TMI Blog2021 (2) TMI 1325X X X X Extracts X X X X X X X X Extracts X X X X ..... A CHARY, J.M. Challenging the order dated 27.02.2015 passed by learned Commissioner of Income-tax (Appeals)-44, New Delhi ( CIT(A)) for assessment year 2009-10, both assessee and Revenue filed these cross appeals. 2. Brief facts of the case is that the assessee is a company incorporated on 17.12.2007 and began its operation from August 2008. It carries on IT enabled services[ITes] in the form of research activities according to the terms of its agreement with its AE which is driven by business information, market research and intellectual property research. It carries on precisely three activities and its functional profile, assets employed and risk assume are- a) Business Information : EVS SEZ 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 siz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible for end to end patent application filing through patent counsels in the relevant jurisdiction. EVS SEZ India prepares a draft and sends it either to the client or patent attorney associated with AEs, to be filed .Thereafter, lawyers, associated with the AE vet the draft and file it. Intellectual Property Asset Management: EVS SEZ India offers patent to product mapping, IP research and analysis and patent consulting as part of Intellectual Property Research. It assists in maintaining a relevant portfolio of patents, offers consulting in overlap and infringement and helps in locating potential companies that may be interested in licensing a particular invention. Marketing and After Sales: EVS SEZ India does not undertake any 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... muda. Accordingly, EVS SEZ India does not own any non-routine intangibles ana does not own trade secrets or undertake research and development activities on its account that would lead to the development of non-routine intangibles. Risk Analysis Risks are those business factors that may expose a company to the possibility of loss or damage. In other words, risk is the probability that a particular adverse event may occur during a stated period of time, or may result from a particular challenge. The following section discusses the risk borne by Company vis-a-vis Group Companies. Customer Credit Risk When a company provides services to a customer in advance of customer payment, the company runs the risk that the customer will fail to make payment. This risk is known as customer credit 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 29.09.2009 declaring loss of Rs.2,10,68,613/-.The assessee is a subsidiary of Evalueserve Limited ( EVS Barmuda ) located at Bermuda providing knowledge Process Outsourcing ( KPO ) Services (Intellectual Property, Market Research, Business Research, Financial and Investment Research and Data Analytics Services) to its clients. EVS SEZ India is engaged in the business of providing IT enabled services to its AEs. The company is a 100% Export Oriented Unit under the Special Economic Zone Act guidelines issued by the Government of India. In the Accountant s Report in Form 3CEB and in the transfer pricing study report following international transactions have been reported : Nature of transaction Value of international Provision of IT Enabled Services (ITES) 231,329,060 Cost of Reimbursements Received 2,136,683 The financial results of the taxpayer and the method of benchmarking as reported in the transfer pricing report is as under: Particulars ITES Operating Revenues 236,696,941 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Pursuant to the order of TPO, ld. Assessing Officer completed the assessment by making upward adjustment on account of Arm s Length Price at Rs.6,14,39,148/-. 5. Aggrieved by such adjustment, the assessee preferred appeal before the Ld. CIT(A), who by way of impugned order allowed it in part. In that process, so far as relevant to these appeals, the CIT(A) excluded the entities Eclerx Services Ltd.and Genesys International Corporation Ltd. while retaining the Cosmic Global Ltd.. Ld. CIT(A) also directed the Ld. A.O./TPO to grant working capital adjustment based on OECD formula and by taking PLR as were taken by State Bank of India for assessment year 2008-09 for working the capital loans. In these circumstances, the assessee filed ITA No. 2516/Del/2015 challenging the inclusion of Cosmic Global Limited in the list of comparables whereas the Revenue filed ITA No. 2966/Del/2015, challenging the exclusion of Eclerx Services Ltd and Genesys International Corporation Ltd. Apart from challenge in respect of comparables, the assessee also complains against capacity underutilization adjustment made by TPO in spite of the fact that there was a detailed analysis in the TP stud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gination could it be said that this is not a good comparable. 9. In so far as this entity is concerned, the functional profile of the assessee sated above is concerned, and we need to compare the profile of Cosmic Global Ltd. In respect of the same assessment year, i.e., 2009-10, profile of this company is concerned by the Judicial Forums. It is not in dispute that this Cosmic Global Ltd. is into the transcription and translation services besides other services. Further, a perusal of the annual report of Cosmic, available in Schedule 13 i.e. Notes Forming part of Financial Accounts ending March 31, 2009 contains the revenue recognition as under : 1.2 Revenue recognition: In respect of Medical Transcription Services, and Translation Services the Company follows the practice of raising monthly invoices job-wise on the clients based on the number of lines and number of words respectively, etc., as accepted by them and in respect of Accounts BPO services the invoices are raised after acceptance by the clients on mutually agreed basis. This year the company has raised the bill on all the jobs accepted and hence the application of proportionate completion method accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of its receipts from outsourcing the translation work and making payment of about Rs. 3 crores and as has been held by the higher judicial forums stated supra, this Cosmic Global Ltd. is not a good comparable and needs to be excluded. Considering all these aspect, we are of the opinion that this is not a good comparable with the assessee and, therefore, direct the ld. AO/TPO to exclude this company from final list of comparables. 