ITAT allows appeal on transfer pricing adjustments and depreciation claims under sections 92CA(3) and 37

The ITAT Delhi allowed the assessee's appeal regarding transfer pricing adjustments and depreciation claims. The tribunal held that cost allocation keys based on headcount, previously accepted by the TPO as arm's length pricing under section 92CA(3), cannot be re-examined by the AO under section 37 deduction provisions. The Delhi HC had affirmed headcount-based allocation as appropriate, and consistency principle applied since no adjustments were made in subsequent years. Additionally, the tribunal directed the AO to grant 25% depreciation on intangible assets including customer contracts and assembled workforce, following its earlier decision in AY 2010-11 where such costs were deemed capital expenditure eligible for depreciation.

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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.

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