ISYS SOFTECH PVT. LTD., Jaipur V. ITO, Jaipur

ITA 81/JPR/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 1919 (ITAT-JAIPUR)
• Duration Of Justice: 1 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 28-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P P MEENA
• Assessee Lawyers: G M MEHTA
• Keywords: Double taxation relief; Question of law
• Section: 43B

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE S, JAIPUR JH FOT; IKY JKO] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI VIJY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM VK;DJ VIHY LA- @ ITA NO. 81/JP/2016 FU/KZKJ.K O'K Z @ ASSESSMENT YEAR : 2011-12 M/S ISYS SOFTECH PRIVATE LIMITED, 11, MOHAN BARI, OUTSIDE SURAJPOLE GATE, JAIPUR CUKE VS. THE ITO, WARD 5(4), JAIPUR. LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: AAACI7859J VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI G.M. MEHTA (C.A.) JKTLO DH VKSJ LS @ REVENUE BY : SHRI P.P. MEENA LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 31/10/2017 MN?KKS'K.KK DH RKJH[ K@ DATE OF PRONOUNCEMENT: 13/11/2017 VKNS'K@ ORDER PER: VIJAY PAL RAO, J.M. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 26.11.2015 OF CIT(A) FOR THE ASSESSMENT YEAR 2011-1 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS AS UNDER:- (1) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN SUSTAINING ADDITION OF RS. 1,14,68,383/- BY APPLICATION OF PRO VISIONS OF SECTION 40(A)(IA) OF IT ACT ON ACCOUNT OF NON-DEDUC TION OF TAX AT SOURCE ON PURCHASES OF COMPUTER SOFTWARE FROM USA B ASED TWO SELLERS, IGNORING THE FACT THAT INCOME OF THE US SE LLERS ( NOT HAVING PLACE OF BUSINESS OR ANY CONTROLLING AUTHORI TY IN INDIA) IS ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 2 NOT CHARGEABLE TO TAX UNDER SECTION 195 OF IT ACT T O WHOM BENEFIT OF DTAA BETWEEN INDIA AND USA IS ALSO AVAIL ABLE. (2) THAT LD. CIT(A) WAS NOT JUSTIFIED IS SUSTAINING DISALLOWANCE OF RS. 3,06,563/- UNDER SECTION 10A OF IT ACT FOR THE BANK INTEREST FROM THE DEPOSITS OUT OF BUSINESS SURPLUS. 2. GROUND NO. 1 IS REGARDING DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT ON ACCOUNT OF NON DEDUCTION OF TAX AT SOURCE ON PURCHASE OF SOFTWARE. THE ASSESSEE IS AN EXPORTER OF COMPUTER S OFTWARE IN THE FIELD OF MEDICAL BILLING FOR WHICH THE ASSESSEE IS ELIGIB LE AND ALSO ALLOWED DEDUCTION U/S 10A OF THE ACT BY THE AO. THE ASSESSE E PURCHASED THE MAIN/MASTER COPY OF THE SOFTWARE TO PRODUCE NEW SOF TWARE FOR MEDICAL BILLING FROM USA BASED SELLER. BY USING THE SAID MA STER COPY AND CARRYING OUT THE NECESSARY CHARGES AS PER REQUIREM ENT OF THE CLIENTS THE ASSESSEE IS EXPORTING THE COMPUTER SOFTWARE. T HE AO NOTED THAT THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE IN RESP ECT THE AMOUNT PAID FOR PURCHASES OF THE MASTER COPY OF RS. 1,14,68,382 /-. ACCORDINGLY, THE