Export commission to foreign agents for overseas services not taxable as fees for technical services under DTAA

ITAT Mumbai held that export commission paid to foreign agents in Korea and Indonesia for sales, marketing and customer support services rendered outside India cannot be treated as fees for technical services (FTS) under DTAA provisions. The tribunal rejected the AO's disallowance under section 40(a)(i) for non-deduction of TDS, following its earlier decision for AY 2013-14. Regarding transfer pricing adjustments, the tribunal directed inclusion of three companies (Isummation Technologies, Sagar Soft India, Yudiz Solution) as comparables for IT services, finding TPO's exclusion based solely on website information insufficient. For sales and marketing services, Majestic Research Services was excluded as functionally dissimilar due to its high-end research activities. The tribunal remitted issues regarding revised return consideration and tax credits to AO pending CBDT's condonation of delay.

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Issues Involved:

1. Draft assessment order being barred by limitation.
2. Disallowance of export commission for non-deduction of tax at source under section 40(a)(i).
3. Transfer Pricing (T.P.) Adjustment towards provision of product development and other IT Services.
4. T.P. Adjustment towards provision of sales and marketing supporting services.
5. Non-grant of credit for foreign tax credit.
6. Levy of interest under section 234A, 234B, and 234C.
7. Initiation of penalty proceedings under section 270A.
8. Non-scrutinizing the revised return of income.
9. Non-granting credit for advance tax and TDS.
10. Not granting interest under section 244A on refund due.

Detailed Analysis:

1. Draft Assessment Order Being Barred by Limitation:
The assessee contended that the draft assessment order was time-barred. However, the assessee's representative submitted that if the issues are considered on merits and held in favor of the assessee, this ground may be treated as not pressed.

2. Disallowance of Export Commission for Non-Deduction of Tax at Source Under Section 40(a)(i):
The assessee argued that the commission paid to foreign agents in Korea and Indonesia should not be disallowed, as these agents do not render consultancy services and do not have a Permanent Establishment (PE) in India. The Tribunal agreed with the assessee, referencing a previous decision in the assessee's own case for AY 2013-14, stating that the export commission is not liable for tax deduction at source since it is paid for procuring export orders outside India. Thus, no disallowance under section 40(a)(i) is warranted.

3. T.P. Adjustment Towards Provision of Product Development and Other IT Services:
The TPO made adjustments by excluding certain comparables deemed functionally dissimilar. The Tribunal directed the inclusion of Isummation Technologies Pvt. Ltd., Sagar Soft (India) Ltd., and Yudiz Solution Pvt. Ltd. as comparables, finding them functionally similar to the assessee. The TPO was instructed to recompute the ALP accordingly.

4. T.P. Adjustment Towards Provision of Sales and Marketing Supporting Services:
The Tribunal found merit in excluding Majestic Research Services and Solutions Ltd. from the list of comparables, as it was engaged in high-end research services, which are functionally different from the marketing support services provided by the assessee. The TPO was directed to recompute the ALP excluding this company.

5. Non-Grant of Credit for Foreign Tax Credit:
The Tribunal directed the Assessing Officer (AO) to consider the submissions of the assessee and allow the foreign tax credit in accordance with the law.

6. Levy of Interest Under Section 234A, 234B, and 234C:
These issues were deemed consequential and did not warrant separate adjudication.

7. Initiation of Penalty Proceedings Under Section 270A:
The Tribunal considered this issue premature and did not warrant separate adjudication.

8. Non-Scrutinizing the Revised Return of Income:
The revised return filed by the assessee was not considered by the AO due to it being filed beyond the time limit. The Tribunal remitted the issue back to the AO, directing that the revised return be considered upon condonation of delay by the CBDT.

9. Non-Granting Credit for Advance Tax and TDS:
The Tribunal directed the AO to consider the advance tax and TDS paid in the name of the merged entity once the delay in filing the revised return is condoned by the CBDT.

10. Not Granting Interest Under Section 244A on Refund Due:
This issue was deemed consequential and did not warrant separate adjudication.

Conclusion:
The appeals for both AY 2017-18 and AY 2018-19 were partly allowed, with specific directions issued to the TPO and AO regarding the inclusion of comparables, granting of credits, and consideration of revised returns, among other issues.

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