall dispose of the application moved by the assessee under section 154 of the Act after verifying the working brought on record by the assessee to arrive at the correct adjustment made in this case within a period of three months.

Next issue raised by the Ld. A.R. for the assessee that the Ld. TPO has not complied with the directions issued by the Ld. DRP while giving effects to its directions that “the TPO to verify the working of the assessee and take the correct margin of calculation of valid comparables as discussed in the order. The Ld. A.R. for the assessee taken us to the Ld. DRP’s orders available on the appeal set wherein these directions are given but the Ld. TPO has not complied with by the same. So the Ld. TPO is directed to comply with the directions accordingly.

In view of the discussion made in the preceding paras, Ground No.1 & Grounds No.1.1, 1.2, 1.3, 1.4, 1.5 1.6 & 1.7;

The Ld. AO/DRP have made addition of Rs.28,01,90,592/- on account of unearned revenue from subscription services. The Ld. A.R. for the assessee contended that the AO/DRP have erred in making these additions by not following the order dated 10.04.2019 passed by the Tribunal in assessee’s own case for A.Y. 2012-13 and 2013-14, this factual position has not been controverted by the Ld. D.R. for the Revenue.

We have perused the order passed by the co-ordinate Bench of the Tribunal in assessee’s own case wherein the issue in question has been decided in favour of the assessee.

Undisputedly, the assessee has entered into Red Hat Enterprise Agreement (subscription agreement) with third party Indian customers which enable such customers to avail support services (subscription services) such as ongoing maintenance support services, updates, promotion and sale of 'Red Hat subscriptions' to customers in Indian sub-continent to avail support subscription period which generally spreads from 1 to 7 years.

The Ld. A.R. for the assessee contended that the assessee has recognized revenue from subscription service in its books of account as per the Percentage Completion Method (PCM) prescribed under Accounting Standard-9 (AS-9). Revenue recognition and subscriptions are provided over a period of 1 to 7 years, the amount received from customer in relation to subscription services are offered to tax on straight line basis under “Long term basis” and “other current liabilities” and is offered as income in the profit & loss account in subsequent years and accordingly offered to tax.

For this subscription services the assessee also claimed to have entered into agreement with Red Hat US under which it is required to pay royalty and services fee to Read Hat US, computed as specific percentage of revenue recorded in profit & loss account of the assessee for the respective years, available at page B239, B252 of the paper book of volume-2. At the same time due taxes have been deducted and paid with Income Tax Authority while making such payment to Read Hat US. revenue) as income of the year under assessment by rejecting the revenue recognition policy followed by the assessee.

We have perused the order passed by the co-ordinate Bench of the Tribunal in assessee’s own case available at page B22 to B57 wherein this issue has been decided in favour of the assessee by returning the following findings:

Moreover, revenue recognition policy has been consistently being followed by the assessee over the years. This identical issue has also been dealt with by the Hon’ble Delhi High Court in the upon the decision rendered by the Hon’ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. vs. CIT (1954) 26 ITR 27, wherein the issue “whether the customer had paid entire fee in advance on which services remained due to be rendered in succeeding years, such receipts could not be considered as income accrued in the year of receipts”, has been decided by the Hon’ble High Court by returning the following findings:

The Ld. AO/DRP has made addition of Rs.25,97,21,357/- on account of employee stock option plan (ESOP) expenses. During the year under assessment Red Hat US granted ESOPs/restricted stock units (RSU) to certain employees of the assessee for which Red Hat Inc. charged the ESOP cost of Rs.25,97,21,357/- from the assessee on cost to cost basis as per duly executed RSU gross charge agreement entered into between the assessee and the Red Hat Inc. available at page B77 to B82 of paper book-2. that assessee has failed to submit copies of email exchange, resolution of board of directors and minutes of meetings wherein the decision to cross charge was taken; that RSU agreement is not acceptable on the ground of non submission of copy of the incentive scheme of Red Hat Inc. and independent valuation; that underlying internal memorandum to the cross charge agreement has been issued by the assessee and not by the Red Hat Inc.; that letter was dated 10.10.2014 and the effective date of cross charge recharge agreement is April 15th, 2015; that the payment is contingent in nature and there is a lack of clarity whether ESOP actually granted to the assessee; that the ESOP expenditure is not fully incurred for the purpose of business of the assessee and that without prejudice to the above the expenditure is of capital in nature. The Ld. DRP upheld the aforesaid disallowance.

The Ld. A.R. for the assessee challenging the impugned findings returned by the Ld. AO/DRP contended that the AO has ignored the documents viz. “recharge agreement” between the assessee and the Red Hat Inc. and internal memorandum prior to execution of the recharge agreement and that the AO has never sought the valuation report or the incentive plan during the course of assessment proceedings. before the Ld. DRP the assessee had brought on record documents as additional evidence, also available before the Tribunal as under:

Since it is the case of the assessee that the Ld. DRP has failed to appreciate the additional evidence brought on record by the assessee and the AO has failed to examine the “recharge agreement” and “internal memorandum prior to the execution of recharge agreement” and has never sought “valuation report” or the “incentive plan”, we are of the considered view that this issue is required to be remitted back to the AO to decide afresh after providing opportunity of being heard to the assessee, in the light of the case law relied upon by the assessee viz. the Mumbai Tribunal in case of DCIT v. Accenture Services Pvt. Ltd. (ITA Nos. 4540, 4541, 5029, 5008 & 5009/M/2008 and Cross objections 214/M/2008, 47, 20, 44 & 45/M/2009, the Bangalore Tribunal in the case of Novo Nordisk India Private Limited vs. DCIT, Circle Finance Co. Ltd. (ITA No.3636/MUM/2017), Kotak Mahindra Asset Management Co. vs DCIT (ITA No.1416/Mum/2008), Aricent Technologies Holdings Ltd. vs. Addl. CIT (ITA No.5708/Del/2019) and Hon'ble Supreme Court’s (SC) judgment in Sassoon J David & Co. Ltd. vs. CIT (118 ITR 261). Consequently the grounds No.6.1, 6.2, 6.3 & 6.4 are decided for statistical purposes in favour of the assessee.

Ground No.7.1 is dismissed having not been pressed by the Ld. A.R. during the course of arguments.

The assessee challenged the action of the AO in not granting deduction under section 80G of the Act with regard to the contribution made to Prime Minister’s national relief fund by the assessee to the tune of Rs.1,18,85,969/-. It is the case of the assessee that he has brought on record the necessary evidence/receipts which is now available at page B169 to B 172.

The assessee has challenged the levying of interest under section 234B of the Act. Since this ground is consequential in nature, the AO is directed to deal with the issue in accordance with the law.

This ground is premature and consequential in nature, hence need no finding.

In view of our findings on the grounds raised by the assessee, present appeal filed by the Assessee is partly allowed for statistical purposes.