2025 (7) TMI 1423 - AT - Income Tax

Deduction u/s 80IC and 10AA - allocation of indirect expenses of the Head Office - HELD THAT - We find that these issues are squarely covered by the decisions of assessee s own case 2023 (8) TMI 1649 - ITAT DELHI delete the disallowances made u/s 80IC and 10AA of the Act respectively by the AO and sustained by the Ld. CIT(A) Disallowance of foreign travelling expenses and Club expenses- AO has disallowed certain percentage of these expenses by recording the reason that the assessee failed to demonstrate that these expenses have been wholly and exclusively incurred for business purposes only - HELD THAT - Finding of the AO was not specifically controverted with the help of documentary evidences during the appellate proceedings either before the CIT(A) or us. AO has made these disallowances on adhoc basis. Keeping in view the facts in entirety and past trend of disallowances made in this regard as highlighted by the CIT(A) we restrict the disallowances @ 10% and 20% of foreign travelling and club expenses instead of 15% and 33.33% upheld by the CIT(A). The respective grounds raised in this regard are thus stand partly allowed as above. The assessee gets consequential relief. Disallowance of deduction u/s 10AA of the Act arising from the scrap sale - AO disallowed it on the reasoning that the scrap sale was domestic sale and it had no relation with the export sale eligible for deduction u/s 10AA - HELD THAT - CIT(A) following the decision of the ITAT in the case of Wipro Ltd. 2012 (7) TMI 432 - ITAT HYDERABAD deleted the disallowance in this regard. .AR placing reliance on the decisions of the coordinate bench in the case of EXL Service. Com India Pvt. Ltd. 2014 (11) TMI 1088 - ITAT DELHI and Wipro Ltd. 2012 (7) TMI 432 - ITAT HYDERABAD prayed for relief. We do not find any infirmity on this issue in the order of the Ld. CIT(A). Disallowance u/s 14A - CIT(A) held assessee had surplus fund to make investments - HELD THAT - We find that this issue is squarely covered by the decision of the Co-ordinate Bench in assessee s own case 2023 (8) TMI 1649 - ITAT DELHI . Further we do not find any infirmity on this issue in the order of the. CIT(A). Therefore the ground numbered 4 raised by the Revenue fails accordingly. Disallowance of depreciation on software license - HELD THAT - AR submitted that this issue was squarely covered by the decision of Amway India Enterprises 2008 (2) TMI 454 - ITAT DELHI-C which had been duly followed by the Ld. CIT(A) while allowing the relief on this score. We do not find any infirmity on this issue in the order of the Ld. CIT(A). Therefore the ground numbered 5 raised by the Revenue fails accordingly.

Summary

ISSUES:

1. Whether deduction under section 80IC of the Income Tax Act, 1961 can be allowed without allocating head office indirect expenses to eligible units.
2. Whether deduction under section 10AA of the Income Tax Act, 1961 requires allocation of head office expenses to the SEZ unit claiming exemption.
3. Whether disallowance under section 14A of the Income Tax Act, 1961 is justified in respect of expenses related to exempt income.
4. Whether foreign travelling expenses can be disallowed on an ad-hoc basis for not being wholly and exclusively incurred for business purposes.
5. Whether club membership expenses can be disallowed on an ad-hoc basis as personal expenses.
6. Whether depreciation on software license is allowable for deduction.
7. Whether income from sale of scrap by SEZ unit is eligible for deduction under section 10AA.
8. Whether inter-unit transfer pricing impacts the allowable deduction under sections 80IC and 10AA.

RULINGS / HOLDINGS:

1. Deduction under section 80IC cannot be restricted by disallowing allocation of head office indirect expenses to eligible units when such expenses are incurred for overall business growth; indirect expenses are not to be considered in computing profits "derived from industrial undertaking."
2. Deduction under section 10AA requires allocation of head office expenses to the SEZ unit on a turnover basis; failure to allocate results in distortion of profits and excess claim of deduction is disallowed.
3. Disallowance under section 14A was upheld only to the extent justified; however, in the present appeals, disallowances were deleted or reduced following coordinate bench decisions.
4. Foreign travelling expenses disallowance made on ad-hoc basis was restricted to 10% instead of 15% as upheld by CIT(A), recognizing lack of specific evidence to fully disallow.
5. Club expenses disallowance on ad-hoc basis was restricted to 20% instead of 33.33% as upheld by CIT(A), granting partial relief due to absence of conclusive proof.
6. Depreciation on software license was allowed as per the decision of the Special Bench of the ITAT, and no infirmity was found in the appellate order allowing such depreciation.
7. Income from sale of scrap by SEZ unit is not eligible for deduction under section 10AA where scrap is sold locally and not used in export activity; excess deduction claimed on this account was disallowed.
8. Inter-unit transfer pricing adjustments must be made on the basis of market rates; netting of higher and lower transfer prices is impermissible, and undue benefit arising from transfer at less than market price is added back to income.

RATIONALE:

1. The Court applied statutory provisions of sections 80IC, 10AA, 14A, and relevant rules under the Income Tax Act, 1961, interpreting "profits derived from industrial undertaking" to exclude indirect and head office expenses not directly attributable to the eligible units.
2. Precedents from coordinate benches and higher authorities, including decisions of the ITAT and Special Bench, were relied upon to determine the correct approach to allocation of expenses and allow deductions accordingly.
3. The Court recognized that head office expenses incurred for overall corporate management and growth, including salaries of CMD/MD and directors, depreciation, and exchange differences, must be apportioned fairly among units claiming deductions to avoid distortion of taxable income.
4. The Court distinguished factual differences from earlier High Court decisions, emphasizing that some prior rulings were fact-specific and did not establish binding legal propositions on allocation of head office expenses.
5. Ad-hoc disallowances without concrete evidence were moderated by the Court to more reasonable percentages, reflecting the need for a balanced approach when business and personal expenses are intertwined.
6. The Court followed the principle that income eligible for deduction under section 10AA must be directly connected to export activities of the SEZ unit, excluding local sales of scrap which do not qualify.
7. The Court held that inter-unit transfer pricing must reflect market realities and that the onus lies on the Assessing Officer to establish market rates; failure to do so results in acceptance of the assessee's valuation.
8. The Court dismissed Revenue appeals where tax effect was below the prescribed threshold as per CBDT Circular No.09/2024 dated 17.09.2024, reinforcing procedural compliance in appeal maintainability.