ASSISTANT COMMISSIONER OF INCOME TAX-5, KANPUR vs. M.K.U PVT. LTD., KANPUR

PER NIKHIL CHOUDHARY, A.M.:

This appeal and the Cross Objection have been filed by the Revenue and the Assessee, respectively against the orders of the ld. CIT(A)-2, Kanpur, passed under section 250 of the Income Tax Act, 1961, dated 26.03.2018, wherein the ld. CIT(A) has allowed the appeals of the assessee against the assessment order passed by the ld. AO under section 147 r.w.s. 144 of the Income Tax Act, 1961. The grounds of appeal and the C.O. are as under:-
“1. That Ld. CIT(A) has erred in law and on facts in quashing the assessment proceedings u/s 147 read with sec. 143 of the IT Act, 1961 without considering the facts & AO's contention and case law of Hon'ble High Court of Andhra Pradesh in the case of Little Angels Educational Society Vs. ITO (2011) 336 ITR 413 (AP), where Hon'ble Court has held that a decision having effect on assessment which CO No.23/LKW/2018
A.Y. 2011-12
M.K.U. Pvt. Ltd.

was missed at the time of original assessment but came to the knowledge of the AO, subsequently, constitutes information for opening original assessment.

C.O. No.23/LKW/2018

“1. BECASUSE CIT(A) has erred in law and on facts in not adjudicating ground no.2, 3, 4, 5 ad 6 of the grounds of appeal filed before him, while deciding the assessee’s appeal vide appellate order dated 26.03.2018.”

assessee’s condonation petition and affidavit, the delay in filing the cross objection is condoned.
3. The facts of the case are that the assessee filed a return of income on 30.09.2011 declaring a book profit of Rs.5,20,24,121/-. The case was selected for scrutiny and assessment under section 143(3) of the Income Tax Act, 1961 was completed on an income of Rs.5,86,94,110/-. Subsequently, it came to the notice of the Department that the assessee had claimed expenditure of Rs.6.42 Crores paid to non-resident under various heads of expenditure viz., export commission Rs.1.98
Crores, interest to foreign bank Rs.41.35 Lacs and testing charges of Rs.4,02,44,816/-. The ld. AO noted that the assessee had paid testing charges to non-resident for certification about quality of bullet proof vest for bullet penetration and strength. From the same, he concluded that testing charges were in the nature of fee for technical services which were covered under section 9(1)(vii) of the Act and TDS should have been deducted under section 195 of the Act for such payment. Since the assessee had not deducted TDS, the case was reopened under section 147 r.w.s. 148 of the Act. However, the assessee did not file a return in response to the notice under section 148 and instead filed objections to the same vide his letters. Subsequently though, the assessee filed a letter requesting that the return filed under section 139(1) of the Act be treated as the return filed in compliance to notice under section 148. The ld. AO first proceeded to dispose the objections raised by the assessee to the initiation of proceedings under section 147. He pointed out that there was no restriction for initiating re-assessment proceedings under section 147, if the ld. AO has discovered any new and fresh fact which was not presented at the time of original assessment. He cited several case laws and also pointed out that the Hon’ble Supreme Court had held in the case of Calcutta Discount Company Limited vs. ITO in 41 ITR that it was the duty of the assessee to disclose all primary facts which have a bearing on liability of income earned by the assessee being subjected to tax, but from a perusal of the records of the case, it was revealed that neither had any queries been raised by the ld. AO
CO No.23/LKW/2018
A.Y. 2011-12
M.K.U. Pvt. Ltd.

