TaxTMI 
TaxTMI 
2011 (12) TMI 49
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....le of consistency when the method of allocation adopted by the assessee was not the correct method of accounting? c) Whether Income Tax Appellate Tribunal was correct in law in discarding the method of distribution adopted by Assessing Officer which was in accordance with the provisions contained in Section 10A (iv) of the Act itself? d) Whether order passed by Income Tax Appellate Tribunal is perverse in law and on facts?" 2. The respondent-assessee is a private limited company resident in India. During the relevant previous years, it operated two units: a Software Technological Park unit ("STP unit", for short) which was engaged in the development of software which was primarily exported to the parent company in Sweden and another domestic unit (non-STP unit) which was primarily engaged in the implementation of the telecom software for vendors/customers in India. In respect of the profits from the STP unit the assessee was undisputedly entitled to the deduction provided in Section 10A of the Act. In the returns filed for the years under appeal the assessee computed the profits from the STP unit by apportioning the indirect or common expenses on the basis o....
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....s.40,13,785/- claimed in the domestic (non-STP) unit. The result was that the taxable income from the non-STP or domestic unit got enhanced by the aforesaid amount. 4. Aggrieved by the method of apportionment adopted by the Assessing Officer and the enhancement of the income of the taxable domestic unit, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A), for short). It was submitted before him that (a) the units were operating on project basis and the expenditure was attributable to each project for which the head-count basis was more appropriate; (b) the method of apportioning the indirect or common expenses on the basis of head-count had been adopted by the assessee consistently in the past and was also accepted without demur by the income-tax authorities; (c) that though there is no judicial precedent available as to what would be the best method of apportionment in such cases, but the turnover basis adopted by the Assessing Officer was more suited to manufacturing concerns, whereas the head-count basis was more appropriate for service industry; and (d) the method adopted by the assessee not having been found to be unreasonable or incon....
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....ng Officer on the basis of turnover and that even if the turnover basis of apportionment of the indirect expenses is adopted, as was done by the Assessing Officer, then the correct amount of deduction available to the assessee in the domestic unit would actually be Rs.6,53,49,442/- as against Rs.6,51,50,217/- claimed by it on the basis of head-count. Thus, if the turnover method, rather than head count method is adopted, in this year, the taxable income from non-STP unit would fall and STP income would increase to the advantage of the Assessee. The CIT(A) held that this claim of the assessee was correct, though in principle he upheld the method adopted by the Assessing Officer (i.e., the turnover basis). However, since the assessee had shown more taxable income from the domestic non-STP unit under the head-count method, he did not disturb the amount of deduction claimed by the assessee and eventually deleted the addition made by the Assessing Officer (based on incorrect figures). 7. The assessee filed an appeal before the Tribunal in ITA No.2395/DEL/2005 for the assessment year 2001-02 and the Revenue filed an appeal before the Tribunal in ITA No.93/DEL/2006 for the assessm....
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.... a reasonable method and fair to both sides is indicated by the conduct of the revenue authorities in accepting it in the past. The reasonableness or fairness of the method of head-count adopted by the assessee can be said to be indicated by the fact that in the assessment year 2002-03 the assessee apportioned more common expenses to the STP unit, thereby reducing its profits and consequently reducing the claim for deduction under Section 10A and at the same time offering a higher income in the domestic unit than what would have been offered had the turnover method of apportionment adopted by the Assessing Officer been followed. This aspect has been noticed by the CIT(A) in his order for the assessment year 2002-03 as follows: "In view of the above facts, though the right course of allocating the common expenses is on the basis of turnover basis. The appellant had filed a calculation on turnover basis, the deduction available to the appellant company comes to Rs.6,53,49,442 instead of Rs.6,51,50,217 claimed by the appellant. The working given by the appellant counsel has been found to be correct. In view of the above facts, as the assessee had shown more income though the r....
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....by the assessee that though the turnover basis preferred by the Assessing Officer may be more suited to manufacturing businesses, in the case of service industry such as the assessee's case the head-count method would be more appropriate to be followed for the purpose of apportioning the indirect expenses. It appears to be a plausible view, though it can possibly also be a debatable view. But merely because there can be more than one method of apportioning the common expenses between the STP and domestic units it cannot be said that the method of head-count followed by the assessee should be discarded, that too mid-way, even though it was not questioned at any time in the past. 10. The provisions of sub-section (4) of section 10A, relied upon by the Assessing Officer, apply for the purpose of segregating the profits of the business into export profits and domestic profits. It is a statutory formula for ascertaining what are profits derived from the export of the eligible items. It has to be read with sub-section (1). It says that the export profits have to be apportioned on the basis of the ratio which the export turnover bears to the total turnover of all the businesses of....
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....sion, the Supreme Court held as under: "As stated above, we are concerned with the assessment years 1991-92 to 1997-98. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessee, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from the completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court." In the light of the observations of the Supreme Court in Hukum Chand Mills Ltd. (supra), in a case where alternative methods of apportionment of the expenses are recognized and there is ....
