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TMI Blog2016 (4) TMI 1054X X X X Extracts X X X X X X X X Extracts X X X X ..... relates to 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 Act. 3. The Assessee is a partnership firm and involved in the business of clearing and forwarding of goods for import and export, in India. It is asserted that in 1988, the Assessee commenced a new business activity which resulted in Assessee earning income by way of commission from certain foreign enterprises. It is not disputed that the commission earned from foreign enterprises was brought into India in convertible foreign exchange and was eligible for deduction under Section 80-O of the Act. 4. During the Previous Years relevant to AYs 1993-94 and 1997-98, the Assessee earned Rs. 1,56,10,111/- and Rs. 4,19,66,477/- as commission in foreign currency respectively. The Assessee filed its return of income for AY 1993-94 on 28th October, 1993, inter alia, claiming a deduction of Rs. 78,05,005/-, being 50% of the gross commission from foreign enterprises, under Section 80-O of the Act. The return filed by the Assessee was picked up for scrutiny. During the assessment proceedings, the Assessee claimed that it was entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 80-O by applying the same formula as adopted by the AO while computing the deduction under Section 80-O for AY 1993-94. Since the total receipts disclosed by the Assessee for AY 1997-98 was Rs. 7,19,42,363/-, out of which commission from foreign enterprises amounted to Rs. 4,19,66,477/- and the total expenses were assessed at Rs. 3,16,25,140/-; the AO computed the deduction under Section 80-O of the Act as under: He computed the expenses attributable to foreign income at Rs. 1,84,48,041/- on a proportionate basis to the gross income of the Assessee [(Rs. 3,16,25,140 /7,19,42,363) x 4,19,66,477/-]. He then calculated the Foreign Income at Rs. 2,34,18,436/- by deducting the expenses attributable to receipts from foreign enterprises from those receipts [4,19,66,477/- − 1,84,48,041/- = 2,34,18,436/-]. Accordingly, he computed the deduction under Section 80-O of the Act, being 50% of the Foreign Income, at 1,17,59,217/- [50% of 2,34,18,436/-] 8. The Assessee appealed against the respective assessment orders for AYs 1993-94 and 1997-98 before the CIT(A). By an order dated 23rd September, 1996, the CIT(A) rejected the Assessee's challenge to the quantum of deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the Revenue's appeal for AY 1997-98 by an order dated 10th February, 2004. 12. Aggrieved by the decision of the ITAT, the Assessee has filed the present appeals. These appeals, ITA 264/2002 and ITA 415/2004, were admitted on 7th October, 2002 and 6th August, 2004 respectively and the following questions of law - which is common to both appeals - was framed: "Whether on the facts and in the circumstances of the case the conclusion recorded by the Tribunal on the apportionment of the net income eligible for deduction under Section 80-O of the Income-tax Act, 1961, is bad in law, being wholly inconsistent with the evidence on record?" 13. We are informed that the Revenue also filed appeals before the ITAT for AY 1995-96 and 1996-97 which have since been disposed of by the ITAT by directing the deduction under section 80-O of the Act be computed in accordance with the decision of this court in the present appeals. Submissions 14. Mr Piyush Kaushik, learned counsel appearing for the Assessee contended that the AO and the ITAT had grossly erred in not considering the submissions made by the Assessee and its computation of Foreign Income had been rejected without assigning an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounting adopted by the Assessee could not be changed unless the AO finds the same to distort profits. 17. Lastly, Mr Kaushik referred to the decision of the Supreme Court in Lalchand Bhagat Ambica Ram v. CIT: 37 ITR 288 (SC) and of the Madras High Court in CIT, Chennai v. M/s Matrix Intel Pvt. Ltd. Chennai: 2006-TIOL-389-HC-MAD-IT and contended that it was incumbent upon the ITAT to consider all the facts, both for and against the Assessee, before rejecting the contentions or material submitted by the Assessee. He also relied on the decision of this Court in CIT v. Satish Kumar Chandna: 311 ITR 276 (Del) in support of the aforesaid contention. Reasoning and Conclusion 18. The question of law before us is a limited one and, that is, 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. The evidence in question, which is relied upon by the Assessee is the average profit margin of 11.5% from Assessee's domestic business determined by averaging the profit margins for a period of 10 years prior to commencement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method as adopted by the Assessee, no part of the fixed cost is allocated to foreign business and at best, only the marginal variable costs are sought to be attributed to earning Foreign Income. This, in our view, would plainly result in a distorted apportionment of net profits of the Assessee between domestic income and foreign income. 21. To illustrate the above point, let us consider a hypothetical case of an assessee who's revenue receipts from business (Existing Business) in a particular year is Rs. 1,00,000/-. He incurs office rentals and establishment costs of Rs. 60,000/-and other variable expenses of Rs. 20,000/-; thus declaring a profit of 20,000/- (translating to a net profit margin of 20%). In the next year, he expands his business by commencing a new activity ('New Business') from the same establishment which results in additional revenues of Rs. 50,000/- for which he incurs incremental variable cost of Rs. 10,000/-. Assuming that the revenues from existing business remain static and there are inflationary pressures on costs; the assessee would earn a profit of Rs. 60,000/- and his overall net profit margin would increase to 40% (i.e 60,000/150,000). If the method as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness would clearly be expected to increase with the incremental revenue's being generated by way of commission from the existing fixed establishment. 24. It is also relevant to note that the average profit margin of 11.5% of domestic business, which is the bedrock of the Assessee's contention, has been calculated by averaging profit margins for AYs 1978-79 to 1987-88 which are several years prior to the AYs in question. 25. Turning to the decisions referred to by Mr Kaushik, it is clear that most of them are wholly inapplicable in the facts of the present case. In EHPT India P. Ltd. (supra), this Court was concerned with apportionment of common expenses between income exempt under Section 10A of the Act and non-exempt income of the Assessee. In that case, the ITAT had upheld the allocation of common expenses on the basis of headcount of employees, which had been followed on a consistent basis. In that case, the Assessee had recorded common expenses separately for various costs centres and the same were apportioned in the ratio of head counts of the exempt and non-exempt units. This Court found that the method for apportioning common expenses between exempt and non-exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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