Appeal details
Counselvise Citation
[2017] 128 COUNSELVISE.COM (IT) 5414 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 1 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-04-2017
Appeal Filed By
Department
Order Result
Partly Allowed
Bench Allotted
A
Next Hearing Date
22-02-2017
Assessment Year
2011-2012
Appeal Filed On
28-03-2016
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI A.K. GARODIA, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER IT(TP)A NO.238/BANG/2016 ASSESSMENT YEAR : 2011-12 M/S. OBOPAY MOBILE TECHNOLOGY INDIA PRIVATE LTD., ENZYME JNC BUSINESS CENTER, 2 ND FLOOR, MPK MANSION, NO.18, GUAVA GARDEN, 5 TH BLOCK, KORAMANGALA, BENGALURU 560 095. PAN: AAACO 9074H VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5(1)(2), BANGALORE. APPELLANT RESPONDENT IT(TP)A NO.553/BANG/2016 ASSESSMENT YEAR : 2011-12 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5(1)(2), BANGALORE. VS. M/S. OBOPAY MOBILE TECHNOLOGY INDIA PRIVATE LTD., BENGALURU 560 095. PAN: AAACO 9704H APPELLANT RESPONDENT ASSESSEE BY : SHRI PADAMCHAND KHINCHA, CA REVENUE BY : SHRI G.R. REDDY, CIT(DR)(ITAT)-1, BENGALURU DATE OF HEARING : 22.02.2017 DATE OF PRONOUNCEMENT : 28.04.2017 IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 2 OF 16 O R D E R PER LALIET KUMAR, JUDICIAL MEMBER THESE ARE CROSS APPEALS PREFERRED BY THE REVENUE A ND THE ASSESSEE AGAINST THE ORDER OF THE ASSESSING OFFICER PASSED U /S. 143(3) R.W.S. 144C OF THE I.T. ACT, 1961 CONSEQUENT TO THE DIRECTIONS OF THE DRP. IT(TP)A 553/BANG/2016 2. FIRST WE TAKE UP THE REVENUES APPEAL. GROUND N OS.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 EXPENS ES OR OPERATING INCOME. 3. WE HAVE HEARD THE RIVAL CONTENTIONS. THE LD. AR HAS SUBMITTED THAT THE FOREIGN EXCHANGE GAIN/LOSS ARE PART OF OPERATIN G REVENUE AND THEREFORE ARE REQUIRED TO BE INCLUDED. THE TRIBUNAL IN THE M ATTER OF SAP LABS HAS HELD THAT THE FOREIGN EXCHANGE FLUCTUATION IN RESPE CT OF THE ASSESSEE AS WELL AS COMPARABLES ARE OPERATING IN NATURE, THEREF ORE ARE TO BE TAKEN INTO CONSIDERATION WHILE DETERMINING THE ALP IN THE CASE OF ASSESSEE. THE TRIBUNAL HAS HELD IN VARIOUS JUDGMENTS THAT THE FOR EIGN EXCHANGE LOSS/GAIN ARE OPERATING IN NATURE AND THEREFORE ARE REQUIRED TO BE TAKEN INTO CONSIDERATION WHILE CALCULATING THE ALP. HOWEVER, T HE LOSS/GAIN OF FOREIGN EXCHANGE FLUCTUATION ARE ONLY REQUIRED TO BE TAKEN INTO CONSIDERATION HAVING DIRECT CO-RELATION OF THE TRANSACTIONS UNDER TAKEN BY THE ASSESSEE AS WELL AS THE COMPARABLE FOR THE YEAR UNDER CONSIDERA TION 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 ASSESS EE/COMPARABLE AS THEN SAID LOSS/GAIN IS NOT REQUIRED TO BE TAKEN INT O CONSIDERATION AS OPERATING IN NATURE. U/S. 92C OF THE ACT, THE ALP IS REQUIRED TO BE DETERMINED IN RELATION TO THE INTERNATIONAL