Income Tax Appellate Tribunal - Delhi
Genpact Mobility Services (India) Pvt. ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'C
'C' : NEW DELHI
BEFORE SHRI G.D.AGRAWAL,
G.D.AGRAWAL, VICE PRESIDENT AND
SHRI A.D.JAIN,
A.D.JAIN, JUDICIAL MEMBER
ITA No.4693/Del/2011
No.4693/Del/2011
Assessment Year : 2007
2007-08
M/s Genpact Mobility Vs. Assistant Commissioner of
Services (India) Private Income Tax,
Limited, Circle-
Circle-12(1),
DMRC, Delhi
Delhi Information New Delhi.
Technology Park,
Metro Station,
Shastri Park,
New Delhi - 110 053.
PAN : AACCG4036D.
(Appellant) (Respondent)
Appellant by : Shri Kanchun Kaushal, CA.
Respondent by : Shri Peeyush Jain, CIT-DR(TP).
ORDER
PER G.D.AGRAWAL, G.D.AGRAWAL, VP :
This appeal by the assessee is filed against the order of learned Additional Commissioner of Income Tax [TPO-1(2)], New Delhi dated 1st September, 2010 for the AY 2007-08.
2. The learned counsel for the assessee submitted that the assessee is a Professional Employer Organization which is engaged in managing global deployment and mobility program for personnel moving from assessee's offshore delivery centre in India to the Associate Enterprises. The assessee is engaging skilled professionals and providing the same to the group companies on secondment. The DRP has not considered the peculiar nature of assessee's business and has compared the same with the recruitment agencies. He also objected to the comparables given by the TPO and approved by the 2 ITA-4693/Del/2011 DRP. The learned counsel furnished the detailed written submissions which read as under:-
"1. Background 1.1 Genpact Mobility Services (India) Private Limited (hereinafter referred to as "the Appellant" or "GMS" or "the Company") is a company incorporated under the Indian Companies Act, 1956 and is a wholly owned subsidiary of Genpact India Holdings, (Mauritius).
1.2 GMS is a Professional Employer Organization ("PEO") and during the relevant assessment year ("AY") 2007-08 under consideration, was engaged in managing global deployment and mobility program for personnel moving from Genpact group's offshore delivery centre in India to the Associates Enterprises ("AEs"). GMS employed and seconded the assignees to overseas on-site Genpact entities to fulfil their contracts with respective customers.
1.3 During the period under consideration the Appellant entered the following international transactions, which were duly reported in the Accountant's Report in Form No.3CEB:-
S.No. International Value (In INR) Most Profit Level Transactions Appropriate Indicator Method ("PLI") ("MAM")
1. Provision of 19,92,27,742 Transactional Operating Secondment Related Net Margin Profit/ Total Services Method Cost ("OP/TC") ("TNMM")
2. Reimbursement of 12,59,45,519 N.A. N.A. Expenses by Aes 1.4 GMS earned an operating margin of 6.02% during FY 2006-07. The financial results of GMS is summarized below:
Particulars Amount (In INR)
Service Fee 19,92,27,742
3 ITA-4693/Del/2011
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, GMS 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 92CA(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 assessment proceedings. The ld.TPO concluded that the Appellant's 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 below:
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 Arm's Length Price at a margin of 22.45% 38,42,23,396 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, 4 ITA-4693/Del/2011 2010 wherein, the Ld.AO proposed to assess the total income of the applicant at Rs.6,94,19,610/- as against returned income of Rs.1,0369,472. Aggrieved with the draft assessment order, the Appellant filed its objections before the Learned Dispute Resolution Panel ("Ld DRP") as provided in section 144C of the Act. However, at the end of the DRP proceedings, in complete disregard of the detailed submissions put forth by GMS, the ld.DRP, vide directions issued under section 144C of the Act dated June 24, 2011, upheld the order of the ld.AO/TPO without appropriate application of mind. Thereafter, in line with the directions issued by the ld.DRP, the ld.AO made an adjustment of Rs.5,90,50,134 vide its assessment order dated August 30, 2011 in the Appellant's case thereby 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 income-tax return.
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 the 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 received from the AEs. In case the performance of the seconded employee is not satisfactory as per the ASSESSEE and it has requested for a substitution, then the said employee 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 mitigated service provider and is accordingly compensated on an arm's length Cost Plus basis.
