DCIT, Bangalore V. M/s Informatics (India) Ltd., Bangalore

ITA 982/BANG/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8544 (ITAT-BANGALORE)
• Duration Of Justice: 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-03-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 01-03-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 29-10-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Section: 143(3)

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE DR. O.K NARAYANAN, VICE PRESIDENT AND SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER ITA NO.982 /BANG/200 9 (ASST. YEA R -2005-06) THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-11(4), BANGALORE. . APPELLANT VS. M/S INFORMATICS (INDIA) LTD., NO.337, KARUNA COMPLEX, 3 RD FLOOR, SAMPIGE ROAD, MALLESWARAM, BANGALORE-560 003. . RESPONDENT AND ITA NO.1025 /BANG/2009 (ASST. YE AR -2005-06) (B Y ASSESSEE) REVENUE BY : SMT. JACINTA ZIMIK VASHAI, ADDL. COMMI SSIONER OF INCOME-TAX ASSESSEE BY : SHRI VENKATESH KAMATH , CHARTERED ACCOUNTANT O R D E R PER DR. O.K NARAYANAN, VICE PRESIDENT THESE ARE TWO CROSS APPEALS FILED BY THE REVENUE A ND THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2005-06. THE APPEALS ARE DIRECTED AGAINST THE ORDER OF THE CIT(A)-I AT BANGA LORE DATED ITA NOS.982 & 1025/B/09 2 21.08.2009 AND ARISE OUT OF THE ASSESSMENT COMPLETE D U/S 143(3) OF THE INCOME-TAX ACT 1961. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DISTRIBUTION OF JOURNALS/CD-ROM DATABASES, CD ROM DRIVES AND NET WORKING SYSTEMS, PROVIDING TECHNICAL CONSULTANCY, EXPORT O F CONTENT DEVELOPMENT AND ELECTRONIC PUBLISHING. . 3. THE ASSESSEE COMPANY HAS SET UP A STPI UNIT IN T HE YEAR 1999- 2000 FOR SATISFYING EXPORT MARKET. THE SAID STPI U NIT IS LOCATED IN A SEPARATE BUILDING WITH INDEPENDENT SUPPORTING SYSTE MS OF ADMINISTRATION AND OTHER FUNCTIONS. THE STPI UNIT IS HEADED BY ONE OF THE DIRECTORS OF THE ASSESSEE COMPANY, SHRI K.S SUB BA RAO. 4. THE ASSESSEE HAS BEEN CLAIMING DEDUCTION U/S 10A IN RESPECT OF THE PROFITS OF STPI UNIT. THE DEDUCTION HAS BEEN C LAIMED BY COMPUTING THE PROFIT AS AN INDEPENDENT FUNCTIONAL U NIT. THERE ARE CERTAIN EXPENSES RELATING TO THE FUNCTIONING OF THE HEAD OFFICE, WHICH HAVE BEEN INCURRED AND ACCOUNTED COMMONLY. THE AS SESSEE COMPANY HAS APPORTIONED SUCH HEAD OFFICE EXPENSES BETWEEN S TPI UNIT AND DOMESTIC UNITS ON THE BASIS OF TURNOVER RATIO. THE TURNOVER OF OTHER ITA NOS.982 & 1025/B/09 3 ACTIVITIES CARRIED ON BY THE ASSESSEE COMPANY WAS H IGHER THAN THE TURNOVER OF THE STPI UNIT. THE ASSESSEE ALWAYS CON TENDED THAT THE STPI UNIT WAS SELF CONTAINED UNIT AND THERE WAS NO NEED FOR ALLOCATING ANY COMMON ADMINISTRATIVE EXPENSES TO ITS ACCOUNT. BUT, AS STATED, TO AVOID ANY KIND OF ARGUMENTS OR ARBITRATION, THE ASSESSEE COMPANY CHOSE TO ALLOCATE THE CORPORATE AND OTHER ADMINISTRATIVE EXPENSES ON A PROPORTIONATE BASIS, ON TURNOVER RATIO. THIS METHO D WAS CONSISTENTLY FOLLOWED IN THE EARLIER YEARS AND THE ASSESSMENTS W ERE COMPLETED U/S 143(3), ACCEPTING THE SAID ALLOCATION METHOD. 