TaxTMI 
TaxTMI 
2025 (12) TMI 298
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....d and therefore, the disallowance of the deduction to the extent of Rs. 7,30,04,275/- and Rs. 18,20,51,370/- for the AYs 2007-08 and 2008-09 respectively under Section 10A of the Income Tax Act, 1961 ("Act") has been rightly deleted by the CIT (Appeals). 2. Some of the facts to be noted in these appeals are that the assessee is a private limited company engaged in rendering human resources consulting services and pay roll outsourcing services. It is also having a captive services unit for rendering services of consulting and human resources outsourcing business to Hewitt Associates LLC. It is also involved in development and export of computer software and Business Process Outsourcing ("BPO") services to Hewitt Affiliates. 3. The assessment for the AY 2007-08 was originally made on 31.10.2011 under Section 143(3) read with Section 144C of the Act on total income of Rs. 42,17,42,170/- as against the 'Nil' income declared in the return filed on 31.10.2007. Subsequently, the assessment was set aside under Section 263 of the Act. Consequent thereto, the Assessment Officer ("AO") made fresh assessment determining total income as Rs. 49,47,46,450/- under Section 143(3) read with Se....
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....als) before the ITAT. The ITAT has in paragraph 8 onwards stated as under:- "8. We have carefully considered the rival submissions of the parties, perused the orders of the Ld. AO/CIT(A) and the material available in the records. We have observed that the assessee has five units in India out of which two units are non 10A units and the remaining three are set up in the area where section 10A deductions are admissible. 8.1 On being asked about the basis of allocation of expenses by the Ld. AO, the assessee submitted details of expenses incurred on 10A units and non 10A units in both the AYs. Perusal thereof made the Ld. AO to conclude that the assessee is reducing income in the units where no deduction under section 10A is admissible by debiting expenses under the head Royalty, Management Fee and Legal and Professional Expenses in AY 2007-08 and by debiting expenses under the head Royalty, Management Fee and Corporate Overhead Charges in AY 2008-09. Accordingly, he apportioned the expenses under the aforesaid heads in proportion of the revenue earned by 10A and non 10A units in both the AYs resulting in the impugned reduction of deduction under section 10A of the A....
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....nces of the case, the Hon'ble ITAT is justified in law in deleting the addition made on account of disallowance in the section 10A amounting to Rs. 18,20,51,370/-without appreciating the fact that by adopting such measures, the assessee has diverted such hidden expenses to its non-eligible unit thereby impacting the taxable profit?" "ITA 486/2025 1. Whether on the facts and in the circumstances of the case, the Hon'ble ITAT is justified in law in deleting the addition made on account of disallowance in the section 10A amounting to Rs. 7,30,04,275/- without appreciating the fact that the benefit of such heads of expenses like Royalty, Management Fee and Legal and Professional Expenses are derived by both the units eligible u/s 10A and non-eligible units? 2. Whether on the facts and in the circumstances of the case, the Hon'ble ITAT is justified in law in deleting the addition made on account of disallowance in the section 10A amounting to Rs. 7,30,04,275/- without appreciating the fact that by adopting such measures, the assessee has diverted such hidden expenses to its non-eligible unit thereby impacting the taxable profit?" 7. The submissi....
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....expenses to non-eligible units, thereby depressing taxable income while artificially boosting profits of the 10A units, which results in lower tax liability overall. He states that the burden of proof lies with the assessee to demonstrate that such allocation of expenses was fair and based on actual usage/benefit, which has not been conclusively done. In fact, it is his submission that the assessee failed to demonstrate on record that the royalty, management fees, and legal expenses did not relate to the 10A unit. In the absence of a rational basis or allocation key, the AO's action to allocate part of these expenses to the 10A unit was justified. 11. He further states that Hewitt Associates LLC was allocating management fee/charge for the managerial services provided to the assessee company in India. Since the managerial services was being provided to the company and not to any particular unit of the assessee company, the expenses on account of management fee could not have been attributed to any particular unit. 12. That apart, it is his submission that the assessee company had entered into agreement with Hewitt Associates LLC to provide human resource outsourcing and c....
