M/s. Indecomm Global Services (India) Private Limited, Bengaluru V. Assistant Commissioner of Income Tax, Circle-3(1)(1), Bengaluru

ITA 2800/BANG/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 4713 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2014-2015
• Appeal Filed On: 20-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRIYADARSHINI BESAGANNI
• Keywords: Business expenditure; Double taxation relief; Retrospective amendment; Additional evidence; TDS
• Section: 37; 143(3); 40(a)(ia); 37(1); 194C; 208; 194J

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C”, BANGALORE Before Shri Chandra Poojari, AM and Shri George George K, JM ITA No.2799/Bang/2017 : Asst.Year 2013-2014 ITA No.2800/Bang/2017 : Asst.Year 2014-2015 M/s.Encora Innovation Labs India Private Limited (Formerly known as Indecomm Global Services (India) Pvt.Ltd.) No.10, Brigade South Parade Third Floor, M.G.Road Bangalore – 560 001. PAN : AABCB6817E. v. The Assistant Commissioner of Income-tax, Circle 3(1)(1) Bangalore. (Appellant) (Respondent) Appellant by : Sri.K.R.Vasudevan, Advocate Respondent by : Smt.Priyadarshini Besaganni, Addl.CIT-DR Date of Hearing : 06.04.2022 Date of Pronouncement : 12.04.2022 O R D E R Per George George K, JM : These appeals at the instance of the assessee are directed against two separate orders of the CIT(A), both dated 23.10.2017. The relevant assessment years are 2013-2014 and 2014-2015. Common issues are raised in these appeals, hence, they were heard together and are being disposed of by this consolidated order. First we shall adjudicate ITA No.2799/Bang/2017 pertaining to assessment year 2013- 2014. ITA No.2799/Bang/2017 (Asst.Year 2013-2014) 2. The ground raised read as follows:- ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 2 The learned Commissioner of ncome Tax (Appeals) ("CIT(A)") has erred in law and facts of the case in determining the total income of the Appellant: 1. Interest on late payment of Service Tax- INR 1,35,917 1.1 The learned CIT(A) has erred in not allowing the interest paid on delayed remittance of service tax as a business expenditure stating that 'service tax' only forms part of the balance sheet and is not routed through the statement of profit and loss account. 1.2 The learned CIT(A) has erroneously held that the appellant has placed reliance on verdict of Lachmandas Mathuradas vs. CIT 254 ITR 799 (SC), and not considered the other judicial precedents submitted that have held that the interest on delayed payment of service tax is 'compensatory' in nature and not 'penal' and hence the allowable as a business expenditure under the Income Tax Act, 1961 ('the Act'). 2. Non-deduction of withholding tax on year-end accrual in the case of legal and professional fees - INR 24,74,692. a)Provision for payment to auditors - INR 18,49,996 (towards audit fees -INR 11,12,112 and towards other services - INR 7,37,884) 2.1 The learned CIT(A) has erred in stating that "the appellant has not shown that the provision made was an ascertained liability worked out on basis of a scientific methodology. So, this unascertained liability cannot be allowed as expenditure, as the provision is of contingent nature". 2.2 The learned CIT(A) has erred in not taking into cognizance the submissions made wherein the correlation between the provisions and the actual invoices subsequently received were provided to substantiate that the provisions were created on a reasonable and reliable estimate basis. 2.3 The learned CIT(A) has erred in not taking into cognizance the submissions made by the appellant wherein the details of withholding taxes deducted on the said provisions was submitted. b) Paid to 'Interactive Solutions' and 'VK Associates' - INR 3,08,000 2.4 The learned CIT(A) has erred in stating that "the appellant has not shown that the provision made was an ascertained liability worked out on basis of a scientific methodology. So, ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 3 this unascertained liability cannot be allowed as expenditure, as the provision is of contingent nature". 2.5 The learned CIT(A) has erred in not taking into cognizance the details of withholding taxes along with the copy of tax deduction certificates furnished before him and has erroneously stating that the TDS has not been deducted on the said amount. c. Other provisions for various legal and professional charges - INR 3,16,696 2.6 The learned CIT(A) has erred in stating that "the appellant has not shown that the provision made was an ascertained liability worked out on basis of a scientific methodology. So, this unascertained liability cannot be allowed as expenditure, as the provision is of contingent nature" . 2.7 The learned CIT(A) has erred in not appreciating the pronouncement made by various judicial precedence wherein, it has been held that "there was no liability in the hands of the assessee company to deduct TDS, merely on the provisions made at the year end." 2.8 The learned CIT(A) has erred in not appreciating the pronouncements made by various judicial precedents, wherein it was held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed in respect of the same even though the liability may have to be quantified and discharged at a future date. 2.9 Notwithstanding and without prejudice to the above, the learned CIT(A) ought to have observed that if the provisions are held to be disallowed pursuant to Section 40(a)(ia) of the Act in the current year, the corresponding benefit shall have to be given in the subsequent year i.e., the year in which withholding tax has been remitted. 3. Non-deduction of withholding taxes on Procurement commission paid to foreign company - INR 13,03,349. a. Amount paid to Seams Inc. - INR 9,82,251 3.1 The learned CIT(A) has erred in not appreciating the fact that the foreign payments made is in the nature of 'procurement commission' and the same is not chargeable to tax in India as per the provisions of Income Tax Act, 1961 and the relevant articles of India Belgium Double Taxation Avoidance Agreement (DT AA), whichever is more beneficial. ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 4 3.2 The learned CIT(A) relying on the statement of the Assessing Officer ('AO') that appellant has not brought on record any details of the clients/business got due to the services rendered by Seams Inc. ' has erred in stating that 'providing these documents do not in themselves prove that the services were actually received by the appellant '. 3.3 The learned CIT(A) ought to observe that the requirement of' details of the clients/business got due to the services rendered by Seams Inc. ' was not brought to the attention of the appellant during the appellate proceedings and the disallowance was upheld without giving the appellant the opportunity to produce the facts. b) Year-end provisions towards 'Seams Inc.' and 'DRT & Partners' - INR 2,71,113 and INR 49,985 3.4 The learned CIT(A) has erred in stating that "the appellant has not shown that the provision made was an ascertained liability worked out on basis of a scientific methodology. So, this unascertained liability cannot be allowed as expenditure, as the provision is of contingent nature". 3.5 The learned CIT(A) has erred in not taking into cognizance the submission wherein the or relation between the provisions made and the actual invoices subsequently received were provided to substantiate that the provisions were created on a reasonable and reliable estimate basis. 