5. BUT, IN THE CASE OF IMPUGNED ASSESSMENT YEAR 200 5-06, THE ASSESSING OFFICER FURTHER SCRUTINIZED THE METHOD OF ALLOCATION ADOPTED BY THE ASSESSEE. HE OBSERVED THAT THE ALLOCATION O F EXPENSES ON THE BASIS OF TURNOVER MAY NOT BE PROPER IN RESPECT OF V ARIOUS EXPENSES. HE EXAMINED CERTAIN INDIVIDUAL ITEMS OF EXPENDITURE ON THE BASIS OF DISCUSSION MADE IN THE ASSESSMENT ORDER AND MADE AL LOCATIONS IN THE RATIO OF 50 : 50 IN SOME CASES AND 70 : 30 IN CER TAIN OTHER CASES. THE ASSESSMENT WAS COMPLETED ON THE BASIS OF THE ABOVE SAID RE-ALLOCATION OF EXPENSES MADE BY THE ASSESSING AUTHORITY AND THU S, THE QUANTUM OF DEDUCTION U/S 10A HAS BEEN REDUCED. ITA NOS.982 & 1025/B/09 4 6. THE ISSUE WAS TAKEN IN FIRST APPEAL BEFORE THE C IT(A). THE CIT(A) MODIFIED THE ALLOCATION RATIO AND DIRECTED T HE ASSESSING OFFICER TO ALLOCATE ONLY 15% FOR LEASE LINE CHARGES TO STPI UNIT INSTEAD OF 50% MADE BY THE ASSESSING AUTHORITY. HE CONFIRMED THE ALLOCATION OF 30% IN THE CASE OF DIRECTORS REMUNER ATION. HE FURTHER DELETED THE ADDITION MADE BY THE ASSESSING AUTHORIT Y ON ACCOUNT OF LICENSE FEE AND ADVERTISEMENT EXPENSES ETC. IN AD DITION TO THE ABOVE, THERE WAS ANOTHER GROUND BEFORE THE CIT(A) REGARDIN G DETERMINATION OF THE TURNOVER. THE CIT(A) DIRECTED THE ASSESSING OFFICER TO RE-FIX THE TOTAL TURNOVER AFTER DEDUCTING THE COMMISSION E XPENSES. 7. THE REVENUE AS WELL AS THE ASSESSEE ARE AGGRIEVE D BY THE ORDER PASSED BY THE CIT(A), THEREFORE, THESE CROSS-OBJECT IONS BEFORE US. 8. THE GROUNDS RAISED BY THE REVENUE IN ITS APPEAL ARE AS FOLLOWS : (I) THAT THE CIT(A) HAS ERRED IN LIMITING THE ALLOCATION TO 15% AS AGAINST 50% MADE BY THE AO IN RESPECT OF LEASE LINE CHARGES. ITA NOS.982 & 1025/B/09 5 (II) THE CTI(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO IN RESPECT OF LICENSE FEES. (III) THE CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO IN RESPECT OF ADVERTISEMENT EXPENSES. (IV) THE CIT(A) IS NOT JUSTIFIED IN DIRECTING THE A O TO DEDUCT THE COMMISSION CHARGES FROM THE TOTAL TURNOVER FOR COMPUTING THE DEDUCTION U/S 10A. 9. IN RESPECT OF THE APPEAL FILED BY THE ASSESSEE, FOLLOWING ARE THE GROUNDS: (I) THE CIT(A) HAS ERRED IN ALLOCATING THE REMUNERA TION OF THE MANAGING DIRECTOR, WHEN THE STPI UNIT WAS INDEPENDENTLY MANAGED BY A WHOLE TIME DIRECTOR FROM ITS INCEPTION. ITA NOS.982 & 1025/B/09 6 (II) THE CIT(A) HAS ERRED IN ALLOCATING THE SEMINAR EXPENSES INCURRED IN INDIA, WHICH EXCLUSIVELY RELAT ED TO NON-STPI ACTIVITIES. (III) THE CIT(A) HAS ERRED IN ALLOCATING THE LEASE LINE EXPENSES TO STPI ON THE GROUND THAT IT WAS NOT QUAN TIFIED ACCURATELY. 10. WE HEARD SMT. JACINTA ZIMIK VASHAI, THE LEARNED ADDL. COMMISSIONER OF INCOME-TAX APPEARING FOR THE REVEN UE AND SHRI VENKATESH KAMATH, THE CHARTERED ACCOUNTANT APP EARING FOR THE ASSESSEE. 11. EVEN THOUGH, THE ASSESSEE HAS MAINTAINED SEPARA TE FUNCTIONAL ACCOUNTS FOR ASSESSEES GENERAL BUSINESS AS WELL AS STPI UNIT, THE COMMON EXPENSES WERE BOOKED JOINTLY FOR ALL THE ACT IVITIES OF THE ASSESSEE COMPANY. THEREFORE, THE COMMON EXPENSES I NCURRED FOR CARRYING ON OF THE BUSINESS AS A WHOLE HAVE TO BE A LLOCATED BETWEEN STPI UNIT AND NON STPI ACTIVITIES. THERE SHOULD NO T BE CONTROVERSY ON THIS BASIC FACTOR. ITA NOS.982 & 1025/B/09 7 12. IT HAS BEEN STATED BEFORE US THAT THE ALLOCATIO NS WERE MADE ON TURNOVER RATIO IN A CONSISTENCY METHOD FOR THE EARL IER ASSESSMENT YEARS. CONSISTENCY AS A PRINCIPLE