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M/s Continental Carriers Versus Commissioner of Income Tax, New Delhi

2016 (4) TMI 1054 - DELHI HIGH COURT

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 urged by the Assessee and articulated its reasons for rejec .....

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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 Carriers (hereafter the Assessee ) under Section 260A of the I .....

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ated 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 Assessee commenced a new business activity which resulted i .....

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93-94 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 prejudice to the said contention, the Assessee also computed its net .....

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;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 attributable to domestic receipts at ₹ 26,92,496/- (be .....

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ed 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. and 10% of the expenses relating to salaries from the gross co .....

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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 deducting the expenses attributable to receipts from foreign e .....

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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 proportionate basis. 9. However, for AY 1995-96, the CIT(A) .....

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8377; 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 dated 31st July, 2000 followed the earlier decisions for AY .....

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idered 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 an order dated 10th February, 2004. 12. Aggrieved by the deci .....

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y 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 the ITAT had grossly erred in not considering the submissions .....

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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 of Foreign Income is accepted, it would imply that Assessee&# .....

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s 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 the Assessee had resulted in underestimation of profits. He a .....

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od 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 the Assessee, before rejecting the contentions or material s .....

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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 expenditure incurred by the Assessee during the relevant previous yea .....

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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 the domestic business and no part of it would be allocated tow .....

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ble 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, such costs may be costs such as electricity charges which h .....

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al 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 which results in additional revenues of ₹ 50,000/- for w .....

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tals 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 the Assessee to Mr Kaushik and had also adjourned the hearing .....

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ely 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 that of foreign business would be 83.36% [(Rs.1,30,12,925/1,56 .....

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nd 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 of 11.5% of domestic business, which is the bedrock of the As .....

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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 unreasonable and had been followed consistently by the Assessee in .....

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