2018 (4) TMI 1826 - AT - Income Tax

TP Adjustment - adjustment to the price of International transaction of provision of engineering and design services - cost incurred toward AE and non-AE transaction - amount received by the assessee corresponding to the man-hours utilised by the AE - cost allocated towards utilized man-hours of AE transactions according to the matching principle of revenue expenses - HELD THAT - We cannot take different yardsticks for measuring cost incurred toward AE and non-AE transaction by same set of manpower. Taking committed man-hours in the case of AE, which also included unutilized man-hours, would distort the allocation key. Thus, the basis of allocation of the cost towards the AE transaction should be on man-hours utilized only and not on man-hours which have been committed by the AE for payment. TPO should have only computed the cost allocated towards utilized man-hours of AE transactions according to the matching principle of revenue expenses - total cost incurred by the assessee is for total man-hours utilized, both for the AE as well as non-AE transactions, and thus, while allocating the cost to the AE transactions, non-utilized manhours cannot be included. Since the man-hours utilized for the AE are 5695 and man-hours utilized for non-AE are 2,77,730, the total man-hours utilized would be (5695 2,77,730 ) 2,83,425 and the ratio of man-hours utilized by the AE to the total man-hours utilized would be (5695/283425)X 100 2%. Since the amount received by the assessee corresponding to the man-hours utilised by the AE has been worked out by the Ld. TPO which being less than the arm s length price computed no adjustment to the price of International transaction of provision of engineering and design services is required. - Decided in favour of assessee. Depreciation on intangibles - HELD THAT - As decided in assessee's own case 2015 (11) TMI 1218 - DELHI HIGH COURT the issue has been decided in favour of the assessee following the judgment of Smifs Securities Limited reported in 2012 (8) TMI 713 - SUPREME COURT

Summary

Issues Involved:
1. Transfer pricing adjustment of ?5,14,35,841.
2. Disallowance of depreciation on intangibles amounting to ?4,28,07,185.
3. Failure of the Dispute Resolution Panel (DRP) to appreciate the evidence produced by the Appellant.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment of ?5,14,35,841:

The primary issue pertains to the addition of ?5,14,35,841 under Section 92CA(3) of the Income Tax Act, 1962, due to an adjustment in the Arm's Length Price (ALP) of international transactions. The assessee, engaged in providing engineering and design services, used the Comparable Uncontrolled Price (CUP) method to benchmark its transactions with Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) rejected the CUP method, citing non-comparability under Rule 10B(2) of the Income Tax Rules, 1962, and instead adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM). The TPO allocated costs based on the ratio of man-hours consumed for AE transactions to total man-hours and selected 11 comparables, resulting in an average profit margin of 27.70%. The TPO proposed an adjustment of ?5,14,35,841, which the DRP upheld.

The Tribunal found the TPO's allocation method flawed, as it included unutilized man-hours, distorting the cost allocation. It agreed with the assessee's contention that only utilized man-hours should be considered. Upon recalculating based on utilized man-hours, the Tribunal concluded that no adjustment was needed. Consequently, ground No. 1(b)(i) was allowed, and grounds Nos. 1(a) and 1(b)(ii) were dismissed as infructuous.

2. Disallowance of Depreciation on Intangibles Amounting to ?4,28,07,185:

The second issue involves the disallowance of depreciation on intangibles, which the Assessing Officer (AO) based on the assessment for the year 2007-08. The AO doubted the existence and acquisition of intangible assets, leading to the disallowance. The assessee argued that the Delhi High Court had already decided this issue in its favor for the assessment year 2007-08, following the Supreme Court's judgment in CIT Vs. Smifs Securities Limited.

The Tribunal noted that the Delhi High Court had indeed ruled in favor of the assessee, recognizing the excess consideration paid over the value of tangible assets as goodwill, which includes various intangible assets. Respectfully following the High Court's decision, the Tribunal directed the AO to delete the disallowance of ?4,28,07,185 on account of depreciation on intangibles, thereby allowing ground No. 2 of the appeal.

3. Failure of the DRP to Appreciate the Evidence Produced by the Appellant:

This ground was not pressed by the appellant's counsel before the Tribunal and was thus dismissed as infructuous.

Conclusion:

The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the transfer pricing adjustment and the disallowance of depreciation on intangibles, while dismissing the unpressed grounds. The decision was pronounced on 27th April 2018.