Kanbay Incorporated, Pune V. Dy. Director of IT ( International Taxation)-1, Pune

ITA 59/PUN/2011

• Counselvise Citation: 5924514 RSA 2011
• Duration Of Justice: 3 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 30-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 11-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Keywords: Double taxation relief; Opportunity of being heard; Principle of natural justice; Additional evidence
• Section: 143(3); 5(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE: SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO . 59 / P N/ 20 1 1 ASSESSMENT YEAR : 200 7 - 08 KANBAY INCORPORATED, (NOW KNOWN AS C APGEMINI FINANCIAL SERVICES USA (INC), PUNE VS. DY. DIRECTOR OF INCOME TAX, (INTERNATIONAL TAXATION) - I, PUNE (APPELLANT) (RESPONDENT) PAN NO. AACCK2357F A SSESSEE BY: SHRI JITENDRA JAIN R EVENUE BY: SHRI A.K. MODI DATE OF HEARING : 30 - 0 6 - 2014 DATE OF PRONOUNCEMENT : 30 - 0 6 - 2014 ORDER PER R.S . PADVEKAR , JM : - IN THIS APPEAL, THE ASSESSEE HAS CHALLENGED THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER U/S. 143(3) R.W.S. 144C(13) OF THE I.T. ACT, 1961. THE ASSESSING OFFICER HAS P ASSED THE ASSESSMENT ORDER A S PER THE DIRECTION S OF THE DISPUTE RESOLUTION PANEL (DRP) U/S. 144C(5) OF THE INCOME - TAX ACT, 1961 DATED 28 - 09 - 2010. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS IN THE APPEAL : 1. THE DISPUTE RESOLUTION PANEL (DRP) ERRED IN HOLD ING THAT GRANTING OF ADEQUATE OPPORTUNITY BY IT COMPENSATES THAT THE FACT THAT THE ASSESSING OFFICER (AO) FAILED TO GRANT ADEQUATE OPPORTUNITY TO THE APPELLANT WHILE PASSING THE DRAFT ASSESSMENT ORDER. THE APPELLANT SUBMITS THAT GRANTING OF OPPORTUNITY B Y THE DRP CANNOT MAKE GOOD THE FACT THAT THE AO FAILED TO GRANT ADEQUATE OPPORTUNITY TO THE APPELLANT. 2. THE AO/DRP ERRED IN HOLDING THAT THE ADDITIONAL EVIDENCES LED BY THE APPELLANT DID NOT DEMONSTRATE THAT MARKETING SERVICES WERE RENDERED BY THE APPELLANT TO KANBAY SOFTWARE (INDIA) PRIVATE LIMITED. 2 ITA NO . 59/PN/2011, KANBAY INCORPORATED, PUNE 3. THE AO/DRP ERRED IN HOLDING THAT THE APPELLANT DID NOT SERIOUSLY CONTEST THE TAXABILITY OF THE FEES RECEIVED BY THE APPELLANT UNDER THE 'MARKETING SERVICES AND REFERRAL AGREEMENT' UNDER THE PROVISIONS OF SECTION 9 R.W.S. 5(2) OF INCOME TAX ACT. 4. THE APPELLANT SUBMITS THAT THE AO / DRP ERRED IN IGNORING THE CONTENTION OF THE APPELLANT THAT 'MARKETING FEES' RECEIVED BY THE APPELLANT WERE IN THE NATURE OF SALES COMMISSION AND SINCE THE SERVICES WERE RENDERED BY THE A PPELLANT OUTSIDE INDIA, THE 'MARKETING FEES' WERE NOT LIABLE TO TAX IN INDIA UNDER THE PROVISIONS OF INCOME - TAX ACT. 5. THE AO/DRP ERRED IN HOLDING THAT 'FEES FOR INCLUDED SERVICES' AS DEFINED IN ARTICLE 12(4)(B) OF THE DOUBLE TAX AVOIDANCE AGREEMENT BETWEEN INDIA AND USA WOULD COVER SERVICES OTHER THAN TECHNICAL SERVICES AS WELL. 6. THE AO/DRP ERRED IN HOLDING THAT MARKETING FEES RECEIVED BY THE APPELLANT ARE IN THE NATURE OF 'FEES FOR INCLUDED