2024 (2) TMI 784 - AT - Income Tax

Assessee wins on TDS section 195, ESOP expenses section 37(1), and doubtful debt provisions

ITAT Bangalore ruled in favor of the assessee on three issues. Regarding TDS under section 195 on sales commission to foreign company, the tribunal held ... Taxability of sales commission paid to non-resident agents as Fee for Technical Services (FTS) - Make available test under DTAA / Article 12 - Liability to deduct tax at source under section 195 and disallowance under section 40(a)(ia)/(i) - Allowability of ESOP expense as business expenditure under section 37 - Deduction for provision for doubtful debts under section 36(1)(vii) and write off principles - Precedential effect of Coordinate Bench ITAT decisionTaxability of sales commission paid to non-resident agents as Fee for Technical Services (FTS) - Make available test under DTAA / Article 12 - Liability to deduct tax at source under section 195 and disallowance under section 40(a)(ia)/(i) - Precedential effect of Coordinate Bench ITAT decision - Deletion of addition in respect of sales commission paid to Manthan Systems Inc. upheld and no liability to deduct TDS - HELD THAT: - The Tribunal accepted the assessee's submission and relied on the Coordinate Bench ITAT decision in M/s. Manthan Systems Inc. vs. DCIT (ITA No. 723/Bang/2022 for AY 2012-13) holding that the payments for sales and marketing services were not FTS under section 9(1)(vii) nor 'fees for included services' under Article 12 of the India-USA DTAA. Applying the treaty and domestic law tests, the Tribunal observed that the agreement delineated marketing and sales activities (lead generation, promotion, coordination, sales support) and did not make available technical knowledge, know how or processes to the payor so as to satisfy the 'make available' limb. Reliance on authorities distinguishing commission/marketing services from managerial/technical services and on the Memorandum of Understanding and case law concerning the 'make available' concept led the Tribunal to conclude there was no obligation to deduct TDS; consequently the AO's disallowance under section 40(a)(i) r.w.s. 195 was correctly deleted by the CIT(A) and required no interference. [Paras 11, 12]Revenue's appeal on this ground dismissed; deletion of the addition in respect of sales commission and finding of no TDS liability upheld.Allowability of ESOP expense as business expenditure under section 37 - Deletion of addition in respect of ESOP expense confirmed - HELD THAT: - The Tribunal followed the reasoning of the jurisdictional High Court in CIT, LTU v. Biocon Ltd., holding that the discount on issue of ESOPs (difference between grant price and market price) represents an expenditure allowable under section 37(1) when it is incurred and accounted for under the mercantile system; no requirement of actual cash payout is necessary. The Tribunal accepted that the ESOP liability was an ascertained business liability accruing over the vesting period, that the accounting treatment followed applicable SEBI guidelines, and that the Supreme Court decision relied on by the Revenue (Infosys) was inapposite to allow interference. On these grounds the CIT(A)'s deletion of the addition was held to be just and proper. [Paras 13, 14, 15]Revenue's ground on ESOP disallowance fails; deletion of addition by CIT(A) is upheld.Deduction for provision for doubtful debts under section 36(1)(vii) and write off principles - Provision for doubtful debts for AY 2015-16 allowed; addition deleted - HELD THAT: - The Tribunal examined the accounting treatment and relied on the Supreme Court's decision in Vijaya Bank v. CIT to conclude that where an assessee debits the profit and loss account and simultaneously shows sundry debtors net of provision (i.e., reduces the asset side), such treatment constitutes an actual write off for the purposes of section 36(1)(vii). The assessee had shown sundry debtors net of provision in the balance sheet and the Tribunal accepted the explanation that the balance included opening provision and current year provision, thereby satisfying the write off test in Vijaya Bank. On that basis the Tribunal held the provision allowable and deleted the addition made by the AO. [Paras 16, 17, 18, 19, 20]Cross objection partly allowed: provision for doubtful debts sustained and the addition deleted for AY 2015-16.Final Conclusion: All appeals filed by the Revenue are dismissed. Cross objections by the assessee are dismissed except that the claim for provision for doubtful debts for AY 2015 16 is allowed (C.O. No. 17 partly allowed), resulting in deletion of the addition for that year. Issues Involved:1. Reopening of assessment under section 148.2. Deletion of addition in respect of sales commission paid to Manthan Systems Inc. under section 40(a)(i) of the Act.3. Deletion of addition in respect of ESOP expense.4. Disallowance of provision for doubtful debts.Summary:Reopening of Assessment under Section 148:The assessee's counsel did not press the ground challenging the reopening of assessment under section 148 for A.Ys. 2012-13 to 2014-15. Consequently, the appeals and cross objections on this ground were dismissed as not pressed.Deletion of Addition in Respect of Sales Commission Paid to Manthan Systems Inc. under Section 40(a)(i) of the Act:The assessee, a software company, paid sales commission to its wholly-owned subsidiary, Manthan Systems Inc. (MSI) in the USA. The AO disallowed this under section 40(a)(i) for non-deduction of TDS. The CIT(A) reversed this, holding that the commission does not fall within the ambit of FTS or under Article 12 of the DTAA, and thus, no TDS was required. This was supported by the ITAT in the case of M/s. Manthan System Inc. vs. DCIT. The ITAT upheld the CIT(A)'s decision, noting that the services provided by MSI were marketing services and not technical or consultancy services, and did not make available any technical knowledge or skill to the assessee.Deletion of Addition in Respect of ESOP Expense:The CIT(A) deleted the addition made by the AO on account of ESOP expenses, relying on the Karnataka High Court's judgment in CIT, LTU vs. Biocon Ltd., which held that the discount on ESOPs is allowable as a deduction under Section 37 of the Act. The ITAT upheld this decision, noting that the ESOPs vest over a period and represent an ascertained liability, not a contingent one.Disallowance of Provision for Doubtful Debts:For A.Y. 2015-16, the CIT(A) confirmed the AO's disallowance of the provision for doubtful debts. The assessee argued that the provision was reduced from sundry debtors in the balance sheet, making it allowable as per the Supreme Court's decision in Vijaya Bank vs. CIT. The ITAT agreed with the assessee, noting that the provision was shown net of sundry debtors and allowed the deduction, deleting the addition made by the revenue.Conclusion:All the appeals filed by the revenue were dismissed, and the cross objections filed by the assessee were dismissed on legal issues except for the one related to the provision for doubtful debts, which was partly allowed.