M/s Ideaobject Software Private Limited , Bangalore V. Assistant Commissioner of Income Tax Circle-3(1)(1), Bangalore

ITA 3393/BANG/2018

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 8894 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 02-08-2021
• Assessment Year: 2014-2015
• Appeal Filed On: 24-12-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Services rendered outside India; Deemed to accrue or arise in india; Retrospective amendment; Set aside
• Section: 195; 13

Judgement Text

ITA NO.3393/BANG/2018 IDEAOBJECT SOFTWARE PVT. LTD., CHENNAI IN THE INCOME TAX APPELLATE TRIBUNAL ABENCH: BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER ITA NO.3393/BANG/2018 ASSESSMENT YEAR: 2014-15 IDEAOBJECT SOFTWARE PVT.LTD. PRABHAKARANNASWAMY, 7154 13 TH FLOOR, TOWER 4B, PRESTIGE BELLA VISTA IYYAPPANATHANAGAR MOUNT POONAMALI ROAD CHENNAI 600 056 PAN NO :AACCI0346N VS. ACIT CIRCLE-3(1)(1) BENGALURU APPELLANT RESPONDENT APPELLANT BY : SHRI CHAITANYA MUDRABETTU, A.R. RESPONDENT BY : SHRI KANNAN NARAYANAN, D.R. DATE OF HEARING : 02.08.2021 DATE OF PRONOUNCEMENT : 03.08.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ORDER DATED 25.10.2018 PASSED BY LD. CIT(A)-3, BENGALURU AND IT RELATES TO THE ASSESSMENT YEAR 2014-15. ALL THE GROUNDS URGED BY THE ASSESSEE ARE DIRECTED AGAINST THE DISALLOWANCE MADE U/S 40(A )(I) OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT]. 2. THE FACTS RELATING TO THE ISSUE ARE STATED IN BR IEF. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING SO FTWARE RELATED ITA NO.3393/BANG/2018 IDEAOBJECT SOFTWARE PVT. LTD., CHENNAI PAGE 2 OF 8 SERVICES FOR MEDICAL INDUSTRY. THE A.O. NOTICED TH AT THE ASSESSEE HAS CLAIMED AN EXPENDITURE OF RS.1,44,92,747/- AS P AYMENT TOWARDS EXPORT COMMISSION. IT WAS SUBMITTED THAT T HE COMMISSION WAS PAID TO M/S. INFOR MEDIX FZ LLC, A COMPANY REGI STERED IN UAE. THE A.O. TOOK THE VIEW THAT THE COMMISSION PAYMENT HAS BEEN MADE BY THE ASSESSEE TO THE ABOVE SAID COMPANY FOR PROVIDING SERVICES WHICH ARE IN THE NATURE OF TECHNICAL SERV ICES MENTIONED IN SECTION 9 OF THE ACT. ACCORDINGLY, HE TOOK THE VIE W THAT THE ASSESSEE SHOULD HAVE DEDUCTED TAX AT SOURCE FROM THE EXPORT COMMISSION PAYMENT. BEFORE A.O., THE ASSESSEE SUBMITTED THAT THE FOREIGN AGENT DID NOT HAVE ANY BUSINESS CONNECTION IN INDIA NOR DO THEY HAVE ANY PLACE OF BUSINESS IN INDIA. ACCORDINGLY, IT WAS SUBMITTED THAT THE COMMISSION EARNED BY THE FOREIGN AGENT IS NOT DEEMED TO ACCRUE OR ARISE