SERVICES' WITHIN THE MEANING OF ARTICLE 12(4)(B) OF THE DOUBLE TAXAT ION AVOIDANCE AGREEMENT BETWEEN INDIA AND USA. 7. THE AO/DRP ERRED IN HOLDING THAT MARKETING FEES RECEIVED BY THE APPELLANT ARE IN THE NATURE OF 'ROYALTY' UNDER ARTICLE 12(3)(A) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND USA. 8. THE AO/DRP ERRE D IN HOLDING THAT THE MARKETING FEES RECEIVED BY THE APPELLANT ARE IN THE NATURE OF 'FEES FOR INCLUDED SERVICES' WITHIN THE MEANING OF ARTICLE 12(4)(A) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND USA. 9. THE AO/DRP ERRED IN HOLDING THAT THE M ARKETING SERVICES RENDERED BY THE APPELLANT WERE ONLY MEANT TO FACILITATE THE EFFECTIVE APPLICATION OF THE INTANGIBLES REFERRED TO IN THE ROYALTY AGREEMENT. 10. THE AO/DRP ERRED IN HOLDING THAT BUT FOR THE MARKETING SERVICES RENDERED BY THE APPELLANT, THE MAR KETING INTANGIBLES REFERRED TO IN THE ROYALTY AGREEMENT WOULD HAVE BEEN RENDERED OTIOSE/FUTILE. 11. THE AO/DRP ERRED IN HOLDING THAT FEES FOR MARKETING SERVICES AND ROYALTY WERE MADE UNDER A SET OF RELATED CONTRACTS. 3 ITA NO . 59/PN/2011, KANBAY INCORPORATED, PUNE 2. THE FACTS WHICH ARE REVEALED FROM THE RECORD AS UNDER. THE ASSESSEE IS A COMPANY INCORPORATED IN THE USA. IT ACTS AS A GLOBAL BUSINESS TECHNOLOGY SOLUTION PROVIDER (GBTSP) AND SPECIALIZES IN CUSTOMIZED PROGRAMMED SOFTWARE AND TECHNOLOGY. THE ASSESSEE COMPANY FILED THE RETURN OF INCOME FOR T HE A.Y. 2007 - 08 ON 31 - 10 - 2007 ADMITTING THE INCOME OF RS.21,35,658/ - WHICH WAS IN RESPECT OF ROYALTY RECEIVED FROM KANBAY SOFTWARE ( INDIA ) PVT. LTD. (IN SHORT KANBAY LTD.). DURING THE A.Y. 2007 - 08 , THE ASSESSEE HAD RECEIVED THE FOLLOWING PAYMENTS FROM T HE KANBAY LTD. (I) . ROYALTY OF RS.21,35,658/ - TOWARDS THE USE OF TRADEMARK AND MARKETING INTA N GIBLES AND (II) . MARKETING FEES OF RS.48,51,108/ - AND PRECISELY THE ISSUE IN DISPUTE IS IN RESPECT OF THE AMOUNT OF RS. 48,51,108/ - WHICH IS CLAIMED TO HAVE BE EN RECEIVED FROM KANBAY LTD. TOWARDS RENDERING OF MARKETING SERVICES. THE ASSESSEE CLAIMED BEFORE THE ASSESSING OFFICER AS WELL AS DRP THAT THE SAID AMOUNT IS NOT TAXABLE IN THE HANDS OF THE ASSESSEE COMPANY IN INDIA AS THE MARKETING SERVICES FOR WHICH TH E SAID AMOUNT WAS GIVEN DID NOT MAKE AVAILABLE (TECHNICAL KNOWLEDGE, SKILL, KNOW - HOW ETC.) WITHIN THE MEANING OF ARTICLE 12 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AND THE USA. 3. THE ASSESSEE ALSO TOOK THE CONTENTION BEFORE THE DRP THAT THE RECEIPT FROM THE MARKETING SERVICES ARE NOT IN THE NATURE OF THE FEES FOR THE TECHNICAL SERVICES WITHIN THE MEANING OF SEC. 9(1)(VII) OF THE ACT AND HENCE, NOT LIABLE TO TAX IN INDIA. IT WAS STATED BY THE ASSESSEE BEFORE DRP/AO THAT THE MARKE TING SERVICES AND REFERRAL AGREEMENT (MSRA) WOULD MAKE IT CLEAR THAT THE PAYMENT WAS PURELY FOR THE MARKETING EFFORTS PUT IN BY THE ASSESSEE. IT WAS FURTHER STATED THAT THE AGREEMENT ALSO GIVES THE METHOD OF CALCULATING MARKET FEES I.E. 1% OF EXPORT REVEN UE AND 2% OF DOMESTIC REVENUE WHICH HAS BEEN BILLED AND COLLECTED BY KANBAY LTD. IN RESPECT OF CLIENTS REFERRED TO KANBAY LTD. BY THE ASSESSEE. THE ASSESSEE CLAIMED BEFORE BOTH THE AUTHORITIES THAT THE AMOUNT 4 ITA NO . 