DCIT CIR 7(2)(2), MUMBAI vs. NGA HR INDIA P.LTD, MUMBAI

We shall first take up the appeal filed by the Revenue. The Grounds of appeal urged by the Revenue read as under :-

Facts relating to the issues are discussed in brief. The assessee is engaged in the business of offering consultancy services in business process outsourcing, HR outsourcing, management consulting services, payroll services etc. The Assessing Officer noticed that the assessee is running two units. One unit is located at Mumbai and the other one is located at Cochin. The Assessing Officer noticed that the assessee has claimed deduction u/s. 10AA of the Act in respect of its Cochin unit to the extent of 120.61 lakhs. Since both the units are engaged in identical businesses, the Assessing Officer wanted to examine the quantum of expenditure claimed by the assessee in both the units in order to verify as to whether there was shifting of profit from Mumbai unit to Cochin unit. Before the Assessing Officer, the assessee produced financial statements of both the units and submitted that the accounts both the units are maintained separately. It was also submitted that the expenditure incurred in the respective units are duly accounted and the common expenses are apportioned between the units in the ratio of total expenditure incurred by the units. The Assessing Officer noticed that the share capital and reserves are disclosed in Mumbai unit only and hence observed that the Mumbai unit is to be considered as Head office, wherefrom

Accordingly, the Assessing Officer reduced the profit of Cochin unit by ` 79.13 lakhs and allowed deduction u/s. 10AA of the Act. The Learned DRP, however, deleted the addition made by the Assessing Officer and hence the Revenue has filed this appeal before us.

The Learned Departmental Representative submitted that the assessee has not explained to the satisfaction of the Assessing Officer as to how expenditure booked in Cochin unit was lower than that incurred in Mumbai unit. The Learned Departmental Representative further submitted that learned DRP has given relief to the assessee by simply accepting the submissions made

The Learned Departmental Representative further submitted that the assessee itself has mentioned before learned DRP that adjustment to the extent of ` 16.68 lakhs may be required to be made to the deduction claimed u/s. 10AA of the Act, if all the expenditure is allocated in the ratio of sales. However, learned DRP has failed to sustain the disallowance at least to the extent of ` 16.68 lakhs.

On the contrary, learned AR submitted that the assessee was maintaining separate books of account for each of the units and expenditure incurred in respective units were duly accounted for there. The assessee has incurred certain common expenses in the form of salaries, guesthouse expenses and car expenses only. They have been allocated between the units in the ratio of total expenditure incurred by them. The Ld A.R submitted that the expenditure incurred in Mumbai unit is higher in tune with the higher cost of living. The Learned AR submitted that the cost of services, employee cost, space rent is higher in Mumbai when compared with Cochin. The Learned AR further submitted that the Assessing Officer has made the impugned addition by drawing inferences without bringing any supporting material on record and without critically analyzing various expenses booked by the assessee. Accordingly, learned AR submitted that the DRP has rightly deleted the addition and hence the order passed by learned DRP does not call for any interference.

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:-

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 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.

The revenue has also taken a ground that the Ld DRP should have sustained disallowance at least to the extent of Rs.16.68 lakhs. We notice that the assessee has simply raised a “without prejudice contention” on this issue and it does not mean that the assessee has accepted the addition to the extent of Rs.16.68 lakhs. Since the Ld DRP has deleted the disallowance on the basis of facts of the case, the above said plea of the revenue is liable to be rejected.

The assessee has also filed Cross objection raising certain plea. However, we notice that the provisions of sec.253(4) permits filing of cross objection only against the appeal filed challenging the order passed by Ld CIT(A), i.e., there is no provision for filing cross objection against the appeal

In the result, the appeal of the revenue and the cross objection filed by the assessee are dismissed.