Genpact Mobility Services (India) Pvt. Ltd., New Delhi v. ACIT, New Delhi

ITA 4693/DEL/2011 | 2007-2008
Pronouncement Date: 29-03-2012 | Result: Partly Allowed

Appeal Details

RSA Number 469320114 RSA 2011
Assessee PAN AACCG4036D
Bench Delhi
Appeal Number ITA 4693/DEL/2011
Duration Of Justice 5 month(s) 2 day(s)
Appellant Genpact Mobility Services (India) Pvt. Ltd., New Delhi
Respondent ACIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 29-03-2012
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 29-03-2012
Date Of Final Hearing 29-03-2012
Next Hearing Date 29-03-2012
Assessment Year 2007-2008
Appeal Filed On 27-10-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI DELHI DELHI DELHI BENCH BENCH BENCH BENCH C CC C : NEW DELHI : NEW DELHI : NEW DELHI : NEW DELHI BEFORE SHRI G. BEFORE SHRI G. BEFORE SHRI G. BEFORE SHRI G.D.AGRAWAL D.AGRAWAL D.AGRAWAL D.AGRAWAL VICE PRESIDENT AND VICE PRESIDENT AND VICE PRESIDENT AND VICE PRESIDENT AND SHRI SHRI SHRI SHRI A.D.JAIN A.D.JAIN A.D.JAIN A.D.JAIN JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ITA NO. ITA NO. ITA NO. ITA NO.4693/DEL/2011 4693/DEL/2011 4693/DEL/2011 4693/DEL/2011 ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR : : : : 200 200 200 2007 77 7- -- -08 0808 08 M/S GENPACT MOBILITY M/S GENPACT MOBILITY M/S GENPACT MOBILITY M/S GENPACT MOBILITY SERVICES (INDIA) PRIVATE SERVICES (INDIA) PRIVATE SERVICES (INDIA) PRIVATE SERVICES (INDIA) PRIVATE LIMITED LIMITED LIMITED LIMITED DMRC D DMRC D DMRC D DMRC DELHI INFORMATION ELHI INFORMATION ELHI INFORMATION ELHI INFORMATION TECHNOLOGY PARK TECHNOLOGY PARK TECHNOLOGY PARK TECHNOLOGY PARK METRO STATION METRO STATION METRO STATION METRO STATION SHASTRI PARK SHASTRI PARK SHASTRI PARK SHASTRI PARK NEW DELHI NEW DELHI NEW DELHI NEW DELHI 110 053. 110 053. 110 053. 110 053. PAN : AACCG4036D. PAN : AACCG4036D. PAN : AACCG4036D. PAN : AACCG4036D. VS. VS. VS. VS. ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF INCOME TAX INCOME TAX INCOME TAX INCOME TAX CIRCLE CIRCLE CIRCLE CIRCLE- -- -12(1) 12(1) 12(1) 12(1) NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI KANCHUN KAUSHAL CA. RESPONDENT BY : SHRI PEEYUSH JAIN CIT-DR(TP). ORDER ORDER ORDER ORDER PER G. PER G. PER G. PER G.D.AGRAWAL D.AGRAWAL D.AGRAWAL D.AGRAWAL VP VPVP VP : : : : THIS APPEAL BY THE ASSESSEE IS FILED AGAINST THE O RDER OF LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX [TPO-1(2)] N EW DELHI DATED 1 ST SEPTEMBER 2010 FOR THE AY 2007-08. 2. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE ASSESSEE IS A PROFESSIONAL EMPLOYER ORGANIZATION WH ICH IS ENGAGED IN MANAGING GLOBAL DEPLOYMENT AND MOBILITY PROGRAM FOR PERSONNEL MOVING FROM ASSESSEES OFFSHORE DELIVERY CENTRE IN INDIA TO THE ASSOCIATE ENTERPRISES. THE ASSESSEE IS ENGAGING SK ILLED PROFESSIONALS AND PROVIDING THE SAME TO THE GROUP COMPANIES ON SE CONDMENT. THE DRP HAS NOT CONSIDERED THE PECULIAR NATURE OF ASSES SEES BUSINESS AND HAS COMPARED THE SAME WITH THE RECRUITMENT AGENCIES . HE ALSO OBJECTED TO THE COMPARABLES GIVEN BY THE TPO AND AP PROVED BY THE ITA-4693/DEL/2011 2 DRP. THE LEARNED COUNSEL FURNISHED THE DETAILED WR ITTEN SUBMISSIONS WHICH READ AS UNDER:- 1. BACKGROUND 1.1 GENPACT MOBILITY SERVICES (INDIA) PRIVATE LIMIT ED (HEREINAFTER REFERRED TO AS THE APPELLANT OR GMS OR THE COMPANY) IS A COMPANY INCORPORATED UNDER THE INDIA N COMPANIES ACT 1956 AND IS A WHOLLY OWNED SUBSIDIAR Y OF GENPACT INDIA HOLDINGS (MAURITIUS). 1.2 GMS IS A PROFESSIONAL EMPLOYER ORGANIZATION (P EO) AND DURING THE RELEVANT ASSESSMENT YEAR (AY) 2007 -08 UNDER CONSIDERATION WAS ENGAGED IN MANAGING GLOBAL DEPLOYMENT AND MOBILITY PROGRAM FOR PERSONNEL MOVIN G FROM GENPACT GROUPS OFFSHORE DELIVERY CENTRE IN IN DIA TO THE ASSOCIATES ENTERPRISES (AES). GMS EMPLOYED A ND SECONDED THE ASSIGNEES TO OVERSEAS ON-SITE GENPACT ENTITIES TO FULFIL THEIR CONTRACTS WITH RESPECTIVE CUSTOMERS. 1.3 DURING THE PERIOD UNDER CONSIDERATION THE APPEL LANT ENTERED THE FOLLOWING INTERNATIONAL TRANSACTIONS W HICH WERE DULY REPORTED IN THE ACCOUNTANTS REPORT IN FO RM NO.3CEB:- S.NO. INTERNATIONAL TRANSACTIONS VALUE (IN INR) MOST APPROPRIATE METHOD (MAM) PROFIT LEVEL INDICATOR (PLI) 1. PROVISION OF SECONDMENT RELATED SERVICES 19 92 27 742 TRANSACTIONAL NET MARGIN METHOD (TNMM) OPERATING PROFIT/ TOTAL COST (OP/TC) 2. REIMBURSEMENT OF EXPENSES BY AES 12 59 45 519 N.A. N.A. 1.4 GMS EARNED AN OPERATING MARGIN OF 6.02% DURING FY 2006-07. THE FINANCIAL RESULTS OF GMS IS SUMMARIZE D BELOW: PARTICULARS AMOUNT (IN INR) SERVICE FEE 19 92 27 742 ITA-4693/DEL/2011 3 TOTAL OPERATING INCOME (A) 19 92 27 742 PERSONNEL EXPENSES 13 41 86 432 ADMINISTRATIVE AND OTHER EXPENSES 