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TMI Blog2021 (2) TMI 1325X X X X Extracts X X X X X X X X Extracts X X X X ..... India carries out business information research based assignments of the following nature: * Periodic Research: Periodic research projects are ongoing in nature. The projects include database content creation, management and updation of existing research. * Project Research: Project research involves research from secondary sources. It also makes use of forecasting, modelling and financial analysis. Typically, it involves industry studies covering the market size, value chair analysis, growth rates and demand and supply projections. EVS SEZ India has conducted studies and prepared research reports for the sectors like the telecom sector, pharmaceutical sectors, etc. The intellectual property rights for the reports are owned by the end customer. * Rapid Research: Rapid research assignments typically have 24 hours as tie turnaround time. These are mostly based on brief client requests received from AEs. b) Investment Research and Financial Analytics: EVS SEZ India has a team of employees exclusively dedicated to tracking stocks and mutual funds. Typically, an investment research and financial analytics assignment as discussed above could also be periodic or project ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y marketing and sales efforts as it carries out offshore research activities on behalf of its AE. The/AE is responsible for the business development, marketing activities and quality assurance for every project undertaken by EVS SEZ India. The AEs, based on the market and economic scenario prepares the general worldwide marketing strategy for the Group. EVS SEZ India secures contracts owing to the brand name and goodwill enjoyed by its AEs. For provision of the aforementioned services, AEs remunerate EVS SEZ India on an hourly basis. Additionally, AEs also reimburse EVS SEZ India at a cost plus 6% for expenses on telephone calls, translation charges, research reports purchased, web hosting and miscellaneous expenses. Routine Functions: These business support functions are a part of the normal course of business and are indispensable in the economic environment. Strategic Policies: All long-term policies are developed and formulated by EVS SEZ India in consensus with its AEs. The company's management personnel handle the corporate communications and deal with the direct customers, Associate Enterprises, etc. Finance and Accounting and IT: EVS SEZ India prepares its own f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit risk. EVS SEZ India is engaged in the provision of IT enabled services to its AEs for which it gets remunerated on the basis of the service agreement. Accordingly, EVS SEZ India is not exposed to the customer credit risk. The AEs cater to end customers and are responsible for recovery of payments. Accordingly, they are exposed to the customer credit risk. Foreign Exchange Risk Exchange rate risk relates to the potential variability of profits that can arise because of changes in foreign exchange rates. Such risks arise when doing business in any market that is affected by international trade and can arise even if a company does not conduct actual transactions in a foreign currency. EVS SEZ India is remunerated by its AEs for services provided to it in US Dollars. However, in the case of third party domestic contracts, EVS SEZ India receivesitsjjaymsntm INR. Accordingly, EVS SEZ India is exposed to foreign currency risk for the AE services. The AEs do not bear this risk to any significant extent with respect to EVS SEZ India's operations. Entrepreneurial Risk There are two distinct sources of uncertainty in entrepreneurial ventures: 1) uncertainty rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported in the transfer pricing report is as under: Particulars ITES Operating Revenues 236,696,941 Opera ting Expenses 258,746,715 Operating Profit (22,049,7731) OP/Sales GP/Sales OP/OC 0.94% OP/OC after undertaking a capacity 2 3.28% adjustment on EVS SEZ India Method used TNMM PLI OP/OC No. of Comparables 8 Mean Margin of Comparable after adjustments for working capital and capacity -3.37% Mean Margin of Comparables after adjustments for working capital 12.84% Ld TPO, however, rejected the TP study of the appellant. Ld. TPO has taken TNMM as the most appropriate method and aggregated both the transactions for the purpose of benchmarking. The margins of comparables have been recomputed by Ld. TPO after considering forex gain/loss as operating in nature as under: S.No. Company PBIT/Cost(%) 1 Aditya Birla Minacs Worldwide Ltd. 0.50% 2. Cosmic Global Ltd. 48.20% 