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.... rejected the revenue-share apportionment proposed by the Revenue. He states that allocation methodology has been consistently followed and also accepted by the Revenue in earlier and later years. 17. He relies upon Hukam Chand Mills Ltd. v. CIT, [1976] 103 ITR 548 (SC) to contend that where there was no statutory formula for apportionment, any exercise to carry out the same would involve approximation and as such, the proportion fixed by the ITAT should not be disturbed if it was based on relevant material. 18. Similarly, he has also relied upon CIT v. EHPT India (P.) Ltd., [2011] 16 taxmann.com 305 (Delhi) to contend that the method adopted by the assessee for the apportionment of expenses is reasonable and consistent and there is no need for the same to be disturbed, especially in cases where there is no straight jacket statutory formula for apportionment. 19. He has also relied upon CIT v. NIT Cris Ltd., [2009] 2 taxmann.com 12 (Delhi) to contend that the findings of CIT (Appeals) and ITAT with respect to apportionment of expenses between two units of a company constituted a pure question of fact and shall not be interfered by this Court in exercise of jurisdiction und....
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....hich are as under Expenses HA/CNS Non 10A Unit HISPL/HIN 10A Unit Unit HRO Non 10A Unit MPHRO 10A Unit Exult 10A Unit Total A B C D E F H Royalty 1,84,67,851 - 75,96,149 - - 2,60,64,000 Management fee 9,62,37,068 - 1,61,62,519 - - 11,23,99,587 Legal and Professional fee 4,22,90,794 4,03,27,403 43,38,807 61,603 18,99,723 8,89,18,330 Corporate Overhead Charges 12,35,032 - 3,32,00,128 - - 3,44,35,160 Advertisement, publicity and business promotion 59,12,273 64,520 45,075 - - 60,21,868 Seminars and meetings 44,08,925 97,016 26,280 - - 45,32,221 Total 16,85,51,943 4,04,88,939 6,13,68,958 61,603 18,99,723 27,23,71,166 Less exp already allocated (C+E+F) 4,24,50,265 22,99,20,901 The Assessing Officer observed that appellant company has allocated royalty, management fee and corporate overhead charges to the units which are non-10A units and not eligible for deduction u/s 10A. it was also observed by the AO t....
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....ving data analysis, interpretation support, data processing and support for other related activities etc. * Payroll Outsourcing Services (subsequently referred to as 'HRO' or 'non-10A unit') These services entail provision for payroll related support to the affiliates and clients. These services are being provided by the following divisions of the appellant: - Human Resource Outsourcing Division ("HRO' and 'INL), which is primarily engaged in providing payroll processing and payroll related reimbursement services for clients located in India. - Retiral Fund Management Division ('RFM') of the Appellant, which is engaged in providing advisory services in relation to actuarial consulting, design and setting up of mandated and non mandated retirement plans (provident fund, gratuity and Superannuation fund). * Technology Development Centre ('TDC') [subsequently referred to as 'HISPL/ HIN' or 'Exult' or '10A unit'] TDC division is engaged in the development and export of software to Hewitt Affiliates, acting in the capacity of a captive service provider of Consulting and HRO businesses owned by Hewitt Affiliates and Is an approved 10A unit. ....
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....e assessment year under consideration. It is also submitted by the appellant that 10A units (HISPL I HIN, MP HRO and EXULT) are captive units and render services to the Hewitt group entities only, therefore, royalty was neither paid nor payable by these captive units to the Hewitt Affiliates LLC. The appellant submitted that royalty amounting to Rs. 2,60,64,000/- computed based on consulting and human resource outsourcing divisions revenue is directly related to the consulting and human resource outsourcing division and does not relate to 10A units and therefore, has been duly accounted for in consulting and human resources outsourcing division's profit & loss account. The appellant submitted that these expenses are on actual basis and cannot be allocated to the 10A units as 10A units are captive units for rendering services to the Hewitt Affiliates LLC only, therefore, the Hewitt Affiliates LLC cannot pay royalty to itself. Therefore, it is submitted by the appellant that royalty amounting to Rs. 2,60,64,000/- computed based on consulting and human resource outsourcing division division's (i.e. HA/ CNS and HRO) revenue is directly related to consulting and human resource outso....
