ITAT remands transfer pricing case to DRP for fresh examination on comparable selection and foreign exchange loss issues

The ITAT Bangalore remanded transfer pricing issues back to the DRP for fresh examination after finding the original DRP order cryptic regarding comparable selection, particularly the exclusion of Persistent Systems Solutions Ltd without detailed findings. The tribunal followed its earlier decision in the assessee's appeal and allowed Revenue's grounds. Issues concerning foreign exchange loss, risk adjustment, and comparable company inclusion/exclusion were also remanded to the DRP for denovo examination with proper opportunity of hearing. The tribunal emphasized that only forex gains/losses with nexus to the year's transactions should be considered, following the Mercedes Benz precedent.

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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.

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