59/PN/2011, KANBAY INCORPORATED, PUNE RECEIVED IS IN THE NATURE OF SALES COMMISSION AND IS NOT LIABLE TO TAX IN INDIA AS THE MARKETING ACTIVITY WAS CARRIED OUT OUTSIDE INDIA AND THE ASSESSEE DOES NOT HAVE A PE IN OR BUSINESS CONNECTION WITH INDIA. THE ASSESSEE ALSO RELIED ON CBDT CIRCULAR NO. 23 DATED 23 - 07 - 1969 AND NO. 786 DATED 07 - 02 - 2 000. THE ASSESSEE ALSO PLACED RELIANCE ON RULING O F THE AAR IN THE CASE OF CUSHMAN AND WAKEFIELD (5) PTE. LTD., 305 ITR 208 I N SUPPORT OF HIS CONTENTION THAT MARKETING FEE WAS NOT LIABLE TO TAX U/S. 9(1)(I) OR 9(1)(VI) OR 9(1)(VII) OF THE ACT. 4. IN SU M AND SUBSTANCE THE ASSESSEE CONTENDED THAT UNDER THE NORMAL PROVISIONS OF THE ACT , THE MARKETING FEES RECEIVED BY THE ASSESSEE TO THE EXTENT OF RS.48,51,108/ - IS NOT TAXABLE. THE ASSESSEE ALSO PLEADED BEFORE THE AUTHORITIES BELOW THAT THE MARKETING FEE R ECEIVED BY IT CANNOT BE TREATED AS F EES FOR TECHNICAL S ERVICES (FTS) . THE ASSESSEE ALSO PLEADED THAT IN VIEW OF THE DTAA BETWEEN INDIA AND USA MORE PARTICULARLY AS PER ARTICLE 12, THE DEFINITION OF FEES FOR INCLUDED SERVICES IS NARROW SINCE IT IS A MAK E AVAILABLE ( DEFINITION ) . IT WAS A PLEA OF THE ASSESSEE THAT TECHNOLOGY WILL BE CONSIDERED MAKE AVAILABLE WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY THE TECHNOLOGY. IN SUM AND SUBSTANCE THE ASSESSEE PLEADED THAT THE SERVICES ARE RESTRIC TED TO USE OF CLIENT RELATIONSHIP DEVELOPED OR MAINTAINED AT USA, PROVIDING CLIENT REFERRALS AND MARKETING SUPPORT, HENCE COULD NOT BE TREATED AS FEES FOR INCLUDED SERVICES WITHIN THE MEANING OF ARTICLE 12(4)(B) OF THE D TAA OF THE CONTRACTING STATES I.E. INDIA AND USA. IN RESPECT OF THE TAXABILITY OF THE SAID AMOUNT UNDER THE NORMAL PROVISIONS OF THE ACT , THE DRP CONFIRMED THE ASSESSING OFFICERS STAND THAT IN VIEW OF THE SCOPE OF SERVICES REFERRED IN THE MASTER SERVICE AGREEMENT (MSA) THERE COULD BE NO DOUBT THAT THE ASSESSEE HAS RENDERED SERVICES OF THE TECHNICAL NATURE. THE DRP HAS NOT ADJUDICATED THE OBJECTION OF THE ASSESSEE ON THE TAXABILITY OF RS.48,51,108/ - RECEIVED TOWARDS MARKETING FEES UNDER THE NORMAL PROVISIONS OF THE INCOME - TAX ACT MORE PAR TICULARLY SEC. 9 R.W.S. 5 ITA NO . 59/PN/2011, KANBAY INCORPORATED, PUNE 5(2) OF THE ACT AND THIS IS PRECISELY THE MAIN GRIEVANCE OF THE ASSESSEE BEFORE US. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE RECORD. AT THE OUTSET THE LD. COUNSEL SUBMITS THAT FOR DECIDING WHETHER TH E ASSESSEE IS ENTITLED FOR BENEFITS OF DTAA , THE DRP/AO HAS TO FIRST ADJUDICATE THE ISSUE IN RESPECT OF THE TAXABILITY OF THE SAID AMOUNT UNDER THE NORMAL PROVISIONS OF THE INCOME - TAX ACT. HE SUBMITS THAT THE OBSERVATION OF THE DRP IN PARA NO. 7.5 THAT TH E ASSESSEE HAS NOT SERIOUSLY CONTESTED THE TAXABILITY OF THE MARKETING FEES UNDER THE INCOME - TAX ACT, 1961 IS