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....tes LLC under Regional Headquarters Services Agreement, the cost incurred (including mark-up) by Hewitt Affiliates LLC has been charged to Hewitt group companies (including the appellant) based on their revenue from Consulting and human resource outsourcing divisions only (i.e. non-10A units). The same is evident from the description mentioned on the invoices for management fee raised by Hewitt Affiliates LLC on the appellant. The appellant has submitted the invoice raised to the appellant on the basis of revenue earned by the appellant company from third parties, the invoice raised is reproduced hereunder: A. Invoice dated 14-03-2008 for the period 1-09-2007 to 31-01-2008: Fees Total Invoice TOC 586,418.32 TOCA 563,604.16 RFM 32,661.50 Total US$ 1,182,683.99 On perusal of above, it is seen that only the costs (including mark-up) relating to non-10A units have been invoiced to the appellant. Accordingly, the same has been duly accounted for in non-10A units (consulting and human resource outsourcing) division's P&L Account. The appellant submitted that the terminology used for business segments is common across Hewitt worldwide. ....
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....ement, charge amounting to Rs. 112,399,588/- has been made to the appellant for consulting and human resource outsourcing division (i.e. HA/ CNS and HRO) only and therefore, has been duly accounted for in consulting and human resource outsourcing division's P&L Account. Allocation of Legal and Professional Expenses to 10A units which pertains to non-10A units: The appellant submitted that expenses are accounted for on actual basis. The appellant further submitted that an amount of Rs. 4,66,29,602/- has been accounted for in consulting and human resource division under the head legal and professional services. It is submitted that to carry out its consulting projects, among other things consulting division and human resources outsourcing division, the appellant has to hire independent consultants and has to avail consulting services from its group companies. In the process of rendering services by the consulting division and human resource division, appellant take services of independent consultants for rendering services for consulting projects and it also take help of the group companies for rendering consultancy services for the projects. The appellant ....
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....ices in relation to HR consulting to prepare report on compensation structuring and profiling for senior position being regional general manager of Whirlpool (i.e. the third part or the client). From above description of invoices mentioned above, it is evident that these invoices have been raised by group companies for various Consultancy/ Human Resources projects done by the appellant company for third parties during the year (i.e. non-10A division). Accordingly, these expenses are directly related to consulting division (i.e. HA/CNS) and human resource outsourcing division (i.e. HRO and INL) and have been duly accounted for in consulting division and human resource outsourcing division's (i.e. non-10A units) P&L account. In view of the above, it is seen that legal and professional fee directly related to consulting division and human resource outsourcing division has been duly accounted for in consulting and human resource outsourcing division's P&L Account (i.e. non-10A units). Therefore, these expenses cannot be apportioned to the 10A units over and above the expenses under the head legal and professional expenses actually related to the 10A units. Therefore, ....
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.... projects, Consulting division (i.e. HA/ CNS) and Human Resource Outsourcing divisions (i.e. HRO) [Both non 10A units] of the appellant incurs advertisement, publicity and business promotion expenses. Since above mentioned advertisement, publicity and business promotion expense are directly related to Consulting division (i.e. HA/ CNS) and Human Resource Outsourcing divisions (i.e. HRO), the same have been duly accounted for in consulting division's (i.e. non-10A units) P&L account. With reference to 'advertisement, publicity and business promotion expenses' amounting to Rs 59,57,348/- duly accounted for in Appellant's Consulting division (i.e. HA/ CNS) and Human Resource Outsourcing divisions (i.e. HRO), the appellant submitted a copy of invoices on sample basis which is filed at page 419 to 420 of the paper book. The relevant extract of the invoice is reproduced hereunder: * "6th Oil and Gas HR round table (2007): It was an HR conference held to cater the developing HR needs in Oil and Gas sector where the Appellant had invited experts and scholars from this sector. * Sponsorship fee for NHRD cocktails: NHRD, a forum of HR, is the national apex body of ....