AO INVOKED THE PROVISIONS OF SECTION 40(A)(IA) OF T HE ACT AND DISALLOWED THE SAID AMOUNT. THE ASSESSEE CHALLENGED THE ACTION OF THE AO BEFORE THE LD CIT(A) BUT COULD NOT SUCCEED BECAUSE BOTH T HE AO AS WELL AS LD. CIT(A) HAVE HELD THAT THE PAYMENT MADE BY THE ASSES SEE FOR PURCHASE OF SOFTWARE IS ROYALTY AND THEREFORE THE INCOME IN THE HANDS OF THE ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 3 NONE RESIDENT IS CHARGEABLE TO TAX IN INDIA. AGGR IEVED BY THE ORDERS OF THE AUTHORITIES BELOW THE ASSESSEE FILED THE PRESEN T APPEAL. 3. BEFORE US, THE LD. AR OF THE ASSESSEE HAS SUBMI TTED THAT THE PURCHASE OF SOFTWARE IS LIKE GOODS OR PRODUCT WHICH IS SUBJECTED TO SALES TAX @ 7% IN USA, IF SOLD LOCALLY. THEREFORE SUCH PURCHASES CANNOT BE EQUATED TO ROYALTY OR A TAXABLE SERVICE AND CONSEQUENTLY NOT CHARGEABLE TO TAX IN INDIA. HE HAS FURTHER CONT ENDED THAT THE SUBSEQUENT AMENDMENT IN SECTION 9(1)(VI) BY INTRODU CTION OF EXPLANATION 4 BY FINANCE ACT 2012 WITH RETROSPECTIV E EFFECT CANNOT BE APPLIED TO THE CASE OF THE ASSESSEE WHEN THIS PROVI SION OF NOT IN STATUTE AT THE TIME OF TRANSACTION OF PURCHASE OF SOFTWARE. HE HAS FURTHER CONTENDED THAT EVEN OTHERWISE THE PAYMENT FOR PURCH ASE OF SOFTWARE CANNOT BE TREATED AS ROYALTY AS PER THE DEFINITIO N PROVIDED UNDER INDO US DTAA. THUS THE LD. AR OF THE ASSESSEE HAS SUBMIT TED THAT THE AMENDMENT IN THE PROVISIONS OF THE ACT CANNOT OVERR IDE PROVISION OF DTAA WHICH IS BENEFICIAL TO THE ASSESSEE. THUS THE LD. AR HAS SUBMITTED THAT THE PURCHASE OF SOFTWARE IS A PURCHASE OF PROD UCT AND THE PURCHASE CONSIDERATION CANNOT BE HELD AS ROYALTY. I N SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE FOLLOWING DECISIO NS:- ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 4 (I) TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH 271 ITR 401. (II) PR. CIT VS. M. TECH INDIA P. LTD. 381 ITR 31. (III) WIPRO LTD. VS DY. DCIT 382ITR 179 (KARN) . HE HAS ALSO RELIED UPON THE VARIOUS DECISIONS OF T HE TRIBUNAL ON THE POINT THAT THE PAYMENT MADE TO THE FOREIGN PARTY FO R PURCHASE OF SOFTWARE FOR INTERNAL USE CANNOT BE SAID TO BE CON SIDERED FOR USE OR RIGHT TO USE AND THEREFORE WILL NOT FALL IN THE AM BIT OF THE DEFINITION OF ROYALTY AS PROVIDED INDO US DTAA. ALTERNATIVELY LD. AR HAS SUBMITTED THAT THE DISALL OWED U/S 40(A)(IA) WOULD RESULT ENHANCED OF PROFIT OF THE AS SESSEE DERIVED FROM EXPORT OF COMPUTER SOFTWARE ELIGIBLE FOR DEDUCTION U/S 10A AND THEREFORE NO ADDITIONAL TAX LIABILITY CAN BE FASTE N ON THE ASSESSEE. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DE CISION OF THE BANGALORE BENCHES OF TRIBUNAL IN CASE OF ITA VS. CE RNER HEALTHCARE SOLUTIONS (P) LTD. 176 TTJ 63. 4. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT IT IS NOT A SIMPLE PURCHASE OF SOFTWARE AS PRODUCT FOR ASSESSEE S OWN INTERNAL USE BUT THE ASSESSEE HAS PURCHASED THE MASTER COPY OF T HE SOFTWARE WITH A RIGHT TO MODIFY, ALTER, AMEND ARE MAKE CHANGES FOR THE PURPOSE OF ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 5 FURTHER DEVELOPING THE IMPROVED SOFTWARE AS PER RE QUIREMENTS OF THE CLIENTS. THUS THE PAYMENT BY THE ASSESSEE FOR PURC HASE OF THE MASTER COPY ALONG WITH THE COPY RIGHTS IS ROYALTY IN NAT URE AS PER THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT AS WELL A S THE DEFINITION PROVIDED UNDER INDO-US DTAA. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. IN THE CASE ON HAND THE ASSESSE E HAS PURCHASED THE MASTER COPY OF SOFTWARE FROM BJW CONSULTANCY SERVIC ES LLC USA VIDE AGREEMENT DATED 16.04.2010 ALONG WITH CERTAIN RIGHT S FOR MODIFICATION, ALTERATION, AMENDMENTS OR CHANGES AND THEN RESELL AND EXPORT THE IMPROVED MODIFIED VERSION OF THE SOFTWARE. FOR REA DY REFERENCE WE REPRODUCED THE AGREEMENT/MOU AS UNDER:- MEMORANDUM OF UNDERSTANDING THIS AGREEMENT IS MADE ON APRIL 16, 2010 BETWEEN BJ W CONSULTING SERVICE LLC, 5700 MIDNIGHT PASS ROAD STE 4 SARASOT A FL 34342 AND ISYS SOFTECH PRIVATE LIMITED, F-139 CHATRALA CIRCLE , SITAPURA JAIPUR. WE ARE THE LARGEST PRODUCER, SELLER AND EXPORTER OF ME DICAL SOFTWARE OF ALL TYPES AND CATEGORIES IN US. AS PER PROPOSAL WE ASSIGN THE FOLLOWING RIGHTS TO T HE CUSTOMER: ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 6 WE ARE SELLING THE SOFTWARE WHICH IS COPY RIGHTED I N US AND AFTER SELLING THE PRODUCT, CUSTOMER IS AUTHORIZED TO RE-S ELL IT IN ANY MANNER AS PER ITS OWN REQUIREMENT. CHARGES FOR SALE OF SOFTWARE AND HARDWARE CONFIGURA TIONS. YOU WILL BE AUTHORIZED TO RESALE OR EXPORT THE SOFT WARE PURCHASED FROM US WITH OR WITHOUT MODIFICATION, ALTERATION, A MENDMENTS OR CHANGES BY USING THE KEY PROVIDED BY US. TIME LIMIT OR VALIDATION OF SOLD SOFTWARE FOR RE-SA LE WITH OR WITHOUT AMENDMENT(S) OR CHANGES WILL BE UNLIMITED T ILL NEW IMPROVED VERSION OF SOFTWARE PRODUCED BY US IS SOLD TO YOU. THIS IS CONFIDENTIAL INFORMATION PROVIDED AS AN INI TIAL SAMPLE PROPOSAL THUS IT IS CLEAR THAT THE ASSESSEE PURCHASE A COPY RIGHTED SOFTWARE ALONG WITH THE RIGHT TO RESALE EXPORT THE SAID SOFT WARE WITH OR WITHOUT MODIFICATION, ALTERATION, AMENDMENTS OR CHANGES BY USING THE KEY PROVIDED BY THE US SUPPLIER. THE TERMS AND CONDITIO NS OF THE AGREEMENT CLEARLY MANIFEST THAT IT IS NOT A MERE PURCHASE A ND SALE OF A COPY RIGHTED PRODUCT BUT THE ASSESSEE PURCHASE THE MASTE R COPY OF THE SOFTWARE WITH THE RIGHT TO USE THE KEY PROVIDED BY THE SUPPLIER FOR MODIFICATION, ALTERATION, AMENDMENT OR CHANGES. TH E ASSESSEE IS UNDISPUTEDLY EXPORTING THE SOFTWARE BY USING THE MA STER COPY AND WITH NECESSARY MODIFICATION, ALTERATION, AMENDMENT OR CH ANGES AS PER THE REQUIREMENT OF THE CLIENTS. THUS IT IS NOT THE PUR CHASE OF SOFTWARE BY ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 7 THE ASSESSEE FOR ITS OWN INTERNAL USE BUT THE SOFT WARE WAS PURCHADED ALONG WITH THE COPY RIGHTS TO BE USED BY THE ASSESS EE FOR DEVELOPMENT OF A NEW SOFTWARE AS PER CUSTOMIZED REQUIREMENT OF THE CLIENTS. AS FAR AS THE DECISIONS RELIED UPON BY THE ASSESSEE THERE IS NO QUARREL ON THE POINT THAT THE PURCHASE OF COPY RIGHTED PRODUCT BEI NG A SOFTWARE WILL NOT FALL IN THE CATEGORY OF THE ROYALTY IN THE ABSE NCE OF ANY TRANSFER OF ACQUIRING OF ANY RIGHT TO USE THE COPY RIGHT. HOWEV ER, IN THE CASE OF THE ASSESSEE THE ASSESSEE IS USING THE COPY RIGHT AS WE LL AS THE SOFTWARE FOR DEVELOPMENT OF THE NEW SOFTWARE WITH THE NECESSARY MODIFICATIONS. THE HONBLE DELHI HIGH COURT IN CASE OF PRE. CIT VS. M. TECH INDIA P. LTD. (SUPRA) HAS OBSERVED IN PARAS 12 AND 13 AS UNDER:- 12. IN THE CASES WHERE AN ASSESSEE ACQUIRES THE RIGHT TO USE A SOFTWARE, THE PAYMENT SO MADE WOULD AMOUNT TO ROYALTY. HOWEVER IN CASES W HERE THE PAYMENTS ARE MADE FOR PURCHASE OF SOFTWARE AS A PRODUCT, THE CONSIDERATIO N PAID CANNOT BE CONSIDERED TO BE FOR USE OR THE RIGHT TO USE THE SOFTWARE. IT IS WEL L SETTLED THAT WHERE SOFTWARE IS SOLD AS A PRODUCT IT WOULD AMOUNT TO SALE OF GOODS. IN THE CASE OF TATA CONSULTANCY SERVICES V. STATE OF ANDHRA PRADESH [2004] 271 ITR 401/141 TAXMAN 132 (SC) , THE SUPREME COURT EXAMINED THE TRANSACTIONS RELATING TO THE PURCHASE AND SALE OF SOFTWARE RECORDED ON A CD IN THE CONTEXT OF THE ANDHRA PRADE SH GENERAL SALES TAX ACT. THE COURT HELD THE SAME TO BE GOODS WITHIN THE MEANING OF SECTION 2(B) OF THE SAID ACT AND CONSEQUENTLY EXIGIBLE TO SALES TAX UNDER THE SA ID ACT. CLEARLY, THE CONSIDERATION PAID FOR PURCHASE OF GOODS CANNOT BE CONSIDERED AS 'ROYALTY'. THUS, IT IS NECESSARY TO MAKE A DISTINCTION BETWEEN THE CASES WHERE CONSIDER ATION IS PAID TO ACQUIRE THE RIGHT TO USE A PATENT OR A COPYRIGHT AND CASES WHERE PAYM ENT IS MADE TO ACQUIRE PATENTED OR A COPYRIGHTED PRODUCT/MATERIAL. IN CASES WHERE PAYM ENTS ARE MADE TO ACQUIRE PRODUCTS WHICH ARE PATENTED OR COPYRIGHTED, THE CONSIDERATIO N PAID WOULD HAVE TO BE TREATED AS A PAYMENT FOR PURCHASE OF THE PRODUCT RATHER THAN C ONSIDERATION FOR USE OF THE PATENT OR COPYRIGHT. 13. A COORDINATE BENCH OF THIS COURT HAS ALSO EXPRESSE D A SIMILAR VIEW IN THE CASE OF INFRASOFT LTD. ( SURPA ). IN THAT CASE, THE REVENUE SOUGHT TO TAX THE RECE IPTS ON SALE OF ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 8 LICENSING OF CERTAIN SOFTWARE AS ROYALTY. THE TRIBU NAL HELD THAT THERE WAS NO TRANSFER OF RIGHTS IN RESPECT OF THE COPYRIGHT HELD BY THE A SSESSEE IN THE SOFTWARE AND IT WAS A CASE OF MERE TRANSFER OF COPYRIGHTED ARTICLE. THIS COURT CONCURRED WITH THE TRIBUNAL AND HELD THAT WHAT WAS TRANSFERRED WAS NOT COPYRIGH T OR THE RIGHT TO USE A COPYRIGHT BUT A LIMITED RIGHT TO USE THE COPYRIGHTED