1.11 During the TP assessment proceedings, the ld.TPO undertook a incorrect FAR analysis and concluded that 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 risks 5 ITA-4693/Del/2011 and therefore, the compensation model adopted by the appellant was inadequate.
1.12 The ld.TPO concluded that the appellant undertook various functions that led to "creation and maintenance of human capital intangible" based on his own conjectures and surmises and in doing so he has relied upon the incorrect understanding of the business model as per which the appellant has undertaken several activities 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 strictly within the confines of the standards prescribed by the overseas AEs. Accordingly, all the key decisions with regard to identification of need for additional qualified staff, acceptance of seconded employees and supervision and control of employees are undertaken solely by the AEs and the risks arising therefrom are also borne entirely by the AEs. Thus the appellant performs a limited role and 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 risks arising from those decisions vesting in their hands. Further, 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 the specific intangibles created, if any, automatically get vested in the hands of the overseas AEs and not in the hands of the appellant. The appellant's 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 given as Appendix 1 of this submission.
Comparables 1.15 For determining the arm's length margin the appellant undertook a search for comparable companies and identified 14 foreign comparable companies, the mean Operating Profit/Total Cost ("OP/TC") of these comparables was 3.91%. On the other hand, during the period under 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 appellant met 6 ITA-4693/Del/2011 the arm's length standard prescribed under the Indian 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 appellant's 100% revenue during the relevant assessment year was attributable to rendering of secondment related services to its various 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 overseas jurisdiction for receipt of similar services as rendered by the appellant.
1.17 The ld.TPO also proposed to consider a set of two Indian companies identified by him for determination of ALM, namely Info Edge (India) Limited and Overseas Manpower Corporation Limited. GMS put forth the following contentions against the use of the said two comparables.
S.No. Name of the OP/TC Dissimilarities between GMS and
Company comparables
1 Info Edge (India) 28.62% * Diversified services such as
Ltd. 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)
7 ITA-4693/Del/2011
2 Overseas 16.28% * Government organization which was
Manpower governed by government policies and
Corpn.Ltd. 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 undertook a fresh search for comparables companies on Indian databases based on the data and information available now which was not available at the time of undertaking the TP analysis and arrived at a close comparable company namely of Miscellaneous application Foi Management Consultants Ltd. which was a PEO and accordingly functionally comparable to the function performed by the Appellant. The ld.TPO rejected the same on the grounds that the comparable had significant related party transaction during the year under consideration. However, the appellant submission proving that the comparable did not have significant related party transactions during the year was ignored completely.
Name of the Company OP/TC Business Description Ma Foi Management 3.35% Ma Foi works on a PEO model similar to the Consultants Ltd. ("Ma model followed by the appellant. The Foi") company provides senior level recruitment, 8 ITA-4693/Del/2011 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 Foi's 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 GMS of 6.02%; it establishes the fact that the appellant's intra- group transactions meet the arm's 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 the 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 Resource Development Division of EDCIL, it can be seen that this segment is comparable to the appellant's functions.
9 ITA-4693/Del/2011 Further, the same segment of the company has been proposed to be accepted by the ld.TPO as comparable in the subsequent year's Transfer Pricing assessment.
Name of the OP/TC Business Description Company EDCIL (Human 11.20% From the analysis of the Human Resource Resource Development Division of EDCIL it can be seen that Development this segment generates its revenues from Segment) 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 experts 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 year's 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:
10 ITA-4693/Del/2011 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 within the 5% range available as per proviso to section 92C(2) of the Income-tax Act, 1961 would meet the arm's length standard required under the Indian Regulations.
Considering the operating margin of 6.02% over costs, the arithmetic mean OP/TC of comparable companies of 7.23% is within the 5% range (which comes to 11.32%) available to GMS.
1.23 The ld.TPO also rejected one comparable namely Acqvire Talent Service Ltd. on the unjustified basis 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 Sony Ruling (Sony India (P) Limited Vs. DCIT (114 ITD 448)) 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 reason for excluding a company but the cumulative result of several factors needs to be seen. If a company is not to be rejected ipso-facto on grounds of losses/consistent losses, then diminishing revenue filter stands on an even weaker footing as an indicator of economic distress for a company.