3.6 The learned CIT(A) has erred in not appreciating the fact that the foreign payments made is not chargeable to tax in India as per the provisions of Income Tax Act, 1961 and the relevant articles of India Belgium Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial. 4. Non-deduction of withholding taxes on outsourced software services - INR 76,873 a) Online Purchase of Software- 36,068 4.1 With regard to INR 9,162, the learned CIT(A) has erroneously held that the amount pertains to prior year i.e., FY 2011-12, without taking into cognizance the fact that the amount of INR 9,162 only pertained to prepaid expense amount allocated to FY 2012-13 out of the total annual subscription charges of INR 1,09,947 which was accounted in the prior year . 4. 2 With regard to INR 26,906, the learned CIT(A) has erred ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 5 in considering the payments made to the foreign entities as 'royalty' by relying on the decision of CIT VS, Samsung Electronics Co Ltd [2011J 203 Taxman 477 (Kar. HC) and disallowing the payment made towards online purchase of standard shrink wrapped software which is available 'off the shelf on the ground of failure to withhold taxes. Short deduction of TDS and paid from own pocket - INR 40,804 4.3 The learned CIT(A) has erroneously held that the short deducted TDS remitted by the appellant ought to be disallowed stating that the amount has been incurred to avoid personal liability of paying higher tax and imposition of penalty and hence the expenditure is in the nature of personal expenditure/penal character' and hence cannot be allowed as a business expenditure to the appellant. 5. Non-deduction of withholding taxes on outsourced software services - INR 74,583 5.1 The learned CIT(A) has erred in considering the payments made to 24X7 Learning Private Limited as 'royalty' by relying on the decision of CIT VS, Samsung Electronics Co Ltd [2011J 203 Taxman 477 (Kar. HC) and disallowing the payment made towards online purchase ofe-learning software which is available 'off the shelf on the ground of failure to withhold taxes. Expense claimed on crystallization of liability - INR 71,362 6.1 The learned CIT(A) has erred in not taking into cognizance that the appellant had created a total provision of INR 1,00,500 towards the expenses during the financial year 2011-12 on an estimate basis. However, the actual bills for the expenses have been received for INR 1,71,862 during the financial year 2012-13. 6.2 The learned CIT(A) has erred in not taking into cognizance that the accounting treatment is based on the Accounting Standard and generally accepted accounting principles ("GAAP") issued by ICAI and the expense has been crystallized in the current year. 7. Short Credit of TDS - INR 5,69,848 7.1 The learned AO ought to have appreciated that the Appellant is entitled to a total credit of Rs.3,19,87,185 towards taxes deducted at source (TDS) as against a credit of Rs.314,17,337 which alone has been granted in the ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 6 assessment order. 7.2 The learned AO erred in not giving an opportunity of being heard to the Appellant before giving effect to short credit of prepaid taxes. The Appellant craves leave to add, alter, rescind and modify the grounds provided herein above or produce further documents, facts and evidence before or during the course of hearing of this appeal. For the above and any other grounds, which may be raised at the time of hearing, it is prayed that necessary relief may be provided.” We shall adjudicate the above issues as under:- Disallowance of interest on late payment of service tax Rs.1,35,917 (Ground 1) 5. Brief facts of above ground are as follows: The assessee has paid an interest of Rs.1,35,917 on account of late payment of service tax dues and has claimed such expenditure as deductible expense in the return of income on the ground that same is compensatory in nature. The Assessing officer (“AO”) held that interest on late payment of service tax is not an allowable expenditure. The AO held that interest on service tax shall be allowed as a deductible expenditure only if the ‘service tax’ is claimed as a deduction under Section 37 of the Act and forms part of Profit & Loss (“P&L”) Account of the assessee. The AO has relied on the judgment of Bharat Commerce & Industries Ltd reported in 230 ITR 733 (SC) which has held that “interest paid for committing a default to pay advance tax is not connected with preserving or promoting the business of the assessee. ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 7 5.1 Aggrieved, assessee raised this issue before the first appellate authority. The CIT(A) held that the receipt and payment of service tax is not forming part of profit and loss account. It was concluded by the CIT(A) that since the service tax is not impacting the P&L account, the question of allowing interest payment for delay in payment of service tax in the P&L account does not arise. 5.2 Aggrieved, the assessee has raised this issue before the ITAT. The submission of the learned AR are as follows:- a) The Appellant submits that the liability of service tax lies on the recipient of service and not on the service provider, hence the appellant is only a part of the mechanism for remittance of the service tax amount. b) The Appellant further submits that the decision of Bharat Commerce & Industries Ltd (supra) is on interest pertaining to late/delayed payment of ‘income tax’ which itself is not an allowable expenditure in the hands of the appellant. c) However, liability of service tax cannot be equated with the liability of Income tax and hence in the current case, the analogy of the case law cannot be applied to current set of facts. d) Conditions for claiming deductions under section 37(1) has been enumerated below for your goodself reference:- Sl. No. Conditions Applicability 1 It should not be in the nature of Capital expenditure The expenditure has been incurred in the course of providing of services. Hence, the same is not in the nature of capital expenditure. 2 It should not be in the nature of Personal expense Payment of service tax is a statutory obligation and is not in the nature of personal expenditure. 3 It should be laid out The liability arises in ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 8 wholly for the purpose of business the normal course of rendering of services by the Appellant. It has been held in the case of Kaypee Mechanical India (P.) Ltd.1, the Hon’ble Gujarat High Court held that the amount being expended by assessee wholly and exclusively for purpose of business, could not be stated to be a penalty for infraction of law and it was allowable as business expenditure. e) The Hon’ble Bangalore Tribunal in the case of Velankani Information Vs DCIT reported in (2018) 97 taxmann.com 599 (Bangalore) has categorically held that interest paid towards delayed payment of service tax is an allowable expenditure following the decision of the Hon’ble Supreme Court in the case Lachmandas Mathura Vs. CIT reported in 254 ITR 799.” 5.3 The learned Departmental Representative supported the finding of the Income Tax Authorities. 