2014 (6) TMI 502 - AT - Income Tax

Disallowance of expenses - Domestic segment being common expenses in the nature of rent, power, telephone, depreciation proportionately allocated to the export segment Held that - CIT(A) has recorded the finding that export segment services rendered by the assessee were outsourced and the expenses which have not been allocated by the assessee were not incurred for the purpose of export business the findings recorded by the CIT(A) have not been controverted by the revenue - Outsource agreements were produced by assessee before the CIT(A) and perusing the same he has recorded the findings thus, there was no infirmity in the order of the CIT(A) - the allocation as done by the AO was not required to be done in respect of expenses relating to rent, power, telephone and depreciation Decided against Revenue.

Summary

Issues:
1. Disallowance of expenses in the nature of rent, power, telephone, and depreciation allocated to the export segment.
2. Deletion of adjustment of 15% mark-up on the expenses allocated to the export segment.

Analysis:

Issue 1 - Disallowance of Expenses:
The appeal was filed by the Revenue against the order of the ld. CIT(A) for the assessment year 2009-10. The Revenue contended that the ld. CIT(A) erred in deleting the disallowance of expenses amounting to Rs.28,69,439 from the domestic segment, which were common expenses proportionately allocated to the export segment based on sales ratio. The AO found that the assessee did not allocate expenses like rent, power, telephone, and depreciation to the export business. The AO added the unallocated amount to the total income of the assessee. However, the ld. CIT(A) deleted this addition based on the submission that the expenses were not related to the export segment as those services were outsourced to third-party agencies. The ld. CIT(A) found that the expenses in question were used for the domestic business and not for the export segment. The Tribunal upheld the ld. CIT(A)'s decision, stating that the expenses were not required to be allocated to the export segment as they were not incurred for that purpose.

Issue 2 - Deletion of 15% Mark-up Adjustment:
The Revenue also challenged the deletion of the adjustment of a 15% mark-up on the expenses allocated to the export segment. The AO had made this adjustment, but the ld. CIT(A) deleted it along with the disallowance of expenses. The Tribunal noted that the export segment services were outsourced by the assessee to third-party agencies. The expenses that were not allocated by the assessee were found to be unrelated to the export business. The ld. CIT(A) provided relief to the assessee based on these submissions. The Tribunal observed that the findings of the ld. CIT(A) regarding the outsourcing of services and the nature of expenses were not contested by the Revenue. Therefore, the Tribunal dismissed the appeal filed by the Revenue, upholding the decision of the ld. CIT(A) to delete the 15% mark-up adjustment.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the decision of the ld. CIT(A) to delete the disallowance of expenses and the adjustment of a 15% mark-up on the expenses allocated to the export segment.