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.... 'Representatives at Human Asset India' relates to participation in HR Conference to explore business ideas and to mark Appellant's presence as leading HR consultancy firm. From above description of invoices it is evident that the above mentioned seminars and meetings expenses are directly related to non 10A units i.e. Consulting division (i.e. HA/ CNS) and Human Resource Outsourcing divisions (i.e. HRO). Accordingly, these expenses, being directly related to consulting division (i.e. HA/CNS) and human resource outsourcing division (i.e. HRO and !NL), have been duly accounted for in consulting division and human resource outsourcing division's (i.e. non-10A units) P&L account. The above discussion establishes that manner of allocation of expenses between 10A and non-10A units are based on common principles of costing and is reasonable. The appellant is following the basis as provided by Accounting Standards-17 approved by ICAI for apportionment of expenses between different units. In light of above discussion and judicial pronouncements cited by the appellant in its submission, it is held that the allocation of expenses between 10A and non-10A units cannot be dist....
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....et profit disclosed by the appellant are as under: Particulars HA/Consul Non 10A Unit HISPL 10A Unit HRO Non 10A Unit MPHRO 10A Unit INL Non 10A Unit Exult 10A Unit Total Nature Activities Providing advice and consultancy Development of software for Hewitt Support to the affiliates and clients HR related services to other Hewitt affiliates Support to the affiliates and clients Development of software for Hewitt Net receipt Including other Income 58,21,71,103 305,94,12,932 25,89,95,920 1,68,32,634 1,50,75,264 50,44,14,693 443,69,02,546 Total Expenses claimed 47,39,08,503 267,93,78,130 25,69,92,118 1,50,29,138 1,01,65,767 44,55,96,853 333,15,70,509 Profit before tax 10,82,62,600 37,95,34,802 20,03,802 18,03,496 49,09,497 5,88,17,841 55,53,32,037 Percentage of Profit Loss 19.49% 68.35% 0,35% 0.32% 0.89% 10.59% It was observed by the AO that appellant company is showing maximum revenue from services in non-10A units and showing profit in the units wherein deduction u/s 10A is admissible. Accordingly, the Assessing O....
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....lent and Organization Consultancy Analytics Division ('TOAC'), which is engaged, inter alia, in the provision of advice and consultancy in the nature of designing and supporting the implementation of HR initiatives, developing reward system modules, designing career development programs for employees etc; - Talent and Organization Consultancy (Global Services) Division, which has been specifically carved out to assist other divisions of the Appellant as well as similar divisions of other Hewitt Affiliates in compiling pre-existing data providing consulting services involving data analysis, interpretation support, data processing and support for other related activities etc. and * Payroll Outsourcing Services (subsequently referred to as 'HRO' or 'non-10A unit') These services entail provision for payroll related support to the affiliates and clients. These services are being provided by the following divisions of the appellant: - Human Resource Outsourcing Division ("HRO' and 'INL'), which is primarily engaged in providing payroll processing and payroll related reimbursement services for clients located in India. - Retiral Fund Managemen....
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....e relevant extract of clause 3 of the agreement dated October 1, 2002 is reproduced hereunder: ........ the affiliate shall pay HA a flat royalty fee based upon the gross revenue of affiliate derived from third parties in the relevant fiscal year in accordance with the following revenue ranges: Royalty Gross Revenue $5000 $0-$1,499,000 $10,000 $1,500,000-$2,499,000 $25,000 $2,500,000 During the course of appellate proceedings, the appellant submitted that since non-10A units (i.e. HA/CNS and HRO) earns revenue from third parties as per the terms of agreement, a royalty as a percentage of net revenue derived from third parties has been paid by these non-10A units to Hewitt Affiliates LLC during the assessment year under consideration. It is also submitted by the appellant that 10A units (HISPL I HIN and EXULT) are captive units and render services to the Hewitt group entities only, therefore, royalty was neither paid nor payable by these captive units to the Hewitt Affiliates LLC. The appellant submitted that royalty amounting to Rs. 10,85,750/- computed on the basis of clause 3 of the agreement by the non-10A units is directly related to th....
