2019 (1) TMI 1904 - AT - Income Tax

Tribunal Excludes Eclerx from Comparables List, Adjusts Arm's Length Price Favorably for Assessee in 2019 Ruling.

The Tribunal ruled that Eclerx Services Limited should be excluded from the list of comparables due to significant functional differences with the ... TP Adjustment - whether the assessee is a BPO or a KPO? - Eclex Solutions Limited exclusion - HELD THAT:- We feel there is no need to address the preliminary issue as to whether the assessee is a BPO or KPO. We find that the ld.AR was very fair in stating that once the comparable Eclex is excluded from the list of comparables chosen by the ld. TPO, then its margin would be through, warranting no adjustment to ALP in respect of international transaction carried out by it. Hence, we proceed to address that particular comparable alone in this order. Outsourcing activity in one company which is done predominantly cannot be treated as a comparable with the company which is engaged in carrying out its activity in-house. These facts were duly brought as a specific objection by the assessee before the ld. TPO as well as ld. DRP as detailed elsewhere hereinabove in this order by way of written submissions. Hence, it cannot be said that the assessee had made this objection for the first time before this Tribunal. We also find that the objections made by the assessee with regard to this comparable namely Eclex Solutions Limited had not been disputed by the ld. TPO or by the ld. DRP by pointing out certain factual differences in the objections of the assessee, more particularly, with regard to the predominant activity carried on by the said comparable. We hold that Eclerx Solutions Limited should not be treated as a comparable as it is functionally different and we direct the ld. TPO to exclude the same from the list of comparables while benchmarking the international transactions for determination of Arm’s Length Price, for this assessment year. We would like to make it clear that the grounds raised by the assessee with regard to other comparables are left open and no opinion is given by us in this order. Accordingly, the grounds raised by the assessee are allowed. Issues Involved:1. Adjustment to Arm's Length Price (ALP) by the Transfer Pricing Officer (TPO).2. Selection of comparables for benchmarking international transactions.3. Classification of the assessee as a Business Process Outsourcing (BPO) or Knowledge Process Outsourcing (KPO) entity.4. Exclusion of Eclerx Services Limited from the list of comparables.5. Inclusion of R Systems International as a comparable.Detailed Analysis:1. Adjustment to Arm's Length Price (ALP):The assessee disputed the adjustment made to the ALP by the TPO, which was upheld by the Dispute Resolution Panel (DRP). The primary contention was the selection of comparables used for benchmarking international transactions.2. Selection of Comparables:The assessee challenged the selection of various comparables by the TPO. The Revenue also appealed against the DRP's direction to include R Systems International as one of the comparables. The assessee's representative argued for the exclusion of Eclerx Services Limited from the list of comparables, asserting that if this exclusion was accepted, the assessee’s margin would be at ALP, making other grounds academic.3. Classification as BPO or KPO:The TPO classified the assessee as a KPO based on its activities, consistent with previous assessment years. The assessee contended that it provided only ITES services and should not be considered a KPO. The TPO rejected this contention, selecting comparables from the KPO industry for benchmarking.4. Exclusion of Eclerx Services Limited:The assessee argued that Eclerx Services Limited should be excluded from the comparables for several reasons:- Eclerx predominantly engages in outsourcing activities, whereas the assessee has its own infrastructure.- Eclerx's services, such as data analytics, are more value-adding and high-end compared to the ITES services provided by the assessee.- Eclerx's standalone turnover includes its subsidiaries, making its data unreliable.- Eclerx had extraordinary events during the year, such as winding up a subsidiary, affecting its operations.- The workforce structure and salary costs of Eclerx are significantly different from the assessee's.The Tribunal found merit in the assessee's arguments, noting that Eclerx's activities and business model were significantly different from the assessee's. The Tribunal referenced several judicial precedents where Eclerx was excluded as a comparable for similar reasons.5. Inclusion of R Systems International:The Revenue's appeal contested the DRP's direction to include R Systems International as a comparable. However, the Tribunal refrained from ruling on this issue, deeming it academic in light of the decision to exclude Eclerx Services Limited.Conclusion:The Tribunal concluded that Eclerx Services Limited should not be treated as a comparable due to its functional differences and directed the TPO to exclude it from the list of comparables for determining the ALP. The Tribunal left open the grounds raised by the assessee regarding other comparables, providing no opinion on them. Consequently, the appeal filed by the assessee was allowed, and the Revenue's appeal was dismissed.Order Pronouncement:The order was pronounced on January 23, 2019.