KPO Services provider could not be a comparable for benchmarking international transactions entered into by an entity rendering BPO services

In a recent judgment, ITAT Delhi has held that Knowledge Process Outsourcing Services (KPO Services) provider could not be be considered as a comparable for benchmarking international transactions entered into by an entity rendering business process outsourcing (BPO) services including collections/call centre services and other back office support services for the customers 

Case Law Details:
ITA No.2024/Del/2014 Assessment Year : 2009-10
Genpact Services LLC (India Branch) vs. ADIT
Date of Judgment/Order: 12/04/2016

Issue involved:
Addition on account of transfer pricing adjustment made by the Assessing Officer based on his chosen omparable

Brief Facts of the Case:
The assessee was an Indian branch of Genpact Services LLC, a US Corporation. During the year under consideration, the assessee was involved in providing collections/call centre services and related back office support services, mainly for the customers of its associated enterprise (AE). The assessee was responsible for executing the collections/call centre services from such contacts from the facility in India. The assessee reported three international transactions in Form No. 3CEB including `Provision of services’. The assessee characterized itself as a routine BPO service provider assuming limited risks associated with carrying out such business adopting Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit level indicator (PLI) of Operating profit/total cost (OP/TC). On a reference by the AO, the Transfer Pricing Officer (TPO) took up determination of the arm’s length price (ALP) of these 3 international transactions. The TPO disputed correctness of the ALP of the international transaction of `Provision of services’. The TPO made certain alterations in the companies chosen by the assessee as comparable inasmuch as certain companies were excluded and certain new companies, including e-Clerx Services Ltd., were included. The assessee challenged the draft order, proposing addition towards the transfer pricing adjustment, before the Dispute Resolution Panel (DRP) and following DRP directions, the AO made addition of Rs.1,31,19,435/-

Before ITAT, the assessee company challenged the inclusion of e-Clerx Services Ltd. as comparables by the TPO.

Excerpts from ITAT Judgment:

The assessee primarily focuses on collections activity concentrating on the collections on the end customers businesses. In the collections area, the assessee follows processes that enhance its customers’ performance in relation to recovery of their debts. Above narration from the assessee’s TP study report along with the TPO’s order makes it manifest that the assessee is engaged in rendering BPO services which are in the nature of collections/call centres mainly for the customers of its AE, which position has not even been disputed by the TPO as well. 

From the above discussed nature of business carried on by eClerx Services Ltd., it is patent that the same being a KPO company, is quite different from the assessee, providing only IT enabled services to its AE, which fall in the realm of BPO services. Apart from that, it is further observed that this company has significant intangibles which it uses in rendering KPO services, against which the assessee does not have any intangibles. As such, e-Clerx Services Ltd. cannot be considered as comparable. 

The Hon’ble jurisdictional High Court in Rampgreen Solutions Pvt. Ltd. vs. CIT (2015) 279 CTR 441 (Del), has held that e-Clerx Services Ltd., being engaged in KPO, cannot be treated as comparable of an assessee engaged in rendering BPO services. In view of the direct judgment of the Hon’ble jurisdictional High Court on the point, we direct to eliminate e-Clerx from the list of comparables.

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