2010 (11) TMI 549 - AT - Income Tax

Disallowance - Allocation of expenditure on account of service charges - Held that - It is not the case of the revenue that the agreement was found to be sham or there is no such agreement or the payment of service charges has not been made in accordance with such agreement. - in the case of SSL the Tribunal has accepted the receipt of corresponding service charges as genuine for the Assessment Years 2001-02, 2002-03 and 2003-04 - CIT(A) was fully justified in deleting the disallowance made by the Assessing Officer - Decided in favor of assessee.

Issues Involved:
1. Allowability of service charges paid by the assessee to its holding company.
2. Verification of services rendered by the holding company.
3. Alleged collusive arrangement to reduce taxable profits.
4. Consistency of the Tribunal's decisions in earlier assessment years.

Detailed Analysis:

1. Allowability of Service Charges:
The primary issue revolves around the payment of Rs.13,02,42,275/- by the assessee to its holding company, Sonata Software Ltd. (SSL), for various services rendered as per an agreement. The Assessing Officer disallowed this expenditure, arguing it was a mere diversion of income without actual services rendered, aimed at reducing taxable profit and increasing non-taxable profit under section 10A for SSL. The CIT(A) deleted this disallowance, referencing the Tribunal's consistent decisions in favor of the assessee for earlier years. The Tribunal upheld the CIT(A)'s decision, noting no dispute over the existence or authenticity of the agreement and the payment made under it.

2. Verification of Services Rendered:
The revenue contended that the assessee failed to furnish necessary documentary evidence proving the services rendered by SSL. However, the Tribunal found that the Assessing Officer did not raise this issue in the assessment order. The Tribunal noted that similar disallowances were made in previous years but were consistently overturned by the CIT(A) and upheld by the Tribunal, which had verified the allocation of expenses based on turnover and found it reasonable.

3. Alleged Collusive Arrangement:
The revenue argued that the agreement for service charges was a collusive arrangement to reduce the assessee's profits and increase SSL's non-taxable profits. The Tribunal, however, found no evidence suggesting the agreement was sham or collusive. It emphasized that the allocation of support service expenses on the basis of turnover had been deemed appropriate and reasonable in earlier Tribunal decisions, which were not distinguished by the revenue.

4. Consistency of Tribunal's Decisions:
The Tribunal reiterated its stance from previous years, where it had accepted the allocation of expenses and the genuineness of service charges paid to SSL. The Tribunal referenced its order from the assessee's case for Assessment Year 2001-02, which had set a precedent for subsequent years. The revenue's failure to bring any new distinguishing features led the Tribunal to follow its consistent view, thereby upholding the CIT(A)'s deletion of the disallowance.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s order to allow the service charges as business expenditure. The Tribunal's decision was grounded in the consistent application of its earlier rulings, the lack of new evidence from the revenue, and the reasonableness of the expense allocation method based on turnover. The Tribunal pronounced the order in the open court on 19.11.2010.

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