2023 (10) TMI 1132 - AT - Income Tax

Eclerx Services Limited excluded from comparable companies for determining Arm's Length Price in transfer pricing case

H And S Software Development and Knowledge Management Centre Private Limited Versus Income Tax Officer Ward-11 (1) New Delhi

ITAT Delhi excluded Eclerx Services Limited from comparable companies for determining Arm's Length Price in transfer pricing adjustment case. The assessee ... TP Adjustment - exclusion of Eclerx Services Limited from the set of comparable companies while determining Arm’s Length Price (ALP) - HELD THAT:- Assessee is rendering back office support service to its AE. There is no change in the services performed by the assessee right from the AY 2007-08 onwards. We find that this Tribunal in assessee’s own case for AY 2007-08 [2017 (1) TMI 1546 - ITAT DELHI] had excluded Eclerx from the list of comparable companies as functionally not comparable with the assessee. Hence, we direct the Ld. AO to exclude Eclerx Service Limited from the final list of comparables while determining the ALP of International Transactions of the assessee. Accordingly, Ground raised by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a particular third-party entity (Eclerx Services Limited) should be excluded from the final set of comparables used to determine the Arm's Length Price (ALP) for international transactions of the assessee, on the ground of functional dissimilarity. 2. Whether prior Tribunal findings (including the assessee's own earlier years and coordinate-bench decisions) on functional comparability and classification of the third party as a KPO versus a routine back-office/ITES provider are binding or persuasive for the present assessment year. 3. Whether the nature of services actually performed by the assessee (back-office support for maintenance of a proprietary database/Search Palace and related research/QA functions) renders the third party non-comparable for transfer pricing benchmarking. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Exclusion of the third-party from comparables on ground of functional dissimilarity Legal framework: ALP determination requires testing comparability of potential comparable companies by examining functional profile, risk profile and nature of services performed. Functional comparability is a core factor in applying the arm's length principle for related-party transactions. Precedent Treatment: The Tribunal relied on its earlier decision in the assessee's own case for an earlier assessment year where Eclerx was excluded as functionally dissimilar, and on a coordinate-bench examination in a related case (Copal Research) that characterized Eclerx as primarily a knowledge process outsourcing (KPO)/data analytics provider rather than a routine service provider. Interpretation and reasoning: The Court examined the assessee's documented activities - database support, database associates, quality assurance, research (executive identification and business development research), and administration - and concluded these constitute back-office support with limited risk and routine processing based on pre-defined coding and strict operational protocols tied to the AE's proprietary Search Palace. By contrast, the third party's published profile and submissions under statutory enquiry portray it as providing high-end services: data analytics, operations management, reconciliation, process reengineering, automation, domain expertise and scalable solutions aimed at reducing client risk and increasing client revenue. Ratio vs. Obiter: The finding that functional dissimilarity warrants exclusion of the third party is treated as ratio decidendi with direct application to the ALP benchmarking exercise for the assessment year in question. Reliance on earlier similar exclusions in the assessee's cases is central, not obiter. Conclusions: The Tribunal concluded that the third party is not functionally comparable with the assessee (which performs low-end, routine back-office activities supporting an AE's proprietary intangible) and thus must be excluded from the final set of comparables for ALP determination. Ground allowing exclusion is upheld. Issue 2 - Reliance on prior Tribunal/coordinate-bench decisions Legal framework: Consistency and precedential value of earlier Tribunal findings are relevant in transfer pricing comparability assessments, particularly where factual and functional profiles are substantially similar across assessment years. Precedent Treatment: The Tribunal expressly referred to and followed its prior orders in the assessee's own case for AY 2007-08 and other subsequent years (2008-09, 2009-10 & 2011-12) where Eclerx had been excluded, and to a coordinate-bench decision in Copal Research that analyzed Eclerx's public profile and functional attributes. Interpretation and reasoning: The Tribunal found material continuity: the assessee's service profile remained unchanged from AY 2007-08 onwards and prior adjudications had already examined and determined Eclerx's functional profile as a KPO providing high-end specialised services. Given the similar factual matrix and identical comparability issue, earlier findings were treated as directly persuasive and followed rather than distinguished or overruled. Ratio vs. Obiter: The Tribunal's reliance on and application of its prior rulings formed part of the ratio for excluding the third party in the present appeal; it is not obiter commentary. Conclusions: Prior Tribunal and coordinate-bench decisions were followed; they supported and were determinative of the conclusion that the third party should be excluded from the comparable set. Issue 3 - Characterization of the assessee's services and its effect on comparability Legal framework: Functional analysis for comparability examines the nature of functions performed, assets used (including proprietary intangibles), and risks borne. A service provider that performs routine, process-driven support with limited risk is functionally distinct from an entity providing specialised, high-value knowledge-based services. Precedent Treatment: The Tribunal applied the established approach of comparing functional profiles rather than merely industry labels; it accepted that differences in service complexity, domain expertise, and value-added (e.g., analytics, automation) are determinative for comparability. Interpretation and reasoning: The assessee was found to perform tasks limited to data entry, coding under preset criteria, quality assurance to eliminate duplication, and routine research for inclusion into the AE's proprietary database; the AE retained ownership and control of relevant intangibles. These features indicate low risk and routine processing. The third party, conversely, had a functional profile of domain specialists, analytics, automation tools and process improvement aimed at strategic outcomes for clients. Such qualitative differences in functions and risks render the third party an inappropriate benchmark. Ratio vs. Obiter: The characterization of the assessee's functions and the consequent conclusion about non-comparability is part of the ratio underpinning the Tribunal's order to exclude the third party. Conclusions: Because the assessee's services are routine back-office support tied to an AE's proprietary intangible and involve minimal risk, while the third party provides high-end KPO/data analytics and value-added solutions, the third party is functionally dissimilar and must be excluded from comparables. Remedial Direction and Scope Interpretation and reasoning: The Tribunal recalled its prior order for the limited purpose of adjudicating the excluded ground and expressly directed the Assessing Officer to exclude the third party from the final list of comparables when determining ALP for the relevant assessment year. The order is to be read as part of the earlier comprehensive Tribunal order for that assessment year. Conclusions: The Tribunal allowed the specific ground seeking exclusion and directed the Assessing Officer to implement exclusion for ALP benchmarking; the direction is operative and binding for the assessment year under adjudication and follows precedent applied to other assessment years.