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2024 (8) TMI 685 - AT - Income TaxTP Adjustment - comparable selection - exclusion of two comparable companies, viz. Inductis India Pvt. Ltd and Mentor Graphics India Pvt. Ltd for Related Party Transaction - HELD THAT - As we note that both the above comparables for Related Party Transaction - as noted from Annual Report of Inductis India Pvt. Ltd., for financial years 2017-18, 2018- 19 out of the revenue of the Company 99% of the revenue is generated from inter co transaction. Annual Report of Mentor Graphics India Pvt. Ltd., for financial years 2017-18, 2018-19 out of the revenue of the Company 100% of the revenue is generated from inter co transaction. The above is excessive related party transaction rendering these two entities, un-comparable. Accordingly, we hold that these two comparables may be removed and other comparables be taken into account for computation of arm s length price. AO jurisdiction over the international transaction of expenditure incurred towards support services - DRP disallowing the expenditure incurred towards support services - as argued impugned transaction has been accepted by the TPO over the years, including the year under consideration, and hence, the same should not have been disturbed - disallowing the support services cost paid by the Appellant to the associated enterprise -changing the cost allocation methodology from headcount ratio to salary expense ratio, thereby partly disallowing support services cost - HELD THAT - The issue is squarely covered in favour of the assessee by the decision of the ITAT, Delhi Coordinate Bench in assessee s own case 2024 (7) TMI 26 - ITAT DELHI cost allocation key on the basis of headcount should not be disturbed for the year under consideration. 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 as relying on case of CIT Vs. EHPT India Private Limited. 2011 (12) TMI 49 - DELHI HIGH COURT Depreciation allowance towards the intangible assets (being customer contracts as well as assembled workforce) - additional ground raised - HELD THAT - As decided in assessee s own case 2024 (7) TMI 26 - ITAT DELHI 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.
Issues Involved:
1. Assessment of total income and adjustment pursuant to DRP directions. 2. Validity of DRP directions under section 144C(8) of the Income Tax Act. 3. Transfer pricing adjustments related to BPO services and comparability analysis. 4. Jurisdiction over international transactions of support services expenses. 5. Disallowance of support services costs and change in cost allocation methodology. 6. Compliance with DRP directions under section 144C(10). 7. Credit for taxes deducted at source, advance tax, and self-assessment tax. 8. Computation of interest under sections 234B and 234C. 9. Additional ground regarding depreciation allowance on intangible assets. Detailed Analysis: 1. Assessment of Total Income and Adjustment Pursuant to DRP Directions: The Assessee contested the AO's assessment of total income at INR 26,42,00,016 against the returned income of INR 12,88,04,240, with an adjustment of INR 13,53,95,776. The Tribunal noted the Assessee's reliance on the ITAT's decision in its own case for AY 2017-18, which was decided in favor of the Assessee. 2. Validity of DRP Directions Under Section 144C(8): The Assessee argued that the DRP's directions were void ab initio and violated section 144C(8). The Tribunal did not specifically address this issue separately, implying acceptance of the DRP's procedural validity. 3. Transfer Pricing Adjustments Related to BPO Services and Comparability Analysis: The Assessee challenged the inclusion of Inductis India Pvt. Ltd. and Mentor Graphics India Pvt. Ltd. as comparables. The Tribunal agreed with the Assessee, noting that these companies had excessive related party transactions (99% and 100% respectively), making them un-comparable. The Tribunal directed their exclusion from the comparables list. 4. Jurisdiction Over International Transactions of Support Services Expenses: The Tribunal found that the AO erred in questioning the TPO's acceptance of the Assessee's cost allocation methodology, which had been consistently accepted in previous years. The Tribunal referenced the ITAT's decision for AY 2017-18, emphasizing that the AO could not retest the ALP determined by the TPO. 5. Disallowance of Support Services Costs and Change in Cost Allocation Methodology: The Tribunal upheld the Assessee's methodology of using headcount for cost allocation, consistent with past assessments and judicial precedents. The Tribunal noted that the AO's attempt to change the allocation basis to salary expense ratio was unfounded and contrary to established practice. 6. Compliance with DRP Directions Under Section 144C(10): The Assessee argued that the AO's assessment was a nullity for defying DRP directions. The Tribunal, by upholding the Assessee's contentions on other grounds, implicitly supported this argument. 7. Credit for Taxes Deducted at Source, Advance Tax, and Self-Assessment Tax: The Tribunal directed the AO to examine and grant the appropriate credits for TDS, advance tax, and self-assessment tax as per law. 8. Computation of Interest Under Sections 234B and 234C: The Tribunal did not provide a detailed discussion on this issue, suggesting it was resolved in line with the overall findings favoring the Assessee. 9. Additional Ground Regarding Depreciation Allowance on Intangible Assets: The Tribunal admitted the additional ground concerning the depreciation allowance of Rs. 55,46,262 on intangible assets, finding it covered by the ITAT's decision for AY 2010-11, which treated the expenditure as capital and allowed depreciation. Conclusion: The Tribunal allowed the Assessee's appeal, directing the AO to: - Recompute the arm's length price excluding Inductis India Pvt. Ltd. and Mentor Graphics India Pvt. Ltd. - Adhere to the established headcount-based cost allocation methodology. - Grant appropriate credits for TDS, advance tax, and self-assessment tax. - Allow the depreciation on intangible assets as per the ITAT's earlier decision. Order pronounced in the Open Court on 09/08/2024.
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