Case Law Details
Adadyn Technologies Private Limited Vs DCIT (ITAT Bangalore)
The issue under consideration is whether assessee engaged in business relating to online advertising is considered as technical services or royalty Section 9(1)(vii) of the Income Tax Act, 1961?
ITAT states that, the AO has mainly placed reliance on the provisions of sec.9(1)(vii) of the Act, though he has made reference to DTAA at some place. ITAT notice that the AO has not properly analysed the nature of services rendered in the context of sec. 9(1)(vii) or DTAA, even though he has extracted the agreement entered between the assessee and M/s Adadyn Inc. The contention of the assessee is that the nature of services provided by the above said company is in the nature of business support services and not in the nature of consultancy services in strict sense. It is not shown that the above said contention of the assessee is wrong. Further, they also notice that the nature of services provided by M/s Adadyn Inc., USA has not been analysed by Ld CIT(A) also. On the contrary, it is the contention of the assessee that the first appellate authority has entertained erroneous belief that the assessee has been using market analysis/ online data/data bases etc., belonging to M/s Adadyn Inc. The above said observation of Ld CIT(A) was strongly objected to by the assessee. Hence the observation of the Ld CIT(A) that a part of payment constitutes Royalty is strongly disputed. Further, ITAT also notice that the Ld CIT(A) has also not properly analysed the provisions of article 12 of India USA DTAA. Without analysing the nature of services, the Ld CIT(A) has observed that the services were made available. Thus, ITAT notice that the Ld CIT(A) has rendered the decision without bringing on record supporting materials and also without properly analysing the provisions and contentions of the assessee. Accordingly, ITAT are of the view that all the contentions of the assessee require fresh examination at the end of Ld CIT(A). Accordingly, they set aside the common order passed by the Ld CIT(A) for the years under consideration and restore all the issues to his file for adjudicating them afresh by properly analysing nature of services.
FULL TEXT OF THE ITAT JUDGEMENT
All the three appeals filed by the assessee are directed against the common order dated 15.03.2019 passed by Ld CIT(A)-12, Bengaluru and they relate to the assessment years 2014-15 to 2016-17. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the demand raised by the AO u/s 201(1) and 201(1A) of the Income-tax Act,1961 [‘the Act’ for short].
2. The assessee company is earlier known as ‘Ozone media solutions Private Limited’. It is engaged in the business relating to online advertising like internet based content, communications, online ad space, online ad network and renders advertising technology solutions. The department noticed that the assessee has been making payments to its US subsidiary named M/s Adadyn Inc, which were in the nature of selling and marketing expenses. The AO took the view that the impugned payments are in the nature of “Fee for technical services” and hence the assessee should have deducted tax at source from the above said payments u/s 195 of the Act. Since the assessee had not deducted TDS, the AO treated the assessee as an assessee in default and accordingly initiated proceedings u/s 201 of the Act.
3. The assessee submitted that the services carried out by its US subsidiary are in the nature of targeting new customers, carrying out promotional activities and participating in trade shows outside India on behalf of the assessee. These services are rendered in USA, Canada and other countries. The payments are made to US subsidiary with regard to the above said services and they are in the nature of selling and marketing expenses. It was submitted that the receipts constitute business income in the hands of M/s Adadyn, Inc., USA. It was submitted that the impugned payments will not fall under the category of “Fee for technical services” in terms of Article 12 of India-USA DTAA, since these services do not make available any technical knowledge, experience, skill, know how or process, to the assessee. The assessee placed its reliance on the decisions rendered in the following cases:-
(a) V.M Salgaoncar & Bro P Ltd (TS-892-ITAT-2014)
(b) Eon Technology (P) Ltd vs. DCIT
4. However, the AO examined the provisions of sec.9(1)(vii) of the Act and held that the impugned payments have been made for rendering of any managerial, technical or consultancy services as defined under the above said section. The AO further examined the agreement entered between the assessee and M/s Adadyn Inc., USA. He concluded that the US entity is providing marketing and business support services to the assessee in India by utilising its skill and marketing capability in the local overseas market. Since the assessee has utilised the services for its business carried on in India, he held that the impugned payments are attracted by the provisions of sec.9(1)(vii)of the Act. He also held that the assessee is liable to deduct TDS both under the Act and DTAA as the payments are in the nature of Fee for Technical Services. The AO noticed that the assessee has not furnished Tax residency certificate and hence he held that the provisions of sec.206AA shall apply. Accordingly he adopted higher rate of 20% for determining tax liability u/s 201(1) of the Act.
5. Accordingly, the AO raised demand u/s 201(1) and interest u/s 201(1A) in all the three years under consideration.
6. In the appellate proceedings, the Ld CIT(A) has initially concurred with the view of the AO that the impugned payments were made for consultancy services rendered to the assessee and hence it is taxable in India (Para 12 of CIT(A)’s order). In paragraph 16 of his order, the Ld CIT(A) expressed the view that the appellant’s claim that the services provided by Adadyn Inc does not qualify as FTS as per Act is not acceptable.