IN INDIA AND HENCE, THERE IS NO LIA BILITY TO DEDUCT TAX AT SOURCE U/S 195 OF THE ACT. THE A.O. DID NOT AGR EE WITH THE SUBMISSIONS MADE BY THE ASSESSEE. THE AO REFERRED T O THE EXPLANATION INSERTED BY FINANCE ACT 2010 WITH RETRO SPECTIVE EFFECT FROM 1.6.1976, WHICH STATED THAT EVEN IF NON-RESIDE NT HAS NO PLACE OF BUSINESS IN INDIA AND WHETHER OR NOT THAT NON-RE SIDENT HAS RENDERED SERVICES IN INDIA, THE FEE FOR TECHNICAL S ERVICES ARE DEEMED TO ACCRUE OR ARISE IN INDIA. THE ASSESSEE ALSO PLA CED RELIANCE ON CERTAIN CASE LAWS TO SUPPORT ITS CONTENTION. HOWEV ER, THE A.O. HELD THAT THE CASE LAWS RELIED ON BY THE ASSESSEE HAVE B EEN RENDERED PRIOR TO AMENDMENT MADE TO EXPLANATION TO SECTION 9 (II) OF THE ACT BY FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FROM 1.6.1976. ACCORDINGLY, THE A.O. HELD THAT THE ASSESSEE IS LIA BLE TO DEDUCT TAX AT SOURCE FROM THE EXPORT COMMISSION PAYMENT. THE AO ALSO PLACED HIS RELIANCE ON THE DECISION RENDERED BY COCHIN BEN CH OF ITAT IN THE CASE OF DEVICE DRIVEN (INDIA) P LTD (29 ITR 263 ). SINCE THE ASSESSEE HAS FAILED TO DEDUCT TAX AT SOURCE, THE A. O. DISALLOWED THE EXPORT COMMISSION EXPENDITURE OF RS.1,44,92,747/- U /S 40(A)(I) OF THE ACT. ITA NO.3393/BANG/2018 IDEAOBJECT SOFTWARE PVT. LTD., CHENNAI PAGE 3 OF 8 3. THE LD. CIT(A) CALLED FOR AGREEMENT ENTERED BETW EEN THE ASSESSEE AND THE FOREIGN AGENT. THE LD. CIT(A) ALS O EXTRACTED THE RELEVANT CLAUSES OF THE AGREEMENT IN HIS ORDER AND FINALLY HELD THAT THE SERVICES PROVIDED BY FOREIGN AGENT WOULD FALL W ITHIN THE PURVIEW OF FEE FOR TECHNICAL SERVICES AND THUS COVERED BY S ECTION 9(I)(VII) OF THE ACT. FOR THE SAKE OF CONVENIENCE, WE EXTRACT B ELOW THE RELEVANT OBSERVATIONS MADE BY LD. CIT(A) IN THIS REGARD. (BUSINESS DEVELOPMENT AND COMMISSION AGREEMENT ---------------------------------------------- -------------------------------------- ARTICLE1- SCOPE WHERE THE PROVIDER WILL ACT ON BEHALF OF THE COMPAN Y IN INTERNATIONAL BUSINESS DEVELOPMENT, MARKETING ACTIV ITIES, REPRESENTATIONS AND PROVIDE SALES OPPORTUNITIES LEA DS TO IN MANAGING THE PROCESS FOR PROVIDING THE COMPANY WITH MARKET PENETRATION IN THE INTERNATIONAL MARKET (OUTSIDE IN DIA AND UNITED STATES), INTRODUCING THE IDEA OBJECT PRODUCTS AND S OLUTIONS, AND BUILD DISTRIBUTION AND PARTNERSHIP AGREEMENT (HEREI NAFTER REFERRED TO AS 'BUSINESS'). ART1CLE 2 OPERATIONS PROVIDE INTERNATIONAL MARKET PENETRATIONS, BUSINESS DEVELOPMENT SALES LEADS AND CUSTOMER, OPPORTUNITIES INTRODUCTIO