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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 ..... rder passed by the Ld.CIT(A) in holding that there is no liability to deduct TDS and accordingly, deletion of addition made to the assessee s income in respect of sales commission under section 40(a)(i) is found to be just and proper so as to warrant interference - Decided in favour of assessee. Addition in respect of ESOP expenses - allowable revenue expenses or not? - HELD THAT:- The issue is squarely covered by the judgment of Hon ble Karnataka High Court in case of CIT, LTU vs. Biocon Ltd [ 2020 (11) TMI 779 - KARNATAKA HIGH COURT] as held incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. Thus 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. Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition 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 this case is this that the assessee is a software private limited company incorporated in the year 2003 under the provision of Companies Act, 1956. It is engaged in the business of providing software development service, sale of software products and rendering of IT enabled Services (ITeS). Manthan Systems Inc. (MSI) is the company incorporated in the United States of America which is wholly owned subsidiary of assessee company; MSI provides sales and marketing services to the assessee for sale of assessee s product / services in the territory of North American / South American and Caribbean markets. The assessee company therefore paid commission to MSI for its services. Though in all the years under consideration assessment was done under section 143(3), no disallowance was made under section 40(a)(i) of the Act for non- deduction of TDS on commission paid to the said company namely MSI. For the year under consideration, reassessment proceeding u/s. 147 was initiated by the Ld.AO and consequently by and u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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 Systems Inc was providing sales and marketing services. These services are enumerated in the ARC Business Partner Agreement between the appellant and Manthan Systems Inc. dated 1 1 th February, 2009 as further amended and renewed by the agreement dated 1st April, 2013. The agreement was for marketing of the appellant's products and associated services, including the software called ARC developed by the appellant which were marketed in North and South America and the Caribbean by Manthan Systems Inc. Para 5 of the said agreement reproduced below further elaborates the nature of the contract between the appellant and Manthan Systems Inc. 5. MSSPL's Responsibilities 5.1 MSSPL, shall provide MSI all necessary and relevant information pertaining to its ARC Products and Associated Services, including all relevant literature, brochure, soft copies, CDs etc. related to the Products and Services, which the Business Partner shall use to adequately market the Products and Services. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 such special programs provided at a fee or charge shall be mutually agreed upon by the Parties hereto. 3.6 MSI agrees to provide the Company with sales and marketing data required by MSSPL in respect of the sales of the ARC Products. MSI will directly input this information into the MSSPL program in the manner stipulated by the MSSPL. 3.7 MSI shall be entitled to receive from MSSPI. such training as MSSPL may deem necessary in order for MSI to carry out its obligations under this Agreement. From a reading of above clauses, it is evident that the services provided by Manthan Systems Inc. to the appellant were in the nature of marketing of the appellant's proprietary products. The AO has briefly discussed in Para 6 and Para 8.3 of her order, that the information provided by the Manthan Systems Inc was in the nature of commercial information and hence the payment for the same was in the nature of royalty. However, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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. The Hon'ble Delhi High Court in case of Dui- (International Taxation) vs Panalfa Autoelectrik Ltd (2014) 49 taxmann.com 412 (Delhi) 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(1)(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. ............... 11. The Hon'ble Supreme Court in the case of CIT v Toshoku Ltd (1980) 125 ITR 525 (SC) held that the sales commission paid to the commission agents outside India was not taxable in India. The Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axmann.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 303 (Cliennai-Trib.); ACIT v Evergreen International Ltd (2018) 91 taxmann.com 111(Delhi-Trib.); CIT v Orient Express (2015) 56 taxmann.com 331 (Madras); Divya Creation v ACIT (2017) 86 taxmann.com 276 (Delhi-Trib.); and Khimji Visram Sons v ACIT (2014) 52 taxinann.com 485 (Mumbai- Trib,). 16. In light of the above judicial pronouncements, 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. 