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TMI Blog2024 (7) TMI 1478X X X X Extracts X X X X X X X X Extracts X X X X ..... to be quashed. 2. Issuing notice under section 148 and passing the assessment order in the absence of 'reason to believe' as contemplated u/s 147. The notice u/s 148 issued and order so passed on mere suspicion, conjecture or surmise without any 'reason to believe' that income has escaped assessment and solely with a view to make further investigation is invalid, bad in law and liable to be quashed. 3. Without prejudice, there being no 'live link' between the material relied on and the formation of belief that income has escaped assessment, the requirements of 'reason to believe' are not satisfied and consequently the' assessment order passed is bad in law and liable to be quashed. 4. The lower authorities have erred in passing the assessment order under section 147 read with section 144C without disposing off the appellant's objections to reasons stated for reopening recorded by passing a speaking order as contemplated by the decision of the Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO (2003) 259 1TR 19. The final assessment order passed in violation of the decision of the Supreme Court is bad in law and liable to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnology shall not per se be considered to make the technology available." 10. That making available service does not make available knowledge, experience, skill, etc. The Appellant has to approach the subsidiary company every time to get new customers and maintain relationship with existing customers. The test of 'make available' as envisaged in the DTAA is therefore, not satisfied. 11. The lower authorities have erred in levying interest of Rs. 2,15,11,688/- u/s 234A and Rs. 2,96,63,485/- u/s 234B. On facts and circumstances of the case, interest under section 234A and 234B of the Act is not leviable. The appellant denies its liability to pay interest under section 234A and 234B of the Act. The appellant submits that each of the above grounds / sub grounds are independent and without prejudice to one another. 3. Ground No.1 is general in nature, which does not require any adjudication. 4. Ground Nos.2 to 4 are with regard to reopening of assessment, which were not pressed before us. Accordingly, these grounds are dismissed as not pressed. 5. Ground Nos.5 to 10 are with regard to taxability of overseas sales commission i.e. the receipt from Associated Enterprises (AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and thereafter the ld. AO passed the final assessment order. Against this assessee is in appeal before us. 6.3 The ld. A.R. submitted that the Assessee procures local sales orders for STEER products to be executed by the AE, and receives payments thereto from the customers which are further transmitted fully to AE. With respect to overseas sales commission, i.e., the receipts from Steer India towards Commission on Sales according to assessee it will not partake the nature of Fees for Services (FTS) under the act as it is neither managerial, consultancy nor services. Steer USA has not made available any knowledge, experience, know-how to its holding company Steer India. Steer USA is remunerated for rendering marketing and support services in the form of sales commission. 6.4 Further, the sales commission was computed based on the cost incurred by Steer USA along with Mark Up of 10% on total costs. Steer USA does not have any personnel except one or two individuals who were employed to demonstrate and explain the products / services to the potential customers. According to assessee, the payment made for sales and marketing services were not liable to tax as per the Income Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tore _India 13 Dr. Reddy'S Laboratories Ltd India Extruder Machinery Bangalore, Coimbatore _India 14 Polyone Polymers (I) Pvt. Ltd India Machinery and its Parts Bangalore, Coimbatore _India 15 Agroha Colourtec Pvt Ltd India Machinery and its Parts Bangalore, Coimbatore _India 7.3 He submitted the list of few Patents Held by SEPL India, Bangalore are as stated below : S.No Patent /Publication Number Patent Description 1 11752681 Method For Producing Fused Unplasticised Polyvinyl Chloride Articles 2 11312041 Extruder Mixing Element 3 10239233 Element For A Co-Rotating Twin Screw Processor 4 10207423 Extruder Mixing Element For A Co-Rotating Twin Screw Extruder 5 8827538 Barrel Cooling And Heating System For Screw Extruder 6 8690473 Stress Concentration Free Spline Profile 7 8113814 Barrel Clamping System For Quick Assembling And Dismantling Of Extruder Barrel Sections 8 9056292 Barrel Alignment In Extruder Systems 9 20230390965 An Element For A Co-Rotating Twin-Screw Processor 10 20210146590 Method For Producing Fused Unplasticised Polyvinyl Chloride Articles 11 20190105803 Extruder Mixing Element 12 20160279 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can Creations (P.) Ltd vs DCIT (2022) 134 taxmann.com 144 (Bangalore-Trib.) vi. M/s. Ad2Pro Media Solutions P. Ltd. in ITA Nos.490 to 503/Bang/2019 dated 20.3.2020. 