N AND COORDINATION FOR NEW BUSINESS TERRITORIES INTERNATI ONALLY FOCUSING IN SOUTH EAST ASIA, AFRICA, AUSTRALIA AND EUROPE (B EING 'TERRITORY') 2.1 WHERE THE COMPANY WISHES TO: 2.1.1 ESTABLISH A COMMERCIAL DISTRIBUTION RELATIONS HIP WITH NEW SOFTWARE AGENTS ACROSS THE TERRITORY FOR IDEAOBJECT PRODUCT LINE. 2.1.2 PURCHASE A MARKETING SERVICES FROM PROVIDER H IMSELF OR AND INFOR MEDIX (LEGAL ENTITY) TO DELIVER A FRAME OF WO RK DEFINED. 2.1.3 SETTING UP AND DELIVER MARKET REQUIREMENTS FO R EACH MARKET TERRITORY TO THE COMPANY ADDRESSING LOCAL HE ALTH IT MARKET REQUIREMENT, ENSURING THE TECHNICAL SUPPORT WILL BE PROVIDED BY THE COMPANY (IDEAOBJECT) STAFF WHICH AL LOW THEM TO BE ABLE TO ADDRESS BOTH MARKETS COMMERCIALLY. ITA NO.3393/BANG/2018 IDEAOBJECT SOFTWARE PVT. LTD., CHENNAI PAGE 4 OF 8 2.1.4 COMMERCIAL MANAGEMENT ALL IDEA0BLECT BUSINESS ASPECT FOR THE AGREED TERRITORY. 2.1.5 DEVELOP AND CREATE COMMERCIAL OPPORTUNITIES A ND GAIN LEADS WITH THE ASSISTANCE FROM THE PROVIDER IN THE TERRIT ORY AND ALSO WIN THE BUSINESS IN THA TERRITORY. 2.1.6 THE COMPANY WILL UTILIZE THE PROVIDER'S CONTA CTS AND EFFORTS TO ARRANGE CONSORTIUMS, JOINT VENTURES AND OTHER ARRANGEMENTS THAT COULD BE ESTABLISHED WITH DIFFERE NT COMPANIES WITHIN THE TERRITORY OR AND THE REGION, I F SO REQUIRED BY THE COMPANY FOR ANY POTENTIAL BUSINESS. 2.2 WHERE THE PROVIDER ACCEPTS TO: 2.2.1 ACT ON BEHALF OF THE COMPANY (IDEA0B)ECT) IN THE AGREED AND DESIGNATED TERRITORIES AS A PROVIDER WITHIN THE AGR EED FRAMEWORK BETWEEN BOTH PARTIES AS DEFINED BELOW. 2.2.2 THE FRAMEWORK BEING FOCUSING ON BUSINESS DEVE LOPMENTS, NEW MARKET ENTRIES, PRODUCT REGISTRATIONS FOR EACH NEW TERRITORY, INTRODUCTION TO CUSTOMER LEADS DIRECTLY WITH IDEAOB JECT OR THROUGH THEIR EXISTING PARTNERS. 2.2.3 PROVIDE ALL THE REQU IRED EFFORTS TO SET UP IDEAOBJECT AND THEIR POTENTIAL CONSORTIUM FOR ALL B USINESSACTIVITIES AND TENDER PARTICIPATION WITHIN THE IT SYSTEM INTEG RATOR PROVIDERS IN THE SPECIFIED TERRITORY. 2.2.4 ACT AS A PROVIDER FOR THE BUSINESS, WHERE HE AND BUSINESS ENTITLES RELATED TO HIM (CLEARLY PREDEFINED) CAN AC T ON BEHALF OF THE COMPANY WITHIN THE FRAMEWORK FOR OPERATIONS, AS DETAILED BELOW. 2.2.5 CREATE NEW SALES LEADS AND NEW BUSINES S OPPORTUNITIES FOR IDEAOBJECT PRODUCTS. 2.2.6 PROVIDE ALL THE NEEDED EFFORTS TO SECURE AND A IN THE PROJECTS RELATED TO THE IDEAOBJECT PRODUCTS. 