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Issues: (i) Whether eClerx Services Ltd. and Mold Tek Technologies Ltd. were functionally comparable with the assessee for determining arm's length price in the ITES segment; (ii) Whether communication expenses reduced from export turnover under section 10A of the Income-tax Act, 1961 were also required to be excluded from total turnover.
Issue (i): Whether eClerx Services Ltd. and Mold Tek Technologies Ltd. were functionally comparable with the assessee for determining arm's length price in the ITES segment.
Analysis: The assessee was engaged in low-end ITES/back-office support services. eClerx Services Ltd. was found to be a high-end KPO company rendering data analytics and specialised process outsourcing services involving domain expertise, while Mold Tek Technologies Ltd. was found to be engaged in structural engineering KPO and similarly specialised services. The reasoning followed the settled view that companies rendering high-end specialised services are not functionally comparable to a low-end ITES provider for transfer pricing purposes.
Conclusion: The two companies were held to be not comparable and were directed to be excluded from the set of comparables; the issue was decided in favour of the assessee.
Issue (ii): Whether communication expenses reduced from export turnover under section 10A of the Income-tax Act, 1961 were also required to be excluded from total turnover.
Analysis: Section 10A is a beneficial provision intended to promote exports, and the formula for deduction requires consistency between the constituents of export turnover and total turnover. If an item is excluded from export turnover, the same item cannot be included in total turnover because that would create an anomaly in the computation formula.
Conclusion: The communication expenses had to be excluded from total turnover as well, and the issue was decided in favour of the assessee.
Final Conclusion: The transfer pricing adjustment was reduced by exclusion of the two comparables, and the section 10A computation was required to be made on a consistent turnover formula, resulting in partial relief to the assessee.
Ratio Decidendi: For transfer pricing, high-end KPO or specialised engineering service providers are not functionally comparable to a low-end ITES provider; for section 10A, whatever is excluded from export turnover must also be excluded from total turnover to maintain parity in the statutory formula.
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