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 lack of new evidence and failure to select comparables, consistent with prior rulings. Disallowance of CSR expenditure under section 80G was set aside, recognizing CSR as philanthropic and eligible for deduction if other conditions are met. The tribunal also directed the AO to allow depreciation at 25% on intangible assets, following precedent in the assessee's earlier years. All related appeals were allowed, and disallowances were deleted.

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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.

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