5.4 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of Velankani Information Systems Ltd. v. DCIT (supra) had categorically held that interest paid towards delayed payment of service tax is an allowable expenditure. The Bangalore Bench of the Tribunal in the case of Velankani Information Systems Ltd. v. DCIT (supra) followed the judgment of the Hon’ble Apex Court in the case of Lachmandas Mathura v. DCIT (supra). The relevant finding of ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 9 the ITAT in the case of Velankani Information Systems Ltd. v. DCIT (supra), reads as follows:- “19. We have given a careful consideration to the rival submissions. As far as payment of interest on delayed payment of service tax is concerned, it is clear from the decision of the Hon'ble Gujarat High Court in the case of Kaypee Mechanical India (P) Ltd. (supra) that service tax and interest paid on delayed deposit of service tax had to be allowed as a deduction. The Hon'ble Gujarat High Court took the view that payment of interest was only compensatory in nature and would not be in the nature of penalty which would be hit by Explanation to section 37(1) of the Act. Therefore, the same had to be allowed as a deduction. As far as the plea of the ld. DR by placing reliance on the decision of the Hon'ble Supreme Court in the case of Star India (P) Ltd. (supra)is concerned, we are of the view that the reliance placed by the ld. DR on the aforesaid decision will not help the case of the revenue. In the case of Star India (P) Ltd. (supra), the facts were that the appellant was a company incorporated under the Companies Act, 1956, and carried on business in India. It is the 'agent of M/s. Satellite Television Asian Region Limited, Hong Kong (referred to as "Star", Hong Kong). The business of Star was to telecast channels from satellites situated outside India. Some of the channels are available and enjoyed by the customers in India. According to the appellant, it does not broadcast, but merely sells time slots for advertisement and obtain sponsors for the serials, programmes or live events, etc. Thus, when the service of broadcasting was introduced in the Finance Act, 1994 as a taxable service with effect from 16-7 - 2001, by the Finance Act, 2001, the appellant disputed its liability to make any payment of service tax on the ground that it did not, in fact, broadcast. The Commissioner, however, held against the appellant. The appellant appealed before the Commissioner (Appeals). While the appeal was pending, the Finance Act, 2001, was amended by the Finance Act, 2002. The effect of the amendment, inter alia, was to make an agent, such as the appellant, liable to pay service tax as broadcaster. The question before the Hon'ble Supreme Court was, can a liability be fastened on an assessee with retrospective effect? The Hon'ble Supreme Court held that retrospective civil liability can be created by legislation and there is a prohibition only to create an offence retrospectively. It is in this context that the Hon'ble Supreme Court had made the following observations in para 8 of its decision. Para 7 & para 8 have to be read together, which reads as follows:- "7. In any event, it is clear from the language of the ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 10 validation clause, as quoted by us earlier, that the liability was extended not by way of clarification but by way of amendment to the Finance Act with retrospective effect. It is well established that while it is permissible for the Legislature to retrospectively legislate, such, retrospectivity is normally not permissible to create an offence retrospectively. There were clearly judgments, decrees or orders of courts and Tribunals or other authorities, which required to be neutralised by the validation clause. We can only assume that the judgments, decree or orders, etc., had, in fact, held that persons situate like the appellants were not liable as service providers. This is also clear from the Explanation to the valuation section which says that no act or acts on the part of any person shall be punishable as an offence which would not have been so punishable if the section had not come into force. 8. The liability to pay interest would only arise on default and is really in the nature of a quasi- punishment. Such liability although created retrospectively could not entail the punishment of payment of interest with retrospective effect." 20. The observations of the Hon'ble Supreme Court in para 8 is only in the context of a question, whether there can be criminal liability imposed by retrospective law. The above observations cannot be read to mean that interest paid on delayed deposit of service tax is penal in nature and therefore cannot be allowed as a deduction under Explanation to section 37(1) of the Act. We, therefore, hold and direct that the deduction of interest on delayed deposit of service tax amounting to Rs.56,11,697 should be allowed as a deduction.” 5.5 In view of the ITAT’s order, which is identical to the issue raised in ground 1, we hold that the interest on delayed remittance of service tax is an allowable deduction. It is ordered accordingly. 5.6 In the result, ground 1 is allowed. ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 11 Disallowance of year-end accrual in the case of legal and professional fees – Rs.13,62,580 and audit fees – Rs.11,12,112 on account of non-deduction of withholding tax (Ground 2) 6. Brief facts of the above ground are as follows: During the relevant assessment proceedings, the assessee had stated that withholding of taxes was not done on the provisions towards legal and professional fees – Rs.13,62,580 and audit fees – Rs.11,12,112. The nature of expenses incurred are as follows:- i. Payment towards Professional Fees (Interactive Solution) – Rs. 2,34,000 ii. Payment towards Professional Fees (VK Associates) – Rs.74,000 iii. Other Provision for Legal and Professional charges– Rs.3,16,696 iv. Other fees paid to Auditors – Rs. 7,37,884 v. Audit fees – Rs. 11, 12,112 6.1 The Assessing Officer in the assessment order completed u/s 143(3) of the I.T.Act (order dated 07.01.2017), held that the provisions created at year end are ‘adhoc’ in nature and not based on reliable estimate as envisaged by the Accounting Standard and accordingly is not allowable expenditure under section 37 read with 40(a)(ia) of the I.T.Act. 6.2 Aggrieved, the assessee raised this issue before the first appellate authority. The CIT(A) has accepted the additional evidences submitted by the assessee with respect to deduction ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 12 of tax on the following payments(para 5 of CIT(A) order in Pg.15 of PB):-  Payment towards Professional Fees (Interactive Solution) - Rs. 2,34,000 (taxes deducted in the subsequent years)  Payment towards Professional Fees (VK Associates) - Rs. 74,000(taxes deducted in the subsequent years)  Other fees paid to Auditors - Rs. 7,37,884 (Taxes deducted and paid during the year)  Audit fees – Rs. 11, 12,112 (Taxes deducted and paid during the year) The CIT(A), however, has disallowed the claim of the assessee on the ground that the provision is an unascertained liability and not allowable for deduction. 6.3 Aggrieved by the order of the CIT(A), the assessee has raised this issue before the ITAT. The submission of the learned AR are as follows:- A. Interactive Solution and VK Associates- Rs.2,34,000 and Rs.74,000  Details available in the Paperbook (‘PB’) and submitted before the CIT(A) a) The Copy of the invoices and TDS withheld on the payments made to Interactive Solution and VK Associates was submitted before the CIT(A) (pg.119 to pg.126 of PB) b) The provision amount is same as the amount of actual billing. Further, provision was made on the agreed amount between the appellant and vendors.  Details submitted as additional evidence (‘AE’) a) Copy of ledger extracts of provision for expenses to demonstrate that the provision created during the year is reversed in the subsequent year (pg.26 of AE) b) Copy of ledger extracts of Interactive Solution and VK Associates to demonstrate that the tax has been deducted at the ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 13 time of credit of the amount to the account of the vendor (pg.27 to pg.29 of AE). The appellant accordingly submits that provision was made based on relevant information available at the end of the year is a liability which was measured by using a substantial degree of estimation and the same ought to be treated as ascertained liability. Additionally, the copy of the invoices were submitted to demonstrate that the provision was created for the agreed amount, which is matching with the invoices and the same is ascertained in nature. B. Other fees paid to Auditors and Audit fees - Rs.7,37,884 and Rs. 11, 12,112  Details available in the Paperbook (PB) and submitted before the CIT(A) a) Other fees paid to auditors is classified as legal and professional fees in the financial statement and is in the nature of fees paid to auditors for the services other than statutory audit. b) The Copy of the invoices (pg.21 to pg.26 of PB)and TDS withheld on the payments w.r.t above payments were submitted before the CIT(A) (pg.107,pg 108 and pg.113 to pg.117 of PB)  Details submitted as additional evidence Historical trend of the provisions created in the last 2 years and subsequent 2 years relevant to AY 13-14 along with the actual invoices received subsequently to demonstrate that the amount of provisions created for any financial year is closed to the actual billing and the provision is an ascertained liability. (pg.1 to pg.25 of AE) Therefore, the appellant submits that provision was made based on relevant information available at the end of the year is a liability, which was measured by using a substantial degree of estimation, and the same ought to be treated as ascertained liability. C. Other Provision for Legal and Professional charges– Rs. 3,16,696 The appellant was not given opportunity to submit the break-up of the above provision and the appellant made efforts in collating the information that is forming the basis of the provision and expenditure for the submission before your goodself as additional evidence  Details available in the Paperbook (PB) and submitted before the CIT(A) The provisions were made for legal fees and complies with the requirement of AS -29 on provisions, Contingent liabilities and Contingent assets (pg.109 of PB)  Details submitted as additional evidence ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 14 A. The break-up of the other Provision for Legal and Professional charges amounting Rs.3,16,696 is as follows (pg.30 to pg.32 of AE):- Sl.no. Nature Amount (in Rupees) 1 Provision for professional charges 25,000 2 Provision for professional charges 26,000 3 Provision for sub- contracting charges 2,65,696 Total 3,16,696 B. In relation to provision for professional charges referred in Sl. no.1, the appellant has submitted the copy of the invoice received subsequently and copy of form 16A to demonstrate that the expense is an ascertained liability (pg.30 to pg.32 of AE) C. In relation to provision for professional charges referred in Sl. no.2, the appellant has submitted the copy of the ledger extract of Provision for professional service charge to demonstrate that the provision was reversed in the subsequent years and has already been offered to tax in that year.(pg.33 of AE) D. In relation to part provision for sub-contracting charges referred in Sl. no.3, the appellant has submitted the copy of the ledger extract of provision for sub-contracting charges to demonstrate that the provision was reversed in the subsequent years and has already been offered to tax in that year.(pg.34 of AE) The appellant submits that on reversal of provision, the appellant has offered the income for taxation in the subsequent year and disallowance of the same in the year under consideration shall lead to double taxation and the same ought to be held as bad in law.  Without prejudice to the above, it is submitted that tax need not be deducted at source for the provisions on following grounds: i) The Appellant submits that as per provisions of section 4 of the Act, tax is deductible at source only when the income is chargeable to the tax. ii) Hence, the appellant submits that no income has accrued in the hands of the payee, hence requirement of charging tax on the same does not arise. iii) The assessee further submits that the requirement of withholding tax as envisaged in Section 194J of the Act requires to “deduct an amount equal to ten percent of such sum as income-tax ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 15 on income comprised therein”. Since no income arises in the hands of payee at the time of creation of provision, therefore no deduction of withholding tax required. iv) In this regard, appellant relies on the following judicial precedents:-  The SC in the case of Bharat Earth Movers vs. CIT reported in 245 ITR 428 (SC) has held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed in respect of the same even though the liability may have to be quantified and discharged at a future date.  In this regard, reliance can be placed on the ruling of Honorable High Court of Karnataka in the case of Karnataka Power Transmission Corporation Ltd. reported in 67 taxmann.com 254 wherein, it had been held that “if no income is attributable to the payee, there is no liability to deduct tax on source in the hands of the tax deductor”. In the present case the Appellant has made year end provisions and no income is attributable to the payee for the captioned year, hence there is no liability to deduct tax at source.  In this regard, reliance can be placed on the ruling of Bangalore Tribunal in the case of Boscj Limited (ITA No.1583/Bang/2014) wherein, it has been held that “there was no liability in the hands of the assessee company to deduct TDS, merely on the provisions made at the year end.”  Relying on the above ruling in the case of Bosch Limited, Bangalore Tribunal in the case of TE Connectivity India Pvt. Ltd (ITA No.3/Bang/2015) has held that provisions relating to withholding of taxes applies only to sums chargeable to tax and hence there is no liability to withhold tax on year-end provisions. The said ruling had also placed reliance on the following rulings of the Apex Court:  M/s GE India Technology Centre P. Ltd. vs. CIT [327 ITR 456] held that if payment is not assessable to tax there is no question of tax at source being deducted.  CIT Vs M/s Shoorji Vallabhdas & Co. [46 ITR 144] held that mere entry in the books of the accounts does not establish the accrual of the income in the hands of the payee. Notwithstanding and without prejudice to the above, the appellant requests your goodself to allow the claim in the year in which the tax on such amount was actually paid as per the provisions of section 40(a)(ia). ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 16 6.4 The learned Departmental Representative supported the orders of the A.O. and the CIT(A). 6.5 We have heard rival submissions and perused the material on record. The A.O. disallowed the above expenditure by holding that it is only an “adhoc provision” and without any scientific basis. The assessee had submitted before the AO that income has not accrued to the payee during the relevant assessment year and these provisions were reversed in the subsequent assessment years. The AO did not consider the above submission and made disallowance. Before the CIT(A), the assessee filed additional evidence, which were admitted by the CIT(A) (refer para 5 at page 4 and 5 of the CIT(A)’s order). The CIT(A) was silent on the issue raised by the AO, namely, that provisions was without any basis. However, the CIT(A) raised a new issue that the assessee has not shown that provision made was an ascertained liability worked out on scientific basis. It is contended by the learned AR that the CIT(A) did not grant any opportunity to the assessee to explain that provisions are ascertained liability worked out on proper scientific basis. Therefore, in this context the assessee has filed additional evidence before the Tribunal to demonstrate that these provisions are ascertained liability and supported by proper past experiences. The additional evidences that are sought to be admitted are detailed in the submissions extracted at para 6.3 (supra). The additional evidences that are sought to be admitted goes to the root of the issue. Therefore, for the proper adjudication of the issue and for substantial cause, the same is admitted. ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 17 Since the CIT(A) has not given an opportunity to demonstrate that the provisions are ascertained liability and since the additional evidences are admitted and taken on record, necessarily, the matter needs send back to the AO for consideration and verification of the additional evidences. It is ordered accordingly. 6.6 In the result, ground 2 is allowed for statistical purposes. Non-deduction of withholding taxes on Procurement commission paid to foreign company – Rs.13,03,349 (Ground 3) 7. Brief facts in relation to the above ground are as follows: The assessee has claimed an expenditure of Rs.13,03,349 relating to commission paid to Seams Inc., Belgium as ‘legal and Professional expenses’ during the year. The AO opined that the shelter of non-applicability of make available clause on account of protocol between India and Belgium read with India-UK treaty cannot be taken on the payment made to Seams Inc. and disallowed the same u/s 40(a)(i) of the income tax act. In relation to Year-end accrual on services received from Seams Inc. and DRT & Partners, the AO has held that the same is provisions in nature and thus make available clause is not applicable. The details of the amount disallowed is as given below: Party Name Nature of service Amount (in Rs.) Seams. Seams Inc. is involved in the sales 9,82,251 ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 18 Inc, Belgium process and customer acquisition process in Belgium for which commission will be paid based on turnover achieved. Provision Year-end accrual based on services received :- a) Seams Inc – 2,71,113 b) DRT & Partners – 49,985 3,21,098 Total 13,03,349 7.1 Aggrieved, the assessee filed appeal before the first appellate authority. As regards the provision amounting Rs.3,21,098, the CIT(A) held that assessee has not shown that the provision made was an ascertained liability worked out on the basis of scientific basis. Hence, it was held that it was contingent in nature. As regards payment made to Seams Inc. amounting Rs.9,82,251, the CIT(A) held that the assessee has not brought on record the details of the clients/business got due to the services rendered by Seams Inc. and proof of actual rendition of service. 7.2 Aggrieved by the order of the CIT(A), the assessee has raised this issue before the ITAT. The submission of the learned AR is summarized as follows:- A. Procurement commission paid to Seams Inc. Rs.9,82,251 and provisions made during the year towards Seams Inc. amounting Rs.2,71,113  Details available in the Paperbook (PB) and submitted before the CIT(A) a) At the outset, it is submitted that Seams Inc. is a third party assisting the Appellant in sales process and customer acquisition process in Belgium. Appellant has entered into a separate agreement with the Seams Inc. for rendition of service. The agreement along with the detailed nature of the services have been ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 19 submitted before the CIT(A) and the same has been admitted in para 6.3 of the Order (pg.17 of PB). b) The Appellant submits that expenditure of Rs. 9,82,251 is towards Procurement commission paid to Seams. Inc, Belgium. Based on the agreement, Seams Inc. is eligible for 3% on the turnover as commission for the first 2 years and for the subsequent years, business partner would be eligible for 1.5% on the turnover as commission (pg.98 of PB). c) The CIT(A) has dismissed the ground of the appellant on the sole ground that appellant has not provided the details of the clients/business got due to the services rendered by Seams Inc. It is submitted that the genuine nature of transaction was never question by the AO and hence, the requirement of the furnishing of such details did not arise. Further, the details of the clients/business was also not asked by the CIT(A) and hence, the appellant restricted to the agreement and the nature of services rendered to demonstrate the genuinity of the transaction. d) As regards provision, it is submitted that the details have been provided to the AO vide submission dated November 30, 2016. Further, it is submitted that the actual copy of invoices received by the appellant during the period April & May 2013 has also been furnished to the AO (page 208 of the PB). Further, the invoices and copy of form 15CA and form 15CB received by the appellant was provided to CIT(A)(pg.127 to pg.151 of the PB).  Details submitted as additional evidence Further to the above, the appellant has submitted the working on the correlation of the commission expenses incurred during the year with the revenue received from Germany in order to demonstrate that the procurement commission paid to Seams Inc. is linked to the revenue earned from Germany (Pg.35 of AE). Therefore, the appellant submits that the contention of CIT(A) that no additional business was received during the year is ought to be stuck down. B. Provision made during the year towards DRT Partners amounting Rs.49,985 The appellant has submitted before the CIT(A) that the provision was made towards an ascertained liability and the details of the invoices received subsequently was also provided in pg.22 and pg.54 of the paperbook to demonstrate that the provision was created for the agreed amount and is ascertained in nature. ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 20 Therefore, in light of the above circumstance, it is submitted that the above expenditure incurred and the provision created deserves to the allowed in the hands of the Appellant. 7.3 The learned DR strongly supported the order of the AO and the DRP. 7.4 We have heard rival submissions and perused the material on record. The assessee had submitted before the AO that the services rendered by Seams Inc. are in the nature of business income and covered under Article 7 of the India- Belgium DTAA and hence not taxable in India. The AO did not consider the above submission and made disallowance by holding that make available clause of DTAA is not applicable to these payments. Before the CIT(A), the assessee filed additional evidences, which was were admitted by the CIT(A). While the CIT(A)’s order was silent on the issue raised by the AO, the CIT(A) raised the following new issues :- (a) As regards the provision, the CIT(A) stated that the assessee has not shown that the provision made was an ascertained liability worked out on scientific basis, and hence, confirmed the disallowance. (refer para 6.2 of the CIT(A)’s order. (b) As regards the payment of Rs.9,82,251, the CIT(A) raised a new point that details of the business got from Seams Inc. for which the commission was paid, was not furnished. ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 21 7.4.1 In this context, the learned AR submits that the CIT(A) did not give any opportunity to the assessee to explain these new issues raised by the CIT(A). In this context, the assessee has filed additional evidence before the Tribunal to demonstrate the co-relation of commission expenses incurred during the year with the revenue received from Germany. The details of the additional evidence are enumerated in the submissions made by the learned AR at para 7.2 (supra). The additional evidence now submitted before the Tribunal goes to the root of the issue raised, hence, the same is taken on record for substantial cause and justice. Since the issue was not raised by the AO and the CIT(A) did not give any opportunity of the assessee, it is necessary to remand the matter to the AO to consider the additional evidence now admitted and taken on record. Therefore, for the necessary verification of the issues raised in ground 3, the matter is restored to the files of the AO for de novo consideration. It is ordered accordingly. 