1.25 If both Ma Foi, EDCIL (Human Resource Development segment) and Acqvire Talent Service Ltd. are considered 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 11 ITA-4693/Del/2011 companies comes to 3.82%. The prices of international transactions of the appellant that achieve an OP/TC of 3.82% would meet the arm's length standard required under the Indian Regulations. The operating margin of GMS is 6.02% over costs, thus establishing the fact that the appellant's intra-group transactions meet the arm's length standard prescribed under the Indian Transfer Pricing regulations.
Value Added Expenses (Alternative Approach) 1.27 The ld.TPO also rejected the alternative approach proposed by the appellant wherein it had suggested that should the ld.TPO wished to continue to benchmark appellant's international transaction with recruitment companies then the cost of seconded employees should 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 undertaking value adding functions such as identification of employees to be seconded, general and administrative support services cost, depreciation and other related operational costs). The ld.AO/DRP upheld the TPO's rejection.
1.28 Further, if one were to consider recruitment agencies which do not maintain hired employees on their rolls, the total operating costs of these companies can be considered 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 A recruitment agency is an prospective employers organization which matches to cost-effectively prospective employers to outsource the prospective employees. The management of human concept is to bring together resources, employee the prospective employee and benefits, payroll and prospective employer based workers' compensation. on matching mutual needs of 12 ITA-4693/Del/2011 PEO clients focus on both the parties. The their core competencies recruitment agency does not to maintain and grow provide any other service in their bottom line. The this regard. The model is PEO typically handles similar to a commission model, the administrative side wherein the commission agent of employment. introduces the buyer and seller.
2. Contractual The employment Employment contract of the contract is between the personnel to be recruited is employee (secondee) between the employer and the and the PEO. prospective employee. The recruitment agency has no role in the employment contract.
3. Revenue model PEOs receive a service Recruitment companies fee for the services receive commission/income on provided. successfully placing an employee or filling a vacancy for the employer.
4. Costs Employee/personnel Employees recruited by costs are part of the customers are not on the rolls PEO's costs as of the recruitment agency. employees provided to Hence, such employee costs other companies are on do not form part of the cost its payroll. base of recruitment agency.
1.30 Based on the alternate approach as suggested by 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 11.20%
Development Segment)
3. Info Edge (India) Ltd. 28.62%
4. Ma Foi Management Consultants Ltd. 16.28%
13 ITA-4693/Del/2011
5. Overseas Manpower Corpn.Ltd. 16.28%
Mean 13.58%
1.31 The above analysis shows that the arithmetic mean OP/VAE of comparable companies identified by the Ld.TPO is 13.58%. On the other hand the appellant's OP/VAE margin works out to 20.18% and accordingly the margin of the appellant is at arm's length.
Particulars Amount (In Rs.)
Service Fee (A) 19,92,27,743
Expenditure
Personnel Expenses 23,60,364
Administrative and other expenses 5,31,86,217
Bank Charges 3,83,522
Depreciation 1,55,029
Value
Value Added Cost ("VAE") (B) 5,60,85,132
Pass through cost of seconded employees (C) 13,18,26,068 Total Cost (TC) (D=B+C) 18,79,11,200 Operating Profit (E=A-D) 1,13,16,543 OP/VAE 20.18% 1.32 The above was also disregarded by the ld.TPO/AO/DRP. (Refer page 336 to page 337 of paperbook to Form 36B and internal page 68 to 76 of the objections raised before the DRP).
Reimbursements 1.33 The international transactions pertaining to cost reimbursements from AEs were undertaken by the appellant to facilitate the payment on behalf of its AEs for mere administrative convenience. Accordingly, the "cost only" reimbursement by AEs to the appellant was considered as the arm's length price ("ALP") for the cost reimbursement transaction.
1.34 Ld.TPO held that the reimbursements received by GMS amounting to Rs.12,59,45,519 should be included in the cost base of the appellant and determined the OP/TC of the appellant at 3.60% as detailed below : (Refer internal page 28 of the ld.TPO's order).
14 ITA-4693/Del/2011
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 which was Rs.18,79,11,200 and thereby ignoring the submissions made by the appellant that these expenses are in the nature of third party expenses and pertained to traveling. VISA and insurance expenses of various personnel deployed to its AEs and were subsequently reimbursed by the AEs to the appellant.
