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Income Tax Appellate Tribunal, KOLKATA BENCH “D”, KOLKATA
Before: SH. P.M.JAGTAP & SH. S.S.GODARA
PER P.M.JAGTAP, ACCOUNTANT MEMBER
This appeal filed by the assessee is directed against the order of Ld. CIT(A)- 2, Kolkata dated 15.05.2017.
The assessee in the present case is a company which is engaged in the business of export of industrial leather hand gloves, silk fabrics and made-ups. In the assessment originally completed u/s 143(3) vide order dated 31.12.2007, the total income of the assessee was determined by the AO at Rs.31,39,990/-. Thereafter, the AO noticed that design & development charges amounting to Rs.41,95,018/- were paid by the assessee in the year under consideration without deducting tax at source. According to him, the said expenditure therefore was liable to be disallowed u/s 40(a)(ia) of the Income Tax Act, 1961 (in short “Act”) and the allowance of the same in the assessment originally completed u/s 143(3) had resulted in escapement of assessee’s income to that extent. He therefore re-opened the assessment and issued a notice u/s 148 after recording the reasons. In reply, a letter was filed by the assessee on 29.12.2005 requesting that the return of income originally filed by it may be treated as the return filed in response to notice u/s 148. In the assessment completed u/s 143(3)/147 vide an order dated 27.12.2010, the AO made a disallowance of Rs.41,95,018/- on account of design & development charges paid by the assessee without deduction of tax at source by invoking the provision of section 40(a)(ia) of the Act, holding that the said charges were paid by the assessee for availing technical services.
Against the order passed by the AO u/s 143(3)/147 of the Act, an appeal was preferred by the assessee before Ld.CIT(A) challenging therein the validity of the said assessment as well as disputing the addition made u/s 40(a)(ia) on merit.
During the course of appellate proceedings before Ld. CIT(A), the following submissions were made on behalf of the assessee while disputing the disallowance made by the AO on account of design & development charges u/s 40(a)(ia):-
“That the conclusion drawn by Ld. AO. that bills/invoices available on record actually suggest payment of technical services is contrary to facts payments to Non-residents were made for job work as per specifications and raw materials form of fabrics supplied to them. That on the facts and in the circumstances of the case, ld.AO is wrong in holding that payment of fees for technical services was liable for tax deduction u/s 9(1)(vi) of Income tax Act, 1961 without considering the DTAA agreement u/s 90 of Income Tax Act, 1961. That on the facts and in the circumstances of the case, Ld.A.O. has failed to consider that the so-called disallowances for technical services stands in fructuous since such payment was provided in the accounts of Zenith Textiles whose entire income is exempt u/s 10A being a 100% Export Oriented Unit. That on the facts and in the circumstances of the case, Ld.A.O. is wrong and unjustified in disallowing job charges paid to Non-residents amounting to Rs.41,95,018/- by referring to section 40(a)(ia) of Income tax Act, 1961.”
Ld. CIT(A) did not find merit in the submissions made on behalf of the assessee as above and confirmed the disallowance made by the AO u/s 40(a)(ia) observing that the AO has already considered the issue in detail. He also did not find merit in the contention raised on behalf of the assessee company challenging the validity of the assessment made by the AO u/s 143(3)/147 and upholding the validity of the said assessment, he decided this preliminary issue against the assessee.
Aggrieved by the order of ld.CIT(A), the assessee has preferred this appeal before the Tribunal on the following grounds:-
1. “That on the facts and in the circumstances of the case, Ld.CIT(A) is wrong and unjustified in dismissing ground No.1 which referred to invalid assumption of jurisdiction u/s 147 of Income Tax Act, 1961 without any speaking order on appellant’s written arguments.
2. That on the facts and in the circumstances of the case, Ld.CIT(A) is wrong and unjustified in dismissing Ground No.2 to 5 which refers to adverse findings of A.O. resulting in disallowance of Job charges paid to non-residents of Rs.41,95,018/- by referring to section 40(a)(ia) of Income tax Act, 1961 without any speaking order on appellant’s arguments.”
We have heard the rival arguments and perused the relevant material available on record. As submitted on behalf of the assessee company before Ld.CIT(A) as well as before us, the expenditure in question on account of design & development charges was incurred by the assessee company in respect of its Zenith Textile Division, the entire income of which was exempt u/s 10A of the Act, being a 100% Export Oriented Unit. In this regard, reliance is placed on behalf of the assessee on the CBDT Circular No.37/2016 issued on 02.11.2016 wherein it has been clarified that the CBDT has accepted the settled position that the disallowance made inter alia u/s 40(a)(ia) of the Act related to the business activity against which the chapter VI-A a deduction has been claimed, result as 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. In our opinion, the spirit of this CBDT Circular is applicable in the present case inasmuch as the disallowance made u/s 40(a)(ia) on account of design & development charges related to the Zenith Textile Unit of the assessee company would result in enhancement of the profits of the said division and the profits so enhanced would be entitled for exemption u/s 10A resulting into no addition to the total income of the assessee. We accordingly decide this issue in favour of the assessee and allow Ground No.2 of the assessee’s appeal.
As a result of decision rendered by us on the issue involved in Ground No.2 resulting into deletion of the addition made by the AO and confirmed by Ld.CIT(A) u/s 40(a)(ia), the issue involved in Ground No.1 relating to the validity of assessment made by the AO u/s 143(3)/147 has become infructuous. We accordingly do not consider it necessary or expedient to decide the same.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 01.08.2018.