M/s. Eka Software Solutions Private Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle- 11(3), Bangalore

ITA 2114/BANG/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 8048 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2020
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 01-10-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN BENGALURU
• Section: 10AA; 40(a)(ia); 195; 201; 192; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT A NO. 2114/BANG/2019 ASSESSMENT YEAR: 2011 - 12 EKA SOFTWARE SOLUTIONS PVT. LTD., BUILDING 2A, EAST TOWER, EMBASSY TECH VILLAGE, OUTER RING ROAD, DEVARABEESANAHALLI, VARTHUR HOBLI, BANGALORE 560 037. PAN: AABCE 3660Q VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(3), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI AJAY ROTT I, CA RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, CIT(DR)(ITAT), BENGALURU. 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 TH E ORDER DATED 29.7.2019 OF THE CIT(APPEALS)-II, BENGALURU RELATIN G TO ASSESSMENT YEAR 2011-12. ITA NO.2114/BANG/2019 PAGE 2 OF 5 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINE SS OF DEVELOPING AND LICENSING OF SOFTWARE PRODUCTS AND RENDERING CO NSULTANCY SERVICES. WHILE COMPLETING ASSESSMENT FOR AY 2011-12, THE AO MADE AN ADDITION OF RS.6,39,20,948 CONSEQUENT TO DISALLOWANCE OF PAYMEN TS MADE TO M/S. EKA SOFTWARE SOLUTIONS INC. [EKA, USA] AS BUSINESS SER VICE-MARKETING CHARGES ON THE GROUND THAT ASSESSEE FAILED TO DEDU CT TAX AT SOURCE ON THE AFORESAID PAYMENT MADE TO A NON-RESIDENT AS WAS REQ UIRED 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. 3. AGGRIEVED BY THE AFORESAID ADDITION MADE BY THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(APPEALS) CHALLENGIN G THE DISALLOWANCE U/S.40(A)(I) OF THE ACT AND RAISING AN ALTERNATE AR GUMENT THAT IF THE DISALLOWANCE/ADDITION IS SUSTAINED THEN THE DISALLO WANCE/ADDITION WILL GO TO INCREASE THE PROFITS OF THE BUSINESS THAT IS ELIGIB LE 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 DISALLO WANCE 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 10A A OF THE ACT 3.1 WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A A OF THE ACT, THE DCIT HAS CONSIDERED PROFITS AND GAINS OF T HE UNITS ELIGIBLE FOR RELIEF UNDER SECTION 10AA OF THE ACT W ITHOUT CONSIDERING THE DISALLOWANCE OF PART OF BUSINESS SE RVICE CHARGES. 3.2 WITHOUT PREJUDICE TO THE ABOVE, EVEN AFTER ASSU MING THAT THE BUSINESS SERVICE CHARGES OF INR 63,920,948 ARE DISA LLOWED, THE DEDUCTION UNDER SECTION IOAA OF THE ACT SHOULD BE RECOMPUTED ON THE BASIS OF THE ASSESSED INCOME. ITA NO.2114/BANG/2019 PAGE 3 OF 5 4. BEFORE THE CIT(APPEALS), THE ASSESSEE POINTED OU T THAT IN ASSESSEES OWN CASE FOR THE AY 2011-12, THE TRIBUNA L HAD REMANDED THE ALTERNATIVE ISSUE I.E., THE ISSUE THAT IF THE DISAL LOWANCE/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 ITA NO.20/BA NG/2014, ORDER DATED 30.1.2015. THE CIT(A), HOWEVER, SUSTAINED THE DISA LLOWANCE U/S.40(A)(I) OF THE ACT BUT GAVE ALTERNATE RELIEF IN RESPECT OF GRO UND NO.3 RAISED BY THE ASSESSEE BEFORE HIM. THE FOLLOWING WERE THE RELEVA NT OBSERVATIONS OF THE CIT(APPEALS):- GROUND NO.2:- THE HON'BLE ITAT VIDE ITS ORDER DATE D 30.01.2015 IN APPELLANT'S OWN CASE FOR AY: 2010-11 HAD STATED THAT TO APPLY MATCHING PRINCIPLE IN TERMS OF EXPEND ITURE AND REVENUE, THE FACTS ARE TO BE VERIFIED AND ACCORDING LY DIRECTED THE AO FOR DE NOVO CONSIDERATION OF THE ISSUE WITH RESP ECT TO THE GENUINENESS AND REASONABLENESS OF THE