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....r, these cost (plus mark-up) are charged to various group entities which are utilizing services of these regional resources (including the appellant) based on their revenue contribution to APAC region from consulting division (i.e. HA/ CNS) and human resource outsourcing division (i.e. HRO and INL). The appellant submitted that in relation to charge received by the appellant from Hewitt Affiliates LLC under Regional Headquarters Services Agreement, the cost incurred (including mark-up) by Hewitt Affiliates LLC has been charged to Hewitt group companies (including the appellant) based on their revenue from Consulting and human resource outsourcing divisions only (i.e. non-10A units). The same is evident from the description mentioned on the invoices for management fee raised by Hewitt Affiliates LLC on the appellant. The appellant has submitted the invoice raised to the appellant on the basis of revenue earned by the appellant company from third parties, the invoice raised is reproduced hereunder: Particulars Amount (in INR) Invoice # 3222AHQ dated September 12, 2006 for the period September 1, 2005 to August 31, 2006 of USD 762,392.52 35,832,448 Reversal for....
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....ivision ('RFM') of the Appellant, which is engaged in providing advisory services in relation to actuarial consulting, design and setting up of mandated and non mandated retirement plans (provident fund, gratuity and Superannuation fund). On perusal of above descriptions, it is seen that only the costs (including mark-up) relating to consulting (TOC and TOAC) and human resource outsourcing (HRO and RFM) from Asia Pacific Headquarter divisions have been invoiced to the appellant. Accordingly, the same has been duly accounted for in consulting division's P&L Account. The appellant submitted that the terminology used for business segments is common across Hewitt worldwide. It was submitted by the appellant that the charge made by Hewitt Affiliates LLC to the appellant under Regional Headquarters Services Agreement has been calculated after considering revenue from Consulting division (i.e. HA/ CNS) and Human Resource Outsourcing division (i.e. HRO and INL) only and no revenue of captive unit(s) (i.e. 10A units) has been considered for calculating charge under Regional Headquarters Services Agreement. The expenses accounted on actual basis cannot be allocated to 10A u....
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....- Mentoring workshops * VSNL - Role competency mapping * Development centre for STML * Development centre for HLL *Microland (Role descriptions & competencies) Project management * Shyam telecom development centre The above description of invoices shows that these independent consultants were hired to deliver client project as and when required. They performed on client projects which are not related to captive units of the appellant and accordingly these invoices have been raised by Independent Consultants for various Consultancy/Human Resources projects (i.e. non-10A division). Therefore, these expenses are directly related to consulting division (i.e. HA/CNS) and human resource outsourcing division (i.e. HRO and INL) and have been duly accounted for in consulting division and human resource outsourcing division's (i.e. non-10A units) P&L account. Fees paid to group companies for rendering consulting services The appellant has also taken services of group companies to carry out its business under consulting division (i.e. HA/CNS) and human resource outsourcing division (i.e. HRO and INL) on project t....
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....head legal and professional expenses actually related to the 10A units. It is seen that out of the total legal & professional fee of Rs.69,985,382/-, expenses of Rs.53,914,799/- debited in 10A units (77.04%) and only Rs.16,070,799/- debited to in non-10A divisions (22.96%), therefore, the Assessing Officer was not justified in further allocating the legal and professional expenses to the 10A units. The above discussion establishes that manner of allocation of expenses between 10A and non-10A units is based on common principles of costing and is reasonable. The appellant is following the basis as provided by Accounting Standards-17 approved by ICAI for apportionment of expenses between different units. In light of above discussion and judicial pronouncements mentioned above, it is held that the allocation of expenses between 10A and non-10A units cannot be disturbed. In view of the discussion made above, it is held that Assessing Officer 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. The Assessing Officer was also ....