The Delhi High Court upheld the direction of the Income Tax Appellate Tribunal (ITAT) to exclude e-Clerx as comparable.
The respondent/assessee, Future First Info Services Ltd, challenged the Assessment Order by way of appeal before the Commissioner, Income Tax (Appeals). Vide order dated 18.11.2016, the CIT(A) partly allowed the appeal of the respondent/assessee, thereby directing the AO/TPO to re-compute the average PLI with final set of comparables, verify the disallowance related to rent expenses; and the addition pertaining to Section 40A(2)(b) of the Income Tax Act was deleted by CIT(A).
Both sides preferred appeal before the Tribunal. By way of the order dated 10.05.2021 impugned in the present appeal, the Tribunal dismissed the appeal filed by the revenue and partly allowed the appeal filed by the assessee. The Tribunal deleted the additions made by the Assessing Officer on account of rent expenditure as well as disallowance of payment made to persons covered under Section 40A(2)(b) of the Income Tax Act and upheld the exclusion of the comparables, namely Infosys BPO, Acropetal Technologies Limited and e-Clerx Services Limited.
On behalf of the appellant/revenue, it was contended that the respondent/assessee as well as e-Clerx being involved in Knowledge Process Outsourcing (KPOs), e-Clerx was wrongly excluded from comparison by the Tribunal. The counsel for appellant/revenue submitted that the decision of a co-ordinate bench of the court in the case of Rampgreen Solutions Pvt. Ltd. vs CIT, has been challenged before the Supreme Court so the same cannot be relied upon.
It was argued that for the purposes of Arms Length Pricing, the Tribunal instead of laying down stringent standards of comparability ought to have recognized that there cannot be an exact comparable with no difference in a given situation. It was also contended on behalf of appellant/revenue that the other two comparables namely Infosys BPO Ltd. and Acropetal Technologies Ltd. were recognized for being used in TNMM in the guidelines of Organization of Economic Cooperation & Development, so those also ought not to have been excluded by the Tribunal.
The counsel for respondent/assessee pointed out various differences between the respondent/assessee and e-Clerx as regards the structure and functionalities of the two entities. It was pointed out by the counsel for respondent/assessee that unlike e-Clerx, the primary function of the respondent/assessee is simply punching in data through freshly employed graduates with no trading experience, without even entering any market risk.
A Division Bench of Justices Rajiv Shakdher and Girish Kathpalia observed that “In contrast, as detailed above, the respondent/assessee has employed fresh young graduates, engaged in simply punching in the data. Another significant aspect is that e-Clerx carries out its substantial business on outsourcing model, which makes it different from the respondent/assessee. The high end KPO services provider cannot be compared with the ITeS, which fall under the category of BPO services provider.”
“Therefore, as regards rejection of e-Clerx as comparable in the present case, we find no error in the decision of the Tribunal” the Court noted.
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