Transfer Pricing: “High End” Cos in ITES/BPO sector comparable to “Low End” ones

The assessee raised three contentions in support of the contention that its charges were at ALP: (i) that the assessee was engaged in the “low end” activity of “voice based call centre” and that the comparables chosen by the TPO were not functionally comparable as they were engaged in the “high end” activity of “knowledge process outsourcing (KPO)“, “software development” etc, (ii) that the margin has to be computed on the basis of return on asset employed (ROA) or on capital employed (ROCE) and not on the basis of operating cost & (iii) that as its income was exempt u/s 10A, there was no ‘tax avoidance‘ and the transfer pricing provisions could not apply. HELD by the Tribunal:

(i) The argument that the ITES/BPO industry has several segments starting from low end segment such ‘call centre’, ‘customer care’ to high end segments such as ‘KPO’, ‘content development’ etc. in which there is wide variation in the billing rates and that high end services are not comparable to the low end services is not acceptable because under Rule 10B(2) the comparability of an international transaction with an uncontrolled transaction has to be judged with the reference to the services provided, functions performed, asset employed and risk assumed. All companies which are in the ITES segment are providing similar services and difference is in the internal working which is reflected through difference in qualifications and skills of the employees. The difference in skill/ qualification of the employees and their payment structure and the difference in billing rate does not affect the comparability in any significant manner under TNMM;

(ii) Though Rule 10B(1)(e) gives the option of computing the margin in relation to asset employed (ROA or ROCE), the OECD and the United Nations TP manual provide that ROCA/ROA are suitable only for manufacturing and other capital or asset intensive industries and not for the service sector. In the case of service companies, the main asset is employees which is not reflected in the balance sheet and, therefore, ROCA/ROA will not be an appropriate method for the purpose of computation of margin;

(iii) The argument that as the assessee’s income is exempt u/s 10A, there was no tax avoidance in transferring profit to a low tax jurisdiction is not acceptable because the law has to be applied as enacted. There is no provision in the transfer pricing regulations that for applying the said provisions the revenue has to prove tax avoidance. Once there is a international transaction, the ALP has to be computed as per the prescribed methods.