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Facts
The assessee, Genpact Services LLC, an Indian branch of a USA company, provided offshore support services. The Assessing Officer (AO) made an addition of INR 9,58,81,838 by changing the cost allocation methodology from headcount ratio to salary expenses ratio for support services. The assessee also raised an additional ground related to depreciation on intangible assets for AY 2010-11.
Held
The Tribunal held that the cost allocation key on a headcount basis should not be disturbed, following previous decisions for AYs 2017-18 and 2018-19. The disallowance of expenses amounting to Rs. 9,58,81,838 was deleted. The Tribunal also allowed the additional ground regarding depreciation on intangible assets for AY 2010-11.
Key Issues
Whether the cost allocation methodology for support services should be based on headcount ratio or salary expense ratio, and whether depreciation on intangible assets acquired in a previous year is allowable.
Sections Cited
143(3), 144C(13), 92CA, 37, 32(1)(ii), 250
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH, ‘D’: NEW DELHI
Before: SHRI ANUBHAV SHARMA & SHRI BRAJESH KUMAR SINGH
ORDER PER BRAJESH KUMAR SINGH, AM,
This appeal by the assessee is directed against the order of the Assessing Officer dated 23.01.2023 passed u/s 143(3) r.w.s.144C(13) of the Income Tax Act, 1961 (hereinafter ‘the Act’) arising out of order of Dispute Resolution Panel dated 09.12.2022 pertaining to Assessment Year 2019-20.
We have heard both the sides and perused the matter on records.
The relevant facts are the Assessee is an Indian branch office of Genpact LLC, a USA Company. The Assessee is a service provider rendering off- shore support services akin to BPO services, including collections / analytics call centre services and other back-office support services to its AEs. The assessee is responsible for rendering the designated BPO / collections services from its facility / infrastructure in India. As for AY 2019-20, the assessee filed its return of income (ROI') declaring an income of INR 21,88,55,720 on November 30, 2019. According to the Assessing Officer, on the basis of survey conducted on 25.02.2019, this case was taken for compulsory scrutiny as documents were impounded.
Subsequently, the Assessee received a notice dated September 28, 2020 under Section 143(2) of the Act requesting for certain information / documents, which were furnished from time to time during the course of the assessment proceedings. The Assessee's case was referred to the Transfer Pricing Officer ("TPO") for the relevant assessment by the Assessing Officer (“AO"). Thereafter, the Assessee received show cause notice dated September 29, 2021 from the TPO under section 92CA of the Act (refer page 162-163/PB). During the course of proceedings, the Assessee submitted relevant information/documents as called upon by the TPO from time-to-time.
The TPO after analyzing the transactions and making further enquiries, passed the order dated January 21, 2022, under section 92CA(3) of the Act, wherein TPO accepted the arm's length price of the international transactions pertaining to provision and receipt of services related to provision and receipt of services.
However, the AO assumed jurisdiction over international transactions and proceeded to make an addition of INR 9,58,81,838 in respect of receipt of support services. The AO changed the cost allocation methodology from headcount ratio to salary expenses ratio, thereby partly disallowing support services cost. Before making the said disallowance, the Assessing Officer issued a show-cause notice dated 03.03.2022, the relevant extract of which is at page no.10 and 11 of the draft assessment order (hereinafter referred to ‘DAO’) is reproduced as under:-
A notice u/s 143(2) of the Act was issued on 28.09.2020. Notice u/s 142(1) of the Act with questionnaires were also issued during the course of scrutiny proceedings. During the course of scrutiny proceedings the assessee was asked to show cause dated 03.03.22 on the following points: "The total cost under the heads are as follows:
1. 1. technical facility maintenance = 2,82,94,08,343.00 2. net communication cost = 20,30,51,367 + 95,00, 10,457 = 1,15,30,61,823.00 3. infrastructure support cost management cost = 4,15,57,09,086.00 4. staff welfare cost = 79,26, 14,857.00 The shared cost debited by the assessee to the P&L account under these heads, to the extent arrived at using headcount ratio, is Rs. 20,30,51,367.00. The shared cost debited as per the salary ratio should be Rs. 10,71,69,529.00 There is a difference of (20,30,51,367 - 10,71,69,529)= Rs. 9,58,81,838.00 between the shared cost arrived at using headcount ratio debited by the assessee to its P&L account and the shared cost as calculated above applying the salary expense ratio. This difference deserved to be reduced from the cost claimed as deductible by the assessee. Please show cause why this amount of Rs. 9,58,81,838.00 should not be added to your income. Objections in this regard, if any, may be filed with the office of the undersigned on or before 10.03.22, failing which the undersigned will be constrained to pass the draft assessment order based on the material available on record. This may also be treated as an opportunity for a personal hearing, if you so desire, at the chambers of the undersigned at 501, D Block, Civic Center, New Delhi -2.”
