Facts of the Case

The assessee, M/s McKinsey Knowledge Centre India Pvt. Ltd., engaged in IT-enabled services (ITES), including research, information services, and IT support services, challenged the order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2011–12.

The dispute primarily revolved around transfer pricing adjustments and determination of Arm’s Length Price (ALP), including exclusion of certain comparables and treatment of receivables.

The assessee filed a review petition under Section 260A of the Income Tax Act, 1961, contending that the earlier High Court judgment contained errors apparent on record.

Issues Involved

  1. Whether interest on delayed receivables constitutes a separate international transaction under Section 92B.
  2. Whether the assessee’s services should be categorized as KPO (Knowledge Process Outsourcing) or BPO (Business Process Outsourcing) for transfer pricing comparability.
  3. Whether reliance on certain precedents and comparables was erroneous.
  4. Maintainability of the review petition after dismissal of Special Leave Petition (SLP) by the Supreme Court.

Petitioner’s Arguments (Assessee)

  • Interest on delayed receivables cannot be treated as a separate international transaction, especially since the Explanation to Section 92B applies prospectively from AY 2013–14.
  • The issue of receivables was not framed earlier by the Court, making the finding erroneous.
  • The assessee’s activities are akin to BPO services, not KPO; earlier judgments (AY 2006–07) had accepted this classification.
  • The Court failed to consider relevant precedents such as Ameriprise India Pvt. Ltd. case.
  • Incorrect reliance on Maersk Global Centres Special Bench decision, which had been disagreed with in Rampgreen Solutions Pvt. Ltd. case.

Respondent’s Arguments (Revenue)

  • The review petition is not maintainable as the assessee had already approached the Supreme Court.
  • Reliance placed on Khoday Distilleries Ltd. case to argue against review jurisdiction.
  • The High Court had already passed a reasoned judgment after considering all submissions, and no apparent error existed.

Court’s Findings / Order

  • Maintainability:
    The Court held that dismissal of an SLP by a non-speaking order does not bar review jurisdiction, relying on the principle laid down in Khoday Distilleries Ltd.
  • Interest on Receivables:
    The Court found an error in treating delayed receivables as a taxable adjustment, noting that the matter had earlier been remitted to ITAT for reconsideration.
  • KPO vs BPO Classification:
    The Court acknowledged errors in:
    • Treating the assessee as a KPO without proper analysis
    • Ignoring earlier binding judgment in assessee’s own case
    • Misapplication of Maersk Global ruling despite contrary view in Rampgreen
  • Comparables & Benchmarking:
    The Court held that functional comparability must be carefully examined, especially distinguishing KPO and BPO services.
  • Final Order:
    • Review Petition Allowed
    • Earlier judgment dated 09.08.2018 recalled
    • Appeals restored for fresh hearing on merits

Important Clarifications

  • Rejection of SLP does not invoke doctrine of merger unless it is a speaking order.
  • KPO and BPO cannot be treated as comparable without functional similarity.
  • Interest on receivables is not automatically an international transaction, especially for periods prior to statutory amendment.
  • Transfer pricing analysis must strictly follow Rule 10B(2) for comparability.

Sections Involved

  • Section 260A – Appeal to High Court
  • Section 92B – Definition of International Transaction
  • Section 92C – Arm’s Length Price
  • Rule 10B of Income Tax Rules, 1962 – Comparability Analysis

 Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:2173-DB/SRB16042019ITA4612017.pdf

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