High-End KPO Services Provider Can't Be Compared With ITeS, Which Is BPO Services Provider: Delhi High Court

The Delhi High Court has held that the high-end knowledge process outsourcing (KPO) services provider cannot be compared with the information technology-enabled services (ITeS), which fall under the category of BPO services provider.

The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia has observed that eClerx focuses on automation and process re-engineering in order to eliminate wasteful steps and automate repetitive ones so as to minimize the need for human intervention and present their clients with cost savings that exceed those from simple wage arbitrage, which in turn reduces the need for costly, highly skilled resources and gives it the ability to scale solutions quickly, both for existing clients and also for new ones. In contrast, the assessee has employed fresh graduates, engaged in simply punching in the data. Another significant aspect is that e-Clerx carries out its substantial business on an outsourcing model, which makes it different from the assessee.

The respondent/assessee, being a subsidiary of GHF Holdings Ltd., Mauritius, is engaged in providing information technology-enabled services (ITeS) to its associated enterprise (AE) through online software, live information services, and research on international databases.

On September 18, 2009, the assessee filed its return of income, declaring its income as Rs. 8,34,16,421. The case having been selected for scrutiny, a notice under Section 143(2) of the Income Tax Act was issued.

The Transfer Pricing Office (TPO) benchmarked the transaction of the assessee using the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Operating Profit to Operating Cost (OP/OC) with nine comparables and a margin of 22.72%. The TPO proposed an adjustment of Rs. 3,42,98,762.

The draft assessment order was passed by the Assessing Officer, incorporating the addition on account of the Arm's Length Price (ALP) determined by the Assessing Officer besides the additions, namely, disallowance of rent paid by the assessee without deducting TDS and payment made to the person specified under Section 40A(2)(b).

The assessee challenged the assessment order by way of appeal before the Commissioner of Income Tax (Appeals). The CIT(A) partly allowed the appeal of the respondent/assessee by directing the AO/TPO to re-compute the average PLI with a final set of comparables to verify the disallowance related to rent expenses. The addition pertaining to Section 40A(2)(b) was deleted by CIT (A).

The Tribunal deleted the additions made by the Assessing Officer on account of rent expenditure as well as the disallowance of payments made to persons covered under Section 40A(2)(b). The tribunal upheld the exclusion of the comparables, namely Infosys BPO, Acropetal Technologies Limited, and e-Clerx Services Limited.

The department contended that the assessee, as well as e-Clerx being involved in KPOs, was wrongly excluded from comparison by the Tribunal.

The assessee pointed out various differences between the respondent/assessee and e-Clerx as regards the structure and functionalities of the two entities. Unlike e-Clerx, the primary function of the respondent or assessee is simply punching in data from freshly employed graduates with no trading experience without even entering any market risk. The distinction between a BPO and a KPO is a vital aspect in the present case to keep in mind.

The court held that where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered comparable for the purposes of transfer pricing analysis.

Counsel For Petitioner: Vipul Agrawal

Counsel For Respondent: Ananya Kapoor

Case Title: PCIT Versus Future First Info. Services Pvt. Ltd.

Citation: 2023 LiveLaw (Del) 1301

Case No.: ITA 56/2022

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