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TMI Blog2024 (2) TMI 784X X X X Extracts X X X X X X X X Extracts X X X X ..... he delay in condoned. Assessment Year 2012-13: 2. At the very outset of the matter, the Ld.Counsel appearing for the assessee submitted before us that the ground challenging the reopening of assessment under section 148 though raised by the assessee in each year are not pressed. Hence this particular ground of appeal is dismissed as not pressed. The cross objections are, therefore, dismissed as not pressed. This here apply mutatis mutandis in A.Ys. 2013-14 and 2014- 15. 3. So far as the cross objection in respect of AY 2015-16 is concerned, this ground preferred by the assessee are dismissed as not pressed. However, the disallowance of provision for doubtful debts as has been challenged by the assessee will be considered by us. 4. In revenue's appeal, the following common grounds are raised: a) Deletion of addition in respect of sales commission paid to Manthan Systems Inc. ('MSI') under section 40(a)(i) of the Act. b) Deletion of addition in respect of ESOP expense made by the Ld.CIT(A). Deletion of addition in respect of sales commission paid to Manthan Systems Inc. ('MSI') u/s. 40(a)(i) of the Act. ITA No. 943/Bang/2023 - A.Y. 2012-13 5. The brief facts leading to thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paper book filed by the assessee. 9. The crux of the case made by the assessee is this that since the services rendered to the appellant by the said Manthan Systems Inc. have been held not falling within the ambit of FTS or under Article 12 of the DTAA, the appellant is also not liable to deduct TDS on the payment made to the said company MSI as held by ITAT in the order under reference hereinabove. In this regard, we have carefully considered the order passed by the Ld.CIT(A) who has taken into consideration this particular aspect of the matter and deleted the addition with the following observation: "4.3.4 FINDING AND DECISION In the impugned order, the AO has made disallowance under Section 40(a)(i) of the payment made to Manthan Systems Inc. towards sales and marketing commission. The AO has extensively discussed why the commission paid by the appellant to Manthan Systems Inc was in the nature of Fees for Technical Services and was taxable both under the provisions of the Act and under the India-USA DTAA. The AO in Para 4.1 (Page 3 86 4) of the assessment order has listed the services provided by the Manthan Systems Inc. to the appellant and also stated that Manthan System ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d services with clients (f) Carry Commercial and contractual ownership of the Customer Relationship (g) Bear equal share of the cost on all event participation focused on the promotion of the Product and Services. (h) Conduct Road shows. Paras 3.3 to 3.7 of the agreement also delineate the responsibilities of both parties to the agreement. 3.3 MSI shall use all reasonable efforts to pursue aggressive sales policies and procedures to realize the maximum sales potential for the ARC Products and Associated Services. 3.4 During the term of this Agreement, MSI shall not, without MSSPL's prior written consent, represent, promote or otherwise try to sell any other types of software Products and/or Services which perform identical functions as the Products and/or Services provided by MSSPL. 3.5 MSI shall support such special programs as may be developed by MSSPL from time to time in relation to the ARC Products and/or Associated Services. Such support may be in the form of marketing or promotional services, provision of certification programs, integration of sales reporting tools developed by the Company, or such other services as the Company may specifically request. Any s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DRP has also observed that services of assessee assist MSSPL in making managerial/business decision. In the instant case, the assessee acted as intermediary and facilitates sale of software products/services outside India. On perusal of copy of sale and marketing agreement dated 11.02.2009 entered between the assessee and MSSPL, it is seen that the assessee rendered the following services. * Promoting the software product/services on behalf of the Appellant; * Co-Ordination between the customers in North American, South American and Caribbean market and MSSPL; * Following up with the customers in North American, South American and Caribbean market for collection of amount. 10. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not applicable. 15. Similarly, the Bangalore tribunal in the case of Deccan Creations (P.) Ltd vs DCIT (2022) 134 taxmann.com 144 (Bangalore-Trib.) 