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

Tax Controversy & Dispute Resolution ()

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.