2015 (4) TMI 754 - AT - Income Tax

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 costs in the two divisions for financial year ended 31.03.2002 and its working, Auditors Report comprising balance sheet of the impugned assessment year, trading and Profit & Loss Account of the sales with accounting policies, notes on accounts, entries in export and domestic divisions and seeks to reverse the impugned allocation. The Revenue supports the lower authorities orders. The case file reveals that these documents have nowhere been specifically discussed in reassessment or in the lower 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 deem it appropriate that the Assessing Officer needs to re-examine the entire issue afresh as per law. The assessee shall be at liberty to produce all its relevant details within three effective opportunities of hearing. We find that a lot of water has flown downstream since the end of the relevant assessment year 2001-02. It would be appreciated if the learned Assessing Officer passes his consequential order within a period of four months from getting copy of this order. - Matter remanded back.

Issues:
1. Allocation of software development expenses between domestic and export units.
2. Justification of apportionment ratio by the Assessing Officer.
3. Correctness of the assessment and allocation of expenses.
4. Consideration of relevant documents and details in the assessment process.
5. Need for reassessment and re-examination of the issue.

Analysis:

Issue 1: Allocation of software development expenses between domestic and export units
The appellant, a software company, challenged the apportionment of software development expenses into domestic and export divisions by the Assessing Officer. The dispute centered on whether the allocation ratio of 50:50 was appropriate. The appellant contended that the entire expenditure written off in the domestic division pertained solely to that division, while the export division had already been allocated 80.03% of salary costs. The appellant argued that the software development expenses were predominantly salary expenses of technical personnel involved in software development in earlier years, which should not be allocated ad hoc at a 50:50 ratio.

Issue 2: Justification of apportionment ratio by the Assessing Officer
The Assessing Officer based the apportionment on the number of items sold in the domestic and export markets, resulting in a 50:50 allocation of expenses. The appellant argued that the Assessing Officer's approach lacked a proper basis and that the software development costs should have been allocated based on the actual work done for each division. The appellant emphasized that the Assessing Officer's allocation method was arbitrary and did not reflect the actual nature of the expenses incurred.

Issue 3: Correctness of the assessment and allocation of expenses
The CIT(Appeals) affirmed the Assessing Officer's allocation of expenses between the domestic and export divisions. However, it was noted that after the apportionment, the Assessing Officer erroneously added the expenses back to the income of the export division, resulting in an inflated income figure. The CIT(Appeals) directed the Assessing Officer to reduce the apportioned expenses from the income of the export division to rectify the error and determine the net income accurately.

Issue 4: Consideration of relevant documents and details in the assessment process
The appellant provided various documents, including correspondence from Software Technology Parks of India, salary cost details, auditors' reports, and financial statements to support its position against the apportionment ratio. However, these documents were not specifically discussed in the reassessment or lower appellate order. The Tribunal emphasized the importance of considering all relevant details and directed the Assessing Officer to re-examine the issue based on the law and the appellant's submissions.

Issue 5: Need for reassessment and re-examination of the issue
The Tribunal concluded that the dispute was primarily factual, focusing on the justification of the software development expenses' allocation. It directed the Assessing Officer to re-examine the issue afresh, allowing the appellant to present relevant details during the process. The Tribunal highlighted the passage of time since the assessment year and instructed the Assessing Officer to issue a consequential order within four months of receiving the Tribunal's directive.

In conclusion, the appellant's appeal was allowed for statistical purposes, emphasizing the need for a thorough reassessment and re-examination of the software development expenses' allocation between the domestic and export divisions.

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