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2015 (4) TMI 1139 - AT - Income TaxAddition 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 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. 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 company had suffered a total loss of USD (5, 165, 000) which included 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 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 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 in favour of assessee
Issues Involved:
1. Deletion of the addition of Rs. 4,34,12,348/- made to the price of the international transaction. Detailed Analysis: Issue 1: Deletion of the Addition of Rs. 4,34,12,348/- to the Price of the International Transaction Facts of the Case: The assessee company, engaged in providing content-related services to its parent company Innodata US, declared a loss of Rs. 1,25,40,010/- for the assessment year 2003-04. The case was selected for scrutiny, and the Transfer Pricing Officer (TPO) determined the arm's length price (ALP) of the international transactions. The TPO found a difference of Rs. 4,34,12,348/- between the arm's length operating profit and the adjusted operating profit, leading to an addition to the taxable income of the assessee. Revenue's Argument: The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], who had deleted the addition of Rs. 4,34,12,348/-. The Revenue relied on the TPO's findings and argued that the addition was justified. Assessee's Argument: The assessee argued that both the assessee and its parent company are independent service providers exposed to business risks and fluctuations. The assessee contended that the TPO's argument regarding employee costs and capacity utilization was not based on facts. The assessee provided detailed data on employee costs, revenue, and fixed asset additions to support its case. Tribunal's Findings: - Business Fluctuations and Risks: The Tribunal noted that both the assessee and its parent company are exposed to business risks and fluctuations. The parent company secures business and sub-contracts it to the assessee, affecting the assessee's revenue based on the business secured by the parent company. - Employee Costs: The Tribunal observed that variable employee costs fluctuated significantly as a percentage of revenue, while fixed employee costs remained relatively constant. This indicated idle capacity and manpower, contradicting the TPO's argument. - Capacity Utilization: The Tribunal found that the parent company had no content manufacturing capacity in the US and outsourced 100% of its work to its subsidiaries, including the assessee. The volume of business outsourced was directly related to the business obtained by the parent company. - Revenue Data: The Tribunal reviewed the revenue data of the group and the assessee over five years, finding consistent job outsourcing from the parent company to the assessee. The Tribunal also considered the impact of the global economic downturn on the assessee's business. - Fixed Assets: The Tribunal examined the fixed asset additions and found that significant capital additions were made in March 2002, but the revenue declined in the same year. The assessee curtailed fixed asset additions in subsequent years due to existing capacity. - Transfer Pricing Audit: The Tribunal noted that the Internal Revenue Service (IRS) in the US had conducted a transfer pricing audit and made no adjustments to the transactions between the assessee and the parent company. - Loss Analysis: The Tribunal found that the parent company had suffered losses in both content and other segments, contradicting the TPO's observation that losses were only in other segments. Conclusion: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 4,34,12,348/-. The Tribunal concluded that the assessee's international transactions with its associated enterprises were at arm's length and that the CIT(A) had rightly deleted the addition made by the Assessing Officer. The Revenue's appeal was dismissed. Order Pronouncement: The order was pronounced in the open court on 30.04.2015, dismissing the Revenue's appeal.
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