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:
