The Income Tax Appellate Tribunal ( ITAT ), Mumbai bench directed to eliminate Eclerx from the final list of comparable chosen for benchmarking Knowledge process outsourcing ( KPO ) services.
The Assessee Crisil Limited has two business divisions namely (i) Ratings and (ii) Research. Under the Ratings segment, the Assessee is engaged in rendering back-end support for data analysis services to its associated enterprises through the Global Analytical Centre ( GAC ) which is the transaction under dispute.
The Assessee had undertaken, inter-alia, international transactions of provision of back-end support for data analysis services from the GAC to its associated enterprises for ₹.53,33,43,789/.The Assessee adopted the Transactional Net Margin Method to determine the arm’s length of the said international transactions.
In relation to this transaction, CRISIL had entered into a Master Services Agreement,with its associated enterprise, Standard & Poor (S&P), whereby S&P would outsource services to CRISIL in accordance with the Statement of Work ( SOW ). These services are provided by CRISIL based on inputs from S&P.
Depending upon the terms of each assignment agreed upon as per the SOW, CRISIL assigns their employees to provide services to S&P. These employees process the data and put them in appropriate structures/ form as required by CRISIL’s AE i.e., S&P. These services are akin to back-office data support services.
After filing the return of income, the assessor’s case was selected for scrutiny . A reference was made to the Transfer Pricing Officer to determine the Arm’s Length Price of the international transactions.
During the Transfer Pricing (TP) assessment proceedings, the Transfer Pricing Officer rejected the characterisation of routine service provider / back-office service provider ( BPO ) and observed that the Assessee is engaged in providing high-end Knowledge process outsourcing ( KPO ) services.
Consequently, rejected the study submitted by the assessee and he conducted a fresh search for comparables and proposed a final set of 6 companies which are engaged in provision of KPO Services like engineering and design services, financial analytical services etc. computing an arm’s length margin at 49.73% .
Thus, the TPO made a TP adjustment amounting to ₹9,03,88,556/- in relation to the international transaction of provision of back-end support for data analysis services.
Aggrieved by the order assesee filed an appeal before the Dispute Resolution Panel. The DRP upheld the order of the Transfer Pricing Officer and affirmed the Transfer Pricing addition. Thereafter the assessee filed an appeal before the tribunal.
During the adjudication Dhanesh Bafna, the counsel for assessee argued that assessee only provides back-end support services to S&P that enable S&P in its business operations, data analytics and financial modeling assignments. The role of the GAC is to be read in conjunction with the SOWs submitted on record which clearly demonstrate that the Appellant’s role is limited to providing services based on inputs, instructions and formats provided by S&P only.
Further with respect to the comparable chosen for benchmarking the transaction the assessee counsel argued that Eclerx is a Knowledge Processing Outsourcing company providing a unique blend of consulting services along with process outsourcing. It provides consulting services, devises innovative solutions for its clients and uses a scalable delivery model which makes it efficient and cheaper for them to deliver.
Therefore while considering the business of assessee who is engaged only in providing support services for financial data analysis and does not do consulting services or provide complete business solutions like that of Eclerx and therefore, Eclerx is functionally different than the assessee and therefore cannot be considered as a comparable to the assessee.
Vachashpati Tripathi, Department representatives objected to the submissions made by the assessee and submitted that Transfer Pricing Officer treated the assessee as a KPO not BPO. Further, he submitted that assessee itself has not submitted any document substantiating that assessee is BPO. Therefore the services offered by the assessee are high-end services, it is to be treated similar to that of KPO not as BPO.
It is observed by the tribunal that the Eclerx Services Ltd, was mainly engaged in providing high end services involving specialized knowledge and domain expertise in the field, thus, it could not be compared that the assessee before them which was mainly into providing of low-end services to its group concerns.
Therefore the bench comprising Aby T Varkey (Judicial Member) and S. Rifaur Rahman (Accountant Member) directed to eliminate Eclerx from the final list of comparable chosen for benchmarking KPO transactions.
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