- (1.) These are two appeals filed by the revenue under Section 260A of the Income-tax Act ("Act", for short) against the common order passed by the Income Tax Appellate Tribunal ("Tribunal", for short) on 31-1-2008 in ITA Nos.2395/DEL/2005 & 93/DEL/2006 for the assessment years 2001-02 and 2002-03 respectively. On 23-7-2010 the appeals were admitted and the following substantial questions of law were framed: "(a) Whether Income Tax Appellate Tribunal was correct in law in accepting "head-count" method of distribution of expenses adopted by the assessee for allocation of indirect expenses between STP unit and non-STP unit? b) Whether Income Tax Appellate Tribunal was correct in law in applying Rule of consistency when the method of allocation adopted by the assessee was not the correct method of accounting? c) Whether Income Tax Appellate Tribunal was correct in law in discarding the method of distribution adopted by Assessing Officer which was in accordance with the provisions contained in Section 10A (iv) of the Act itself? d) Whether order passed by Income Tax Appellate Tribunal is perverse in law and on facts?"
(2.) The respondent-assessee is a private limited company resident in India. During the relevant previous years, it operated two units: a Software Technological Park unit ("STP unit", for short) which was engaged in the development of software which was primarily exported to the parent company in Sweden and another domestic unit (non-STP unit) which was primarily engaged in the implementation of the telecom software for vendors/customers in India. In respect of the profits from the STP unit the assessee was undisputedly entitled to the deduction provided in Section 10A of the Act. In the returns filed for the years under appeal the assessee computed the profits from the STP unit by apportioning the indirect or common expenses on the basis of the head-count of the employees working in the said unit and the domestic unit and claimed the deduction u/s.10A in respect of the former unit accordingly. For instance, we may take up the computation of the profits from the STP unit for the assessment year 2001-02 which according to the assessee was as under: JUDGEMENT_5569_ILRDLH21_2011_1.html While completing the assessment under Section 143(3) of the Act, the Assessing Officer was of the view that the apportionment of the common or indirect expenses between the two units STP and domestic on the head-count basis was not appropriate and it resulted in more profits being shown from the STP unit. He therefore called upon the assessee to justify the apportionment. The assessee submitted its reply in writing which is reproduced in page 2 of the assessment order, the gist of which is that the common expenses were recorded separately in the cost centers maintained for the purpose and the same were apportioned in the ratio of head count for arriving at the total expenses of the two units.
(3.) The Assessing Officer considered the explanation of the assessee to be unacceptable. He was of the view that the common expenses should have been apportioned on the basis of the turnover in the respective units and that method "would have been a much more logical basis for apportioning of these expenses". He accordingly apportioned the total indirect expenses of Rs.12,56,00,825 in the ratio of the turnover in the two units in the following manner: JUDGEMENT_5569_ILRDLH21_2011_2.html It may be seen from the above re-apportionment made by the Assessing Officer on the basis of the turnover, that the common expenses attributable to the domestic unit came to only Rs.8,09,853 as against Rs. 48,23,638/- apportioned by the assessee by following the head-count method. He therefore disallowed the difference of Rs.40,13,785/- claimed in the domestic (non-STP) unit. The result was that the taxable income from the non-STP or domestic unit got enhanced by the aforesaid amount. ;