TaxTMI 
TaxTMI 
2015 (7) TMI 291
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....he Income Tax Act, 1961 (herein after 'the Act') on 20.04.2006. The case was selected for scrutiny. A reference was made to TPO, New Delhi for determining the arm's length price u/s. 92CA(3) of the Act in respect of international transactions entered into by the assessee during the financial year 2004-05. The TPO vide his order dated 16.09.2008 has examined and determined the arm's length price of the international transactions of the assessee with its Associated Enterprises using the current year data when assessee had considered multiple year data in respect of comparable, as under:- "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 is not in proportion to the functions performed by the associated enterprise. Further, the inter....
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.... In view of above, AO shall enhance the total income of the assessee by Rs. 3,00,60,788/- for 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 Rs. 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, assessee appealed before the ld. CIT(A), who vide her Order dated 31.01.2011 has allowed the appeal of the assessee by deleting the addition. 6. Now the revenue is in appeal before us. 7. Ld. DR relied upon the order of the Assessing Officer and TPO. 8. On the contrary, ld. counsel of the assessee relied upon the order of the ld. CIT(A) and does not want us to interfere 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 vario....
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.... 14. The assessee revenue model is based on a price per transaction/ transmission undertaken for its AEs. The per transaction price received by the assessee is determined as a % of the sale price derived by the AEs from the sale to the ultimate end customer. During the financial year under consideration, the assessee received as its revenues 76% of the end customer revenue generated by the AE's from sale of services provided by the assessee. 15. Accordingly, the assessee revenues (and consequently its margins) are directly interlinked to the revenues generated by the AEs. The assessee thus 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. This is a different model as compared to a cost plus service entity which would earn a low an....
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....son. ........." The parent 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 TPO in his order for the financial year 2002-2003 (assessment year 2003 - 2004). It is precisely on account of the fluctuations in the revenues and in the OP /TC percentage that the Appellant has adopted the weighted average data for the current year as well as the previous two years. In fact the 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 ....
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....e Appellant Company and which were recurring in nature are highlighted in the attached statement. As stated in the foregoing paragraphs, the billing rate to the end customer by the Parent Company in respect of recurring Projects is consistent as the billing rates are agreed upon at the contract negotiation stage. In other words, whilst the volumes may fluctuate, the billing rate is constant. 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. 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 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 Transf....
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.... 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 by the Parent Company in respect of recurring Projects is consistent, as the billing rates are agreed upon at the contract negotiation stage. In other words, whilst the volumes may fluctuate, the billing rate is constant. I agree with the contention of the Appellant that the Proviso to Rule 10B (4) of the Income Tax Rules, 1962 will apply to the instant case because the data of the Appellant reveals facts which has an influence on 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, w....
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....d also the form 10K and l0Qs filed by the Parent Company which justifies the usage of multiple year data. I have also considered the various judgments cited by the Appellant in support of their detailed submissions. I also found that the observations of the TPO in rejecting comparables on the premise of nil foreign exchange earnings as per his order is not consistent. TPO has himself 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 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 ....
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....eting, 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. A perusal of the chart 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:- &nb....