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Case Law Details

Case Name : The DCIT Vs M/s. 3 Global Services Pvt. Ltd. (ITAT Mumbai)
Appeal Number : ITA No. 1812/Mum/2009
Date of Judgement/Order : 18/02/2010
Related Assessment Year : 2004- 05

Facts:- The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has recently pronounced its ruling on an appeal originating from a transfer pricing adjustment imposed on 3 Global Services Private Limited (“assessee”).

The assessee operates in the voice based customer care segment within the IT-enabled services (ITeS) industry. During financial year 2003-04, the assessee rendered services to its associated enterprises (“AEs”). The Comparable Uncontrolled Price (CUP) method was selected as the most appropriate method to justify the arm’s length result of transactions with its AE. In order to apply the CUP method, the assessee relied on hourly rates of “Customer Care” segment as published by NASSCOM and a report prepared by M/s Batliwala & Karani Securities Pvt. Ltd.

During the course of assessment proceedings, the transfer pricing officer (TPO) rejected the CUP method selected by the assessee and chose the Transactional Net Margin Method (TNMM) as the most appropriate method for evaluating the international transaction. The TPO selected five companies for comparability purposes which operate in various segments, viz, KPO, content development, data conversion, software etc. These segments differ in essence from the voice based customer care segment to which the assessee belongs. The TPO computed the average margin of five companies at 6.28% resulting in an upward adjustment of Rs 6.73 crore to the income of the assessee. The AO passed the final order in conformity with the order of the TPO.

Proceedings before CIT(A)

Aggrieved by the order of the TPO/AO, the assessee preferred an appeal before CIT (A). The assessee contended that per hour rate relied upon by it relates specifically to voice-based ITeS services hence are comparable. Further, third-party transactions are priced on the basis of hourly rates and not as a percentage of costs. On the technicalities of the transfer pricing analysis, the assessee appealed that the usage of TNMM as the most appropriate method is not justifiable in view of availability of CUP which has not been rebutted by TPO. Further, the set of companies considered by the TPO/AO for arriving at the at arm’s length price under TNMM are not comparable given functional differences and erroneous margin computation by the TPO.

Ruling of CIT (Appeals)

The CIT (A) upheld the conclusions reached by the assessee and observed:

  • Per hour rate of customer care segment as reported by NASSCOM is based on actual billing rates offered by a member of independent enterprise and therefore the rate represent the arithmetic average of comparable uncontrolled rates.
  • Per hour rate of specific companies engaged in voice based services sector, as per Batliwala Karani Securities (I) Pvt. Ltd., ranges between $10 to $13 whereas appellant’s per hour rate is $13.09 which is within the arm’s length rage. Therefore, CUP method is justified in this case
  • The companies selected by the TPO are functionally different from assessee as these are not from voice?
    based BPO services segment. Hence such companies are not comparable while applying the TNMM;
  • Even if the CUP is not applied, the appellant has generated reasonable amount of profit.

Ruling of the ITAT

Aggrieved by the decision, the revenue appealed before the ITAT, Mumbai Bench. The ITAT passed its order in conformity with the order of the CIT(A) and observed that:

  • The specific rates provided by the NASSCOM report, are specific to voice-based ITeS services segment under which the assessee falls;
  • Billing rate per hour of the assessee is in line with the man hour rate prevalent in the industry;
  • The companies selected by the TPO are not comparable as they operate in a segment different from that of the assessee; and
  • Computation of the average margin of companies selected by the TPO are incorrect and hence cannot be relied upon

In these circumstances, the CUP method as followed by the assessee is the most appropriate method.


The ruling emphasises that per hour rate of a specific sub segment of ITeS industry may be considered as CUP provided the assessee applying such rate belongs to the specific sub segment. Further, companies which operate in a different segment of the industry cannot be selected as com parables for application of TNMM.

It is important to bear in mind that in an earlier ruling by Bangalore ITAT in case of Aztec Software & Technology Service Ltd its was held that average per hour rate given by NASSCOM cannot be considered as it is an average of transactions quite different in nature and content than the taxpayer. OECD’s transfer pricing guidelines also asserts that unadjusted industry average rate should not be considered as CUP.

(Source: DCIT Vs. M/s 3 Global Services Pvt. Ltd. ITA No. 1812/Mum/09)

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