DCIT, BANGALORE vs. OBOPAY MOBILE TECHNOLOGY INDIA PVT. LTD.,, BANGALORE

2. First we take up the revenue’s appeal. Ground Nos.2 & 3 raised by the revenue is that the DRP erred in law in holding that the foreign exchange loss or gain is a part of operating expenses or operating income.

We have heard the rival contentions. The ld. AR has submitted that the foreign exchange gain/loss are part of operating revenue and therefore are required to be included. The Tribunal in the matter of SAP Labs has held that the foreign exchange fluctuation in respect of the assessee as well as comparables are operating in nature, therefore are to be taken into consideration while determining the ALP in the case of assessee. The Tribunal has held in various judgments that the foreign exchange loss/gain are operating in nature and therefore are required to be taken into consideration while calculating the ALP. However, the loss/gain of foreign exchange fluctuation are only required to be taken into consideration having direct co-relation of the transactions undertaken by the assessee as well as the comparable for the year under consideration i.e., if the dues remain unpayable after the export undertaken by the assessee or the IT(TP)A Nos. 238 & 553/Bang/2016 Page 3 of 16 comparable company in the previous year and on that account some foreign exchange loss/gain was passed to the assessee/comparable as then said loss/gain is not required to be taken into consideration as operating in nature. U/s. 92C of the Act, the ALP is required to be determined in relation to the international transaction and the income arising from the international transaction shall be computed having regard to the ALP. The international transaction has been defined u/s. 92B and it clearly provides that the transaction entered between the assessee and AE in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, etc., having a bearing on the profits, income, losses or assets of such enterprises. Thus, it is the international transaction for the year under assessment, not the previous transaction entered between the assessee and its AE in the previous year. Therefore, the foreign exchange loss/gain is a part of operating expenses or operating income in respect of international transaction entered into between the assessee and its AE for the year under consideration and not for the previous year. In view of the above, ground Nos.2 &3 are set aside to the file of DRP with a direction to work out the actual basis in respect of foreign exchange with respect to loss/gain pertaining to the assessment year under consideration.

Ground No.4 pertains to risk adjustment. In this regard, attention of the Bench was drawn to para 4.8 of the DRP’s order to the following effect:-

The ld. DR has drawn our attention to the submissions made by the assessee before the TPO and it was submitted that no working in respect of comparable companies with respect to risk adjustment has been given and further in respect of assessee also no risk adjustment has been given. The ld. DR has submitted that no risk adjustment is required to be given to the assessee as there is no risk with the assessee for dealing with single customer i.e., with its AE and therefore risk adjustment granted by the DRP at 1% is unjustifiable.

We have gone through the record and applied our mind. In our view, the assessee is entitled to risk adjustment only when the assessee has given the detailed calculation of the risk adjustment in respect of comparable company as well as that of assessee. Since no detailed working has been given by the assessee in submission made before the DRP as well as before the TPO, in our view, grant of risk adjustment of 1% by the DRP to the assessee is without any basis and without any factual

The other grounds raised by the revenue are general in nature and therefore are not pressed.

Now we will deal with the appeal filed by the assessee. The grounds raised are as follows:-

The lower authorities have erred in: a. Making transfer pricing adjustment of Rs. 4,73,19,859/-. b. Re-computing the TP adjustment in the final assessment order without following all the directions of the honourable DRP and also not giving the basis of computation of TP adjustment arrived at in the final assessment order. c. Making a reference to Transfer Pricing Officer for determining arm's length price. d. Not appreciating that there is no amendment to the definition of "income" and charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed

The assessee is engaged in two distinct business segments viz., (a) development and delivery of domain specific software for Obopay Inc.; and (b) establishing, deploying and maintaining a platform for making mobile payments and facilitating related services for users in India. The assessee during the assessment under consideration has derived income from software development services amounting to Rs.41,13,14,580 and the assessee has also undertaken international transactions in the form of reimbursement of expense paid to its AE amounting to Rs.2,17,76,409; purchase of fixed assets amounting to Rs.5,69,112, share application received amounting to Rs.14,35,51,141.

The assessee filed return of income and the case of assessee was selected for scrutiny assessment and thereafter the case was referred to the TPO as international transaction was involved. The assessee has selected 13 comparables for the year under consideration on the basis of middle year data and PLI was calculated at 15%. The arithmetic mean of the comparables was calculated by the assessee in the TP study at 13.66%. As the PLI of the comparables was within 5% range, therefore no adjustment was proposed by the assessee.

The TPO has rejected the TP study of the assessee and thereafter he has used the following filters:-

On the basis of above filters and the objections raised by the assessee, the TPO has considered 13 comparables which are as under:-

On the basis of the said comparables, the TPO has made the adjustment to the extent of Rs.29,290,704.

The assessee challenged the direction issued by the TPO before the DRP. The DRP has adjudicated the issues raised by the assessee and thereafter pass an order. Feeling aggrieved by the order passed by the DRP, the assessee is before us.

Before us, the ld. AR of assessee has submitted that out of the 13 comparables finally retained by the TPO, the various comparables are required to be excluded by applying the turnover filter as the turnover of the assessee company is Rs.41,13,14,580.

It was submitted that the Tribunal is taking the turnover filter of 10 times of the turnover of assessee as well as 1/10th of the turnover of assessee i.e., companies which are falling with 1/10th and 10 times of the assessee’s turnover are required to be retained and the companies which are falling less than 1/10th and more than 10 times of the turnover are required to be excluded. By applying the above logic, if we look into the turnover given by the TPO in his order, then we can come to the conclusion that the following companies are required to be excluded by applying the turnover filter:- Turnover (in Crores) 1. Infosys Ltd. 25,385 2. Larsen & Toubro Infotech Ltd. 2,181 3. Mindtree Ltd. 878 4. Persistent Systems Ltd. 610

Since turnover of these companies are more than Rs.410 crores i.e., more than 10 times of the turnover of assessee, therefore these companies are required to be excluded as comparables in terms of size and therefore are directed to be excluded. The TPO/AO is directed to exclude these companies from the list of comparables.

After excluding the above 4 companies, now we will deal with the companies left behind one after the other.

Regarding the comparables viz., Acropetal Technologies Ltd., E- Zest Solutions Ltd., E-Infochips Ltd., Evoke Technologies Pvt. Ltd., I C R A Techno Analytics Ltd., Persistent Systems & Solutions Ltd., Sasken Communication Technologies and Tata Elxsi, our attention was drawn to para 4.3 of the DRP’s order wherein the DRP has rejected the objection raised by the assessee without giving a reasoned order. The order of DRP is reproduced hereinbelow:-

In our view, once the assessee has raised the objection with respect to functional data, employee cost and application of RPT filters, it is the duty of the DRP to examine the objections of the assessee. Since the DRP has not decided the issue after detailed and elaborate examination of facts and law, we therefore deem it appropriate to remand the matter to the file of DRP to deal with the objections appropriately and pass a reasoned order on the issues raised by the assessee. In view thereof, these issues are decided in favour of assessee for statistical purposes.

The next ground raised by the assessee is with respect to ground No.5 which reads as follows:-

It is submitted that these two employees were working for the assessee as mentioned in the reply submitted by the assessee and reproduced by the AO in paras 13 to 13.6 and other pages from 19 to 32. The ld. DRP dealt with the issue in para 5.1 & 5.2 as under:-

The ld. AR has ably submitted that the salary paid by the assessee to these employees were merely on the basis of reimbursement of the cost and therefore the apportionment of 80:20 given by the TPO is without any basis and it will amount to double addition. Para 6.15 was more particularly referred to by the ld. AR to the Bench and on the basis of that it was IT(TP)A Nos. 238 & 553/Bang/2016 Page 15 of 16 submitted that Raj Rai was a part of support team and performed his services in legal department and 70% of the cost was allocated to SWD segment of assessee. This was marked up 15%. Therefore, effectively, 70% of salary on the mark up of 15% is already billed to AE. On the basis of the above, it was submitted that if the salary is apportioned to the extent of 80:20, that will result into double addition and therefore it is required to be excluded.

We have heard the rival contentions of the parties and perused the record. In our view, this issue is also required to be sent back to the file of DRP. The assessee called upon by the TPO vide notice dated 01.12.14 to provide the complete list of employees along with designation, work profile and pay. However, the assessee has failed to provide the details and in the absence of any particulars given by the assessee, the TPO had adjudicated the issue and estimated based on the material available in the ratio of 80:20 i.e., 80% pay is towards Service PE of Obopay and 20% towards services beneficial to assessee. Since the assessee has not provided the details as sought by the TPO, therefore the TPO has only decided this issue on the basis of material available. It is incumbent upon the assessee to render all possible help and provide all documents which are necessary and relevant for adjudication of the issues. As the assessee has not provided these details, therefore we direct the assessee to provide all the details as sought for by the TPO vide notice dated 01.12.2014. It is further directed that the ld. DRP on receipt of this information from the IT(TP)A Nos. 238 & 553/Bang/2016 Page 16 of 16 assessee, shall decide the issue afresh. Accordingly, this issue is allowed in favour of assessee for statistical purposes.

In the result, the appeal of revenue is partly allowed and the appeal of assessee is allowed for statistical purposes.