7.6 He submitted that the following judicial pronouncements have also taken an identical view:- * PCIT vs Puma Sports India (P.) Ltd (2021) 127 taxmann.com 169 (Karnataka} SLP dismissed by Supreme Court - (2022) 134 taxmann.com 60 (SC); * Bengal Tea & Fabrics Ltd.. v DCIT (2018) 91 taxmann.com 38 (Kolkata - Trib.); * DCIT v Divi's Laboratories Ltd (2011) 12 taxmann.com 103 (Hyd.); * CIT vs. Model Exims, (2014) 42 taxmann.com 446 (ALL) * Brakes India Ltd. v DCIT (2013) 33 taxmann.com 501 (Chennai - Trib.); * Sri Subbaraman Subramanian v Asst CIT (2013) 30 taxmann.com 236 (Bangalore - Trib.); * ACIT v India Shoes Exports (P.) Ltd (2015) 57 taxmann.com 303 (Cliennai-Trib.); * ACIT v Evergreen International Ltd (2018) 91 taxmann.com 111(Delhi-Trib.); * CIT v Orient Express (2015) 56 taxmann.com 331 (Madras); * Divya Creation v ACIT (2017) 86 taxmann.com 276 (Delhi- Trib.); * Khimji Visram & Sons v ACIT (2014) 52 taxinann.com 485 (Mumbai- Trib,) 7.7 In light of the above judicial pronouncements, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yers of the Indian company. Further in the preceding paragraphs we dealt with how the marketing services provided by the assessee to its AE is managerial and consultancy in nature and therefore falls within the ambit of fees for technical services. 8.4 She further submitted that, it is a clear case of using the market research and expertise of the foreign com any in India for expanding their products reach in global market through the assessee. The market, analysis, knowledge supplied by the assessee remains with the assessee forever and it could be even used in future for the business of the assessee in the form of a database of the prospective customers. Therefore, she submitted that she finds no infirmity in the action of the AO treating the payment as FTS. In view of the above discussion, she requested that all the objections of the Assessee are, therefore, to be rejected. 9. We have heard the rival submissions and perused the materials available on record. In this case, assessee is a foreign company incorporated in USA. It had not filed return of income for the assessment year 2013-14 and the case was reopened by issuing notice u/s 148 of the Act on 30.6.2021 after duly foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form this function. (b) Evaluation Steer America and SEPL discuss and understand the specific requirements of the customer and do the evaluation. The evaluation would include kind of material to be used, quality standards etc. Steer America perform this fimction with support of Steer India. (c) Quotation Based on the study of customer's requirement, Steer America tender the quotation to the customer. Steer America evaluate the customer's requirement and determine the price to be charged based on the quality and grade of the raw material to be used. Steer America perform this function with the help of standard database provided by Steer India and with the prior consultation-and approval from Steer India. (d) Negotiation Negotiation is a process through which the buyer and seller agree for prices to be aid for the products and terms and conditions of supply. Steer America and SCG negotiate with the buyer on prices and other terms of supply. (e) Customer Order Based on the negotiation and approval from SEPL, the customer places order on Steer America. Steer America place back to back order on Steer India. The consideration agreed for Steer America is cost plu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, replacement, warranties, technical writeups and training of the users. Dedicated technical team from SEPL India travels to customers location to train resources, trouble shoot, make technical evaluation and feasibility, address customer requirements and concerns, understand requirement, to provide solution. As all the Tech team is based out of Bangalore and are in India including Dr Babu Padmanbahan who is the Chief Knowledge Officer of the Company. Steer India being located in India that is 12,000 Kms away and a developing country, customers from the Developed World like United States of America raised doubts regarding precision of machining meeting up the Global Standards, compete with Global Giants and ability to serve locally. In order to demonstrate its long term intend to serve the American Market. Establishing the local presence gave the comfort to American Clients that STEER is here to stay in USA for a long term confidently rely on STEER for not only their aftermarket components but also for their Capital Goods. Sensing the need to have office place in USA to tell customers we are available locally is the precise reason for opening up office in United States so that Glo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MUM.) where in it was held that an Indian resident company, entered into an agreement with a China based company - Under said agreement, assessee, which was in process of building alumina refinery, was to pay US Dollars one million in consideration of bauxite testing services by Chinese company and Test reports of bauxite samples were to cover complete chemical composition of bauxite, physical phase constitution of bauxite, abradability test of bauxite, digestion performance test and red mud settling performance test, which are of technical services as accepted the Assessee itself. 9.10 However, the matter addressed by the Tribunal is not whether the services are of technical services or anything else, whether it is no longer necessary that in order to attract taxability under section 9(l)(vii), services must also be rendered in India; utilization of these services in India is enough to attract its taxability in India - Held, yes. The above order of Tribunal is not applicable in the present case as the consideration paid by Ashapura Minichem Ltd is towards 'Testing Service and issue a report on technical composition of substance' where as activities carried out by rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany for marketing services take the character of FTS and chargeable to tax in India. [Para 9] Thus, according to the revenue the royalties and fees for included services may also be taxed in the Contracting State. [Para 10] The Assessing Officer's view is that assessee utilizes the services of the US Company even in the negotiations with customers and in finalizing contracts, and the same cannot be done without sharing technical knowledge, knowhow, processes or experience. [Para 11] The language employed in clause 4 of article 12 of DTAA between India and USA is unambiguous. The services rendered by the US Company do not make available its technical knowledge, skill, knowhow, process or transfer of technical plan or design. Therefore, the view taken by the Assessing Officer that negotiation with customers to finalise the contract without sharing the technical knowledge or knowhow is perverse. [Para 14] The Tribunal has noted in its order that the scope of the work is to generate customer leads using/subscribing customer data base, market research, analysis, and online research data and rightly held that the service provider has not made available any technical knowledg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased 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. 9.22 Similarly, the Bangalore Bench of Tribunal in the case of Deccan Creations (P.) Ltd vs DCIT (2022) 134 taxmann.com 144 (Bangalore-Trib.) had held that services of foreign agents in the form of providing the data related to market trends and requirements of customers does not constitute as managerial services, as these services are usually provided by any agent. Thus, sales commission paid to foreign agents on the value of sales affected through them cannot be treated as technical services and therefore, not taxable in India. 9.23 Further, in the case of DIT v/s Sheraton International Inc. [2009] (313 ITR 267) (Delhi HC), the Hon'ble Delhi High Court held that the non-resident assessee had entered into a commercial service agreement with Indian hotels for advertising, publicity and promotion of their sales worldwide. Pursuant to the arrangement, it also allowed the use of its trade name, trademark and stylized "S". In return, the assessee rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y services rendered to BTIN was taxable in India as fee for technical services. Payment of consideration would be regarded as 'fee for technical/included services' only if twin test of rendering services and making technical knowledge available at same time is satisfied. Since intermediary services rendered by assessee did not make available any technical knowledge, skill, etc., to BTIN and BTIN was not equipped to apply technology contained in services rendered by assessee, intermediary services provided by assessee to BTIN did not tantamount to FTS and accordingly, would not be taxable in India. 