2019 (4) TMI 2129 - AT - Income Tax

TP Adjustment - comparable selection - Revenue had submitted that the order passed by the DRP u/s.154 r.w.s.144C is cryptic as the DRP had excluded the Persistent Systems Solutions Ltd without giving elaborate and detailed finding - HELD THAT - As in the assessee s appeal bearing 2019 (4) TMI 2128 - ITAT BENGALURU we had already remanded back the entire TP issues to the file of the DRP for denovo examination of the entire case by passing a detailed and reasoned order. Therefore respectfully following the same ratio, we allow the grounds raised by the Revenue. Foreign exchange loss and risk adjustment - HELD THAT - As we had already remanded back TP grounds to the file of the DRP, further we feel that the various companies will be included / excluded based on our remanding back the entire TP issues to the file of DRP. In view of the above, and more particularly when the assessee had provided the details of working risk adjustment before the DRP as well as the AO, in view of the above, we also remand risk adjustment issue to the file of DRP for deciding afresh, after affording opportunity of hearing and provide time to explain the case of the assessee. With respect to the ground no. 2 , we had taken consistent view that only forex gain / loss which have nexus with the transactions of the year shall alone be taken into account. Hence we also sent back this issue to the file of DRP to decide a fresh in the light of Mercedez Benz R D India P. Ltd v. ACIT 2018 (2) TMI 1975 - ITAT BANGALORE

Summary

Issues:
1. Exclusion of Persistent Systems and Solutions Ltd from comparables for software development services.
2. Inclusion of foreign exchange loss/gain in determining the Profit Level Indicator.
3. Granting risk adjustment without analyzing the difference in risk level between the tested party and comparables.

Analysis:
1. The Revenue appealed against the order of the DCIT regarding the exclusion of Persistent Systems and Solutions Ltd from comparables for software development services. The Tribunal allowed the Revenue's grounds, stating that the issue was remanded back to the DRP for a detailed examination in a previous appeal. The Tribunal followed the same ratio and allowed the Revenue's grounds.

2. Regarding the inclusion of foreign exchange loss/gain in determining the Profit Level Indicator, the Tribunal noted discrepancies in the treatment of foreign exchange in the case. The Tribunal observed that while the DRP considered foreign exchange loss/gain as operational income, clarity was lacking on whether it was related to business operations. The matter was remanded to the TPO for factual verification before allowing it as operational income.

3. The Tribunal addressed the issue of risk adjustment, highlighting that the DRP had referred to a previous decision for guidance on risk adjustment percentage but did not direct a specific percentage. The Tribunal emphasized that risk adjustment cannot be granted without a proper computation provided by the assessee. As the assessee failed to provide a scientific basis or working for risk adjustment, the Tribunal reversed the DRP's decision on granting risk adjustment. The Tribunal remanded the risk adjustment issue to the DRP for a fresh decision after providing an opportunity for the assessee to explain their case.

In conclusion, the Tribunal allowed the Revenue's appeal for statistical purposes, remanding both the foreign exchange loss/gain and risk adjustment issues back to the DRP for further examination and clarification.