EXPENDITURE C LAIMED BY THE APPELLANT. THE AO VIDE HIS REMAND REPORT DATED 12.04.2018 SUBMITTED THAT THE APPELLANT FURNISHED INVOICES ONL Y ON SAMPLE BASIS AND ALL THE INVOICES WERE NOT PRODUCED BEFORE HIM AND ACCORDINGLY THE APPELLANT'S CLAIM OF EXPENSES IS NO T 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 EXPE NSES 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 PROCEED INGS AFTER FOLLOWING THE DIRECTIONS OF THE HON'BLE ITAT THE GE NUINENESS AND REASONABLENESS OF THE EXPENDITURE CLAIMED BY THE AP PELLANT COULD NOT BE VERIFIED FOR THE REASON THAT THE APPELLANT F URNISHED INVOICES ONLY ON SAMPLE BASIS AND ALL THE INVOICES WERE NOT PRODUCED BEFORE HIM AND ACCORDINGLY SINCE THE APPELLANT'S CL AIM OF EXPENSES ARE NOT BACKED BY PROPER DOCUMENTARY EVIDE NCE IS JUSTIFIED. EVEN DURING THE APPELLATE PROCEEDINGS, T HE APPELLANT COULD NOT SUBSTANTIATE ITS CLAIM WITH PROPER DOCUME NTARY EVIDENCE AND THEREFORE THIS GROUND IS NOT ALLOWED. ITA NO.2114/BANG/2019 PAGE 4 OF 5 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 AR TICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CASE MAY BE, AN D THEREAFTER ALLOW THE DEDUCTION U/S 10A IN ACCORDANCE WITH THE LAW AND DIRECTED THE AO TO GRANT DEDUCTION U/S 10A ACCORDIN GLY. RESPECTFULLY FOLLOWING THE SAME I HEREBY DIRECT AO TO FOLLOW THE DIRECTIONS OF ITAT IN APPELLANT'S OWN CASE FOR AY 2 010-11. 5. AGGRIEVED BY THE ORDER OF CIT(APPEALS) IN NOT DE LETING THE DISALLOWANCE/ADDITION U/S.40(A)(I) OF THE ACT, THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS NOT ICED FROM THE ORDER OF CIT(APPEALS) THAT IN ASSESSEES OWN CASE FOR AY 201 0-11, THE TRIBUNAL HAS HELD THAT DISALLOWANCE OF BUSINESS SERVICE-MARKETIN G CHARGES WILL GO TO INCREASE THE PROFITS OF THE BUSINESS WHICH IS ELIGI BLE 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., HO NBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. GEM PLUS JEWELLERY INDIA LTD. (2010) 194 TAX MAN 192 (BOM) AND HONBLE 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 PROFI TS THAT ARE ELIGIBLE FOR DEDUCTION UNDER CHAPTER VIA OF THE ACT, THE DEDUCTI ON UNDER CHAPTER VIA SHOULD BE ALLOWED ON SUCH INCREASED PROFIT. THIS P OSITION HAS ALSO BEEN NOW CONFIRMED BY THE CBDT IN ITS CIRCULAR NO.37/201 6 DATED 02.11.2016 WHEREIN THE BOARD HAS OBSERVED AS FOLLOWS:- 3. IN VIEW OF THE ABOVE, THE BOARD HAS ACCEPTED TH E SETTLED POSITION THAT THE DISALLOWANCES MADE UNDER SECTIONS 32, 40(A)(IA), 40A(3), 43B, ETC. OF THE ACT AND OTHER SPECIFIC DIS ALLOWANCES, RELATED TO THE BUSINESS ACTIVITY AGAINST WHICH THE CHAPTER VI-A DEDUCTION HAS BEEN CLAIMED, RESULT IN ENHANCEMENT O F THE PROFITS ITA NO.2114/BANG/2019 PAGE 5 OF 5 OF THE ELIGIBLE BUSINESS, AND THAT DEDUCTION UNDER CHAPTER VI-A IS ADMISSIBLE ON THE PROFITS SO ENHANCED BY THE DISALL OWANCE. 7. IT THEREFORE APPEARS THAT THERE WILL BE NO TAX L IABILITY 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 DISALL OWANCE U/S. 40(A)(I) OF THE ACT IS JUSTIFIED OR NOT, IS ACADEMIC, IF THE AL TERNATIVE 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 AL LOWING RELIEF U/S. 10AA OF THE ACT ON THE ENHANCED PROFIT CONSEQUENT TO DISALL OWANCE U/S. 40(A)(I) OF THE ACT. 8. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS DIS MISSED. PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DAY OF JANUARY, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 17 TH JANUARY, 2020. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FIL E BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.