TMI Blog2015 (4) TMI 1139X X X X Extracts X X X X X X X X Extracts X X X X ..... ect 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 arriving at net operating expenses of ₹ 18,55,63,560/-. Based on such net operating expenses, the net operating profit margin works out to ₹ 1,80,16,160/-, resulting in NCP margin percentage of 9.71%. 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 para 5. 1 of his order is 10.12%. 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 ₹ 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 abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will get reflected in the depreciation being part of total cost. It is therefore held that the price different as computed above is attributable to the main activity of provision of IT Enabled services to the group companies. The price of international transaction as per books of accounts is ₹ 20,27,10,379/- 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 assessee company by the AO vide his order dated 20-3-2006. 6. Against the aforesaid order of the Assessing Officer, assessee appealed before the Ld. CIT(A), who vide her Order dated 30.9.2010 has allowed the appeal of the assessee by deleting the addition. 7. Now the Revenue is in appeal before us. 8. Ld. DR relied upon the order of the Assessing Officer and TPO. 9. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riable costs as a percentage of revenues have fluctuated from as low as 37% to as high as 46%, ignoring March 2001 because of abnormal profits. (The TPO excluded this year for comparative purposes.) Fixed labour costs (in absolute terms) have remained more or less constant. It is this fixed cost which creates idle capacity/manpower. Thus the TPO's argument that the employee cost does not show much variation is not based on facts. 13. We find that Parent company has no content 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 the volume of business obtained by its customers. From a perusal of the chart below the assessee has been able to demonstrate before the ld CIT(A) and before us that it was receiving consistently jobs from Innodata US, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g up the operations in financial years 2000-01 and 2001-02 in which years there was an increase in revenues: In financial year 2002-03, with the revenues of the parent company declined and as a consequence thereof; the revenue of the assessee also declined creating excess capacities and idle time costs. The submissions made by the assessee in response to the observations of the TPO as contained in para 4.1 of his order establish the fact that the fixed 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 ASSETS (figures in Rs. million) Year March 2001 March 2002 March 2003 March 2004 March 2005 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the stand of the assessee that the international transactions entered in to by the appellant with its associated enterprises, were at arm s length. 20. Moreover 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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