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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI KUL BHARAT & SHRI MANISH BORAD
PER MANISH BORAD, AM.
The above captioned appeals filed at the instance of assessee pertaining to Assessment Year 2015-16 and 2016-17 are directed against the orders of Ld. Commissioner of Income Tax (Appeals)13 (in short ‘Ld.CIT’], Ahmedabad dated 15.02.2019 which is arising
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
out of the order u/s 201 of the Income Tax Act 1961(In short the
‘Act’) dated 26.07.2016 framed by ITO (Intl. Taxn.), Bhopal.
Assessee has raised following grounds of appeal;
ITA No.448/Ind/2019 A.Y.2015-16
That the Learned CIT(A)-13 erred in maintaining the order of the Ld. ITO(IT&TP) Bhopal in respect of applicability of section 195/201 of the Income Tax Act. 02. That on the facts and circumstances of the case the Ld. CIT(A) has erred in confirming the action of the Ld. ITO by holding that services provided by System Integration Inc. USA are covered as fees under the India-USA double taxations avoidance agreement (DTAA) and hence taxable under Article 12 of DTAA. 03. That the Ld. CIT(A) has erred in confirming the addition of Ld. ITO (TDS) that the services provided in USA and payments made in USA are covered u/s 195/201 of the I.T. Act. 04. That the Ld. CIT(A) has erred in holding that the services provided by Systems Integrations in USA is considered as making technology available as per the service agreement. 05. The claim of the appellant about non deductibility of TDS be allowed and the order of the Ld. CIT(A) be quashed.
The appellant craves to add, alter, delete and amend any of the 06. grounds of appeals. ITA No.449/Ind/2019 A.Y.2016-17
That the Learned CIT(A)-13 erred in maintaining the order of the Ld. ITO(IT&TP) Bhopal in respect of applicability of section 195/201 of the Income Tax Act.
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
That on the facts and circumstances of the case the Ld. CIT(A) has erred in confirming the action of the Ld. ITO by holding that services provided by System Integration Inc. USA are covered as fees under the India-USA double taxations avoidance agreement (DTAA) and hence taxable under Article 12 of DTAA. 03. That the Ld. CIT(A) has erred in confirming the addition of Ld. ITO (TDS) that the services provided in USA and payments made in USA are covered u/s 195/201 of the I.T. Act. 04. That the Ld. CIT(A) has erred in holding that the services provided by Systems Integrations in USA is considered as making technology available as per the service agreement. 05. The claim of the appellant about non deductibility of TDS be allowed and the order of the Ld. CIT(A) be quashed.
The appellant craves to add, alter, delete and amend any of the 06. grounds of appeals.
As the issues raised in these appeals are common and relates
to the same assessee, these were taken together and are being
disposed off by this common order for the sake of convenience and
brevity.
Brief facts of the case as culled out from the records and
narrated by the Ld. Counsel for the assessee are that the assessee
is a Private Limited company engaged in the business of export of
software services. The assessee is responsible for deducting tax at
source under Chapter XVII of the Income Tax Act. The assessee 3
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
made payments of Rs.17,98,000/- and Rs.42,14,000/- to Non
resident company namely M/s System Integration Inc, USA (In
short SII) during Financial Year 2014-15 and Financial Year 2015-
16 respectively. The payments were made without deducting tax at
source u/s 195 of the Act treating the amount as not eligible for
deduction of tax at source. Ld. A.O subsequently on going through
the Form 15CB issued by the Chartered Accountant wherein it was
mentioned that the payments were made towards “consultancy
services” and also on perusal of the invoices raised by the Non
resident company for the services rendered, came to the conclusion
that the alleged amount is towards payment of “fees for technical
services”. Ld. A.O further applying the provisions of Section 9 of the
I.T. Act framed order u/s 201(1)/201(1A) r.w.s. 195 of the Act
treating the assessee in default for not deducting the tax at source
and computed the default of TDS at Rs.6,17,313/- and
Rs.14,46,807/- along with levying interest u/s 201(1A) of the Act at
Rs.1,11,858/- and Rs.1,28,063/- for Financial Year 2014-15 and
Financial Year 2015-16 respectively. The detailed working of the
computation of TDS and interest is mentioned below:-
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
Financial Year 2014-15
S.No. Name of Total Date of Gross up Default of Interest Recipient Amount remittance amount as TDS thereon remitted in per Section @25.75% u/s Rs. 195A of the incl. cess 201(1A) till Act date 1 Systems 15,82,000/- 27.02.15 21,09,333/- 5,43,153/- 97,768/- Integrations Inc, USA. 2 Systems 2,16,000/- 24.01.15 2,88,000/- 74,160/- 14,090/- Integrations Inc, USA. Total 17,98,000/- 23,97,333/- 6,17,313/- 1,11,858
Financial Year 2015-16
S.No. Name of Total Date of Gross up Default of Interest Recipient Amount remittance amount as TDS thereon remitted in per Section @25.75% u/s Rs. 195A of the incl. cess 201(1A) till Act date 1 Systems 24,20,000/- 22.12.15 32,26,667/- 8,30,867/- 66,469/- Integrations Inc, USA. 2 Systems 17,94,000/- 12.10.15 23,92,000/- 6,15,940/- 61594/- Integrations Inc, USA. Total 42,14,000/- 56,18,667/- 14,46,807/- 1,28,063/-
Aggrieved assessee preferred appeal before Ld. CIT(A) but
failed to succeed. Though assessee made necessary submission
that the nature of services are not in nature of “technical services”
but is the payment for procurement of orders. Once the orders are
procured then the assessee provides necessary services to the
client. The Non resident company i.e. Systems Integrations Inc (In
short ‘SII’) has no other role to play except of procuring orders and
refer them to the assessee company. However Ld. CIT(A) did not
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
find any merit in the submissions and he after referring to the
relevant clauses of the agreement as well as the Article 12(4)(b) of
the Tax Treaty between India and USA confirmed the finding of Ld.
