TaxTMI 
TaxTMI 
2024 (10) TMI 863
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....ome for AY 2016-17 on 28.11.2016 declaring total loss of Rs. 33,42,26,978/-. 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 detai....
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....itted that the disallowance made by the AO u/s. 40(a)(i) for non deduction 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 t....
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....ct the purchase order number, line item number, description of items, quantities, the price payable by the Customer for the 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 Prod....
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....ervices was royalty or FTS. This issue has been decided in the appellant's favour by the Bangalore ITAT 'C' Bench in the case of Manthan Systems Inc. vs DCIT, International Taxation, Circle-1(2), Bangalore IT (IT)A No. 723/Bang/2022 for the AY 2012-13 wherein 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....
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....ent 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 non-resident agents does not fall within the meaning of managerial services as mentioned under section 9(1)(vii) of the I.T.Act and not required 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 i....
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....arious 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-company in loan negotiations and documentations with the lenders, structuring, 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 residen....
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....e" 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 '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&....
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....ingly." 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 year under appeal is deleted." 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....
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....89, 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 '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 re....
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....g 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 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 servi....
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....i) 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 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 th....
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....4. 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 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. Th....
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....nt 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) 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 th....