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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B R BASKARAN
Date of hearing : 09 .01.2020 Date of Pronouncement : 17.01.2020 O R D E R
Per N.V. Vasudevan, Vice President
This is an appeal filed by the assessee against the order dated 29.7.2019 of the CIT(Appeals)-ii, Bengaluru relating to assessment year 2011-12.
The assessee is a company engaged in the business of developing and licensing of software products and rendering consultancy services. While completing assessment for AY 2011-12, the AO made an addition of Rs.6,39,20,948 consequent to disallowance of payments made to M/s. Eka Software Solutions Inc. [EKA, USA] as “business service-marketing charges” on the ground that assessee failed to deduct tax at source on the aforesaid payment made to a non-resident as was required u/s. 195 of the Income-tax Act, 1961 [the Act]. The AO invoked the provisions of section 40(a)(i) of the Act and made the disallowance.
Aggrieved by the aforesaid addition made by the AO, the assessee preferred appeal before the CIT(Appeals) challenging the disallowance u/s.40(a)(i) of the Act and raising an alternate argument that if the disallowance/addition is sustained then the disallowance/addition will go to increase the profits of the business that is eligible for deduction u/s.10AA of the Act and the deduction should be allowed on such enhanced profits. If the alternate argument is accepted then the disallowance u/s.40(a)(i) of the Act will have no tax implications for the Assessee. The alternate ground raised by the Assessee before CIT(A) reads thus:
“3 Error in computation of deduction under Section 10AA of the Act 3.1 While computing the deduction under section 10AA of the Act, the DCIT has considered profits and gains of the units eligible for relief under section 10AA of the Act without considering the disallowance of part of business service charges. 3.2 Without prejudice to the above, even after assuming that the business service charges of INR 63,920,948 are disallowed, the deduction under Section IOAA of the Act should be recomputed on the basis of the assessed income.”
Before the CIT(Appeals), the assessee pointed out that in assessee’s own case for the AY 2011-12, the Tribunal had remanded the alternative issue i.e., the issue that if the disallowance/addition is sustained then the disallowance/addition will go to increase the profits of the business that is eligible for deduction u/s.10AA of the Act and the deduction should be allowed on such enhanced profits in order dated 30.1.2015. The CIT(A), however, sustained the disallowance u/s.40(a)(i) of the Act but gave alternate relief in respect of ground No.3 raised by the assessee before him. The following were the relevant observations of the CIT(Appeals):-
“Ground No.2:- The Hon'ble ITAT vide its order dated 30.01.2015 in appellant's own case for AY: 2010-11 had stated that to apply matching principle in terms of expenditure and revenue, the facts are to be verified and accordingly directed the AO for de novo consideration of the issue with respect to the genuineness and reasonableness of the expenditure claimed by the appellant. The AO vide his remand report dated 12.04.2018 submitted that the appellant furnished invoices only on sample basis and all the invoices were not produced before him and accordingly the appellant's claim of expenses is not backed by proper documentary evidence. The appellant has not been able to establish as to how the expenses were concluded as marketing charges to refute the stand of the AO that the expenses incurred were in the nature of Technical services as defined u/s 9(1)(vii) of the Income tax Act,1961.Therefore am of the opinion that the finding given by the AO during the scrutiny proceedings after following the directions of the Hon'ble ITAT the genuineness and reasonableness of the expenditure claimed by the appellant could not be verified for the reason that the appellant furnished invoices only on sample basis and all the invoices were not produced before him and accordingly since the appellant's claim of expenses are not backed by proper documentary evidence is justified. Even during the appellate proceedings, the appellant could not substantiate its claim with proper documentary evidence and therefore this ground is not allowed.
Ground No.3:- The Hon'ble ITAT vide its order dated 30.01.2015 in appellant's own case for AY: 2010-11 had stated that the AO is bound to first compute the income from export of articles or things or computer software, as the case may be, and thereafter allow the deduction u/s 10A in accordance with the law and directed the AO to grant deduction u/s 10A accordingly. Respectfully following the same I hereby direct AO to follow the directions of ITAT in appellant's own case for AY 2010-11.”
Aggrieved by the order of CIT(Appeals) in not deleting the disallowance/addition u/s.40(a)(i) of the Act, the assessee has preferred the present appeal before the Tribunal.
We have heard the rival submissions. It is noticed from the order of CIT(Appeals) that in assessee’s own case for AY 2010-11, the Tribunal has held that disallowance of business service-marketing charges will go to increase the profits of the business which is eligible for deduction u/s. 10AA of the Act and that deduction u/s. 10AA of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. In this regard, we find that two High Courts viz., Hon’ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (2010) 194 Taxman 192 (Bom) and Hon’ble Gujarat High Court in the case of ITO v. Kewal Construction, 354 ITR 13 (Guj) have taken the view that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. This position has also been now confirmed by the CBDT in its Circular No.37/2016 dated 02.11.2016 wherein the Board has observed as follows:-
“3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.”
It therefore appears that there will be no tax liability on the assessee, consequent to disallowance u/s. 40(a)(i) of the Act. In such circumstances, we are of the view that the question whether disallowance u/s. 40(a)(i) of the Act is justified or not, is academic, if the alternative relief is provided to the assessee. We therefore dismiss the appeal with a direction to the AO to comply with the directions of CIT(Appeals) in allowing relief u/s. 10AA of the Act on the enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act.
In the result, the appeal by the assessee is dismissed.
Pronounced in the open court on this 17th day of January, 2020.