2.2.7 ACHIEVE THE TARGET BUSINESS REVENUE AGREED WI THIN THIS AGREEMENT. ARTICLE 4- FRAMEWORK FOR OPERATIONS 4.1 THE PROVIDER WILL PROVIDE THE COMPANY (IDEAOBJE CT) WITH BUSINESS PLAN MODEL BASED ONINTERNATIONAL MARKET STRATEGY AND PRO CEDURES. 4.2 THE PROVIDER WILL LEAD AND ACT A! IDEAOBJECT PA RTNER IN BUILDING THE RELATION WITH SUPPLYCHAIN DISTRIBUTION AGENCY MODEL ON THE AGREED TERRITORIES. 4.3 SUPERVISION AND ASSISTING IDEAOBJECT SALES TEAM EVEN TO ACTS IN SOME SALES OPPORTUNITIES ANDACT ON WHEN NEEDED TO PERFORM THE REQUIRED TASKS RELATED TO THE COMPANY BUSINESS ENSURINGDEAL CLOSURE TO THE BENEFI T OF IDEAOBJECT. 4.5 THE PROVIDER WILL WORK WITH COMPANY AND THEIR M ANAGEMENT TEAM ENSURING THAT THECOMPANY WILL DELIVER THE TARGETED ANNUAL SALES REVENUE 4.6 THE PROVIDER WILL BE PROVIDE THE COMPANY WITH M ARKET REPORT FOR THE PROSPECT BUSINESSPOTENTIAL SALES ANALYSIS AND MARKE T ACTIVITIES_ ITA NO.3393/BANG/2018 IDEAOBJECT SOFTWARE PVT. LTD., CHENNAI PAGE 5 OF 8 4.7 THE PROVIDER SHALL WORK WITH POTENTIAL PROJECT, FOR BID PREPARATION UNTIL SUBMITTAL. 4.6 A PERUSAL OF THE ABOVE CLAUSES OF THE AGREEMENT SHOWS THAT IT IS NOT ANAGREEMENT FOR COMMISSION SIMPLICITER. THE SAME AR E NOT NORMAL ACTIVITIES WHICH A SALES COMMISSION AGENT WOULD BE PERFORMING, BUT MUCH MORE THAN THAT. THE PAYMENTS MADE BY THE APPEL LANT INCLUDE PAYMENTS FOR ACTIVITIES OTHER THAN MERE COMMISSION FOR PROCURING ORDERS OR IDENTIFYING THE CUSTOMERS. FROM ABOVE DET AILS IT BECOMES VERY CLEAR THAT THE SERVICES TO BE PROVIDED THROUGH THE SALES COMMISSION AGREEMENT ARE NOT PURELY SALES COMMISSIO N AGENT SERVICES BUT INCLUDE MANAGERIAL, TECHNICAL AND CONSULTANCY S ERVICES, ALTHOUGH SEPARATE CHARGES FOR THE SAME ARE NOT INDICATED. TH ESE SERVICES WOULD FALL WITHIN THE PURVIEW OF 'FEE FOR TECHNICAL SERVI CES' AND THUS COVERED BY SECTION 9(1)(VII) OF THE ACT. 4. BEFORE LD. CIT(A), THE ASSESSEE PLACED RELIANCE ON CERTAIN CASE LAWS. HOWEVER, THE LD. CIT(A) HELD THAT THE SAID D ECISIONS HAVE BEEN RENDERED ON ENTIRELY DIFFERENT FACTS I.E. THEY WERE CONSIDERING THE CASE OF PURE COMMISSION PAYMENT. THE LD. CIT (A) OBSERVED THAT THE SERVICES RENDERED BY THE FOREIGN AGENT ARE NOT PURELY SALES COMMISSION AGENT SERVICES BUT INCLUDE MANAGERIAL, T ECHNICAL AND CONSULTANCY SERVICES, ALTHOUGH SEPARATE CHARGES FOR THE SAME ARE NOT INDICATED. ACCORDINGLY, THE LD. CIT(A) CONFIRM ED THE DISALLOWANCE MADE BY THE A.O. U/S 40(A)(I) OF THE A CT. 5. THE LD. A.R. CONTENDED THAT THE EXPORT COMMISSIO N HAS BEEN PAID FOR PROCURING ORDERS FOR THE ASSESSEE AND APAR T FROM THE SAME, THE