4. Ground No.1 is general and Ground no. 4 and 5 are not pressed.
4.1 In regard to ground Nos. 2 and 3, we find same arises out of disallowing the support services cost amounting to INR 9,58,81,838. The ld. AR submitted that grounds are supported by the Assessee's own cases, Genpact Services LLC vs ACIT: [2024] 101 taxmann.com 785 /TA Na 1992/Del/2022 for AY 2017-18 and Gennact Services LLC vs ACIT:
[2024] TS-359-ITAT-2024DEL-TP /ITA No. 1834/Del/2022 for AY 2018- 19, as decided by this Co-ordinate Bench, wherein, the issues in question in the present appeal are identical to those of the preceding assessment years (AY 2017-18 and AY 2018-19).
4.2. This fact has also been noted by the Ld. Dispute Resolution Panel in its directions dated 09.12.2022 in para no.4.2.3.1, which is reproduced as under:-
“4.2.3.1 In view of above, the Panel takes a note that this is a legacy issue which has been coming up before the Panel since AYs 2017-18 & 2018-19. The factual matrix continues to be almost the same for AY 2019-20 also. The Panel does not find any ground or reasons to deviate from its earlier opinion in this regard. Accordingly, the assessing officer's action in this regard, is upheld and the assessee's objections are accordingly rejected and disposed of. Coming to objection no. 22, the assessee has submitted that the AO has failed to follow his own approach for AY 2017-18, wherein he had allowed the voice based communication cost to be allocated bases the voice based head count ratio. In this regard, the AO is directed to verify the assessee's contention and pass a speaking order on this aspect before completing the assessment. Coming to again objection no. 2.2, regarding mistakes as pointed out by the assessee in respect of Support Services cost amounting to Rs. 9,58,81,838/-; the AO is directed to consider the assessee's contention made at para no. 4 of the paper- book by passing a speaking order. The Panel hastens to clarify that the AO shall not conduct any fresh inquiry in this regard; the verification shall be made on the basis of documents/submissions available on the records. The assessee's objections in this regard are hereby, rejected and disposed off accordingly.” 4.3. This similarity of the issues in the present appeal with AYs 2017-18 and 2018-19 is also mentioned by the Assessing Officer on page no.9 and 10 of DAO, which is reproduced as under:
“The salary expense ratio of GSL and Gl for FY 2017-18 is 1.20%. This ratio is much lower than the headcount ratio for this financial year (FY 2018-19), which is 1.75%. In fact, for each year, from FY 2011-12 to 2018-19 (all years for which the figures were provided by the assessee or called for information under section 133 of the Income-tax Act, 1961), the salary ratio is significantly lower than the headcount ratio. The headcount ratio of GSL and all entities combined among which cost is shared (i.e. GI, GSL and Other Entities) for FY 2018-19 is 926/51,993 = 1.75%, whereas salary expense ratio of GSL and all entities combined among which cost is shared for the same FY is 1.20%. In fact, for each year, from FY 2011-12 to 2017-18, as well as FY 2018-19, the salary ratio of GSL and all cost sharing entities combined is significantly lower than the headcount ratio. In the light of the above, I have reason to believe that the assessee used an inappropriate and wholly unscientific method for charging of costs to GSL, which resulted in a higher ratio of common costs allocated to GSL every year than is allocable based on sound and appropriate methodology. It is also relevant to note here that these costs have not been allocated on monthly basis, as should have been done, and as was required vide the terms of the Cost Sharing Agreement but was done as a once in a year (annual) exercise using average annual data. This method adds to the inaccuracy and blurs real-time figures. This also amounts to inaccurate methodology of cost allocation.” 4.4. The relevant extract of the order of the Tribunal in Para No.11 to 15, as relied by the assessee in AY 2017-18(supra) is reproduced below:
The fact of services being rendered is not disputed by the revenue right from the time of survey. In fact, both the ld. AO and Id. DRP merely rely on the findings given in AY 2015-16. In our considered opinion, the cost allocation Key on 'headcount basis' has been duly examined and accepted by the ld. TPO to be at ALP in the transfer pricing proceedings u/s 92CA(3) of the Act. The same cannot be subjected to retest by the ld. AO in the peculiar facts and circumstances of the instant case, under the garb of examining the same in the context of allowability of deduction u/s 37 of the Act as argued by the Id. DR before us. No doubt, the scope of Id. TPO is only to ensure whether the pricing of services is at arm's-length or not. But for that purpose, the cost sharing agreement, cost allocation keys used thereon and reasons for such usage of allocation keys are very much material for the Ld. TPO to examine and conclude whether the pricing thereon is at ALP or not. In the instant case, all these documents were duly placed on record before the ld. TPO and the same was accepted to be at ALP by the ld. TPO. It is also pertinent to note that the reference u/s 92CA(1) of the Act to the ld. TPO was made by the ld. AO after the survey proceedings. Hence, even the findings of the survey team were very much available before the Ld. TPO. We find that the cost allocation on the basis of "headcount" has been affirmed to be an appropriate allocation key by the Hon'ble jurisdictional High Court in the case of CIT vs EHPT India Private Limited reported in 350 ITR 41 (Del). Similar was the view taken by the coordinate bench of this tribunal in the case of Orange Business Services India Solution Pvt Ltd vs DCIT in for AY 2013-14 dated 15.07.2021. Further, the coordinate bench of Mumbai tribunal in the case of Cable and Wireless India Ltd Vs. DCIT in for AY 2012-13, 756/Mum/2017 for AY 2013-14, 6074/Del/2017 for AY 2014-15 dated 25.02.2020, also had an occasion to adjudicate the similar issue, as is the case before us in the case of the assessee herein. ...............
It is also pertinent to note that no adjustment has been made on the impugned transactions in the hands of Genpact India Private Limited in AYs 2017-18 and 2018-19 in the assessments framed u/s 143(3) read with section 144C(13) read which section 144B of the Act dated 30.10.2022, which are enclosed in pages 263 to 624 of the paper book and 625 to 860 of the paper book, respectively.
In view of the aforesaid. observations and respectfully following the judicial precedents relied upon hereinabove and also by following the principle of consistency, we hold that the cost allocation key on the basis of headcount should not be disturbed for the year under consideration.
Ld. DR could not dispute the fact that there is no change in facts and circumstances for the present year in the case of the assessee with reference to AY 2017-18 and AY 2018-19. In fact as discussed above, the ld. Tax authorities have themselves followed AY 2017-18 and AY 2018-19 for making the adjustment. Therefore, respectfully following the order of the Tribunal in assessee’s own case for AY 2017-18 (supra) the ground Nos. 2 and 3 raised by the assessee are allowed and the disallowances of expenses amounting to Rs.9,58,81,838/- stands deleted.
Additional Ground No. 1: This ground filed by the assessee vide letter dated 28.08.2023 arises out of claim of assessee that during the FY 2009-10 (relevant to AY 2010-11), the Assessee acquired a business of third-party debt collection services as well as part of the analytics business from Genpact India Pvt. Ltd (the seller entity') for a total sum of INR 62,12,70,648 vide agreement to sell entered into between the Assessee and Genpact India. Out of the total purchase consideration of INR 62,12,70,648, an aggregate sum of INR 22,16,00,276 (paid towards acquisition of customer contracts as well as the assembled workforce) was claimed as revenue expenditure by the Assessee in its return of income ('ROI"), filed for AY 2010-11. Subsequently, the ROI of AY 2010-11 was selected for scrutiny assessment under section 143(3) of the Act. The AO, vide assessment order, dated May 21, 2014, inter-alia, took a view that the aforesaid amount of INR.22,16,00,276, incurred by the Assessee towards acquisition of customer contracts and assembled workforce, was in the nature of capital expenditure and hence the same should have been capitalised as intangible assets by the Assessee. Accordingly, the sum of INR 22,16,00,276 was added back to the returned income of the Assessee and a corresponding depreciation claim of 25% i.e., INR 5,54,00,069 was allowed to the Assessee under section 32(1)(ii) of the Act. Being aggrieved by the aforesaid assessment order passed for AY 2010-11, the Assessee preferred an appeal before the Ld. Commissioner of Income-tax (Appeal)
['ІТ(А)]. On appeal, the CIT(A) vide its order, dated February 15, 2016, passed under section 250 of the Act, had upheld the view taken by the AO. Further, the CIT(A), for the limited purpose of allowing depreciation under the Act, held that out of the total sum of INR 22,16,00,276, only INR 16,05,41,276 was to be considered as the value of intangible assets for allowing depreciation at the rate of 25%. This Tribunal vide its order dated January 31, 2023, in in assessee’s own case for AY 2010-11 modified the decision of CIT(A) to the extent of valuation of intangible assets treating the value of intangible assets to be INR 22,16,00,276 and allowing depreciation on the same.
Considering the aforesaid order passed by this Tribunal in AY 2010- 11, the Assessee has claimed vide this additional ground to be now eligible to claim depreciation allowance of INR 41,59,697 in the impugned AY (being depreciation at the rate of 25% on the written down value of intangible assets of INR 22,16,00,276).
As the additional ground arises out of admitted facts the same is admitted. Further, placing in assessee’s own case, Genpact Services LLC vs ACIT: [2024] 161 taxmann.com 765 / for AY 2017-18 and Genpact Services LLC vs ACIT: [2024] TS-359-ITAT- for AY 2018-19, the issue in question with identical facts has been adjudicated with following relevant conclusion;
"18. In view of the above, we 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."
9. In the light of above, the additional ground the assessee is allowed and we direct the ld. AO to grant depreciation consequent to the order of the Tribunal in AY 2010-11.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 06th June, 2025.