2019 (2) TMI 1993 - HC - Income Tax

TP Adjustment - allocation of certain common expenditure - Expenditure incurred as common for two different segments - applicability of head count principle - HELD THAT - This Court notices that the principle of applying the headcount method has not been universally accepted and was in fact rejected in M/S Continental Carriers vs. Commissioner of Income Tax New Delhi 2016 (4) TMI 1054 - DELHI HIGH COURT . At the same time the Court did say so on the basis that the assessee had not followed the consistent method; and that the issue of allocation of such expenditure was in the context of deduction claimed under Section 80(4). This Court is of the opinion that the two possible choices i.e. turnover method as well as the headcount method in the present case was not justified. Concededly the expenditure incurred by the assessee was common for two different segments. The tax authorities broadly agreed that expenditure could be allocated on the basis of proportionate turnover of the concerned segment. Having done so the alternative was open to accept one or the other principle. Therefore the choice of the assessee in relying upon the headcount principle per se could not have been rejected. The question of law therefore is answered against the Revenue and in favour of the assessee. Comparability selection - ITAT has remitted the matter for consideration of one of the comparables i.e. for M/S Indus Technical and Financial Consultants Ltd - The reasoning of the ITAT was that the details on the website could not be relied upon. It was argued and perhaps quite correctly that this comparable was included by the TPO relying upon the material available at that time from the internet. If such were the decision the assessee could possibly also have relied upon material similar to such material. In any event this Court does not propose to pass any final decision on the merits. Pursuant to the remand it is open to the authorities to take into consideration all the relevant material including credible material available with respect to the comparables in question. The question of law number two is answered accordingly.

Summary

Issues:
1. Allocation of common expenses using the headcount method
2. Acceptance of a functionally different company as a comparable for transfer pricing

Issue 1: Allocation of common expenses using the headcount method
The case involved the appellant challenging the transfer pricing adjustment made by the Assessing Officer/TPO regarding the allocation of common expenditure using the headcount method. The appellant argued that the headcount method was suitable for allocating expenses, but this argument was rejected by the TPO, DRP, and ITAT. The appellant relied on a previous judgment to support the use of the headcount method, emphasizing that it had been applied consistently in the past. The Court noted that the headcount basis is an acceptable principle and recognized by law. It highlighted a previous case where the headcount method was considered acceptable, even when there was a disparity in employee salaries. The Court concluded that the choice of the headcount principle for allocation of expenses could not have been rejected in the present case, answering the question of law in favor of the assessee.

Issue 2: Acceptance of a functionally different company as a comparable for transfer pricing
The ITAT remitted the matter for consideration of a comparable company, M/S Indus Technical and Financial Consultants Ltd. The ITAT had rejected the reliance on details from the company's website and remanded the case for further review. The Court acknowledged that the comparable was included based on information available at the time from the internet. It stated that the authorities could consider all relevant material, including credible sources, for evaluating comparables. The Court declined to make a final decision on the merits, leaving it open for the authorities to assess the comparables thoroughly. Consequently, the second question of law was answered accordingly, and the appeal was partly allowed in the mentioned terms.

In conclusion, the judgment addressed the issues of allocation of common expenses using the headcount method and the acceptance of a functionally different company as a comparable for transfer pricing. The Court upheld the use of the headcount method for expense allocation and allowed the appeal partly, remanding the matter for further consideration of comparables.