17. The AO has relied on the judgment of Hon'ble Supreme Court in case of GVK Industries Ltd vs ITO (2015) 54 taxmann.com 347 (SC) where in it was held that services provided by Switzerland based company for raising required finance from international organisations on most competitive terms, payment made to swiss compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keting 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 technical or consultancy services and therefore are outside the ambit of FIS as defined in India-USA DTAA. Even if it is assumed without admitting that marketing services is technical or consultancy in nature, it did not make available any technical knowledge, experience, know-how, process to MSSPL. The term make available under the treaty law postulates a concept wherein the recipient of the services is not only ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, 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 technical or consultancy services and therefore are outside the ambit of FIS as defined in India-USA DTAA. Even if it is assumed without admitting that marketing services is technical or consultancy in nature, it did not make available any technical knowledge, experience, know-how, process to MSSPL. The term make available under the treaty law postulates a concept wherein the recipient of the services is not only benefited by the services but there is also a transfer of the technology, processes, skill etc., to the recipient in a manner which will enable the latter to apply the technology, processes, skill etc., in future without recourse to the service provider. The term make available encompasses some sort of durability and stability with reference to the transfer of technology, proces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ider 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 technology by the recipient. The recipient after receiving of technology may use or may not use the technology. It has no bearing on the taxability aspect is concerned. When technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilises for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I 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 nature of FIS even under India USA DTAA. Payment to MSI 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. d. It is also not covered under clause (b) to Article 12(4) of India- USA DTAA as Sales Commission is not in the nature of technical or consultancy services. Further, the services of MSI do not 'make available' any technical knowledge, experience, know-how, process to the Respondent. Thus, the payment does not satisfy the make available test envisaged under Article 12 of India USA DTAA. e. The Honourable Bangalore ITAT in the case of Manthan Systems Inc (Supra) has held that amount paid by the Respondent to MSI is not in the nature of FTS both und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability. 10. From perusal of Section 37(1), which has been referred to supra, it is evident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em 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 that the question raised therein i.e. the ESOP benefit was not in the provision of law at that material point of time rather the same was inserted by the Finance Act, 1999 w.e.f. 01.04.2000 and not applicable to the case of CIT, LTU vs. Biocon Ltd. (supra). Finally the Ld.CIT(A) relying upon the jurisdictional High Court order granted relief to the assessee by deleting addition made by the Ld.AO on account of ESOP expenses. Thus taking into consideration the entire aspect of the matter, we also do not find any reason to interfere with the same as the same is found to be just and proper. This ground of appeal preferred by the revenue, thus fails. This decision will apply mutatis mutandis in A.Ys. 2012-13 to 2015- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 whereof has been made at page 26 which has also been relied upon by the Ld.DR. In rebuttal, the assessee s contention is this that the total provision for doubtful debts reduced from debtors as on 31.03.2015 includes opening provision of Rs.78,06,193/- and the current year provision debited to P L account of Rs.303,61,700/- which is appearing at pages 28-31 of the paper book filed by the assessee. In that view of the matter, it was argued by the Ld.AR that the order passed by the Ld.CIT(A) is without any merit and thus not sustainable in the eye of law. 19. In this aspect, we have considered the judgment passed by the Hon ble Apex Court in the case of Vijaya Bank vs. CIT (supra) as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd `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 case, the assessee would not be entitled to deduction after April 1, 1989. 7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [supra] was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1st April, 1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in Section 36(1)(vii) with effect from 1st April, 1989, a mere debit of the impugned amount of bad debt to the Profit and Loss Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of loans and advances or the debtors at the year-end in the balance-sheet is shown as net of the provisions for impugned debt. However, what is being insisted upon by the Assessing Officer is that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assessee-Bank to close each and every individual account of loans and advances or debtors as a precondition for claiming deduction under Section 36(1)(vii) of 1961 Act. This view has been taken by the Assessing Officer because the Assessing Officer apprehended that the assessee-Bank might be taking the benefit o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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