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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI S. V. MEHROTRA & MS. SUCHITRA KAMBLE
ORDER PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against the order dated 23/11/2015 for A.Y. 2011-12 passed under Section 143(2) read with Section 144C of the Income Tax Act, 1961.
Exl SEZ was incorporated in India as a private limited company in January 2009 and is a subsidiary of Exl Service Mauritius Limited which is a subsidiary of Exl Holdings Inc. through ExlService.com LLC (earlier known as ExlService.com Inc.).
During FY 2010-11, the assessee was engaged in providing back- office Information Technology (“IT”) enabled services to its associated enterprises (“AE”). For rendering these services, the assessee was remunerated on an arm’s length cost plus basis i.e. it was compensated for all its operating costs, plus a pre-agreed mark-up thereon. As per assessee, in operating as a contract service provider for Group Companies and in being compensated on a cost plus revenue model basis, the assessee is completely shielded from risks such as cost variance/cost escalation risk (which arises on account of variations between actual costs and budgeted costs), rework/corrections risk (which is the risk of having to perform non- billable rework), price risk (which arises as a result of pricing and cost pressures in the market, and thereby adversely impacts profitability) and capacity utilization risk (which arises on account of under-utilization of service facilities/personnel or ideal capacity). The assessee further submitted before the AO that , since the assessee’s customers are Group Companies only, and since Group Companies undertake all the marketing and business development functions overseas, with no involvement of the assessee, it is also shielded from other critical risks such as credit risk/debt collection risk and market risk. The assessee filed electronic return declaring income of Rs. 4,91,769/- on November 29, 2011 for the AY in consideration.
The TP study report prepared for the FY 2010-11 satisfied the requirements prescribed under Rule 10D(1) of the Income-tax Rule, 1962 and complied with the contemporaneous documentation requirements of Rule 10D(4). The TP study report used multiple year data in accordance with Rule 10B(4) of the Rules and the OECD guidelines. The said data shows that the international transactions were at arm’s length in accordance with the Indian TP Regulations.
During the course of the TP assessment proceedings, the assessee filed detailed submissions with explanations for the approach followed in the TP study report and provided evidences and workings as requested by the TPO. The TPO selected 9 companies as comparables comprising of entrepreneurial companies earning high mark-up, engaged in provision of diversified activities including high end KPO services and/or owning software products/intangibles. In doing so, the TPO determined an adjustment of Rs. 13,67,51,320/- to the income of the assessee.
The assessee filed an appeal before the Dispute Resolution Panel (DRP) against the draft assessment order. The DRP allowed the working capital adjustment and directed the TPO to re-work the operating margins keeping in view the Safe Harbour Rules for treatment of expenses as operating/non-operating. The TPO vide order dated January 15, 2016, giving effect to DRP’s directions, determined OP/TC mark-up of 23.73% as arm’s length mark up and consequently revised TP adjustment of Rs. 4,99,34,460/-. Considering the said adjustment, the AO passed the final assessment order dated January 21, 2016. Further, the DRP while framing its directions u/s 144C, inadvertently missed adjudication on one of the specific grounds of the assessee, with respect to allowing adjustment on account of higher rates of depreciation charged by the assessee as compared to comparables, while computing the margin of comparables. In this regard, the assessee field an application with the DRP requesting adjudication for the same and grant appropriate adjustment to the assessee. The DRP vide directions dated April 22, 2016 directed the TPO to allow suitable adjustment to the profits of comparable keeping in view the higher rate of depreciation charged by the assessee and retain the PLI as OP/TC. The TPO passed the revised order giving effect to the DRP’s directions, determined the ALP as 15.58%. Consequently, the TPO revised the TP adjustment to Rs. 25,598,271.
The assessee filed the present appeal before us.
The Ld. AR submits that the companies engaged in KPO activities cannot be compared with a low end BPO service provider as the assessee is primarily engaged in rendering BPO services in the nature of claims processing, finance and accounting and customer service for the customers of its AE. The Ld. AR pointed out the functional difference that Eclerx is engaged in the business of providing knowledge process outsourcing (KPO) services. It is engaged in providing business/data analytics and data process solution to the customers. The company provides data analytics services wherein it collates raw data and analyse such data with the purpose of drawing conclusions about the information. It provides end-to-end support through the trade lifecycle, including trade confirmation, settlements, transaction maintenance, risk analytics and reporting. Further, under Sales and Marketing services, Eclerx provides web content management & merchandising execution, web analytics, social media moderation and analytics, search engine analytics & support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price & catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting. It is very evident that these services are a mix of research, advice and operation management. Hence, in view of the same, the Ld. AR submitted that the data analytics services being provided by Eclerx is more value adding and high end in nature than the routine IT enabled back office support service functions being performed by the assessee. The Ld. AR relied upon the Hon’ble Delhi High Court judgment in case of Rampgreen Solutions Private Limited vs. CIT (TS-387-HC- 2015(DEL)-TP), wherein the Hon’ble High Court adjudicated the principal question of “whether a KPO Service provider could be considered as a comparable for benchmarking international transactions entered into by an entity rendering voice call service.” While adjudicating upon this issue, the Hon’ble Jurisdictional High Court acknowledged that voice call services are considered to be the lower-end of ITeS whereas KPO on the other hand includes involvement of advance skills wherein the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management etc. The Ld. AR also relied upon the Delhi ITAT ruling in the case of Genpact Services LLC Vs. ADIT (ITA No. 2024/DEL/2014), wherein the Tribunal acknowledging the fact that Eclerx being a KPO company cannot be compared to assessee providing only IT enabled services to its AE and relying on Hon’ble High Court ruling in the case of Rampgreen Solutions (supra), directed exclusion of Eclerx from the list of comparables. The Ld. AR also relied upon the decision of assessee’s group companies namely, ExlService.com (India) Private Limited vs. DCIT (ITA No. 5182/DEL/2010 & 5174/DEL/2011) for one of the preceding years i.e. AY 2007-08 which is also engaged in same/similar activities as the assessee. The Tribunal in its order had directed to verify the functional comparability of Eclerx Services Limited in light of decision in the case of Special Bench in Maersk Global Centres (India) Private Limited, and Hon’ble Delhi High Court decision in case of Rampgreen Solutions Private Limited vs. CIT (ITA No. 102/2015) and exclude the aforementioned company from the final set of comparables considered for the purpose of benchmarking analysis. Since, the functions performed by the assessee are similar to the Group company, following the principle of functional comparability, e-Clerx ought to be rejected in assessee’s case as well.
The Ld. AR submitted that Ground No.2 is not pressed by him. As per the Delhi High Court judgment in the case of Rampgreen Solutions Private Limited, e-Clerx & Genpact Services LLC has to be excluded.
The Ld. DR submitted that the decision in case of Rampgreen Solutions Private Limited was not available before the TPO.
The Ld. AR submitted that TPO has not challenged the functionality of the e-Clerx and Genpact Services LLC as set out in Page No. 191 of the paper book.
We have heard both the parties and perused the documents pointed out by the parties. As relates to ground no. 2 the same is not pressed by the assessee, hence dismissed. The Ld. DR submitted that the decision of Rampgreen Solutions was not available before the TPO. The Ld. AR submitted that the ITAT decision in one of the group company of the assessee, ExlService.com (India) Private Limited vs. DCIT (ITA No. 5182/DEL/2010 & 5174/DEL/2011) for one of the preceding years i.e. AY 2007-08 which is also engaged in same/similar activities as the assessee. The Tribunal in its order had directed to verify the functional comparability of Eclerx Services Limited in light of decision in the case of Special Bench in Maersk Global Centres (India) Private Limited, and Hon’ble Delhi High Court decision in case of Rampgreen Solutions Private Limited vs. CIT (ITA No. 102/2015) and exclude the aforementioned company from the final set of comparables considered for the purpose of benchmarking analysis. Since, the Assessing Officer/Transfer Pricing Officer has not considered the Hon’ble Delhi High Court judgment in case of Rampgreen Solutions Limited, it is proper to remand back this matter to the file of AO/TPO to verify the functional comparability of Eclerx Services Limited and other comparables. Under the given circumstances, we are of the considered opinion that the ends of justice would meet adequately, if the impugned order is set aside and the matter is restored to the file of the AO for deciding these issues afresh as per law. We order accordingly. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh assessment proceedings.
In result, appeal of the assessee is partly allowed for statistical purpose. Order pronounced in Open Court on 23/01/2017.