IN THE INCOME TAX APPELLATE TRIBUNAL, ‘J’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER &

SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER ITA No.3853/Mum/2025 (Assessment Year :2016-17 (Assessment Year :2016-17 (Assessment Year :2016-17 (Assessment Year :2016-17 (Assessment Year :2016-17 (Assessment Year :2016-17 (Assessment Year :2016-17 (Assessment Year :2016-17 (Assessment Year :2016-17 (Assessment Year :2016-17 (Assessment Year :2016-17 Assessee by Shri Ajit Jain a/w Shri Akshay Jain & Ms.Archita Singhal Revenue by Shri Pankaj Kumar. CIT DR Date of Hearing 07/01/2026 Date of Pronouncement 12/01/2026 / O R D E R आदेश PER AMIT SHUKLA (J.M):

The present appeal has been preferred by the assessee assailing the Order Giving Effect dated 31 December 2024 passed by the learned Assessing Officer under section 143(3) read with section 254 of the Income Tax Act, 1961 for the Assessment Year 2016–17, pursuant to the directions issued by the Dispute Resolution Panel–2, Mumbai. The appeal arises in the second round of proceedings, the matter having earlier travelled to this Tribunal, which had partly set aside the assessment and restored the issue to the file of the Transfer Pricing Officer for limited and specific purposes. The impugned order, therefore, is required to be examined not only on its own merits but also strictly in the light of, and in faithful conformity with, the binding directions issued by this Tribunal in the first round.

2. The assessee company forms part of the globally renowned Red Hat Group and is ultimately held by Red Hat Inc., USA. The assessee is engaged in the business of providing open-source software solutions to customers across jurisdictions. Owing to the intrinsic nature of open-source software, the business model of the group does not envisage charging customers for the software itself. Instead, the commercial value is realised through subscription-based services, updates, support, and enterprise solutions, with Red Hat Enterprise Linux constituting the principal driver of the group’s worldwide growth strategy. This fundamental business architecture has a direct bearing on the transfer pricing analysis and cannot be viewed in isolation or through a narrow lens.

3. In the original transfer pricing proceedings, the learned Transfer Pricing Officer observed that during the relevant previous year the assessee had entered into several international transactions with its Associated Enterprises. These transactions included payment of royalty and service fees under the subscription and services segments, provision of software development services, and provision of IT enabled services to group entities. The complete details of such international transactions, along with the Associated Enterprises involved, the amounts transacted, and the most appropriate method applied, are tabulated and are reproduced hereunder.

4. The learned TPO, vide order dated 31 October 2019 passed under section 92CA(3) of the Act, proposed an aggregate transfer pricing adjustment of INR 32,51,93,181. The adjustment was made on multiple counts, including alleged excess payment of royalty and service fees under both segments, as well as margin adjustments in respect of software development and IT enabled services. The issue-wise and amount-wise break-up of the proposed adjustment, as recorded by the learned TPO, is reproduced hereunder.

recorded by the learned TPO, is reproduced hereunder.

recorded by the learned TPO, is reproduced hereunder.

recorded by the learned TPO, is reproduced hereunder.

recorded by the learned TPO, is reproduced hereunder.

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recorded by the learned TPO, is reproduced hereunder.

5. Thereafter, a recti