DIRECTI INTERNET SOLUTIONS PVT LTD,MUMBAI vs. ACIT 5(1)(2), MUMBAI

Appellant by : Shri Firoze B.Andhyarujina.Sr. Adv & Ms.Pooja A. Gajara.Adv.AR Respondent by : Shri.S.G.Menon.Sr.DR Date of Hearing 07.11.2023 Date of Pronouncement 07.12.2023 आदेश / O R D E R

PER PAVAN KUMAR GADALE JM:

1. The Ld. CIT(A) has erred in confirming the order of Ld. AO allowing arbitrary allocation of general corporate expenses amounting to INR 1,13,26,557 to STPI and Non STPI unit even though separate books were maintained for all the units.

Directi Internet Solutions Pvt Ltd, Mumbai. - 2 - 2 The Ld. CIT(A) failed to comprehend that Appellant has already allocated the expenses following Scientific & Accounting Principles and Policies to its each separate and Independent Units.

3 The Ld. CIT(A) has grossly failed in understanding that re- allocation done by Ld. AO is ultimately amounting to double allocation of expenses to STPI and non STPI unit.

4 The Ld. CIT(A) erred in confirming the order of Ld. AO without having regard to the fact that Appellant has followed the principle of consistency for expenses allocations in lines with earlier years.

5 The Ld. CIT(A) failed to appreciate that only those expenditure which had a direct and proximate nexus with the earning of the profit of STPI undertaking could be taken into consideration deductibility u/s 10A 6 The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeals herein or to submit such statements documents and papers as may be considered necessary either before or during the hearing of the appeal as they may be admitted to do so.

7 The above grounds of appeal are without prejudice to each now.

2. The brief facts of the case are that, the assessee company is engaged in the business of information technology IT computer software and IT enabled services (ITES). The assessee has filed the return of income for the A.Y 2007-08 on 31.10.2007 disclosing a total income of Rs. Nil after claiming the deduction of Rs.65,26,15,180/- u/sec 10A of the Act. Whereas Directi Internet Solutions Pvt Ltd, Mumbai. - 3 - the assessment was completed u/sec 143(3) of the Act dated 30.12.2009 with disallowance in respect of interest on loan, other incomes, disallowance u/sec 14A of the Act and computed the business income due to reallocation of expenses and the assessed total income was determined at Rs.35,52,141/-. Aggrieved by the order, the assessee has filed an appeal before the CIT(A), whereas the CIT(A) has granted partial relief and partly allowed the assessee appeal.Aggrieved by the order of the CIT(A), the assessee has filed an appeal before the Hon’ble Tribunal, whereas the Hon’ble ITAT in dated 14.09.2016 has granted partial relief and on the disputed issue of allocation of common expenses between STPI and non STPI units, the ITAT has restored the issue to the file of the Assessing officer to examine afresh and decide in accordance with law.

3. Whereas, the Assessing Officer (AO) has issued notice u/sec 142(1) of the Act dated 28.08.2017, in compliance to the notice, the Ld. AR of the assessee has appeared from time to time and submitted the details. On the issue of allocation of the expenses, the Directi Internet Solutions Pvt Ltd, Mumbai. - 4 - assessee was called upon to explain the basis of allocation/scientific basis. The assessee has submitted the details vide letter dated 17.11.2017 & 7-12-2017 along with the annexure. The AO has considered the findings of the original assessment, and dealt on facts, procedure of reallocation of expenses between STP & non STPI and observed at para7 & 8 of the order as under: “7. On examination of the facts, it is found that the assessee has claimed total corporate expenditure in General P/L account. As per procedure it should be re- allocate between STP Unit and Domestic Unit in logical ratio. As corporate expenditure is comprise of four heads:

1. Indirect Expenses, 2. Administrative Expenses, 3. Selling & Distribution Expense

4. Director Remuneration So, these expenditure should be divide on the basis of respective head expenditure of Domestic and STP Unit. Therefore, it is hereby corporate expenditure will divide in these ratio. Further, interest (finance expenditure) is already taken in other source of Income (Net). So there is no allocation made of finance cost.

