TaxTMI 
TaxTMI 
2017 (1) TMI 257
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....of by this common order for the sake of convenience and brevity, as the issue involved is common. 2. The following grounds have been raised by the Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal (hereinafter called "the tribunal") :- "On the facts and in the circumstances or the case and in law, the learned DRP has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below: 1. On the facts and in the circumstances of the case and in law, the Ld. DRP has erred in deleting the disallowance of Rs. 1,48,37,899/- made u/s 40(a)(ia) ignoring the fact that sales & marketing expenses are not covered under specified services defined in Article 15(2) of the India USA DTAA Treaty and therefore liable for deduction of tax at source u/s 195 of the Act. 2. On the facts and in the circumstances of the case and in law, the Ld. DRP has erred in deleting the disallowance of Rs. 1,48,37,899/- made u/s 40(a)(ia) ignoring the fact that 'sales & marketing expenses' payable to agents abroad is deemed to accrue and arise in India and therefore liable for deduction of tax at source u/s 195 of the Income Tax ....
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....- u/s 40(a)(i) of the Act is upheld, the increased business profits pursuant to the said disallowance u/s 40(a)(i) to be considered as profit eligible for deduction u/s 10B of the Act." 4. The main issue involved in the Revenue's appeal and the C.O. filed by the assessee is with respect to the disallowance made u/s 40(a)(i) of the Act. The assessee is registered as a 100% export oriented unit under the Software Technology Park of India Scheme and the assessee is engaged in the business of provision of information technology enabled services and other back office support services. It is an undisputed and admitted position between both the parties that the assessee is entitled for deduction u/s 10B of the Act and the profits of the assessee are exempt from payment of taxes u/s 10B of the Act. The assessee has shown total turnover of the eligible undertaking at Rs. 32,76,00,596/- and profit of the undertaking is at Rs. 7,60,34,821/-. The assessee has claimed deduction u/s 10B of the Act of Rs. 7,60,34,821/- being 100% of the profits of the undertaking. The A.O. has proposed in the draft assessment order passed u/s 143(3) r.w.s. 144C of the Act dated 25th February, 2014 to disallow ....
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....owance u/s 32, 40(a)(ia), 40A(3), 43B etc. of the Act which has an effect of increasing the profit, the assessee is entitled for the profit linked deductions under Chapter VI-A on the enhanced profits. It is submitted that in the instant appeal, the addition has been made u/s 40(a)(i) of the Act and the assessee is entitled for deduction u/s 10B of the Act under Chapter III of the Act. It is also pointed out that while referring to the afore- stated circular that the CBDT used the word 'etc.' with respect to the disallowance pertaining to section 32, 40(a)(i), 40A(3), 43B of the Act which means that section 40(a)(ia) of the Act is also covered under the aforestated circular and the assessee will be entitled for deduction u/s 10B of the Act on the enhanced profit. It was submitted that in any case this issue is also covered by decision of Hon'ble jurisdictional Bombay High Court in favour of the assessee in CIT v. Gem Plus Jewellary India Limited in (2010) 194 taxman 192(Bombay) as disallowance u/s 40(a)(i) of the Act is a statutory disallowance and the hence enhanced profits after statutory disallowance shall be considered for deduction u/s 10B of the Act which deduction is profit ....
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....d u/s 40(a)(i) of the Act. . The DRP held that these payments to the tune of Rs. 1,48,73,455/- are to be allowed, while, with respect to the 4th person Mr. John Blyzinskyj, the payment of Rs. 1,35,556/- without deduction of tax at source had remained unsubstantiated and the ld. DRP confirmed the addition of Rs. 135,556/- by issuing directions u/s 144C(5) of the Act, which additions were confirmed by the AO in his assessment order dated 17.12.2014 passed u/s 143(3) of the Act r.w.s. 144C(13) of the Act in pursuance of directions of DRP. . We have observed that the CBDT has issued Circular No. No. 37/2016 dated 2nd November, 2016, which is reproduced below:- "SECTION 80-IB, READ WITH SECTIONS 32, 40(a)(ia), 40A(3) & 43B, OF THE INCOME-TAX ACT, 1961 - DEDUCTIONS - PROFITS AND GAINS FROM INDUSTRIAL UNDERTAKINGS OTHER THAN INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS - CHAPTER VIA DEDUCTIONS ON ENHANCED PROFITS CIRCULAR NO.37/2016 [F.NO.279/MISC./140/2015/ITJ], DATED 2-11-2016 Chapter VI-A of the Income-tax Act, 1961 ("the Act"), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the Assessing Officer m....
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.... business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance. 4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned." The sum , substance and spirit of the afore-stated circular is that the Revenue does not want to continue the litigation with respect to disallowance made by the Revenue u/s 32,40(a)(ia), 40A(3), 43B etc. of the Act , which ultimately led to increase in profits which are otherwise eligible for profit linked deduction under Chapter VI-A of the Act. The Board has accepted that the disallowance made u/s 32, 40(a)(ia), 40A(3), 43B etc. of the Act and other disallowance out of specific expenditure related to the business activity may be made by Revenue which led to enhancement of profits against which Chapter -VIA profit linked deductions has been claimed and it is accepted that enhanced profit linked deduction under Chapter VI-A is admissible on the profits so enhanced by the said disallowance made by the Revenue. We find that the R....