3. Genesys International Corporation (Seg.) 58.45% 4 Eclerx Services Ltd. 47.00% 5 Omega Healthcare Management Services Pvt. Ltd. 15.43% 6 Microgenetic. System Ltd. 9.98% 7 Motif India Infotech Pvt. Ltd. 10.41% Average 27.14% Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of sales (106%); that Cosmic has revenue from 3 sources, i.e., medical transcription and consultancy services, translation and BPO services- it earns 95% of the revenue from translation services which are not comparable to the assessee - the revenue from BPO is only Rs. 27.7 lakhs (less than 75% and less than Rs. 5 crores) hence it fails two filters applied by Ld. TPO himself.at pg. 21 of Ld. TPO order Companies whose ITES revenue is <5 crores and ITES revenue is less than 75% of total operating revenues; and that it has volatile profits at 23.4%, 23.4%, 48.2%, 18.28% and 8.06% for F.Yrs. 2006-07 to 2010-11 respectively. It is therefore, argued on behalf of the assessee that this is not a good comparable and needs to be excluded. 7. Assessee placed reliance on this aspect on the following decisions (i). NCS Pearson India Pvt. Ltd.- ITA No. 2556/Del/2014, (ii).UT Starcom Inc., ITA No. 1829/Del/2014 - Delhi ITAT, (iii). PCIT vs. Xchanging Technology Services India Pvt. Ltd.-ITA No. 813/2015 -Delhi High Court and (iv).Quark Systems (2010) 132 TTJ (Chd) (SB) and submitted that having regard to the functional profile of the assessee in all these cases, it is emphatically held by high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire outsourcing is confined to translation charges paid of Rs.3 crores and in view of such activities, of outsourcing and having a different business model apart from having the abnormal growth of sale at 106%, this Cosmic Global is not a good comparable with the assessee which is confined to ITES alone. 12. Further, in the case of UTStarcom Inc. vs. DDIT in ITA No. 1829/Del/2014 for the assessment year 2009-10, the profile of this Cosmic Global Ltd. is considered by the Tribunal and after examining the financials of Cosmic Global Ltd., the Tribunal observed that the activities of outsourcing the translation services and payment of Rs.3 crores for such purpose, which constituted significant portion of its services, makes this company not a good comparable. In this process, the Tribunal placed reliance on the decision of the Tribunal in Macquarie Global Services (P) Ltd. vs. DCIT for A.Y. 2009-10 to reach such a conclusion. 13. In PCIT vs. Exchange Technology Services India Ltd. in ITA No. 813/2015, Hon'ble jurisdictional High Court considered this Cosmic Global Ltd. vis a vis, the entity dealing with ITES and held that outsourcing of major activities by this company renders it no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ics and data process solutions; that it provides very high-end services; that it is recognised as expert in chosen market financial services and retail and manufacturing; that the year of acquisitions is extra-ordinary events; and that it has abnormal margins earned due to extra-ordinary circumstances. 16. Apart from this, it is brought to our notice that in the assessment year 2010-11 in assessee's own case, this comparable is considered by the Tribunal in ITA No. 1467/Del/2015 and was rejected with the following observations : "12. The next comparable by the assessee is that eClarx Services submitting that it is a knowledge process outsourcing (KPO) unit and therefore cannot be compared with the ITES service provider like assessee. The assessee has relied on the decision of Hon'ble Delhi High Court of Ramgreen Solutions Pvt. Ltd Vs. CIT. 13. The ld DR submitted that the assessee is also a knowledge process outsourcing unit as it employs 616 personnel. He referred to page No. 6 of the order of the ld Transfer Pricing Officer for this. He submitted that assessee's case falls into all three horizontal segments of ITES industries such as call centre and technical support, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through its pricing and profitability services. Further this company has also developed it tool and process automation. From the above discussed nature of business carried on by e- Clerx Services Ltd., it is patent that the same being a KPO company, is quite different from the assessee, providing only IT enabled services to its AE, which fall in the realm of BPO services. Apart from that, it is further observed that this company has significant intangibles which it uses in rendering KPO services, against which the assessee does not have any intangibles. The Hon'ble jurisdictional High Court in Rampgreen Solutions (P.) Ltd. v. CIT [2015] 234 Taxman 573/60 taxmann.com 355 (Delhi), has held that e-Clerx Services Ltd., being engaged in KPO, cannot be treated as comparable of an assessee engaged in rendering BPO services. In view of the direct judgment of the Hon'ble jurisdictional High Court on the point, we direct to eliminate e-Clerx from the list of comparables. As such, e-Clerx Services Ltd. cannot be considered as comparable." 