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 assessee. This decision led to the adjustment of the Arm's Length Price (ALP) in favor of the assessee. The Tribunal did not address the inclusion of R Systems International as a comparable, considering it academic. The appeal filed by the assessee was allowed, and the Revenue's appeal was dismissed. The order was pronounced on January 23, 2019.

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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.

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