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2022 (9) TMI 1555 - AT - Income TaxAccrual of income in India - income deemed to accrue or arise in India - sales and marketing services rendered by the assessee to foreign marketing companies - whether it would not fall within the ambit of FTS as defined under section 9(1)(vii) or under Article 12 of DTAA? - AR submitted that the assessee is not providing any technical / managerial or consultancy services - HELD THAT - In the instant case, the assessee is not providing any technical, managerial or consultancy services rather has been engaged to act as authorized business partner to market and promote the products or services of MSSPL outside India - in fact, the AO/DRP have not even concluded as to what is the nature of services rendered by the assessee. The decision regarding what are the products/services that are to be developed or provided, the price to be charged to the customer etc. are solely taken by MSSPL. The assessee does not play any role in the decision-making process. Further, once the assessee procures the orders, it is at the discretion of MSSPL whether to sell the product or render services to identified customers. As decided in Panalfa Autoelectrik Ltd 2014 (9) TMI 706 - DELHI HIGH COURT held that commission paid by the assessee to its foreign Agent for arranging export sales and recovery of payments could not be regarded as fee for technical services under section 9(l)(vii) of the I.T. Act. The High Court held that the skill, business acumen and knowledge acquired by the non-resident were for his own benefit and use. Also see Bangalore tribunal in the case of Deccan Creations (P.) Ltd 2021 (12) TMI 707 - ITAT BANGALORE had held that services of foreign agents in the form of providing the data related to market trends and requirements of customers does not constitute as managerial services, as these services are usually provided by any agent. Thus, sales commission paid to foreign agents on the value of sales affected through them cannot be treated as technical services Thus the income received towards sales commission does not satisfy the definition of FTS under the Act as it is not in the nature of Managerial, Technical or Consultancy Services. Taxability as per DTAA - scope of 'made available' clause - As per Memorandum of Understanding ( MOU ) on Article 12 of the Treaty, entered into by the Government of India and the Government of USA on May 15, 1989, the technology is considered made available when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service. AO has stated that marketing services rendered by the assessee are technical in nature and which are used by MSSPL for development of business, which results in enduring benefit. Accordingly, the A.O. has concluded that make available is satisfied as there is transfer of skill and knowledge which falls within the ambit of technical services. DRP has also confirmed the view of the A.O. The AO and DRP has erred in not appreciating that what should be made available is technical knowledge, experience, skill etc. Making available service does not make available knowledge, experience, skill etc. MSSPL has to approach the assessee every time to get new customers and maintain relationship with existing customers. The test of make available as envisaged in the DTAA is therefore not satisfied in the instant case. We hold that the sales and marketing services rendered by the assessee to MSSPL would not fall within the ambit of FTS as defined under section 9(1)(vii) or under Article 12 of DTAA.
Issues Involved:
1. Validity of the reassessment proceedings under Section 147 of the Income Tax Act. 2. Taxability of sales commission received by the assessee under the Income Tax Act and the India-USA DTAA. 3. Non-disposal of objections by the Assessing Officer (AO). 4. Non-grant of credit for Tax Deducted at Source (TDS) by the AO/Dispute Resolution Panel (DRP). 5. Levy of interest under Section 234A of the Income Tax Act. Detailed Analysis: 1. Validity of the Reassessment Proceedings: The assessee challenged the issuance of notice under Section 148 and the passing of the assessment order in the absence of 'reason to believe' as required under Section 147. The assessee argued that the notice and order were based on mere suspicion and without a live link between the material relied upon and the belief that income had escaped assessment. Additionally, the assessee contended that the reassessment was conducted based on proceedings in the case of ASPL without any specific reason to believe that income had escaped assessment. 2. Taxability of Sales Commission: The core issue was whether the sales commission received by the assessee from MSSPL was taxable in India. The AO and DRP concluded that the sales commission partook the character of Fees for Technical Services (FTS) under both the Income Tax Act and the India-USA DTAA. The assessee argued that the services provided were purely marketing and promotional, not technical or consultancy services, and thus not taxable as FTS. The assessee relied on multiple judicial pronouncements, including DIT (International Taxation) v. Panalfa Autoelectrik Ltd. and CIT v. Toshoku Ltd., which held that commission paid to foreign agents for arranging export sales and recovery of payments could not be regarded as FTS. 3. Non-disposal of Objections by AO: The assessee contended that the AO failed to dispose of the objections to the reasons for reopening the assessment by passing a speaking order, as mandated by the Supreme Court in GKN Driveshafts (India) Ltd. v. ITO. This non-compliance rendered the final assessment order bad in law. 4. Non-grant of Credit for TDS: The assessee argued that the AO/DRP erred in not granting credit for TDS remitted by ASPL in response to the order under Section 201 of the Act. The assessee contended that recovery from both ASPL and the appellant would lead to double recovery of the same tax. 5. Levy of Interest under Section 234A: The assessee disputed the levy of interest under Section 234A, arguing that it was not leviable under the facts and circumstances of the case. Judgment: Reassessment Proceedings: The Tribunal noted that no arguments were raised regarding the validity of the reopening of the assessment, and thus did not delve into this issue in detail. Taxability of Sales Commission: The Tribunal held that the sales commission received by the assessee did not qualify as FTS under the Income Tax Act or the India-USA DTAA. The Tribunal emphasized that the services rendered by the assessee were purely marketing and promotional, not technical or consultancy services. The Tribunal relied on various judicial pronouncements, including DIT (International Taxation) v. Panalfa Autoelectrik Ltd. and CIT v. Toshoku Ltd., to support its conclusion. The Tribunal also noted that the AO and DRP failed to establish that the services rendered by the assessee made available any technical knowledge, experience, skill, or know-how to MSSPL, as required under the India-USA DTAA. Non-disposal of Objections by AO: The Tribunal did not specifically address this issue, as no arguments were raised regarding it during the hearing. Non-grant of Credit for TDS: The Tribunal did not specifically address this issue, as no arguments were raised regarding it during the hearing. Levy of Interest under Section 234A: The Tribunal did not specifically address this issue, as no arguments were raised regarding it during the hearing. Conclusion: The Tribunal concluded that the sales and marketing services rendered by the assessee to MSSPL did not fall within the ambit of FTS as defined under Section 9(1)(vii) of the Income Tax Act or under Article 12 of the India-USA DTAA. The appeal filed by the assessee was partly allowed. The order was pronounced on September 23, 2022.
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