PR. CIT-9, Mumbai V. E-CLINICAL WORKS INDIA PVT LTD, Mumbai

ITA 4106/MUM/2019

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The case involves an appeal by the Revenue against the order of CIT(A)-56, Mumbai, concerning the transfer pricing assessment of E-Clinical Works India Pvt. Ltd. for the assessment year 2014-15. The primary contention was the inclusion and exclusion of certain comparables used in the transfer pricing study. The Tribunal examined the functional and economic characteristics of the comparables and the assessee's business operations. E-Clinical Works India Pvt. Ltd. provides IT-enabled services, and the Tribunal found that the inclusion of M/s. MPS Limited as a comparable was inappropriate due to significant functional differences.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 302527 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2023
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: K
• Next Hearing Date: 11-07-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 06-06-2019
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘K‘ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No.4106/Mum/2019 (Assessment Year :2014-15) Pr.CIT-9 Room No.259A 2 nd Floor Ayakar Bhavan Churchgate Mumbai – 400 020 Vs. M/s. E-Clinical Works India Pvt. Ltd. A/701-705 and Part B1-706, 7 th Floor Boomerang, Chandivali Farm Road, Near Chandivali Studio Andheri East Mumbai – 400 072 PAN/GIR No.AABCE6639F (Appellant) .. (Respondent) Assessee by Shri Madhur Agrawal Revenue by Shri Rajneesh Yadav Date of Hearing 12/07/2023 Date of Pronouncement 31/07/2023 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the Revenue against order dated 22/03/2019 passed by CIT(A)-56, Mumbai for the quantum of assessment passed u/s.143(3) r.w.s. 144C(3) for the A.Y.2014-15. ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 2 2. In various grounds of appeal, Revenue has mainly challenged inclusion and exclusion of three parties, firstly, FCS Software Solutions; secondly inclusion of Informed Technologies India Ltd; and lastly exclusion of comparable M/s. MPS Limited. Before us, ld. Counsel for the assessee at the outset submitted that even if one comparable, i.e., M/s. MPS Limited is excluded, then other two comparables even if they are not to be included will become purely academic because assessee would be within the arm’s length price. 3. The brief facts are that E-Clinical Works India Pvt. Ltd. is engaged in providing IT-enabled services to the clients of its AE in the form of providing certain post sales customer care services like technical support, information queries, issues with new products, trouble-shooting through email and voice platforms, etc.). In the TP study report the assessee has given detailed analysis of functions, assets and risks wherein it has been stated that it provides IT enabled services to the client of its AEs for which it is remunerated by AEs. It is the AE which is responsible for developing the business and developing systems and methods, doing software research and development, carrying out further improvement in the software design and software capabilities, apart from coordinating with the various Customer Interaction Centers, for rendering the IT enabled services. The detailed functions performed by AE and E-Clinical Works India Pvt. Ltd in the TP study report has been highlighted in the following manner:- ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 3 a) Development of Services 4.8.2 Initially the integrated EMR/ PM solutions of e-Clinical Works are offered by providing the software solutions using the Software as a Service (SaaS) Model. The original concept of outsourcing post-sales services and more specifically, software installation and technical support services was developed by eClinicalWorks LLC. eClinicalWorks India has inherited operational intangibles and know-how from eClinicalWorks LLC. Currently, several IT enabled services companies participate in this market, and the concept of outsourcing IT enable services is no longer a cutting-edge idea. 4.8.3 All new services and service concepts are developed by eClinicalWorks LLC/AES. b) Sales and Marketing Activities 4.8.4 The highly experienced marketing team of AEs is responsible for selling and marketing activities. 4.8.5. AES focus its marketing efforts on the development of new service offerings and products for its targeted clientele such as doctors, hospitals and physicians to manage patient flow, access patient records in-house or remotely and securely share Information among physicians. Once a potential client is identified or approaches an AE, an analysis is conducted to define the service needs of the potential client. c) Drafting of Proposals and Contracts 4.8.6. Drafting initial proposals to clients involves establishing a service package for the client specifying the contents of the service, procedures for operation, fee structures, training measures to ensure quality, data to be migrated from legacy system, terms of remote access and facilities/fixed assets to be utilized. 