MATERIAL AND THAT DID NOT GIVE RISE TO ANY ROYALTY INCOME. THUS THE HONBLE HIGH COURT AFTER CONSIDERING THE D ECISION OF HONBLE HIGH COURT IN CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH (SUPRA) HAS HELD THAT IT IS NECESSARY TO MA KE A DISTINCTION BETWEEN THE CASES WHERE THE CONSIDERATION IS PAID T O ACQUIRE THE RIGHT TO USE PATENTED OR A COPY RIGHT AND CASES WERE PAY MENT IS MADE TO ACQUIRE PATENTED OR COPY RIGHTED PRODUCT/GOODS. IN THE CASE OF THE ASSESSEE IT IS NOT AN ACQUISITION OF COPY RIGHTED P RODUCT BEING SOFTWARE BUT THE ASSESSEE HAS ACQUIRED THE SOFTWARE ALONG WI TH THE RIGHT TO USE IT FOR FURTHER DEVELOPMENT/PRODUCTION. ACCORDINGLY, IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE PAYMENT MADE BY THE A SSESSEE FOR ACQUISITION OF THE SOFTWARE AS WELL AS RIGHT TO USE THE KEY PROVIDED BY THE SUPPLIER FOR MAKING NECESSARY MODIFICATION, ALT ERATION, AMENDMENTS OR CHANGES WHICH AMOUNTS TO ACQUIRING THE RIGHT TO USE THE COPY RIGHT AND THEREFORE THE PAYMENT WILL FALL IN THE DEFINITI ON OF ROYALTY AS DEFINED U/S 9(1)(VI) AS WELL AS UNDER ARTICLE 13(2) OF IND O-US DTAA. 6. NOW WE TAKE UP THE ALTERNATIVE PLEA OF THE ASSES SEE THAT THE DISALLOWANCE MADE U/S 40(A)(IA) WOULD RESULT ENHANC ED OF BUSINESS ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 9 INCOME OF THE ASSESSEE DERIVED FROM EXPORT OF SOFTW ARE ELIGIBLE FOR DEDUCTION U/S 10A. 7. HAVING CONSIDERING THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD AT THE OUTSET WE NOTE THAT THIS ISSUE IS COVERED BY A SERIES OF DECISIONS OF THE COORDINATE BENCHES OF TH IS TRIBUNAL. THE BANGALORE BENCHES OF THE TRIBUNAL IN CASE OF ITO V S. CERNER HEALTHCARE SOLUTIONS (P) LTD.(SUPRA) HAS HELD IN PARAS 16,19 & 20 AS UNDER:- 16. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. IN OUR VIEW IT WOULD BE UNNECESSARY TO GO INTO THE QUESTION WHETHE R THE PAYMENT IN QUESTION IS REIMBURSEMENT OF EXPENSES OR IN THE NATURE OF FTS O R THE QUESTION WHETHER THE SERVICES RENDERED MADE AVAILABLE TECHNOLOGY TO THE ASSESSEE IN TERMS OF ARTICLE 12(4) OF THE INDIA USA DTAA, BECAUSE EVEN ASSUMING THE SU M IN QUESTION IS TO BE DISALLOWED U/S.40(A)(IA) OF THE ACT, THE DISALLOWAN CE WILL ONLY GO TO ENHANCE THE PROFITS DERIVED BY THE ASSESSEE FROM THE BUSINESS O F EXPORT OF COMPUTER SOFTWARE AND ON SUCH ENHANCED PROFITS DEDUCTION U/S.10A OF THE A CT HAS TO BE ALLOWED, THEREBY RENDERING TAX IMPLICATION ON THE ASSESSEE INSIGNIFI CANT. THEREFORE THE PRAYER MADE IN THE APPLICATION UNDER RULE 27 OF THE ITAT RULES REQ UIRES CONSIDERATION. 