TRANSAC TION 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 BETWE EN THE ASSESSEE AND AE IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBL E OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, ETC., HAVING A BEARING ON TH E PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES. THUS, IT IS THE INT ERNATIONAL TRANSACTION FOR THE YEAR UNDER ASSESSMENT, NOT THE PREVIOUS TRANSAC TION ENTERED BETWEEN THE ASSESSEE AND ITS AE IN THE PREVIOUS YEAR. THER EFORE, THE FOREIGN EXCHANGE LOSS/GAIN IS A PART OF OPERATING EXPENSES OR OPERATING INCOME IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INTO B ETWEEN 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 O F FOREIGN EXCHANGE WITH RESPECT TO LOSS/GAIN PERTAINING TO THE ASSESSMENT Y EAR UNDER CONSIDERATION. 4. GROUND NO.4 PERTAINS TO RISK ADJUSTMENT. IN THI S REGARD, ATTENTION OF THE BENCH WAS DRAWN TO PARA 4.8 OF THE DRPS ORDER TO THE FOLLOWING EFFECT:- 4.8 THE OBJECTION REGARDING ADJUSTMENT ON ACCOUNT OF RISK PROFILE WAS RAISED BY THE ASSESSEE BEFORE DRP IN RE LATION TO AY IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 4 OF 16 2010-11 ALSO AND FOLLOWING THE DECISION OF THE HON' BLE ITAT BANGALORE IN INTELLINET TECHNOLOGIES INDIA PVT. LTD. VS ITO (ITA NO, 1237/BANG/2007) THE TPO WAS DIRECTED TO DECIDE THE PERCENTAGE OF RISK ADJUSTMENTS TO BE CALCULATED IN THAT CASE. BY MEANS OF GUIDANCE, IT WAS MENTIONED THAT IN THE CAS E OF DCIT VS. HELLO SOFT PVT. LTD. (2013) 32 TAXMANN.COM 101 (ITA T, HYD) 1% ADJUSTMENT TO THE AVERAGE MARGIN WAS PROVIDED TOWAR DS RISK DIFFERENTIAL. THE DRP FOR AY 2010-11, AFTER CONSIDE RING THE SUBMISSION OF THE ASSESSEE, HAS GRANTED RISK ADJUST MENT. SINCE THE FACTS OF THE CASE REMAIN THE SAME, THE TPO IS DIREC TED TO DO THE NEEDFUL IN ABOVE TERMS. 5. THE LD. DR HAS DRAWN OUR ATTENTION TO THE SUBMIS SIONS MADE BY THE ASSESSEE BEFORE THE TPO AND IT WAS SUBMITTED THAT N O WORKING IN RESPECT OF COMPARABLE COMPANIES WITH RESPECT TO RISK ADJUST MENT HAS BEEN GIVEN AND FURTHER IN RESPECT OF ASSESSEE ALSO NO RISK ADJ USTMENT HAS BEEN GIVEN. THE LD. DR HAS SUBMITTED THAT NO RISK ADJUSTMENT I S 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 ADJUS TMENT GRANTED BY THE DRP AT 1% IS UNJUSTIFIABLE. 6. WE HAVE GONE THROUGH THE RECORD AND APPLIED OUR MIND. IN OUR VIEW, THE ASSESSEE IS ENTITLED TO RISK ADJUSTMENT ONLY WH EN THE ASSESSEE HAS GIVEN THE DETAILED CALCULATION OF THE RISK ADJUSTME NT IN RESPECT OF COMPARABLE COMPANY AS WELL AS THAT OF ASSESSEE. SI NCE NO DETAILED WORKING HAS BEEN GIVEN BY THE ASSESSEE IN SUBMISSIO N MADE BEFORE THE DRP AS WELL AS BEFORE THE TPO, IN OUR VIEW, GRANT O F RISK ADJUSTMENT OF 1% BY THE DRP TO THE ASSESSEE IS WITHOUT ANY BASIS AND WITHOUT ANY FACTUAL IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 5 OF 16 FOUNDATION. IN VIEW THEREOF, WE DO NOT DEEM IT APP ROPRIATE TO GRANT RISK ADJUSTMENT TO THE ASSESSEE. ACCORDINGLY, THIS GROU ND OF REVENUE IS ALLOWED. 