7. In paragraph 48 of his order, the Ld CIT(A) has expressed the view that the payment is composite in nature, i.e., some of it is Royalty, some is FTS and others may be of some other nature also. Finally, the Ld CIT(A) concluded as under:-
“61. I find that the payment for market analysis, maintenance of online data, customer database etc., are in the nature of royalty, where as the payment the advice received for evaluation of the client’s needs, their capacity to pay, the market conditions, lead generation etc., are in the nature of consultancy services (these are also made available). Hon. Supreme Court in the case of Transmission Corporation has held that the intention of the Legislature is to enforce tax deduction at source even in respect of gross sums, the whole of which do not represent income chargeable under theAct.
62. I hold that the payments received by the Adadyn Inc (US entity) are composite in nature (being royalty as well as consultancy services and may be others also). Since it is taxable under the IT Act as well as DTAA the TDS must have been deducted.
63. On the issue of rate applicable I hold that the rate prescribed under DTAA or Act whichever beneficial to the appellant is applicable.”
8. Aggrieved by the order passed by Ld CIT(A), the assessee has filed these appeals.
9. The Ld A.R submitted that the assessee is engaged in the business of online advertisements. Since its customers are located in USA, Canada and other countries, it has floated a subsidiary in USA by name M/s Adadyn Inc. The assessee has utilised the above said company in order to provide business support services in the form of identifying target customers. The role of M/s Adadyn Inc., is limited to identifying target customers. In this regard, it will carry out promotional activities, participate in trade shows etc. Once a target customer is identified, the details will be forwarded to the assessee and then the assessee will deal with those customers. Accordingly he submitted that the services so rendered by M/s Adadyn Inc., USA are not in the nature of managerial, technical or consultancy services as defined in the Explanation 2 to sec.9(1)(vii) of the Income tax Act. It is also not in the nature of technical services as defined in article 12 of India-USA DTAA.
10. The Ld A.R further submitted that the Ld CIT(A) has taken the view that the services rendered by M/s Adadyn Inc., are composite in nature, i.e., in the nature of royalty, technical services and other service. He submitted that the Ld CIT(A) has entertained the view that M/s Adadyn Inc., USA has got market analysis report, online data, customer database etc., and the assessee is making payment for using them. He submitted that it is not known as to how the Ld CIT(A) has entertained the view, since it is nobody’s case that the US company is possessing such kind of data bases. He further submitted that the Ld CIT(A) has also held that a part of payment constitutes fee for technical services both under the Act and DTAA. He submitted that the Ld CIT(A) has not analysed the provisions of Article 12 of India USA DTAA. Without analysing the same, the Ld CIT(A) has expressed the view that the services are made available. He submitted that the tax authorities have not demonstrated as to how the services rendered by M/s Adadyn Inc fall in the category of technical services and how it was made available to the assessee. The Ld CIT(A) has also expressed the view that a part of payment has been made for other services also. He contended that the payments made by the assessee do not fall under the category of royalty or fee for technical services either under sec. 9(1) of the Act or under DTAA. Accordingly he submitted that the order passed by Ld CIT(A) is liable to quashed.
11. On the contrary, the Ld D.R submitted that the Ld CIT(A) has upheld the view of the AO that part of the payments constitute Fee for technical services. However, the Ld CIT(A) has also held that some part of payment constitutes royalty. With regard to the contention of Ld A.R that the Ld CIT(A) has not given the basis for his observation that the assessee is using the data base belonging to M/s Adadyn Inc., USA and other contention that the provisions of article 12 of DTAA has not been analysed, the Ld D.R submitted that the matter may be restored to the file of Ld CIT(A).
12. We heard rival contentions and perused the record. We notice that the AO has mainly placed reliance on the provisions of sec.9(1)(vii) of the Act, though he has made reference to DTAA at some place. We notice that the AO has not properly analysed the nature of services rendered by M/s Adadyn Inc., USA, in the context of sec. 9(1)(vii) or DTAA, even though he has extracted the agreement entered between the assessee and M/s Adadyn Inc. The contention of the assessee is that the nature of services provided by the above said company is in the nature of business support services and not in the nature of consultancy services in strict sense. It is not shown that the above said contention of the assessee is wrong.
13. We also notice that the nature of services provided by M/s Adadyn Inc., USA has not been analysed by Ld CIT(A) also. On the contrary, it is the contention of the assessee that the first appellate authority has entertained erroneous belief that the assessee has been using market analysis/ online data/data bases etc., belonging to M/s Adadyn Inc. The above said observation of Ld CIT(A) was strongly objected to by the assessee. Hence the observation of the Ld CIT(A) that a part of payment constitutes Royalty is strongly disputed. Further, we also notice that the Ld CIT(A) has also not properly analysed the provisions of article 12 of India USA DTAA. Without analysing the nature of services, the Ld CIT(A) has observed that the services were made available. Thus, we notice that the Ld CIT(A) has rendered the decision without bringing on record supporting materials and also without properly analysing the provisions and contentions of the assessee. In the absence of proper analysis of facts relating the issues contested before us, it would be difficult for the Tribunal to adjudicate them.
14. Accordingly, we are of the view that all the contentions of the assessee require fresh examination at the end of Ld CIT(A). Accordingly, we set aside the common order passed by the Ld CIT(A) for the years under consideration and restore all the issues to his file for adjudicating them afresh by properly analysing nature of services, bringing on record materials relied upon, contentions of the assessee and the relevant provisions of the Act and DTAA. After affording adequate opportunity of being heard, the Ld CIT(A) may take appropriate decision in accordance with law.
15. In the result, all the three appeals are treated as allowed for statistical purposes.
