DCIT, New Delhi v. M/s Innodata Isogen India Pvt. Ltd., New Delhi

ITA 5390/DEL/2010 | 2003-2004
Pronouncement Date: 30-04-2015 | Result: Dismissed

Appeal Details

RSA Number 539020114 RSA 2010
Assessee PAN AAACI2425G
Bench Delhi
Appeal Number ITA 5390/DEL/2010
Duration Of Justice 4 year(s) 4 month(s) 29 day(s)
Appellant DCIT, New Delhi
Respondent M/s Innodata Isogen India Pvt. Ltd., New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 30-04-2015
Appeal Filed By Department
Order Result Dismissed
Bench Allotted I
Tribunal Order Date 30-04-2015
Date Of Final Hearing 10-04-2015
Next Hearing Date 10-04-2015
Assessment Year 2003-2004
Appeal Filed On 01-12-2010
Judgment Text
INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I: NEW DELHI BEFORE SHRI S.V.MEHTORA ACCOUNTANT MEMBER AND SHRI A. T. VARKEY JUDICIAL MEMBER ITA NO5390/DEL/2010 (ASSESSMENT YEAR: 2003 - 04) DCIT CIRCLE - 11(1) ROOM NO - 312 C.R.BUILDING NEW DELHI VS. INNODATA ISOGEN INDIA PVT LTD 19 K G MARG 708 SURYA KIRAN BUILDING NEW DELHI PAN NO - AAACI2425G (APPELLANT) (RESPONDENT) DATE OF HEARING 10.04.2014 DATE OF PRONOUNCEMENT 30 .04.2015 O R D E R PER A. T. VARKEY JUDICIAL MEMBER THIS APPEAL FILED BY THE REVENUE ARISES OUT OF THE ORDER PASSED BY THE LD. CIT(A) - XX NEW DELHI DATED 30. 0 9.2010 PERTAINING TO ASSESSMENT YEAR 2003 - 04. 2. THE EFFECTIVE SOLE GROUNDS RAISED IN THE REVENUES APPEAL READ AS UNDER: - THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.4 34 12 348/ - MADE TO THE PRICE TO THE INTERNATIONAL TRANSACTION. 3. APROPOS GROUND NO.1 IS OF DELETION OF THE ADDITION OF RS.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 AND INDEXING ETC. TO ITS PARENT COMPANY INNODATA US. THE RETURN OF INCOME HAS BEEN FILED BY THE ASSESSEE ON APPELLANT BY : SH. AJAY VOHRA ADV M.L. KRISHNAMURTY CA SH R KATYAL CA MEHAR GUPTA ADV R. BALASUBRMANIUM CA RESPONDENT BY : SH JUDY JAMES STANDING COUNSEL PAGE 2 OF 8 28.11.2003 DECLARING A LOSS OF RS.1 25 40 010/ - . THE RETURN WAS P ROCESSED U/S. 143(1) OF THE INCOME TAX ACT 1961 (HEREIN AFTER THE ACT) ON 19. 0 3.2004. THE CASE WAS SELECTED FOR SCRUTINY. A REFERENCE WAS MADE TO TPO NEW DELHI FOR DETERMINING THE ARMS LENGTH PRICE U/S. 92CA(3) OF THE ACT IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE DURING THE FINANCIAL YEAR 2002 - 03. THE TPO VIDE HIS ORDER DATED 3.3.2006 HAS EXAMINED AND DETERMINED THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS A SSOCIATED 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 RS.22 42 93 560/ - WORKS OUT TO RS.2 26 98 508/ - AS COMPARED TO THE LOSS PO STED OF RS.2 07 13 840/ - . THE DIFFERENCE WORKS OUT TO RS.4 34 12 348/ - . THE PRIMARY INTERNATIONAL TRANSACTION OF THE ASSESSEE IS IN RESPECT OF IT ENABLED SERVICES BECAUSE THE EFFECT OF ANY PRICE DIFFERENT ON PURCHASE OF COMPUTERS OR SALE OF COMPUTERS 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 TRANSACT ION AS PER BOOKS OF ACCOUNTS IS RS.20 27 10 379/ - AND TO BRING IT BACK THIS TRANSACTION TO ARM'S SPHERE ITS VALUE IS ENHANCED TO RS.24 61 22 727 AND THUS AN ADDITION OF RS.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 RS.4 34 12 348/ - BETWEEN ARM'S LENGTH OPERATING PROFIT AND ADJUSTED OPERATING PROFIT IS ADDED TO THE INCOM E 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 T HE 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 CONTRARY LD. COUNSEL OF THE ASSESSEE RELIED UPON THE ORDER OF THE LD. CIT(A) AND DOES NOT WANT US TO INTERFERE IN THE S AME. PAGE 3 OF 8 10 . 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 9 2CA(3) OF THE INCOME ACT DATED 3 RD 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 FROM ITS CUSTOMERS AND IS THEN SUB - CONTRACTED TO THE ASSESSEE. SO IF THE PARENT COMPANY DOES NOT SECURE BUSINESS IT CANNOT PASS IT ON TO THE ASSESSEE. LIKEWISE IF THE PARENT COMPANY SECURES GOOD WORK THEN IT WILL PASS IT ON TO THE ASSESSEE AND THE ASSESSEE IN T URN WILL HAVE GOOD WORK/ BUSINESS. THEREFORE LIKE OTHER SERVICE PROVIDERS THE ASSESSEE AND ITS PARENT ARE EXPOSED TO RISKS OF BUSINESS FLUCTUATIONS. 