4.8.7. The above process is critical and time consuming. The proposal is highly customized to the client and involves a ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 4 significant amount of effort and co-ordination among various service departments. A signed document is entered between the client as 'Purchase Order for software' stating all the terms and conditions. d) Initial Set-up of Operation ✔The System will focus on interconnecting healthcare providers for quality care and further use eClinicalWorks Electronics Health exchange (eEHXX®) community health record to connect public schools, foster care programs and mobile vans, along with immunizations registries, commercial labs and other regional health care providers. ✓ Before the installation of the software, the responsible team at ECW US, conducts the initial verification and performs the required tasks such as data collection, data migration from the legacy system, preparing the client's site ready for the installation services etc. 4.8.8 AEs staff is responsible for the implementation and set-up of the telecommunications and Information technology platform. This function involves selection of the location and capital investment. 4.8.9. Each site uses a standard operating environment developed by the AES. This includes the telephone communications systems, desktops and software. 4.8.10 All assets situated in India are purchased and owned by eClinicalWorks. 4.8.11 eClinicalWorks works in co-ordination with its AEs to resolve any client connectivity issues at eClinicalWorks site and customization of any software, if required. e) Training Customer Interaction agents 4.8.12 A critical success factor for eClinicalWorks is its service by well-trained Service Support Representatives (SSRS). eClinicalWorks has a training department which provides two to three weeks of basic training to all newly hired SSRS. ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 5 SSRS's are trained in three areas:  Customer Services ("Soft Skills"), which involves applying the ECW's customer delivery procedures and standards.  General Technology, which involves training on eClinicalWorks Group technology platforms; and  Client servicing Technology, which involves training on the specific client requirements such as Installation and software support services that the SSR will be responsible for. 4.8.13 SSRS must be well trained because customers email/ call for help on software issues ranging from configuration problems to the setting up of a computer, Installation of software, interoperability of hardware and software, and more. As a result, training must be sufficiently technical for the SSRS to flexibly respond to widely diverse customer queries 4.8.14 Depending on the contract or service terms, client technology servicing training is conducted by eClinicalWorks. The SSR's are provided training on the eClinicalWorks software, its installation requirements and further software support activities. At times, personnel of ECW-US provide training to reduce the learning curve for an experienced product. 4.8.15 Human Resource function also plays a key role due to the high employee turnover ratio. Due to similarities in IT enabled services, it is possible to shift employees amongst project, after providing adequate training. f) Provision of Services 4.8.16. eClinicalWorks uses the staffing model (which stipulates the number of client service managers, quality control managers, training managers, and IT personnel in relation to the number of Service Support Representatives) for software support and call centre operations developed by its AES. This model ensures that appropriate staffing levels are maintained and the quality matrix for that client is achieved. ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 6 4.8.17 A dedicated team is assigned to serve a particular client. The team in charge is responsible for the management of such teams. The copy of software purchase order as signed by the customers of ECW US is forwarded to the eClinicalWorks India Office. As per the contractual terms, operation managers plan the staffing requirements and the job is assigned to a particular team. Proper planning schedule for installation function is communicated to eClinicalWorks India as well as to its US Client, by ECW-US. 4.8.18 eClinicalWorks makes all day-to-day operational decisions. The Operations Manager have weekly conference calls with the AES business manager and the client. 4.8.19 eClinicalWorks's SSRS provide services directly to customers of its AEs. As per the agreed installation schedule, the SSR log's into the client servers performs the installation tasks. For voice support, the automated call distribution system (switches) automatically routes customer calls to an appropriate SSR. Customized software enables Identification of case history and case ownership. 4.8.20 eClinicalWorks is responsible for the maintenance of the system supporting its operations, eClinicalWorks LLC determines and provides any software upgrades to the system. 