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TMI Blog2024 (10) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,42,26,978/-. The return was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) received information from DCIT (International Tax), Circle 1(2), Bangalore wherein it was reported that verification u/s. 133A(2A) of the Act done at the premises of the assessee revealed that an amount of Rs. 37,92,79,043/- was accounted as sales commission. Upon further enquiry the AO noticed that the said sales commission was paid to the assessee's US subsidiary Manthan Systems Inc and other subsidiaries (AEs) towards selling and marketing services and that no TDS was deducted on the same. The AO called on the assessee to furnish details pertaining to the payment of commission. The assessee submitted that the payments were made towards marketing and support services paid as sales commission and that it will not partake the nature of fees for technical services (FTS). The assessee further submitted that the AEs are remunerated for rendering marketing support services in the form of sales commission and that the AEs do not render any technical services The AO after perusing the details submitted by the assessee held that the payment made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of tax at source u/s. 195 of the Act is not tenable. The learned A.R further submitted that the coordinate bench in assessee's own case (supra) has considered the issue of ESOP expenses and Provision for doubtful debts and has allowed the issue in favour of the assessee. 6. The learned D.R., on the other hand, submitted that the department has preferred appeal against the order of the Tribunal in assessee's own case for AYs 2012-13 to 2015-16 (Supra) and accordingly prayed that the issues may be kept alive by setting aside the order of the CIT(A). 7. We have heard the rival contentions and perused the material on record. We notice that the coordinate bench in assessee's own case has considered the issue of disallowance u/s. 40(a)(ia) towards sales commission paid to Manthan Systems Inc and held that: - "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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he units sold. 5.4 Notwithstanding the generality of the above, MSSPL shall also: (a) Direct leads to MSI which it may receive directly from prospects (b) Continue lead generation and marketing activities (c) Until MSI achieves a Sales Revenue Level of USD 1 Million, Provide Sales training hours to the MSI team consisting of: (i) Product training (ii) Technical and deployment training (iii) Sales training Training beyond that Revenue level shall be priced to MSI on par with MSSPL's Training offered to other Channel Partners. (d) Assist in ARC Product and Associated Services sales. business, technical and commercial discussions, product demonstrations and services portfolio presentations to the prospect. (e) Deploy, maintain, customize and support the product and 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 ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein the same transaction has been held to be not taxable as FTS either under the Act or under Article 12 of the DTAA. The relevant portion of the order of the Tribunal is reproduced below. "9. We have heard rival submissions and perused the material on record. The AO has referred to the services rendered by the assessee at para 6.1 of his order, The AO has contended that services rendered by the assessee are project management services and thereby fall within the ambit of FTS as per Explanation 2 to section 9(1)(vii) of the Act. The AO has concluded that services are in the nature of technical or consultancy services (Para 6.7 of the order). Finally at Para 10.2, it is concluded that services are technical in nature. The DRP has confirmed the finding of AO (Page 4 of the DRP order). The 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. * Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired to deduct TDS under section 195. Further, it has been held that in the absence of permanent establishment(s) of such agents in India, the export commission income of the agents was not liable to be taxed in India and thus, the assessee was not obliged to effect any deduction of tax on the commission payments made to the agents who were positioned overseas. 14. The ITAT in the case of iRunway India (P) Ltd vs DCIT (2022) 138 taxmann.com 188 (Bangalore-Trib.) had held that where assessee has obtained certain sales consulting services from USA and commission is based on fixed percentage of sales, then merely because the service provider is technically qualified, sales commission paid for enabling sale could not become payment for rendering technical services and therefore, TDS is 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, negotiating and closing financing for the project in a coordinated and expeditious manner. The above services are clearly in the nature of consultancy services as they assist in decision making. However, in the instant case, the assessee has rendered sales and marketing services to MSSPL. No consultancy services are rendered and in fact even the AO has concluded that assessee has rendered technical services. Therefore, the above decision of Hon'ble Supreme Court in GVK Industries is not applicable to the facts of the present case. Further, the decision does not deal with the taxability under the treaty. .......................... 19. Now, we shall deal with taxability as per DTAA: The assessee is admittedly a tax resident of USA and hence it is eligible to claim benefits under 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 provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service. In this context, we rely on the judgment of the Hon'ble jurisdictional High Court in the case of CIT v De Beers India Minerals (P.) Ltd. 21 taxmann.com 214 (Kar.), wherein the Honourable High Court dealt with 'make available' clause. The High Court held 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 Hon'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 pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. We further find that while dealing with the issue, the Coordinate Bench has been pleased to observe as follows while holding that the sales commission paid to the Manthan System Inc. does not fall within the ambit of FTS: 19. Now, we shall deal with taxability as per DTAA: The assessee is admittedly a tax resident of USA and hence it is eligible to claim benefits under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke available' clause. The High Court held 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 Hon'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. The relevant finding of the Hon'ble High Cot reads as follows:- "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 servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, 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 Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve decision of the coordinate bench is squarely applicable to the impugned issue for the year under consideration also. Therefore, respectfully following the above decision we hold that there is no infirmity in the order passed by the CIT(A) in holding that there is no liability to deduct tax towards sales commission paid by the assessee to Manthan System Inc and accordingly no disallowance is warranted u/s. 40(a)(i) of the Act. 9. We further notice that the coordinate bench in assessee's own case for AYs 2012-13 to 2015-16 (supra) 13. At the outset of the proceedings, the Ld.Counsel appearing for the assessee submitted before us that the issue is squarely covered by the judgment of Hon'ble Karnataka High Court in case of CIT, LTU vs. Biocon Ltd., reported in [2020] 121 taxmann.com 351 (Karnataka). In this regard, the Ld.Counsel appearing for the assessee submitted the written notes which is reproduced as follows: "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 age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apposite to take note of Section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". 7. Thus, from perusal of Section 37 (1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expnded and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of Section 37(1) of the Act would be attracted. It is also pertinent to note that Section 37 does not envisage incurrence of expenditure in cash. 8. Section 2(15A) of the Companies Act, 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 securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition. 11. 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. 12. So far as reliance place by the revenue in the case of CIT VS. INFOSYS TECHNOLOGIES LTD. is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under Section 201 of the Act for non deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered 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 effe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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