INCOME TAX ACT, 1961

--Business expenditure--Allowability Service charges reimbursed to holding company--The assessee was a company engaged in the business of purchase and sale of software. The assessee while computing its income from business had claimed expenditure on account of service charges paid to M/s. SSL. The expenditure was claimed to be in accordance with the agreement entered into by the assessee with M/s. SSL., which has been revised on 1-7-2002 and 1-7-2004 and 1-7-2006. As per the said agreement, the assessee was to pay service charges to M/s. SSL. for rendering the following services. Further, all out of pocket expenses including travel, conveyance etc. were to be billed separately by SSL. and was to be reimbursed by the assessee. The quantum of service charges was determined by adopting the following basis. The expenditure incurred by SSL on account of insurance, salaries, allowances, directors' remuneration's, electricity and charges, printing and stationery, professional charges, repairs and maintenance, rent for offices, etc., and also depreciation has been apportioned to the assessee on the basis of turnover as service charges. 5. The assessing officer called upon the assessee to furnish the necessary documentary evidence to show that services stated above were rendered by SSL to the assessee. The assessee was also asked to furnish the supporting evidence for the out of pocket expenses on travel, conveyance, etc. In response, the assessee furnished its explanation on 25-11-2009 that SSL was its parent company. SSL was in the business the profits, which were not taxable under section 10A of the Income Tax Act, 1961 (the Act) as well as other business. The assessee-company was formed and started operating from 1-7-2000 and took over the business activities of SSL the profits of which were not exempt under section 10A. The assessee entered into an agreement dated 28-9-2000 referred to in the earlier paragraph of this order with SSL for availing of common services in the areas of finance, accounts, taxation, legal administration, HRD, etc., for the consideration on terms and conditions contained in the said agreement. The assessee pointed out that SSL has raised debit note on the assessee for rendering services, which are duly authenticated by agreement which has been duly revised. The assessee pointed out that for services rendered during the previous year, the assessee raised debit notes. The assessing officer however was of the view that (i) payment of service charges by the assessee 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. (ii) 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 the 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 to tax. (iii) The assessee has contended that the said agreements have been executed in the best interest of the business between two independent corporate entities. It has also been contended that the same has been incurred out of commercial expediency. The implication of this agreement is that the taxable profits of the assessee have been reduced and at the same time increasing the non-taxable profits of its holding company—SSL. For the above reasons, the assessing officer held that the services agreement between the assessee and its holding company has been entered into with the clear intention of reducing the tax liability of the assessee and increasing the non-taxable profits of SSL. The assessing officer also held that the assessee did not prove that services were in fact rendered by SSL with supporting evidence. He also held that the assessee has only submitted debit notes raised by SSL which in no way substantiates as to whether SSL has really provided any services to the assessee-company and has incurred any expenses for providing the same. He held that the onus to prove that a particular expenditure has been incurred for the purposes of business is on the assessee and as the assessee has failed to discharge this onus, the expenditure claimed is not allowable. Accordingly, the amount paid to SSL was held to be not an expenditure incurred by the assessee for the purposes of its business and thus was not allowable expenditure. The assessing officer also held that the decision Tribunal in the earlier assessment years has not been accepted by the Department and appeal has been filed before the High Court in all the concerned years, the final decision of which is still awaited. Accordingly, the assessee's claim of payment of service charges to M/s. SSL. was disallowed and added back to the total income of the assessee. On appeal by the assessee the Commissioner (Appeals) deleted the addition made by the assessing officer following the Tribunal order for the earlier assessment years. Held: The above order of the Tribunal has been followed in the assessee's own case for the assessment year 2002-03, in I. T. A. No. 3027/M/06, the assessment year 2003-04, 3758/M/06, the assessment years 2004-05 and 2005-06 I. T. A. Nos. 3158 and 3161/M/08. The facts and circumstances under which the disallowance was made in the earlier years and the present assessment year are identical. Respectfully following the aforesaid decisions we uphold the order of the Commissioner (Appeals) is upheld and dismiss ground No. 1 raised by the revenue.