1.36 Further, even if one were to follow the TPO's approach by considering reimbursements as part of operating cost, then also the arithmetic mean OP/TC of comparable companies (taking Ma Foi and EDCIL (Human Resource Development Segment) of 7.23% as compared to that of the appellant at 3.60% would fall within the 5% range (which comes to 8.78%) available to GMS. Therefore, by exercising the option of proviso to section 92C(2) of the Income-tax Act, the pricing basis of international transactions of GMS with its AEs is in accordance with the 'Arm's Length' standard required under the Indian Regulations.
The ld.TPO while determining the ALP at 22.45% based 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 Exposure to GMS Exposure to AEs Description Market Risk : Market GMS provides secondment The personnel are risk arises for a related services to various AEs seconded on need and business due to and not a single customer as request of the AEs. increased competition alleged by the ld.TPO in the This need is dependent 15 ITA-4693/Del/2011 and relative pricing impugned TP order. Further, the upon the volume of pressures, change in appellant receives remuneration business operations demand patterns and from its AEs on a total cost plus carried out by the AEs.
needs of customers, basis irrespective of the fact Thus, the AEs are inability to whether the AEs are able to exposed to this risk. develop/penetrate in a recover these costs from htier market, etc. customers. Accordingly, GMS is not exposed to this risk.
Service liability risk : As part of its operation, GMS The seconded Risks associated with makes available the required employee works under product/service failures qualified person to the respective the direction and including non- AEs according to their needs. control of the AEs to performance to The seconded employees work which they are generally accepted or under the direction and seconded. The AEs pay regulatory standards. supervision of respective AEs the cost of such This could result in who monitor the work performed employees with a product recalls and by seconded employees, mark-up, therefore, AEs possible injuries to end- accordingly, GMS is not are exposed to this users. responsible for the work risk.
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.
16 ITA-4693/Del/2011
Credit Risk : This is the GMS is protected from this risk The AEs bear this risk
risk arising from non- as it is compensated by its AEs to the extent they have
payment of dues by on a cost plus mark-up thereon to recover payments
customers. irrespective of the fact whether from third parties for
the AEs have recovered such provision of services.
costs from its customers.
Foreign Exchange Risk : GMS invoices its AEs in currency To the extent the
This risk relates to the other than its functional currency Genpact Group
potential impact on i.e. Indian Rupees. Accordingly, transacts in currency
profits that may arise GMS bears the foreign exchange other than its functional
because of changes in risk in relation to movement in currency, it is subject
foreign exchange rates. exchange rate between foreign to foreign exchange
currency and local currency. risk.
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.
Manpower Risk : Any Majority of GMS's personnel AEs also employ
enterprise which is consists of employees seconded skilled/technical and
largely dependent, for to AEs for which the appellant trained workforce and
its success, upon does not bear any manpower accordingly face
qualify personnel with risk, as it employs these people significant risk on this
superior technical for secondment after the account.
knowledge is faced with acceptance from its AEs.
this risk. Competitive Further, GMS does not employ
market forces expose high end technical personnel for
such an enterprise to its routine operations. Also,
the risk of losing its since GMS renders secondment
trained personnel. related services on cost plus
mark-up basis, hence any risk, if
at all arisen out of its routine
functions, is mitigated.
Price Risk : This risk GMS does not have an exposure AEs operate in highly
arises as a result of to this risk as its remuneration competitive
price pressures in the from AEs is not dependent upon environment and have
market resulting in prices charged by AEs to their direct dealings with
17 ITA-4693/Del/2011
price undercutting, and customers. customers and are
thereby adversely accordingly exposed to
impacting profitability. pricing pressures and
bears significant risk on
this account.
Legal and Statutory GMS bears normal risk AEs face stringent legal
Risk : This risk primarily associated with operating in the environment and are
arises on non- Indian environment. exposed to higher risks
compliance with any of huge claims,
legal/ contractual/ damages and suits
statutory provisions. from end-customers.
Technology Risk : This The services provided by GMS is AEs are exposed to this
risk arises if the market not very sensitive to risk as they are
in which the Company technological changes, hence it engaged in rendering
operates in is sensitive is not exposed to this risk. It information technology
to introduction of new recruits manpower from Genpact enabled services.
products and group's offshore delivery centre
technologies. Hence, in in India and seconds them to its
that case, business AEs.
units may face loss of
potential revenues due
to inefficiencies arising
from obsolete
infrastructure and tools
as well as obsolescence
of manufacturing
processes.
