Tribunal rules in favor of assessee on transfer pricing and depreciation, dismissing unpressed grounds

The Tribunal partly allowed the appeal, ruling in favor of the assessee on the transfer pricing adjustment and the disallowance of depreciation on intangibles. The Tribunal found the Transfer Pricing Officer's allocation method flawed and recalculated the adjustment based on utilized man-hours, concluding no adjustment was necessary. The disallowance of depreciation on intangibles was overturned based on a previous ruling by the Delhi High Court. Unpressed grounds were dismissed, and the decision was issued on 27th April 2018.

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Issues Involved:
1. Transfer pricing adjustment of Rs. 5,14,35,841.
2. Disallowance of depreciation on intangibles amounting to Rs. 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 Rs. 5,14,35,841:

The primary issue pertains to the addition of Rs. 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 Rs. 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 Rs. 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 Rs. 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.

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