9.27 Further, the Delhi Bench of Tribunal in the case of Apurva Goswami v. Deputy Director of Income-tax (International Taxation) reported in [2022] 140 taxmann.com 198 (Delhi - Trib.), dated 24-05- 2-2022 in Assessment years 2010-11 to 2012-13 held that Assessee-proprietor was a contract research organisation and specialized in area of pharmacovigilance (drug safety) services - During year, assessee entered into master service agreements with non-resident Global Business Affiliates (GBAs)/Business Development Associates (BDAs) located in USA, UK and Switzerland for receiving sev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Bench of Tribunal in the case of ITO v. Skill Infrastructure Ltd. [2015] 62 taxmann.com 33 (Mumbai - Trib.) held that an Indian company had merely availed services of U.K. Company for global market survey to determine business prospects to carry out project in India were neither geared to nor did they 'make available' any technical knowledge, skill or experience to assessee or consisted of development and transfer of a technical man or technical design to assessee does not qualify as FTS under article 13 of DTAA between India and U.K. 9.31 Further, in the case of Rich Graviss Products (P.) Ltd. v. Additional Commissioner of Income-tax -7(2), Mumbai in Assessment year 2007-08 held that Assessee had paid consultancy services fee to a US company for exploring export market without making any TDS on payment. Assessing Officer held that since assessee did not deduct TDS, expenditure was not allowable under section 40(a)(i). Since payment was made in foreign currency and tax authorities had failed to show that payment received by non-resident was liable to tax in India either in terms of Indian Income tax Act or in terms of Indo-US DTAA, assessee was not liable to deduct TDS o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only distinct and different from license fee but they were done under two distinct and separate agreements and could not be treated to be ancillary and subsidiary to license fee. Hence, such fee would not fall under article 12(4)(a) of treaty. Similarly, nature of services rendered did not demonstrate that they were in nature of managerial, technical or consultancy services. Even if, to some extent they might involve consultancy services, however, there was nothing on record to demonstrate that while rendering services, assessee had made available technical knowledge, experience, skill, know-how or processing etc. to bring it within ambit of FTS under article 12(4)(b) of treaty - Whether therefore, Assessing Officer was to be directed to delete additions. 9.34 In the case of Commissioner of Income-tax, (International Taxation) v. Starwood Hotel & Resorts Worldwide Inc reported in [2023] 148 taxmann.com 131 (Delhi HC), (NOVEMBER 16, 2022) for the Assessment year 2015-16 wherein held that Payments received by assessee, a foreign company from its Indian customers/hotels on account of Centralized Services, viz., sales and marketing, loyalty programs, reservation service, technologica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accrued to payees in India and in terms of sections 9(1)(i) and 5(2)(b), same was chargeable to tax in India. It was noted that nature of services performed by foreign companies did not involve rendering or providing or making available to assessee any technical service or technical knowledge so as to attract provisions of section 9(1)(vii) or article 12 of DTAA between India and USA. In view of aforesaid, impugned order passed by Assessing Officer was to be set aside. 9.37 In the case of WNS North America Inc vs ADIT [2012] 28 taxmann.com 173 (Mum ITAT) (JULY 31, 2013) for the Assessment year 2007-08 wherein held that Assessee, a US based company, entered into an agreement with WNS India for providing marketing and managerial services. Since assessee's employees visited India to provide managerial services, WNS India was treated as service PE under article 5 of DTAA. Assessing Officer held that assessee rendered expertise and technical knowledge to WNS India and taxed entire marketing and management fees received from WNS India as FTS under article 12 of DTAA. In assessee's own case for assessment year 2006-07, Tribunal held that since assessee had not made available an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services' as mentioned in article 12(4) of DTAA, hence, it could not be taxed in India. It was to be considered as sales commission only. 9.40 In the case of Manthan System Inc, Bangalore vs Assistant Commissioner of Income Tax, on 20 May, 2024, ITA No.394 to 398/Bang/2024 (ruling in the case of the Foreign Company's appeal), in the above ruling, Hon'ble Bengaluru Tribunal held that Sales & marketing services rendered to Indian-entity by US subsidiary in American markets are not FTS/FIS. 9.41 In the case of Algonomy Software Private Limited ... vs Deputy Commissioner Of Income Tax, ... on 19 January, 2024, ITA Nos. 943 to 946/Bang/2023 (ruling in the case of the Indian Company's appeal), the Bengaluru Tribunal held as follows: "12. Therefore, respectfully relying upon the same, we find no ambiguity in the order passed by the Ld.CIT(A) in holding that there is no liability to deduct TDS and accordingly, deletion of addition made to the assessee's income in respect of sales commission under section 40(a)(i) is found to be just and proper so as to warrant interference. The same is, therefore, upheld. The revenue's this ground of appeal, is, thus, found to be devoid of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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