2025 (8) TMI 378 - AT - Income Tax

ITAT Upholds Headcount Ratio for Cost Allocation, Allows CSR Deduction Under Section 80G, Approves 25% Depreciation on Intangibles

The ITAT Delhi upheld the assessee's cost allocation method based on headcount ratio, rejecting the TPO's substitution with salary expense ratio due to ... TP Adjustment - TPO has taken cognizance of the allocation method used by the assessee and has applied other method for making adjustment qua these expenses - changing the cost allocation methodology from headcount ratio to salary expense ratio - HELD THAT:- We observe that similar issue had come up for consideration in assessee’s own case in AY 2017-18 [2024 (7) TMI 26 - ITAT DELHI] wherein, the Co-ordinate Bench of the Tribunal had approved the cost allocation key adopted by the assessee i.e. head count basis. Co-ordinate Bench of the Tribunal while deciding the issue in earlier year has taken note of the fact that a survey was conducted at the premises of the assessee and on the basis of that material, the Assessing Officer has disallowed these expenses. Therefore, the argument of the ld. DR that in the impugned year, the TPO has made the adjustment on the basis of material gathered in survey proceedings is not acceptable as no new fact has been brought either by the TPO or the Assessing Officer other than what has been already considered by the Tribunal in assessee’s own case for AY 2017-18 as referred above. Before parting, we note that the ld. TPO has failed to conduct the exercise of selecting comparable before resorting to other method, which is legally not permissible in view of the order of the Coordinate Bench in the case of SABIC India Pvt. Ltd. [2021 (6) TMI 1111 - ITAT DELHI] and further confirmed by [2024 (10) TMI 1283 - DELHI HIGH COURT] the Hon’ble jurisdictional High Court in ITA No.512/2014 (Delhi). Therefore, Tribunal in assessee’s own case for AY 2017-18 raised by the assessee are allowed and the disallowances of expenses stands deleted. Ground no.3 to 3.3 of the appeal is allowed. Disallowance of deduction u/s 80G - CSR expenditure - HELD THAT:- This issue has been decided in favour of the assessee in the case of Interglove Technology quotient(P) Ltd [2024 (6) TMI 8 - ITAT DELHI] section 80G(2) lists down the sums on which deduction shall be allowed to the assessee. Section 80G falls in Chapter VIA, which comes into play only after the gross total income has been computed by applying the computation provisions under various heads of income, including the Explanation 2 to section 37(1). Thus, there is no correlation between suo-moto disallowance in section 37(1) and claim of deduction under section 80G of the Act. Reasoning that CSR expenditure are not voluntary but mandatory in nature due to penal consequences, we are of considered view that voluntary nature of donation is by nature of fact that it is not on the basis of any reciprocal promise of donee. The CSR expenditures are also without any reciprocal commitment from beneficiary being philanthropic in nature. The Act permits deduction of donations as per Section 80G of the Act, even though, assessee is not gaining any benefit out of any reciprocity from donee. Similar is the case of CSR expenditure. Thus the reasoning of learned Tax Authority, the CSR expenditure is mandatory, does not justify disallowance of these expenditures u/s 80G, if other conditions of section 80G are fulfilled. There is no allegation of Revenue that other conditions of Section 80G are not fulfilled. We, thus sustain the ground. Depreciation allowance (being depreciation at the rate of 25% on the written down value of intangible assets - We notice that in assessee’s own case AY 2017-18 [2024 (7) TMI 26 - ITAT DELHI] and AY 2018-19 [2024 (8) TMI 685 - ITAT DELHI] the issue in question with identical facts has been adjudicated with following relevant conclusion as direct the ld. 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: Whether the change of cost allocation methodology from headcount ratio to salary expense ratio for determining arm's length price (ALP) of support services cost is justified under transfer pricing provisions.Whether the Assessing Officer (AO) and Transfer Pricing Officer (TPO) can reject the arm's length price determined by the assessee and apply an 'other method' without identifying comparable uncontrolled transactions.Whether the disallowance of support services cost on account of change in cost allocation method is sustainable in light of previous years' decisions.Whether deduction under Section 80G of the Income Tax Act, 1961 