DCIT Vs Algonomy Software Pvt. Ltd. (ITAT Bangalore)
No TDS deductible on payment made to wholly-owned subsidiary company in respect of sales commission u/s 40(a)(i)
Conclusion: TDS was not to be deducted on payments to Manthan Systems Inc. (MSI) for sales commission under section 40(a)(i) as services rendered to assessee by the said Manthan Systems Inc. was not falling within the ambit of FTS or under Article 12 of the treaty, assessee was not liable to deduct TDS on the payment made to the MSI.
Held: Assessee-company was engaged in the business of providing software development service, sale of software products and rendering of IT enabled services. Manthan Systems Inc. (MSI) was the company incorporated in the United States of America which was wholly owned subsidiary of Assessee Company; MSI provided sales and marketing services to assessee for sale of assessee’s product / services in the territory of North American / South American and Caribbean markets. Assessee company therefore paid commission to MSI for its services. Despite assessment under section 143(3) in all relevant years, no disallowance was made under section 40(a)(i) for non-deduction of TDS on commissions to MSI. It was held that CIT(A) ruled that commissions paid to Manthan System Inc. did not constitute Fees for Technical Services ( FTS ) or fall under Article 12 of the Double Taxation Avoidance Agreement ( DTAA).The bench found force in the submission made by assessee that since it had already been decided by the Coordinate Bench that the services rendered to assessee by the said Manthan Systems Inc. was not falling within the ambit of FTS or under Article 12 of the treaty, assessee was not liable to deduct TDS on the payment made to the MSI. There was no ambiguity in the order passed by CIT (A) in holding that there was no liability to deduct TDS and accordingly, deletion of addition made to assessee’s income in respect of sales commission under section 40(a) (i) was found to be just and proper so as to warrant interference. The revenue’s appeal found to be devoid of any merit and therefore, dismissed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The instant appeals and cross objections filed by the respective parties are directed against the order passed by the Ld.CIT(A)- 12, Bangalore all dated 30.08.2023 for A.Ys. 20 12-13 to 20 15- 16 respectively arising out of the order passed by the Assessing Officer u/s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) all dated 30.11.2019 for A.Ys. 2012- 13 to 2015-16 respectively.
Before us, the appeals by revenue for A.Ys. 2012-13 to 2015-16 are barred by limitation for 25 days. Considering the facts and circumstances of the case, the delay in condoned.
Assessment Year 2012-13:
2. At the very outset of the matter, the Ld.Counsel appearing for the assessee submitted before us that the ground challenging the reopening of assessment under section 148 though raised by the assessee in each year are not pressed. Hence this particular ground of appeal is dismissed as not pressed. The cross objections are, therefore, dismissed as not pressed. This here apply mutatis mutandis in A.Ys. 20 13-14 and 20 14-
3. So far as the cross objection in respect of AY 2015-16 is concerned, this ground preferred by the assessee are dismissed as not pressed. However, the disallowance of provision for doubtful debts as has been challenged by the assessee will be considered by us.
4. In revenue’s appeal, the following common grounds are raised:
a) Deletion of addition in respect of sales commission paid to Manthan Systems Inc. (‘MSI’) under section 40(a)(i) of the
b) Deletion of addition in respect of ESOP expense made by the Ld. CIT(A).
Deletion of addition in respect of sales commission paid to Manthan Systems Inc. (‘MSI’) u/s. 40(a)(i) of the Act.
ITA No. 943/Bang/2023 – A.Y. 2012-13
5. The brief facts leading to this case is this that the assessee is a software private limited company incorporated in the year 2003 under the provision of Companies Act, 1956. It is engaged in the business of providing software development service, sale of software products and rendering of IT enabled Services (ITeS). Manthan Systems Inc. (MSI) is the company incorporated in the United States of America which is wholly owned subsidiary of assessee company; MSI provides sales and marketing services to the assessee for sale of assessee’s product / services in the territory of North American / South American and Caribbean markets. The assessee company therefore paid commission to MSI for its services. Though in all the years under consideration assessment was done under section 143(3), no disallowance was made under section 40(a)(i) of the Act for non‑deduction of TDS on commission paid to the said company namely MSI. For the year under consideration, reassessment proceeding u/s. 147 was initiated by the Ld.AO and consequently by and under the order passed under section 143(3) r.w.s. 147 of the Act, disallowance of sales commission paid to MSI was made under section 40(a)(ia) of the Act which was challenged by the assessee before the First Appellate Authority. However, the order was made reversed by the First Appellate Authority deleting disallowances. Hence the appeal before us by the revenue.
6. At the outset of the proceeding, the Ld.Counsel appearing for the assessee submitted before us that the issue is squarely covered in the case of M/s. Manthan System Inc. vs. DCIT in IT(IT)A No. 723/Bang/2022 for A.Y. 2012-13 by order dated 23.09.2022. He contended that in that case the Ld.CIT(A) also held that the sales commission paid to the said Manthan System Inc. by the assessee does not fall within the ambit of FTS or under Article 12 of DTAA. It was further observed by the Ld.CIT(A) therein that the contention made by the Ld.AO that payment qualifies as royalty is also not sustainable and finally held that there is no liability to deduct TDS. Such contention made by the Ld.AR has not been able to be controverted by the Ld.DR.
7. We have heard the rival submissions made by the respective We have also perused the relevant materials available on record.
8. We have perused the order passed in the matter of M/s. Manthan System Inc. vs. DCIT (supra), a copy whereof is available in the paper book filed by the assessee.
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 the said company MSI as held by ITAT in the order under reference hereinabove. In this regard, we have carefully considered the order passed by the Ld.CIT(A) who has taken into consideration this particular aspect of the matter and deleted the addition with the following observation:
“4.3.4 FINDING AND DECISION
In the impugned order, the AO has made disallowance under Section 40(a)(i) of the payment made to Manthan Systems Inc. towards sales and marketing commission. The AO has extensively discussed why the commission paid by the appellant to Manthan Systems Inc was in the nature of Fees for Technical Services and was taxable both under the provisions of the Act and under the India-USA DTAA. The AO in Para 4.1 (Page 3 86 4) of the assessment order has listed the services provided by the Manthan Systems Inc. to the appellant and also stated that Manthan Systems Inc was providing sales and marketing services. These services are enumerated in the ARC Business Partner Agreement between the appellant and Manthan Systems Inc. dated 11 th February, 2009 as further amended and renewed by the agreement dated 1st April, 2013. The agreement was for marketing of the appellant’s products and associated services, including the software called ARC developed by the appellant which were marketed in North and South America and the Caribbean by Manthan Systems Inc. Para 5 of the said agreement reproduced below further elaborates the nature of the contract between the appellant and Manthan Systems Inc.
5. MSSPL’s Responsibilities
5.1 MSSPL, shall provide MSI all necessary and relevant information pertaining to its ARC Products and Associated Services, including all relevant literature, brochure, soft copies, CDs etc. related to the Products and Services, which the Business Partner shall use to adequately market the Products and Services.
5.2 MSSPL shall, upon the receipt of a purchase order from the Customer, intimate MSI as to the acceptance of the purchase order. MSSPL shall be at liberty to reject any purchase order which does not comply with the pricing agreed at the end of the Commercial Negotiations or is not accompanied with the advance amount as agreed therein.
5.3 MSSPL shall send along with the confirmation of the purchase order, an invoice to the Customer with a copy for information to MSI, which shall reflect 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 Product and Services.
(h) Conduct Road shows.
Paras 3.3 to 3.7 of the agreement also delineate the responsibilities of both parties to the agreement.
3.3 MSI shall use all reasonable efforts to pursue aggressive sales policies and procedures to realize the maximum sales potential for the ARC Products and Associated Services.
3.4 During the term of this Agreement, MSI shall not, without MSSPL’s prior written consent, represent, promote or otherwise try to sell any other types of software Products and/or Services which perform identical functions as the Products and/or Services provided by MSSPL.
3.5 MSI shall support such special programs as may be developed by MSSPL from time to time in relation to the ARC Products and/or Associated Services. Such support may be in the form of marketing or promotional services, provision of certification programs, integration of sales reporting tools developed by the Company, or such other services as the Company may specifically request. Any such special programs provided at a fee or charge shall be mutually agreed upon by the Parties hereto.
3.6 MSI agrees to provide the Company with sales and marketing data required by MSSPL in respect of the sales of the ARC Products. MSI will directly input this information into the MSSPL program in the manner stipulated by the MSSPL.
3.7 MSI shall be entitled to receive from MSSPI. such training as MSSPL may deem necessary in order for MSI to carry out its obligations under this Agreement.
From a reading of above clauses, it is evident that the services provided by Manthan Systems Inc. to the appellant were in the nature of marketing of the appellant’s proprietary products. The AO has briefly discussed in Para 6 and Para 8.3 of her order, that the information provided by the Manthan Systems Inc was in the nature of commercial information and hence the payment for the same was in the nature of royalty. However, this view is not tenable in the light of the clauses of agreement discussed above.
Be that as it may be, the AO has gone into some detail and also extensively discussed with reference to various case laws that the payment for the services rendered by Manthan Systems Inc was also FTS and chargeable to tax as per the Act and DTAA. The AO has not specifically identified whether the payment for the services 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 assessee acted as intermediary and facilitates sale of software products/services outside India. On perusal of copy of sale and marketing agreement dated 11.02.2009 entered between the assessee and MSSPL, it is seen that the assessee rendered the following services.