regarding TDS deduction under section 195 on, ‘testing charges’ nor had the assessee’s furnished any record regarding TDS deduction on the same. No facts regarding TDS deduction had been given in the Audit Report also, thus, the assessee’s claim that all information in support of the return and claims and deductions have been placed on record was not correct. It was further observed that in the case of Little Angels Educational Society vs. ITO (2011) 336 ITR 413 (AP), the Hon’ble Andhra Pradesh High Court had held that a decision having effect on assessment, which was missed at the time of original assessment, but came to the knowledge of the AO subsequently, constitutes information for re-opening original assessment. The AO pointed out that in this case there was, ‘tangible material’ on record, on the basis of which the re-assessment proceedings had been initiated. He also placed reliance on the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P.) Ltd.,
291 ITR 500 (SC) for the proposition that the ld. AO was free to initiate proceedings under section 147, if all the ingredients of section 147 were fulfilled and failure to take steps under section 143(3), would not render the ld. AO powerless to initiate reassessment proceedings. The ld. AO also pointed out that the re-assessment proceedings had not been finalized and due opportunity would be provided to the assessee in the case. He also rejected the second set of objections filed by the assessee regarding the issuance of notice beyond time, pointing out that since the amount escaped was likely to be Rs.1,00,000/- or more, the notice could be issued within six years from the end of the relevant assessment year. He reiterated the fact that the information regarding TDS deduction on expenditure claim under the head,
‘testing charges’, had neither been provided by the assessee, nor had the AO asked for the same, hence there could be no change of opinion in the matter. After disposing of these objections, the assessee was given opportunity to furnish a reply on the issue of non-deduction of TDS made to non-resident for testing charges amounting to Rs.4,02,44,816/- and asked to show cause as to why the provisions of section 40a(ia) should not be invoked for failure to deduct TDS under section 195
r.w.s. 9 of the Act. In response, the assessee filed a submission that the payment did
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A.Y. 2011-12
M.K.U. Pvt. Ltd.

not fall under the expression, ‘any other sum chargeable under the provision of this act’ appearing in section 195 of the Act. Furthermore, it was submitted that since the charging section i.e. section 4 was not maintainable in respect of such payments, section 195 would also become inapplicable. This was because the foreign parties had no permanent establishment in India and the assessment have been made under section 143(3), after examining the books of accounts and records and other parties. The ld. AO, however, held that the payment was in the nature of, ‘fee for technical services’ covered under section 9 (1)(vii) of the Act and placing reliance on the decision of the Hon’ble Delhi High Court in the case of Havells India Limited, he held that the assessee was required to deduct TDS on that payment, in the light of the provisions of section 195. Furthermore, he pointed out that the assessee’s submission that PE was not in India was not acceptable, as no supportive documentary evidences had been produced by it. For this proposition, he placed reliance on the judgment of the Hon’ble ITAT Bangalore Bench (B) in the case of Vodafone South Limited vs. DDIT (Intnl. Taxation) Circle-1(1), Bangalore in (2015)
53 taxman.com 441. He also pointed out that Finance Act, 2010 had clarified that the existing explanation to section 9 would apply retrospectively w.e.f. 1.06.1976. Thus, any judicial pronouncement which called for sit us of services in India for requirement of deduction under section 195 of the Act were nullified by this explanation. He also held that whether the income of the non-resident was taxable or not in India, was not material at the stage of deduction of TDS under section 195, because the taxability could only be judged when the non-resident files his ITR. He also rejected the plea of the assessee that its case was governed by the DTAA, because the assessee could not elaborate under which clause of DTAA it was benefited. Hence, invoking the provisions of section 40a(ia), he disallowed the expenditure of Rs.4,02,44,816/- and added the same back to the income of the assessee.
4. Aggrieved with the said assessment, the assessee went in appeal to the ld.
CIT(A)-2, Kanpur. The ld. CIT(A), Kanpur passed a short order in which he pointed
CO No.23/LKW/2018
A.Y. 2011-12
M.K.U. Pvt. Ltd.

