In the case of 3 Global Services (DCIT v. M/s. 3 Global Services Pvt. Ltd. (ITA No. 1812 / MUM/ 2009), the tribunal upheld hourly rate billing information published by National Association of Software Companies (NASSCOM) as an acceptable external comparable uncontrolled price (CUP) for benchmarking the international transaction of provision of certain IT enabled services.

The taxpayer is an Indian company engaged in the business of provision of IT enabled services. During assessment year 2004-2005, it provided voice based customer care services to its associated enterprises (AEs) and benchmarked this international transaction using external CUP data. The industry hourly rates published by NASSCOM specifically for voice based customer care services were compared with the hourly rate earned by the taxpayer from the services rendered. These transfer prices were also supported by providing comparable uncontrolled data as reported by M/s. Batliwala & Karani Securities (giving hourly rates of three independent companies engaged in voice based services).

During the transfer pricing audit proceedings, the transfer pricing officer (TPO) applied the transactional net margin method (TNMM) for benchmarking the international transactions without rebutting the CUP adopted by the taxpayer and without giving the taxpayer adequate opportunity to be heard. The TPO passed the order making an adjustment of Rs6.73 crore ($1.5 million). The TPO’s order was followed by the assessing officer (AO) who made an upward adjustment to the income of the taxpayer.

Aggrieved by the AO’s order, the taxpayer filed an appeal with the commissioner of income tax (appeals) [CIT(A)].

The CIT(A) considered CUP as the most appropriate method and ruled that the industry hourly rates published by NASSCOM are based on available billing rates offered by a number of independent uncontrolled companies. The CIT(A) also took note of the fact that the taxpayer had earned a sizeable amount of profit in its very first year of operations, whereas a call centre which deals with third parties normally may not break-even in the first year of operations.

Furthermore, the CIT(A) observed that none of the comparables selected by the TPO in his TNMM analysis were engaged in voice-based call centre services and therefore were functionally different from the taxpayer (for example these alleged comparable companies were engaged in high-end IT enabled services, falling within the segment of software development, content development and so on).

Independent of the CUP analysis, the CIT(A) was of the view that the taxpayer had generated a reasonable amount of profits based on its profitability ratios. In this regard, the CIT(A) agreed with the taxpayer’s contention that it had received certain support from its AE, for example, financial support in relation to investments in certain assets and their maintenance, supplemented with savings resulting for the taxpayer in advertisement costs among other things (as it has assured business from its AE). Based on quantification provided by the taxpayer, the CIT(A) observed that the taxpayer’s adjusted profits before depreciation, interest and tax (PBDIT) to total cost would be around 45.9%, while the PBDIT to total costs without any adjustment would be 18.54%.

Taking into account all of the above, the CIT(A) deleted the adjustment of Rs6.73 crore made by the TPO. Aggrieved by the order of CIT(A), the Revenue filed an appeal before the ITAT.

The tribunal’s views
The tribunal upheld the CIT(A)’s order favouring the taxpayer and held that: