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TMI Blog2018 (4) TMI 1826X X X X Extracts X X X X X X X X Extracts X X X X ..... E 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] - ITA No. 1744/Del/2015 - - - Dated:- 27-4-2018 - SH. AMIT SHUKLA, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER For the Appellant : Sh. Gautam Jain, Adv.; Sh. Lalit Mohan, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 4,71,01,470/-. The case was selected for a scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short the Act ) was issued and complied with. During the scrutiny proceedings, the Assessing Officer noted the international transaction carried out by the assessee with its Associated Enterprises (AEs) and, accordingly, he referred the matter to the Ld. Transfer Pricing Officer (TPO) for determination of Arm s Length Price (ALP) of the international transaction. The Ld.TPO vide order dated 30/01/2014 under section 92CA(3) of the Act, proposed adjustment of ₹ 5,14,35,841/- to the international transaction. Besides the transfer pricing adjustment proposed by the learned Transfer Pricing Officer, the Assessing Officer made certain additions/disallowances in the draft assessment order passed on 28/03/2014. Aggrieved, the assessee filed objections against the draft assessment order before the Ld. DRP on 30/04/2014. The Ld. DRP in its directions dated 16/12/2014 allowed part relief to the assessee. In compliance to the direction of the Ld. DRP, the Assessing Officer issued final assessment order on 26/12/2014 assessing the total income at ₹ 14,15,70 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n etc. According to the Ld. TPO, the assessee had not provided details of services provided to AEs and non-AEs as required for a strict comparability under the CUP method and the geographical area of the AE and Non-AE was also different. The Ld. TPO also relied on the OECD guidelines and the decision of the Tribunal, Mumbai Bench in the case of Intervet India (P) Ltd Vs. ACIT (2010) 130 TTJ 301, to reject the CUP method as the most appropriate method (MAM). 3.3 The Ld. TPO chosen Transactional Net Margin Method (TNMM) as most appropriate method using the operating Profit/Total Cost (OP/TC) and Profit Level Indicator (PLI) for benchmarking the international transaction of the assessee. The Ld. TPO allocated the operating cost in respect of the AE transaction in the ratio of total man-hours consumed (81962) towards AE transactions to the total man-hours (359692) consumed both for the AE and non-AE. The said allocation made by the Ld. TPO, wherein he computed the total cost (total expenses) of ₹ 13,77,66,716/- towards AE transactions, is reproduced as under: Particulars AE Non-AE Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as well as un-utilized man-hours. The Ld. TPO rejected the segmental cost allocation computed by the assessee. 3.5 The Ld. TPO selected 11 comparables and worked out their averages profit margins (OP/OC) at 27.70%. The Ld. TPO applied this average margin over the Operating Cost (₹ 13,77,66,716/-) of AE transactions and computed the arm s length price at ₹ 17,59,28,096/- and after subtracting the price of ₹ 3,10,68,901/- for utilised man-hours and ₹ 9,34,23,354/- for unutilised man-hours received by the assessee, adjustment for balance amount of ₹ 5,14,35,841/- was proposed. Before the Ld. DRP, the assessee objected to TNMM as the most appropriate method as well as selection of comparables. The Ld. DRP rejected the objections raised by the assessee and affirmed the finding of the Ld. TPO. 3.6 Before us, the learned counsel objected on the basis adopted by the Ld. TPO of allocation of cost to AE transactions. The Ld. Counsel referred to page 361 of the paper book, which is part of transfer pricing report of the assessee and submitted that according to the terms of agreement between the assessee and its AEs, in case if the actual utilization of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umed 81,962 2,77,730 3,59,692 5,695 Service Income -- Utilized (AE + Non AE) 3,10,68,901 47,43,44,273 50,54,13,174 3,10,68,901 Unutilzed 9,34,23,354 - 9,34,23.354 Other income (Divided on Man hour Basis) 9,41,606 33,38,422 42,80,028 65,426 Total Income (I) 12,54,33,861 47,76,82,695 60,31,16,556 3,11,34,327 As you have not provided anybasis for cost allocations, these will be divided on Man- hours basis (22%) (78%) | Consultancy and sub-contract charge 2,76,70,815 9,81,05,618 12,57,76,433 19,91,417 Personal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted (81,962) by the AE and the man-hours utilized (2,77,730) towards non-AE transactions and worked out total man-hours to 3,59,692. He worked out ratio of the man-hours consumed (committed) by the AE as compared to total man-hours consumed as 23%. He then mentioned the receipt of ₹ 3,10,68,901/- from the AE corresponding to man-hours utilized and receipt of ₹ 9,34,23,354/-from AE corresponding to the unutilized manhour. The Ld. TPO then applied this ratio of utilized man-hours of AE to total man-hours over the total expenses of ₹ 62,62,12,353 and worked out total operating cost of AE transactions at ₹ 13,77,66,716/-. In this manner, the Ld. TPO allocated the cost of ₹ 13,77,66,716/- towards the AE transactions. Whereas, the contention of the Ld. counsel is that for allocating costs toward the AE transactions, the total cost incurred by the assessee should be allocated in the ratio of manhours utilised by the AE to the total man-hours utilised, both by the AE and non-AE. He also drawn our attention to para 5 of the show cause notice issued by the Ld. TPO, acknowledging utilized man-hours toward AE transactions, which reads as under: 5. As per the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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%. 3.8.5 Accordingly, out of the total cost of ₹ 62,62,12,353/- of the assessee, the cost which could be allocated to the AE transaction would be worked out to [( 62,62,12,353 X 2)/100]= ₹ 1,25,82,797/-. 3.8.6 On applying the average margin of 27.70% of comparables as computed by the Ld. TPO, on the operating cost of AE transactions of ₹ 1,25,82,797, the arm s length margin works out to Rs. [( 1,25,82,797 X 27.70/100]= 34,85,434/. When we add the operating cost towards AE transaction of ₹ 1,25,82,797/- to arm s length margin of ₹ 34,85,434/-, the arm s length price of AE transaction works out to ₹ 1,60,68,232/-. 3.8.7 Since the amount received by the assessee corresponding to the man-hours utilised by the AE has been worked out by the Ld. TPO at ₹ 3,10,68,901/-, which being less than the arm s length price of ₹ 1,60,68,232/- computed above , in our opinion, no adjustment to the price of Intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P also upheld the action of the Assessing Officer. We note that the Hon ble Delhi High Court in the case of the assessee itself for assessment year 2007-08 in ITA 40/2015 decision dated 19/11/2015, which is reported in 237 taxman 230(Del) has decided this issue in favour of the assessee. The relevant finding of the Hon ble High Court is reproduced as under: 19. In view of the above, we are inclined to accept the contention advanced on behalf of the Assessee that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill. 20. In the facts of the present case, the ITAT has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The Agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The Agreement itself indicates that slump sale included sale of g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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