7.5 In the result, ground 3 is allowed for statistical purposes. Non-deduction of withholding taxes on outsourced software services - Rs.76,873 (Ground 4) 8. Brief facts in relation to the above ground are as follows: The assessee had incurred expenditure on purchase of software from foreign entities. The description of the said expenditure is enumerated in the below table:- Sl. No. Nature of the Payment Amount Description ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 22 1 Payment made during the FY 2011-12 for getting images annual subscription. 9,162 Expense incurred during the last year for Rs.1,09,947. The amount adjusted during the current year for prepaid expenses is Rs.9,162 2 Payment made to audio network for online Purchase of the software 8,685 Payment made for online purchase of the software from Audio network to be used for corporate/charity production, for distribution on website. 3 Payment made to audio network for online Purchase of the software 8,476 Payment made for online purchase of the software from Audio network plc to be used for corporate/charity production, for distribution on website. 4 Payment made for online Purchase of the software 8,608 Payment made for online purchase of the software 5 Reimbursment of audio purchased from Envato pty. ltd (Audio Jungle) $20 1,137 Reimbursement for purchase of software. 6 Short deduction of TDS on making payment outside India. 40,804 The company has made payment to TV radio, Cipherion & EQHQ on which TDS has been paid @10% and actual liability to deduct was realized as 20%, hence the balance amount is paid & claimed as business expenditure Total 76,872 8.1 The AO has held that the assessee has not submitted any detail in respect of the persons to whom the sum is paid and nature of services provided. Hence, the expenditure was disallowed. ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 23 8.2 Aggrieved, the assessee filed appeal before the first appellate authority. The finding of the CIT(A), as regards each expenditure are listed below:- (a) As regards item No. 1 relating to prior period expenses amounting to Rs. 9,162/-, it was held that expenditure pertains to AY 2011-12 and hence is not allowable for the year under consideration. (b) Regarding the expenditure incurred towards purchase of software amounting to Rs. 26,906/-, the disallowance made by the A.O. was upheld as the expenditure was in the nature of royalty following the decision of the Hon’ble Jurisdictional High Court in the case of Samsung Electronics (203) Taxman 477 (Kar). (c) As regards the allowability of an amount of Rs. 40,804/- as business expenditure, the CIT(A) held that the said expenditure is in the nature of penal liability or personal liability and hence, in either case, the same is not allowable as business expenditure. 8.3 Aggrieved by the order of the CIT(A), the assessee has raised this issue before the ITAT. The submission of the learned AR are summarized as follows:- a) As regards prior period expenses, it is submitted that the expenditure has been incurred during the last year for Rs.1,09,947. The amount was adjusted during the current year for prepaid expenses is Rs.9,162. It is further submitted that the expenditure has not been claimed during the pervious year. b) Without prejudice to the above, if the amount is allowable for the year under the consideration, the same should be allowed in the year where the expenditure has been incurred. c) As regards the expenditure amounting to Rs. 26,906/- relating to purchase of software, d) Further, it is submitted that expenditure to the extend of Rs. 1,137/- has been incurred by the Appellant towards reimbursement of purchse of software and the same has not been adjudicated by the CIT(A). e) As regards the business expenditure incurred on account of short deduction of tax at source it is submitted that the expenditure has been incurred solely for the purpose of business and no element ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 24 of personal expenditure can be attributed to such payment. It is further submitted that the parties are not related and transaction between the parties purely related to the business of the Appellant. f) It is submitted that the expenditure is not incurred under any penal provision nor any consequences. Further, it is submitted that the logic of short payment leading to penal consequence cannot be assume that the actual expenditure is incurred is towards penalty and hence not allowable. In light of the above facts and circumstance of the case, it is submitted that the entire amount claimed by the Appellant should be allowed as an allowable deduction. 8.4 The learned Departmental Representative supported the orders of the Income Tax Authorities. 8.5 We have heard rival submissions and perused the material on record. The AO had disallowed the expenditure on the ground that the details of the payments were not submitted. However, the learned AR submits that the AO never called for the details. The discussion on this issue is on para 9 of the impugned order of the Assessing Officer. The assessee filed details of the expenses incurred for purchase of software before the CIT(A), which were admitted and the CIT(A) adjudicated this issue by classifying the amount of Rs.76,873 under three broad heads – (a) Amount of Rs.9,162 held as prior period expenses and disallowed. (b) Amount of Rs.26,906 being payment for purchase of software, is held as “Royalty” and subject to TDS, relying on the decision in case of Samsung Electronics. (c) Amount of Rs.40,804 held as not in the nature of business expenditure but personal expenditure/penal in character. ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 25 8.5.1 As regards the amount of Rs.9,162 is concerned, it is submitted that it pertains to the current year period and therefore, was booked in the current year as prepaid expenses. The CIT(A) seems to have confused between the prepaid with the prior period expenses. Since both the AO and the CIT(A) has not examined the facts relating to the issue, the same needs fresh examination to see if the amount represents prepaid expenses or not. 8.5.2 As regards the payment of Rs.26,906 is concerned, the same relates to the purchase of software. The CIT(A) had held that these payments as “royalty” and hence for non- deduction of tax the said expenditure was denied deduction by relying on the judgment of the Hon’ble Karnataka High Court in the case of Samsung Electronics (supra). The Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence reported in 432 ITR 471 (SC) had held that the payment of purchase of software is not “royalty” and hence not liable for TDS. Since both the AO and the CIT(A) has not examined the facts relating to the nature of payment made and the nature of software purchased, this issue requires fresh examination in the light of the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence (supra). 8.5.3 As regards the amount of Rs.40,804 is concerned, the assessee made TDS deduction at 10% on a particular payment. However, on realizing that the applicable rate is 20%, the assessee made the balance payment of 10%. Since it ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 26 was not realizable from the payee, assessee claimed it as an expenditure u/s 37 of the I.T.Act. In support of the same, the assessee relied on Kolkata Bench ITAT order in the case of DCIT v. Narayani Ispat Limited in ITA No.2127/Kol/2014 (order dated 30.08.2017). The CIT(A) did not understand the issue in the right perspective and wrongly characterized the payment as personal expenditure / penal in nature. Since both the AO and the CIT(A) have not examined the facts relating to the transaction, this issue needs to be examined afresh by verifying the facts relating to the transaction and examining the same in the light of the order of the ITAT Kolkata Bench in the case of DCIT v. Narayani Ispat Limited (supra). 