7. THE OTHER GROUNDS RAISED BY THE REVENUE ARE GENE RAL IN NATURE AND THEREFORE ARE NOT PRESSED. IT(TP)A NO.238/BANG/2016 8. NOW WE WILL DEAL WITH THE APPEAL FILED BY THE AS SESSEE. THE GROUNDS RAISED ARE AS FOLLOWS:- GROUNDS RELATING TO TRANSFER PRICING - LEGAL ISSUES 1. THE ORDERS PASSED LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-5(1)(2), BENGALURU (HEREINAFTER REFERRED AS 'AO' FOR BREVITY), LEARNED DEPUTY COMMISSIONER OF I NCOME TAX (TRANSFER PRICING) - 2(1)(2), BENGALURU (HEREINAFTE R REFERRED AS 'TPO' FOR BREVITY) AND THE HONOURABLE DRP - II ('AO ', 'TPO' AND DRP COLLECTIVELY REFERRED AS 'LOWER AUTHORITIES ' FOR BREVITY) ARE BAD IN LAW AND LIABLE TO BE QUASHED. 2. 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 ASS ESSMENT ORDER WITHOUT FOLLOWING ALL THE DIRECTIONS OF THE H ONOURABLE 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 F OR DETERMINING ARM'S LENGTH PRICE. D. NOT APPRECIATING THAT THERE IS NO AMENDMENT TO THE DEFINITION OF 'INCOME' AND CHARGING OR COMPUTATION PROVISION R ELATING TO INCOME UNDER THE HEAD 'PROFITS & GAINS OF BUSINE SS OR PROFESSION' DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 6 OF 16 UNDER CHAPTER X' AND THEREFORE ADDITION UNDER CHAPT ER X IS BAD IN LAW. E. PASSING THE ORDER WITHOUT DEMONSTRATING THAT THE APPELLANT HAD MOTIVE OF TAX EVASION. 3. SINCE THE COMPUTATION OF TP ADJUSTMENT, PURSUAN T TO DRP DIRECTIONS, HAS NOT BEEN GIVEN IN THE FINAL ASSESSM ENT ORDER, THE ASSESSMENT ORDER PASSED IS BAD IN LAW. 4. WITHOUT PREJUDICE, THE LOWER AUTHORITIES HAVE E RRED IN: A. REJECTING SOME OF THE COMPARABLES SELECTED BY TH E APPELLANT IN THE TP STUDY ON UNJUSTIFIABLE GROUNDS; B. IGNORING THE ADDITIONAL COMPARABLES PROPOSED BY THE APPELLANT WITHOUT GIVING ANY COGENT REASONS AND ON UNJUSTIFIABLE GROUNDS; C. REJECTING THE TRANSFER PRICING ANALYSIS UNDERTA KEN BY THE APPELLANT ON UNJUSTIFIABLE GROUNDS; D. CONDUCTING A FRESH TRANSFER PRICING ANALYSIS DE SPITE ABSENCE OF ANY DEFECTS IN THE TRANSFER PRICING ANALYSIS SUB MITTED BY THE APPELLANT; E. ADOPTING INAPPROPRIATE FILTERS LIKE ONE SIDED LO WER TURNOVER FILTER, 25% RPT FILTER ETC. IN THE PROCESS OF SELEC TING COMPARABLES; F. ADOPTING COMPANIES AS COMPARABLES EVEN THOUGH TH EY ARE NOT COMPARABLE IN RESPECT OF FUNCTIONS PERFORMED, RISKS ASSUMED, ASSETS UTILIZED, SIZE, TURNOVER HAVING UNUSUAL BUSI NESS CIRCUMSTANCE, HIGH MARGINS ETC. G. INAPPROPRIATELY COMPUTING THE OPERATING MARGINS OF COMPARABLES; H. INAPPROPRIATELY COMPUTING THE OPERATING MARGIN O F THE APPELLANT INTER ALIA INCLUDING LOSS ON SALE OF ASSE T AND FOREIGN EXCHANGE LOSS AS PART OF OPERATING COST; I. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEV EL AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLA NT AND THE COMPARABLE COMPANIES. IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 7 OF 16 J. IGNORING THE BUSINESS, COMMERCIAL AND INDUSTRY REALITIES AND ECONOMIC CIRCUMSTANCES APPLICABLE TO THE APPELLANT VIS A VIS THE COMPARABLES; K. NOT RECOGNIZING THAT THE APPELLANT WAS INSULAT ED FROM RISKS, AS AGAINST COMPARABLES, WHICH ASSUME THESE RISKS AN D THEREFORE HAVE TO BE CREDITED WITH A RISK PREMIUM O N THIS ACCOUNT; AND L. RESTRICTING WORKING CAPITAL ADJUSTMENT TO 1.63%. EVEN OTHERWISE NOT APPROPRIATELY COMPUTING THE WORKING C APITAL ADJUSTMENT WHILE COMPUTING THE ALP 5. THE LOWER AUTHORITIES HAVE ERRED IN: A. CONCLUDING THAT TWO DEPUTED EMPLOYEES WORK FOR OBOPAY INC WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE; B. CONCLUDING THAT TWO DEPUTED EMPLOYEES CONSTITUT E SERVICE PE OF OBOPAY INC WITHOUT APPRECIATING THAT THE JURISDI CTION OF THE TPO IS ONLY TO COMPUTE ALP; C. TREATING SALARY PAID TO EMPLOYEES AS INTERNATION AL TRANSACTION WITHOUT APPRECIATING THAT SALARY WAS REIMBURSED TO AE AT COST BASIS; AND D. CONSIDERING 80% OF SALARY PAID TO EMPLOYEES AS TP ADJUSTMENT BY ADOPTING FLAWED AND ARBITRARY METHODO LOGY, INCORRECT FIGURES AND ASSUMPTIONS, WITHOUT SELECTIN G MOST APPROPRIATE METHOD AND COMPARABLES. 6. THE LOWER INCOME TAX AUTHORITIES HAVE ERRED IN N OT APPRECIATING THAT THE LAW DOES NOT COMPEL ADOPTING MANY (OR ANY MINIMUM) COMPANIES AS COMPARABLES AND THAT THE APPELLANT COULD JUSTIFY THE PRICE PAID/CHARGED ON T HE BASIS OF ANYONE COMPARABLE. 7. ASSUMING WITHOUT ADMITTING THAT THE ADJUSTMENT IS TO BE MADE, THE LOWER INCOME TAX AUTHORITIES HAVE ERRED I N NOT ALLOWING THE BENEFIT OF THE +/-5% RANGE PRESCRIBED IN THE PROVISO TO SECTION 92C(2). THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUND S/ SUB- GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO ON E ANOTHER. IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 8 OF 16 THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFO RE OR AT, THE TIME OF HEARING, OF THE APPEAL, SO AS TO ENABLE THE INCOME-TAX APPELLATE TRIBUNAL TO DECIDE THE APPEAL ACCORDING T O LAW. THE APPELLANT PRAYS ACCORDINGLY. 9. THE ASSESSEE IS ENGAGED IN TWO DISTINCT BUSINE SS SEGMENTS VIZ., (A) DEVELOPMENT AND DELIVERY OF DOMAIN SPECIFIC SOF TWARE FOR OBOPAY INC.; AND (B) ESTABLISHING, DEPLOYING AND MAINTAINING A P LATFORM FOR MAKING MOBILE PAYMENTS AND FACILITATING RELATED SERVICES F OR 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 TRANSACT IONS IN THE FORM OF REIMBURSEMENT OF EXPENSE PAID TO ITS AE AMOUNTING T O 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. 