AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (6) TMI 195
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....l (DRP) was passed u/s. 143(3) r.w.s. 144C of the Act on 31.3.2014. Against the aforesaid order, the assessee preferred appeal before the Tribunal and the same is stated to be pending. 3. The AO issued a notice u/s. 148 of the Act dated 30.3.2016. As we have already seen, the assessee is in the business of rendering software development services. The software is developed both on-site and off-site. The assessee designed software in India in its own premises by its own employees. However, certain parts of the software development are required to be executed physically at the customer's premises outside India. The services rendered at the customer's site are referred to as onsite services. The assessee sub-contracts the on-site services to its Associated Enterprise [AE] which is located outside India. Apart from onsite services, Assessee's AE's located outside India also rendered marketing services for which the assessee pays selling commission. The assessee paid the following sums to the AE on account of on-site services and selling commission:- Particulars Amount in Rs. Payments for on-site services 5,760,203,166 Payments for selling commission 21,802,448 ....
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....t it is entitled to deduction u/s. 10A/10AA of the Act on its profits derived from rendering software development services and even assuming that the disallowance has to be made u/s. 40(a)(i) of the Act, the same will go to enhance the profits on which deduction u/s. 10A/10AA of the Act has to be allowed and consequently there would be no ultimate tax liability. 6. The AO did not accept any of the aforesaid contentions. He held that reassessment proceedings were validly reopened. He also rejected the contention of assessee that payment in question is not chargeable to tax under the Act. Consequently, the AO added to the total income of the Assessee, the sum disallowed u/s. 40a(i) of the Act viz., payment for onsite services and payment for selling commission by the assessee to its AE. 7. On appeal by the assessee, the CIT(Appeals) upheld the action of the AO insofar as the contention of assessee with regard to validity of initiation of reassessment proceedings and the sum in question is not chargeable to tax in India under the Act. With regard to the alternative contention that disallowance u/s. 40(a)(i) will have no effect because deduction u/s 10A/10AA of the Act has to be ....
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....ssment order passed under section 143(3) read with section 147 (a) without satisfying the pre-requirements of section 147/148; (b) beyond the limitation period of four years as provided under first proviso to section 147; (c) without demonstrating the failure on the part of the appellant to disclose fully and truly all material facts necessary for the original assessment proceedings; (c) on a mere change of opinion without any new tangible information; (d) by relying on the order passed under section 201(1)/(IA) for the purposes of reassessment. Grounds relating to disallowance under section 40(a)(i) 2. The learned CIT(A) erred in confirming the disallowance under section 40(a)(i) amounting to Rs. 578,20,05,614 in respect of payments made to Associated Enterprises (AEs) without appreciating the fact that the said payments were not chargeable to tax under the Act and under the DTAAs and consequently not liable for TDS under section 195 and consequently not liable for disallowance under section 40(a)(i). Levy of Interest under section 234B and 234C 3. The learned CIT(A) erred in confirming the levy of interest under section 234B and 234C of the IT ....
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....nd that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance". 11. Further the Hon'ble Karnataka in the case of CIT Vs. M/s. M.Pact Technology Services Pvt. Ltd. in ITA No.228/2013 order dated 11.7.2018 had to deal with admissibility of the following substantial question of law in an appeal by the Revenue u/s.260A of the Act :- "5. Whether the Tribunal is correct in law in not adjudicating the main issue of applicability of provisions of section 40(a)(ia) in respect of disallowance of sub-contracting chares of RS.16,21,851/- made by assessing authority on the ground that the assessee had failed to deduct tax at source under section 194C of I.T. Act? 6. Whether the Tribunal is justified in law in directing the assessing authority to allow deduction under section 10A in respect of amount disallowed under section 40(a)(ia) without appreciating the fact that the income enhanced on account of deeming provisions cannot be considered for the purpose of claiming benefit under the provisions of section 10A?" 12. The Hon'ble Karnataka High Court held as follows: "5. In so far as the substantial question of law Nos.5 and 6 ....
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....rt [ii] If deduction under section 40A[3] of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act." 7. Applying the same analogy, it can be held that if deduction u/s. 40[a][ia] of the Act is not allowed, the same would have been to be added to the profits of the undertaking on which the Assessee would be entitled for deduction u/s. 10A of the Act. This view is fortified by the decision of Bombay High Court in the case of 'Commissioner of Income Tax v. Gem Plus Jewellery India Ltd.,' [2011] 330 ITR 175 [Bom], wherein it is held thus: "13. By reason of the judgment of the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Limited [2009] 319 ITR 306 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 present case arises out of the fact that the disallowance which was effected by the Assessing Officer has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of ....