8.6 Therefore, ground 4 is allowed for statistical purposes. Non-deduction of withholding taxes on outsourced software services – Rs.74,583 (Ground 5) 9. Brief facts in relation to the issue raised in above ground are as follows. The assessee had paid an amount of Rs.74,583 towards online e-learning module to 24X7 Learning Private Limited and did not deduct tax on the same. The AO has disallowed the expenditure to the amount of Rs.74,583 paid to 24X7 Learning Private Limited on account of non-availability of non- deduction TDS Certificate. 9.1 The CIT(A) upheld the action of the AO relying on decision of the Hon’ble Jurisdictional High Court in the case of Samsung Electronics (203) Taxman 477 (Kar). ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 27 9.2 Aggrieved by the order of the CIT(A), the assessee has raised this issue before the ITAT. The submission of the learned AR are summarized as follows:- a) The Appellant has paid Rs.74,583 towards online e-learning module to 24X7 Learning Private Limited and did not deduct any withholding on the same. b) The appellant has relied on the pronouncement made by the Hon’ble supreme Court in the case of Tata Consultancy Services2 wherein the Court has held that canned software (i.e., computer software packages off the shelf) can be termed to be ‘goods’ and as such assessable to sales tax. c) Appellant in this regard also relied on the definition of Works contract as defined u/s 194C of the Act as “manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer” d) Based on the above observation, appellant submits that the same cannot be taxed as works contract. e) The appellant has further relied on the pronouncement made by the Hon’ble Delhi High Court in the case of Infrasoft Ltd.3 wherein it was held that “In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work and Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent.” Based on the above pronouncement, assessee submits that the software purchased is used only for the internal business purpose, accordingly not liable to withholding tax. ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 28 9.3 The learned Departmental Representative supported the orders of the Income Tax Authorities. 9.4 We have heard rival submissions and perused the material on record. The AO disallowed the amount of Rs.74,583 paid to 24x7 Learning Private Limited, on account of non-availability of non-deduction TDS certificate. The issue is discussed in para 8 of the AO’s order. The CIT(A) upheld the disallowance by holding this payment is for purchase of software and is liable for TDS by relying on the judgment of the Hon’ble Karnataka High Court in the case Samsung Electronics (supra). The Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (supra) has held that payment for purchase of software is not royalty and hence not liable for TDS. Since both the AO and the CIT(A) have not examined the nature of the payments made, the issue requires fresh examination, in the light of the judgment of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (supra). It is ordered accordingly. 9.4.1 In the result, ground 5 is allowed for statistical purposes. Prior Period Expenses – Rs.71,362 (Ground 6) 10. The assessee had created a total provision of Rs. 1,00,500 as prior period expenses on an estimate basis. However, the actual bills received amounted to Rs.1,71,862. The actual amount over the provisions available has been ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 29 recognised in the current year. Accordingly, tax was deducted on the same before making the payment and thus claimed the expenditure u/s 40(a)(ia). The AO held that the expenditure is related to previous assessment year and accordingly disallowed the same on the ground that it is a prior period expenses. 10.1 Aggrieved by the order of the AO, the assessee preferred appeal before the first appellate authority. The CIT(A) held that the fact that amount relates to AY 2011-12 is not disputed and hence, has been correctly treated as prior period expenses by the AO and disallowed u/s 40(a)(ia) of the I.T.Act. 10.2 Aggrieved, the assessee has raised this issue before the ITAT. The learned AR submits that the TDS on such expenditure has been deducted and paid during the AY 2013- 14. Hence, such expenditure should be allowed u/s 40(a)(ia) of the Act in the relevant assessment year. 10.3 The learned Departmental Representative supported the orders of the AO and the CIT(A). 10.4 We have heard rival submissions and perused the material on record. The assessee had created a provision fo Rs.1,00,500 in the earlier year on estimate basis. However, the actual bills received amounted to Rs.1,71,862. The differential amount over the provisions made was booked in the current year and TDS was made, while making the payment. The AO disallowed the amount by holding it as prior period expenses. This issue has been discussed at para 7 in ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 30 page 5 of the AO’s order. The CIT(A) confirmed the same, as discussed in para 9 of the CIT(A)’s order. It is the submission of the learned AR that the expenditure had crystallized during this year, the invoices was received during this year and TDS was deducted during the year. We find that the year of crystallization of the expenses has not been examined by the AO and the CIT(A). Therefore, this issue requires fresh examination. It is ordered accordingly. 10.5 In the result, ground 6 is allowed for statistical purposes. Short credit of TDS- Rs.5,69,848 (Ground 7) 11. The assessee had claimed tax credit amounting to RS.3,19,87,185 in the return of income. The AO, however, granted TDS only for a sum of Rs.3,14,77,337. The CIT(A)’s order has not considered the issue, though the same was raised before him. 11.1 We have heard rival submissions and perused the material on record. The assessee claims, it has not been granted TDS credit for a sum of Rs.5,69,848 (3,19,87,185 – 3,14,77,337). We direct the AO to examine the said plea of the assessee and grant TDS credit in accordance with law. ITA No.2800/Bang/2027 (Asst.Year 2014-2015) 12. The grounds raised read as follows:- “The learned Commissioner of Income Tax (Appeals) ("CIT(A)") has erred in law and facts of the case in determining the total income of the Appellant as details below: ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 31 1. Interest on late payment of Service Tax- INR 2,527 1.1 The learned CIT(A) has erred in not allowing the interest paid on delayed remittance of service tax as a business expenditure stating that 'service tax' only forms part of the balance sheet and is not routed through the statement of profit and loss account. 1.2 The learned CIT(A) has erroneously held that the appellant has placed reliance on verdict of Lachrnandas Mathuradas vs. CIT 254 ITR 799 (SC) however the learned CIT(A) has not considered the other judicial precedents submitted that have held that the interest on delayed payment of service tax is 'compensatory' in nature and not 'penal' and hence the allowable as a business expenditure under the Income Tax Act, 1961 ('the Act'). 2.Non-deduction of withholding taxes on payments made to foreign company - INR 11,82,594 a) Amount paid to Seams Inc. - INR 4,88,570 2.1 The learned CIT(A) has erred in not appreciating the fact that the foreign payments made is in the nature of 'procurement commission' and the same is not chargeable to tax in India as per the provisions of Income Tax Act, 1961 and the relevant articles of India Belgium Double Taxation Avoidance Agreement (DT AA), whichever is more beneficial. 2.2 The learned CIT(A) relying on the statement of the Assessing Officer ('AO') that 'appellant has not brought on record any details of the clients/business got due to the services rendered by Seams Inc. has erred in stating that 'providing these documents do not in themselves prove that the services were actually received by the appellant '. 