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DCIT Circle-11 (1) , New Delhi Versus Innodata Isogen India Pvt Ltd, New Delhi

Addition made to the price to the international transaction - Determination of arm's length price - CIT(A) deleted addition - Held that:- Out of the total revenue earned by the parent company from India activity, it has transferred 76% of the revenue to the Appellant and has incurred about 20.6% of the revenue towards sales, marketing, general and administration allocable to India operations. In other words, it retains only 3.38% of the revenue which it has earned from India operations and which .....

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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.

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, 200 .....

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-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 background of the aforesaid discussions, the impugned order of Ld. CIT(A) does not need any interference on our part, hence, we uphold the same - Decided against revenue. - ITA 1528/Del/2011 - Dated:- 30-6-2015 - .....

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o the price to the international transaction. 3. Facts, in brief are that the assessee company is engaged in the business of providing content related services such as data conversion, composition editorial services and indexing etc. to its parent company Innodata US. The return of income has been filed by the assessee on 31.10.2005 declaring ₹ 5,71,340/-. The return was processed u/s. 143(1) of the Income Tax Act, 1961 (herein after the Act ) on 20.04.2006. The case was selected for scrut .....

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uot;Innodata India is retaining only 60% of the profit, whereas, Innodata US is retaining 40% of the profit. As discussed in the previous paragraphs the associated enterprise is mainly performing the functions of marketing activities and the assessee in India performs all other functions. Therefore, the compensation to the assessee as per the marketing service agreement is not reflecting the market reality as associated enterprise is retaining more profit than the assessee and this profitability .....

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roup 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 .....

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ted enterprise is determined as under: Average OP/TC of the comparables = 17.70% Total Cost of the assessee = Rs.27,20,71,890 Arm's length revenue = 117.70 % ₹ 27,20,71,890 = 32,02,27,439 Book value = 29,01,66,650 Difference = 3,00,60,788 The international transactions undertaken by the assessee is understated by ₹ 3,00,60,788/-. The ratio of quantum of adjustment to arm's length price is 9.4%, Therefore, proviso to see. 92C (2) is not attracted. 9. The Arm's length price .....

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the A.Y.2005-06 for the international transactions undertaken by the assessee during the F.Y. 2004-05 to bring the international transactions relating to IT enabled services at arm's length price." 4. In view of above, the difference amounting to ₹ 3,00,60,788/- between arm's length operating profit and adjusted operating profit was added to the income of the assessee company by the AO vide his order dated 16.09.2008. 5. Against the aforesaid order of the Assessing Officer, a .....

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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 ca .....

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nnodata US/ Innodata Asia in the services provided by them to the ultimate customers. Assessee is established as a Software Technology Park (STP) Unit. Assessee main activities include data capture and conversion, imaging, Electronic publishing services, indexing and Abstracting. 11. During the year, the assessee has undertaken the following international transactions: S.No. Nature of Transaction Value (in Rs.) 1 Purchase of Computer & communication related peripherals 3,71,428 2 Provision o .....

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gin, the assessee company has taken operating revenues from P & L account which comes to ₹ 29,01,66,650/-, against which operating cost is shown at ₹ 27,20,71,890/-. In this manner a profit of ₹ 1,80,94,760/- is arrived at which works out to 6.65%. Thus it has been concluded by the assessee that arm s length price of the international transaction is within + 5% of arithmetic mean. 14. The assessee revenue model is based on a price per transaction/ transmission undertaken fo .....

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s shares the market and related risks with the AEs and is not a risk free service provider who is generally compensated on a cost plus basis by the buyer of the services. 16. Consequent to the revenue model of the assessee, 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. T .....

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ables 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 as under:- "Use of multiple year data: - The taxpayer has selected TNMM as the most app .....

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o the transfer pricing analysis and helps the Appellant gain information about the cycle which may affect the Appellant's transactions. Most importantly, using multiple year data helps eliminate possible seasonal effects in the financial results of the comparables. As already noted there are peaks and troughs, which the Appellant is subject to. It is likely that the comparable company could also be in a similar situation, where they feel the brunt of business volatility. A careful examinatio .....