11. TABLE 1 B E LOW INDICATES THE FIXED PERSONNEL COSTS VARIABLE PERSONNEL COTS SALES AND V ARIABLE PERSO NNEL 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% 12 . AS SHOWN ABOVE VARIABLE COSTS AS A PERCENTAGE OF REVENUES HAVE FLUCTUATED FROM AS LOW AS 3 7% TO AS HIGH AS 46% IGNORING MARCH 2001 BECAUSE OF ABNORMAL PROFITS. (THE TPO EXCLUDED THIS YEAR FOR COMPARATIVE PURPOSES.) FIXED L ABO U R COSTS (IN ABSOLUTE TERMS) HAVE REMAINED MORE OR LESS CONSTANT. IT IS THIS FIXED COST WHICH CREATES IDLE CAPACITY/ MAN P OWER. THUS THE PAGE 4 OF 8 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 FACT S 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 AS A PERCENTAGE OF THE TOTAL REVENUE OF THE ASSESSEE. 14. TABLE 6 INDICATES THE REVENUE OF THE GROUP AND THE APPELLANT FOR FIVE YEARS WHICH IS AS UNDER: - TABLE 6: REVENUES (FIGURES IN RS. MILLION) MARCH MARCH MARCH MARCH YEAR 2001 2002 MARCH 2003 2004 2005 REVENUE (GROUP) 2 739.70 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 REDUCTION IN WORKFORCE (550 PEOPLE) FIXED COSTS LIKE PORTION OF MANAGEMENT SALARIES AND PAGE 5 OF 8 GENERAL AND ADMINISTRATIVE STAFF DID NOT GET REDUCED. THE ASSESSEE HAS ATTACHED A TABLE /CHART TO DEMONSTRATE THAT THE FIXED EMPLOYEE COST (IN ABSOLUTE NUMBERS) IS FAIRLY CONSTANT (SUPRA) . HOWEVER AS A PERCENTAGE OF SALES IT FLUCTUATES. THIS FLUCTUATION ACCORDING TO ASSESSEE WAS ON ACCOUNT OF FLUCTUATION IN REVENUES (CHART SUPRA) . NEITHER THE PARENT COMPANY NOR THE ASSESSEE HAD ANY CONTROL OVER THE GLOBAL MELT DOWN WHICH WAS HAPPENING ESP ECIALLY 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. UNDER UTILIZATION HAD TAKEN PLACE BECAUSE O F SCALING 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 T O 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 INSIG NIFICANT 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 COMPUTER I EQUIPMENT 18.08 42.55 26.48 6.49 2.71 SOFTWARE 1.26 30.89 28.98 0.80 - INFRASTRUCTURE IMPROVEMENTS / EQUIP 5.95 26.71 10.26 1.42 6.22 TOTAL FIXED ASSET ADDITIONS 25.10 100.15 65.72 8.71 8.93 REVENUE 331.50 282.80 202.70 249.40 290.10 PAGE 6 OF 8 10.10 AS SHOWN ABOVE THE ASSESSEE MADE SIGNIFICANT CAPITAL ADDITIONS IN MARCH 2002. BUT THE REVENUE IN THE SAME YEAR DECLINED AS COMPARED TO MARCH 2001 OF THE PRIOR 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 OBSERVATI ONS OF THE TPO AS REGARDS IMPROPER TRANSFER PRICING AND THAT THE PARENT COMPANY HAD PASSED ON PART OF ITS LOSSES TO THE ASSESSEE IS NOT BASED ON PROPER EVALUATION OF FACTS. A PERUSAL OF THE TABLE REPRESENTS THE PARENTS REVENUE FOR SEVEN YEARS STARTING MAR CH 2000: TABLE 7: REVENUES (FIGURES IN RS. MILLION) YEAR MARCH 2000 MARCH 2001 MARCH 2002 MARCH 2003 MARCH 2004 MARCH 2005 MARCH 2006 REVENUE (GROUP) 1413 2 740 2 519 1 478 1 94 3 2 381 1 822 % FLUCTUATION - 94% - 8% - 41% 31% 23% - 23% 18. THE LD CIT(A) HAS NOTED THAT IN THE FINANCIAL YEAR 2002 - 2003 INNODATA US THE PARENT COMPANY HAD TRANSFERRED 98% OF 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 B ELOW: - 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% PAGE 7 OF 8 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 ARMS 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 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 I NCOME 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 CONTE NT 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 E XPENSES OF RS.3 87 30 000/ - FROM THE TOTAL OPERATING EXPENSES AND THEREBY ARRIVING AT NET OPERATING EXPENSES OF RS.18 55 63 560/ - . BASED ON SUCH NET OPERATING EXPENSES THE NET OPERATING PROFIT MARGIN WORKS OUT TO RS.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 ASSESSEES OPERATING MARGINS FALLS W ITHIN (+1 - ) 5% OF THE ARITHMETICAL MEAN OF COMPARABLE PRICES LD. CIT(A) HAS RIGHTLY HELD THAT THE ASSESSEES INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES DURING THE YEAR TO BE AT ARM'S LENGTH. CONSEQUENTLY THE ADDITION OF RS.4 34 12 348/ - M ADE TO THE PRICE OF INTERNATIONAL TRANSACTION WAS DIRECTED TO BE DELETED BY THE LD CIT(A) . PAGE 8 OF 8 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 R S.4 34 12 348/ - . IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS WE FIND THAT LD. CIT(A) HAS PASSED A WELL REASONED ORDER WHICH DOES NOT NEED ANY INTERFERENCE ON OUR PART HENCE WE UPHOLD THE SAME. THEREFORE THE ISSUE IN DISPUTE RAISED BY THE REVENUE I S REJECTED. 22 . IN THE RESULT THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 0 .04.2015. - S D / - - S D / - ( S.V.MEHROTRA) (A. T. VARKEY) A CCOUNTANT MEMBER JUDICIAL MEMBER DATED: 3 0 /04/2015 *A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT NEW DELHI