9911796707
TMI Blog2024 (10) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... d u/s. 40(a)(i). Disallowance of ESOP expenses - Issue of allowability of ESOP expenses is well settled and the coordinate bench in assessee s own case for AYs 2012-13 to 2015-16 [ 2024 (2) TMI 784 - ITAT BANGALORE] has been consistently holding that the ESOP expenses are to be allowed as a deduction. Thus, we are not inclined to interfere with the decision of the CIT(A) in allowing the claim of the assessee towards ESOP expenses. Decided in favour of assessee. - Shri George George K., Vice President And Ms. Padmavathy S., Accountant Member For the Assessee : Shri Narendra Kumar Jain, Advocate For the Revenue : Shri R.N. Siddappaji, CIT-DR ORDER PER BENCH These appeals of the Revenue are directed against the separate orders of the Commissioner of Income Tax (Appeals)-12, Bangalore [CIT(A)] dated 30.04.2024 for Assessment Years (AY) 2016-17 to 2018-19. The common issues contended by the Revenue for all the AYs pertain to: - i) Disallowance u/s. 14(a)(i) of the Income Tax Act, 1961 (the Act) ii) ESOP expenses Since the issues contended are common, these appeals were heard together and were disposed off by this common order. ITA No. 1196/Bang/2024 2. The brief facts of the case are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 95,064/-. No TP adjustments were made by the TPO towards international transaction entered into by the assessee with its AEs and hence TP adjustment was considered as Nil by the AO while passing the assessment order. 4. Aggrieved assessee filed further appeal before the CIT(A). The ld. CIT(A) relied on the decision of the Tribunal in assessee s own case for AYs 2012-13 to 2015-16 and deleted all the disallowance made by the AO. The Revenue is in appeal before the Tribunal against the order of the CIT(A) contending the deletion of disallowance made u/s. 40(a)(i) of the Act and ESOP expenses. 5. The learned A.R. submitted that the issue is squarely covered by the decision of the coordinate bench in assessee s own case for AYs 2012-13 to 2015-16 (ITA Nos. 943 to 946/Bang/2023 dated 19.01.2024) and therefore the CIT(A) has rightly relied on the said decision while deleting the disallowances made by the AO. The learned A.R. drew our attention to the decision of the coordinate bench in the case of Manthan System Inc (IT(IT)A No. 723/Bang/2022 dated 23.09.2022) where it has been held that the amount received by Manthan Systems Inc towards rendering sales and marketing services would not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther 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. 5.2 MSSPL shall, upon the receipt of a purchase order from the Customer, intimate MSI as to the acceptance of the purchase order. MSSPL shall be at liberty to reject any purchase order which does not comply with the pricing agreed at the end of the Commercial Negotiations or is not accompanied with the advance amount as agreed therein. 5.3 MSSPL shall send along with the confirmation of the purchase order, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I 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 view is not tenable in the light of the clauses of agreement discussed above. Be that as it may be, the AO has gone into some detail and also extensively discussed with reference to various case laws that the payment for the services rendered by Manthan Systems Inc was also FTS and chargeable to tax as per the Act and DTAA. The AO has not specifically identified whether the payment for the services was royalty or FTS. This issue has been decided in the appellant's favour by the Bangalore ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 Court observed that the sales commission earned by the non-resident agents cannot be deemed to accrue or arise in India. 12. The Hon'ble Madras High Court in the case of CIT vs Faizan Shoes (P.) Ltd (2014) 48 taxmann.com 48 (Madras) had held that Assessee was not liable to deduct tax at source when non-resident agent provides services outside India on payment of commission. 13. In the case of Exotic Fruits (P.) Ltd reported in (2013) 10 taxmann.com 348 (Bangalore- Trib.), the Bangalore Bench of the Tribunal held that payment made to the no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company for rendering such consultancy services amounted to 'fee for technical service' liable to tax in India. The above judgment of Hon'ble Apex Court is not applicable to facts of the present case. In the above judgment Hon'ble Supreme Court observed that the non-resident entity provided various services like advising the assessee on various aspects like financial structure, and security package to be offered to the lender, study of various lending alternatives for the local and foreign borrowings, making assessment of expert credit agencies worldwide and obtaining commercial bank support on the most competitive terms, assisting the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfirmed 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, processes and skill etc., so that the same is not regarded as transient or ephemeral. 21. As per Memorandum of Understanding ( MOU ) on Article 12 of the Treaty, entered into by the Government of India and the Government of USA on May 15, 1989, the technology is considered made available when the person acquiring the service is enabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 25. In light of the aforesaid reasoning, we hold that the sales and marketing services rendered by the assessee to MSSPL would not fall within the ambit of FTS as defined under section 9(1)(vii) or under Article 12 of DTAA. It is ordered accordingly. As a corollary to the above order, since the services rendered to the appellant by Manthan Systems Inc. have been held to not fall within the ambit of FTS or under Article 12 of the treaty, there was no requirement on the part of the appellant to deduct TDS on the payment to MS1. Respectfully following the above order of the jurisdictional Tribunal, the disallowance made by the AO under Section 40(a)(i) r.w.s. 195 of the sales and marketing commission paid by the appellant for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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, processes and skill etc., so that the same is not regarded as transient or ephemeral. 21. As per Memorandum of Understanding ( MOU ) on Article 12 of the Treaty, entered into by the Government of India and the Government of USA on May 15, 1989, the technology is considered made available when the person acquiring the service is enabled to apply the technology. The fact that the provision 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 his technical knowledge, experience, skill, know how or process to the recipient of the technical service, in view of the Clauses in the DTAA. the liability, to tax is not attracted. . 22. What is the meaning of make available . The technical or consultancy service rendered should be of such a nature that it makes available to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology making available , the technical knowledge, skill?, etc., must remain with the person receiving the services even after the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 25. In light of the aforesaid reasoning, we hold that the sales and marketing services rendered by the assessee to MSSPL would not fall within the ambit of FTS as defined under section 9(1)(vii) or under Article 12 of DTAA. It is ordered accordingly. 11. Taking into consideration the entire aspect of the matter, we find force in the submission made by the Ld.Counsel that since it has already been decided by the Coordinate Bench that the services rendered to the assessee by the said Manthan Systems Inc. is not falling within the ambit of FTS or under Article 12 of the treaty, the assessee is not liable to deduct TDS on the payment made to the MSI. 8. The fact for the year under consideration being similar wherein the sales commission paid under the same agreement, we are of the view that the above decision of the coordinate bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 under the Act and DTAA. 14. We also find from the order passed by the Ld.CIT(A) that while dealing with the matter, he has relied upon the judgment passed by the jurisdictional High Court in case of CIT, LTU vs. Biocon Ltd. (supra) which was held as follows: 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under Section 37 of the Act. Before proceeding further, it is apposite to take note of Section 37(1) of the Act, which r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility, 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 that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 10. The issue of allowability of ESOP expenses is well settled and the coordinate bench has been consistently holding that the ESOP expenses are to be allowed as a deduction. Respectfully following the decision of the Hon'ble Jurisdictional High Court and the decision of the coordinate bench we are not inclined to interfere with the decision of the CIT(A) in allowing the claim of the assessee towards ESOP expenses. ITA Nos. 1226 1229/Bang/2024 11. On a perusal of records we notice that the facts of AY 2017-18 2018- 19 pertaining to the issue of disallowance made towards section 40(a)(i) of the Act and disallowance of ESOP expenses are similar to the facts pertaining to AY 2016-17. Therefore, in our considered view our decision for the AY 2016-17 on these two issues is mutatis mutandis applicable to AYs 2017-18 2018- 190 also. 12. In the result, the appeals filed by the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
