The Bangalore Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] concerning the sales commission payments made by the assessee, for the assessment year ( AY ) 2016-17. This conclusion led to the ruling that the assessee was not obligated to deduct Tax Deducted at Source ( TDS ) on these payments.
The Revenue-appellant filed an appeal against the order of the CIT(A) for the AY 2016-17, focusing on the disallowance of sales commission payments made by Algonomy Software Pvt. Ltd., the respondent-assessee.
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The assessee domestic company engaged in software support and development services,reported a total loss of Rs. 33,42,26,978 in its return. During the scrutiny process, the Assessing Officer ( AO ) identified sales commission payments totaling Rs. 37,92,79,043 to the U.S. subsidiary, Manthan Systems Inc., and other associated enterprises ( AEs ).
The AO observed that no TDS was deducted on these payments and classified them as fees for technical services ( FTS ), asserting that 85% of the respondent-assessee’s revenue originated from exports. As a result, the AO disallowed these payments under Section 40(a)(i) of the Act.
The AO maintained that the commission payments were taxable under Indian tax law and the India-USA Double Taxation Avoidance Agreement ( DTAA ). He argued that these payments qualified as either FTS or royalty, which would require TDS deductions.
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In response, the CIT(A) examined the case and relied on a prior tribunal decision that favored the assessee for the assessment years 2012-13 to 2015-16. The CIT(A) concluded that the commission payments did not qualify as FTS under the DTAA, emphasizing that the services rendered were of a marketing nature rather than technical or managerial. Consequently, the CIT(A) deleted the disallowances made by the AO.
The tribunal upheld the CIT(A)’s decision, reiterating that the payments to Manthan Systems Inc. were not classified as FTS, as supported by earlier rulings, including Manthan Systems Inc. vs DCIT. It noted that the services provided were marketing-related and did not convey enduring technical knowledge.
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The two-member bench, consisting of George George K ( Vice President ) and Padmavathy S ( Accountant Member ), determined that since the payments were not classified as FTS, the respondent-assessee was not obligated to deduct TDS.
Ultimately, the tribunal concluded that the Assessing Officer’s disallowance under Section 40(a)(i) was invalid, thus ruling in favor of the assessee.
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