TaxTMI 
TaxTMI 
2005 (11) TMI 384
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....assessment order, treated such sum as payment on account of 'Royalty' under section 9(1)(vi) of the Act. Since no tax was deducted at source by the assessee at the time of making payments, the Assessing Officer disallowed the same as revenue expenditure under section 40(a)( i) of the Act. The CIT(A), for the reasons given in his order, confirmed the finding of Assessing Officer that such payments fell within the ambit of section 9(1)(vi) of the Act and consequently, the assessee was under the obligation to deduct the tax at source under section 195. 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 Tribuna....
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....t 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 under section 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). 6. In view of the above discussion, we set aside the order of CIT(A) and deleted the entire disallowance under section 40(a)( i) made by Assessing 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....
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.... disproportionate to the turnover of the assessee. (ii)It has been stated in the said agreement of SSL with the assessee company that all out of pocket expenses including travel, conveyance etc. are to be billed separately by SSL and shall be reimbursed by the assessee. However rather then separately billing for these out of pocket expenses, SSL is raising periodic lump sum credit notes by apportioning the expenditure incurred by SSL on account of insurance, salaries and allowances, directors remuneration, electricity and water charges, printing and stationery, professional charges, repairs and maintenance, rent for offices and also depreciation. The assessee was categorically asked to furnish supporting evidences to 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 ....
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.... expenses. It was explained that the area of services covered under the agreement is very broad and that the expenditure has been claimed on the basis of actual expenditure incurred on the basis of debit notes received from SSL and that if the expenditure in question was not incurred the assessee would not have been able to carry on its business. It was further submitted that the debit notes issued by SSL and the details given to the Assessing Officer in support of the expenditure included in the debit notes show that not only legal and other specified services were the subject in the agreement but also other services which are not specifically stated in the agreement were also included." 10. The CIT(A) examined the details of 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 busines....
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....led to deduction under section 10A and support services. Further, it is found that the basis of allocation amongst the three heads is actual expenses, number of employees and ratio of fixed assets, floor area and turnover ratio. Thus, on the basis of above five criteria, expenditure has been allocated to the three heads. Further, it is noticed that the total expenditure allocated under third head i.e., support services, has been again allocated under two heads-(1) STP units entitled to deduction under section 10A and non-STP which is not entitled for deduction under section 10A on the basis of turnover ratio. In our considered opinion the allocation of expenditure contained in the paper book at pages 27 to 31 appears to be appropriate. 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 n....