DCIT, NEW DELHI vs. M/S. EVALUESERVE SEZ (GURGAON) PVT. LTD., NEW DELHI

EVS SEZ India makes use of a variety of research tools including the web, databases and publications apart from analytics and forecasting. The industries covered include financial services (banking and insurance), hi-tech (software, electronics, engineering, nano technology, networking, biomedical engineering), telecom equipment and operators, pharmaceuticals and biotech, chemicals, energy and consumer products. c) Market Research: This segment caters to primarily market research firms based overseas. It focuses on primary research in the nature of business to business surveys only where data is collected via telephonic surveys. The surveys are carried out on a case to case basis and as per the specific client requirements.The employees comprise mainly graduates, undergraduates, and MBA. The surveys carried out by the market research segment include surveys like analyzing the trends in IT and telecom spending, etc. These surveys are normally carried out on the basis of a questionnaire received from the client. Depending on the work load at times, some employees may be shifted to the business research segment for short term projects. d) Intellectual Property Research: The intellectual property research services includes research on patents, drafting of patent applications, prior art search, etc. Essentially, EVS SEZ India offers the following kind of services to its AEs: • Patent Assessment: This is concerned with evaluating whether a product can be patented or not. It involves finding out whether a patent exists for a similar product in the global market. • Drafting of Patent Applications: The AEs are responsible 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.

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 financial statements.

Hunan Resource Management: EVS SEZ India performs recruitment, soft skills training, performance evaluation and other related functions.

The employee strength of EVS SEZ India was about 616 personnel including the corporate group as on March 31, 2010. Assets Any business requires assets without which it cannot carry out itsactivities. The assets might be clearly recognisable i.e. tangible (plant and machinery, equipment, building etc) or they might be intangible assets (brand-name, trademarks, technical know-how, patents, etc). Following is the list of assets used by EVS SEZ India: Tangible Assets The tangible assets employed in EVS SEZ India are considered essential for running the business. They are described below: EVS SEZ India being an ITES service provider does not have a significant tangible asset base for carrying out its operations. EVS SEZ India does not own any land and carries out its operations on rented premises. Its tangible asset base comprises computers, office equipment, furniture and fittings, etc. Intangible Assets ’As EVS SEZ India operates in the research domain, human capital forms its core resource. However, the employees of EVS SEZ India typically only comprise undergraduates, graduates, engineers and MBAs. The business of the Evalueserve group does not result in the development of any form of intellectual property rights. The copyrights relating to the reports, if any are held by the client only. Further, the marketing intangible is owned by the Associated Enterprise - Evalueserve Limited, Bermuda.

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. 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 regarding market demand, and 2) uncertainty regarding capability. The first type of uncertainty is characterised as “exogenous uncertainty” because it emerges as a state of nature. The second type of uncertainty is referred to as “endogenous” uncertainty because entrepreneurs realise that there is high risk of failure as it is tied to their capability.

As EVS SEZ India is remunerated on an hourly basis by its AEs, it is exposed to this risk. The AEs are indirectly exposed to this risk for the Indian operations. Price Risk This risk arises due to the competitive pressures prevailing in the market, which lead to price undercutting thereby adversely impacting the profitability of the Company. EVS SEZ India is compensated for the services rendered by it to its AEs, on an hourly rate basis. As this compensation is subject to market dynamics, the Company is exposed to price risk. As the AEs compete in the open market, they are exposed to this risk. Manpower Risk Manpower is one of the most valuable resources employed by an organisation for carrying out its day-to-day operations. The increasing competition in the market place combined with other uncontrolled variables result in exposure to manpower risk. As the ITES industry is characterised by a high level of attrition,, EVS SEZ India is exposed to this risk. The AEs are indirectly exposed to this risk for the Indian operations.”

Nature of transaction Value of international Provision of IT Enabled Services 231,329,060 (ITES) 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 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 -3.37% adjustments for working capital and capacity Mean Margin of Comparables after 12.84% adjustments for working capital 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(%) Aditya Birla Minacs Worldwide Ltd. 0.50% 1 Cosmic Global Ltd. 48.20% 2.

3. Genesys International Corporation (Seg.) 58.45% 4 Eclerx Services Ltd. 47.00%

5 Omega Healthcare Management Services Pvt. Ltd. 15.43%

Microgenetic. System Ltd. 9.98% 6 7 Motif India Infotech Pvt. Ltd. 10.41% Average 27.14% Ld. TPO has determined the TP adjustment as under: Operational Cost 234,494,328 Arm’s Length Price at a Margin of 298,136,089 27.14% Price Received 236,696,941 105% of International Transaction 248,531,788 Adjustment u/s 92CA 61,439,148 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/-.

“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 according to AS-9 has not arisen. Export/Consultancy Services are billed at mutually discussed rates wherever the terms have not been reduced to writing. Revenue from Operations includes Revenue earned through Translation Services Rs.6,99,35,756.45, through Medical Transcription Rs.9,90,737 and through Accounts BPO services Rs.27,76,090.”

13. In PCIT vs. Exchange Technology Services India Ltd. in 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 not a good comparable to the entity like assessee in this case, who has been in the business in houses. It is, therefore, clear that Cosmic Global is an entity which has been deriving a significant portion 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.

“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.

“ 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.] Functionally different: Engaged in geographical information services, engineering services and software product development services The Appellant would like to bring to your goodselfs notice that Genesys is not functionally comparable to the Appellant. It is engaged, in providing geographical information services comprising of photogrammetry, remote sensing, cartography, data conversion and other computer based related activities. The business model of Genesys is different from that of the Appellant. Geographical Information Services (GIS): Your goodself s attention is drawn to the following extract of the annual report for FY 2008-09 (Page 39) which evidences the fact that the business model of Genesys is different from that of the Appellant and hence should be rejected:.... Further, as mentioned on page xvi and xvii of the Annual Report of Genesys, the company is engaged in following range of activities > GIS consulting: Offers consultancy services for needs assessment, system requirement, analysis and design, 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 of ‘Point of Interest’ (POI) attributes; Business geographies and logistics: decision support, system, that can be customized, to 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”

“Ld. TPO on page 48 of his order has examined CBDT Circular SO 890(E) dated 26.09.2000 which provides a detailed list of products or services that can be covered under the ITES for the purposes of Section 10A and 10B of the Act. In this Circular, the Information Technology Enabled Products/Services have been divided into fifteen categories, starting with Bank Office operations, Call centres etc. and ending with Website services. From the very description of such services, it is palpable that even though these fall under the overall ITES category, but some of them are quite different from each other. To cite, service 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 Information Systems Services', whereas those rendered by the assessee fall partly under clause (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.”

5.5 As regards working capital adjustment, the appellant has submitted as under: “From an economic perspective, the Appellant would like to submit that, in terms of business and risk comparability, a significant 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 differences in working capital position of the Appellant vis-a-vis comparable companies. 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 our view, working capital adjustment will improve the comparability. ” Unquote [Emphasis supplied] Thus, the approach of adopted by the Appellant wherein, it made working capital adjustments to account for the differences in working capital positions of the comparable companies vis-a-vis the Appellant had a valid sanction of the law...........

The Appellant, wishes to submit that the Appellant has demonstrated that the difference in working capital is resulting in a difference in the margins earned by the Appellant and the comparables.

As mentioned above the Appellant relied on the available guidance from, the OECD's guidelines 2010 and performed working capital adjustments to the comparable companies as per the formula provided in OECD. ”

I have examined the issue of working capital adjustment. For the purposes of proper comparability differences in the prices charged by the appellant and the comparables arising on account of different levels of working capital are required to be eliminated. The OECD guidelines also support, this view, In a competitive environment the price should include an element to 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-ITAT- BANG-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”

Order pronounced in the open court on this the 02nd day of February, 2021 immediately after the conclusion of the hearing over virtual mode.