SPi Technologies India Private Ltd Vs DCIT (ITAT Chennai)
Summary: The Chennai Bench of the Income Tax Appellate Tribunal partly allowed SPi Technologies India Private Ltd.’s appeals for AYs 2013-14 and 2014-15 against the NFAC appellate orders dated 24 May 2023. The company, formerly known as Laser Words Private Limited, carried on data processing, typesetting, electronic publishing and project-management services. It had returned income of ₹7.94 crore and ₹20.40 crore for the respective years. The disputes concerned management-service fees, sales commission paid to a US group entity, allocation of expenses for Section 10AA deduction and consequential interest. A separate jurisdictional challenge arose from orders allegedly issued against the PAN of an entity that had ceased to exist following amalgamation.
On management fees, the disputed amounts were approximately ₹3.96 crore and ₹3.28 crore across the two years. Payments were made to SPi Technologies Inc., SPi CRM Inc., SPi America LLC and SPi Global Shared Services Pvt. Ltd. The Assessing Officer disallowed the expenditure under Section 37 on the ground that supporting evidence had not been provided. The CIT(A) sustained the disallowance, questioning evidence of services, commercial benefits and quantification, and also referring to OECD transfer-pricing guidelines and arm’s length pricing.
The assessee relied on the master services agreement, email communications and paper-book material to establish that the requested details had been furnished. It explained that obtaining services from group companies promoted uniformity, quality, economies of scale and confidentiality, and contended that the CIT(A)’s transfer-pricing observations travelled beyond the issue of deductibility under Section 37(1). It also relied on the coordinate Bench decision in ITA Nos. 1354 and 1355 of 2019 and on the treatment of comparable management-service expenditure in earlier and subsequent years. The Tribunal found that the allegation of non-furnishing of evidence was not borne out by the record, that commercial expediency had been demonstrated and that the transfer-pricing observations were irrelevant to the dispute. Following the coordinate Bench, it directed deletion of the management-fee additions.
The sales-commission issue concerned approximately ₹10.33 crore paid to Laser Words US Inc. under an agreement dated 1 April 2010. The services included identifying prospective US customers, understanding their requirements and liaising with them. The assessee argued that the commission was not taxable in India under the Act or the India-USA DTAA and therefore attracted no withholding obligation under Section 195. It relied on the recipient’s AY 2017-18 Tribunal decision, which treated the commission as falling outside Fees for Included Services under Article 12(4)(b), and cited GE India Technology Centre Pvt. Ltd., 327 ITR 456. It further submitted that the Assessing Officer had accepted its withholding position in AY 2014-15 after raising a specific query.
The Tribunal accepted that the commission was not chargeable to tax in India in the recipient’s hands and consequently required no tax withholding. Referring to the recipient’s coordinate Bench decision on Article 12(4)(b), it set aside the CIT(A)’s finding and directed deletion of the sales-commission disallowance. The common order discusses this issue in the lead appeal for AY 2013-14 and states that the sales-commission ground was not raised in the AY 2014-15 appeal.
For Section 10AA, the assessee operated an STPI unit and an SEZ unit and claimed that expenses were allocated on the basis of actual expenditure. The Assessing Officer substituted a turnover-based allocation, resulting in disputed reductions of approximately ₹1.13 crore and ₹3.67 crore across the two years. The assessee pointed to the accountant’s report in Form 56F and detailed unit-wise profit workings, which it said had already been furnished but had not been considered. It requested reconsideration, and the Departmental Representative did not object. The Tribunal restored the issue to the Assessing Officer for fresh adjudication after examining those documents and giving the assessee an opportunity of hearing. The claim was therefore remanded rather than finally allowed.
The Tribunal dismissed the ground concerning Section 234B interest as consequential and governed by the applicable statutory provisions. It did not decide the merits of the non-existent-PAN jurisdictional objection, treating it as academic after adjudicating the individual issues. Its conclusions in the lead appeal were applied mutatis mutandis to AY 2014-15, subject to the absence of the sales-commission ground, and both appeals were partly allowed.
Cases Discussed
- Laserwords US Inc. Vs DCIT, International Taxation-1(2), Chennai — IT(TP)A No. 45/Chny/2021, AY 2017-18, order dated 10 May 2024 (ITAT Chennai). Relied upon for the finding that the marketing commission did not constitute Fees for Included Services under Article 12(4)(b) of the India-USA DTAA.
- SPi Technologies India Pvt. Ltd. — ITA Nos. 1354 & 1355 of 2019, AYs 2013-14 & 2014-15 (ITAT Chennai). Followed on management-service expenditure and consistency with the Revenue’s treatment in earlier and subsequent years.
- GE India Technology Centre Private Ltd. Vs Commissioner of Income Tax & Anr. — (2010) 327 ITR 456 (Supreme Court). Cited by the assessee in support of its submission that Section 195 withholding does not arise for a payment not chargeable to tax in India.
- S.A. Builders Ltd. Vs CIT(A) — (2007) 288 ITR 1 (Supreme Court). Cited in the assessee’s grounds for examining expenditure from the businessman’s perspective and with reference to commercial expediency.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
These two appeals are filed against the order bearing DIN & Order No. ITBA / NFAC / S / 250/2023-24 / 1053124256(1) and No.ITBA / NFAC / S / 250 / 2023-24 / 1053124463(1) dated 24.05.2023 of the Learned Commissioner of Income Tax [herein after “CIT(A), National Faceless Appeal Center[NFAC], Delhi, for the assessment year 2013-14 & 2014- 15. Through the aforesaid appeal the assessee has challenged order u/s 250 dated 24.05.2023 passed by NFAC, Delhi.
2.0 Perusal of the aforesaid appeals allude that the assesse has taken more or less identical grounds while contesting the order bearing DIN & Order No.ITBA/NFAC/S/250/2023-24/1053124256(1) dated 24.05.2023 & No. ITBA/NFAC/S/250/2023-24/1053124463(1) dated 24.05.2023 of the Learned Commissioner of Income Tax [herein after “CIT(A), National Faceless Appeal Center[NFAC], Delhi, for the assessment year 2013-14 & 2014-15. It also transpires therefrom that the ground of appeal contesting the jurisdictional appropriateness of the assessment orders is common in both the appeals. Consequently the two appeals are adjudicated by this common order.
3.0 Aggrieved by the above order the assesse has raised following grounds of appeal contesting order bearing DIN & Order No.ITBA/NFAC/S/250/2023-24/1053124256(1) dated 24.05.2023 for the assessment year 2013-14.
I. General Grounds
1.1. The Ld, AO and the Ld. CIT(A) (hereinafter referred to as “lower authorities”) erred in passing orders, which suffers from legal defects such as being passed in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law and has been completed without adequate inquiries and as such is liable to be quashed.
II. Order is invalid in law
2.1. Based on the facts and circumstances of the case and in law, the orders issued by the lower authorities including the impugned order dated May 24, 2023 issued in the PAN of the Company, which was not in existence at that point of time (AAACL5993L) is in excess of jurisdiction, patently illegal, malicious in law and fact and is therefore, liable to be quashed.
III. Allowability of Management Fees
3.1. Based on the facts and circumstances of the case and in law, the lower authorities erred in confirming the disallowance of management fees amounting to INR 3,96,07,857 without appreciating that the said expenses have been incurred wholly and exclusively for the purpose of the business.
3.2. Based on the facts and circumstances of the case and in law, the lower authorities erred in not considering the evidence and documents submitted by the Assesee in support of the expenditure incurred towards management fees.
3.3. Based on the facts and circumstances of the case and in law, the lower authorities erred in not following the ruling of the Hon’ble Supreme Court in the case of S.A. Builders v. CIT(A) 2007 (288 ITR1) wherein it was held that the tax authorities must look at the matter from the point of view of a businessman and from the perspective of commercial expediency.
3.4. Based on the facts and circumstances of the case and in law, the lower authorities erred in not taking into consideration the favourable order passed by your goodself in the case of the Assesee (formerly SPi Technologies Indía Private Limited bearing PAN AABCK3967C) for AY 2013-14 and AY 2014-15 wherein the management fees paid was allowed as a tax deductible expenditure under section 37 0f the Act.
IV. Non deductibility of taxes at source for marketing fees and data processing charges
4.1.Based on the facts and circumstances of the case and in law, the lower authorities erred in confirming the disallowance under section 40(a)(i) of the Act without appreciating the fact that the sales commission is not taxable in India in the hands of the recipient associated enterprise as the services were rendered outside India, for customers located outside India and the payment for such services was also received outside India, and consequentially the obligation to deduct tax at source under section 195 of the Act does not arise.
4.2. Based on the facts and circumstances of the case and in law, the lower authorities failed to appreciate that marketing service does not fall within the definition of Fees for Technical Services (“FTS”) under section 9 of the Act and accordingly, the fees paid for provision of marketing services is not deemed to accrue or arise in India.
4.3. Based on the facts and circumstances of the case and in law, the lower authorities erred in not appreciating the exception clause of section g(i)(vii) (b) of the Act, while considering the taxability of the subject transaction in India. Thus, the provision of service is not deemed to accrue or arise in India.
4.4. Based on the facts and circumstances of the case and in law, the lower authorities erred in concluding that the sales commission received towards marketing service is FIS under Article 12 of the India- US DTAA.
4.5. Based on the facts and circumstances of the case and in law, the lower authorities erred in concluding that the services were made available to the recipient, without appreciating the meaning of the term ‘make available as defined in the Memorandum of Understanding to India-USA DTAA and yarious judicial precedents.
V. Claim under section 10AA of the Act
5.1 Based on the facts and circumstances of the case and in law, the lower authorities had failed to appreciate the fact that the Assesee had apportioned the expenses between the STPI unit and SEZ unit on actual expenditure basis.
5.2. Based on the facts and circumstances of the case and in law, the lower authorities had failed to appreciate that the Company had adopted a reasonable basis to allocate expenses, consistent with earlier years.
5:3. Based on the facts and circumstances of the case and in law, the lower authorities erred in arbitrarily apportioning expenditure amongst the STPI and SEZ units, thereby, disallowing deduction to the tune of INR 1,13,09,801 claimed under section 1OAA of the Act.
VI. Miscellaneous grounds
6.1. The lower authorities erred in charging interest under section 234B of the Act which is consequential in nature.
The Assesee prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto.
The grounds of appeal raised by the Assesee herein are without prejudice to each other. The Assesee craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.
ITA Nos.843 /Chny/2023
Assessment Years: 2013-14
4.0 As stated above, since the twin appeals are adjudicated by this common order, therefore the assessment year 2013-14 is being taken as the lead year for the purposes of capturing the relevant figures.
5.0 Before proceeding further it is considered imperative to briefly recapitulate the brief factual matrix of the case brought to our knowledge by the Ld. Counsel of the assesse. The appellant Company, SPI Technologies India Private Limited (formerly known as Laser words Private Limited) bearing PAN AADCL3320N is a part of the SPi group which is engaged in the business of data processing and related services, services which primarily include typesetting including transformation of unedited manuscripts into final print-ready files, supply of structured data for electronic publishing and providing end-to-end project management services. Pursuant to an order of the Hon’ble Madras High Court dated September 04, 2014, Laser Words Private Limited (PAN AAACL5993L) was amalgamated with SPi Technologies India Private Limited (PAN AABCK3967C) with effect from April 01, 2014. Consequent to the amalgamation, the amalgamating company i.e., Laser Words Private limited (PAN AAACL5993L) ceased to exist with effect from April 01, 2014. The assesse intimated the office of the AO vide its letter dated January 02, 2015 regarding the amalgamation of the existing entity, Laser Words Private limited bearing PAN AAACL5993L into a new entity SPi Technologies India Private Limited bearing PAN AABCK3967C. This evidences that the Ld. AO was aware of the cessation of the entity having PAN AAACL5993L and its amalgamation with the entity having PAN AABCK3967C. SPi Technologies India Private Limited (formerly known as Laser words Private Limited) (bearing PAN AAACL5993L) filed its return of income (RoI’) for the Assessment Years ((AYs’) 2013-14 and 2014-15 under section 139(1) of the Income Tax Act, 1961 by declaring an income of INR 7.94 crores and INR 20.40 crores respectively. The Assesse’s return of income was selected for scrutiny and the Ld. AO completed the assessment proceedings by issuing the final assessment order dated March 31, 2016 and December 30, 2016 for AYs 2013-14 and 2014-15 respectively under section 143(3) of the Act by making the following adjustments:
| S. No. | Nature of disallowance/ adjustment | AY 2014-15 | AY 2013-14 |
|---|---|---|---|
| 1 | Disallowance of management service fees under Section 37 of the Act | 3.96,07,857 | 3,28,88,483 |
| 2 | Disallowance of sales commission paid under Section 40(a)(i) of the Act | 10,33,72,570 | – |
| 3 | Disallowance of excess claim under Section 10AA of the Act | 1,13,09,801 | 3.67,28,299 |
The assesse filed an appeal before the Learned Commissioner of Income Tax – Appeals (Ld. CIT(A)) under section 246A of the Act who upheld the order of the Ld. AO. Aggrieved by the above impugned order, the assesse is in appeal before this Hon’ble Tribunal. The Ld. Counsel of the assesse has contested the impugned appellate orders raising both legal grounds on its jurisdictional insufficiency as well as grounds challenging merits of the additions made to the returned income.
6.0 The assesse has raised altogether six grounds of appeal. Ground of appeal No.1 is general in nature and therefore not requiring any separate adjudication. Ground of appeal No.2 is a legal ground which challenges the orders of the Ld. CIT(A) dated 24.05.2023 on the premise of the same being passed without any valid jurisdiction and is liable to be quashed. It is the case of the assesse that the PAN No. AAACL5993L issued to the assesse was, owing to scheme of amalgamation, not in existence and hence the appellate order is void ab initio. Considering the overall facts of the case, we deem it fit to discuss this ground of appeal separately.
7.0 The first issue arising from merits of the addition raised via ground of appeal No.3 is concerning addition made on account of management service fees u/s 37 of the Act. The Ld. Counsel for the assesse informed that it had paid an amount of Rs. 3.96 Crs and 3.28 Crs for AY-2013-14 and 2014-15 respectively towards management fees to SPi Technologies Inc, SPi CRM Inc, SPi America LLC and SPi Global shared services Pvt. Ltd. The impugned expenses were claimed u/s 37(1) as they were incurred only and exclusively for the business. The Ld. AO rejected the claim on the premise that appellant had failed to provide supporting evidences. The Ld. First Appellant Authority sustained the order holding that appellant had failed to provide concrete evidence of rendering of service, quantum of benefit denied there from and the basis of quantification. He further proceeded to rely upon the transfer pricing guidelines issued by OECD for arm’s length pricing to conclude that the appellant had failed to demonstrate economic and commercial benefits coming from the said expenses as also as to whether the same were at arm’s length.
8.0 In support of its contentions the Ld. Counsel for the assesse submitted that the issue under consideration is squarely covered by the decision of this tribunal in the case of Spi Technologies India Pvt. Ltd ITA 1334 vide ITA No.1354 and 1355 of 2019. Wherein the allowability of expenses qua management services has been held permissible u/s 37 of the Act. The appellant submitted that it later merged into the above company w.e.f. 01.04.2015 and that the said management fees was paid to the group companies. The appellant argued that the transactions concerning payment of management fees for AY-2015-16 was also tested at arm’s length by TPO who vide his order dated 31.12.2018 held that transactions are at arm’s length indicating that transaction were at its arm’s length and in the eligible business expenditure. The Ld. Counsel for the assesse argued that it is a group practice to take services from group companies so as to meet the objective of uniformity and quality of services, economy to scale as also maintaining confidentiality of its operations etc. It was argued that for the same services from third parties the appellant might have spent comparatively larger amounts of monies. On the issue of non-providing of documentary evidences during proceedings before the lower authorities the appellant invited our attention to Page 92 of its paper book for AY-2013-14 and page-52 for AY-2014-15 indicating that the Ld. AO was provided the requested details. The Ld. Counsel for the assesse also invited our attention to the master agreement between the assesse and the group companies containing comprehensive details of services to be provided. The Ld. Counsel for the assesse also took us through email communications etc. which indicate that the services work provided. On the issue of impugned expenses not tested by the Ld. TPO it submitted that the Ld. CIT(A) has exceeded its jurisdiction as the issue before him was merely to examine the disallowance u/s 37(1) and had nothing to do with any proceedings before Ld. TPO. The Ld. DR would like to place reliance on the merits of the order of lower authorities.
9.0 We have heard rival submissions in the light of the material available on records. The Ld. Counsel for the assesse unequivocally brought on records that all the details called for by the Ld. AO regarding justification of expenses were duly provided him. The allegation raised by the Ld. AO thus is not borne from records. The argument of Ld. CIT(A) regarding transfer pricing issues are not connected with the facts of the case and have also been found to be unnecessary and irrelevant. The assesse on its part has adequately demonstrated the commercial expediency to have incurred these expenses, their justification etc. We have also perused the order of the Hon’ble Coordinate of this Tribunal in ITA 1354 & 1355 Supra holding as under. “…We heard the rival submissions and gone through the relevant material. The agreement for the management services were entered into as early as April-2010. The assesse has been claiming such expenses which were examined and allowed in the assessments made for the assessment years 2011-12, 2012-13 and 2015-16 by the Revenue. Since, the Revenue has not pointed out specific deviation vis-à-vis earlier and subsequent years, if any, the principle of consistency requires that the assesse’s claim be allowed for the impugned assessment years also and accordingly, we direct the Assessing Officer to allow the assesse’s claim…”
10.0 We are in agreement with the decision of the Hon’ble Coordinate Bench that management fees paid to group companies is an allowable deduction u/s 37(1). Accordingly, in respectful compliance to the decision of the Hon’ble Coordinate Bench Supra as also in consideration of peculiar facts of the case enumerated herein above we hold that the management fees of Rs. 3.96 Crs and 3.28 Crs for AY-2013-14 and 2014- 15 is an allowable business expenditure. Therefore the order of Ld. CIT(A) is set aside and the Ld. AO is accordingly directed to delete the impugned addition. The ground of appeal no.3 raised by the assesse is deleted.
11.0 The next issue which has been brought to our notice through ground of appeal no.4 is regarding the disallowance made for sales commission on account of non-deduction of tax at source for AY-2013-14. The Ld. Counsel for assesse explained that vide an agreement dated 01.04.2010 with laser words US Inc, the latter provides marketing and support services to the appellant which includes identifying prospective customers in USA, understanding customer requirements and expectations, liaising with customers etc. During AY-2013-14 an amount of Rs.10.33 Crs was paid without deducting tax u/s 195. It has been argued that the impugned amounts are not chargeable to tax in India both as per provisions of the Income Tax Act as well as DTAA between India and USA. In support of its contentions, the assesse relied upon decision of this tribunal in the case of laser words US Inc (being the payee of the impugned amount of Rs.10.33 Crs) for AY-2017-18 . The Hon’ble Coordinate Bench in the referred case held that pursuant to the agreement dated 01.04.2010 between assesse and laser words US Inc, sales commission received by the latter cannot be equated to Fees for Included Services(FIS). It was held that as the amount is not FIS in view of Article-12(4)(b) of DTAA between India and USA therefore not liable for tax India. The appellant also place reliance upon the decision of Hon’ble Apex Court in the case of GE India Technology Cen Pvt Ltd, 327 ITR 456. The appellant further submitted that in AY-2014-15 the Ld. AO had raised a specific query u/s 142(1) dated 19.12.2016 on this account regarding withholding of taxes on impugned sales commission. Having been satisfied with the assesse’s stand no disallowance was made on this account. It was argued that principles of consistency requires same view to be adopted for different years. In support of its contentions the appellant invited our attention to relevant pages in its paperbook for AY- 2014-15. The Ld. DR would like to make us believe that the order of lower authorities is based upon correct understanding of facts and law.
12.0 We have heard rival submissions in the light of material available on records. We are inclined to subscribe to the view of the appellant that as the impugned amounts in the hands of laser words US Inc are not liable for tax as per the provisions of Indian Income Tax Act, there cannot be any case for withholding of any tax at the time of their payment to the payee. We have also seen the order of the Hon’ble Coordinate Bench in the case of the payee for AY-2017-18 Supra holding that within the meanings of Article 12(4)(b) of India US DTAA, the amounts cannot be equated to FIS. Consequently, the action of the AO and the Ld. CIT(A) in confirming the disallowance cannot be sustained. Accordingly, the order of the Ld. CIT(A) is set aside and the Ld. AO is directed to delete the disallowance. The ground of appeal no.4 raised by the assesse is allowed.
13.0 The next issue raised by the assesse through ground of appeal no.5 concerns disturbance made to assesse’s claim of interest u/s 10AA. The Ld. Counsel for the assesse submitted that it operates two units viz software technology park in India unit (STP1) and special economic zone unit (SEZ) out of which it is eligible to claim deduction of the profits earned by the SEZ unit u/s 10AA. During the year under consideration the assesse has claimed deduction of Rs. 4.83 Crs. With a view to correctly identify profits earned by the SEZ unit, the appellant assesse had apportioned total expenditure between the STP1 and SEZ on the basis of actual expenditure incurred by the respective units. The Ld. AO however, disregarded the profits declared in Form-56 F and the relevant workings given by the assesse and proceeded to apportion the expenditure based on the proportion of turnover earned by the two units (14.76% for STP1 and 23.6% for SEZ for AY-2013-14 and 70.% for STP1 and 30% for SEZ for AY-2014-15. Consequently, the Ld. AO disallowed Rs.1.13 Crs and 3.67 Crs for AY-2013-14 & AY-2014-15 respectively. It is the case of the assesse that the accountant report in Form-56F was based upon true facts of the case and had scientific basis. It duly certified that the deduction has been worked out as per the provisions of the act. The Ld. Counsel for the assesse argued that the Ld. AO chose to make the disturbance on the premise that the assesse has failed to substantiate its claims that the expenses are apportioned on actual basis. It is the case of the assesse that the Ld. AO has concluded so without considering the relevant profit computation submitted by it during the course of assessment proceedings. In support of its contentions the Ld. Counsel for the assesse invited our attention to page 89 & 155 of its paper book for AY 2013-14 & AY 2014-15 respectively. It was therefore prayed that given the impugned omission of consideration of these details by the Ld. AO resulting in addition to the returned income, matter may restored to the file of Ld. AO for considering the accountants report in Form-56F along with the detailed profit computation workings submitted and deciding the matter accordingly. The Ld. DR did not object to the assesse’s callings.
14.0 We have considered the rival submissions in the light of material available on records. We have perused the documents identified by the appellant. Whereas the Ld. AO has opined that the assesse had not provided required details, the assesse has indicated that it did provide accountants report in Form-56F along with the detailed profit computation workings during assessment proceedings. Be that as it may be, we are of the view that ends of justice would be met if both the parties get a chance to revisit the issue for a judicious conclusion. Accordingly, we set aside the order of Ld.CIT(A) and we direct the Ld. AO to readjudicate the matter by considering accountants report in Form-56F along with the detailed profit computation workings during assessment proceedings filed by the assesse during the original assessment proceedings. For the purpose Ld. AO shall be required to provide necessary opportunity to the assesse and the assesse shall be bound to comply with notices of the Ld. AO. The ground of appeal no.5 is therefore allowed for statistical purposes.
15.0 The next issue that arises is raised through ground of appeal no.6 challenging the charging of interest u/s 234B. Upon consideration we find that the charging of interest is consequential and is governed by the contemporaneous provision of the statute and hence does not require any interference at this state. The ground of appeal No.6 is therefore dismissed.
16.0 We would now like to revert to the legal issue raised by the appellant through ground of appeal No.2. The appellant assesse has challenged the order of lower authorities on the premise that the orders have been passed in respect of non-existent PANs’ and thus were devoid of jurisdictional sufficiency. It has been argued that post amalgamation the impugned PANs’ had ceased to exist. Rival submissions were made in support of respective claims. We are however inclined to hold that since the issues have been adjudicated on the individual merits of the case, the impugned legal ground has become mere academic and therefore not fit for any separate adjudication.
17. In the result, the appeal of the assesse is partly allowed.
ITA Nos.844 /Chny/2023
Assessment Years: 2014-15
18.0 Since the decision of Ld.CIT(A) is identical in both the years under consideration the above decision in ITA No.843 shall apply mutatis mutandis in both the appeals save the fact that the ground concerning disallowance of sale commission by invoking provisions of section 40(a)(ia) are not raised in this year.
19.0 In the result, the appeals of the assesse are partly allowed.
Order pronounced on 27th , September-2024 at Chennai.