4.8.21 Each client contract has a metrics of quality levels that are based on customer service levels, customer wait time, management of call volumes and expected volumes The majority of contracts set out specific quality control measures that must be met by the site. eClinicalWorks is a strong proponent of continuous quality improvement The quality leads monitor the SSRs customer interactions and assess those interactions using a structured measurement process. eClinicalWorks performs quality assurance to ensure that its services meet the specified quality standards. The quality and performance are also monitored by eClinicalWorks LLC. 4.8.22. The training & quality department is also responsible for addressing quality control issues g) Client Relationship ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 7 4.8.23. AES are responsible for maintaining and strengthening client relationship/ contact. This includes delivering services as per contract. Further, AEs are responsible for maintaining the software and upgrading the same as per the client's requirements. 4.8.24. AEs are responsible for all aspects of credit collection and control with the client. 4.9 Assets Employed 4.9.1. Any business requires assets (tangible or intangible) without which it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by eClinicalWorks provides an insight into the resources deployed by eClinicalWorks and their contribution to the business processes/economic activities of eClinicalWorks. 1) Tangibles owned by eClinicalWorks 4.9.2 eClinicalWorks employs required infrastructure including its premises at both locations, computers and networks equipment, air conditioners/ electrical, furniture, leasehold improvements, office equipment and vehicles for the purpose of its business. ii) Intangibles 4.9.3. The most significant intangible with respect to eClinicalWorks's operations are the client contracts. eClinicalWorks LLC owns all intangibles relating to the client contracts. Further, US owns the trademarks, process, know-how, technical data software, operating / quality standards etc. used by eClinicalWorks for providing IT enabled services. 4.9.4. The overall process of implementing projects, including set- up, actual operations, and output reports delivery, is standardized and structured, and are developed by AES: The value of intangibles associated with the operational procedures is considered to be significant. ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 8 4.9.5 Further, eClinicalWorks does not own/ develop any significant non- routine intangibles in relation to the provision of IT enabled services. All the trademarks and tradenames are owned by eClinicalWorks LLC. 4.10. Economic Characterization 4.10.1 The purpose of this section is to provide information on the economic characterization of eClinicalWorks India and eClincialWorks LLC, based on the functional analysis of the Inter- company transactions of ECW India. This is an important step to enable execution of the benchmarking analysis. 4.10.2. eClinicalWorks LLC can be characterized as the entrepreneur because of its ultimate responsibility for marketing, contractual risks and client ownership. 4.10.3 eClinicalWorks India can be characterized as a limited-risk back office service provider, rendering software support, call center and IT/MIS and ITES to its associated enterprise. 4. Thus, the major functions are being carried out by AE, whereas E-Clinical Works India Pvt. Ltd. mostly carries out service by well trained service support representatives and training of the staff. The assets are mostly required infrastructure including its premises at both locations, computers and networks equipment etc. and does not have any significant tangible assets and even the intangible assets are owned by AE. The assessee in so far as risk is concerned is a very limited risk back office service provider rendering software support, call centre and ITES to its AEs. The international transaction entered with its AE was purely in respect of provision of IT enabled services of Rs.120,42,18,944/-. The assessee ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 9 company had applied TNMM as the Most Appropriate Method and submitted its margin on that profit before interest, depreciation and tax upon operating cost at 21.05% and reported that the comparables which assessee has chosen the average margin as 14.44%. The ld. TPO had accepted and rejected the following comparables:- Sr.No. Company Name PLI (excluding depreciation) PLI (including depreciation) Remarks 1 Accentia Technologies Ltd 32.98% -17.16 Export data not available 2 E4e Healthcare Business Services Private Limited 18.59% 7.80 Fails RPT filter 3 FCS Software Solutions Ltd -3.74% -8.37% Segment wise data not available 4 First Object Technologies Ltd -3.59% -11.87% Segment wise data not available 5 Informed Technologies India Ltd. 15.22% 7.11% Functionally not comparable 6 Jindal Intellicom Ltd. 22.96% 15.91% Accepted 7 Kireeti Soft Technologies Ltd 9.86% 4.08% Functionally not comparable 8 Silgate Solutions Pvt.Ltd 23.23% 4.01% Functionally not comparable ARITHMETIC MEAN 14.44% ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 10 5. The ld. TPO proposed six more comparables and finally he adopted following three comparables:- Sr.No. Company name PU = OP/OC Assessee/TPO 1 Jindal Intellicom Ltd. 15.91% Assessee and TPO 2 MRS Ltd 53.26% TPO 3 Infosys BPO 27.92% TPO Average 32.36% 6. TPO had worked out the PLI after taking depreciation and forex loss / income as non-operating in nature and the PLI was worked out at 10.33%. As stated above, the ld. Counsel has submitted that if only one comparable namely M/s. MPS Ltd. is excluded, then assessee’s margin would be at arm’s length and whereas other two comparable with the department need not to be adjudicated. 7. Before the ld. TPO regarding M/s. MPS Ltd assessee submitted that it is engaged in the business of providing publishing solutions and providing publishing services relating to type setting of books and journals, data coding, conversion, editing, indexing etc. and hence, same is not functionally comparable. However, the ld. TPO rejected the contention of the assessee and held that since it is in the business of outsourcing ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 11 which is same as ITES segment, hence, same should be included in final list of comparables. 8. The ld. CIT (A) has directed to exclude the said comparable after observing as under:- 11. Perusal of annual report reveal that the company is not a comparable as they operates in a different profile. As per annual report the company is "engaged in the business of providing publishing solutions viz, type setting and data digitization services for overseas publishers and supports international publishers through every stage of the author-to-render publishing process and provides a digital-first strategy for publishers across content production, enhancement and transformation, delivery and customer support This digital focus spans across STM/academic, Ingher education, trade and directory markets". Annual report (page 30) also reflects that activity is more than real BPO/IT enables services, more into publishing services. Hence Transfer Pricing Officer/Assessing Officer is directed to eliminate the case as a comparable. 9. After hearing both the parties and on perusal of the relevant material referred to before us at the time of hearing and orders of the authorities below on the issue of inclusion of one comparable M/s. MPS Limited, we find that in so far as FAR of the assessee is concerned, we have already incorporated in detail and it can be seen that assessee is just providing well trained service support representatives and train them for providing services to ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 12 particular clients of the AE and does not carry out any other functions or assume any kind of risk or have any significant assets deployed. Now, in so far as M/s. MPS Ltd. is concerned from the perusal of the annual reports it is seen that it is engaged in business of providing publishing solutions viz., typesetting and data digitization services for publishers. As per the report of MPS, it provides publishing services relating to typesetting of books and journals, composing of yellow page advertisement and catalogues, data coding, conversion, indexing, editing, copy editing, editorial services, software development, maintenance and support to global publishers. It is also engaged in web-site designing & development and provides various software and cloud-based digital publishing platform developed by it called "MPS DigiCore’. As per its website, it is largely engaged in providing content solution like content authoring and development, content production, content transformation, etc. As per the website at 50% of its business activities comprises of content solution. 10. Furthermore, the annual report also mentions that it carries out various R&D activities in relation to cloud based digital publishing platform and the various benefits derived by it due to such R&D activities and these services are much more than IT enabled services and is more into publishing services and providing content solutions, content product and content transformation. It also carries out significant R & D activities in relation to cloud base digital publishing platforms. Thus, this ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 13 comparable has rightly been excluded by the ld. CIT (A) while carrying out comparative analysis with the assessee company which is pure IT enabled services. Further, in the balance sheet of M/s. MPS Ltd. there is an inventory of Rs.7.82 Crores and there is also work-in-progress shown as inventory and if one sees the mark-up of Revenue recognition, it is seen that Revenue is from website designing and development as well as Revenue from website posting. It has also outsourcing cost of Rs.10.78 Crores. Thus, segmental information provides that the company operates in one business segment of providing publishing solutions, typesetting and data digitalization services which is considered to constitute a single segment. Thus, this company nowhere is a comparable to the assessee company and accordingly, we hold the order of the ld. CIT (A). In so far as other comparables are concerned as agreed by both the parties, they became purely academic and need not to be admitted and adjudication on these two comparables are left open. Accordingly, the Revenue’s appeal is partly allowed. 11. In the result, appeal of the Revenue is partly allowed. Order pronounced on 31 st July, 2023. Sd/- (GAGAN GOYAL) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 31/07/2023 KARUNA, sr.ps ITA No. 4106/Mum/2019 E-Clinical Works India Pvt. Ltd. 14 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//