14. Next grievance of the assessee is in respect of the capacity underutilization adjustment, in respect of which ld. TPO at page No. 31 at paragraph No. 16 made an observation that the claim of adjustment of low capacity utilization for the ideal capacity, in the TP study, the assessee has not made any such adjustment and if the claim was correct, it would have made in the TP study itself and not to meet the goal of ALP. But with reference to TP study document at page No. 29, it is demonstrated before us that there was a reference to the capacity underutilization adjustment which missed the attention of the ld. TPO. On examination of para 5.3 and 5.4 of the TP study, we are convinced that this missing of the details relating to the capacity underutil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable for AY 2010-11 at page No. 734 to 83.7 of the paper book. The functions of the company are described at page No. 23 of its annual report under management discussion and analysis. It provides that eClerx supports its clients through its two business units- Capital markets and sales and marketing support. Across both these units, the company supports and improves processes that are core of its customers day to day business operations. The company continues to focus on engagements where it can tap the largest percentage of client spend by leveraging its domain expertise and by bringing together consulting, project management and solution based service delivery. In the capital markets division, the company today provides end-to- end financial transaction support services such as trade booking, trade confirmation, asset servicing cash settlements, client servicing risk management and reference data integrity across all asset classes, and its services span both sell side ( the large banks) and buy side ( the funds and assets managers) Furthermore, the company provides strategic and process consulting services helping clients devise solutions to improve efficiency,reduce risk an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee company stands unchanged while respectfully following the view taken by the Co-ordinate Bench, we hold that Eclerx Services Ltd. is not a good comparable and the ld. CIT(A) rightly directed its deletion. 18. Now, coming to the Genesys International Corporation Ltd, (GIS) the assessee has submitted that Genesys is mainly engaged in the area of Geographical Information System Services and the company provides high end GIS services A which include the generation, processing, management and maintenance of data for GIS and other information management systems and all other services necessary for successful geospatial data implementation. The GIS services performed by Genesys is functionally different from the functions performed by the Appellant under IT enabled services segment. In this regard, the assessee had submitted as under : Genesys International Corporation Ltd. ( Genesys ): Should be rejected The Ld. TPO has considered Genesys as an ITBS/BPO comparable. The Appellant does not agree to the selection of Genesys as a comparable and the content.ion(s) of the Appellant in this regard, are detailed below Appellant's contentions: 4.3.5.] Functionall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suit the requirements of the end-user; Cadastral Mapping; City Space: provides unique geo data content for most urban areas of India, and Telecommunication Engineering Services: Further, Genesys is engaged in offering LIDAR (Light Detection and ranging) engineering services including Mobile Mapping survey in India and has the country's largest fleet of mobile mapping units including sizeable number of High Definition (LiDAR) scanning systems. It offers the following engineering services: (Source: http://www.igenesys.com/LiDAR_Engineering.html) Survey and Mapping Comprehensive 2D / 3D Topographic feature maps Contour Maps (at user defined intervals) 3D data sets (DSM, DEM, DTM) Engineering drawings cross/Long sections 3D Animation/Fly through 19. Ld. CIT(A) analysed the functional profile of the assessee as well as Genesys International Corporation Ltd in the light of decision of Hyderabad Tribunal in the case of Parexel International (India) Private Limited to reach a conclusion that this company is functionally different in as much as it is providing data management and data processing services whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use (vii) with the heading 'Human Resources Services' and partly under clause (xi) with the heading 'Payroll'. On juxtaposition examination of these two sets of services, we find that there is a vast difference which make one quite distinct from the other. In view of such functional incomparability between the assessee and Genesys, we hold that this company cannot be treated as comparable. We, therefore, direct to exclude this case from the list of comparables. 21. After considering the functional profile of this Genesys International Corporation Ltd, the Tribunal observed that Geo Special services provided by this Genesys International Corporation Ltd relate to the relative position of things on the earth s surface. These basically include 3D mapping, Navigation maps, image processing, Cadastral mapping etc. And do not match with the services provided by the entity like assessee whichare into ITES services. Further, for the assessment year 2009-10, Hon ble Punjab Haryana High Court considered this company in the case of CIT vs. M/s. Mercer Consulting for A.Y. 2009-10 to reach a conclusion that Genesys International Corporation Ltd. provides a full range of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. In this regard, the Appellant would like to place reliance on the following case laws: ..Further, in case of Qualcomm India Pvt. Ltd. Vs. ACIT (ITA No. 5239/Del/2010), it was held : Quote .....In the present case the Assessee is engaged in the business of software development and providing marketing services, hence there is no dispute that appropriate adjustment to account for difference in working capital employed by the Assessee vis. a vis. the comparable companies for software development seruues is required to be considered. Similarly making of suitable adjustments to (wiuunt for differences in the risk profile of the Assessee vis. a vis. the comparable companies for software development services is also required to be considered Unquote Further. n was held in Capgemim India Private Limited case (ITA No 786 1 Mum/ 201 I): Quote ..In our view, working capital adjustments are required, to be made because these do impact the profitability of the company.,,, . ...working capital cannot be denied to the Assessee only on ground that the Assessee had not made any claim in the TRP study if it is possible to make such adjustment. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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