10. THE ASSESSEE FILED RETURN OF INCOME AND THE CAS E 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 CONSIDER ATION 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 T HE TP STUDY AT 13.66%. AS THE PLI OF THE COMPARABLES WAS WITHIN 5 % RANGE, THEREFORE NO ADJUSTMENT WAS PROPOSED BY THE ASSESSEE. IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 9 OF 16 11. THE TPO HAS REJECTED THE TP STUDY OF THE ASSESS EE AND THEREAFTER HE HAS USED THE FOLLOWING FILTERS:- A. CURRENT YEAR DATA B. COMPANIES HAVING SOFTWARE DEVELOPMENT INCOME < RS,1 CRORE WERE EXCLUDED C. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE AND RE LATED SERVICES IS LESS THAN 75% OF THE TOTAL OPERATING RE VENUES WERE EXCLUDED D. COMPANIES WHO HAVE MORE THAN 25% RELATED PARTY TRANSACTIONS OF THE SALES WERE EXCLUDED E. COMPANIES WHO HAVE PERSISTENT LOSSES FOR THE LAST T HREE YEARS UPTO AND INCLUDING FY 2010-11 WERE EXCLUDED F. COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING (I .E. NOT MARCH 31, 2011) OR DATA OF THE COMPANY DOES NOT FAL L WITHIN 12 MONTH PERIOD I.E. 01-04-2-1- TO 31-03-2011, WERE REJECTED G. COMPANIES THAT ARE FUNCTIONALLY DIFFERENT FROM THE TAXPAYER WERE EXCLUDED H. COMPANIES THAT ARE HAVING PECULIAR ECONOMIC CIRCUMS TANCES WERE EXCLUDED I. COMPANIES WHO HAVE EXPORT SALES LESS THAN 75% OF TH E SALES IN SOFTWARE CASES WERE EXCLUDED J. COMPANIES WITH EMPLOYEE COST LESS THAN 25% OF TURNO VER IN SOFTWARE CASES WERE EXCLUDED. 12. ON THE BASIS OF ABOVE FILTERS AND THE OBJECTION S RAISED BY THE ASSESSEE, THE TPO HAS CONSIDERED 13 COMPARABLES WHI CH ARE AS UNDER:- IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 10 OF 16 SL. NO. NAME SALES COST PLI 1 ACROPETAL TECHNOLOGIES LTD. (SEG) 814,016,893 616,754,876 31.98% 2 E ZEST SOLUTIONS (FROM CAPITALINE) 112,866,098 93,255,341 21.03% 3 E-INFOCHIPS LTD. 260,384,251 166,447,527 56.44% 4 EVOKE (FROM CAPITALINE) 144,869,912 133,996,568 8.11% 5 I C R A TECHNO ANALYTICS LTD. (IN 000) 158,401,000 126,894,000 24.83% 6 INFOSYS LTD. 253,850,000,000 177,030,000,000 43.39% 7 LARSEN & TOUBRO INFOTECH LTD. 233,181,122,096 19,764,861,289 19.83% 8 MINDTREE LTD. (SEG) 8,783,000,000 7,937,143,242 10.66% 9 PERSISTENT SYSTEMS & SOLUTIONS LTD. 189,490,457 155,172,089 22.12% 10 PERSISTENT SYSTEMS LTD. 6,101,270,000 4,971,860,000 22.84% 11 R S SOFTWARE (INDIA) LTD. 1,882,638,741 1,617,804,170 16.37% 12 SASKEN COMMUNICATION TECHNOLOGIES LTD. 3,941,962,000 3,175,616,000 24.13% 13 TATA ELXSI LTD. (SEG) 3,581,985,000 2,962,533,352 20.91% AVERAGE MARGIN 24.82% 13. ON THE BASIS OF THE SAID COMPARABLES, THE TPO H AS MADE THE ADJUSTMENT TO THE EXTENT OF RS.29,290,704. 14. 