2013 (1) TMI 106 - AT - Income Tax

Fee for Technical Services - whether the consideration received under the Buying Agency Services Agreement ( BAS ) could be characterized as fees for technical services u/s 9(1)(vii) and accordingly by taxed under the provisions of section 115A - penalty u/s 271AA - Held that - It is evident that for a particular stream of income to be characterized as fees for technical services , it is necessary that some sort of managerial , technical or consultancy services should have been rendered in consideration. The terms managerial , technical or consultancy do not find a definition in the Income-tax Act, 1961 and it is a settled law that they need to be interpreted based on their understanding in common parlance. In the case of Skycell Communications Ltd s case (2001 (2) TMI 57 - MADRAS HIGH COURT), it was held that the popular meaning associated with the word technical is involving or concerning applied and industrial science . The consultancy should be rendered by someone who has special skills and expertise in rendering such advisory. Perusal of copies of the Buying Agency Services agreement depicts the nature of services have not been disputed. Department has only interpreted them to be amounting to Fees for Technical Services , but these are not technical services but routine services offered in the procurement assistance. The agreements demonstrate that the assessee was to receive commission for procuring the products of AIMPL and rendering incidental services for purchases. The primary services provided by the assessee to AIMPL in terms of the Buying Agency Services agreement are Co-ordinate between AIMPL and manufacturers for the purpose of buying the merchandise,assisting in negotiations,procurement of samples and sending them to AIMPL,maintaining relationship with the manufacturers and search for new manufacturers,supply credit reports and other marketing information concerning manufacturers and to provide translation services as required for communication between AIMPL and the manufacturers. Applying these principles and as decided in Linde A.G. v. ITO 1997 (1) TMI 479 - ITAT MUMBAI to the facts of the present case, the services rendered by the assessee in this case were purely in the nature of procurement services and cannot be characterized as managerial technical or consultancy services. Accordingly, the consideration received by the assessee was appropriately classified as commission as against fees for technical services . Penalty u/s 271AA & 271BA - No separate proceedings have been initiated so far and the Grounds about levy of interest u/s 234B, 234D and 244A are consequential in nature. Ground regarding TDS credit will be verified by the AO in accordance with law - assessee s appeal is allowed on above terms.

Issues Involved:
1. Taxability of fee received for buying agency services as Fee for Technical Services (FTS).
2. Applicability of the 30% tax rate based on the agreement date.
3. Initiation of penalty proceedings under section 271AA.
4. Levy of penalty under section 271BA.
5. Levy of interest under sections 234B and 234D.
6. Withdrawal of interest under section 244A.
7. Credit for tax deducted at source.
8. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Taxability of Fee for Buying Agency Services as FTS:
The main issue is whether the fee received by the assessee for buying agency services is considered as 'fees for technical services' (FTS) under section 9(1)(vii) of the Income-tax Act, 1961. The assessee, a tax resident of Hong Kong, provided buying agency services to Adidas India Marketing Private Limited (AIMPL) and received a commission. The assessee argued that the services provided were not managerial, technical, or consultancy in nature, but rather routine procurement services. The tribunal examined the nature of services, including coordination, negotiation assistance, procurement of samples, maintaining relationships with manufacturers, supplying credit reports, and providing translation services. It concluded that these services were not managerial, technical, or consultancy services, and thus, the fee received should not be classified as FTS but as commission.

2. Applicability of the 30% Tax Rate:
The assessee contended that the agreement for buying agency services was entered into on 18 June 1999, with subsequent amendments, and thus, the 30% tax rate applied by the assessing officer was not justified. The tribunal did not find sufficient grounds to uphold the 30% tax rate based on the agreement date and sided with the assessee's argument.

3. Initiation of Penalty Proceedings under Section 271AA:
The assessee argued that the penalty proceedings under section 271AA were proposed without considering that the relevant transfer pricing documents were submitted during the assessment proceedings. The tribunal found this ground inconsequential as no separate penalty proceedings had been initiated so far.

4. Levy of Penalty under Section 271BA:
The assessee contended that the penalty under section 271BA was proposed without appreciating that the accountant's report under section 92E was furnished before the due date. The tribunal found this ground inconsequential as no separate penalty proceedings had been initiated so far.

5. Levy of Interest under Sections 234B and 234D:
The assessee argued against the proposed levy of interest under sections 234B and 234D. The tribunal noted that these grounds were consequential in nature and would be addressed in accordance with the law.

6. Withdrawal of Interest under Section 244A:
The assessee contended that the assessing officer erred in proposing to withdraw interest granted under section 244A. The tribunal noted that this issue was also consequential and would be addressed in accordance with the law.

7. Credit for Tax Deducted at Source:
The assessee argued that the assessing officer did not allow credit for the whole amount of tax deducted at source. The tribunal directed the assessing officer to verify the TDS credit in accordance with the law.

8. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee contended that the initiation of penalty proceedings under section 271(1)(c) was erroneous. The tribunal did not address this issue in detail, as it was not directly relevant to the primary grounds of appeal.

Conclusion:
The tribunal allowed the assessee's appeal, concluding that the services rendered were procurement services and not FTS. Consequently, the fee received was classified as commission, not taxable under FTS provisions. Other grounds related to penalties and interest were deemed consequential or required verification by the assessing officer.

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