ITAT accepts assessee's turnover-based allocation of general corporate expenses between STPI and non-STPI units under section 10A

The ITAT Mumbai ruled in favor of the assessee regarding allocation of general corporate expenses between STPI and non-STPI units under section 10A deduction. The assessee maintained separate books and consistently allocated expenses based on turnover ratios - STPI turnover to total turnover for STPI units, and domestic turnover to total turnover for non-STPI units. The tribunal found the assessing officer's reallocation untenable as the revenue failed to justify their basis, while the assessee followed scientific allocation principles. The revenue had previously accepted this methodology for assessment years 2008-09 to 2012-13. The CIT(A) order was set aside, directing acceptance of the assessee's allocation method.

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Issues involved:
The appeal against the order of National Faceless Appeal Centre (NFAC) and CIT (A) regarding allocation of general corporate expenses to STPI and Non STPI unit, following scientific principles and policies, consistency in expense allocations, and deductibility under section 10A of the Act.

Allocation of General Corporate Expenses:
The appellant challenged the order confirming the arbitrary allocation of expenses to STPI and Non STPI units by the CIT(A), emphasizing the separate maintenance of books for each unit. The appellant contended that the reallocation by the AO resulted in double allocation and lacked consideration for consistency in expense allocation from previous years.

Assessment and Disallowances:
The appellant, engaged in IT services, filed for deduction under section 10A for A.Y 2007-08, with the assessment resulting in disallowances and a revised total income. The ITAT granted partial relief in a previous appeal, specifically on the issue of common expenses allocation, which was remanded to the Assessing Officer for reexamination.

Assessing Officer's Order and Appeal:
The AO issued a notice for explanation on expense allocation, and upon review, reallocated expenses between STP and domestic units based on specific ratios. The AO determined the deduction under section 10A accordingly. Subsequently, the CIT(A) upheld the AO's decision, leading to the current appeal before the Tribunal.

Tribunal's Decision:
During the hearing, the appellant argued that the CIT(A) erred in confirming the AO's decision without considering the scientific basis of expense allocation and the maintenance of separate accounts for each unit. The appellant demonstrated consistency in allocation methodology and proximity of expenses to unit profits. The Tribunal found the AO's actions untenable, noting the lack of explanation for reallocation by the revenue. Considering the appellant's compliance with accounting principles and past acceptance of allocation methods, the Tribunal set aside the CIT(A)'s order and directed the AO to accept the appellant's allocation methodology.

Conclusion:
The Tribunal allowed the appeal in favor of the appellant, emphasizing the scientific and consistent allocation of expenses between STPI and Non STPI units based on audited accounts. The decision was pronounced in open court on 07.12.2023.

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