17. It is not the case of the Revenue that there is any change in facts and circumstances of the case to render this view taken by the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, geospatial data services and application development; 3D Mapping: Large scale .3D content building; Navigation Maps: created data, base for maps navigation and running an "offshore production centre'for data updates and enhancements; Lidar: Includes ground point classification, building and power line classification vectorization and vegetation classification; Photogrammetry remote sensing services: offers complete range of photogrammetric services for municipal mapping, utilities mapping, road and highway planning, cadastral mapping etc.; Utility services: offers end to end services including consulting to build enterprise-wide GIS to enhance lifecycle management of both the physical network and customers' work processes, Network Data Building &^ Maintenance, Mapping & Survey, Integration Services, Network Planning, Land-base Conflation to utility companies; Image Processing: satellite data processing for geospatial domain; Surveying: surveying through 'Electronic Total Station ' (ETS), Differential Global Positioning System' (DGPS)&other contemporary surveying techniques for mapping in addition to management large human resource for collection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice at SI.No. (vi) of this Circular is 'Geographic Information System services and at SI. No. (vii) is 'Human Resources Services.' No doubt, all these fifteen categories of products/services have been included under the major head of 'Information Technology Enabled Services' (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading 'Geographical In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficant aspect for all entities is the requirement of working capital. There are three critical elements in the working capital policy of a firm: (a) lags between the time products are sold and payments on these sales are received, which create accounts receivable, (b) lags between the time inputs are purchased and payments on these purchases become due, which create accounts payable and (c) lags in the physical process of production and sale, which create inventories. By allowing customers/ creditors to defer payment for a certain period, any company foregoes the right to receive its revenues immediately and to earn, additional income by re¬investing these revenues over the deferral period. All companies have their own limits for deferring such payments and these limits determine that working capital cycles. Such cycles would have a direct impact on the revenue and cost of any entity. Accordingly for a due economic analysis, it becomes important to make an adjustment for different working capital positions so as to eliminate the impact of such factors from an arm's length comparison. In view of the above it is humbly submitted that adequate adjustment needs to be made for di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reflect the different payment and receipt terms and compensate for the timing effect. Guidelines further say that making a working capital adjustment is an attempt to adjust for the difference in time value of money between the tested party and potential comparables with an assumption that the difference should be reflected in profits. Though guidelines say that as a matter of routine such adjustment should not be made but also state that the same should be resorted to if it improves the comparability. The provisions contained in Rule 1QB(3) also mandate adjustments wherever there are material differences in the situations of comparables and the taxpayer, The different benches of the ITATs have upheld such adjustment [Vedaris Technology ITAT (Del); Sony India 1114ITD448(Del)j, Mentor Graphics, E Gain communication 2008-TIOL-282-ITAT-Pune, Global Vantedge 2010-TOP-24 ITAT-DEL, TNT India P Ltd 2011-TII-39-ITATBANG- TP etc. Accordingly, the AO/TPO is therefore directed to grant working capital adjustment based on the OECD formula and by taking the PLR as adopted by the Slate Bank of India in FY 2008-09 for working capital loans" 23. In view of the considered observations of the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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