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nt company is also subject to fluctuation in the revenues as the result of the OP/TC ratio. Between the years 2000-200 I and 2007-2008 it has fluctuated from -19.51 % (in the year 2002-2003) to 18.81 (in the year 2004-2005). Likewise the revenues and (OP /TC percentage of the Appellants has also fluctuated from -9.07% (in the year 2002-2003) to 83.79% (in the financial year 2000-200 I). It may be mentioned that financial year 2000- 2001 was an unusual year, which has also been referred to by the .....

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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-recurrin .....

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onsidering the time required for the ramp-up. In certain other cases, no agreed level of volume is decided upfront. Despite the fact that the volume could fluctuate within a Project, the bill rate to the client is consistent, as the bill rates are agreed upon at the contract negotiation stage. Thus, the Project continuity is key determining factor. A statement showing the summary of revenues earned by the Appellant Company in respect of Projects under taken by the Appellant on behalt of the Pare .....

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financial year 2003-2004 (assessment year 2004-2005) the recurring revenue earned by the Appellant constituted 89% of the total revenue. iii. In financial year 2004-2005 (assessment year 2005-2006 - year under appeal) the recurring revenue earned by the Appellant constituted 94% of the total revenue. iv. In financial year 2005-2006 (assessment year 2006-2007) the recurring revenue earned by the Appellant constituted 99% of the total revenue. The various end customers, whose Projects were underta .....

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to arrive at the weighted average of OP/TC of each comparable company. Coming back to the Proviso to Rule 10B(4) of the Income Tax Rules, 1962, which is reproduced herein below: - "Provided that data relating to a period not being more than two years prior to such financial year may also 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." The Proviso clearly states that data rel .....

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03-2004 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 .....

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rs 2002-2003 and 2003-2004, the TPO had accepted the principle of multiple year data. The assessee had used multiple year data in respect of the comparable companies and after arriving at the weighted average of each comparable company, calculated the arithmetic mean of the comparable companies selected. 20. Having regard to the above contention of the tax-payer, the ld CIT(A), held as under :- I have carefully considered the facts and the detailed submissions filed by the Appellant in pursuance .....

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of IT enabled services (content segment) to its AEs. During the financial year under consideration, the Appellant received as its revenues 76% of the end customer revenue generated by the AEs from sale provided by the Appellant. The Appellant has used multiple year data to mitigate the effect caused by business cycles or other economic distortions. The various end customers, whose Projects were undertaken by the Appellant Company were recurring in nature and the billing rate to the end customer .....

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actions 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 a .....

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facts which could have influence on determination of transfer price in relation to Transactions being compared. It is noticed above that there is wide variations in the profit margins of the Assessee company over last many years therefore, in such cases where there is such a variation use of data of multiple year would result into better comparability. In view of the special circumstances financial data of earlier years is also being considered in this case ". 22. From the aforesaid, it is .....

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he case. Therefore we uphold the decision of the ld CIT(A) to take multiple year data for determination of ALP, since it falls in the ken of proviso to Rule 10B(4) of the Rules. 23. In respect to the deletion of addition of ₹ 3,00,60,7488/- made to the price of the international transaction we find that the ld CIT(A) held as follows:- During the course of the hearing, the Appellant had filed a copy of the transfer pricing audit conducted by the Internal Revenue Service, Department of the T .....

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lf considered some companies having nil or low earnings from foreign sources in his comparables list. The TPO has incorrectly stated in his order that the parent company is only performing the function of marketing and the Appellant performs all other functions and compensation to the Appellant. This is not reflective of the facts. During the course of the hearing, the Appellant has explained that the parent company shares greater risks than the Appellant. The Appellant is not a back office or a .....

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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 here .....

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der:- TABLE 1.7: INNODATA GROUP, US AND INDIA PROFITABILITY Computation of Innodata US Profitability from India Activity Computation of Innodata US Profitability from India Activity Particulars INR Revenue earned by Innodata US from India activity (A) 38,05,4 1.601 Sales. Marketing and General and Administration cost of Group allocable to India Operations (B) 7.80.80.245 Transfer Price paid to India (C) 29,01,12.910 Total Operating cost of Innodata US for India activity D = (B+C) 36,8 I ,93.155 .....

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lant and has incurred about 20.6% of the revenue towards sales, marketing, general and administration allocable to India operations. In other words, it retains only 3.38% of the revenue which it has earned from India operations and which is the operating profit. Whereas, the Appellant has earned an operating profit of 6.63%. 25. In respect to the finding of the TPO that the parent company is only preferring the functions of marketing and the tax payer performs all other functions, is not correct .....

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