2022 (1) TMI 33 - AT - Income Tax

TDS u/s 195 - disallowance of commission expenses u/s.40(a)(i) for non-deduction of tax at source - HELD THAT - We hold that the payments made by the assessee to foreign agents are mainly towards marketing services only. Other services rendered by them are in the nature of support services only, which are incidental to the main marketing support services - we hold that these services do not fall under the category of Fee for technical services. Following the decision rendered by the co-ordinate bench in the assessee's own case AY 2010-11 and 2011-12 2019 (7) TMI 865 - ITAT BANGALORE and also the decision rendered in AY 2013-14 2021 (6) TMI 1081 - KARNATAKA HIGH COURT in assessee's own case, we hold that no income chargeable in India has accrued in the hands of the foreign agents. Accordingly, we hold that the assessee is not liable to deduct tax at source from the payments made to the foreign agents. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue in all the three years under consideration and direct the AO to delete the disallowance made u/s. 40(a)(i). TP adjustment - transfer pricing adjustment in respect of transactions relating to provision of software services - HELD THAT - We notice that the co-ordinate bench has directed exclusion of Infosys Ltd., Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd. in the case of SAP Labs India P Ltd 2021 (7) TMI 1301 - ITAT BANGALORE wherein it has followed the decision rendered by another co-ordinate bench in the case of NXP India P Ltd. 2020 (5) TMI 86 - ITAT BANGALORE . Negative working capital - It is the contention of the assessee that the negative working capital should be ignored, since the assessee is a risk free enterprise - A.R placed his reliance on the decision rendered in the case of ACIT vs. e4e Business Solutions India P Ltd. 2020 (12) TMI 1255 - ITAT BANGALORE wherein it has been held that the negative working capital should be ignored, since it artificially increases Arms Length Price. Accordingly, we restore this issue to the file of TPO with the direction to follow the principles laid down in the case of e4e Business solutions India P Ltd. (supra).

Issues Involved:
1. Disallowance of commission payments made to non-resident agents under section 40(a)(i) for non-deduction of tax at source.
2. Addition made on account of transfer pricing adjustment for AY 2012-13.

Detailed Analysis:

1. Disallowance of Commission Payments:

All three appeals involve a common issue of disallowance of commission payments made to non-resident agents under section 40(a)(i) of the Act due to non-deduction of tax at source. The assessee had paid commission to foreign agents without deducting tax at source, which the Assessing Officer (AO) disallowed under section 40(a)(i). The disallowed amounts were ?2.64 crores, ?2.73 crores, and ?0.50 crores for AY 2012-13, 2014-15, and 2015-16 respectively.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the services provided by the foreign agents were managerial, technical, and consultancy services, thus falling under "Fee for Technical Services" (FTS) requiring tax deduction at source. This conclusion was based on the nature of services described in the agreements between the assessee and the agents.

The assessee argued that the services were primarily marketing support services and did not qualify as FTS. The assessee cited past Tribunal decisions and a Karnataka High Court ruling in its favor, which held that similar payments did not result in income chargeable in India and thus did not require tax deduction at source.

The Tribunal examined the nature of services provided by the foreign agents, which included administrative assistance, arranging meetings, and marketing support. It concluded that these services were primarily marketing support services and did not fall under the category of managerial, technical, or consultancy services as per Explanation 2 to section 9(1)(vii) of the Act. Consequently, the payments made to foreign agents did not constitute FTS and no income chargeable in India accrued to the foreign agents. The Tribunal also noted that the Karnataka High Court had previously ruled in favor of the assessee on a similar issue.

Based on these findings, the Tribunal held that the assessee was not liable to deduct tax at source for the payments made to foreign agents. The Tribunal set aside the CIT(A)'s orders and directed the AO to delete the disallowance made under section 40(a)(i) for all three years.

2. Transfer Pricing Adjustment for AY 2012-13:

In AY 2012-13, the assessee contested the addition made on account of transfer pricing adjustment. The Transfer Pricing Officer (TPO) had made an adjustment in respect of transactions related to the provision of software services, rejecting the assessee's transfer pricing study and selecting ten comparable companies with an average margin of 22.63%. After considering a negative working capital adjustment, the TPO arrived at an adjusted margin of 27.49% and made an adjustment of ?2,24,47,737/-.

The CIT(A) excluded three comparable companies (Datamatics Global Services Ltd., Genesys International Corporation Ltd., and ICRA Techno Analytics Ltd.) from the list but upheld the negative working capital adjustment. The assessee sought the exclusion of three additional comparable companies (Infosys Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd.) and argued that the negative working capital should be ignored.

The Tribunal referred to its previous decisions and those of other coordinate benches, which consistently held that Infosys Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd. were not comparable to smaller companies like the assessee. The Tribunal directed the exclusion of these three companies from the list of comparables.

Regarding the negative working capital adjustment, the Tribunal noted that it should be ignored as it artificially increases the Arms Length Price (ALP). The Tribunal restored this issue to the TPO with the direction to follow the principles laid down in the case of ACIT vs. e4e Business Solutions India P Ltd.

In conclusion, the Tribunal allowed all the appeals of the assessee, setting aside the CIT(A)'s orders and directing the AO to delete the disallowance and adjustments made.

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