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 and therefore, not taxable in India The following judicial pronouncements have also taken an identical view:- * PCIT vs Puma Sports India (P.) Ltd (2021) 127 taxmann.com 169 (Karnataka} SLP dismissed by Supreme Court - (2022) 134 taxmann.com 60 (SC); * Bengal Tea & Fabrics Ltd.. v DCIT (2018) 91 taxmann.com 38 (Kolkata - Trib.); * DCIT v Divi's Laboratories Ltd (2011) 12 taxmann.com 103 (Hyd.); * CIT vs. Model Exims, (2014) 42 taxmann.com 446 (ALL) * Brakes India Ltd. v DCIT (2013) 33 taxmann.com 501 (Chennai - Trib.); * Sri Subbaraman Subramanian v Asst CIT (2013) 30 taxmann.com 236 (Bangalore - Trib.); * ACIT v India Shoes Exports (P.) Ltd (2015) 57 taxmann.com 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder India-USA DTAA. The payment received by the assessee will not qualify as "fees for Included services" under the India-USA DTAA. The definition "fees for Included services" under Article 12 to India-USA DTAA is as follows: "fee for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design." 20. The payments towards sales and marketing services provide by the assessee is not covered under sub clause (a) to Article 12(4) of India-USA DTAA as it is not ancillary to application or enjoyment of any right. Further, clause (b) to Article 12(4) of India-USA DTAA is only applicable if the services are in the nature of technical or consultancy services, which make available knowledge, exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble High Court, held that test is whether the recipient of the service is equipped to carry on his business without reference to the service provider. If he is able to carry on his business in future without the technical service of the service provider in respect of services rendered then, it would be said that technical knowledge is made available. ..................... 22. Reliance is also placed on the judgment of Delhi High Court in the case of DIT v. Guy Carpenter & Co. Ltd. [2012] 346 ITR 504 (Del.) 23. The Kolkata Tribunal decision in the case of On process Technology India (P.) Ltd v DCIT (2018) 96 taxmann.com 428 (Kolkata-Trib.) is squarely applicable to the facts of the present case. In the aforesaid case, the Tribunal rendered decision in the context of India-USA DTAA. The Tribunal held that the act of securing orders and soliciting business by the foreign marketing companies does not make available any technical knowledge or technical service and the same is not taxable either ups 9(I)(vii) or under India-USA DTAA. Reliance is also placed on the decision of Delhi Tribunal in the case Rajinder Kumar Aggarwal (HUF) vs DC1T [2021] 131 taxmann.com 252 (Delhi-Trib.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical or other personnel) if such services: a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design." 20. The payments towards sales and marketing services provide by the assessee is not covered under sub clause (a) to Article 12(4) of India-USA DTAA as it is not ancillary to application or enjoyment of any right. Further, clause (b) to Article 12(4) of India-USA DTAA is only applicable if the services are in the nature of technical or consultancy services, which make available knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design. The sales and marketing services rendered by assessee is not in the nature of technical or consultancy services. The AO has submitted that services are in the nature of project management of services and the same has been confirmed by the DRP. The project management services does not constitute te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "14. Therefore the Clause in Singapore agreement which explicitly makes it clear the meaning of the word 'make available', the said clause has to be applied, and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person receiving the technical services. The technology will be considered 'made available' when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tar is not dependent on the use of the tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other word, payment of consideration would be regarded as 'fee for technical / included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied." 22. Reliance is also placed on the judgment of Delhi High Court in the case of DIT v. Guy Carpenter & Co. Ltd. [2012] 346 ITR 504 (Del.) 23. The Kolkata Tribunal decision in the case of On process Technology India (P.) Ltd v DCIT (2018) 96 taxmann.com 428 (Kolkata-Trib.) is squarely applicable to the facts of the present case. In the aforesaid case, the Tribunal rendered decision in the context of India-USA DTAA. The Tribunal held that the act of securing orders and soliciting business by the foreign marketing companies does not make available any technical knowledge or technical service and the same is not taxable either ups 9(I)(vii) or under India-USA DTAA. Reliance is also placed on the decision of Delhi Tribunal in the case Rajinder Kumar Aggarwal (HUF) vs DC1T [2021] 131 taxmann.com 252 (Delhi-Trib.) 24. The AO has stated that marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Ground 2 The Revenue has taken a Ground that services rendered by the US entity are in the nature of Consultancy as provided in Explanation 2 to Section 9(1)(vii) providing significant professional skills and the subsidiaries are not mere marketing or commission agents. In this regard, the Respondent submits as follows: a. The CIT(A) has held that sales commission is not taxable both under the Income Tax Act and DTAA. The Revenue has not taken ground that the CIT(A)'s decision of non-taxability under the DTAA needs to be reversed. Thus, entire contention of Revenue has no legs to stand on as once income is not taxable under the tax treaty, its taxability under the Act is of no relevance. b. Without prejudice, the Appellant submits that MSI 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 Respondent outside India. For the said activity, Respondent pays sales commission to MSI. Sales Commission is computed based on the percentage of billings made to customers for the orders secured by MSI. c. The services provided by MSI are not in the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees. 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the Supreme Court in the aforesaid case, the Assessment Year in question was 1997-98 to 1999- 2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 01.04.2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of account." The Ld.DR relied upon the order passed by the authorities below. 15. We also find that in the case of CIT, LTU vs. Biocon Ltd. (supra), the revenue relied upon the judgment in case of CIT vs. Infosys Technologies Ltd. reported in (2008) 166 Taxman 204/297 ITR 167 which has also been taken care by the Jurisdictional High Court and distinguished to this effect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rit. 3.15 Therefore, Provision for Doubtful debts should be allowed as deduction. The Respondent Prays that Revenue Appeals be dismissed, and its CO be allowed." 17. It is the case of the assessee that the Ld.CIT(A) has not appreciated that the assessee has reduced the provision for doubtful debts from sundry debtors in the balance sheet (Schedule 2.12 of the financial statement). In this regard, he has drawn our attention to page 28 of the paper book filed for the year under consideration (2015-16). The sundry debtors were shown net of provision for doubtful debts in the balance sheet. Accordingly, the provision for doubtful debts is allowable in terms of the decision passed by the Hon'ble Supreme Court in case of Vijaya Bank vs. CIT reported in (2010) 190 Taxman 257 as the main contention made by the Ld.AR. A copy of the judgment has also been annexed to the paper book filed before us. 18. On the other hand, it is the contended by the revenue that the amount of provision for doubtful debts debited to the P&L account and amount of provision for doubtful debts reduced in the balance sheet is not matching which is appearing from the order passed by the Ld.CIT(A), observation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sertion (with effect from April 1, 1989) of a new Explanation in section 36(1)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee. The said amendment indicates that before April 1, 1989, even a provision could be treated as a write off. However, after April 1, 1989, a distinct dichotomy is brought in by way of the said Explanation to section 36(1)(vii). Consequently, after April 1, 1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii). To understand the above dichotomy, one must understand `how to write off'. If an assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like sundry debtor's account, it would constitute a write off of an actual debt. However, if an assessee debits `provision for doubtful debt' to the profit and loss account and makes a corresponding credit to the `current liabilities and provisions' on the liabilities side of the balance-sheet, then it would constitute a provision for doubtful debt. In the latter ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (s) is now required not only to debit the Profit and Loss Account but simultaneously also reduce loans and advances or the debtors from the asset side of the Balance Sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in it's impugned judgement. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under Section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in it's Books, as indicated above. 8. Coming to the second question, we may reiterate that it is not in dispute that Section 36(1)(vii) of 1961 Act applies both to Banking and Non-Banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assessee-Bank has not only been debiting the Profit and Loss Account to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year-end, as stated hereinabove. In other words, the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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