OF ASSESSMENT IS AN IMPORTANT INGREDIENT. BUT THAT DOES NOT MEAN THAT SUCH METHO D SHOULD BE ALWAYS ACCEPTED AS RESJUDICATA . THE RULE OF RESJUDICATA DOES NOT APPLY TO FACTUAL MATTERS AND THE QUESTION OF ALLOCATION OF C OMMON EXPENSES IS ESSENTIALLY A QUESTION OF FACT. WHEN THE ASSESSING OFFICER HAS POINTED OUT REASONS TO DEVIATE FROM THE EARLIER METHOD, THE DEVIATION HAS TO BE ACCEPTED, IF THE REASONS POINTED OUT BY THE ASSESSI NG AUTHORITY ARE CONVINCING. IN THE PRESENT CASE, THE ASSESSING OFFI CER HAS DISCUSSED IN DETAIL, WHY HE IS EXAMINING DIFFERENT KINDS OF EXPE NDITURE IN A DETAILED MANNER FOR THE PURPOSE OF ITEM-WISE ALLOCA TION. THEREFORE, WE ARE NOT IN A POSITION TO UNDO THE METHOD ADOPTED BY THE ASSESSING AUTHORITY FOR THE IMPUGNED ASSESSMENT YEAR 2005-06. 13. NOW LET US COME TO THE SPECIFIC GROUNDS RAISED BY THE REVENUE IN ITS APPEAL. WE FIND THAT THE CIT(A) HAS ERRED I N REDUCING THE DISALLOWANCE TO 15% IN THE CASE OF LEASE LINE CHARG ES. IN THE LIGHT OF THE FACTUAL DISCUSSION MADE BY THE ASSESSING AUTHOR ITY, SO ALSO ON ACCEPTANCE OF THOSE REASONS BY THE CIT(A), WE FIN D THAT THE MODIFICATION GRANTED BY THE CIT(A) IS ON THE HIGHER SIDE. TAKING INTO ITA NOS.982 & 1025/B/09 8 ALL ASPECTS OF THE CASE, WE ALLOCATE 40% OF THE EXP ENSES TOWARDS STPI UNIT AND 60% TOWARDS NON STPI ACTIVITIES. 14. IN RESPECT OF LICENSE FEES AND DEVELOPMENT EXPE NSES, WE DO NOT AGREE WITH THE CIT(A) IN DELETING THE DISALLOWANCE IN ENTIRETY. WE RESTORE THE DISALLOWANCE TO THE EXTENT OF 40% OF TH E EXPENDITURE AND ALLOCATE 60% THERE OF TO NON-STPI ACTIVITIES. 15. REGARDING EXCLUDING COMMISSION EXPENDITURE FROM THE TOTAL TURNOVER, WE ARE NOT INCLINED TO INTERFERE WITH THE ORDER OF THE CIT(A). 16. THE REVENUE IS PARTLY SUCCESSFUL IN ITS APPEAL. 17. REGARDING THE CONTENTIONS OF THE ASSESSEE, ON A LLOCATION OF EXPENSES RELATING TO THE MANAGING DIRECTORS REMUNE RATION, SEMINAR EXPENSES, LEASE LINE EXPENSES ETC., WE DO NOT FIND MUCH FORCE. THE MANAGING DIRECTOR IS FUNCTIONING FOR THE COMPANY AS A WHOLE OVER SEEING ITS ENTIRE ACTIVITIES. THEREFORE, ALLOCATIO N IS CALLED FOR. THIS IS THE CASE WITH THE OTHER TWO EXPENSES AS WELL. THER EFORE, WE ARE NOT INCLINED TO INTERFERE WITH THE DECISIONS TAKEN BY T HE CIT(A) IN THESE MATTERS. ITA NOS.982 & 1025/B/09 9 18. THE ASSESSEE FAILS IN ITS APPEAL. 19. WE MAKE IT CLEAR THAT THE GROUNDS RAISED BY THE REVENUE AS WELL AS BY THE ASSESSEE IN THESE CROSS APPEALS ARE DISPO SED OFF THROUGH THIS ORDER CONFINING TO THE FACTS, ARGUMENTS AND REASONS HIGH LIGHTED FOR THIS PARTICULAR ASSESSMENT YEAR. THEREFORE, THE DE CISIONS FOR THE IMPUGNED ASSESSMENT YEAR DO NOT MAKE OUT A CASE OF PRECEDENCE NECESSARILY FOLLOWED IN SUCCEEDING ASSESSMENT YEARS . OUR FINDINGS DO NOT BECOME A PRECEDENT, EITHER IN FAVOUR OR AGAINST THE REVENUE/THE ASSESSEE. 20. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED AND APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON MONDAY , THE 1ST DAY OF MARCH, 2010, AT BANGALORE. SD/- SD/- (SHAILENDRA KUMAR YADAV) (DR. O.K NARAYA NAN) JUDICIAL MEMBER VICE PR ESIDENT VMS. ITA NOS.982 & 1025/B/09 10 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF 7..GF, ITAT, NEW DELHI. BY ORDER ASST. REGISTRAR, ITAT, BANGALOR E.