Tax Alert which summarizes a recent decision of the Special Bench of the Mumbai Income-tax Appellate Tribunal (SB) in the case of Maersk Global Centres (India) Private Limited [Taxpayer] for financial year ended 31 March 2008 reported in TS-74-ITAT-2014 (Mum)-TP. The Taxpayer is a provider of information technology enabled services (ITeS) such as transaction processing, data entry and information technology (IT) services such as process support/ optimization and technical support services to its Associated Enterprises (AEs). The Taxpayer’s transfer pricing (TP) documentation supported that its international transactions were at arm’s length using the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) rejected the TP documentation and made an adjustment by treating the activities of the Taxpayer to be in the nature of Knowledge Process Outsourcing (KPO) services instead of Business Process Outsourcing (BPO) services.
The main issue before the SB was whether for purpose of comparability analysis, there is a requirement to further segregate ITeS into BPO and KPO services? The SB, while approving TNMM as the most appropriate method (MAM), and considering the gamut of services provided by companies in the ITeS sector, ruled that there is no requirement to further segregate ITeS into BPO and KPO activities. The SB also ruled that comparables having abnormally high profits need not be eliminated at the threshold, but should trigger further investigation to ascertain whether such trends reflect normal business conditions or not. Where a high profit margin making entity does not satisfy comparability criteria or the same does not reflect normal business conditions, then such entity needs to be excluded from the comparability analysis.
Globalization has led many multinational enterprises to establish information technology and back office operations in India. Such centers have faced significant TP controversy relating to comparability analysis. The process followed to identify potential comparables is an important aspect of the comparability analysis. The choice of selection criteria has a significant influence on the outcome of the analysis and should, therefore, reflect the most meaningful economic characteristics of the subject transactions. The approach adopted by the tax authority in selection of comparable data has generally been a contentious issue in most TP controversies.
The SB rejects a broad brush distinction between BPO and KPO services while undertaking a comparability analysis for provision of outsourced services. At the same time, the SB recognizes that a wide set of potential comparables that operate in the same sector of activity and perform similar broad functions may need to be further refined using qualitative criteria having regard to facts and circumstances. This ruling, with clear emphasis on the functional aspect of comparability analysis, provides guidance on a number of issues that taxpayers as well as tax authorities face while undertaking a TP analysis for such transactions, especially with regard to the approach in selection of comparable companies. The ruling also provides guidance on comparability considerations when potential comparables demonstrate abnormally high profit results.
Taxpayers should therefore appropriately consider the impact this ruling could have on their intercompany TP arrangements.
The main issue before the SB was whether for purpose of comparability analysis, there is a requirement to further segregate ITeS into BPO and KPO services? The SB, while approving TNMM as the most appropriate method (MAM), and considering the gamut of services provided by companies in the ITeS sector, ruled that there is no requirement to further segregate ITeS into BPO and KPO activities. The SB also ruled that comparables having abnormally high profits need not be eliminated at the threshold, but should trigger further investigation to ascertain whether such trends reflect normal business conditions or not. Where a high profit margin making entity does not satisfy comparability criteria or the same does not reflect normal business conditions, then such entity needs to be excluded from the comparability analysis.
Globalization has led many multinational enterprises to establish information technology and back office operations in India. Such centers have faced significant TP controversy relating to comparability analysis. The process followed to identify potential comparables is an important aspect of the comparability analysis. The choice of selection criteria has a significant influence on the outcome of the analysis and should, therefore, reflect the most meaningful economic characteristics of the subject transactions. The approach adopted by the tax authority in selection of comparable data has generally been a contentious issue in most TP controversies.
The SB rejects a broad brush distinction between BPO and KPO services while undertaking a comparability analysis for provision of outsourced services. At the same time, the SB recognizes that a wide set of potential comparables that operate in the same sector of activity and perform similar broad functions may need to be further refined using qualitative criteria having regard to facts and circumstances. This ruling, with clear emphasis on the functional aspect of comparability analysis, provides guidance on a number of issues that taxpayers as well as tax authorities face while undertaking a TP analysis for such transactions, especially with regard to the approach in selection of comparable companies. The ruling also provides guidance on comparability considerations when potential comparables demonstrate abnormally high profit results.
Taxpayers should therefore appropriately consider the impact this ruling could have on their intercompany TP arrangements.
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