FOREIGN AGENT HAS NOT PROVIDED ANY OTHER SERVIC ES. THE LD. A.R. INVITED OUR ATTENTION TO THE COPY OF MASTER INVOICE RAISED BY THE FOREIGN AGENT UPON THE ASSESSEE, WHICH IS PLACED AT PAGE 23 OF THE PAPER BOOK AND SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, THE FOREIGN AGENT HAS PROCURED AGGRE GATE SALES OF USD 1462620 AND THE SALES COMMISSION HAS BEEN CALCU LATED ON THE ABOVE SAID GROSS SALES PROCURED BY THE FOREIGN AGEN T. THE ASSESSEE HAS PAID A COMMISSION OF USD 242523.96, WHICH WORKE D OUT TO RS.1,44,92,747/-. THE LD. A.R. ALSO PLACED RELIANC E ON THE DECISION ITA NO.3393/BANG/2018 IDEAOBJECT SOFTWARE PVT. LTD., CHENNAI PAGE 6 OF 8 RENDERED BY LUCKNOW BENCH OF TRIBUNAL IN THE CASE O F ACIT VS. NORTHERN TANNERY (ITA NO.636/LKW/2013 DATED 18.6.20 15) AND ALSO THE DECISION RENDERED BY THE BENGALURU BENCH O F TRIBUNAL IN THE CASE OF EXOTIC FRUITS PVT. LTD. VS. ITO (2013) 40 TAXMANN.COM 348 AND CONTENDED THAT THE TRIBUNAL HAS HELD THAT T HERE IS NO LIABILITY TO DEDUCT TAX AT SOURCE WHEN THE SERVICES OF NON-RESIDENT AGENTS WERE RENDERED OUTSIDE INDIA AND THE COMMISSI ON WAS ALSO PAID OUTSIDE INDIA AND HENCE, NO INCOME ACCRUE OR A RISE IN INDIA. 6. ON THE CONTRARY, THE LD. D.R. SUPPORTED THE ORDE R PASSED BY LD. CIT(A). INVITING OUR ATTENTION TO CLAUSES 2.1.2 , 2.1.4, 2.2.2, 4.1 & 4.6 OF THE AGREEMENT ENTERED BETWEEN THE ASSESSEE AND FOREIGN AGENT, THE LD. D.R. SUBMITTED THAT THESE CLAUSES CL EARLY SHOWS THAT THE FOREIGN AGENTS ARE PROVIDING SERVICES MUCH MORE THAN ORDINARY SELLING AGENT. ACCORDINGLY, HE SUBMITTED THAT THE LD. CIT(A) HAS HELD THAT THE FOREIGN AGENT HAS PROVIDED SERVICES W HICH ARE IN THE NATURE OF FEE FOR TECHNICAL SERVICES. 7. WE HEARD THE PARTIES AND PERUSED THE RECORD. IT IS THE CASE OF THE ASSESSEE THAT IT HAS ONLY PAID PURE SALE COMMI SSION AND IN SUPPORT OF THE SAME, THE ASSESSEE HAS PLACED ITS RE LIANCE ON THE MASTER INVOICE RAISED BY THE FOREIGN AGENT UPON THE ASSESSEE. AS POINTED OUT BY LD A.R, THE COMMISSION AMOUNT HAS BE EN COMPUTED ON THE VALUE OF EXPORTS MADE THROUGH THE FOREIGN AG ENT. ON THE CONTRARY, IT IS THE SUBMISSION OF LD D.R THAT THE F OREIGN AGENT HAS PROVIDED SERVICES MORE THAN THAT WILL BE PROVIDED B Y AN ORDINARY SALES AGENT. IN THIS REGARD, THE LD D.R INVITED OU R ATTENTION TO CERTAIN CLAUSES OF THE AGREEMENT. HOWEVER, ARTICLE 1 OF THE AGREEMENT, WHICH READS AS UNDER, PROVIDES FOR THE S COPE OF SERVICES:- ITA NO.3393/BANG/2018 IDEAOBJECT SOFTWARE PVT. LTD., CHENNAI PAGE 7 OF 