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 TH E ORDER PASSED BY THE DRP, THE ASSESSEE IS BEFORE US. 15. BEFORE US, THE LD. AR OF ASSESSEE HAS SUBMITTED THAT OUT OF THE 13 COMPARABLES FINALLY RETAINED BY THE TPO, THE VARIOU S COMPARABLES ARE REQUIRED TO BE EXCLUDED BY APPLYING THE TURNOVER FI LTER AS THE TURNOVER OF THE ASSESSEE COMPANY IS RS.41,13,14,580. IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 11 OF 16 16. IT WAS SUBMITTED THAT THE TRIBUNAL IS TAKING T HE TURNOVER FILTER OF 10 TIMES OF THE TURNOVER OF ASSESSEE AS WELL AS 1/10 TH OF THE TURNOVER OF ASSESSEE I.E., COMPANIES WHICH ARE FALLING WITH 1/1 0 TH AND 10 TIMES OF THE ASSESSEES TURNOVER ARE REQUIRED TO BE RETAINED AND THE COMPANIES WHICH ARE FALLING LESS THAN 1/10 TH AND MORE THAN 10 TIMES OF THE TURNOVER ARE REQUIRED TO BE EXCLUDED. BY APPLYING THE ABOVE LOGI C, 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 EXC LUDED 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 17. SINCE TURNOVER OF THESE COMPANIES ARE MORE THAN RS.410 CRORES I.E., MORE THAN 10 TIMES OF THE TURNOVER OF ASSESSEE, THE REFORE THESE COMPANIES ARE REQUIRED TO BE EXCLUDED AS COMPARABLES IN TERMS OF SIZE AND THEREFORE ARE DIRECTED TO BE EXCLUDED. THE TPO/AO IS DIRECTE D TO EXCLUDE THESE COMPANIES FROM THE LIST OF COMPARABLES. 18. AFTER EXCLUDING THE ABOVE 4 COMPANIES, NOW WE WILL DEAL WITH THE COMPANIES LEFT BEHIND ONE AFTER THE OTHER. IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 12 OF 16 19. REGARDING THE COMPARABLES VIZ., ACROPETAL TECHN OLOGIES LTD., E- ZEST SOLUTIONS LTD., E-INFOCHIPS LTD., EVOKE TECHNO LOGIES PVT. LTD., I C R A TECHNO ANALYTICS LTD., PERSISTENT SYSTEMS & SOLUTIO NS LTD., SASKEN COMMUNICATION TECHNOLOGIES AND TATA ELXSI, OUR ATTE NTION WAS DRAWN TO PARA 4.3 OF THE DRPS ORDER WHEREIN THE DRP HAS REJ ECTED THE OBJECTION RAISED BY THE ASSESSEE WITHOUT GIVING A REASONED OR DER. THE ORDER OF DRP IS REPRODUCED HEREINBELOW:- IT CAN BE SEEN THAT THE TPO HAS USED APPROPRIATE AND RELEVANT FILTERS TO SELECT THE COMPARABLES WHICH CA NNOT BE FAULTED. THE COMPARABLES OF THE ASSESSEE THAT DO NOT COMPARE FUNCTIONALLY OR DO NOT QUALIFY FILTERS ARE REJECTED. THE TPO HA S GIVEN REASONS TO JUSTIFY EITHER SELECTION OR REJECTION OF A COMPA NY AS COMPARABLE. IN VIEW OF THIS, THE OBJECTIONS OF THE ASSESSEE RELATING TO SELECTION/REJECTION OF COMPARABLES CANN OT BE ACCEPTED. 20. IN OUR VIEW, ONCE THE ASSESSEE HAS RAISED THE O BJECTION WITH RESPECT TO FUNCTIONAL DATA, EMPLOYEE COST AND APPLICATION O F RPT FILTERS, IT IS THE DUTY OF THE DRP TO EXAMINE THE OBJECTIONS OF THE AS SESSEE. SINCE THE DRP HAS NOT DECIDED THE ISSUE AFTER DETAILED AND ELABOR ATE 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 AN D PASS A REASONED ORDER ON THE ISSUES RAISED BY THE ASSESSEE. IN VIEW THER EOF, THESE ISSUES ARE DECIDED IN FAVOUR OF ASSESSEE FOR STATISTICAL PURPO SES. 21. THE NEXT GROUND RAISED BY THE ASSESSEE IS WITH RESPECT TO GROUND NO.5 WHICH READS AS FOLLOWS:- IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 13 OF 16 5. THE LOWER AUTHORITIES HAVE ERRED IN: A. CONCLUDING THAT TWO DEPUTED