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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
AadoSa / O R D E R महावीर स ुंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM: This appeal is arising out of the order of Dispute Resolution Panel-2, Mumbai [in short ‘DRP’], in objection No. 161, vide direction dated 29.11.2016. The Assessment was framed by the Asst. Commissioner of Income Tax, Circle-7(2)(2), Mumbai (in short ‘ACIT/ DCIT/AO’) for the assessment year 2012-13 vide order dated 2 27.01.2017 under section 143(3) read with section 144C(13) of the Income Tax Act, 1961(hereinafter ‘the Act).
The only issue in this appeal of assessee is against the order of AO/ TPO reducing the deduction under section 10AA of the Act in respect of Kochi and Hyderabad units by an amount of ₹ 80,12,797/- and making an corresponding disallowance in Mumbai Unit. For this assessee has raised the following three grounds: - “1.1 Ground No. 1.1 - Reduction in the claim of deduction under section 10AA:
1.1.1 On the facts and in the circumstances of the case and in law, the learned Dispute Resolution Panel-2 and Assistant Commissioner of Income Tax, Circle 7(2)(2), Mumbai (hereinafter referred to as 'DRP' and 'AO', respectively) has erred in reducing the deduction under section 10AA of Kochi and Hyderabad unit by an amount of Rs. 80,12797 and making a corresponding disallowance in Mumbai unit.
1.1.2 On the facts and in the circumstances of the case and in law, the learned DRIP and AO has erred in not appreciating the fact that the DRIP in assessee's own case on the similar issue of allocation of expenses in both AY 2010- 11 and AY 2011 - 12 has directed not to allocate the expenses.
3 1.1.3 Without prejudice to the above, the learned DRIP and AO has erred in ignoring the revenue model of the assessee which is TNMM whereby any additional expenses allocated to Kochi unit or Hyderabad unit would result in higher turnover and profits of these units and thereby would lead to higher deduction u/s 10AA.
1.1.4 The appellant therefore prays Your Honour to direct the A0 to not to reduce the deduction under section 10M of Kochi and Hyderabad unit and to not make a corresponding disallowance in Mumbai unit.
1.2 Ground No. 1.2 – Disallowance of Legal & Professional Fees:
1.2.1 On the facts and in the circumstances of the case and in law, the learned DRP and AC has erred in holding that Legal & Professional Fees is disproportionate to the percentage of the turnover and that the same ought to have been determined on pro rata basis of the turnover achieved by each unit.
1.2.2 The appellant therefore prays Your Honour to direct the AC to not re-compute the legal and professional fees as a percentage of the turnover and to not allocate the expenses.
4 1.3 Ground No. 1.3- Disallowance of Director's Remuneration:
1.3.1 On the facts and in the circumstances of the case and in law, the learned DRP and AO has erred in allocating Director's remuneration to all units in proportion to the turnover achieved by each unit.
1.3.2 The appellant therefore prays Your Honour to direct the AO to not re-compute the Director's remuneration in the proportion of the turnover achieved by each unit.”
Briefly stated facts are that the assessee company has engaged in the business of providing payroll processing and HR support services to its parent company. The assessee primarily performs data processing task for payroll and HR related support services in the nature of data processing. The assessee also provided the same amount of services to the third parties in India. The assessee has claimed exemption under section 10AA of the Act in respect to its units. The assessee runs separate units, one at Mumbai and other two at Kerala and Hyderabad respectively. The Kochi and Hyderabad units are in SEZ zone eligible for deduction under section 10AA of the Act but the Mumbai unit is not eligible for the same. The AO while working out the claim of deduction under section 10AA of the Act, re-worked the exemption and made addition of ₹ 80,12,797/- in Mumbai Unit i.e. ₹ 28,97,776/- allocated to Kochi unit and ₹ 51,15,021/- allocated to Hyderabad Unit. The assessee raised the objections and the assessee’s contention was 5 that the unit wise profit and loss account have been rejected by the TPO on account of improper allocation case. The assessee claimed by filing evidences that there are audited accounts unit wise of profit and loss account and the scheme of allocation of expenses is scientific and most appropriate basis. It was claimed that the assessee company has allocated three different units at Hyderabad, Kochi and Mumbai for providing payrolls processing and HR support services. Out of the three units, units allocated at Hyderabad and Kochi is providing services to AE’s only. Whereas, services from Mumbai unit are provided to AE and third party customers as well. It was claimed that Hyderabad and Kochi Units being specifically dedicated for providing services to AE and all the costs are charged to AE on actual basis. As regards to Mumbai unit of that services are rendered to AE and non-AE these are separate identified projects for AE and non-AE, whereby the only target costs to the extent possible are charged to AE and non-AE respectively. In the light of these DRP stated that even in earlier years i.e. AY 2011-12 and 2010-11, the directions of DRP are clear and following the earlier years, he disallowed the expenses. The learned Counsel for the assessee took us through the draft assessment order, wherein the AO has noted that the assessee has inflated the income of Kochi and Hyderabad units enjoying the claim of exemption under section 10AA of the Act and deflated the profit of Mumbai unit not filing the deduction under section 10AA of the Act by travelling expenses of Mumbai Unit. The AO has worked the deduction and disallowed the same to the tune of ₹ 80,12,797/-. Aggrieved, assessee came in appeal before Tribunal.
