2020 (10) TMI 986 - AT - Income Tax

TDS u/s 195 - Demand raised u/s 201(1) and 201(1A) - assessee has been making payments to its US subsidiary which were in the nature of selling and marketing expenses - AO took the view that the impugned payments are in the nature of Fee for technical services - assessee submitted that the services carried out by its US subsidiary are in the nature of targeting new customers, carrying out promotional activities and participating in trade shows outside India on behalf of the assessee - HELD THAT - We notice that the AO has not properly analysed the nature of services rendered by M/s Adadyn Inc., USA, in the context of sec. 9(1)(vii) or DTAA, even though he has extracted the agreement entered between the assessee and M/s Adadyn Inc. Assessee contention that nature of services provided by the above said company is in the nature of business support services and not in the nature of consultancy services in strict sense. It is not shown that the above said contention of the assessee is wrong. Nature of services provided by M/s Adadyn Inc., USA has not been analysed by Ld CIT(A) also. On the contrary, it is the contention of the assessee that the first appellate authority has entertained erroneous belief that the assessee has been using market analysis/ online data/data bases etc., belonging to M/s Adadyn Inc. The above said observation of Ld CIT(A) was strongly objected to by the assessee. Hence the observation of the Ld CIT(A) that a part of payment constitutes Royalty is strongly disputed. CIT(A) has also not properly analysed the provisions of article 12 of India USA DTAA. Without analysing the nature of services, the Ld CIT(A) has observed that the services were made available. Thus, we notice that the Ld CIT(A) has rendered the decision without bringing on record supporting materials and also without properly analysing the provisions and contentions of the assessee. In the absence of proper analysis of facts relating the issues contested before us, it would be difficult for the Tribunal to adjudicate them. Thus all the contentions of the assessee require fresh examination at the end of Ld CIT(A). Assessee appeals are treated as allowed for statistical purposes.

Summary

Issues involved:
Assessment of demand raised under sections 201(1) and 201(1A) of the Income-tax Act, 1961 for payments made to a US subsidiary for selling and marketing expenses.

Detailed Analysis:

1. Nature of Payments and Tax Deduction:
The Assessing Officer (AO) held that payments made by the assessee to its US subsidiary for selling and marketing expenses constituted "Fee for technical services" under section 195 of the Act. As the assessee did not deduct tax at source (TDS), the AO treated the assessee as an assessee in default and initiated proceedings under section 201 of the Act.

2. Arguments by the Assessee:
The assessee argued that the services provided by its US subsidiary did not fall under the category of "Fee for technical services" as per the India-USA Double Taxation Avoidance Agreement (DTAA). The services were related to targeting new customers, promotional activities, and trade shows outside India, and did not involve technical knowledge transfer. The assessee relied on specific legal cases to support its position.

3. AO's Findings and CIT(A) Decision:
The AO concluded that the US entity provided managerial, technical, or consultancy services to the assessee in India, making the payments subject to TDS under section 9(1)(vii) of the Act. The Commissioner of Income Tax (Appeals) [CIT(A)] initially upheld the AO's decision, stating that the payments were for consultancy services and taxable in India. The CIT(A) further categorized the payments as composite in nature, including royalty and consultancy services.

4. Appellate Tribunal Decision:
The Appellate Tribunal set aside the CIT(A)'s order and directed a fresh examination of all contentions. It noted that the AO and CIT(A) had not adequately analyzed the nature of services provided by the US subsidiary in the context of the Act and DTAA. The Tribunal emphasized the need for a proper assessment of facts, supporting materials, and relevant provisions before adjudication.

5. Outcome:
The Tribunal allowed all three appeals for statistical purposes, instructing the CIT(A) to re-examine the issues by analyzing the nature of services, presenting supporting evidence, considering the assessee's contentions, and applying relevant legal provisions. The case was remanded for a fresh decision by the CIT(A) after affording the assessee a fair opportunity to present its case.

This detailed analysis highlights the key legal and procedural aspects of the judgment, emphasizing the need for a thorough examination of the nature of services and proper application of tax laws and international agreements.