out that he had already considered the similar issue in the case of the assessee for the assessment year 2008-09 in Appeal No. CIT(A)2/10109/16-17 dated
26.03.2018 and annulled the assessment. Since the facts for the year under consideration were exactly the same, the action of the AO of reopening the computed assessment was held to be legally not sustainable and therefore, this assessment proceeding was held to be void ab initio and it was quashed.
5. The Revenue is aggrieved at this order of the ld. CIT(A) and has accordingly come before us. Sh. R.K. Agarwal, CIT DR (hereinafter referred to as the ld. CIT DR) pointed out that the ld. CIT(A) had erred in law and in facts in quashing the assessment proceedings under section 147 r.w.s. 143(3) of the Act without considering the facts of the case and the AOs contention. He pointed out that in the case of Little Angels Educational Society vs. ITO (2011) 336 ITR 413 (AP), the Hon’ble Andhra Pradesh High Court had held that a decision having an effect on assessment, which was missed at the time of original assessment but came to the knowledge of the AO subsequently, constitutes information for opening original assessment. He pointed out that the ld. AO had elaborately spelt out how the assessee had not placed information regarding the non-deduction of TDS on payment to non-resident, ‘testing charges’ either in the return or in the Audit
Report or in any submission, because the ld. AO had not asked any questions in this regard in the provisional assessment. Therefore, going by the decision of the Hon’ble Andhra Pradesh High Court and also by the decision of the Hon’ble
AO was fully within his rights to initiate re-assessment proceedings on these grounds. The ld. CIT(A), then drew our attention to the fact that the ld. CIT(A) had not discussed the issue on merits, while the ld. AO had gone into great detail and pointed out that in the case of Havells India Limited, the Hon’ble Delhi High Court had held that fees for testing and certification paid to US Company were to be treated, ‘fees for technical services’ (FTS) under the I.T. Act. Hence, the assessee was required to deduct TDS on that payment, in the light of the provisions of section CO No.23/LKW/2018
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M.K.U. Pvt. Ltd.

the aforesaid decisions of the ITAT Agra and the ITAT Mumbai Tribunal, the ITAT
Lucknow in the assessee’s own case, had observed that if there was no human element in a technical service, then the fee paid for that service cannot be said to be fee for technical service and observed that these findings of the Hon’ble Delhi High
Court in the case of Bharti Cellular Limited had been upheld by the Hon’ble Supreme
Court, even while it sent the matter back to the AO to verify the human element in technical services. The ld. AR, thereafter, submitted that subsequent to this, the Hon’ble Tribunal had remanded the matter back to the file of the AO, to verify whether there was any human element involved in testing or not and the ld. AO thereafter, had recorded a finding that there was no human element involved in the testing and therefore, in the said assessment year, testing charges paid to foreign entities amounting to Rs.3,34,80,454/- had been allowed to the assessee, after such verification by the ld. AO. The ld. AR then invited our attention to the orders of the ITAT Lucknow in ITA Nos.573 to 575 for the assessment years 2013-14, 2014-15
and 2015-16 and the Cross Objection Nos. 24 to 26/LKW/2018 corresponding to these appeals, which was placed in his paper book, and he pointed out that taking note of the AOs subsequent orders, the Hon’ble ITAT observed that since the AO had himself accepted the payment that was made was not in the nature of fees for technical services on which TDS was required to be deducted, the disallowance made has as such been deleted by the AO himself. That being so, there was no merit in the appeal of the Department that the ld. CIT(A) had erred in deleting the additions made under sections 40a(ia), made earlier for failure to deduct tax at source under section 195. The ld. AR thus submitted, that the matter having already decided in favour of the assessee, the present appeal which was arising out of the same set of facts, was not sustainable and accordingly it was prayed that in view of the fact that the Department had accepted that there was no default on the part of the assessee, which could result in any addition under section 40a(ia), the question of reopening the assessee’s case on this account was not required. Furthermore, the ld. AR pointed out, that the AO was wrong to state that the primary facts had not CO No.23/LKW/2018
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M.K.U. Pvt. Ltd.