is allowable for donations made towards Corporate Social Responsibility (CSR) activities, despite Explanation 2 to Section 37(1) disallowing CSR expenditure as business expense.Whether depreciation can be claimed on intangible assets acquired in earlier years as per the Tribunal's earlier order.Whether TDS credit and self-assessment tax claimed by the assessee should be allowed.Whether interest levied under Sections 234A, 234B, and 234C has been correctly computed. RULINGS / HOLDINGS: The Tribunal held that the cost allocation key based on headcount ratio adopted by the assessee is an appropriate and accepted method for allocation of common expenses in the service sector, particularly for technical facilities maintenance, communication, HR, and staff welfare costs, and that the change to salary expense ratio by the TPO/AO was not justified. The Tribunal noted that 'the cost allocation on the basis of 'headcount' has been affirmed to be an appropriate allocation key' by various judicial precedents.The Tribunal ruled that the TPO's application of 'other method' without identifying comparable uncontrolled transactions or providing data for such method is not maintainable under Rule 10AB(2) of the Income Tax Rules, 1962, and relevant case law. The TPO's statement that the method applied was 'one such method that appears to be appropriate' indicates acceptance of multiple appropriate methods, and thus the assessee's headcount method cannot be rejected on conjecture.The Tribunal deleted the disallowance of INR 9,32,12,889/- relating to support services cost, following the principle that once the TPO has accepted the arm's length price, the AO is bound under Section 92CA(4) to compute income accordingly and cannot re-examine the cost allocation method. The Tribunal relied on its own earlier decisions for AY 2017-18 and AY 2018-19 and relevant High Court and Tribunal precedents.The Tribunal allowed the deduction under Section 80G for the CSR-related donation of INR 16,90,975/-, holding that Explanation 2 to Section 37(1) disallows CSR expenditure as business expense but does not restrict deduction under Section 80G. The Tribunal observed that CSR expenditure is 'application of income' and Section 80G deduction applies after computation of gross total income, citing various judicial decisions supporting the claim of deduction under Section 80G despite CSR nature of expenditure.The Tribunal directed the AO to grant depreciation on intangible assets in the impugned year in accordance with its earlier order for AY 2010-11, allowing the additional ground raised by the assessee.The Tribunal directed the AO to verify and allow the claim of TDS credit of Rs. 8,53,053/- and self-assessment tax of Rs. 24,10,000/- as per law.The Tribunal allowed the ground relating to interest levy for statistical purposes, directing the AO to compute interest as per law. RATIONALE: The Tribunal applied the transfer pricing provisions under Sections 92CA and 92C of the Income Tax Act, 1961, emphasizing the statutory obligation of the AO to compute income in conformity with the ALP determined by the TPO under Section 92CA(4). The Tribunal relied on the cost sharing agreement, supporting documents, and prior judicial precedents affirming headcount as an appropriate allocation key in service sectors, rejecting the TPO's unilateral change to salary expense ratio without comparable data.The Tribunal noted that Rule 10AB(2) permits use of 'other method' only if it takes into account prices charged in similar uncontrolled transactions, which the TPO failed to establish. The Tribunal referred to established case law holding that the TPO/assessee cannot apply 'other method' without identifying comparable transactions.Regarding CSR expenditure, the Tribunal interpreted Explanation 2 to Section 37(1) as a bar only to deduction as business expense and recognized that Section 80G operates subsequently to allow deduction of donations, including those made as part of CSR, if conditions are met. The Tribunal relied on the legislative intent expressed in the Finance (No.2) Act, 2014 and multiple Tribunal decisions distinguishing mandatory CSR expenditure from voluntary donations.The Tribunal followed its earlier ruling on depreciation claim for intangible assets acquired in earlier years, ensuring consistency and adherence to precedent.The Tribunal's approach reflects adherence to statutory framework, judicial precedents, and a consistent application of transfer pricing and income tax provisions, rejecting arbitrary changes in methodology unsupported by data or legal basis.