TOTALLY MISPLACED. THE LD. COUNSEL REFERRED TO THE OBJECTION FILED BEFORE THE DRP AND SUBMITTED THAT FROM THE VERY STAGE OF THE ASSESSING OFFICER ITSELF THE ASSESSEE S STAND IS VERY CLEAR THAT THE AMOUNT RECEIVED TOWARDS THE MARKETING FEES OF RS.48,51,108/ - FROM THE KANBAY LTD. IS NOT ALSO TAXABLE UNDER THE NORMAL PROVISIONS OF THE ACT MORE PARTICULARLY SEC. 9 R.W.S. 5(2) OF THE INCOME - TAX ACT. WE HAVE ALSO HEARD THE LD. DR. 6. ON PERUSAL OF THE OBJECTION S FILED BEFORE THE DRP, WE FIND THAT THE ASSESSEE HAS OBJECTED TO THE ASSESSING OFFICERS STAND THAT THE MARKETING FEES ARE IN THE NATURE OF THE TECHNICAL SERVICES AND TAXABLE U/S. 9 OF THE ACT. THE ASSESSEE HAS TAKEN THE SPECIFIC OBJECTION BEING OBJECTION NO. 2 WHICH IS AS UNDER: THE ASSESSING OFFICER HAS ERRED IN HOLDING THAT THE RECEIPT FROM MARKETING SERVICES IS INCOME DEEMED TO BE ACCRUE OR ARISE IN INDIA BY VIRTUE OF SECTION 9(1)(VII) OF THE INCOME - TAX ACT, 1961. 7. THE ASSESSEE ALSO FILED THE SUBMISSIONS BEFORE THE DRP FROM WHICH IT IS CLEAR THAT THE ASSESSEE WAS SERIOUS ON THE ISSUE OF TAXABILITY OF THE SAID AMOUNT UNDER THE NORMAL PROVISIONS OF THE INCOME - TAX ACT MORE PARTICULARLY U/ S. 9(1)(I) OR 9(1)(VI) OR 9(1)(VII) OF THE ACT. IT IS A STAND OF THE ASSESSEE THAT SINCE THE SAID INCOME IS IN THE NATURE OF COMMISSION IS DOES NOT FALL WITHIN THE PROVISIONS OF SEC. 9(1)(VII) OF THE ACT. WE FIND 6 ITA NO . 59/PN/2011, KANBAY INCORPORATED, PUNE THAT THE DRP HAS NOT DECIDE D THE ISSUE OF TAXABILITY OF THE MARKETING SERVICES UNDER THE NORMAL PROVISIONS OF THE INCOME - TAX ACT IN SPITE OF THE FACT THE ASSESSEE HAS FILED THE OBJECTION AS WELL AS THE SUBMISSIONS. WE CAN UNDERSTAND IF THE DRP HAS MENTIONED IN THE ORDER THAT THE ASSESSEE HAS NOT PRESS THE PARTICULAR OBJECTION OR GROUNDS BUT MERELY OBSERVING THAT THE ASSESSEE HAS NOT SERIOUSLY CONTESTED THE SAID ISSUE MAY NOT BE IN THE CORRECT PERSPECTIVE . WE, THEREFORE, RESTORE THIS MATTER TO THE DRP THROUGH THE ASSESSING OFFICER WITH DIRECTIONS THAT DRP SHOULD DECIDE THE ISSUE OF THE TAXABILITY OF THE MARKETING FEES RECEIVED BY THE ASSESSEE TO THE EXTENT OF RS.48,51,108/ - UNDER THE NORMAL PROVISIONS OF THE INCOME - TAX ACT . NEEDLESS TO SAY THE DRP SHOULD GIVE OPPORTUNITY OF BEING HEARD TO THE ASS ESSEE AS PER PRINCIPLES OF NATURAL JUSTICE. THE ARP SHOULD CONSIDER ALL OBJECTIONS OF THE ASSESSEE TO DECIDE THE ISSUE. WE KEEP OPEN ALL OTHER ISSUES ARISING FROM THE GROUNDS TAKEN BEFORE US. 8. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED FOR THE ST ATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 30 - 0 6 - 2014 PRONOUNCED IN THE OPEN COURT ON - 05 - 2014 SD/ - SD/ - ( R . K . PAN DA ) ( R.S. PADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER RK /PS PUNE , DATED : 30 TH JUNE, 20 1 4 COPY TO 1 ASSESSEE 2 DEPARTMENT 3 4 THE DRP , PUNE THE CIT/DIT (INTERNATIONAL TAXATION), PUNE 5 THE DR, ITAT, B BENCH, PUNE. 6 GUARD FILE. //TRUE COPY// BY ORDER PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE