Common service cost allocation is deductible when backed by genuine inter-company arrangement and business nexus under tax law.

Centralised common service costs shared under a genuine inter-company arrangement are deductible as business expenditure where the allocation is supported by agreement, applied on a reasonable basis, and shown to have business nexus. The expenditure cannot be disallowed merely because it was first incurred by another group entity and then cross-charged to the assessee, if there is no material to show that the services were sham, fictitious, excessive, personal, or capital in nature. The common service charges for functions such as finance, taxation, human resources, marketing, and IT support were therefore allowable under section 37(1) of the Income-tax Act, 1961.

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Issues: Whether the cost allocated from the group company of Rs. 21,06,749 was deductible as business expenditure.

Analysis: The assessee showed that the amount represented its share of common service costs incurred by a group entity for centralized functions such as finance, taxation, human resources, marketing and IT support. The allocation was supported by an inter-company agreement, was based on a rational workstation method, and was reflected in the accounts. The disallowance was founded on broad objections about absence of direct incurrence and precise identification, but no material was brought to show that the services were sham, fictitious, excessive, personal, capital in nature, or otherwise inadmissible. In the circumstances, the expenditure had business nexus and was incurred on commercial grounds, so it could not be denied merely because it was first incurred by another group concern and then cross-charged.

Conclusion: The disallowance was unsustainable, and the claim was allowable in favour of the assessee.

Ratio Decidendi: Where centralized common service costs are incurred under a genuine inter-company arrangement and are allocated to a beneficiary entity on a reasonable basis with business nexus, deduction cannot be denied under section 37(1) of the Income-tax Act, 1961 merely because the expenditure was initially incurred by another group concern.

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