LASERWORDS US INC, Pondicherry V. DCIT INTERNATIONAL TAXATION 1(2), CHENNAI

ITTPA 74/CHNY/2018

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 6590 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 27-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2015-2016
• Appeal Filed On: 26-11-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Double taxation relief; Principle of natural justice; Set aside

Judgement Text

IT(TP)A NO74/2018 :- 2 -: PURSUANT TO DIRECTIONS OF LD. DISPUTE RESOLUTION PA NEL (IN SHORT LD. DRP), IT HAS RAISED THE FOLLOWING GROUNDS:- 1.1. THE LOWER AUTHORITIES HAVE ERRED IN FINALIZING AN O RDER OF ASSESSMENT WHICH SUFFERS FROM LEGAL DEFECTS SUCH AS BEING PASSED IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE AND T HE PROVISIONS OF THE ACT AND IS DEVOID OF MERITS AND ARE CONTRARY TO FACTS ON RECORD AND APPLICABLE LAW, AND HAS BEEN COMPLETED WITHOUT ADEQUATE INQUIRIES AND AS SUCH IS LIABLE TO BE QUASHED. 1.2. THE LOWER AUTHORITIES HAVE FINALIZED THEIR ORDER WI TH IMPROPER ADJUSTMENTS TO THE TRANSACTION OF THE APPELLANT, BE CAUSE OF MISAPPLYING THE PROVISIONS OF THE ACT AND DTAA, AND BY ADOPTING FAULTY ASSESSMENT PROCEDURE TO FINALIZE THE ADJUSTM ENT, WITHOUT CONSIDERING THE INFORMATION, ARGUMENTS AND EVIDENCE PROVIDED BY THE APPELLANT. 1.3. THE LOWER AUTHORITIES HAVE, IN THE FACTS AND CIRCUM STANCES OF THE CASE AND IN LAW, ERRED IN NOT SERVING SHOW CAUSE NO TICE ON THE APPELLANT THEREBY DENYING THE APPELLANT'S BASIC RIG HT TO EXPLAIN AND PUT FORTH ITS LEGAL AND FACTUAL ARGUMENTS AGAIN ST THE ACTION OF LOWER AUTHORITIES. 1.4. THE LOWER AUTHORITIES HAVE, IN THE FACTS AND CIRCUM STANCES OF THE CASE AND IN LAW, ERRED IN MAKING REFERENCE TO FUNCT IONS PERFORMED BY SPI AMERICA LLC (,SPI US') WHILE TAXING THE APPE LLANT AS PER THE PROVISIONS OF DTAA. 2. NON TAXABILITY OF INCOME FROM MARKETING SERVICE A. NOT TAXABLE UNDER THE ACT: 2.1. THE LOWER AUTHORITIES HAVE, IN THE FACTS AND CIRCUM STANCES OF THE CASE AND IN LAW, ERRED IN CONCLUDING THAT THE SERVI CES WERE MADE AVAILABLE TO SPI INDIA, WITHOUT ESTABLISHING THE TA XABILITY OF THE SAME UNDER THE PROVISIONS OF THE ACT. IT(TP)A NO74/2018 :- 4 -: KNOWN AS M/S. LASER WORDS PRIVATE LIMITED (IN SHOR T SPI INDIA) HAD AN AGREEMENT WITH THE LATTER FOR PROVIDING MARKETING A ND SALES SERVICE IN UNITED STATES OF AMERICA. ASSESSEE IS A COMPANY IN CORPORATED IN USA. ASSESSEE HAD FILED ITS RETURN FOR THE IMPUGNED ASSESSMENT YEAR, WHEREIN NIL INCOME WAS ADMITTED BY IT. LD. ASSESSIN G OFFICER FOUND FROM THE TRANSFER PRICING STUDY SUBMITTED BY THE A SSESSEE THAT IT WAS RENDERING MARKETING AND SALES SERVICES TO M/S. SPI INDIA BY WAY OF IDENTIFICATION OF CUSTOMERS AND LIAISONING WITH THE M FOR THE ASSESSEE WHICH WAS ENGAGED IN THE BUSINESS OF E-PUBLISHING. ASSESSEE PROVIDED BUSINESS SOLUTIONS LIKE CLIENT WORK FLOW R EQUISITION TO ITS PRINCIPAL IN INDIA. ASSESSEE HAD A MARKETING AND SALES TEAM IN USA AND THE SERVICES RENDERED BY THE ASSESSEE TO M/S. SPI TECHNOLOGIES INDIA PRIVATE LIMITED INCLUDED DEVELOPMENT OF SALES CHANNEL, SELECTION AND TRAINING OF APPROPRIATE SALES STAFF, ACCOUNT MA NAGEMENT AND CUSTOMER RELATIONSHIP. ROLE OF THE ASSESSEE WAS TO IDENTIFY A CUSTOMER FOR ITS PRINCIPAL IN INDIA, INTERACT WITH SUCH CUST OMER, IDENTIFY THEIR EXACT REQUIREMENTS, COLLATE AND SHARE THE DELIVERABLES EX PECTED BY THE CUSTOMERS WITH ITS PRINCIPAL IN INDIA. AS PER THE L D. ASSESSING OFFICER, MARKETING SERVICE AGREEMENT BETWEEN ASSESSEE AND IT S PRINCIPAL HAD THE FOLLOWING CLAUSES WHICH INDICATED THAT ASSESSE E WAS RENDERING TECHNICAL SERVICES TO ITS PRINCIPAL IN INDIA. WITH RESPECT TO EACH PARTY, PROPRIETARY INFORMATION SHALL MEAN ALL INFORMATION OF A CONFIDENTIAL OR PROPRIETARY NATURE DISCLOSED TO IT BY THE OTHER PARTY PURSUANT TO THIS AGREEMENT OR ANY A GREEMENT IT(TP)A NO74/2018 :- 6 -: 14,51,34,576/- HAD TO BE CONSIDERED AS FEES FOR IN CLUDED SERVICES WHICH WAS TAXABLE AT THE RATE OF 15% AS PER INDIA- USA DTAA. A DRAFT ASSESSMENT ORDER ON THE ABOVE LINES WAS FORWARDED B Y THE LD. ASSESSING OFFICER TO THE ASSESSEE. 3. ON RECEIPT OF THE DRAFT ASSESSMENT ORDER, ASSESSEE CHOSE TO FILE AN APPLICATION BEFORE LD. DISPUTE RESOLUTION P ANEL. LD. DRP AFTER GIVING THROUGH THE SUBMISSIONS OF THE ASSESSEE FOU ND THAT OUT OF THE TOTAL SALE COMMISSION OF 14,51,34,576/- RECEIVED BY THE ASSESSEE FROM ITS INDIAN PRINCIPAL, A SUM OF 1,47,29,539/- WAS SUB CONTRACTING CHARGES WHICH COULD NOT BE CONSIDERED AS FEE FOR IN CLUDED SERVICES. ACCORDING TO THE LD. DRP BALANCE SUM OF 13,04,05,037/- COULD BE CONSIDERED AS FEES FOR INCLUDED SERVICES. LD. DRP THUS GAVE A RELIEF OF 1,47,29,539/- TO THE ASSESSEE. THEREAFTER LD. ASSE SSING OFFICER COMPLETED THE ASSESSMENT TAXING THE SUM OF 13,04,05,037/- AT THE RATE OF 15% CONSIDERING IT AS FEES FOR INCLUDED SER VICES UNDER ARTICLE 12 OF THE INDIA AND USA DTAA. 4. NOW BEFORE US, LD. AUTHORISED REPRESENTATIVE STRONG LY ASSAILING THE ORDERS OF THE LOWER AUTHORITIES SUBMI TTED THAT ASSESSEE WAS ONLY A SUBSIDIARY OF M/S. SPI TECHNOLOGIES INDIA PRIVATE LIMITED. ACCORDING TO HIM, THE MARKETING SERVICES RENDERED B Y THE ASSESSEE WAS THROUGH ITS EMPLOYEES IN USA. CONTENTION OF TH E LD. AR WAS THAT THERE WAS NO TECHNICAL SERVICES NOR INCLUDED SERVI CES MADE AVAILABLE IT(TP)A NO74/2018 :- 8 -: INPUTS GIVEN BY PRINCIPAL IN INDIA FOR DEVELOPING T HE SKILL SET OF THE MARKETING PERSONNEL OF THE ASSESSEE IN USA, WAS USE D BY THE ASSESSEE IN USA FOR INDENTIFYING THE CUSTOMERS AND OBTAININ G ORDERS. MARKETING TEAM OF THE ASSESSEE ACCORDING TO THE LD. DEPARTMEN TAL REPRESENTATIVE WAS COLLATING COLLECTING INFORMATION AND DOING TEC HNICAL SERVICES LIKE XML CONVERSION, FORMALIZING THE LAY OUTS, ETC. ACC ORDING TO HIM, TECHNICAL KNOWHOW WAS PASSING FROM THE ASSESSEE TO ITS PRINCIPAL IN INDIA. ASSESSEE, AS PER LD. DEPARTMENTAL REPRESENT ATIVE, COULD NOT SAY THAT NO TECHNICAL SERVICES WERE MADE AVAILABLE TO ITS PRINCIPAL IN INDIA. AS PER THE LD. DEPARTMENTAL REPRESENTATIVE, ASSESSEES CASE