TMI Blog2005 (11) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the meaning of section 9(1)( vi ) of the Act is hereby vacated. In the present case, it has been noted by the CIT(A) that the non-resident had paid the tax on 22-3-2004, consequently, deduction could be claimed only in the assessment year 2004-05 and not in the year under consideration. The CIT(A), therefore, was incorrect in holding that no disallowance could have been made u/s 40( a )( i ) of the Act as the tax was ultimately paid by non-resident. Accordingly, we also vacate this finding of the CIT(A). Thus, we set aside the order of CIT(A) and deleted the entire disallowance u/s 40(a)(i) made by Assessing Officer and sustained by CIT(A). We find that the issue regarding the allocation of expenses in respect of service charges arose in the case of SSL. In that case, the Assessing Officer was of the view that allocation of expenses of Non-10A unit (not eligible for exemption) was excessive as exempted unit was much more expenditure oriented. The matter ultimately reached the Tribunal which accepted the case of assessee that allocation of support services expenses on the basis of turnover was justified. Admittedly, prior to incorporation of assessee company, SSL was carrying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, provisions of section 40( a )( i ) of the Act were attracted. However, he accepted the alternate plea of assessee that since the biggest supplier of software namely Microsoft Regional Sales Corp., Singapore had paid the tax on the amount received by the assessee, no disallowance is justified to that extent. This plea was accepted after following various judgments of various High Courts. Accordingly, he deleted the disallowance to the extent of Rs. 5,460.80 lakhs after verifying the fact that tax due was paid by Singapore party on 22-3-2004. Aggrieved by the same, the assessee as well as the revenue are in appeal before the Tribunal. 3. The assessee is aggrieved by the finding of the CIT(A) that payment on account of purchase of software amounted to Royalty within the meaning of section 9(1)( vi ) of the Act while the revenue is in appeal against the finding of the CIT(A) that no disallowance under section 40( a )( i ) could be made if it is found that due tax has been paid by the non-resident supplier. The ld. counsel for the assessee has submitted that the issue is now covered by the decision of the Tribunal in assessee s own case wherein it has been held that such payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer and sustained by CIT(A). 7. The next issue arising from the appeal of assessee relates to the disallowance of Rs. 6,55,88,590 on account of service charges paid to Sonata Software Ltd. (SSL). Brief facts giving rise to this appeal are these: The assessee is 100 per cent subsidiary of SSL. It came into existence in the year under consideration with the object to carry out one of the activities of SSL which was not eligible for exemption under section 10A. Prior to the year under consideration, SSL was carrying out two independent activities i.e., ( i ) activity eligible for exemption under section 10A and ( ii ) the activity not eligible for exemption under section 10A. Separate accounts were maintained by SSL for these activities. Direct expenses relating to these activities were accounted for in the separate accounts respectively. However, service charges were common and later on allocated to these activities on the basis of turnover. The assessee, after its incorporation, took over the activity of SSL, which was not eligible for exemption under section 10A on 1-7-2000. However, an agreement was entered into between assessee and SSL to the effect that SSL would continue to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o show that the said services stated at ( a ) to ( d ), above were rendered by SSL. However, the assessee has not furnished the same till the finalisation of the assessment. The only evidences submitted are the debit/credit notes raised on the assessee by SSL according to which the expenses incurred in SSL have been apportioned to the assessee on the basis of turnover of the assessee and SSL. Payment of service charges from SITL to SSL is mere diversion of income without services rendered by SSL. Mens rea for this claim is to reduce taxable profit and claim more 10A profit in SSL. ( iii )The receipts on account of Service Charges in the hands of SSL have not been credited separately as the income of its non-10A activity. However, these receipts have been reduced from the expenditure claimed of 10A activity of SSL. The net implication of this is that the profits of the 10A activity of SSL have increased and on which no tax has been paid. Whereas in fact, these receipts are clearly pertaining to the non-10A activity of SSL and therefore such receipts should have been offered for tax. ( iv )The assessee has contended that the said agreement has been executed in the best interest of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure which had been allocated on the basis of respective turnover which was given along with debit notes. It has been made clear that such details were also furnished before Assessing Officer. ( See pages 23-24 of the order). It was noted by CIT(A) that entire expenditure was incurred commonly for SSL and assessee and was allocated on the basis of turnover. According to him, business activity of SSL was much more expenditure oriented than business activity of assessee. Hence, in his opinion, the expenditure on support services to the assessee in the ratio of turnover was patently wrong. After going through the agreement, it was also held that SSL was required to advise the assessee in the matters of finance, accounts, taxation, legal, administration, HRD etc., and proper maintenance of record, compliance under various laws and training of employees. He also noted that assessee itself had incurred operational expenses of Rs. 835.76 lakhs which shows that assessee itself maintaining a large force of its employees. Such expenses amounted to 8.31 per cent of total turnover which itself was very high. Proceeding further, he examined the nature of expenses of SSL, which had b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As per details contained in pages 27 to 31, it can be seen that the appellant company has only allocated expenses of Support Service Division between 10A and non-10A activities in the ratio of turnover has been called for by the Assessing Officer by this letter dated 20-1-2000 appearing at page 35 of the paper book. Further, direct expenses relating to 10A and non-10A activity has been directly charged against the profits of these activities and do not call for any interference." The above observations of the Tribunal resolve the controversy before us. Admittedly, prior to incorporation of assessee company, SSL was carrying on two units independently i.e., unit exempted under section 10A and the unit not exempted. Direct expenses incurred were separately booked to respective units. Only the support services expenses were allocated on the basis of turnover. Such allocation has been found to be proper and reasonable by the Tribunal. There is no dispute that non-exempted unit was taken over by the assessee company and support services were continued to be rendered by SSL. From the inception, the stand of the assessee has been that such expenses were allocated on the basis of turnove ..... X X X X Extracts X X X X X X X X Extracts X X X X
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