TMI Blog2016 (4) TMI 1054X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Income Tax Act, 1961 (hereafter the Act ) impugning orders dated 24th April, 2002 and 10th February, 2004 passed by the Income Tax Appellate Tribunal (hereafter ITAT ) in ITA Nos. 5890/Del/1996 and 4169/Del/2000 respectively. Whereas ITA No. 5890/Del/1996 was preferred by the Assessee against an order dated 23rd September, 1996 passed by the Commissioner of Income Tax Act (Appeals) [ hereafter CIT(A) ] for Assessment Year (AY) 1993-94, ITA 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted net profit of ₹ 1,57,05,421/- as per its Profit and Loss Account to compute its Foreign Income as ₹ 1,30,12,925/-. 6. The AO rejected the Assessee s method of computing the Foreign Income for deduction under Section 80-O of the Act and determined the Foreign Income by applying the Assessee s profit margin 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. and 10% of the expenses relating to salaries from the gross commission received from foreign enterprises to compute its Foreign Income. 50% of the Foreign Income so computed was claimed as deduction under Section 80-O of the Act. The AO rejected the aforesaid computation and computed the deduction under Section 80-O by applying the same formula as adopted by the AO while com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 AYs 1995-96 and 1996-97 and, computed the deduction under Section 80-O of the Act at ₹ 1,84,34,998/- for AY 1997-98. 11. Aggrieved by the order dated 23rd September, 1996 passed by the CIT(A) for AY 1993-94, the Assessee preferred an appeal before the ITAT. The Revenue, on the other hand, appealed against the CIT(A)'s order dated 31st July, 2000 for AY 1997-98. By an order dated 24th April, 2002, the ITAT rejected the Assessee'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&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to the decision of the Supreme Court in CIT v. Bilahari Investment P. Ltd.:(2008) 299 ITR 1 SC in support of his contention that the 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 the Assessee had resulted in underestimation of profits. He also referred to the decision of the Supreme Court in CIT v. McMillan Co.: 33 ITR 182 SC to contend that the method of accounting adopted by the Assessee must be scrutinised carefully and such power should be exercised reasonably and judicially. 16. Next, Mr Kaushik referred to the decision of the Supreme Court in CIT v. Woodward Governor India P. Ltd.: 312 ITR 254 SC and the decision of this Court in CIT v. Jagatjit Industries Ltd.: 339 ITR 382 SC in support of his contention that the method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ean that all fixed costs would be allocated to the domestic business and no part of it would be allocated towards earning Foreign Income. 20. In Cost Accountancy terms, all costs incurred by the Assessee for carrying on its business can be classified into Fixed Costs, Semi-variable Costs and Variable Costs. Fixed Costs are such costs which have to be incurred by the Assessee irrespective of whether the Assessee earns any income or not. Typically, such costs include costs for basic infrastructure, office space, etc. and such costs do not vary with 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, such costs may be costs such as electricity charges which have a fixed component of line charges and variable per unit cost for electricity consume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... air 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 that of foreign business would be 83.36% [(Rs.1,30,12,925/1,56,10,011)x100] for AY 1993-94 and 87.86% [(Rs.3,68,69978/4,17,66,477)x100] for AY 1997- 98. It is the Assessee s case before the CIT(A) for AY 1995-96 that it did not incur any specific expenditure for earning the commission from foreign principals in respect of the said consolidation business. The Assessee also contended that Assessee has a running business establishment all over the country in regard to its original business i.e. clearing 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 pari ..... X X X X Extracts X X X X X X X X Extracts X X X X
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