8 ARTICLE1- SCOPE WHERE THE PROVIDER WILL ACT ON BEHALF OF THE COMPAN Y IN INTERNATIONAL BUSINESS DEVELOPMENT, MARKETING ACTIV ITIES, REPRESENTATIONS AND PROVIDE SALES OPPORTUNITIES LEA DS TO IN MANAGING THE PROCESS FOR PROVIDING THE COMPANY WITH MARKET PENETRATION IN THE INTERNATIONAL MARKET (OUTSIDE IN DIA AND UNITED STATES), INTRODUCING THE IDEA OBJECT PRODUCTS AND S OLUTIONS, AND BUILD DISTRIBUTION AND PARTNERSHIP AGREEMENT (HEREI NAFTER REFERRED TO AS 'BUSINESS'). ALL OTHER ARTICLES MENTIONED IN THE AGREEMENT, IN O UR VIEW, ARE ENABLING ARTICLES FOR COMPLYING WITH THE SCOPE MENT IONED IN ARTICLE 1. A PERUSAL OF ARTICLE 1 WOULD SHOW THAT THE FORE IGN AGENT IS PROVIDING PURE MARKETING SERVICES ONLY. WE NOTICE THAT THOUGH THE LD CIT(A) HAS OBSERVED THAT THE FOREIGN AGENT IS PR OVIDING SERVICES MORE THAN AN ORDINARY SALES AGENT, YET IT WAS ONLY A GENERAL OBSERVATION ONLY, SINCE HE HAS NOT POINTED OUT THE ACTUAL SERVICES, IF ANY, PROVIDED BY THE AGENT OTHER THAN THE PURE MARK ETING SERVICES. AS OBSERVED EARLIER, VARIOUS CLAUSES OF THE AGREEME NT POINTED OUT BY LD D.R, IN OUR VIEW, ONLY MENTION THE AGREEMENT BET WEEN THE PARTIES ABOUT THE WAYS AND MEANS FOR CARRYING OUT E FFECTIVE MARKETING SERVICES. ACCORDINGLY WE ARE OF THE VIEW THAT PAYMENTS HAVE BEEN MADE BY THE ASSESSEE AS EXPORT COMMISSION TO THE FOREIGN AGENT FOR MARKETING ITS PRODUCTS/SERVICES O NLY. HENCE, IT CANNOT BE TERMED AS FEE FOR TECHNICAL SERVICES WI THIN THE MEANING OF INCOME TAX ACT. THE PAYMENT HAS BEEN MADE OUTSI DE INDIA FOR SERVICES RENDERED OUTSIDE INDIA AND HENCE THE INCOM E OF FOREIGN AGENT CANNOT BE HELD TO ACCRUE OR ARISE IN INDIA AS HELD BY THE TRIBUNAL IN THE CASE OF EXOTIC FRUITS PVT. LTD. (SU PRA). SINCE NO INCOME IS CHARGEABLE IN THE HANDS OF FOREIGN AGENT, THERE IS NO LIABILITY TO DEDUCT TAX AT SOURCE U/S 195 OF THE AC T. ACCORDINGLY, THE AO WAS NOT JUSTIFIED IN DISALLOWING THE EXPORT COMM ISSION PAYMENT U/S 40(A)(I) OF THE ACT. ITA NO.3393/BANG/2018 IDEAOBJECT SOFTWARE PVT. LTD., CHENNAI PAGE 8 OF 8 8. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED B Y LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THE DISALLOWANCE MADE U/S 40(A)(I) OF THE ACT. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSE SSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD AUG, 2021. SD/- (N.V. VASUDEVAN) VICE PRESIDENT SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 3 RD AUG, 2021. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.