5 35 69 739 DEPRECIATION 1 55 029 TOTAL OPERATING COST (B) 18 79 11 200 OPERATING PROFIT (C=A-B) 1 13 16 542 OPERATING PROFIT MARGIN (OP/TC)(C/B) 6.02% 1.5 FOR THE YEAR UNDER CONSIDERATION GMS FILED ITS INCOME-TAX RETURN (ROI) DECLARING AN INCOME OF RS.1 03 69 472. IN RESPONSE TO THE RETURN FILED G MS RECEIVED A NOTICE UNDER SECTION 143(2) OF THE ACT. FURTHER IN THE INSTANT CASE THE ASSISTANT COMMISSIONER OF INCOME TAX (LD AO') ALSO MADE A REFERENCE UNDER SECTION 9 2CA(3) OF THE ACT TO ADDITIONAL COMMISSIONER OF INCOME TAX TRANSFER PRICING OFFICER 1(2) NEW DELHI (LD TPO) PURSUANT TO WHICH THE LD.TPO INITIATED THE TP ASSES SMENT PROCEEDINGS. THE LD.TPO CONCLUDED THAT THE APPELLA NTS INCOME SHOULD BE ADJUSTED BY RS.5 90 50 134. 1.6 THE COMPARABLES AND THE MARGIN ADOPTED BY THE LD.TPO TO COMPUTE THE ADJUSTMENT IS AS DETAILED BEL OW: COMPANY NAME OP/TC INFO EDGE (INDIA) LTD. 28.62% OVERSEAS MANPOWER CORPORATION LTD. 16.28% AVERAGE 22.45% 1.7 FURTHER THE LD.AO COMPUTED THE AMOUNT OF ADJUSTMENT IN THE MANNER DETAILED BELOW: PARTICULARS AMOUNT (IN INR) TOTAL COST OF APPELLANT 31 38 56 720 ARMS LENGTH PRICE AT A MARGIN OF 22.45% 38 42 23 3 96 PRICE RECEIVED 32 51 73 262 ADJUSTMENT U/S 92CA 5 90 50 134 1.8 THEREAFTER THE LD.AO FRAMED A DRAFT ASSESSMENT ORDER UNDER SECTION 144C OF THE ACT DATED DECEMBER 21 ITA-4693/DEL/2011 4 2010 WHEREIN THE LD.AO PROPOSED TO ASSESS THE TOTA L INCOME OF THE APPLICANT AT RS.6 94 19 610/- AS AGAI NST RETURNED INCOME OF RS.1 0369 472. AGGRIEVED WITH T HE DRAFT ASSESSMENT ORDER THE APPELLANT FILED ITS OBJ ECTIONS BEFORE THE LEARNED DISPUTE RESOLUTION PANEL (LD DR P) AS PROVIDED IN SECTION 144C OF THE ACT. HOWEVER AT T HE END OF THE DRP PROCEEDINGS IN COMPLETE DISREGARD OF TH E DETAILED SUBMISSIONS PUT FORTH BY GMS THE LD.DRP VIDE DIRECTIONS ISSUED UNDER SECTION 144C OF THE ACT DAT ED JUNE 24 2011 UPHELD THE ORDER OF THE LD.AO/TPO WITHOUT APPROPRIATE APPLICATION OF MIND. THEREAFTER IN LI NE WITH THE DIRECTIONS ISSUED BY THE LD.DRP THE LD.AO MADE AN ADJUSTMENT OF RS.5 90 50 134 VIDE ITS ASSESSMENT OR DER DATED AUGUST 30 2011 IN THE APPELLANTS CASE THERE BY ASSESSING THE TOTAL INCOME OF THE APPELLANT AT RS.6 94 19 610/- AS AGAINST RETURNED INCOME OF RS.1 03 69 472 DISCLOSED BY THE APPELLANT IN ITS IN COME-TAX RETURN. FUNCTIONAL ASSETS AND RISK (FAR) ANALYSIS FUNCTIONAL ASSETS AND RISK (FAR) ANALYSIS FUNCTIONAL ASSETS AND RISK (FAR) ANALYSIS FUNCTIONAL ASSETS AND RISK (FAR) ANALYSIS 1.9 THE APPELLANT ON THE REQUIREMENT OF THE AES SHORTLISTS AND INTERVIEWS THE POTENTIAL CANDIDATES AND BASED ON THE FINAL ACCEPTANCE OF THE CANDIDATE BY T HE AES THE CANDIDATE IS RECRUITED BY THE APPELLANT ON ITS ROLLS AND SECONDED TO THE AES. DURING THE SECONDMENT PERIOD THE CANDIDATES ARE IN COMPLETE SUPERVISION AND CONTROL OF THE AES. FURTHER THE COMPENSATION AND OTHER EMPLOYEE BENEFITS ARE ALSO PROVIDED TO THE EMPLOYEE BY THE APPELLANT BASED ON THE PERFORMANCE FEEDBACK RECEIV ED FROM THE AES. IN CASE THE PERFORMANCE OF THE SECON DED EMPLOYEE IS NOT SATISFACTORY AS PER THE ASSESSEE AN D IT HAS REQUESTED FOR A SUBSTITUTION THEN THE SAID EMP LOYEE IS TERMINATED FROM EMPLOYMENT WITH GMS ALSO AND SUBSTITUTED BY ANOTHER SUITABLE CANDIDATE. 1.10 FOR PROVIDING THE ABOVE MENTIONED SECONDMENT RELATED SERVICES THE APPELLANT ACTS A RISK MITIGAT ED SERVICE PROVIDER AND IS ACCORDINGLY COMPENSATED ON AN ARMS LENGTH COST PLUS BASIS. 1.11 DURING THE TP ASSESSMENT PROCEEDINGS THE LD.T PO UNDERTOOK A INCORRECT FAR ANALYSIS AND CONCLUDED TH AT WITH RESPECT TO PROVISION OF SECONDMENT RELATED SERVICES THE APPELLANT OPERATES AS AN INDEPENDENT ENTERPRISE UNDERTAKING VARIOUS FUNCTIONS THAT LED TO CREATION AND OWNERSHIP OF VARIOUS ASSETS AND ASSUMING SEVERAL RI SKS ITA-4693/DEL/2011 5 AND THEREFORE THE COMPENSATION MODEL ADOPTED BY TH E APPELLANT WAS INADEQUATE. 1.12 THE LD.TPO CONCLUDED THAT THE APPELLANT UNDERT OOK VARIOUS FUNCTIONS THAT LED TO CREATION AND MAINTEN ANCE OF HUMAN CAPITAL INTANGIBLE BASED ON HIS OWN CONJECTU RES AND SURMISES AND IN DOING SO HE HAS RELIED UPON THE INCORRECT UNDERSTANDING OF THE BUSINESS MODEL AS PE R WHICH THE APPELLANT HAS UNDERTAKEN SEVERAL ACTIVITI ES AND BORNE SIGNIFICANT RISKS FOR THE DEVELOPMENT OF THE WORK FORCE. 