2018 (6) TMI 1318 - AT - Income Tax

Allocating indirect expenses against commission income from other group companies based upon sales made by other group companies in India - Held that - Allocation key should be accepted for determination of indirect expenses to be deducted from the gross income to arrive at the net income. The assessee has stated that the allocation of indirect expenses should be made based upon commission income. The assessee has also relied upon the cost accounting standard 3 issued by ICWA and emphatically relied upon on para No. 5 of that standard. The assessee has relying on the old cost accounting standard which was revised in 2011, and further revised in 2015. Assessing Officer has without assigning the detailed reason rejected the contention of the assessee and referred straightway for the guidance of the Addl Commissioner. In fact the assessee took an additional ground before the coordinate bench who allowed grant of relief by allowing expenses against commission income earned from group companies and other income earned by its branch office. ITAT merely accepted the claim of the assessee in principle that gross income cannot subjected to tax and assessee must be granted deduction of the expenses from the gross income and tax only net income. To determine the net income the issue was set aside to the file of the ld AO at the request of both the parties which is evident from the order of the coordinate bench. In the interest of justice, we set aside the issue of determination of indirect expenditure to be reduced from gross total income back to the file of the AO with a direction to him to first examine the claim of the assessee, give reasons why the same is not proper and then if he is not satisfied with the explanation of the assessee give his reasons for adopting an alternative method and after giving opportunity of hearing to the assessee decide the issue afresh. Assessee is also directed to substantiate its claim with proper reasoning. Therefore, ground No. 1 of the appeal of the assessee is rejected for the reasons given above and ground No. 2 of the appeal is allowed with above direction.

Issues Involved:

1. Whether the CIT(A) erred in not giving effect to the directions of the ITAT in toto.
2. Whether the CIT(A) erred in upholding the method adopted by the ADIT for allocating indirect expenses against commission income from other group companies.

Detailed Analysis:

1. Whether the CIT(A) erred in not giving effect to the directions of the ITAT in toto:

The appellant's primary grievance is that the CIT(A) did not fully comply with the directions issued by the ITAT in its previous order. The ITAT had directed the AO to allow deductions for expenses incurred in earning commission from group companies and other income, which were taxed on a gross basis. The ITAT had also instructed that if the deductions resulted in a net income lower than the returned income, the returned income should be assessed. The appellant argued that the CIT(A) failed to implement these directions correctly.

The ITAT reviewed the previous order and found that it had indeed directed the AO to verify the correctness of the appellant's claims and allow deductions for expenses related to earning commission income. The ITAT noted that the CIT(A) had not adhered to this directive, leading to the appellant's grievance.

2. Whether the CIT(A) erred in upholding the method adopted by the ADIT for allocating indirect expenses against commission income from other group companies:

The appellant contended that the CIT(A) erred in upholding the method adopted by the ADIT for allocating indirect expenses. The ADIT had allocated indirect expenses based on sales made by other group companies in India, which the appellant argued was incorrect. The appellant claimed that the indirect expenses should be allocated based on the commission income earned from group companies.

The ITAT examined the method adopted by the ADIT and found that the ADIT had calculated the expenses allocable to the commission income as ?18,77,818 for the commission income of ?52,16,507. The appellant argued that the commission income should be reduced by indirect expenses of ?48,92,399 and direct expenses of ?14,17,132, totaling ?63,09,531.

The ITAT noted that the CIT(A) had rejected the appellant's basis for allocation of indirect expenses against commission income. The CIT(A) held that the ITAT had not accepted the appellant's computation in its entirety and had merely set aside the issue for verification by the AO. The ITAT agreed with the CIT(A) that the correctness of the appellant's claim needed to be verified and that the allocation key adopted by the ADIT was based on sales to group companies, which was 16.62%.

The ITAT found that the ADIT had given the appellant an opportunity to present its case, but the appellant had reiterated that the ITAT had accepted its working method. The ITAT clarified that it had not accepted the appellant's methodology and had only set aside the issue for verification.

The ITAT directed the AO to examine the appellant's claim afresh, provide reasons for rejecting the appellant's method if not found proper, and adopt an alternative method with detailed reasoning. The AO was instructed to give the appellant an opportunity of hearing and decide the issue afresh. The appellant was also directed to substantiate its claim with proper reasoning.

Conclusion:

The ITAT concluded that the CIT(A) had not fully complied with its previous directions and that the method adopted by the ADIT for allocating indirect expenses needed to be re-examined. The ITAT set aside the issue of determining indirect expenses to be deducted from gross income back to the AO for fresh adjudication, with specific instructions to provide detailed reasoning and an opportunity of hearing to the appellant. The appeal was partly allowed for statistical purposes.

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