March 2010
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.
By Geeta Jani, Dhishat B. Mehta
Reading Time 4 mins
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Tribunal News
Part C — Tribunal & AAR International Tax Decisions
Geeta Jani
Dhishat B. Mehta
Chartered Accountants
21 DCIT vs Global Vantedge Pvt. Ltd.
2010-TIOL-24-ITAT-DEL
Section 92
Dated: 17.12.2009
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.
Facts:
-
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:
(a) The least complex entity (RCS in the present
case) needs to be selected as a tested party for the purpose of carrying out
transfer pricing analysis because a simpler party requires fewer and more
reliable adjustments to be made to its operating margins.
(b) Without prejudice, the adjustment to the transfer price
between the AE and the taxpayer cannot be more than the revenue earned by the
group from independent third parties. Also, the transfer price needs to be
determined after excluding a fair remuneration payable to the AE, from the
revenue earned from third parties.
(a) The least complex entity should be selected as a tested
party.
(b) However, selection of RCS as a tested party and
consequent use of international comparables would be inappropriate, as it is
difficult to benchmark ALP in different jurisdictions on account of the
differences in facts and circumstances in each geographical area.
(c) The total amount of adjustment along with the arm’s
length price already reported by the assessee cannot exceed the total revenue
earned by the assessee and its associated enterprise from dealing with third
party clients.
(d) Also, the ALP of the assessee in the present case
cannot be 100% of revenues earned from third party customers. RCS was
admittedly rendering market support for which it was entitled to a fair
consideration.
(e) ALP remuneration of RCS was determined @1.4% by
adopting a report issued by the Information and Credit Rating Agency of India
Limited (ICRA report) on marketing expenses in the BPO industry.
(f) The balance 98.6% (100 – 1.4) of the revenues was held
to represent an arm’s length price between GV and RCS.
Held:
The ITAT upheld the order of the CIT(A) as neither GV nor the
tax authority was able to controvert the its findings.
