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2015 (4) TMI 1139 - ITAT DELHI

2015 (4) TMI 1139 - ITAT DELHI - TMI - Addition made of the price of the international transaction - Held that:- As 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 examination carried out by the international divisi .....

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uded loss from content segment of USD (2,996,900)and loss from system and training segment of USD (2,169,000). So, it is an incorrect observation of the TPO that the reasons for the loss of the parent company are on account of segments and not the content segment. In view of the precedents cited in the impugned order, we find that the ld CIT(A) rightly observed that the assessee was justified in reducing idle fixed expenses of ₹ 3,87,30,000/- from the total operating expenses and thereby a .....

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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 ₹ 4,34,12,348/- 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 ₹ 4,34,12,348/-. - Decided .....

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The effective sole grounds raised in the Revenue s appeal read as under:- The Ld. CIT(A) erred in deleting the addition of ₹ 4,34,12,348/- made to the price to the international transaction. 3. Apropos ground No.1 is of deletion of the addition of ₹ 4,34,12,348/- made of the price of the international transaction. 4. 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 an .....

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2-03. The TPO vide his order dated 3.3.2006 has examined and determined the arm s length price of the international transactions of the assessee with its Associated Enterprises using multiple year data as under:- "The operating margin of the comparables was 10.12%. By applying this margin, the arm's length operating profit on cost of ₹ 22,42,93,560/- works out to ₹ 2,26,98,508/- as compared to the loss posted of ₹ 2,07,13,840/-. The difference works out to ₹ 4,34 .....

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379/- and to bring it back this transaction to arm's sphere its value is enhanced to ₹ 24,61,22,727 and thus an addition of ₹ 4,34,12,348/- to the taxable income of the assessee. In view of provision of chapter X of the I.T. Act, the assessee will not be entitled to benefit of exemption u/s 10A of the Act. 5. In view of above, the difference amounting to ₹ 4,34,12,348/- between arm's length operating profit and adjusted operating profit is added to the income of the ass .....

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. 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 3rd March 2006 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 f .....

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variable personnel costs over sales over a five year period starting 2001: TABLE 1: EMPLOYEE COSTS (figures in Rs. million) Year March 2001 March 2002 March 2003 March 2004 March 2005 Total employee cost 118.54 148.46 104.00 117.55 157.64 Variable employee cost 102.10 122.87 77.29 92.68 134.47 Fixed employee cost 16.44 25.59 26.71 24.88 23.17 Revenue 331.50 282.80 202.70 249.40 290.10 Variable emp cost as % of revenue 31% 43% 38% 37% 46% Fixed Employee Cost as a % of Revenue. 5% 9% 13% 10% 8% 1 .....

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ntent manufacturing capacity in the United States. So the observations of the TPO that the assessee's lower capacity utilization is because of lower/volume of work outsourced by Parent Company is not based on facts and has been rightly stated by the ld CIT(A). Since the Parent company outsources one hundred percent of its work it secure from customers to its subsidiaries in India and Asia. The natural outcome is that the volume of business outsourced by the Parent is directly co-related to t .....

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2,518.99 1,478.07 1,943.29 2,381.01 Revenue (IIPL) 331.50 282.80 202.70 249.40 290.10 % of IIPL revenue over group revenue 12.1% 11.2% 13.7% 12.8% 12.2% 15. Therefore the observation of the TPO that the Parent company has outsourced lower volume of work to the assessee is incorrect. 16. The explanation of the assessee that excess capacities were on account of human resources, computers, infrastructural facilities, electricity costs, etc. And variable labour costs had been controlled by the redu .....

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own which was happening especially at US. The fluctuation in percentages went to show that in the year when it is high, there is under absorption of the fixed costs, which results in excess capacities and idle fixed costs including manpower. Further, despite the revenues being low, the assessee had to retain skilled technical manpower. Also there were fixed cost on rentals, electricity, depreciation on computers and infrastructure, which had to be incurred. This resulted in idle time costs. Unde .....

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xed assets were purchased in the quarter January to March 2003 on account of new orders being received by the parent company and in turn the assessee which continued in the financial year 2003-2004. A perusal of the table clearly shows that in the financial years 2003-2004 and 2004-2005, there were insignificant purchase of fixed assets on account of capacities built up as in the quarter ending January to March 2003 and earlier years. A perusal of the table will reveal this fact TABLE 1.1: FIXED .....

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rior year. Revenue of the Group further declined in March 2003 as compared to the prior year and so did the appellant's revenues. Due to the reduction in revenues, the assessee curtailed fixed asset additions in March 2003. Albeit, the revenue went up in 2004 and 2005, the assessee further curtailed its fixed assets procurement due to its already existing capacity. 17. The observations of the TPO as regards improper Transfer Pricing and that the parent company had passed on part of its losse .....

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its gross revenues which it had earned from its customers on the jobs done by the assessee for the same financial year, which is as given below:- REVENUE COMPUTATION - Assesse (amount in Rs.) Financial Year Total Revenue Reported (by the appellant) Customer Price (CP) as invoiced by Parent Company % of the appellant's revenue as a % of Customer Price 2001-02 282,893,100 321,681,600 88% 2002-03 202,706,500 207,743,700 98% 2003-04 249,458,600 283,162,000 88% 19. This table also corroborates th .....

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2005. The examination carried out by the international division of the Internal Revenue Service, indicated a downward adjustment to income of one its foreign subsidiaries in Sri Lanka, resulting in an increase of income in the U.S. No adjustments were carried out to any transaction between the assessee India Co. and the parent company. 21. TPO is of the opinion that reason of loss are on other segments and not the content segment which is not correct because in the calendar 2002 the parent compa .....

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