6 4. At the outset, the learned Counsel for the assessee stated that the issue is squarely covered by Tribunal’s decision in assessee’s own case in for AY 2010-11, wherein the identical issue has decided vide Para 8 to 10 as under: - “8. We have heard the rival contentions and perused the record. We noticed that the Assessing Officer has picked up expenditure incurred by the assessee under three heads and allocated them in the ratio of sales reported by Cochin unit and Mumbai unit of the assessee. In this process, the AO has noticed that the expenditure booked in Mumbai unit is higher and accordingly drawn inference that the assessee has deflated the expenditure for Cochin unit to the extent of ` 79.13 lakhs. Accordingly, he has reduced the deduction claimed by the assessee u/s. 10AA of the Act to the extent of ` 79.13 lakhs.
We have noticed that learned DRP has deleted the disallowance so made by the Assessing Officer with following observations: -
Directions of the DRP The assessee's contentions have been considered. The reason for allocation of certain expenses from Mumbai Unit to Cochin Unit is based on the Assessing Officer's assumption that Mumbai is the 7 Head Office and hence, there has to be some common expenses incurred in Mumbai which requires to be reallocated to Cochin. However, the assessee has submitted that all common expenses incurred by the Mumbai Unit in respect of common Finance and HR Staff have] already been allocated. In this connection, the assessee has furnished particulars ' of six employees whose total salary of Rs.29.67 lacs has been allocated between Mumbai and Cochin Unit. The AO has neither brought any material on record challenging the correctness of this allocation nor has the AO brought any material on record to show that there were more employees whose costs were required to be allocated to Cochin Unit, As regards rent and other expenses, the assessee has furnished unit wise details in respect of the same to show that the expense booked under each unit are on actual basis. All these documents were before the AO also and the AO has not countered these facts as asserted by the assessee. Further, the assessee has also pointed out that its expenses on account of legal .and professional charges, travelling, insurance and miscellaneous expense should have also been 8 reallocated in the ratio of sales as done by the AO in respect of employee cost, repairs and rent. If the common approach of allocating all expense in the ratio of sales is adopted, the assessee submits that the adjustment on account of 10A will only be Rs.16.68 lacs as compared to Rs.79.13 lacs as computed by the AO. After examining all these aspects, the DRP is of the opinion that there is no basis for the reallocation of expense as undertaken by the AO. The AO has failed to controvert the specific fact brought on record by the assessee in support of the allocations made. In view of the same, the AO is directed not to reallocate the expense in the manner proposed by him. Hence the addition made on account of sec. 1OAA is deleted.
We notice that the assessee has furnished the details of common expenses incurred by it and has submitted that they have been apportioned in the ratio of total expenditure incurred by both the units. We notice that the assessing officer has not examined this claim of the assessee and also did not take any steps to ascertain as to whether any other common expenditure was incurred by the assessee. There is also merit in the 9 submission of the Ld A.R that the cost of services is higher in Mumbai when compared with Cochin and that may be one of the main reasons for incurring higher expenditure in Mumbai unit. Hence we are of the view that the assessing officer has made impugned disallowance by drawing adverse inferences and he has also failed to bring on record any supporting material. Accordingly, we are of the view that the Ld. DRP was justified in deleting the disallowance so made by the AO in the deduction claimed u/s 10AA of the Act.” 5. The learned Sr. Departmental Representative could not controvert the findings given by the Tribunal in AY 2010-11 in assessee’s own case. Admitted, the facts are exactly identical in this year also. Hence, respectfully following the Tribunals order in assessee’s own case, we allow this issue of assessee’s appeal.