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M/s Eco Tech Software Pvt. Ltd. Versus The Deputy Commissioner of Income Tax

2015 (4) TMI 754 - ITAT CHENNAI

Apportionment of software development expenses in ad hoc manner in export and domestic sales - Held that:- The assessee challenges apportionment of the impugned software development expenditure into domestic and export divisions @ 50:50 each by the Assessing Officer and affirmed in the lower appellate order. It files a correspondence from Software Technology Parks of India dated 29.03.2000 granting 100% export oriented permission under STP Scheme, its letter dated 16.12.2008, details of salary c .....

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appellate order.

The dispute before us is essentially a factual one, i.e. whether or not the impugned allocation of software development expenditure in export and domestic sales division is justified. The Assessing Officer has based his findings on the sales quantities of the software to observe that the very software has been sold in domestic and export market. The assessee’s books treating the impugned expenditure only for domestic division have nowhere been rejected. Therefore, we .....

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- ITA No.3094/Mds/2014 - Dated:- 5-3-2015 - Shri A. Mohan Alankamony And shri S.S. Godara JJ For the Appellant : Shri S. Raghunathan, Advocate &Shri S. Sankara Narayanan, Advocate For the Respondent : Shri P. Radhakrishnan, JCIT ORDER Per S.S. Godara, JUDICIAL MEMBER: This assessee s appeal for assessment year 2001-02 arises from order of the Commissioner of Income Tax (Appeals)- II, Chennai, dated 12.08.2014 passed in ITA No.944/2013-14 affirming the A.O. s action apportioning software dev .....

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reasons to believe that the assessee s expenditure written off had to be apportioned between its export and domestic units and failure thereof resulted in escapement of income from being assessed. This culminated in a Section 148 notice dated 31.03.2008. The assessee reiterated with the income already returned. 3. In consequential proceedings, the Assessing Officer noticed the assessee to be having domestic as well as export sales. It was found to have written off the impugned software developme .....

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said expenditure had to be allocated between these two divisions. The number of items sold in domestic market and exported was taken for equal apportionment of the expenditure in 50:50 ratio @ 1,23,710/- each. The assessee s total income stood assessed as 4,19,920/-. 4. The CIT(Appeals) affirmed the Assessing Officer s action in allocating the impugned expenditure as under:- The assessee before the undersigned submitted that the entire expenditure of ₹ 2,47,420/- written off in the P& .....

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he Appellant') during AY 200.1-02 in its return of income declared gross total income of 4,80,856/" after claiming deduction of lOB unit at ₹ 237,134/- and thereby determined the taxable income at ₹ 243,722/. The assessment was re-opened under 147 for the relevant year and during the assessment proceeding, AO taken one line item expenditure towards Software Development written off of ₹ 247,420/- considered in Export Division, and reallocated 50/50 basic to domestic div .....

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ts mostly the Salary expenses of the technical people involved with the development of software in the earlier years, which has been charged to profit and loss account on deferred basis amounting to (one seventh in the current year ₹ 245,462/-). The Appellant submits that the work carried out for domestic division during the year mostly from these base work created in the earlier year. (the assessing officer were to conclude that the amount charged in the current year should be allocated b .....

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as to how the Appellant has treated the total salary cost in the current year. (Amount in Indian Rupees) Description Domestic Division Export Division Total Software Development Turnover 4,021,770 5,554,030 9,575,800 Expenses towards software development salary paid Refer Schedule14 546,474 2,190,220 2,736,694 Expenses towards Software Development -Written off 245,462 - 245,462 From the above table it am be seen that the Appellant has allocated 80.03% of the Salary cost to export division. With .....

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g sought to disallow expenditure towards software development written off of ₹ 123,710/· allocated to domestic unit. While working out the revised assessed income, AO instead of reducing ₹ 123, 71 0/-, erroneously added back the said amount which has resulted in double adjustment. The actual assessed income and the assessed income worked out by Assessing Officer is given below:- Description Actual income to be assessed, rectifying the above Assessed income worked by AO Domesti .....

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00 x 3,197,578 = rs 308,357/- 5,554,030 **10B Unit profit actual Profit of the EOU x Export Turnover of undertaking (Amt.realized in Convertible Foreign currency Total Turnover of the undertaking = 288,180 x 3,197,578 = 1,65,911/- 5,554,030 As detailed above, the assessed income has been overstated to the tune of 1,04,974/- this may be taken care while passing order by our honour. The appellant omitted to include the above ground while filing the above appeal. Therefore the appellant request you .....

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rightly apportioned the expenses. The Assessing Officer's action is justified and confirmed. However, after apportioning the above development expenses of ₹ 2,47,420/-, equally among the domestic and export divisions, the Assessing Officer should reduce the so-apportioned expenses from the income of the export division. Instead, the Assessing Officer erroneously added iL to the income of the export division, which in turn, resulted in inflation of the income of the export division. Th .....

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/s.10B Profit of the EOU x Export Turnover Total Turnover i.e. 2,88,180 x 31,97,578 = 1,65,911/- 55,54,030 Net income from export unit after 10B deduction: ₹ 1,22,268/- Therefore, the Assessing Officer is directed to determine the net income from the export division (before allowing deduction u/s.l0B) at ₹ 2,88,180/- as against ₹ 5,33,600/- determined by him in his order. Similarly, the allowable deduction u/s.l0B is to be determined at R.1,65,912j-. as against ₹ 3,08,537 .....

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