2021 (2) TMI 538 - AT - Income Tax

TP Adjustment - Comparable selection - action of AO/TPO for selecting companies as comparables without considering their functions undertaken and picking the high margin companies by applying arbitrary filters - main contention of Ld. AR is that Eclerx Services Ltd. is functionally not comparable to the functions of assessee - HELD THAT - There is no dispute regarding exclusion of Eclerx Services Ltd. by this Tribunal in assessee's own case in A.Y. 2011-12 2020 (8) TMI 441 - ITAT PUNE There is no dispute regarding exclusion of Eclerx Services Ltd. by this Tribunal in assessee's own case in A.Y. 2011-12 Eclerx Services Ltd. shall be excluded from the set of comparables and the AO/TPO is directed to determine the arm's length price for the purpose of benchmarking of international transactions in design engineering services segment. Thus, the final assessment order in this regard is set aside and the ground raised by the assessee are allowed.

Summary

Issues Involved:
1. Selection of comparables by AO/TPO.
2. Functional comparability of Eclerx Services Ltd.

Issue-wise Detailed Analysis:

1. Selection of comparables by AO/TPO:
The assessee, engaged in the business of design, development, and manufacturing of automotive parts, contested the selection of comparables by the AO/TPO. The AO/TPO rejected several companies initially selected by the assessee and included others based on certain filters and criteria. The assessee argued that the AO/TPO applied arbitrary filters and selected high-margin companies without considering the functional comparability.

2. Functional comparability of Eclerx Services Ltd.:
The primary contention revolved around the inclusion of Eclerx Services Ltd. as a comparable. The assessee argued that Eclerx Services Ltd. is engaged in providing data analytics and process solutions, which are functionally different from the engineering design support services provided by the assessee. The TPO and DRP, however, considered Eclerx Services Ltd. as a Knowledge Process Outsourcing (KPO) service provider, similar to the assessee's services, and included it as a comparable.

The Tribunal examined the functional dissimilarity of Eclerx Services Ltd. with the assessee. It was noted that Eclerx Services Ltd. operates in banking and financial services, digital marketing, and cable and telecom business, which are different from the engineering design services provided by the assessee. The Tribunal also referred to its previous judgments, including the case of MACOM Technology Solutions (India) Limited, where Eclerx Services Ltd. was excluded from the list of comparables due to functional dissimilarity.

The Tribunal concluded that Eclerx Services Ltd. should be excluded from the set of comparables for the assessment year under consideration, as the facts and circumstances were similar to the earlier assessment years where Eclerx Services Ltd. was excluded.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO/TPO to exclude Eclerx Services Ltd. from the set of comparables and to determine the arm's length price for the benchmarking of international transactions in the design engineering services segment accordingly. The final assessment order was set aside, and the grounds raised by the assessee were allowed. The order was pronounced in the open court on 05th February 2021.