Capacity Utilisation GMS is compensated by its AEs AEs face this risk as
Risk : This risk arises on for its operating cost incurred in they compensate GMS
account of under- rendering the secondment on a cost plus basis,
utilisation of related services plus a mark-up irrespective of the
manufacturing/service thereon; accordingly it is not extent of utilization of
facility/personnel. exposed to this risk. GMS the seconded
recruits employees to be employees.
seconded once it consults the
AEs for their acceptance. Hence,
GMS does not face the risk of idle
bench.
Scheduling Risk : This The appellant is engaged in AEs are exposed to this
18 ITA-4693/Del/2011
risk arises out of providing secondment related risk.
inefficient delivery services on the directions laid
schedules and down by its AEs. In the event
deficiency in planning. 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.
Government & GMS's focus is on overseas AEs face stringent legal
Institutional/Legal & market, however as the environment and are
Statutory Risk : appellant is located in India, it exposed to higher risks
Government & has to comply with the local legal of huge claims,
Institutional risk is and statutory requirements. damages and suits
borne by an entity if a Moreover, the appellant is not from end-customers.
change in a engaged in sensitive industries
government tax policy like oil exploration, weapons and
or regulation affects armoury, airlines etc.
the functioning or Accordingly, it bears normal
remuneration of that risks.
entity or this risk
primarily arises on non-
compliance with any
legal contractual/
statutory provisions.
Operational Risk : All costs of business operations The risk of inadequate
Operational risk is the of GMS are recovered from its performance of the
risk of loss resulting AEs along with a mark-up. seconded employee
from inadequate or Therefore, GMS is not exposed to lies with the AEs. The
failed internal this risk. performance of the
processes, people and seconded employee is
systems or from the responsibility of the
external events. AEs to which the
employee is seconded.
Asset Redundancy Risk GMS utilizes routine tangible AEs own various
: This risk arises out of assets like computers and significant intangible
obsolescence and peripherals, office premises, such as brand name,
redundancy of assets. communication facilities, etc. technical know-how
19 ITA-4693/Del/2011
Further, the appellant does not etc. Thus the AEs are
own or develop any intangible or exposed to this risk.
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.
Security Risk : This risk Unforeseen events like riots, Unforeseen events like
refers to the threat of terrorist attacks, bomb-blast etc. riots, terrorist attacks,
terrorist attacks which cannot be predicted and are bomb-blast etc. cannot
can significantly impact common to all players in the be predicted and are
the economy as well as industry. common to all players
various companies. in the industry.
Environmental Risk : GMS is services provider and not AEs also do not operate
a manufacturer and there are in areas highly prone to
potentially negligible bio- natural calamities.
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.
3. The learned counsel, therefore, submitted that the entire addition made by the TPO and sustained by DRP is liable to be deleted. He alternatively submitted that the DRP has not properly considered the assessee's contention and, in a summary manner, rejected the assessee's 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 assessee's contentions properly.
4. The learned DR, on the other hand, objected to the deletion of the addition and he stated that TPO has passed a detailed speaking order pointing out the adjustment required. The DRP has also 20 ITA-4693/Del/2011 considered the same and upheld the finding of the TPO. Even if the order of the DRP is a summary order, it cannot be said that it has not considered the assessee's submission properly. He, therefore, submitted that the order of the DRP should be upheld and the assessee's appeal should be rejected. However, he has no serious objection for accepting the alternative contention of the assessee's counsel for setting aside the matter back to the file of the DRP for reconsideration.
5. After considering the arguments of both the sides and the facts of the case, we are of the opinion that it would meet 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 after considering the assessee's contentions. Accordingly, we set aside the matter back to the file of the DRP. We direct them to allow adequate opportunity of being heard to the assessee and, thereafter, readjudicate the issue in accordance with law by passing a speaking order.
6. In the result, the assessee's appeal is deemed to be allowed.
Decision pronounced in the open Court on conclusion of hearing on 29th March, 2012.
Sd/- Sd/-
(A.D.JAIN)
A.D.JAIN) (G.D.AGRAWAL)
JUDICIAL MEMBER VICE PRESIDENT
Dated : 29.03.2012
VK.
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Assistant Registrar