Bangalore ITAT Sends Back Reseller vs ITeS Characterisation to AO in Light of Subsequent APA

Background of the Dispute

The decision in Akamai Technologies Solutions (India) Private Limited Vs ACIT (ITAT Bangalore) concerns transfer pricing characterisation for AY 2011-12 and its impact on the arm’s length price of international transactions. The core controversy is whether the Indian entity should be viewed as:

  • A reseller of services purchased from its associated enterprises (AEs), or
  • An IT-enabled services (ITeS) provider rendering services to AEs.

This characterisation dictates the entire Functions–Assets–Risks (FAR) analysis, choice of comparables, and ultimately the transfer pricing adjustment. The Bangalore ITAT has set aside the Dispute Resolution Panel’s (DRP) decision and has remanded the matter back to the Assessing Officer (AO), directing a fresh examination in the backdrop of a later unilateral Advance Pricing Agreement (APA) entered into by the assessee with the CBDT.

Facts of the Case

Corporate Structure and Agreements

The assessee is an Indian company within a multinational group ultimately owned by a US parent company. To operate in India, it entered into the following arrangements:

  1. A Service Reseller Agreement with the US group entity on 07 January 2010, effective from 01 April 2009, appointing the assessee as a non-exclusive reseller to:

    • Market
    • Resell, and
    • Provide support for proprietary services in India.

  2. A separate Service Reseller Agreement with a Switzerland-based group entity dated 12 July 2010, effective from 01 July 2010, on substantially similar terms for reselling and supporting services in India.

Under these agreements, the assessee purchased services from its AEs and resold them to customers in the Indian market.

International Transactions Reported

For AY 2011-12, the assessee disclosed the following international transactions:

  • Purchase of services for resale: ₹256,717,524
  • Reimbursement of expenses: ₹12,887,052
  • Recovery of reimbursement: ₹1,769,796

The assessee characterised itself as a reseller of services purchased from AEs.

Return of Income and Reference to TPO

  • Return of income filed on 30 November 2011 declaring total income of ₹24,459,626.
  • The case was picked up for scrutiny, and notice under section 143(2) of the Income Tax Act 1961 was issued.
  • The AO referred the international transactions to the Transfer Pricing Officer (TPO) under the transfer pricing provisions for determination of arm’s length price (ALP).

Assessee’s Transfer Pricing Position

In its transfer pricing study, the assessee:

  • Treated itself as a reseller of services.
  • Adopted the Transactional Net Margin Method (TNMM) as the most appropriate method.
  • Selected 18 comparables to benchmark its international transactions.
  • Concluded that its margins were at arm’s length.

TPO’s Approach and Adjustment

The TPO disagreed with the assessee’s characterisation and TP study. Key elements of the TPO’s order were:

  • Re-characterisation of the assessee as an ITeS service provider instead of a reseller.
  • Fresh search and selection of 10 comparables, all treated as ITeS entities.
  • Determination of an average margin of 18.54% for those comparables.
  • Resultant transfer pricing adjustment of ₹44,666,385 on the assessee’s international transactions.

DRP’s Directions for AY 2011-12

The assessee objected before the DRP to the TPO’s re-characterisation and the resulting adjustment. The DRP, however, upheld the TPO’s view. It briefly stated that:

  • It had examined paragraphs 6 and 7 of the TPO’s order, where the TPO analysed the assessee’s submissions, agreements and nature of services.
  • It agreed with the TPO’s conclusion in paragraph 7.4 that the services were in the nature of IT-enabled services.
  • It found no infirmity in this conclusion and, therefore, rejected the assessee’s objections on characterisation.

The DRP thus effectively confirmed the ITeS character, with only a nominal relief of ₹783,895 in the adjustment.

Prior Year Treatment (AY 2010-11)

Critically, in the immediately preceding assessment year (AY 2010-11):

  • The assessee had also portrayed itself as a reseller.
  • The TPO again viewed the assessee as an ITeS provider.
  • However, the DRP, after a detailed FAR analysis spread over more than 20 pages, had taken a different stand, characterising the assessee as a marketing support service provider.

Thus, for AY 2010-11, the DRP had not accepted the ITeS character; it had carefully analysed the functions and ultimately held the assessee to be a marketing support service provider.