2016 (4) TMI 1054 - HC - Income Tax

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 rejecting the same, we are not inclined to remand the matter as the method of apportionment of expenses between domestic business and income from foreign commission is clearly unacceptable in the given facts of the case. Further, the ITAT has concurred with the view of the AO that the method provided by the Assessee was not acceptable as the expenses would vary from year to year. Finally, the ITAT had accepted the methodology adopted by the AO to compute Foreign Income to be reasonable and scientific and we find no infirmity with this view. - Decided in favour of the Revenue and against the Assessee.

Issues Involved:
1. Method of computing income eligible for deduction under Section 80-O of the Income Tax Act.
2. Allocation of expenses between domestic and foreign income.
3. Consistency and fairness of the method used for apportionment of expenses.
4. Acceptance of the Assessee's method of computation by the authorities.

Issue-wise Detailed Analysis:

1. Method of computing income eligible for deduction under Section 80-O of the Income Tax Act:
The primary issue in both appeals was 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 Income Tax Act. The Assessee claimed deductions based on the gross commission earned from foreign enterprises, while the Assessing Officer (AO) computed the deduction based on net income, applying a proportionate allocation of expenses between domestic and foreign income.

2. Allocation of expenses between domestic and foreign income:
The Assessee computed the Foreign Income by first calculating the average profit margin on its domestic receipts over a ten-year period (11.5%) and then deducting the net profits from domestic receipts from the consolidated net profit. The AO, however, rejected this method, instead applying the ratio of assessed income to gross receipts on the commission received. The AO allocated expenses on a proportionate basis, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT).

3. Consistency and fairness of the method used for apportionment of expenses:
The Assessee argued that the method adopted by the AO was inconsistent and resulted in distorted profit margins for the domestic business. The Assessee cited various judicial precedents to support the contention that the method of allocation should be reasonable and consistently accepted by both parties. However, the court found that the Assessee's method allocated all fixed costs to the domestic business and only marginal variable costs to the foreign business, which was deemed unreasonable and resulted in distorted apportionment.

4. Acceptance of the Assessee's method of computation by the authorities:
The CIT(A) and ITAT both rejected the Assessee's method of computation. The CIT(A) accepted the AO's proportionate allocation method for AY 1993-94 but accepted the Assessee's method for AYs 1995-96 and 1996-97. The ITAT upheld the AO's method as reasonable and scientific, rejecting the Assessee's plea for AY 1993-94 and allowing the Revenue's appeal for AY 1997-98.

Reasoning and Conclusion:
The court concluded that the Assessee's method of apportioning expenses resulted in a distorted allocation of net profits between domestic and foreign income. The court found the AO's method of proportionate allocation to be reasonable and scientific. The court noted that the Assessee's method allocated all fixed costs to the domestic business, which was not acceptable. The court also observed that the Assessee had not followed a consistent method for apportionment of expenses in different assessment years. Consequently, the court upheld the ITAT's decision and dismissed the appeals, answering the question of law in favor of the Revenue and against the Assessee.

Final Judgment:
The appeals were dismissed, and the court upheld the ITAT's decision, finding no infirmity in the AO's method of computing the deduction under Section 80-O of the Act. The parties were left to bear their own costs.

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