The total amount of adjustment, along with the arm’s length price already reported by an assessee, cannot exceed the total amount of revenues earned by the assessee and its associated enterprises from third party customers.

Tribunal News

Geeta Jani
Dhishat B. Mehta
Chartered Accountants

Issues:

• The total amount of adjustment, along with
  the arm’s length price already reported by an assessee, cannot exceed the
  total amount of revenues earned by the assessee and its associated enterprises
  from third party customers.

• In undertaking a transfer pricing analysis,
  the least complex entity should be selected as the tested party. However,
  selecting an overseas entity as the tested party may not be appropriate;
  because it is difficult to obtain all relevant facts and data required for
  undertaking a proper analysis of functions, assets and risks (FAR) and making
  the requisite adjustments.

• Global Vantedge Pvt. Ltd.
  (GV), is an Indian company engaged in providing IT enabled services. RCS
  Centre Corp (RCS), a company incorporated in USA, is a customer of GV. GV and
  RCS are held by a common parent company and, hence, are associated enterprises
  (AE).

• RCS is engaged in the
  business of providing debt collection and telemarketing services to clients in
  USA. RCS contracts with third party customers in USA. In turn, RCS enters into
  contracts with GV which has the requisite infrastructure and capacity for
  providing the services which RCS has contracted to render to its customers.
  

• RCS retains 9.4% of the
  revenues earned from third party customers in USA and remits the balance 90.6%
  to GV. GV is also engaged in rendering services to other independent clients
  which constitute approximately 18% of its total revenue.

• GV selected RCS as the
  tested party for the purpose of TP analysis. The TPO rejected selection of RCS
  as the tested party by contending that it is difficult to benchmark an entity
  in overseas jurisdiction.

• The TPO selected GV as the
  tested party and by making a comparative analysis, he arrived at an average
  operating margin of 11.88%, as against the loss of 53.5% incurred by GV. As a
  result, GV was virtually assessed on revenue of Rs 101.1 as against the
  transaction value with RCS of Rs 90.8, and as against the billing of Rs 100
  raised by RCS on third party customers.

• Aggrieved, the assessee
  preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].
  Before the CIT(A), the assessee, inter-alia, contended that:

• Based
  on the contentions of the assessee, the CIT(A) held as follows: