2012 (11) TMI 89 - AT - Income Tax

Addition towards profit attributable to the expenditure incurred on representatives of Australian Educational Institutions for visiting India for the purpose of enrolment of students - held that - it will be appropriate to assume that the expenditure has not been incurred by the assessee in this year also looking to the factual position that the expenditure was incurred by the institutions last year. Therefore, it is held that there is no evidence on record to come to a conclusion that assessee incurred the expenditure in respect of stay of representatives of Australian Educational Institutions in India. Accordingly, it is held that no income is attributable to the Indian offices on this ground. - Decided in favor of assessee. Attribution of head office expenses to the LO computation of profit on cost plus basis - Allowance of expenditure incurred by Head office in relation to offices in India - held that - The income is being offered for tax on cost plus basis, therefore, the general and administrative expenditure incurred by the head office for running India offices has to be considered for working out the cost base. The fact of the matter is that the Indian offices have not incurred any expenditure. If any income accrues on account of expenditure incurred by the head office, it will be the income of the head office and not Indian offices. At the same time, if any expenditure is attributed to Indian offices deduction of the expenditure will have to be allowed. Thus seen from any angle the revenue does not have any case in this matter. - Decided in favor of assessee.

Summary

Issues Involved:
1. Attribution of expenses of representatives of Australian Educational Institutions to the assessee.
2. Attribution of head office expenses to the Liaison Office (LO) and computing profit thereon on a cost-plus basis.
3. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Attribution of Expenses of Representatives of Australian Educational Institutions to the Assessee:
The primary issue was whether the expenses incurred by representatives of Australian Educational Institutions visiting India for student enrolment should be attributed to the assessee. The Assessing Officer (AO) estimated that 175 representatives visited India and calculated the expenses at Rs. 4,79,25,675/-, which was added to the LO's expenditure to compute the profit.

The assessee argued that these expenses were borne by the Australian universities themselves, as evidenced in the assessment year 2006-07, where the Commissioner of Income Tax (Appeals) [CIT(A)] accepted certificates from the universities confirming they bore the costs. The Dispute Resolution Panel (DRP) upheld the AO's estimation due to lack of evidence from the assessee for the current year.

The Tribunal noted that the assessee had not provided evidence for the current year but emphasized that the reasonable assumption, based on the previous year's findings, was that the expenses were borne by the universities. The Tribunal concluded there was no evidence to suggest the assessee incurred these expenses in the current year. Consequently, it was held that no income is attributable to the Indian offices on this ground, and Ground No. 1 was allowed.

2. Attribution of Head Office Expenses to the LO and Computing Profit Thereon on a Cost-Plus Basis:
The second issue concerned the attribution of head office expenses to the LO by taking an analogy from Section 44C of the Income Tax Act. The AO included Rs. 10,21,016/- as head office expenses in the cost base for computing profit.

The assessee contended that it did not claim any deduction for head office expenses and relied on the CIT(A)'s findings from the previous year, which stated that the assessee could only be taxed on income derived from activities in India, not for services rendered by the head office in Australia. The Tribunal agreed, noting that if any income accrues from head office expenditure, it would be the income of the head office, not the Indian offices. Thus, the revenue's case was not justified, and Ground No. 2 was allowed.

3. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:
Ground No. 3 pertained to the initiation of penalty proceedings under Section 271(1)(c). The Tribunal noted that this ground was not appealable before them and had not been argued by the assessee's counsel. Consequently, this ground was dismissed.

Conclusion:
The Tribunal allowed the appeal of the assessee partly. It ruled in favor of the assessee on both the primary issues of attributing expenses of representatives of Australian Educational Institutions and head office expenses to the LO, thus excluding these from the cost base for computing profit. The ground related to penalty proceedings was dismissed as it was not appealable.