19. AS RIGHTLY CONTENDED ON BEHALF OF THE ASSESSEE THE CONSEQUENCE OF DISALLOWANCE U/S.40(A)(IA) OF THE ACT WILL BE THAT THE BUSINESS PROFITS OF THE ASSESSEE TO THAT EXTENT WILL STAND ENHANCED. IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. ( SUPRA ), THE HON'BLE BOMBAY HIGH COURT HAD TO ANSWER THE FOLLOWING QUEST ION OF LAW: 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE TRIBUNAL WAS JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO GRA NT THE EXEMPTION U/S.10A OF THE ACT ON THE ASSESSED INCOME, WHICH WAS ENHANCED DUE TO DISALLOWANCE OF EMPLOYER'S AS WELL AS EMPLOYEE'S CONTRIBUTION TOWAR DS PF/ ESIC;' THE HON'BLE BOMBAY HIGH COURT HELD ON THE ABOVE QUE STION OF LAW AS FOLLOWS: '12. BY REASON OF THE JUDGMENT OF THE SUPREME COURT IN COMMISSIONER OF INCOME TAX V. ALOM EXTRUSIONS LIMITED THE EMPLOYER'S CONTRIBUTION WAS LIABLE TO BE ALLOWED, SINCE IT WAS DEPOSITED BY THE DUE DATE FOR THE FILING OF THE RETURN. THE PECULIAR POSITION, HOWEVER, AS IT OBTAINS IN THE PR ESENT CASE ARISES OUT OF THE FACT THAT THE DISALLOWANCE WHICH WAS EFFECTED BY THE ASS ESSING OFFICER HAS NOT, THE COURT IS INFORMED, BEEN CHALLENGED BY THE ASSESSEE. AS A MATTER OF FACT THE QUESTION OF LAW WHICH IS FORMULATED BY THE REVENUE PROCEEDS ON THE BASIS THAT ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 10 THE ASSESSED INCOME WAS ENHANCED DUE TO THE DISALLO WANCE OF THE EMPLOYER'S AS WELL AS THE EMPLOYEES' CONTRIBUTION TOWARDS PROVIDE NT FUND /ESIC AND THE ONLY QUESTION WHICH IS CANVASSED ON BEHALF OF THE REVENU E IS WHETHER ON THAT BASIS THE TRIBUNAL WAS JUSTIFIED IN DIRECTING THE ASSESSING O FFICER TO GRANT THE EXEMPTION UNDER SECTION 10A. ON THIS POSITION, IN THE PRESENT CASE IT CANNOT BE DISPUTED THAT THE NET CONSEQUENCE OF THE DISALLOWANCE OF THE EMPL OYER'S AND THE EMPLOYEE'S CONTRIBUTION IS THAT THE BUSINESS PROFITS HAVE TO T HAT EXTENT BEEN ENHANCED. THERE WAS, AS WE HAVE ALREADY NOTED, AN ADD BACK BY THE A SSESSING OFFICER TO THE INCOME. ALL PROFITS OF THE 4 (2009) 319 ITR 306 UNIT OF THE ASSESSEE HAVE BEEN DERIVED FROM MANUFACTURING ACTIVITY. THE SALARIES PAID BY THE ASSESSEE, IT HAS NOT BEEN DISPUTED, RELATE TO THE MANUFACTURING ACTIVITY. THE DISALLOWANCE OF THE PRO VIDENT FUND/ ESIC PAYMENTS HAS BEEN MADE BECAUSE OF THE STATUTORY PROVISIONS - SECTION 43B IN THE CASE OF THE EMPLOYER'S CONTRIBUTION AND SECTION 36(V) READ WITH SECTION 2(24)(X) IN THE CASE OF THE EMPLOYEE'S CONTRIBUTION WHICH HAS BEEN DEEMED TO BE THE INCOME OF THE ASSESSEE. THE PLAIN CONSEQUENCE OF THE DISALLOW ANCE AND THE ADD BACK THAT HAS BEEN MADE BY THE ASSESSING OFFICER IS AN INCREA SE IN THE BUSINESS PROFITS OF THE ASSESSEE. THE CONTENTION OF THE REVENUE THAT IN COMPUTING THE DEDUCTION UNDER SECTION 10A THE ADDITION MADE ON ACCOUNT OF T HE DISALLOWANCE OF THE PROVIDENT FUND/ESIC PAYMENTS OUGHT TO BE IGNORED CA NNOT BE ACCEPTED. NO STATUTORY PROVISION TO THAT EFFECT HAVING BEEN M ADE, THE PLAIN CONSEQUENCE OF THE DISALLOWANCE MADE BY THE ASSESSING OFFICER MUST FOLLOW. THE SECOND QUESTION SHALL ACCORDINGLY STAND ANSWERED AGAINST T HE REVENUE AND IN FAVOUR OF THE ASSESSEE.' 