Contact us   Feedback   Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2016 (4) TMI 1054 - DELHI HIGH COURT

2016 (4) TMI 1054 - DELHI HIGH COURT - [2016] 384 ITR 102 - Computing the income received or brought into India in convertible foreign exchange for the purposes of deduction under Section 80-O - whether the conclusion of the ITAT with regard to the apportionment of expenses to determine the Foreign Income for the purposes of deduction under Section 80-O of the Act, is inconsistent with the evidence on record? - Held that:- Although, the ITAT ought to have discussed the method of apportionment as .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

AO to compute Foreign Income to be reasonable and scientific and we find no infirmity with this view. - Decided in favour of the Revenue and against the Assessee. - ITA 264/2002, ITA 415/2004 - Dated:- 26-4-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr Piyush Kaushik, Advocate For the Respondent : Mr Dileep Shivpuri, Senior Standing Counsel with Mr Sanjay Kumar, Junior Standing Counsel JUDGMENT Vibhu Bakhru, J. 1. The present appeals have been preferred by M/s Continental Ca .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

TA 4169/Del/2000 was filed by the Revenue against an order dated 31st July, 2000 passed by CIT(A) for AY 1997-98. 2. The controversy involved in both the appeals relates to the method of computing the income received or brought into India in convertible foreign exchange for the purposes of deduction under Section 80-O of the Act. 3. The Assessee is a partnership firm and involved in the business of clearing and forwarding of goods for import and export, in India. It is asserted that in 1988, the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

pectively. The Assessee filed its return of income for AY 1993-94 on 28th October, 1993, inter alia, claiming a deduction of ₹ 78,05,005/-, being 50% of the gross commission from foreign enterprises, under Section 80-O of the Act. The return filed by the Assessee was picked up for scrutiny. During the assessment proceedings, the Assessee claimed that it was entitled to deduction of 50% of the gross commission from foreign enterprises under Section 80-O of the Act. However, without prejudic .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

convertible foreign exchange (hereafter referred to as 'the Foreign Income') as a deduction under Section 80-O of the Act. 5. The Assessee computed the Foreign Income at ₹ 1,30,12,924/- in the following manner: the Assessee first computed the average profit margin on its domestic receipts for the AYs 1978-79 to 1987-88 - a period of 10 years during which the Assessee did not have any commission from foreign enterprise - at 11.5%. Accordingly, the Assessee computed the net profits .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

gin on its consolidated income. In other words, the AO applied the ratio of assessed income to gross receipts on the commission received and computed the deduction under Section 80-O at ₹ 32,57,779/- for AY 1993-94. 7. For the AY 1997-98, the Assessee filed its return claiming a deduction of a sum of ₹ 2,00,98,400/- under Section 80-O of the Act. The Assessee had computed the aforesaid deduction by deducting 80% of the expenses relating to postage, telegram, telephone and fax etc. an .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

₹ 7,19,42,363/-, out of which commission from foreign enterprises amounted to ₹ 4,19,66,477/- and the total expenses were assessed at ₹ 3,16,25,140/-; the AO computed the deduction under Section 80-O of the Act as under: He computed the expenses attributable to foreign income at ₹ 1,84,48,041/- on a proportionate basis to the gross income of the Assessee [(Rs. 3,16,25,140 /7,19,42,363) x 4,19,66,477/-]. He then calculated the Foreign Income at ₹ 2,34,18,436/- by de .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

antum of deduction under Section 80-O of the Act as computed by the AO for AY 1993-94 and upheld the AO's conclusion that the average rate of net profit for a period of 10 years provided no basis for determining the Foreign Income. The CIT(A) concurred with the AO that since, the Assessee had not maintained separate books of accounts, the most scientific method for determining Foreign Income would be by allocating expenses between the domestic income and income from foreign enterprises on a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ses being ₹ 1,04,27,180/- (that is, after deducting ₹ 3,01,55,138/- from the total expenses of ₹ 4,05,82,318/-) were held to be attributable to earning commission from foreign enterprises in convertible foreign exchange. Accordingly, the Foreign Income for AY 1995-96 was computed at ₹ 1,61,50,615/- (that is, gross foreign commission of ₹ 2,65,77,795/- less ₹ 1,04,27,180/-). This method was also accepted by the CIT(A) for AY 1996-97. 10. The CIT(A), by an order .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

39;s plea that only 11.5% of domestic receipts could be considered as expenditure allocable to foreign commission receipts as being not acceptable. The ITAT further held that the formula adopted by the AO in estimating the Foreign Income was reasonable and scientific and concurred with the AO's estimation of Foreign Income for the purposes of deduction under Section 80-O of the Act. Following the aforesaid decision for AY 1993-94, the ITAT allowed the Revenue's appeal for AY 1997-98 by a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

80-O of the Income-tax Act, 1961, is bad in law, being wholly inconsistent with the evidence on record?" 13. We are informed that the Revenue also filed appeals before the ITAT for AY 1995-96 and 1996-97 which have since been disposed of by the ITAT by directing the deduction under section 80-O of the Act be computed in accordance with the decision of this court in the present appeals. Submissions 14. Mr Piyush Kaushik, learned counsel appearing for the Assessee contended that the AO and th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ontended that in cases where there is no statutory or fixed formula for allocation of expenditure between exempt and non-exempt income, the method of allocation of expenditure should be one which is consistently accepted by both the parties - the assessees and the Revenue - in the past; the method should be reasonable; and one which does not distort profits. 15. Next, he referred to the written submissions filed before the ITAT and contended that if the method adopted by the AO for computation o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

AO could not reject the method adopted by the Assessee unless he recorded a finding that the same has resulted in distortion of profits. He submitted that since no such findings had been recorded, the ITAT's decision was erroneous. Mr Kaushik also relied upon the decision of the Supreme Court in CIT v. Realest Builders & Services Ltd.: (2008) 307 ITR 202 SC and contended that it was incumbent upon the AO to give facts and figures to demonstrate that the method of accounting followed by t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

.: 339 ITR 382 SC in support of his contention that the method of accounting adopted by the Assessee could not be changed unless the AO finds the same to distort profits. 17. Lastly, Mr Kaushik referred to the decision of the Supreme Court in Lalchand Bhagat Ambica Ram v. CIT: 37 ITR 288 (SC) and of the Madras High Court in CIT, Chennai v. M/s Matrix Intel Pvt. Ltd. Chennai: 2006-TIOL-389-HC-MAD-IT and contended that it was incumbent upon the ITAT to consider all the facts, both for and against .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

with the evidence on record. The evidence in question, which is relied upon by the Assessee is the average profit margin of 11.5% from Assessee's domestic business determined by averaging the profit margins for a period of 10 years prior to commencement of the new line of business. It was urged that on the aforesaid basis, the expenditure on domestic business could be reasonably estimated at 88.5% of domestic receipts. And, if the expenditure so estimated was reduced from the total expenditu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

business has been calculated by averaging the profit margin for AYs 1978-79 to 1987- 88, that is, during the period when the Assessee did not carry out the business resulting in Foreign Income. Plainly, the computation of this profit margin of 11.5% takes into account all costs - including fixed costs and variable costs - which constitute 88.5% of the gross domestic receipts. Now, if the method as canvassed by the Assessee is accepted, it would mean that all fixed costs would be allocated to th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ith the volume of business carried on by the Assessee. Variable costs are typically costs that vary in direct proportion to the volume of business carried out by the Assessee. These costs typically include costs such as costs for direct raw material that is incorporated in or consumed to produce the final product. Semivariable costs are such costs which have elements of both fixed costs and variable costs. Such costs would vary with the volume of business but not in direct proportion. Typically, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

To illustrate the above point, let us consider a hypothetical case of an assessee who s revenue receipts from business (Existing Business) in a particular year is ₹ 1,00,000/-. He incurs office rentals and establishment costs of ₹ 60,000/-and other variable expenses of ₹ 20,000/-; thus declaring a profit of 20,000/- (translating to a net profit margin of 20%). In the next year, he expands his business by commencing a new activity ( New Business ) from the same establishment wh .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

prior to commencement of New Business, the entire office rentals and establishment costs of ₹ 60,000/- would be allocated to the Existing Business even though the same establishment was used for carrying on the New Business. The result would be that while the profit margin of the Existing Business would continue to be assumed at 20% and the profit margin of the New Business would be reflected at 80%. 22. During the course of hearing, we had put the above fallacy in the method adopted by th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

portionate basis - was in principle unfair or flawed. He merely contended that the same had resulted in the profit margins of the domestic business being computed at very high rates (41.73% for AY 1993-94 and 56.32% for AY 1997-98). This objection, in our view, is clearly without any merit as it fails to consider the result on the profit margin of foreign business. If the methodology as adopted by the Assessee is accepted, then the profit margin of the domestic business would remain 11.5% but th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ing agency with branches in different parts of the country and the receipt of the commercial information regarding probable imports are merely incidental which are transmitted to foreign principals interested therein. . Thus, ceteris paribus, the profit margins of the domestic business would clearly be expected to increase with the incremental revenue's being generated by way of commission from the existing fixed establishment. 24. It is also relevant to note that the average profit margin o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ct and non-exempt income of the Assessee. In that case, the ITAT had upheld the allocation of common expenses on the basis of headcount of employees, which had been followed on a consistent basis. In that case, the Assessee had recorded common expenses separately for various costs centres and the same were apportioned in the ratio of head counts of the exempt and non-exempt units. This Court found that the method for apportioning common expenses between exempt and non-exempt units was not unreas .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version