1.13 IN THIS REGARD THE APPELLANT PROVIDED DETAILED FAR ANALYSIS STATING THAT ITS ROLE IS TO OPERATE STRICT LY WITHIN THE CONFINES OF THE STANDARDS PRESCRIBED BY THE OVERSEA S AES. ACCORDINGLY ALL THE KEY DECISIONS WITH REGARD TO IDENTIFICATION OF NEED FOR ADDITIONAL QUALIFIED STA FF ACCEPTANCE OF SECONDED EMPLOYEES AND SUPERVISION AN D CONTROL OF EMPLOYEES ARE UNDERTAKEN SOLELY BY THE A ES AND THE RISKS ARISING THEREFROM ARE ALSO BORNE ENTIRELY BY THE AES. THUS THE APPELLANT PERFORMS A LIMITED ROLE AN D BEARS LIMITED/MINIMAL RISKS AS A RESULT OF ITS FUNCTIONS CARRIED OUT BASED ON THE REQUIREMENTS/SPECIFICATIONS OF THE AES WITH ALL ENTREPRENEURIAL DECISIONS AS WELL AS ALL THE RI SKS ARISING FROM THOSE DECISIONS VESTING IN THEIR HANDS. FURTH ER FOR THE ACTIVITIES CARRIED OUT BY IT THE APPELLANT IS COMPENSATED ON A COST PLUS BASIS. THUS IN FORM AS WELL AS IN SUBSTANCE THE LEGAL AND ECONOMIC OWNERSHIP OF T HE SPECIFIC INTANGIBLES CREATED IF ANY AUTOMATICALLY GET VESTED IN THE HANDS OF THE OVERSEAS AES AND NOT IN THE HANDS OF THE APPELLANT. THE APPELLANTS ARGUMENTS WERE NOT TAKEN INTO COGNIZANCE BY THE LD.TPO. THE LD.AO /DRP UPHELD THE TPO ORDER. 1.14 THE DETAILED RISK ANALYSIS OF GMS HAS BEEN GIV EN AS APPENDIX 1 OF THIS SUBMISSION. COMPARABLES COMPARABLES COMPARABLES COMPARABLES 1.15 FOR DETERMINING THE ARMS LENGTH MARGIN THE APPELLANT UNDERTOOK A SEARCH FOR COMPARABLE COMPANI ES AND IDENTIFIED 14 FOREIGN COMPARABLE COMPANIES THE MEAN OPERATING PROFIT/TOTAL COST (OP/TC) OF THESE COMP ARABLES WAS 3.91%. ON THE OTHER HAND DURING THE PERIOD UN DER CONSIDERATION THE APPELLANT EARNED AN OP/TC MARGIN OF 6.02% FOR PROVISION OF SECONDMENT RELATED SERVICES TO ITS AES ACCORDINGLY IT WAS CONCLUDED THAT THE APPELLAN T MET ITA-4693/DEL/2011 6 THE ARMS LENGTH STANDARD PRESCRIBED UNDER THE INDI AN TRANSFER PRICING REGULATIONS. 1.16 THE LD.TPO REJECTED THE ECONOMIC/BENCHMARKING ANALYSIS UNDERTAKEN BY THE APPELLANT IN ITS TP DOCUMENTATION BY MERELY CONCLUDING THAT THE SEARCH FOR FOREIGN COMPARABLES UNDERTAKEN BY THE APPELLANT WAS UNNECESSARY AND INAPPROPRIATE AND DID NOT TAKE COGNIZANCE OF THE FACT THAT THE APPELLANTS 100% RE VENUE DURING THE RELEVANT ASSESSMENT YEAR WAS ATTRIBUTABL E TO RENDERING OF SECONDMENT RELATED SERVICES TO ITS VAR IOUS AES ACROSS THE GLOBE AND FOR AN APPROPRIATE COMPARISON IT WOULD BE PRUDENT TO COMPARE THE PRICE THAT THE AES WOULD HAVE PAID TO THIRD PARTY SERVICE PROVIDERS IN OVERS EAS JURISDICTION FOR RECEIPT OF SIMILAR SERVICES AS REN DERED BY THE APPELLANT. 1.17 THE LD.TPO ALSO PROPOSED TO CONSIDER A SET OF TWO INDIAN COMPANIES IDENTIFIED BY HIM FOR DETERMINATIO N OF ALM NAMELY INFO EDGE (INDIA) LIMITED AND OVERSEAS MANPOWER CORPORATION LIMITED. GMS PUT FORTH THE FOLLOWING CONTENTIONS AGAINST THE USE OF THE SAID T WO COMPARABLES. S.NO. NAME OF THE COMPANY OP/TC DISSIMILARITIES BETWEEN GMS AND COMPARABLES 1 INFO EDGE (INDIA) LTD. 28.62% * DIVERSIFIED SERVICES SUCH AS RECRUITMENT RELATED REAL ESTATE RELATED MATRIMONIAL RELATED SERVICES AND OWNS SIGNIFICANT INTANGIBLES/WEBSITES SUCH AS NAUKRI.COM 99 ACRE.COM WHEREAS GMS DOES NOT OWN ANY INTANGIBLES. * HAS INCURRED HIGH ADVERTISEMENT AND MARKETING EXPENSES OF APPROX 28% AS AGAINST GMS WHICH HAS NIL ADVERTISEMENT EXPENSE AND * HAS EMPLOYEES COST/TOTAL COST RATIO OF ONLY 46% AS COMPARED TO 71% OF THE APPELLANT. (REFER PAGE 176 TO PAGE 181 OF THE PAPERBOOK TO FORM 36B AND REFER INTERNAL PAGE 49 TO PAGE 52 OF THE OBJECTIONS RAISED BEFORE THE DRP) ITA-4693/DEL/2011 7 2 OVERSEAS MANPOWER CORPN.LTD. 16.28% * GOVERNMENT ORGANIZATION WHICH WAS GOVERNED BY GOVERNMENT POLICIES AND NOT BY MARKET FORCES. * AS PART OF ITS BUSINESS ACTIVITIES IT IS ENGAGED IN PROVIDING RECRUITMENT AGENCY SERVICES. * HAS INCURRED HIGH ADVERTISEMENT AND MARKETING EXPENSES OF APPROX. 10% AS AGAINST GMS WHICH HAS NIL ADVERTISEMENT EXPENDITURE. * HAS EMPLOYEES COST/TOTAL COST RATIO OF ONLY 22% AS COMPARED TO 71% OF THE APPELLANT. (REFER PAGE 181 TO PAGE 183 OF THE PAPERBOOK TO FORM 36B AND REFER INTERNAL PAGE 53 TO PAGE 55 OF THE OBJECTIONS RAISED BEFORE THE DRP) MEAN 22.45% 1.18 THE APPELLANT ON A WITHOUT PREJUDICE BASIS UND ERTOOK A FRESH SEARCH FOR COMPARABLES COMPANIES ON INDIAN DATABASES BASED ON THE DATA AND INFORMATION AVAILAB LE NOW WHICH WAS NOT AVAILABLE AT THE TIME OF UNDERTAK ING THE TP ANALYSIS AND ARRIVED AT A CLOSE COMPARABLE COMPA NY NAMELY OF MISCELLANEOUS APPLICATION FOI MANAGEMENT CONSULTANTS LTD. WHICH WAS A PEO AND ACCORDINGLY FUNCTIONALLY COMPARABLE TO THE FUNCTION PERFORMED B Y THE APPELLANT. THE LD.TPO REJECTED THE SAME ON THE GRO UNDS THAT THE COMPARABLE HAD SIGNIFICANT RELATED PARTY TRANSACTION DURING THE YEAR UNDER CONSIDERATION. H OWEVER THE APPELLANT SUBMISSION PROVING THAT THE COMPARABL E DID NOT HAVE SIGNIFICANT RELATED PARTY TRANSACTIONS DUR ING THE YEAR WAS IGNORED COMPLETELY. NAME OF THE COMPANY OP/TC BUSINESS DESCRIPTION MA FOI MANAGEMENT CONSULTANTS LTD. (MA FOI) 3.35% MA FOI WORKS ON A PEO MODEL SIMILAR TO THE MODEL FOLLOWED BY THE APPELLANT. THE COMPANY PROVIDES SENIOR LEVEL RECRUITMENT ITA-4693/DEL/2011 8 VENDOR MANAGEMENT PSYCHOMETRIC TESTING