2022 (11) TMI 419 - AT - Income Tax

TDS u/s 195 - payment made to non-resident - Disallowance u/s.40(a)(i) - HELD THAT - Since, the assessee is in the business of providing software solutions and services to various industries, in our considered view, said services definitely requires technical expertise and knowledge. When the marketing partner provides pre-sale services and post-sale services to customers, the employees of marketing partner should be expertise in technical knowledge of the products. Therefore, we are of the considered view that the AO has rightly held that services rendered by marketing partner in terms of agreement between the assessee and M/s.SSG Technologies, LLC, comes under FTS as per Explanation-2 to Sec.9(1)(vii) - Since, the services rendered by marketing partner is in the nature of FTS, the assessee ought to have deducted TDS in terms of Sec.195 - Since, the assessee has failed to deduct TDS when payment made to non-resident, the AO has rightly disallowed said payment u/s.40(a)(i) of the Act. The Ld.CIT(A) after considering relevant facts rightly upheld addition made by the AO. Hence, we are inclined to uphold the findings of Ld.CIT(A) and reject the ground taken by the assessee.

Summary

Issues involved:
1. Jurisdiction of CIT(A) under section 9(1)(vii) of the Income Tax Act.
2. Tax Deducted at Source (TDS) liability under section 195 of the Act.
3. Classification of services as Fees for Technical Services (FTS) under Explanation-2 to section 9(1)(vii) of the Act.
4. Disallowance of payment made to marketing partner under section 40(a)(i) of the Act.

Jurisdiction of CIT(A) under section 9(1)(vii) of the Income Tax Act:
The appeal filed by the assessee challenged the order of the Commissioner of Income Tax (Appeals) regarding the assessment year 2016-17. The grounds of appeal included contentions that the CIT(A) fundamentally assumed jurisdiction wrongly and failed to appreciate the provisions of section 9(1)(vii) of the Income Tax Act. The assessee argued that the services rendered by the marketing partner did not qualify as technical services under the Act. However, both the Assessing Officer (AO) and the CIT(A) held that the services provided by the marketing partner fell under the category of Fees for Technical Services (FTS) as per Explanation-2 to section 9(1)(vii) of the Act. The CIT(A) upheld the disallowance of the payment made by the assessee to the marketing partner under section 40(a)(i) of the Act.

Tax Deducted at Source (TDS) liability under section 195 of the Act:
The AO observed that the assessee had remitted charges for services to non-resident marketing partners without deduction of TDS. The AO concluded that the services provided by the marketing partner constituted FTS and disallowed the payment made by the assessee to the marketing partner under section 40(a)(i) of the Act. The failure to deduct TDS led to the disallowance of the payment. The CIT(A) upheld the addition made by the AO, emphasizing the necessity of TDS deduction under section 195 of the Act for such payments to non-residents.

Classification of services as Fees for Technical Services (FTS) under Explanation-2 to section 9(1)(vii) of the Act:
The nature of services provided by the marketing partner was a crucial point of contention. The agreement between the assessee and the marketing partner specified that the latter would market, promote, and distribute the products, along with providing sales support services. The agreement also outlined that the marketing partner would retain a percentage of the project value as charges for services rendered. The CIT(A) analyzed the agreement and determined that the services provided by the marketing partner qualified as FTS under Explanation-2 to section 9(1)(vii) of the Act. The CIT(A) differentiated between the payment for services and reimbursements for expenses, directing the AO to delete additions related to expense reimbursements.

Disallowance of payment made to marketing partner under section 40(a)(i) of the Act:
The dispute revolved around whether the payment made by the assessee to the marketing partner should be disallowed under section 40(a)(i) of the Act. The assessee argued that the services provided were merely marketing services and not technical in nature. However, the authorities determined that the services rendered by the marketing partner required technical expertise and knowledge, falling under the definition of FTS. The failure to deduct TDS on such payments led to the disallowance under section 40(a)(i) of the Act. The appeal filed by the assessee was ultimately dismissed, upholding the findings of the CIT(A) and the AO regarding the disallowance of the payment made to the marketing partner.