been disclosed before him. The fact of the expenditure made had duly been disclosed in the accounts and elaborated upon in the proceedings. Since, there was no requirement of deduction of tax, therefore, there could not be any disclosure with regard to the same, hence the presumptions of the AO were themselves incorrect and accordingly his assumption of juri iction was without any sound basis. It was, therefore, prayed that the appeal of the Revenue may be dismissed.
Ld. AR further submitted, that in view of the fact that the matters had already been decided in favour of the assessee by previous benches of the ITAT and accepted by the Department itself subsequently, the Cross Objection filed by the assessee was not being pressed.
7. We have duly considered the facts and circumstances of the case and the rival arguments. We note that on the issue of managerial, technical and consultancy services, the Hon’ble Delhi High Court in the case of Bharti Cellular Limited vs. CIT
(2009) 319 ITR 139, has considered the issue and come to a conclusion that where there is no human element involved in testing, the same cannot be said to be fee for technical services. It is also observed that this judgment was affirmed, in principle, by the Hon’ble Supreme Court in CIT vs. Bharti Cellular Limited (2011) 330 ITR 239, even while it restored the matter of factual finding of human intervention to the file of the ld. AO. Pursuant to these decisions, the Hon’ble ITAT Lucknow in ITA
No.47/LKW/2017 restored the issue to the file of the AO, for examining this aspect in the assessment year 2012-13 and after an examination of the same, the ld. AO came to the conclusion that there was no human intervention in the ballistic testing process and therefore, he had allowed the expenses of Rs.3,34,80,554/- incurred by the assessee company as ‘testing charges’ without making any disallowance under section 40a(ia). Subsequently, the ITAT Lucknow Bench in ITA Nos. 573 to 575 and CO Nos.24 to 2026 for the A.Ys. 2013-14, 2014-15 and 2015-16, had pointed out that once the AO had decided the issue in favour of the assessee for the A.Y. 2012-
13 holding that these are not fees for technical services on which tax was required to be deducted under section 195, there was no merit in the appeals of the CO No.23/LKW/2018
A.Y. 2011-12
M.K.U. Pvt. Ltd.

Department against the orders of the ld. CIT(A), who had granted relief to the assessee on this issue. Accordingly, the ITAT vide its order dated 14.06.2019, had dismissed the various appeals of the Revenue. That being the case and the facts in this year being identical to the facts of the subsequent years, it is clear that since there was no human intervention involved in the process of ballistic testing, the assessee was not required to deduct tax at source under section 195, as the payments in this regard could not be regarded as fees for technical services, within the meaning of the aforesaid judgment. Therefore, no addition can be sustained in this matter. Furthermore, we note that in view of this finding, that no part of the payment made for testing charges was disallowable in the hands of the assessee, it cannot be said that the assessee had failed to disclose any material fact during the course of its previous assessment. The payments that had been made had been duly disclosed and because there was no obligation to deduct tax, therefore, there could be no obligation to disclose as to why the tax had not been deducted. Therefore, we do not agree with the reasoning of the ld. CIT DR that the ld. CIT(A) had erred in law or in facts in quashing the assessment proceeding under section 147, on account of the judgment of the Hon’ble Andhra Pradesh High Court in the case of Little Angels
Educational Society vs. ITO (supra), because in this case, there was only a change of opinion that was behind the reopening of the case and therefore, the ld. CIT(A) was justified in following his detailed order in Appeal No. CIT(A)-2/10109/DCIT-6/16-
17 for the A.Y. 2008-09, where he had pointed out that the AO had failed to note that in the case of Calcutta Discount Company Limited (supra), the Hon’ble Supreme
Court had held that once conclusions are drawn by the AO, the AO cannot at a later point of time form a different opinion, by giving a second thought to the facts disclosed by the assessee, holding that he committed an error in computing taxable income and reopening the assessment under section 147. Further, we hold that there was no failure on the part of the assessee to disclose primary facts. Since it was not required to deduct tax at source, it could not be expected to furnish information regarding the tax deducted on testing charges. Thus, we find no CO No.23/LKW/2018
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M.K.U. Pvt. Ltd.

infirmity in the order of the ld. CIT(A) and we accordingly uphold his decision to quash the assessment. Consequently, we do not find any merit in the grounds raised by the Revenue and the appeal of the Revenue is accordingly dismissed. As the assessee has not pressed the Cross Objection, the Cross Objection is also dismissed.
8. In the result, appeal in ITA No.509/LK W/2018 and C.O. No.23/LKW/2018
are dismissed.

Order pronounced on 29.08.2025 in the open Court. [KUL BHARAT]

[NIKHIL CHOUDHARY]
VICE PRESIDENT

ACCOUNTANT MEMBER

DATED: 29/08/2025
Sh