AND RELATED SERVICES. TPO REJECTED IT ON THE GROUND OF IT HAVING SIGNIFICANT RELATED PARTY TRANSACTIONS. ON PERUSAL OF THE ANNUAL REPORT OF FY 2007-08 IT CAN BE SEEN THAT MA FOI DOES NOT HAVE SIGNIFICANT RELATED PARTY TRANSACTION IN THE YEAR CONSIDERATION. ACCORDINGLY SHOULD BE ACCEPTED AS A COMPARABLE. DURING THE YEAR UNDER CONSIDERATION MA FOIS PERCENTAGE OF RELATED PARTY TRANSACTIONS TO REVENUE WAS 4.95%. IN CASE OF SONY RULING (SONY INDIA (P) LIMITED VS. DCIT (114 ITD 448)) THE ITAT HELD THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED IF ITS RELATED PARTY TRANSACTION DO NOT EXCEED 10%- 15% OF TOTAL REVENUE. WITHIN THE ABOVE LIMIT TRANSACTIONS CANNOT BE HELD TO INFLUENCE THE PROFITABILITY OF COMPARABLES. (REFER PAGE 184 TO PAGE 186 OF THE PAPERBOOK TO FORM 36B AND REFER INTERNAL PAGE 46 TO PAGE 48 OF THE OBJECTIONS RAISED BEFORE THE DRP) 1.19 FURTHER IF ONE WERE TO COMPARE THE OPERATING MARGIN OF MA FOI IS 3.35% WITH THE OPERATING MARGIN OF GM S OF 6.02%; IT ESTABLISHES THE FACT THAT THE APPELLANTS INTRA- GROUP TRANSACTIONS MEET THE ARMS LENGTH STANDARD. 1.20 THE LD.TPO ALSO REJECTED ANOTHER COMPARABLE COMPANY NAMELY EDCIL(INDIA) LTD. (HUMAN RESOURCE DEVELOPMENT SEGMENT) GIVEN IN THE FRESH SEARCH BY T HE APPELLANT WITHOUT STATING ANY REASON FOR REJECTION OF THE SAID COMPANY IN HIS IMPUGNED ORDER. THE APPELLANT SUBMITTED THAT ON A CLOSE ANALYSIS OF THE HUMAN RES OURCE DEVELOPMENT DIVISION OF EDCIL IT CAN BE SEEN THAT THIS SEGMENT IS COMPARABLE TO THE APPELLANTS FUNCTIONS. ITA-4693/DEL/2011 9 FURTHER THE SAME SEGMENT OF THE COMPANY HAS BEEN PROPOSED TO BE ACCEPTED BY THE LD.TPO AS COMPARABLE IN THE SUBSEQUENT YEARS TRANSFER PRICING ASSESSMENT. NAME OF THE COMPANY OP/TC BUSINESS DESCRIPTION EDCIL (HUMAN RESOURCE DEVELOPMENT SEGMENT) 11.20% FROM THE ANALYSIS OF THE HUMAN RESOURCE DEVELOPMENT DIVISION OF EDCIL IT CAN BE SEEN THAT THIS SEGMENT GENERATES ITS REVENUES FROM PROVISION OF TESTING RECRUITMENT AND ASSESSMENT SERVICES SECONDMENT SERVICES AND STUDENT PLACEMENT. THE TESTING RECRUITMENT AND ASSESSMENT SERVICES INVOLVE SELECTION AND RECRUITMENT OF EXECUTIVES PROFESSIONALS TEACHERS AND SKILLED STAFF TO VARIOUS SECTORS ACROSS THE COUNTRY. THE SECONDMENT SERVICES INVOLVE FACILITATION OF SECONDMENT OF FACULTY/TEACHERS AND EX PERTS IN DIVERSE FIELDS TO COUNTRIES OUTSIDE INDIA. THE STUDENT PLACEMENT SERVICES ARE PROVIDED WITH THE OBJECTIVE TO PLACE INTERNATIONAL ELIGIBLE FOREIGN NATIONALS/NON-RESIDENT INDIANS (NRIS)/PERSONS OF INDIAN ORIGIN (PIO) IN REPUTED AND PRESTIGIOUS INDIAN INSTITUTIONS RECOGNIZED BY THE REGULATORY BODIES GOVERNMENT OF INDIA. THE TPO REJECTED THE SEGMENT WITHOUT GIVING ANY REASON IN HIS ORDER. THE SAME HAS BEEN ACCEPTED BY THE TPO IN NEXT YEARS TP ASSESSMENT PROCEEDINGS. (REFER INTERNAL PAGE 48 TO PAGE 49 OF THE OBJECTIONS RAISED BEFORE THE DRP) 1.21 IF BOTH MA FOI AND EDCIL (HUMAN RESOURCE DEVELOPMENT SEGMENT) ARE CONSIDERED THE MEAN COMES TO 7.23% AS DETAILED BELOW: ITA-4693/DEL/2011 10 COMPANY NAME OP/TC MA FOI MANAGEMENT CONSULTANTS LTD. 3.35% EDCIL (HUMAN RESOURCE DEVELOPMENT SEGMENT) 11.20% AVERAGE 7.23% 1.22 HENCE PRICES OF INTERNATIONAL TRANSACTIONS OF GMS THAT ACHIEVE AN OP/TC OF 7.23% OR MORE OR IS WITHI N THE 5% RANGE AVAILABLE AS PER PROVISO TO SECTION 92C(2) OF THE INCOME-TAX ACT 1961 WOULD MEET THE ARMS LENGTH STANDARD REQUIRED UNDER THE INDIAN REGULATIONS. CONSIDERING THE OPERATING MARGIN OF 6.02% OVER COST S THE ARITHMETIC MEAN OP/TC OF COMPARABLE COMPANIES OF 7. 23% IS WITHIN THE 5% RANGE (WHICH COMES TO 11.32%) AVAI LABLE TO GMS. 1.23 THE LD.TPO ALSO REJECTED ONE COMPARABLE NAMELY ACQVIRE TALENT SERVICE LTD. ON THE UNJUSTIFIED BASI S OF DECLINING PROFITS AND SALES. (REFER INTERNAL PAGE 55 OF THE OBJECTIONS RAISED BEFORE THE DRP). 1.24 THE APPELLANTS CONTENDED THAT BASED ON THE SON Y RULING (SONY INDIA (P) LIMITED VS. DCIT (114 ITD 44 8)) TO JUDGE AN APPROPRIATENESS OF A COMPARABLE A NUMBER OF FACTORS ARE TO BE SEEN AND THEIR CUMULATIVE EFFECT NEEDS TO BE EVALUATED. THE TRIBUNAL IN SONY RULING HAS HELD THAT EVEN CONSISTENT LOSSES ALONE IS NOT A SUFFICIENT RE ASON FOR EXCLUDING A COMPANY BUT THE CUMULATIVE RESULT OF SE VERAL FACTORS NEEDS TO BE SEEN. IF A COMPANY IS NOT TO B E REJECTED IPSO-FACTO ON GROUNDS OF LOSSES/CONSISTENT LOSSES THEN DIMINISHING REVENUE FILTER STANDS ON AN EVEN W EAKER FOOTING AS AN INDICATOR OF ECONOMIC DISTRESS FOR A COMPANY. 1.25 IF BOTH MA FOI EDCIL (HUMAN RESOURCE DEVELOPM ENT SEGMENT) AND ACQVIRE TALENT SERVICE LTD. ARE CONSID ERED THE MEAN COMES TO 3.82% AS DETAILED BELOW: S.NO. NAME OF THE COMPANY OP/TC 1. ACQVIRE TALENT SERVICE LTD. -3.08% 2. MA FOI MANAGEMENT CONSULTANTS LTD. 3.35% 3. EDCIL (HUMAN RESOURCE DEVELOPMENT SEGMENT) 11.20 % MEAN 3.82% 1.26 A PERUSAL OF THE ABOVE SHOWS THAT THE MEAN OPERATING MARGIN ON COSTS OF THE THREE COMPARABLE ITA-4693/DEL/2011 11 COMPANIES COMES TO 3.82%. THE PRICES OF INTERNATIO NAL TRANSACTIONS OF THE APPELLANT THAT ACHIEVE AN OP/TC OF 3.82% WOULD MEET THE ARMS LENGTH STANDARD REQUIRED UNDER THE INDIAN REGULATIONS. THE OPERATING MARGIN OF GMS IS 6.02% OVER COSTS THUS ESTABLISHING THE FACT THAT THE APPELLANTS INTRA-GROUP TRANSACTIONS MEET THE A RMS LENGTH STANDARD PRESCRIBED UNDER THE INDIAN TRANSFE R PRICING REGULATIONS. VALUE ADDED EXPENSES (ALTERNATIVE APPROACH) VALUE ADDED EXPENSES (ALTERNATIVE APPROACH) VALUE ADDED EXPENSES (ALTERNATIVE APPROACH) VALUE ADDED EXPENSES (ALTERNATIVE APPROACH) 1.27 THE LD.TPO ALSO REJECTED THE ALTERNATIVE APPRO ACH PROPOSED BY THE APPELLANT WHEREIN IT HAD SUGGESTED THAT SHOULD THE LD.TPO WISHED TO CONTINUE TO BENCHMARK APPELLANTS INTERNATIONAL TRANSACTION WITH RECRUITM ENT COMPANIES THEN THE COST OF SECONDED EMPLOYEES SHOUL D BE TREATED AS PASS THROUGH COSTS SINCE THE APPELLANT HAD NOT UNDERTAKEN ANY VALUE ADDING FUNCTION FOR SUCH COSTS AND THUS ONLY A MARK-UP ON THE VALUE ADDED EXPENSES WAS SUFFICIENT (I.E. ONLY COST OF THOSE EMPLOYEES UNDER TAKING VALUE ADDING FUNCTIONS SUCH AS IDENTIFICATION OF EM PLOYEES TO BE SECONDED GENERAL AND ADMINISTRATIVE SUPPORT SERVICES COST DEPRECIATION AND OTHER RELATED OPERA TIONAL COSTS). THE LD.AO/DRP UPHELD THE TPOS REJECTION. 1.28 FURTHER IF ONE WERE TO CONSIDER RECRUITMENT A GENCIES WHICH DO NOT MAINTAIN HIRED EMPLOYEES ON THEIR ROLL S THE TOTAL OPERATING COSTS OF THESE COMPANIES CAN BE CON SIDERED EQUAL TO THE VALUE ADDED EXPENSES. 1.29 THE LD.TPO FAILED TO APPRECIATE THE DIFFERENCE BETWEEN THE RECRUITMENT AGENCY AND PEO MODEL. THE SAME IS REPRODUCED BELOW : (REFER PAGE 177 OF THE PAPERBOOK TO FORM 36B AND INTERNAL PAGE 64 OF THE OBJECTIONS RAISED BEFORE THE DRP). S.NO. BASIS PEO MODEL RECRUITMENT AGENCY MODEL 1. CONCEPT PEOS ENABLE PROSPECTIVE EMPLOYERS TO COST-EFFECTIVELY OUTSOURCE THE MANAGEMENT OF HUMAN RESOURCES EMPLOYEE BENEFITS PAYROLL AND W ORKERS COMPENSATION. A RECRUITMENT AGENCY IS AN ORGANIZATION WHICH MATCHES PROSPECTIVE EMPLOYERS TO PROSPECTIVE EMPLOYEES. THE CONCEPT IS TO BRING TOGETHER THE PROSPECTIVE EMPLOYEE AND PROSPECTIVE EMPLOYER BASED ON MATCHING MUTUAL NEEDS OF ITA-4693/DEL/2011 12 PEO CLIENTS FOCUS ON THEIR CORE COMPETENCIES TO MAINTAIN AND GROW THEIR BOTTOM LINE. THE PEO TYPICALLY HANDLES THE ADMINISTRATIVE SIDE OF EMPLOYMENT. BOTH THE PARTIES. THE RECRUITMENT AGENCY DOES NOT PROVIDE ANY OTHER SERVICE IN THIS REGARD. THE MODEL IS SIMILAR TO A COMMISSION MODEL WHEREIN THE COMMISSION AGENT INTRODUCES THE BUYER AND SELLER. 2. CONTRACTUAL THE EMPLOYMENT CONTRACT IS BETWEEN THE EMPLOYEE (SECONDEE) AND THE PEO. EMPLOYMENT CONTRACT OF THE PERSONNEL TO BE RECRUITED IS BETWEEN THE EMPLOYER AND THE PROSPECTIVE EMPLOYEE. THE RECRUITMENT AGENCY HAS NO ROLE IN THE EMPLOYMENT CONTRACT. 3. REVENUE MODEL PEOS RECEIVE A SERVICE FEE FOR THE SERVICES PROVIDED. RECRUITMENT COMPANIES RECEIVE COMMISSION/INCOME ON SUCCESSFULLY PLACING AN EMPLOYEE OR FILLING A VACANCY FOR THE EMPLOYER. 4. COSTS EMPLOYEE/PERSONNEL COSTS ARE PART OF THE PEOS COSTS AS EMPLOYEES PROVIDED TO OTHER COMPANIES ARE ON ITS PAYROLL. EMPLOYEES RECRUITED BY CUSTOMERS ARE NOT ON THE ROLLS OF THE RECRUITMENT AGENCY. HENCE SUCH EMPLOYEE COSTS DO NOT FORM PART OF THE COST BASE OF RECRUITMENT AGENCY. 1.30 BASED ON THE ALTERNATE APPROACH AS SUGGESTED B Y THE APPELLANT WHEREIN THE COST OF SECONDED EMPLOYEE IS TREATED AS A PASS THROUGH COST IN CASE OF PEOS THE MEAN MARGIN OF UNCONTROLLED COMPARABLES COMES TO 13.58% AS GIVEN BELOW. S.NO. NAME OF THE COMPANY OP/VAE 1. ACQVIRE TALENT SERVICES LTD. -3.08% 2. EDCIL (INDIA) LTD. (HUMAN RESOURCE DEVELOPMENT SEGMENT) 11.20% 3. INFO EDGE (INDIA) LTD. 28.62% 4. MA FOI MANAGEMENT CONSULTANTS LTD. 16.28% ITA-4693/DEL/2011 13 5. OVERSEAS MANPOWER CORPN.LTD. 16.28% MEAN 13.58% 1.31 THE ABOVE ANALYSIS SHOWS THAT THE ARITHMETIC M EAN OP/VAE OF COMPARABLE COMPANIES IDENTIFIED BY THE LD .TPO IS 13.58%. ON THE OTHER HAND THE APPELLANTS OP/VA E MARGIN WORKS OUT TO 20.18% AND ACCORDINGLY THE MARG IN OF THE APPELLANT IS AT ARMS LENGTH. PARTICULARS AMOUNT (IN RS.) SERVICE FEE (A) SERVICE FEE (A) SERVICE FEE (A) SERVICE FEE (A) 19 92 27 743 EXPENDITURE EXPENDITURE EXPENDITURE EXPENDITURE PERSONNEL EXPENSES 23 60 364 ADMINISTRATIVE AND OTHER EXPENSES 5 31 86 217 BANK CHARGES 3 83 522 DEPRECIATION 1 55 029 VA VAVA VALUE ADDED COST (VAE) (B) LUE ADDED COST (VAE) (B) LUE ADDED COST (VAE) (B) LUE ADDED COST (VAE) (B) 5 60 85 132 5 60 85 132 5 60 85 132 5 60 85 132 PASS THROUGH COST OF SECONDED EMPLOYEES (C) 13 18 2 6 068 TOTAL COST (TC) (D=B+C) TOTAL COST (TC) (D=B+C) TOTAL COST (TC) (D=B+C) TOTAL COST (TC) (D=B+C) 18 79 11 200 18 79 11 200 18 79 11 200 18 79 11 200 OPERATING PROFIT (E=A-D) 1 13 16 543 OP/VAE OP/VAE OP/VAE OP/VAE 20.18% 1.32 THE ABOVE WAS ALSO DISREGARDED BY THE LD.TPO/AO/DRP. (REFER PAGE 336 TO PAGE 337 OF PAPE RBOOK TO FORM 36B AND INTERNAL PAGE 68 TO 76 OF THE OBJEC TIONS RAISED BEFORE THE DRP). REIMBURSEMENTS REIMBURSEMENTS REIMBURSEMENTS REIMBURSEMENTS 1.33 THE INTERNATIONAL TRANSACTIONS PERTAINING TO C OST REIMBURSEMENTS FROM AES WERE UNDERTAKEN BY THE APPELLANT TO FACILITATE THE PAYMENT ON BEHALF OF IT S AES FOR MERE ADMINISTRATIVE CONVENIENCE. ACCORDINGLY THE COST ONLY REIMBURSEMENT BY AES TO THE APPELLANT WAS CONSIDERED AS THE ARMS LENGTH PRICE (ALP) FOR TH E COST REIMBURSEMENT TRANSACTION. 1.34 LD.TPO HELD THAT THE REIMBURSEMENTS RECEIVED B Y GMS AMOUNTING TO RS.12 59 45 519 SHOULD BE INCLUDED IN THE COST BASE OF THE APPELLANT AND DETERMINED THE O P/TC OF THE APPELLANT AT 3.60% AS DETAILED BELOW : (REFER I NTERNAL PAGE 28 OF THE LD.TPOS ORDER). ITA-4693/DEL/2011 14 PARTICULARS AMOUNT (IN INR) TOTAL OPERATING INCOME 32 51 73 262 TOTAL OPERATING EXPENSES 31 38 56 720 OPERATING PROFIT 1 13 16542 OP/TC 3.60% 1.35 FURTHER IN DOING SO THE LD.TPO INCLUDED THE REIMBURSEMENTS RECEIVED BY THE APPELLANT AMOUNTING TO RS.12 59 45 519 TO THE COST BASE OF THE APPELLANT W HICH WAS RS.18 79 11 200 AND THEREBY IGNORING THE SUBMIS SIONS MADE BY THE APPELLANT THAT THESE EXPENSES ARE IN TH E NATURE OF THIRD PARTY EXPENSES AND PERTAINED TO TRA VELING. VISA AND INSURANCE EXPENSES OF VARIOUS PERSONNEL DEPLOYED TO ITS AES AND WERE SUBSEQUENTLY REIMBURSE D BY THE AES TO THE APPELLANT. 1.36 FURTHER EVEN IF ONE WERE TO FOLLOW THE TPOS APPROACH BY CONSIDERING REIMBURSEMENTS AS PART OF OPERATING COST THEN ALSO THE ARITHMETIC MEAN OP/TC OF COMPARABLE COMPANIES (TAKING MA FOI AND EDCIL (HUMA N RESOURCE DEVELOPMENT SEGMENT) OF 7.23% AS COMPARED TO THAT OF THE APPELLANT AT 3.60% WOULD FALL WITHIN TH E 5% RANGE (WHICH COMES TO 8.78%) AVAILABLE TO GMS. THEREFORE BY EXERCISING THE OPTION OF PROVISO TO S ECTION 92C(2) OF THE INCOME-TAX ACT THE PRICING BASIS OF INTERNATIONAL TRANSACTIONS OF GMS WITH ITS AES IS I N ACCORDANCE WITH THE ARMS LENGTH STANDARD REQUIRE D UNDER THE INDIAN REGULATIONS. THE LD.TPO WHILE DETERMINING THE ALP AT 22.45% BASE D ON TWO COMPARABLE COMPANIES UNDERTAKING HIGH RISKS MISCONSTRUED THE RISK PROFILE OF GMS BY INCORRECTLY CONSIDERING THAT THE APPELLANT WAS ALSO EXPOSED TO SIMILAR RISKS AS THAT OF COMPANIES SELECTED BY THE LD.TPO. HOWEVER THE CORRECT RISK PROFILE OF THE APPELLANT IS REPRODUCED BELOW : RISK CATEGORY AND DESCRIPTION EXPOSURE TO GMS EXPOSURE TO AES MARKET RISK : MARKET RISK ARISES FOR A BUSINESS DUE TO INCREASED COMPETITION GMS PROVIDES SECONDMENT RELATED SERVICES TO VARIOUS AES AND NOT A SINGLE CUSTOMER AS ALLEGED BY THE LD.TPO IN THE THE PERSONNEL ARE SECONDED ON NEED AND REQUEST OF THE AES. THIS NEED IS DEPENDENT ITA-4693/DEL/2011 15 AND RELATIVE PRICING PRESSURES CHANGE IN DEMAND PATTERNS AND NEEDS OF CUSTOMERS INABILITY TO DEVELOP/PENETRATE IN A MARKET ETC. IMPUGNED TP ORDER. FURTHER THE APPELLANT RECEIVES REMUNERATION FROM ITS AES ON A TOTAL COST PLUS BASIS IRRESPECTIVE OF THE FACT WHETHER THE AES ARE ABLE TO RECOVER THESE COSTS FROM HTIER CUSTOMERS. ACCORDINGLY GMS IS NOT EXPOSED TO THIS RISK. UPON THE VOLUME OF BUSINESS OPERATIONS CARRIED OU T BY THE AES. THUS THE AES ARE EXPOSED TO THIS RISK. SERVICE LIABILITY RISK : RISKS ASSOCIATED WITH PRODUCT/SERVICE FAILURES INCLUDING NON- PERFORMANCE TO GENERALLY ACCEPTED OR REGULATORY STANDARDS. THIS COULD RESULT IN PRODUCT RECALLS AND POSSIBLE INJURIES TO END- USERS. AS PART OF ITS OPERATION GMS MAKES AVAILABLE THE REQUIRED QUALIFIED PERSON TO THE RESPECTIVE AES ACCORDING TO THEIR NEEDS. THE SECONDED EMPLOYEES WORK UNDER THE DIRECTION AND SUPERVISION OF RESPECTIVE AES WHO MONITOR THE WORK PERFORMED BY SECONDED EMPLOYEES ACCORDINGLY GMS IS NOT RESPONSIBLE FOR THE WORK PERFORMED BY THE EMPLOYEES. IN CASE OF NON-PERFORMANCE BY SECONDED EMPLOYEE TO THE SATISFACTORY LEVEL THE GROUP COMPANIES REQUEST FOR SUBSTITUTION OF SUCH EMPLOYEE. ACCORDINGLY GMS TERMINATES THE EMPLOYMENT WITH SUCH EMPLOYEE AND RECRUITS A FRESH CANDIDATE. THE COST BORNE BY GMS IN TERMINATION AND RECRUITMENT IS RECOVERED BY GMS FROM ITS AES WITH A MARK-UP. FURTHER ANY LOSSES OR LIABILITY ARISEN DUE TO NON-PERFORMANCE OF THE SECONDED EMPLOYEES REMAINS THE RESPONSIBILITY AND LIABILITY OF THE AE. THEREFORE GMS IS NOT EXPOSED TO THE SERVICE LIABILITY RISK. THE SECONDED EMPLOYEE WORKS UNDER THE DIRECTION AND CONTROL OF THE AES TO WHICH THEY ARE SECONDED. THE AES PAY THE COST OF SUCH EMPLOYEES WITH A MARK-UP THEREFORE AES ARE EXPOSED TO THIS RISK. ITA-4693/DEL/2011 16 CREDIT RISK : THIS IS THE RISK ARISING FROM NON- PAYMENT OF DUES BY CUSTOMERS. GMS IS PROTECTED FROM THIS RISK AS IT IS COMPENSATED BY ITS AES ON A COST PLUS MARK-UP THEREON IRRESPECTIVE OF THE FACT WHETHER THE AES HAVE RECOVERED SUCH COSTS FROM ITS CUSTOMERS. THE AES BEAR THIS RISK TO THE EXTENT THEY HAVE TO RECOVER PAYMENTS FROM THIRD PARTIES FOR PROVISION OF SERVICES. FOREIGN EXCHANGE RISK : THIS RISK RELATES TO THE POTENTIAL IMPACT ON PROFITS THAT MAY ARISE BECAUSE OF CHANGES IN FOREIGN EXCHANGE RATES. GMS INVOICES ITS AES IN CURRENCY OTHER THAN ITS FUNCTIONAL CURRENCY I.E. INDIAN RUPEES. ACCORDINGLY GMS BEARS THE FOREIGN EXCHANGE RISK IN RELATION TO MOVEMENT IN EXCHANGE RATE BETWEEN FOREIGN CURRENCY AND LOCAL CURRENCY. HOWEVER THIS RISK IS MITIGATED AS GMS BILLS FOR ITS SERVICES ON COST CONSIDERING THE IMPACT OF MOVEMENT IN EXCHANGE RATE BETWEEN FOREIGN CURRENCY AND LOCAL CURRENCY PLUS MARK-UP BASIS TO ITS AES. TO THE EXTENT THE GENPACT GROUP TRANSACTS IN CURRENCY OTHER THAN ITS FUNCTIONAL CURRENCY IT IS SUBJECT TO FOREIGN EXCHANGE RISK. MANPOWER RISK : ANY ENTERPRISE WHICH IS LARGELY DEPENDENT FOR ITS SUCCESS UPON QUALIFY PERSONNEL WITH SUPERIOR TECHNICAL KNOWLEDGE IS FACED WITH THIS RISK. COMPETITIVE MARKET FORCES EXPOSE SUCH AN ENTERPRISE TO THE RISK OF LOSING ITS TRAINED PERSONNEL. MAJORITY OF GMSS PERSONNEL CONSISTS OF EMPLOYEES SECONDED TO AES FOR WHICH THE APPELLANT DOES NOT BEAR ANY MANPOWER RISK AS IT EMPLOYS THESE PEOPLE FOR SECONDMENT AFTER THE ACCEPTANCE FROM ITS AES. FURTHER GMS DOES NOT EMPLOY HIGH END TECHNICAL PERSONNEL FOR ITS ROUTINE OPERATIONS. ALSO SINCE GMS RENDERS SECONDMENT RELATED SERVICES ON COST PLUS MARK-UP BASIS HENCE ANY RISK IF AT ALL ARISEN OUT OF ITS ROUTINE FUNCTIONS IS MITIGATED. AES ALSO EMPLOY SKILLED/TECHNICAL AND TRAINED WORKFORCE AND ACCORDINGLY FACE SIGNIFICANT RISK ON THIS ACCOUNT. PRICE RISK : THIS RISK ARISES AS A RESULT OF PRICE PRESSURES IN THE MARKET RESULTING IN GMS DOES NOT HAVE AN EXPOSURE TO THIS RISK AS ITS REMUNERATION FROM AES IS NOT DEPENDENT UPON PRICES CHARGED BY AES TO THEIR AES OPERATE IN HIGHLY COMPETITIVE ENVIRONMENT AND HAVE DIRECT DEALINGS WITH ITA-4693/DEL/2011 17 PRICE UNDERCUTTING AND THEREBY ADVERSELY IMPACTING PROFITABILITY. CUSTOMERS. CUSTOMERS AND ARE ACCORDINGLY EXPOSED TO PRICING PRESSURES AND BEARS SIGNIFICANT RISK ON THIS ACCOUNT. LEGAL AND STATUTORY RISK : THIS RISK PRIMARILY ARISES ON NON- COMPLIANCE WITH ANY LEGAL/ CONTRACTUAL/ STATUTORY PROVISIONS. GMS BEARS NORMAL RISK ASSOCIATED WITH OPERATING IN THE INDIAN ENVIRONMENT. AES FACE STRINGENT LEGAL ENVIRONMENT AND ARE EXPOSED TO HIGHER RISKS OF HUGE CLAIMS DAMAGES AND SUITS FROM END-CUSTOMERS. TECHNOLOGY RISK : THIS RISK ARISES IF THE MARKET IN WHICH THE COMPANY OPERATES IN IS SENSITIVE TO INTRODUCTION OF NEW PRODUCTS AND TECHNOLOGIES. HENCE IN THAT CASE BUSINESS UNITS MAY FACE LOSS OF POTENTIAL REVENUES DUE TO INEFFICIENCIES ARISING FROM OBSOLETE INFRASTRUCTURE AND TOOLS AS WELL AS OBSOLESCENCE OF MANUFACTURING PROCESSES. THE SERVICES PROVIDED BY GMS IS NOT VERY SENSITIVE TO TECHNOLOGICAL CHANGES HENCE IT IS NOT EXPOSED TO THIS RISK. IT RECRUITS MANPOWER FROM GENPACT GROUPS OFFSHORE DELIVERY CENTRE IN INDIA AND SECONDS THEM TO ITS AES. AES ARE EXPOSED TO THIS RISK AS THEY ARE ENGAGED IN RENDERING INFORMATION TECHNOLOGY ENABLED SERVICES. CAPACITY UTILISATION RISK : THIS RISK ARISES ON ACCOUNT OF UNDER- UTILISATION OF MANUFACTURING/SERVICE FACILITY/PERSONNEL. GMS IS COMPENSATED BY ITS AES FOR ITS OPERATING COST INCURRED IN RENDERING THE SECONDMENT RELATED SERVICES PLUS A MARK-UP THEREON; ACCORDINGLY IT IS NOT EXPOSED TO THIS RISK. GMS RECRUITS EMPLOYEES TO BE SECONDED ONCE IT CONSULTS THE AES FOR THEIR ACCEPTANCE. HENCE GMS DOES NOT FACE THE RISK OF IDLE BENCH. AES FACE THIS RISK AS THEY COMPENSATE GMS ON A COST PLUS BASIS IRRESPECTIVE OF THE EXTENT OF UTILIZATION OF THE SECONDED EMPLOYEES. SCHEDULING RISK : THIS THE APPELLANT IS ENGAGED IN AES ARE EXPOSED TO THIS ITA-4693/DEL/2011 18 RISK ARISES OUT OF INEFFICIENT DELIVERY SCHEDULES AND DEFICIENCY IN PLANNING. PROVIDING SECONDMENT RELATED SERVICES ON THE DIRECTIONS LAID DOWN BY ITS AES. IN THE EVENT THAT THERE ARE ADDITIONAL COSTS INCURRED BY THE APPELLANT DUE TO SCHEDULING REQUIREMENTS THE SAME IS REMUNERATED BY ITS AES ALONGWITH A MARK-UP. THEREFORE THIS RISK IS NOT BORNE BY THE APPELLANT. RISK. GOVERNMENT & INSTITUTIONAL/LEGAL & STATUTORY RISK : GOVERNMENT & INSTITUTIONAL RISK IS BORNE BY AN ENTITY IF A CHANGE IN A GOVERNMENT TAX POLICY OR REGULATION AFFECTS THE FUNCTIONING OR REMUNERATION OF THAT ENTITY OR THIS RISK PRIMARILY ARISES ON NON- COMPLIANCE WITH ANY LEGAL CONTRACTUAL/ STATUTORY PROVISIONS. GMSS FOCUS IS ON OVERSEAS MARKET HOWEVER AS THE APPELLANT IS LOCATED IN INDIA IT HAS TO COMPLY WITH THE LOCAL LEGAL AND STATUT ORY REQUIREMENTS. MOREOVER THE APPELLANT IS NOT ENGAGED IN SENSITIVE INDUSTRIES LIKE OIL EXPLORATION WEAPONS AND ARMOURY AIRLINES ETC. ACCORDINGLY IT BEARS NORMAL RISKS. AES FACE STRINGENT LEGAL ENVIRONMENT AND ARE EXPOSED TO HIGHER RISKS OF HUGE CLAIMS DAMAGES AND SUITS FROM END-CUSTOMERS. OPERATIONAL RISK : OPERATIONAL RISK IS THE RISK OF LOSS RESULTING FROM INADEQUATE OR FAILED INTERNAL PROCESSES PEOPLE AND SYSTEMS OR FROM EXTERNAL EVENTS. ALL COSTS OF BUSINESS OPERATIONS OF GMS ARE RECOVERED FROM ITS AES ALONG WITH A MARK- UP. THEREFORE GMS IS NOT EXPOSED TO THIS RISK. THE RISK OF INADEQUATE PERFORMANCE OF THE SECONDED EMPLOYEE LIES WITH THE AES. THE PERFORMANCE OF THE SECONDED EMPLOYEE IS THE RESPONSIBILITY OF THE AES TO WHICH THE EMPLOYEE IS SECONDED. ASSET REDUNDANCY RISK : THIS RISK ARISES OUT OF OBSOLESCENCE AND REDUNDANCY OF ASSETS. GMS UTILIZES ROUTINE TANGIBLE ASSETS LIKE COMPUTERS AND PERIPHERALS OFFICE PREMISES COMMUNICATION FACILITIES ETC. AES OWN VARIOUS SIGNIFICANT INTANGIBLE SUCH AS BRAND NAME TECHNICAL KNOW-HOW ITA-4693/DEL/2011 19 FURTHER THE APPELLANT DOES NOT OWN OR DEVELOP ANY INTANGIBLE OR SPECIFIC KNOW HOW ON ITS ACCOUNT ALL INTANGIBLES AND SPECIFIC KNOW HOW ARE OWNED BY THE AES. THEREFORE THE APPELLANT IS PROTECTED FROM THIS RISK. ETC. THUS THE AES ARE EXPOSED TO THIS RISK. SECURITY RISK : THIS RISK REFERS TO THE THREAT OF TERRORIST ATTACKS WHICH CAN SIGNIFICANTLY IMPACT THE ECONOMY AS WELL AS VARIOUS COMPANIES. UNFORESEEN EVENTS LIKE RIOTS TERRORIST ATTACKS BOMB-BLAST ETC. CANNOT BE PREDICTED AND ARE COMMON TO ALL PLAYERS IN THE INDUSTRY. UNFORESEEN EVENTS LIKE RIOTS TERRORIST ATTACKS BOMB-BLAST ETC. CANNOT BE PREDICTED AND ARE COMMON TO ALL PLAYERS IN THE INDUSTRY. ENVIRONMENTAL RISK : GMS IS SERVICES PROVIDER AND NOT A MANUFACTURER AND THERE ARE POTENTIALLY NEGLIGIBLE BIO- HAZARDOUS SUBSTANCES IT EMITS. HOWEVER RISKS CREATED BY NATURAL CALAMITIES LIKE FLOODS VOLCANOES EARTHQUAKES ETC. ARE IRRELEVANT FOR THE APPELLANT AS IT DOES NOT OPERATE IN AREAS HIGHLY PRONE TO NATURAL CALAMITIES. AES ALSO DO NOT OPERATE IN AREAS HIGHLY PRONE TO NATURAL CALAMITIES. 3. THE LEARNED COUNSEL THEREFORE SUBMITTED THAT T HE ENTIRE ADDITION MADE BY THE TPO AND SUSTAINED BY DRP IS LI ABLE TO BE DELETED. HE ALTERNATIVELY SUBMITTED THAT THE DRP HAS NOT PRO PERLY CONSIDERED THE ASSESSEES CONTENTION AND IN A SUMMARY MANNER REJECTED THE ASSESSEES CONTENTION BY UPHOLDING THE ORDER OF THE TPO AS IT IS. THEREFORE THE MATTER CAN BE SET ASIDE TO THE FILE OF THE LEARNED DRP FOR READJUDICATION FOR CONSIDERING THE ASSESSEES CONTE NTIONS PROPERLY. 4. THE LEARNED DR ON THE OTHER HAND OBJECTED TO T HE DELETION OF THE ADDITION AND HE STATED THAT TPO HAS PASSED A DE TAILED SPEAKING ORDER POINTING OUT THE ADJUSTMENT REQUIRED. THE DR P HAS ALSO ITA-4693/DEL/2011 20 CONSIDERED THE SAME AND UPHELD THE FINDING OF THE T PO. EVEN IF THE ORDER OF THE DRP IS A SUMMARY ORDER IT CANNOT BE S AID THAT IT HAS NOT CONSIDERED THE ASSESSEES SUBMISSION PROPERLY. HE THEREFORE SUBMITTED THAT THE ORDER OF THE DRP SHOULD BE UPHEL D AND THE ASSESSEES APPEAL SHOULD BE REJECTED. HOWEVER HE HAS NO SERIOUS OBJECTION FOR ACCEPTING THE ALTERNATIVE CONTENTION OF THE ASSESSEES COUNSEL FOR SETTING ASIDE THE MATTER BACK TO THE FI LE OF THE DRP FOR RECONSIDERATION. 5. AFTER CONSIDERING THE ARGUMENTS OF BOTH THE SIDE S AND THE FACTS OF THE CASE WE ARE OF THE OPINION THAT IT WOULD ME ET THE ENDS OF JUSTICE IF THE ORDER OF THE DRP IS SET ASIDE AND THE MATTER IS RESTORED TO ITS FILE FOR READJUDICATION AND PASSING A SPEAKING ORDER AFT ER CONSIDERING THE ASSESSEES CONTENTIONS. ACCORDINGLY WE SET ASIDE THE MATTER BACK TO THE FILE OF THE DRP. WE DIRECT THEM TO ALLOW ADEQU ATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND THEREAFTER READJU DICATE THE ISSUE IN ACCORDANCE WITH LAW BY PASSING A SPEAKING ORDER. 6. IN THE RESULT THE ASSESSEES APPEAL IS DEEMED T O BE ALLOWED. DECISION PRONOUNCED IN THE OPEN COURT ON CONCLUSION OF HEARING ON 29 TH MARCH 2012. SD/- SD/- ( (( (A.D.JAIN A.D.JAIN A.D.JAIN A.D.JAIN) )) ) (G.D.AGRAWAL) (G.D.AGRAWAL) (G.D.AGRAWAL) (G.D.AGRAWAL) JUDICIAL JUDICIAL JUDICIAL JUDICIAL MEMBER MEMBER MEMBER MEMBER VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT DATED : 29.03.2012 VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT ASSISTANT REGISTRAR