India - Arm’s length price for sourcing services - cost based remuneration model adjudged most appropriate for limited risk procurement support service provider

Tax Insights ()

In the case of GAP International Sourcing (India) Pvt. Ltd.  (GIS India or the taxpayer), the Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) adjudged that a cost based remuneration model was most appropriate for low risk procurement service providers, rather than a commission based remuneration. The Tribunal acknowledged that procurement service providers could operate on various remuneration models including percentage of value of goods procured and cost plus mark-up based on the facts of each case. However, in either case, the transacting parties would need to set their contractual terms in adherence with market forces to ensure a reasonably acceptable profitability. This ruling also distinguishes the taxpayer's facts and circumstances from an earlier precedent of the coordinate bench in the case of Li & Fung India Pvt. Ltd.  wherein the Tribunal had upheld a commission based remuneration for procurement services rendered by Li & Fung India Pvt. Ltd.