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Tax Times Maersk Global Service Centres (Special Bench Ruling) Transfer Pricing for Captive BPOs April, 2014 Indian Member of Global Network of Transfer Pricing Firms
Tax Times
Maersk Global Service Centres
(Special Bench Ruling)
Transfer Pricing for Captive BPOs
April, 2014
Indian Member of
Global Network of Transfer Pricing Firms
Background
Key Issues
BPO vs KPO
OECD Guidance
Whether ITES can be bifurcated?
Treatment of comparables with abnormally high margins
Key Takeaways
Contents
Background
Historical dispute on benchmarking of BPO units
Revenue Authorities have insisted on high mark-ups (25-30%)
Reliance on KPOs by Revenue Authorities to defend high mark-ups
Conflicting decisions of Tax Tribunal (two member/division benches) on inclusion of KPOs
( * List is illustrative)
Reference made to Special Bench (three member bench) to lay down law on benchmarking of BPOs
For Inclusion* For Exclusion*
Exxon Mobil Company India Pvt Ltd (Mumbai
Tribunal)
CES Pvt Ltd (Hyderabad Tribunal)
NextLink India Pvt Ltd (Bangalore Tribunal) Sap Labs India Pvt Ltd (Bangalore Tribunal)
ChrysCapital Investment Advisors India Pvt Ltd
(Delhi Tribunal)
Symantec Software Solutions Pvt Ltd (Mumbai
Tribunal)
Willis Processing Services(I) Pvt Ltd (Mumbai
Tribunal)
Sapient Corporation (P) Ltd (Delhi Tribunal)
Serial No
Key Issues before Special Bench
1 Whether KPOs can be compared to BPOs?
2 Whether companies earning abnormally high profit margin can be included as
comparables?
Key Issues
` Special Bench Ruling: BPO vs KPO (Functional
Profile)
Particulars BPO KPO
Nature of Services Low-end High-end
Scope
Collation of information/
populating same into processes
Knowledge intensive business
process
Driving Force Process driven Knowledge driven
Expertise & Skills Limited expertise & no analytical
skills
Significant expertise, advanced
information analysis, judgment &
decision making
Composition of Workforce Graduates & post graduates Professionally qualified & highly
skilled
` BPO vs KPO (Profitability Comparison)
BPO
Op
era
tin
g M
arg
ins
Comparables
KPO
BPO Margins
Caliber Point Solutions 7.17%
Cosmic Global 20.87%
Maple E-solutions 15.14%
R systems International 8.90%
Spanco Telesystems &
Solutions 2.99%
Crossdomain Solutions 25.71
Datamatics Financial
Services 33.90%
Average 16.38%
KPO Margins
eClerx Services 63.06%
Mold-Tek Technologies 83.31%
Average 73.18% KPO average margin significantly higher than
BPO average margin Source: TPO’s set in Maersk Global Service Centres
` BPO vs KPO (Definition in Safe Harbour Rules)
ITES/BPO KPO
Back office operations
Call centres or contact centre services
Data processing & data mining
Insurance claim processing
Legal databases
Creation & maintenance of medical
transcription excluding medical advice
Translation services
Payroll
Remote maintenance
Revenue accounting
Support centres
Website services
Data search integration & analysis
Remote education excluding education
content development
Clinical database management services
Requires application of knowledge and
advanced analytical and technical skills
Geographic information system
Human resources services
Engineering & design services
Animation or content development &
management
Business analytics
Financial analytics
Market research
` OECD GUIDANCE
Particulars References
OECD Transfer Pricing Guidelines
(2010)
Stress on Functional Similarity
“ Attributes or ‘comparability factors’ that may be important when determining
comparability include the characterstics of the property or services transferred ,the
functions performed by the parties…. strategies pursued by the parties ”
(Para 1.36 of Chapter I)
“….comparability analyses for methods based on gross or net profit indicators
often put more emphasis on functional similarities than on product similarities.
Depending on the facts & circumstances of the case, it may be acceptable to
broaden the scope of the comparability analysis to include uncontrolled transactions
involving products that are different, but where similar functions are undertaken “
(Para 1.41 of Chapter I)
OECD Draft Notes on Comparability
(May 10, 2006)
Treatment of Companies with
abnormally high margins
“ Where one or more of the potential comparables have extreme results,
further examination would be needed to understand the reasons for such
extreme results. Any subjective decision to include or reject extreme results would
need to be considered in light of comparability factors. Extreme results may also need
to be considered in the context of the number of potential comparables. Extreme
results might be rejected in comparability terms, but not solely because they
are extreme.”
` Tribunal Ruling: Whether bifurcation of ITES
possible?
Broad functionality test: Selection
of ITES companies for ITES
taxpayer
Whether further bifurcation is possible?
Taxpayer performs BPO
functions
Bifurcation should aim to achieve higher comparability
Taxpayer performs KPO
functions
Comparison with only
BPOs
Comparison with only
KPOs
Yes (based on functionality of taxpayer)
` Tribunal Ruling: Treatment of comparables with
abnormally high margins
Companies with abnormally
high margin
Further investigation required
Closely examine:
Functional Profile
Profitability Trend
Surrounding Business
conditions
Normal business conditions
Functionally comparable Abnormal business conditions
Functionally not comparable
Accept Reject
Key Takeaways
Generalized functional analysis is inadequate
Nature of Taxpayer’s ITES functions to be closely evaluated
Distinction between low-end and high-end functions is feasible
Nature of taxpayer’s functions is key to choice of comparables for ITES
Tribunal has ultimately endorsed distinction between BPO and KPO (depending upon
taxpayer’s functional profile)
Abnormally high margin per se not a reason for rejection- functional
differences/abnormal economic circumstances must be demonstrated before rejection
Nature of function Accept/Reject
Low end ITES Reject KPO companies
High end ITES Accept KPO companies
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