COULD NOT BE COMPARED WITH A SIMPLE COMMISSION AG ENT WHO WAS MERELY MARKETING THE GOODS. ACCORDING TO THE LD. D EPARTMENTAL REPRESENTATIVE, ASSESSEE HAVING MADE AVAILABLE TECH NICAL KNOWLEDGE, SKILL, KNOW-HOW PROCESS AND TECHNICAL PLAN TO ITS COUNTERPARTS IN INDIA THE PAYMENTS RECEIVED WERE NOTHING BUT FEES FOR I NCLUDED SERVICES AND COVERED BY CLAUSE (4) TO ARTICLE 12 OF INDIA AN D USA DTAA. ACCORDING TO HIM, LOWER AUTHORITIES WERE JUSTIFIED IN TAXING SUCH AMOUNT AT 15%. 6. AD LIBITUM REPLY OF THE ASSESSEE WAS THAT THERE WAS NO FLOW OF TECHNICAL KNOWLEDGE FROM THE ASSESSEE TO ITS IND IAN PRINCIPAL AT ANY STAGE. TO A QUESTION FROM THE BENCH, WHETHER ASSES SEES PRINCIPAL WAS RENDERING E-PUBLISHING SERVICES TO OTHER COUNTR IES AND WHETHER IT(TP)A NO74/2018 :- 10 -: SERVICES OF TECHNICAL OR OTHER PERSONNEL) IF SUCH S ERVICES: (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A P AYMENT DESCRIBED IN PARAGRAPH 3 IS RECEIVED .- OR B) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKI LL, KNOW- HOW, OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AN D TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN . TO APPLY CLAUSE (B) ABOVE, IT IS NECESSARY THAT TEC HNICAL KNOWLEDGE, SKILL, KNOW-HOW, ARE IMPARTED OR PROCESSES OR DEVEL OPMENT OR TRANSFER OF TECHNICAL PLAN OR TECHNICAL DESIGN IS THERE FROM ASSESSEE TO ITS PRINCIPAL IN INDIA. ADMITTEDLY, ASSESSEE WOULD NOT FALL WITHIN CLAUSE (A) SINCE IT DID NOT PROVIDE ANY SERVICES WHICH WERE AN CILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE R IGHT, PROPERTY OR INFORMATION. THE INVOICES RAISED BY THE ASSESSEE FOR ITS SERVICES HAS BEEN PLACED AT PAPER BOOK PAGES 132 TO 135. THE INV OICES ARE TYPICALLY WORDED AND ONE SUCH INVOICE IS REPRODUCED HEREUN DER:- INVOICE # LWI/2014-15/003 JUNE 30, 2014 TO ACCOUNTS PAYABLE, SPI TECHNOLOGIES INDIA PRIVATE LIMITED, 117/1 LB ROAD, ADYAR, CHENNAI - 600 020, INDIA. AMOUNT IN USD TOWARDS SALES & MARKETING EXPENSES: SALES & MARKETING EXPENSES FOR THE MONTH OF JUNE'14 $1,53,668.00 ------------------ TOTAL $1,53,668.00 ------------------ (US DOLLARS ONE LAKH FIFTY THREE THOUSAND SIX HUNDR ED AND SIXTY EIGHT ONLY) IT(TP)A NO74/2018 :- 12 -: MARKETING EFFORTS IN OTHER COUNTRIES. IN THE CIRCU MSTANCES OF THE CASE, WE ARE OF THE OPINION THAT THE ISSUE REQUIRES A FRE SH LOOK BY THE LD. ASSESSING OFFICER. WE SET ASIDE THE ORDERS OF THE L OWER AUTHORITIES AND REMIT THE QUESTION WHETHER RECEIPTS OF THE ASSESSEE FROM ITS PRINCIPAL IN INDIA COULD BE CONSIDERED AS FEES FOR INCLUDED SER VICES OR NOT BACK TO THE FILE OF THE LD. ASSESSING OFFICER FOR CONSIDER ATION AFRESH IN ACCORDANCE WITH LAW. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON WEDNESDAY, THE 27 TH DAY OF FEBRUARY, 2019, AT CHENNAI. SD/- SD/- ( . ) ( DUVVURU RL REDDY ) / JUDICIAL MEMBER ( . ) (ABRAHAM P. GEORGE) ! / ACCOUNTANT MEMBER / CHENNAI / DATED: 27TH FEBRUARY, 2019 KV / COPY TO: 1 . / APPELLANT 3. () / CIT(A) 5. '#$ %& / DR 2. ' / RESPONDENT 4. / CIT 6. $() * / GF