On enquiry it is found that Ratio of STP and domestic as under:- Sr. Heads STP Domestic Ratio No 1 Administrative 20118200 6717905 95:5 2 Selling and 6028282 1001903 92:8 Directi Internet Solutions Pvt Ltd, Mumbai. - 5 - Distributing 3 Turnover Ratio 103212390 1065865101 91:9 Allocation of corporate expenditure in STP and Domestic Unit as under:

Name of Total Basis Rati Allocated amount expenditure amount Expenditure o STP Domestic Indirect 6751 Administrative 95:5 6413 337 expenditure Administrati 671790 Administrative 95:5 638200 335895 ve 5 expenditure 9 expenditure Selling and 100190 Selling and 92:8 921750 80152 distributing 3 distributing Direct 360000 Administrative 95:5 342000 180000 remuneratio 0 expenditure 0 n 107301 596385 72

Sr. Particular Rs. Rs. No 1 Profit 66,26,15,180 Less Corporate Expenditure 1,07,30,172 (including domestic and STP) 2 Deduction u/s 10A 65,18,85,008 Re-computation of Income Business Income (as per computation) : 65,26,15,180 Net Other Income : (Rs. 27,70,962-15,38,239)

Directi Internet Solutions Pvt Ltd, Mumbai. - 6 -

: 12,32,723 Disallowance u/s 14A : 4074 Gross Business Income : Rs. 65,38,51,977 Less Deduction u/s 10A : Rs. 65,18,85,008 Total Business Income : Rs. 19,66,969”

, submissions of the assessee and findings of the AO with respect to reallocation of common expenses and has confirmed the action of the A.O and dismissed the assessee appeal. Aggrieved by the CIT(A)order, the assessee has filed an appeal before the Hon’ble Tribunal.

5. At the time of hearing, the Ld. AR submitted that the CIT(A) has erred in confirming the action of the AO without going into the facts and policy adopted on the allocation of general corporate expenses between STPI and non STPI units. Further the Ld. AR emphasized that the expenses were allocated on the scientific and accounting principles and policies and the books of accounts are maintained separately for Directi Internet Solutions Pvt Ltd, Mumbai. - 7 - the units. The Ld.AR substantiated the submissions with the factual paper book and the judicial decisions and prayed for allowing the appeal. Per Contra, the Ld. DR supported the order of the CIT(A).

6. Heard the rival submissions and perused the material on record. The sole disputed issue envisaged by the Ld. AR that the CIT(A) has erred in confirming the action of assessing officer without considering the basis of allocation of general corporate expenses between the STPI and non STPI units and the assessee has maintained separate books of accounts. Further the assessee has allocated the expenses following the scientific principles and policies between STPI and non STPI units. Whereas reallocation of expenses by the assessing officer is without any basis or methodology. The Ld. AR further emphasized that the AO in the assessment proceedings has not considered the consistency of expenses allocation adopted in the earlier year. Further the expenditure has direct proximity and nexus with profit of STPI and non STPI Units. On the query from the bench on the consistency of methodology adopted by the assessee, the Ld. AR Directi Internet Solutions Pvt Ltd, Mumbai. - 8 - submitted that the assessee has been following this system of allocation in the earlier year and subsequent years. The Ld.AR highlighted the submissions made by the assessee in the proceedings on the disputed issue placed at page 8 to 21 of the paper book. Whereas in the assessment years(A.Y) 2008-09 to 2011-12, the allocation was accepted by the revenue and is not disputed. Whereas having considering the facts and information, the allocation of corporate expenses was on the different parameter. The assessee has been following scientific method whereby the expenses allocated to STPI units, domestic unit and to general profit and loss account and those expenses cannot be attributed to specific and domestic STPI. The Ld. AR submitted that the allocation was made to STPI units on the basis of STPI turnover to total turnover and in case of Non STPI units, the basis adopted being domestic turnover to total turnover and the Ld.AR demonstrated the chart on the allocation of expenses.

are allowed in favour of the assessee

8. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 07.12.2023.