EMPLOYEES WORK FOR OBOPAY INC WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE; B. CONCLUDING THAT TWO DEPUTED EMPLOYEES CONSTITUT E SERVICE PE OF OBOPAY INC WITHOUT APPRECIATING THAT THE JURISDI CTION OF THE TPO IS ONLY TO COMPUTE ALP; C. TREATING SALARY PAID TO EMPLOYEES AS INTERNATION AL TRANSACTION WITHOUT APPRECIATING THAT SALARY WAS REIMBURSED TO AE AT COST BASIS; AND D. CONSIDERING 80% OF SALARY PAID TO EMPLOYEES AS TP ADJUSTMENT BY ADOPTING FLAWED AND ARBITRARY METHODO LOGY, INCORRECT FIGURES AND ASSUMPTIONS, WITHOUT SELECTIN G MOST APPROPRIATE METHOD AND COMPARABLES. 22. IT IS SUBMITTED THAT THESE TWO EMPLOYEES WERE W ORKING 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:- 5.1 THIS ISSUE HAS BEEN DISCUSSED BY THE TPO FROM PAGE 19 TO PAGE 31 OF HIS ORDER. THE TPO HAS VERIFIED THE DETA ILS OF WORK DONE BY TWO EMPLOYEES RAJ AJI AND GARY SINGH ENGAGE D AS VP (BUSINESS DEVELOPMENT & LEGAL AFFAIRS FOR EMERGING MARKETS) AND VP (CHANNELS & GLOBAL RELATIONSHIP) RESPECTIVEL Y: AFTER VERIFICATIONS OF THE DETAILS OF JOB PROFILE OF THE SECONDED EMPLOYEES THE TPO HAS OBSERVED THAT THEIR JOB IS TO ENSURE THAT INFORMATION RELAYED TO OBOPAY INC. IS ACCURATE AND SRI GARY SINGH HAS BEEN SECONDED BY OBOPAY INC TO FURTHER TH E INTEREST OF THAT COMPANY IN ASSESSE'S BUSINESS. HE HAS BEEN SEN T TO MAINTAIN CONTROL OVER ASSESSEE'S BUSINESS BY OBOPAY INC. THE TPO HAS FURTHER OBSERVED THAT 'AFTER CONSIDERATION OF SUBMI SSION OF ASSESSEE, THE FUNCTIONS OF THE TWO EMPLOYEES WERE R ESTUDIED. IT IS CLEAR THAT THEY WERE SECONDED BY OBOPAY INC. TO OVE RSEE THE DEAL WITH NOKIA INDIA AND ESTABLISH CONTROL OVER THE IND IAN COMPANY IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 14 OF 16 VIA MONITORING AND REVIEW. RAJ AJI IS NOT AN INDIAN RESIDENT AND HAS FLIMSY EXPOSURE TO LEGAL MATTERS IN INDIA. INDI AN LAW IS DIFFERENT FROM AMERICAN LAW. A FURTHER EVIDENCE IS THAT OBOPAY INC HAS BEEN A SIGNATORY TO MOST AGREEMENTS WITH NO KIA INDIA. OBOPAY INC WAS ENGAGED IN THE WHOLE PROCESS OF LEGA L ARBITRATION AND NEGOTIATION. THEY CAN NOT DO THAT WITHOUT HAVIN G THEIR LEGAL PERSON IN INDIA. RAJ RAI CLEARLY WORKED ON BEHALF O F OBOPAY INC IN INDIA. AS SUCH HE IS A 'SERVICE PE' OF OBOPAY IN C IN INDIA. IT IS ALSO INTERESTING TO SEE THAT THE EMPLOYMENT AGRE EMENT IS BETWEEN OBOPAY INC AND RAJ RAI. SCANNED COPY OF AGR EEMENT PLACED IN THIS ORDER AFTER PARA 13.8. CLEAR EVIDENCE OF RAJ RAI'S COMPLICITY IS AVAILABLE IN THE FORM OF AN AGREEMENT SUBMITTED BY ASSESSEE TO THIS OFFICE I N WHICH RAJ RAI HAS SIGNED ON BEHALF OF OBOPAY INC IN 2011. THE PIECE OF INCREMENTING EVIDENCE IS SCANNED AND REPRODUCED AS UNDER'. 