20. IN VIEW OF THE AFORESAID DECISION OF THE HON'BLE B OMBAY HIGH COURT WHICH HAS BEEN FOLLOWED IN SEVERAL DECISIONS RENDERED BY ITAT BENCHES OF DELHI, HYDERABAD AND BANGALORE REFERRED TO IN THE SUBMISSIONS MADE B Y THE LEARNED COUNSEL FOR THE ASSESSEE, WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) ON THIS ISSUE DOES NOT CALL FOR ANY INTERFERENCE. CONSEQUENTLY, GROUNDS NOS. 5 TO 8 RAISED BY THE REVENUE ARE DISMISSED. THUS IT IS CLEAR THAT THE COORDINATE BENCHES WHILE DECIDING THIS ISSUE HAS FOLLOWED THE DECISION OF HONBLE HIGH COURTS IN CLUDING THE DECISION OF HONBLE MOMBAY HIGH COURT IN CASE OF THE JEM P LUS JEWELLERY INDIA LTD. 330 ITR 175. WE FURTHER NOTED THAT THE CBDT VI DE CIRCULAR NO. 37 OF 2016 HAS ACCEPTED THIS POSITION THAT THE DISALLO WANCE MADE U/S 32, ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 11 40(A)(IA), 40A(3), 43B ETC. OF THE ACT RELATES TO THE BUSINESS ACTIVITY AGAINST WHICH CHAPTER VI-A DEDUCTION HAS BEEN CLA IMED, RESULTING IN ENHANCEMENT OF THE PROFITS OF ELIGIBLE BUSINESS AN D THAT DEDUCTION UNDER CHAPTER VI-A IS ADMISSIBLE ON THE PROFITS SO ENHANCED BY THE DISALLOWANCE. FOLLOWING THE DECISION OF COORDINATE BENCHS AS WELL AS THE HONBLE HIGH COURT ON THIS ISSUE AND FURTHER IN VI EW OF THE CIRCULAR NO. 37 OF 2016 WE HOLD THAT THE DISALLOWANCE U/S 40(A)( IA) WOULD RESULT ENHANCEMENT OF PROFIT OF THE ELIGIBLE BUSINESS OF THE ASSESSEE FOR DEDUCTION U/S 10A AND ACCORDINGLY THE ASSESSEE WOUL D BE ENTITLED FOR THE CLAIM OF DEDUCTION ON ENHANCED PROFIT. THE AO IS DIRECTED TO ALLOWED THE CLAIM OF THE ASSESSEE. 8. GROUND NO. 2 IS REGARDING DISALLOWANCE OF 10A OR BANK INTEREST FROM DEPOSIT. AT THE TIME OF HEARING THE LD. AR OF THE ASSESSEE HAS STATED AT BAR THAT ASSESSEE DOES NOT PRESSED THIS G ROUND DUE TO SMALLNESS OF THE AMOUNT AND THEREFORE THE SAME MAY BE DISMISSED HAS NOT PRESSED. THE LD. DR HAS RAISED NO OBJECTION IF GROUND NO. 2 OF THE ASSESSEE APPEAL IS DISMISSED HAS NOT PRESSED. ACC ORDINGLY GROUND NO. 2 OF THE APPEAL IS DISMISSED BEING NOT PRESSES. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED. ITA NO. 81/JP/2016 M/S ISYS SOFTECH PVT. LTD. V. ITO, JAIPUR 12 ORDER PRONOUNCED IN THE OPEN COURT ON 13/11/2017 SD/- SD/- FOE FLAG ;KNO FOT; IKY JKO (VIKRAM SINGH YADAV) (VIJAY PAL RAO) YS[KK LNL;@ ACCOUNTANT MEMBER U;KF;D LNL;@ JUDICIAL MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 13/11/2017. * SANTOSH. VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- M/S ISYS SOFTECH PRIVATE LIMITED, 11, MOHAN BARI, OUTSIDE SURAJPOLE GATE, JAIPUR. 2. IZR;FKHZ@ THE RESPONDENT- ITO WARD 5(4), JAIPUR. 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDR@ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR. 6. XKMZ QKBZY@ GUARD FILE {ITA NO. 81/JP/2016} VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR