DCIT Vs Algonomy Software Pvt Ltd (ITAT Bangalore)
Conclusion: Sales and marketing services rendered to assessee by its US based subsidiary did not fall within the ambit of FTS as defined u/s 9(1)(vi) or Article 12 of India-US DTAA as making available service did not make available knowledge, experience, skill etc. US-based subsidiary and other subsidiaries had to approach the assessee every time to get new customers and maintain relationship with existing customers. The test of make available as envisaged in the DTAA was therefore not satisfied.
Held: Assessee-domestic company was engaged in the business of providing software support and development services including ITES, filed its return declaring loss. AO however issued SCN alleging that the sales commission paid by assessee to its US-based subsidiary and other subsidiaries, towards selling & marketing services should constitute FTS in terms of Article 12 of India-US DTAA and liable for deduction of tax at source u/s 195. Assessee objected to the show cause notice stating that no technical services were rendered by US based entity and other AE, whereas, AO held that payment made by assessee was towards FTS since 85% of the Revenue was generated from exports. AO thus, made disallowance of the sales commission u/s 40(a)(i) due to non-deduction of tax at source. This decision of AO was reversed by CIT(A) on appeal. It was held that AO had stated that marketing services rendered by assessee were technical in nature and which were used by MSSPL for development of business, which resulted in enduring benefit. Accordingly, AO had concluded that make available was satisfied as there was transfer of skill and knowledge which fell within the ambit of technical services. DRP had also confirmed the view of the AO. AO and DRP had erred in not appreciating that what should be made available was technical knowledge, experience, skill etc. Making available service did not make available knowledge, experience, skill etc. US-based subsidiary and other subsidiaries had to approach the assessee every time to get new customers and maintain relationship with existing customers. The test of make available as envisaged in the DTAA was therefore not satisfied in the instant case. The sales and marketing services rendered by the assessee to US-based subsidiary and other subsidiaries would not fall within the ambit of FTS as defined under section 9(1)(vii) or under Article 12 of DTAA. The fact for the year under consideration being similar wherein the sales commission paid under the same agreement, the above decision of the coordinate bench was squarely applicable to the impugned issue for the year under consideration also. Therefore, there was no infirmity in the order passed by the CIT(A) in holding that there was no liability to deduct tax towards sales commission paid by the assessee to US-based subsidiary and other subsidiaries and accordingly no disallowance was warranted u/s. 40(a)(i).