5.2 THE TPO HAS FURTHER MENTIONED THAT THE SERVICE CONDITIONS, PAY STRUCTURE, PAY CONDITIONS, ETC. WER E ESTABLISHED BY OBOPAY INC FOR BOTH GARY SINGH & RAJ RAI. ASSESSEE HAD NO ROLE TO PLAY IN DETERMINATION OF PAY STRUCTURE OR OTHER BENEFITS. THESE EMPLOYEES COULD ALSO NOT BE REMOVED BY THE ASSESSEE . THUS, THE TPO HAS FINALLY CONCLUDED THAT IT CANNOT BE DENIED THAT WHILE OVERSEEING AND PERFORMING BUSINESS INTEREST OF OBOP AY INC IN INDIA, THEY MUST HAVE ALSO PERFORMED SOME WORK FOR OBOPAY INDIA. IN VIEW OF NON-COMPLIANCE ON PART OF ASSESSE E TO SUPPLY DATA AS REGARDS LIST OF EMPLOYEES, THEIR DESIGNATIO N, WORK PROFILE AND PAY, ETC. A REASONABLE RATIO OF 80% PAY TOWARD S SERVICE PE OF OBOPAY INC AND 20% PAY TOWARDS SERVICE BENEFICIA L TO ASSESSEE IS ADOPTED. CONSEQUENTLY, TPO HAS MADE AN ADJUSTMENT OF RS.1,74,21,127/-. 23. THE LD. AR HAS ABLY SUBMITTED THAT THE SALARY P AID BY THE ASSESSEE TO THESE EMPLOYEES WERE MERELY ON THE BASIS OF REIM BURSEMENT OF THE COST AND THEREFORE THE APPORTIONMENT OF 80:20 GIVEN BY T HE 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 B ASIS 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 A ND PERFORMED HIS SERVICES IN LEGAL DEPARTMENT AND 70% OF THE COST WA S ALLOCATED TO SWD SEGMENT OF ASSESSEE. THIS WAS MARKED UP 15%. THER EFORE, EFFECTIVELY, 70% OF SALARY ON THE MARK UP OF 15% IS ALREADY BILL ED TO AE. ON THE BASIS OF THE ABOVE, IT WAS SUBMITTED THAT IF THE SALARY I S APPORTIONED TO THE EXTENT OF 80:20, THAT WILL RESULT INTO DOUBLE ADDITION AND THEREFORE IT IS REQUIRED TO BE EXCLUDED. 24. WE HAVE HEARD THE RIVAL CONTENTIONS OF THE PART IES AND PERUSED THE RECORD. IN OUR VIEW, THIS ISSUE IS ALSO REQUIRED T O BE SENT BACK TO THE FILE OF DRP. THE ASSESSEE CALLED UPON BY THE TPO VIDE NOTI CE DATED 01.12.14 TO PROVIDE THE COMPLETE LIST OF EMPLOYEES ALONG WITH D ESIGNATION, WORK PROFILE AND PAY. HOWEVER, THE ASSESSEE HAS FAILED TO PROVI DE THE DETAILS AND IN THE ABSENCE OF ANY PARTICULARS GIVEN BY THE ASSESSE E, THE TPO HAD ADJUDICATED THE ISSUE AND ESTIMATED BASED ON THE MA TERIAL 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, THEREFOR E THE TPO HAS ONLY DECIDED THIS ISSUE ON THE BASIS OF MATERIAL AVAILAB LE. IT IS INCUMBENT UPON THE ASSESSEE TO RENDER ALL POSSIBLE HELP AND PROVID E 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 NOTIC E DATED 01.12.2014. IT IS FURTHER DIRECTED THAT THE LD. DRP ON RECEIPT OF THI S INFORMATION FROM THE IT(TP)A NOS. 238 & 553/BANG/2016 PAGE 16 OF 16 ASSESSEE, SHALL DECIDE THE ISSUE AFRESH. ACCORDING LY, THIS ISSUE IS ALLOWED IN FAVOUR OF ASSESSEE FOR STATISTICAL PURPOSES. 25. IN THE RESULT, THE APPEAL OF REVENUE IS PARTLY ALLOWED AND THE APPEAL OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF APRIL, 2017. SD/- SD/- ( A.K. GARODIA ) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 28 TH APRIL, 2017. / D ESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.
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