2024 (7) TMI 26 - AT - Income Tax

TP Adjustment - disallowances of cost of support services - HELD THAT - The cost allocation Key on headcount basis has been duly examined and accepted by the ld TPO to be at ALP in the transfer pricing proceedings u/s 92CA(3) of the Act. The same cannot be subjected to retest by the ld AO in the peculiar facts and circumstances of the instant case under the garb of examining the same in the context of allowability of deduction u/s 37 of the Act as argued by the ld DR before us. No doubt the scope of ld TPO is only to ensure whether the pricing of services is at arm s-length or not. But for that purpose the cost sharing agreement cost allocation keys used thereon and reasons for such usage of allocation keys are very much material for the ld TPO to examine and conclude whether the pricing thereon is at ALP or not. In the instant case all these documents were duly placed on record before the ld TPO and the same was accepted to be at ALP by the ld TPO. It is also pertinent to note that the reference u/s 92CA(1) of the Act to the ld TPO was made by the ld AO after the survey proceedings. Hence even the findings of the survey team were very much available before the ld TPO. We find that the cost allocation on the basis of headcount has been affirmed to be an appropriate allocation key by the Hon ble jurisdictional High Court in the case of CIT Vs. EHPT India Private Limited. 2011 (12) TMI 49 - DELHI HIGH COURT It is also pertinent to note that no adjustment has been made on the impugned transactions in the hands of Genpact India Private Limited in AYs 2017-18 and 2018-19 in the scrutiny assessments framed u/s 143(3) read with section 144C(13) read which section 144B. Thus following the principle of consistency we hold that the cost allocation key on the basis of headcount should not be disturbed for the year under consideration. Accordingly the ground Nos. 2 and 3 raised by the assessee are allowed. Non granting the depreciation allowance towards the intangible assets (being customer contracts as well as assembled workforce - HELD THAT - We find that in AY 2010-11 2023 (3) TMI 83 - ITAT DELHI this Tribunal in assessee s own case had held that the cost of intangible assets to be capital expenditure and accordingly granted depreciation at the rate of 25%. Thus we direct the AO to grant depreciation consequent to the order of the tribunal in AY 2010-11 and allow the additional ground raised by the assessee.

Summary

Issues Involved:

1. Jurisdiction of the Assessing Officer (AO) over international transactions.
2. Disallowance of expenditure incurred towards support services.
3. Methodology for cost allocation.
4. Depreciation allowance on intangible assets.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Assessing Officer (AO) over international transactions:

The AO assumed jurisdiction over the international transaction of expenditure incurred towards support services, which had already been considered at arm's length by the Transfer Pricing Officer (TPO). The AO made an addition of INR 6,43,00,860/- by changing the cost allocation methodology from 'headcount ratio' to 'salary expense ratio'. The tribunal observed that the TPO had accepted the 'headcount' allocation key for provision of support services and the AO should not have reassessed the arm's length price (ALP) of the international transaction. The tribunal emphasized that once the TPO has determined the ALP, the AO is bound to compute the income in conformity with the TPO's determination.

2. Disallowance of expenditure incurred towards support services:

The AO disallowed the expenditure incurred towards support services by arbitrarily changing the cost allocation methodology. The tribunal noted that the assessee had provided all necessary documents, including the cost-sharing agreement, which were accepted by the TPO. The tribunal found that the AO's findings were based on incorrect assumptions, as the cost-sharing agreement and supporting documents were indeed submitted and examined by the TPO. The tribunal held that the cost allocation key on 'headcount basis' had been consistently accepted by the revenue in previous years and should not be disturbed.

3. Methodology for cost allocation:

The AO changed the cost allocation methodology from 'headcount ratio' to 'salary expense ratio', partly disallowing the support services cost. The tribunal found that the 'headcount' method was appropriate as it reflected the level of support required by the assessee. The tribunal cited various judicial precedents supporting the use of 'headcount' as an appropriate allocation key. The tribunal also noted that different expenses were allocated on different bases, demonstrating a proper analysis by the assessee. The tribunal concluded that the cost allocation key on 'headcount basis' should not be disturbed for the year under consideration.

4. Depreciation allowance on intangible assets:

The assessee raised an additional ground regarding the non-granting of depreciation allowance of INR 73,95,017 towards intangible assets. The tribunal referred to its earlier decision in the assessee's own case for AY 2010-11, where the cost of intangible assets was treated as capital expenditure and depreciation was allowed. The tribunal directed the AO to grant depreciation in line with the assessment order upheld by the tribunal for AY 2010-11.

Conclusion:

The tribunal allowed the appeal of the assessee, holding that the AO should not have reassessed the ALP determined by the TPO, the cost allocation methodology on 'headcount basis' should be upheld, and the depreciation allowance on intangible assets should be granted as per the earlier tribunal decision.