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.... {mso-style-name:"Table Grid"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-priority:59; mso-style-unhide:no; border:solid windowtext 1.0pt; mso-border-alt:solid windowtext .5pt; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-border-insideh:.5pt solid windowtext; mso-border-insidev:.5pt solid windowtext; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi;} MR. JUSTICE SANJIV KHANNA, MR. JUSTICE R.V. EASWAR, JJ. For Appellant: Mr. Kiran Babu, Sr. Standing Counsel/Income Tax Deptt. For Respondent: Dr. Rakesh Gupta, Advocate with Ms. Rani Kiyala, Advocate. R.V. EASWAR, J.: These are two appeals filed by the revenue under Section 260A of the Income-tax Act ("Act", for short) against the common order passed by the Income Tax Appellate Tribunal ("Tribunal", for short) on 31-1-2008 in ITA Nos.2395/DEL/2005 & 93/DEL/2006 for the assessment years 2001-....
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.... view that the apportionment of the common or indirect expenses between the two units - STP and domestic - on the head-count basis was not appropriate and it resulted in more profits being shown from the STP unit. He therefore called upon the assessee to justify the apportionment. The assessee submitted its reply in writing which is reproduced in page 2 of the assessment order, the gist of which is that the common expenses were recorded separately in the cost centers maintained for the purpose and the same were apportioned in the ratio of head count for arriving at the total expenses of the two units. 3. The Assessing Officer considered the explanation of the assessee to be unacceptable. He was of the view that the common expenses should have been apportioned on the basis of the turnover in the respective units and that method "would have been a much more logical basis for apportioning of these expenses". He accordingly apportioned the total indirect expenses of Rs.12,56,00,825 in the ratio of the turnover in the two units in the following manner: "Turnover: 339000025 (B) 2200000(C) 341200025(D) Allocation of the indirect expenses: 124791002 809853 123600855 ....
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....e is not available on the issue how the expenditure is to be allocated between the two units. Though the appellant counsel is talking of commercially accountable principles but the appellant has not filed what are those in relation to his line of business. As there are no provision in the IT Act nor any accounting principles have been relied upon by the appellant, the expenses are required to be allocated between the two units on some sound basis. The allocation of the expenditure by the appellant on head count basis is totally incorrect as the expenditure cannot be allocated on the basis of the person employed in the two units. The only sound basis which comes to the mind is that adopted by the Assessing Officer to distribute the same on the basis of turnover. In view of the same, the ASSESSING OFFICER has rightly allocated the expenditure and the action of the Assessing Officer is upheld." 6. The assessee carried the matter in appeal before the Tribunal. Before we notice the decision of the Tribunal, it needs to be mentioned that the assessment for the assessment year 2002-03 had also been completed in the meantime by order dated 18-3-2005 passed under Section 143(3) of t....
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....stently following the method of apportioning the indirect expenses on the basis of the head-count and the same was also accepted by the income-tax authorities; c) That therefore there was no justification for disturbing the method adopted by the assessee. In the aforesaid view of the matter, the Tribunal upheld the method adopted by the assessee, allowed the assessee's appeal and dismissed the department's appeal. 8. We have examined the matter in the light of the submissions made before us. The fate of the appeals must depend upon the answer to the question whether the method adopted by the assessee, namely, that of apportioning the indirect expenses between the STP unit and the non-STP domestic unit on the basis of the "head-count" is an unreasonable method and if it has been followed consistently by the assessee in the past and has also been accepted by the department, should the revenue authorities be permitted to disturb the same in the years under appeal. It seems to us that the settled position in such matters is to examine whether the method which is canvassed for acceptance is the one (a) which has been consistently accepted by both the parties, nam....
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....unting standard that repudiates the method. 9. Section 10A provides for deduction for profits derived from the export of software for a period of ten years. During the period of tax-holiday, it is desirable that the same method of computing the profits of the STP unit is adopted so that any distortion is avoided. We must however clarify that we are not to be understood as laying down as a proposition that in all cases arising under Section 10A, where the question of apportionment of common/indirect expenses between the taxable and the exempt units arises, the head-count method is the most appropriate method. The question will have to depend, in the very nature of things, on the nature of the business and the facts of the particular case. Our decision is confined to the facts of the present case. In the present case, there is no finding by the revenue authorities that by adopting the head-count method which was hitherto being accepted by them there was a distortion of the profits nor have they said that the head-count method of accounting is not the correct method of accounting. All that they have said is that in their opinion the turnover basis of apportionment of the expen....
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.... of apportionment without having regard to the history of assessments and other relevant factors may not be justified. 11. In Hukam Chand Mills Ltd. (supra), in the context of apportioning profits accruing to the assessee under the several categories of businesses carried on by him in British India, it was held that the question as to the method of apportionment was essentially one of fact depending upon the circumstances of the case. It was recognized that in the absence of any statutory or fixed formula, any finding on the question would involve an element of guess work and that "the endeavor can only be to be approximate and there cannot in the very nature of things be great precision and exactness in the matter" (at page 552). In the recent judgment of the Supreme Court in CIT v Bilahari Investment P. Ltd. (2008) 299 ITR 1, the facts were these. The assessee was subscribing to chits and was maintaining the accounts on mercantile basis. The discount on the chits, which was actually the profit arising to the assessee, was declared at the end of the chit period, which at times exceed a period of 12 months. This method adopted by the assessee was being accepted by the depar....