2024 (7) TMI 1478 - AT - Income Tax

Overseas sales commission to US entity not Fee for Technical Services under section 9(1)(vii) - pure sales functions distinguished from technical services

The ITAT Bangalore ruled that overseas sales commission received by a US-based associated enterprise from its Indian counterpart does not constitute Fee ... Taxability of overseas sales commission - “FTS” - receipt from Associated Enterprises (AEs) towards commission on sales though it will not take up the nature of fee for technical services u/s 9(1)(vii) of the Act as it is neither managerial nor consultancy services - HELD THAT:- It is clear that services rendered by 'Guangzhou Usha' are clearly different from activities of Steer America and therefore, services of Steer America cannot be considered in nature of technical, managerial or consultancy in nature as referred under the Income Tax Act or 'Fees for technical services' as per India USA DTAA. SEPL India is a Champion of technology developed indigenously in India and with strong manufacturing presence in India supplies to global customers, brings in made in India Flavor with locally developed and globally registered Patents. Steer America Inc, performs pure sales function with connecting potential customers from United States of America by performing pre sales activity of introducing SEPL India to potential customers rest of the activity is predominantly taken care by SEPL India as evident from the services and functions listed. AO in the impugned order under surmise and conjectures have made out list of reasons to treat overseas sales commission as Fee for Technical Services, without appreciating the fact that Assessee Steer America Inc, does not render services resulting in provision 'Fee for Technical Services' (FTS) or Make available Technical Knowledge to Steer India. In the case of DCIT v. Welspun Corporation Ltd [2017 (1) TMI 1084 - ITAT AHMEDABAD] wherein it was observed and held that Assessee paid commission to non-resident export commission agents for highly technical products. As held that just because a product is highly technical does not change the character of activity of the sale agent. The object of the salesman is to sell and familiarity with the technical details, whatever be the worth of those technical skills, is only towards the end of selling. Payment to non-resident commission agents was for securing orders and not for rendering any managerial, technical or consultancy services per se. The commission paid to non-resident export commission agents is not taxable in India whether or not the non-resident is tax resident of a jurisdiction having a tax treaty and whether or not the tax treaty has an FTS clause. We hold that the impugned payment received by present assessee from Steer Engineering SCL, Bangalore is commission on sales and marketing services and cannot be treated as FTS in the hands of present assessee in terms of section 9(1)(vii) of the Act and accordingly, we allow all the grounds raised by the assessee. Levy of interest u/s 234A & 234B are consequential and mandatory in nature to be computed accordingly. Issues Involved:1. Validity of reopening assessment under section 147.2. Taxability of overseas sales commission as Fees for Technical Services (FTS) under section 9(1)(vii) of the Income Tax Act and India-USA DTAA.3. Levy of interest under sections 234A and 234B.Issue-wise Detailed Analysis:1. Validity of Reopening Assessment under Section 147:The assessee challenged the reopening of assessment on the grounds that there was no 'reason to believe' that income had escaped assessment. However, these grounds were not pressed before the Tribunal and were dismissed as not pressed.2. Taxability of Overseas Sales Commission as Fees for Technical Services (FTS):The primary issue was whether the sales commission received by the assessee from Steer Engineering Private Limited (SEPL) for marketing and sales services in the USA should be classified as FTS under section 9(1)(vii) of the Income Tax Act and the India-USA DTAA.- Facts and Contentions:- The assessee, a subsidiary of SEPL India, provided marketing and sales services in the USA and received commissions for these services.- The Assessing Officer (AO) treated these commissions as FTS, arguing that the services rendered involved technical knowledge and consultancy.- The assessee contended that the services were purely marketing and did not involve transferring any technical knowledge, experience, or skill to SEPL India.- Tribunal's Analysis:- The Tribunal noted that the assessee's activities were limited to marketing and procuring sales orders, while all technical activities were carried out by SEPL India.- The Tribunal relied on various judicial precedents, including the Karnataka High Court's decision in CIT Vs. Ad2Pro Media Solutions Pvt. Ltd., which held that marketing services do not constitute FTS if they do not make available technical knowledge or skill to the recipient.- The Tribunal also referred to the Supreme Court's decision in CIT v Toshoku Ltd, which held that sales commission paid to foreign agents for services rendered outside India is not taxable in India.- Conclusion:- The Tribunal concluded that the sales commission received by the assessee did not qualify as FTS under section 9(1)(vii) of the Income Tax Act or the India-USA DTAA.- The Tribunal allowed the assessee's appeal on this ground, holding that the commission was not taxable in India.3. Levy of Interest under Sections 234A and 234B:- The Tribunal noted that the levy of interest under sections 234A and 234B is consequential and mandatory.- Since the primary issue of taxability of the sales commission was decided in favor of the assessee, the interest levied under these sections would be computed accordingly.Judgment:The Tribunal allowed the appeals of the assessee partly, holding that the sales commission received by the assessee was not taxable as FTS. The levy of interest under sections 234A and 234B was to be computed based on this finding. The order was pronounced in the open court on 10th July 2024.