TMI Blog2015 (7) TMI 291X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly stated parent company is only performing the functions of marketing. We take note that during the course of the appellate proceedings before the ld CIT(A), the assessee had filed a copy of the, transfer pricing audit conducted by the Internal Revenue Service, Department of the Treasury US. The assessee was audited by Internal Revenue Service- International Division US for the calendar years 2003, 2004 and 2005. The arithmetical mean of the weighted averages of the comparable companies as compiled by the assessee and as also referred to and accepted by the TPO in his order is 10.25%. Since the assessee’s operating margins falls within (+1) 5% of the arithmetical mean of comparable prices, Ld. CIT(A) has rightly held that the assessee’s International Transactions with its associated enterprises during the year to be at Arm's Length. Consequently the addition of ₹ 3,00,60,788/-made to the price of international transaction was directed to be deleted by the ld CIT(A). For the reasons enumerated above by the ld CIT(A), she rightly deleted the addition made by the Assessing Officer on account of difference in arm's length price of ₹ 3,00,60,788/-. In the backgrou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee are with one of its AE M/s Innodata Asia Holdings Ltd. which is located in Bermuda, which is the immediate holding company of the assessee. The ultimate parent holding company is located in the USA. From the analysis submitted by the assessee, it is noticed that group company is earning 8.68% and Innodata US is earning 3.35% from India operation. The group profit retained by Innodata US is 40% whereas it is 60% in the case of assessee. Further, assessee is earning 6.65% at entity level. As discussed the major functions are performed in India and the AE of the assessee is performing functions relating to marketing activities and coordination. In spite of this, the differences in the functions of the assessee and its AE, the profitability retained by the AE of assessee is in larger proportion than the functions performed by the AE. The assessee is not getting compensated from its AE on the basis of arm's length price. Therefore, it is concluded that compensation received by the assessee from its AE is not commensurate with the functions performed by the assessee. The compensation received by the assessee needs to be adjusted to reflect the market reality. 8. Determinati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere in the same. 9. We have heard both the parties and perused the records. We have carefully considered the facts and the detailed submissions of Revenue and the assessee in pursuance to the various observations of the TPO, as contained in his order under section 92CA(3) of the Income Act dated 16.09.2008 and also the paper book filed before us. In this case, we take note that the assessee and its Parent company Innodata US are independent service providers. The parent company Innodata US , secures business from its customers and is then sub-contracted to the assessee. So if the parent company does not secure business it cannot pass it on to the assessee. Likewise if the parent company secures good work then it will pass it on to the assessee and the assessee in turn will have good work/ business. Therefore, like other service providers, the assessee and its parent are exposed to risks of business fluctuations. 10. The assessee has been incorporated primarily with the purpose of providing IT enabled services for its group entities Innodata US/Innodata Asia. IT enabled services provided by the assessee is used by Innodata US/ Innodata Asia in the services provided by them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, its revenues and margins fluctuate on a year to year basis, depending on the revenues generated by its AEs. Accordingly, the assessee annual margins can fluctuate widely, although on a long term basis it would tend to earn a margin commensurate with its functions and risks. This is a different model as compared to a cost plus service entity which would earn a low and consistent returns on a year on year basis. 17. The TPO passed an order under section 92CA(3) and determined the arm's length price to be received by the assessee from its associated enterprises to be ₹ 32,02,27,438/- instead of ₹ 29,01,66,650/- resulting in an addition of ₹ 3,00,60,788/-. 18. In the Transfer Pricing Review Study, on page 30, the companies were identified as comparables and the data for the financial years 2002-2003, 2003- 2004 and 2004 -2005 (to the extent available) were listed, whereas in the final analysis, the TPO has taken the data for the financial year 2004 - 2005 in respect of eleven companies against the thirteen companies selected for comparables for rejecting the multiple year data relied on by the assessee. The TPO at pages 9 of his order has reasoned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data of previous two years reveals facts, which has an influence on the determination of transfer prices in relation to the transactions being compared. The Services that the Appellant provides can be characterized into recurring and non-recurring categories. Services that are ongoing in nature, generate what Appellant regards as recurring revenues. It consists of services which it anticipates a client will require for at least 3 years. Some services could even last longer. The facts could vary from Project to Project. Services that terminate upon completion of a defined task, generate what is regards as non-recurring revenues. A service for a discrete Project is characterized as non-recurring. On services where the Company anticipates that revenue is recurring, volume of work received from the client on a periodic basis could fluctuate. In few instances, a certain tentative volume of work is agreed upon at the onset of the Project. Irrespective of the agreed thresholds, the actual volume of the work received from the client within a Project could fluctuate on a month to month basis. In few cases, volume of work received from the client and the, production work gradually in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence on the determination of transfer prices in relation to the, transactions being compared. The Proviso clearly states that data relating to a period not being more than two years prior to such financial year is also to be considered if such data reveals facts which could have an influence on the determination of Transfer Prices in relation to the transactions being compared. As stated in the foregoing paragraphs, the nature of business of the Appellant Company recurring Projects- constitutes 94% of the total revenue in financial year 2004-2005 and such recurring Projects had been contracted in the previous financial year 2003-2004 or before and continued in financial year 2004-2005 and 2005-2006 at the billing rates contracted in financial year 2003-2004, which rates continued in the financial year 2004-2005 and 2005-2006. This necessitated the use of multiple year data for the previous two financial years to determine the Transfer Prices in relation to the transactions being compared. Based on the above facts, the Appellant's case is squarely covered by the Proviso and if that be the case, the Proviso, which is a part of the Rule has to be applied. It is a fundame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the determination of the transfer prices in relation to the transactions being compared. It is for this reason that the Appellant used multiple year data in respect of the comparables to arrive at the weighted average of OP/TC of each comparable Company. 21. In the light of the above factual background, we notice that, it is as matter of fact that in para 5.1 of the order for assessment year 2002-03, (A.Y. 2003-04), the TPO himself has held as under:- The assessee company has used weighted average data for three financial years in the case of comparables to arrive at an arithmetical mean of 10.12% in case of comparable companies. three financial years in the case of comparables To arrive at an arithmetical mean of 10.12% in case of comparable companies. The details are provided at page 31 of Transfer Pricing Report, the provision of rule 10B(4) cast an obligation of use of data for the year in which international transaction took place. However, as per the proviso attached to the rule prior two years data can also be considered if such data reveals facts which could have influence on determination of transfer price in relation to Transactions being compared. It is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office or a captive unit, but faces risks and uncertainties as does the Parent Company as any volume fluctuations in business of parent company have a direct bearing on the revenue of the Appellant. Despite this fact, the Parent company retains only 3.38% of its revenue generated from activities in India as against operating profit of 6.63% earned by the Appellant. Based on the above findings, I hold that the Appellant was justified in using multiple year data and the comparables provided by the Appellant is acceptable. The arithmetical mean of the weighted averages of the comparable companies as compiled by the Appellant and also to by the TPO is 10.25%. Since the Appellant's operating margins falls within (+/-) 5% of the arithmetical mean of comparable prices. I hold the Appellant's international transaction with its associated enterprises during the year to be at Arm's Length. Consequently the addition of ₹ 3,00,60,788/- made to the price of international transactions is hereby directed to be deleted. Accordingly, the addition made by the Assessing officer on account of difference in Arm's Length Price of ₹ 3,00.60,788/- is hereby delete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Pg. 34 and 35 of the ld CIT(A) clearly reveals that the parent company is exposed to Market Risk, service liability risk, technology risk, credit risk and price risk and the parent company is engaged in Research and Development (R D) of new process/ service. So we concur with the ld CIT(A) that TPO has incorrectly stated parent company is only performing the functions of marketing. 26. Table 6 indicates the revenue of the Group and the tax-payer for five years, which is as under:- TABLE 6: REVENUES (figures in Rs. million) Year March 2001 March 2002 March 2003 March 2004 March 2005 Revenue (Group) 2,739.70 2,518.99 1,478.07 1,943.29 2,381.01 Revenue (IIPL) 331.50 282.80 202.70 249.40 290.10 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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