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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 ..... 5,841/- under Section 92CA(3) of Income Tax Act, 1962 ('Act') to the total income of the Appellant on account of adjustment in the Arm's Length Price ('ALP') of the international Transactions. a) Ld. AO/DRP has erred in considering Transactional Net Margin Method ('TNMM')as Most Appropriate Method ('MAM') instead of Comparable Uncontrolled Price method. b)(i) Without prejudice to ground 1(a), and based on facts and circumstances of this case, Ld. AO/DRP has even erred in computing transactional net margin earned from services provided to Associated Enterprise b)(ii) Without prejudice to ground 1(a), and based on facts and circumstances of this case, Ld. AO/DRP has erred in facts and law while considering certain companies as comparables to the Appellant with respect to the provision of services to Associated Enterprises 2. That the AO/ DRP erred in disallowing the claim of Rs. 4,28,07,185/- on account of depreciation on intangibles and concurring the findings of Assessing Officer in assessment year 2007-08. 3. That the DRP has failed to appreciate the evidence produced by Appellant. 2. Briefly stated facts of the case are that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rement of engineering services TNMM 11,55,48,939 3. Recovery of expenses - 11,37,410 3.2 The Ld. TPO accepted value of the transaction of procurement of engineering services reported by the assessee as at arm's length, however, transaction of providing engineering and design services was not accepted by him. For benchmarking the provision of engineering and design services to the AEs, the assessee selected Comparable Uncontrolled Price (CUP) method as the most appropriate method. According to the assessee, manhour rate charged to the non-AEs was Rs. 18.83, whereas the man-hour rate charged to AEs was Rs. 32.76, which being higher, the transaction with AEs was at arm's length. This contention of the assessee was rejected by the Ld. TPO on the ground that transaction with AEs was not strictly comparable uncontrolled transaction with the transaction with non-AEs, in view of Rule 10B(2) of the Income Tax Rules, 1962 (in short 'the Rules'), which state that comparability of an international transaction with uncontrolled transaction shall be judged with reference to conditions prevailing in the market, the geographical location, the size of the market, cost of labour, overal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hours were utilized and balance 76267 hours were non-utilized. The assessee provided segmental accounts of the AE for utilized 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 (Rs. 13,77,66,716/-) of AE transactions and computed the arm's length price at Rs. 17,59,28,096/- and after subtracting the price of Rs. 3,10,68,901/- for utilised man-hours and Rs. 9,34,23,354/- for unutilised man-hours received by the assessee, adjustment for balance amount of Rs. 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 accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; -- 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 Expenses 6,51,72,441 23,10,65,929 29,62,38,370 46,90,340 Administrative Expense 2,83,29,889 10,04,42,335 12,87,72,224 20,38,849 Less: Foreign exchange loss ----- ----- Less: Loss on sale of fixed assets ------ ------ Marketing expense 11,00,619 39,02,198 50,02,817 79,209 Bank Cheques 14,40,971 51,08,897 65,49,868 1,03,704 Depreciation 1,40,51,981 4,98,20,660 6,38,72,641 10,11,295 Total Expenses (II) 13,77,66,716 48,84,45,637 62,62,12,353 99,14,814 Operating Profit (III = I-II) (1,23,32,855) (1,07,62,942) (2,30,95,797) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AE, if the work assigned to the assessee company exceeds the committed work load for a year, then the payment made for the unutilized man hours shall be adjusted in the subsequent years." 3.8.2 According to, the Ld. counsel, if basis of allocation of costs towards AE transaction out of the total cost incurred i.e. allocation key, is taken as the man-hours utilized than there would not be any adjustment even after adopting TNMM as most appropriate method and working out arms length price applying average margins of comparables selected by the learned TPO. 3.8.3 In our opinion, the contention of the Ld. counsel is logical and on scientific basis. For allocation of cost between the AE and the non-AE transactions, different basis cannot be taken. In other words, we cannot take different yardsticks for measuring cost incurred toward AE and non-AE transaction by same set of manpower. Taking committed man-hours in the case of AE, which also included unutilized man-hours, would distort the allocation key. Thus, the basis of allocation of the cost towards the AE trasnaction should be on man-hours utilized only and not on man-hours which have been committed by the AE for payment. In par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on the basis of order of assessment for assessment year 2007-08. He submitted that in assessment year 2007-08, the issue has been decided by the Hon'ble Delhi High Court in favour of the assessee following the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Limited reported in 348 ITR 302. Accordingly, he submitted that disallowance in question might be deleted. 4.2 The Ld. DR, on the other hand, could not controvert the above statement of the Ld. Counsel of the assessee. 4.3 We have heard the rival submission and perused the relevant material on record. The finding of the Assessing Officer on the issue of disallowance of deposition on intangibles is reproduced as under: "Assessee was specifically asked to submit that why depreciation on intangible should not be disallowed. Assessee submitted that a sum of Rs. 40,58,00,000/- was attributable to intangible assets relating to design engineering capability in the hydro carbon in sector, which was acquired by the assessee as part of aforesaid business. Assessee further submitted that as these assets were required as a result of slump sale, it is undoubted that TPPL carried significant goodwill in ter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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