2.3 The learned CIT(A) ought to observe that the requirement of' details of the clients/business got due to the services rendered by Seams Inc. ' was not brought to the attention of the appellant during the appellate proceedings and the disallowance was upheld without giving the appellant the opportunity to produce the facts. b Paid to DRT Partners, Belgium and Euringration, Belgium - INR 5,77,101 2.4 The learned CIT(A) has erred in not appreciating the fact that the foreign payments made has not 'made available' any technical knowledge to the recipient of service hence the same not chargeable to tax as per the provisions of Income Tax Act, 1961 and the relevant articles (including Most ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 32 Favored Nation clause) of India Belgium Double Taxation A Taxation Agreement (DTAA), whichever is more beneficial. 2.5 The learned CIT(A) has erred in not taking into cognizance the fact that learned AO had allowed the said expenditure in AY 2013-14 (mentioning that the make- available cause is applicable on the payment), however, in the current assessment year , wherein the facts of the case are similar, the learned AO has erroneously disallowed the same which has been upheld by CIT(A) . 2. 6 The learned CIT(A) has erred in not taking into cognizance the submissions made by the appellant on the nature of payments made to DRT Partners, Belgium and Euringration, Belgium and erroneously disallowing the same without deliberating the reasons for disallowance in the order. c)Year-end provisions towards 'Euringration' and 'DRT & Partners' - INR 61,064 and INR 55,859 2.7 The learned CIT(A) has erred in disallowing the above provisions stating that "the appellant has not shown that the provision made was an ascertained liability worked out on basis of a scientific methodology. So, this unascertained liability cannot be allowed as expenditure, as the provision is of contingent nature". 2.8 The learned CIT(A) has erred in not taking into cognizance the submissions made before him wherein the correlation between the provisions made and the actual invoices subsequently received were provided to substantiate that the provisions were created on a reasonable and reliable estimate basis. 2.9 The learned CIT(A) has erred in not appreciating the pronouncement made by various judicial precedence wherein it was held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed in respect of the same even though the liability may have to be quantified and discharged at a future date. 2.10Notwithstanding and without prejudice to the above, the learned CIT(A) has erred in not appreciating the fact that the payments made to the above foreign entities is not chargeable to tax in India as per the provisions of Income Tax Act, 1961 and the relevant articles of India Belgium Double Taxation A voidance Agreement (DTAA) (including Most Favored Nation clause), whichever is more beneficial. 3.Non-deduction of withholding tax on year-end accrual in the case of Audit fees-INR 15,16,446 . ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 33 3.1 The learned CIT(A) has erred in stating that "the appellant has not shown that the provision made was an ascertained liability worked out on basis of a scientific methodology. So, this unascertained liability cannot be allowed as "expenditure, as the provision is of contingent nature". 3.2 The learned CIT(A) has erred in not taking into cognizance the submissions made wherein the correlation between the provisions and the actual invoices subsequently received were provided to substantiate that the provisions were created on a reasonable and reliable estimate basis. 3.3 The learned CIT(A) has erred in not taking into cognizance the submissions made by the appellant wherein the details of withholding taxes deducted on the said provisions was submitted. 3.4 Notwithstanding and without prejudice to the above, the learned AO ought to have observed that if the audit fees is held to be disallowed pursuant to section 40(a)(ia) in the current year, the corresponding benefit shall have to be given in the subsequent year i.e., the year in which withholding tax has been paid. 4. on-deduction of withholding taxes on online purchase of software applications-INR 91,511 4.1 The learned CIT(A) has erred in considering the payments made to the foreign entities towards online purchase of software applications as 'royalty' by relying on the decision of CIT vs, Samsung Electronics Co Ltd [2011] 203 Taxman 477 (Karnataka HC) and disallowing the payment made towards online purchase of standard shrink wrapped software which is available 'off the shelf' on the ground of failure to withhold taxes. 5. Ineligible credit of service tax- INR 17,057 5.1 The learned CIT(A) has erred in not allowing the reversed portion of ineligible credit of service tax as a business expenditure stating that 'service tax' itself is not part of P&L account of the appellant, so ineligible credit of service tax cannot be allowed as business expenditure. 5.2 The learned CIT(A) has erred in not taking into cognizance the fact that the 'service tax' which was a part of the recoverable portion of original expense of the appellant has been subsequently reclassified as 'non-recoverable', hence the ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 34 same has been claimed as a deductible business expenditure.” We shall adjudicate the above grounds as under. Disallowance of interest on late payment of service tax (Ground 1) 13. This issue has been raised in assessment year 2013- 2014. For our reasoning mentioned in para 5.4 to 5.4.1 (supra), we allow this ground of the assessee. Non-deduction of TDS and payments made to foreign companies (Ground 2) 14. The above ground is similar to ground 3 raised for assessment year 2013-2014 in ITA No.2799/Bang/2017. The assessee has also raised additional evidence similar to assessment year 2013-2014 in this assessment year as well. Therefore, for our reasoning mentioned in para 7.4, 7.4.1 and 7.5 (supra), we restore the issue to the files of the AO for de novo consideration. Disallowance of year-end provisions–Audit Fees (Ground 3) 15. It is admitted by both the sides that an identical issue raised in ground 2 for assessment year 2013-2014 relating to audit fees. The assessee has raised additional evidence before the Tribunal for this assessment year also that is similar to assessment year 2013-2014. Therefore, for our reasoning mentioned in para 6.5 (supra), we restore the above ground to the files of the AO, for de novo consideration. ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 35 Non-deduction of TDS on outsourced software services (Ground 4) 16. It is admitted by both the parties that an identical issue was raised in assessment year 2013-2014. Therefore, for the reasoning mentioned in para 8.5 (supra), we restore this issue to the files of the AO for de novo consideration. It is ordered accordingly. Ineligible credit of service tax (Ground 5) 17. This issue has been discussed at para 6.6 of the impugned order of the CIT(A). This issue requires reexamination in the light of our reasoning as regards interst on delayed payment of service tax. Therefore, the matter is restored to the files of the AO. It is ordered accordingly. 18. In the result, the appeals filed by the assessee for assessment years 2013-2014 and 2014-2015 are partly allowed, as indicated above. Order pronounced on this 12 th day of April, 2022. Sd/- (Chandra Poojari) Sd/- (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 12 th April, 2022. Devadas G* ITA Nos.2799 & 2800/Bang/2017. M/s.Encora Innovation Labs India Pvt.Ltd. 36 Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-3, Bangalore 4. The Pr.CIT-3, Bangalore. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore