2025 (12) TMI 298 - HC - Income Tax

Deduction u/s 10A Restored as Revenue's Reallocation of Royalty and Expenses to 10A Units Held Unjustified

Principal Commissioner of Income Tax, Delhi-1 Versus M/s. AON Consulting Private Limited

HC upheld ITAT's dismissal of Revenue's appeals, confirming the CIT(A)'s deletion of disallowance of deduction u/s 10A for AYs 2007-08 and 2008-09. It was ... Deduction u/s 10A - allocation of expenses made by the assessee to 10A eligible units and non 10A eligible units was not appropriate - reduction in the amount of deduction claimed under Section 10A of the Act in both the AYs 2007-08 and 2008-09 - ITAT [2022 (7) TMI 951 - ITAT DELHI] has dismissed the appeals filed by the appellant/Revenue thereby endorsing the view taken by the Commissioner of Income Tax (Appeals) on the issue that the allocation of expenses between 10A units and non-10A units made by the assessee/respondent cannot be disturbed therefore, the disallowance of the deduction under Section 10A has been rightly deleted by the CIT (Appeals) - whether the ITAT is justified in rejecting the appeals challenging the orders passed by the CIT (Appeals) in the facts of this case? HELD THAT:- As correctly held by CIT(A) AO was not justified in allocating the royalty expenses, management fee expenses paid by the non-10A units to the Hewitt Affiliates LLC to the 10A units in proportion to the revenue earned by the units. AO was also not justified in further allocating the legal and professional expenses to 10A units over and above the expenses already incurred by such units. As discussed above, the royalty is paid to the Hewitt Affiliates LLC as per the clause 3 of the license agreement for the revenue derived from third parties for rendering services. Similarly, the management fee is also paid to Hewitt Affiliates LLC by the consulting division and human resource outsourcing division for utilizing services of various group entities based on their revenue contribution, therefore, these expenses cannot be apportioned to the 10A units which are captive service provider to the Hewitt Affiliates LLC. Based on these apportionment of the expenses, the deduction to the extent has been disallowed by the AO which is not correct and same is deleted. ITAT agrees with the findings of the CIT (Appeals). We agree with the conclusion drawn by the ITAT in the impugned orders. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, on the facts, expenses under the heads royalty, management fee, legal and professional expenses, corporate overheads, advertisement and business promotion, and seminars and meetings could be reallocated by the Assessing Officer from non-10A units to 10A units so as to reduce deduction under Section 10A. 1.2 Whether the findings of the Commissioner (Appeals) and the Tribunal on allocation of expenses between 10A and non-10A units were perverse or otherwise gave rise to any substantial question of law warranting interference under Section 260A. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Reallocation of common/corporate expenses to 10A units and disallowance under Section 10A Interpretation and reasoning 2.1 The Assessing Officer treated royalty, management fee, legal and professional expenses and in one year corporate overheads, advertisement, publicity, business promotion, seminars and meetings as common to both 10A and non-10A units, and reallocated them between units in proportion to revenue, thereby reducing the deduction under Section 10A. 2.2 The Commissioner (Appeals), on detailed examination of the assessee's business divisions, cost centres, agreements and invoices, found that: (i) distinct cost codes existed for non-10A units, 10A units, and common costs; (ii) royalty was computed strictly as per clause 3 of the licence agreement on revenue from third parties, and only non-10A divisions (consulting and human resource outsourcing) earned such third-party revenue; the 10A units were captive units rendering services only to group entities and could not be liable for such royalty; (iii) management fee under the Regional Headquarters Services Agreements was charged only in respect of consulting and human resource outsourcing divisions; Asia Pacific regional resources did not provide services to captive 10A units; invoices and workings showed that fees were computed solely with reference to non-10A divisions' revenue and cost consumption; (iv) corporate overhead charges under the Corporate Services Agreement were similarly computed and charged on the basis of non-10A units' revenue and actual consumption, with charges relating to 10A units retained by the foreign affiliate. 2.3 As regards legal and professional expenses, the Commissioner (Appeals) found, on sample invoices, that: (i) independent consultants and group entities rendered services for specific client/third-party projects (e.g. development centres and HR consulting assignments for various named clients), all relating to consulting and human resource outsourcing divisions; (ii) such expenditure was directly attributable to non-10A units and had been booked accordingly; (iii) in one year, approximately 77% of the total legal and professional expenses were already debited to 10A units, demonstrating actual, not manipulative, allocation and leaving no basis for further apportionment to 10A units. 2.4 For advertisement, publicity, business promotion, seminars and meetings, the Commissioner (Appeals) recorded that: (i) these expenses related to HR conferences, sponsorships and marketing events aimed at third-party business development, clearly connected with consulting and human resource outsourcing (non-10A) divisions; (ii) 10A units were captive service providers to group companies and had no requirement for such marketing expenditure; (iii) actual expenditure incurred by each unit had been debited to that unit and could not be reallocated to 10A units. 2.5 The Commissioner (Appeals) concluded that the assessee's allocation of all these expenses between 10A and non-10A units was based on actual nexus, contractual terms, specific cost codes and accepted costing principles, and that it followed Accounting Standard-17 for segmental apportionment. 2.6 The Tribunal endorsed these factual findings, holding that: (i) the assessee had five/six units in India with clear segregation between 10A and non-10A units; (ii) the allocation method was based on common principles of costing and was reasonable; (iii) the assessee's adherence to Accounting Standard-17 for apportionment stood uncontroverted by the Revenue; (iv) without any adverse material brought on record, the Assessing Officer's revenue-based reallocation could not displace the assessee's method. 2.7 The Court noted that the Tribunal, in paragraph 9 of its order, had categorically agreed with the Commissioner (Appeals) that the assessee's allocation 'cannot be disturbed' and that the disallowance of deduction under Section 10A was rightly deleted. Conclusions 2.8 The Court held that there was a clear factual basis for the Commissioner (Appeals) to conclude that: (i) royalty and management fee were incurred exclusively for non-10A units on the basis of third-party revenue and identified divisional usage; (ii) legal and professional, corporate overhead, advertisement, publicity, business promotion, seminar and meeting expenses in dispute pertained to non-10A divisions and were already allocated on an actual and reasonable basis; (iii) 10A captive units neither generated the relevant third-party revenue nor consumed the services in question so as to justify the Assessing Officer's reallocation. 2.9 Consequently, the reallocation of these expenses to 10A units by the Assessing Officer, and the resultant reduction of deduction under Section 10A, was not justified, and the deletion of the disallowance by the Commissioner (Appeals), as upheld by the Tribunal, stood affirmed. Issue 2 - Perversity of findings and existence of substantial question of law under Section 260A Legal framework (as discussed) 2.10 The Court proceeded on the footing, supported by authorities cited by the respondent, that allocation of expenses between units is essentially a question of fact; that where there is no statutory formula, apportionment involves approximation, and a proportion fixed by the Tribunal on relevant material is not to be disturbed; and that a plausible view of the Tribunal, absent perversity, does not give rise to a substantial question of law under Section 260A. Interpretation and reasoning 2.11 The Court observed that the Commissioner (Appeals) had rendered detailed factual findings on the nature of each unit, the terms of the relevant inter-company agreements, the specific cost centre structure, and the contents of invoices and workings evidencing that the disputed expenditures related only to non-10A units or had already been appropriately charged to 10A units. 2.12 These findings were fully endorsed by the Tribunal, which specifically recorded that the assessee's basis of allocation, including adherence to Accounting Standard-17, remained uncontroverted by the Revenue, and that no adverse material was produced to justify overriding that allocation with a simple revenue-share formula. 2.13 The Court held that, in these circumstances, the conclusion of the Commissioner (Appeals) and the Tribunal constituted a plausible factual view, based on evidence, and could not be characterised as perverse. 2.14 The Court further noted that the allocation methodology followed by the assessee had been consistently accepted by the Revenue in earlier and later assessment years (2004-05, 2005-06, 2006-07 and 2009-10), reinforcing the conclusion that the method adopted was reasonable and not contrived for the disputed years. 2.15 The Court found the precedents relied on by the Revenue to be distinguishable on the facts of the present case. Conclusions 2.16 The Court concluded that no substantial question of law arose from the Tribunal's order, as the findings on allocation of expenses and eligibility for deduction under Section 10A were purely factual, supported by material on record, consistent with accepted accounting standards, and had been consistently applied across years. 2.17 The appeals were dismissed and the proposed questions of law were declined, as they did not merit consideration under Section 260A in the facts of the case.