A.O and dismissed the assessee’s appeal.
Now the assessee is in appeal before the Tribunal challenging
the finding of Ld. CIT(A) confirming the action of Ld. A.O for
treating assessee in default for non deduction of tax at source u/s
195 of the Act on the payments made to SII, USA during Financial
Year 2014-15 and Financial Year 2015-16.
Ld. Counsel for the assessee by referring to the paper book
dated 29.01.2020 running from page 1 to 55, submission dated
17.02.2020 and also strongly supporting the letter issued by the
Non resident Company namely SII, USA dated 19.2.2020 to the
Registrar, Income Tax Appellate Tribunal, Indore submitted that
“SII” has certified that their company has acted as a liaison and
procurement agent between the assessee company namely Snap
Computer Pvt. Ltd and client based in USA and further certified
that “SII” has not provided any technical or managerial services. He
further submitted that Non resident company SII was only working 6
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
as interface to get the order and all the work was done by the
assessee’s team by connecting to the clients net work using Virtual
Private Net Work (VPN) and Virtual Desktop Image (VDI). Ld.
Counsel for the assessee also submitted that though in the
agreement between the assessee and Non resident company “SII”
there appears the words “consulting services, project work and
procurement and any other task” but that should not be given
much importance over and above the actual work under taken by
the Non resident company. Since no technical services have been
provided and the payment was just in the nature of commission for
procurement of orders assessee should not have been treated as
assessee in default for non deducting tax on services on payment of
technical services. Reliance was placed on following two decisions;
(i) Dr. Reddy Laboratories Ltd (2016) 73 taxmann.com 144/
243 taxman 127/289 CTR 24 (AAR New Delhi)
(ii) CIT V/s Bharti Cellular Ltd (2009) 319 ITR 139 (Delhi)
Per contra Ld. Departmental Representative vehemently
argued supporting the orders of both the lower authorities.
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
We have heard rival contentions, perused the records placed
before us and carefully gone through the decisions referred and
relied by the assessee. In the instant appeal for Assessment Year
2015-16 and Assessment Year 2016-17 though the assessee has
raised various grounds of appeal but the sole issue for adjudication
is that whether the Ld. CIT(A) erred in confirming the action of the
Ld. A.O by holding that the payments made for services provided by
SII, USA were in the nature of technical services liable for deduction
of tax at source u/s 195 of the Act.
The assessee company is engaged in the business of export of
software services. It has entered into an agreement with the U.S.A
based company M/s. System Integration Inc (SII) which agreed for
providing of consulting services, procurement of orders and other
tasks given. This fact is not in dispute that the Non resident
company do not have any permanent establishment in India nor
having any business connection in India and the income of such
Non resident company i.e. SII can be deemed to accrued or arise in
India only if the payments are of the nature provided u/s 9 of the
I.T. Act.
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
It is further agreed by both the parties that the issue which
finally needs to be adjudicated is whether the payment made to the
“SII” was for providing technical services or was it for the
procurement of orders.
As far as service agreement dated 1.2.2015 is concerned which
is at page 24 to 30 of the paper book, reference is made to Exhibit-1
of the service agreement. For better understanding this exhibit-1 is
reproduced below:-
Attachment I to the Services Agreement by and between SYSTEMS INTEGRATIONS INC. and Snap Computer system Pvt. Ltd. dated 01/02/2015 1. DUTIES OF !NTEGRATOR -In General SYSTEMS INTEGRATIONS INC. Consulting Services, project work procurement and any other task given to consultant by Snap Computer Systems Pvt. Ltd. 2. COMPENSATION AND EXPENSES A. For tile performance of its duties and services hereunder, Integrator shall be paid based upon actual time and materials used in the performance of its duties hereunder. Charges for services performed within the scope of the Agreement are as follows: Vaishali Paranjpe $. 48/hour (01/02/2015)
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd 3. DURATION OF AGREEMENT A. Either party may terminate this agreement upon giving one month prior written notice: to the other. Termination of this agreement does not relieve either party of responsibilities or indebtedness incurred while the contract was in force. B. 13. In the above exhibit nature of work to be performed by “SII” is
mentioned and in one line it can be summarised as “consulting
services, project work procurement and any other task”. We also
need to understand the actual work performed by the Non resident
company. For looking into the same we first need to go through the
description of services shown in the invoices raised by SII. In one of
the invoice dated 14.3.16 placed at Page-50 of the paper book
under the head description it is mentioned “Onsite Project
Management and Procurement”. Similar description is given in all
other invoices. It has been submitted by Ld. Counsel for the
assessee that the payment made to SII was only for procurement of
orders and no other services of technical in nature were received.
This submission of the Ld. Counsel for the assessee further gets
strengthened by the certificate issued by SII, USA dated 19.2.2020
which reads as follows:-
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd SYSTEMS INTEGRATIONS INC. 4213 Peakview CT, Fairfax VA 22033 (609)-662-0145 February 19th 2020 TO-WHOM-IT--MAY CONCERN - This is to certify that we, Systems Integrations Inc. have acted as a Liaison and procurement agent between Snap Computer Systems Pvt LTD and clients based in USA. We have not provided any technical or managerial services. We were only working as an interface to get order. All the work was done by the Snap Systems team by connecting to the clients' network using VPN (Virtual Private Network) and VDI (Virtual Desktop Image). 14. The above certificate makes the picture very clear that “SII”
has only have acted as a Liaison and procurement agent between
assessee and clients based in USA. SII was working only as an
interface to procure orders and hand over the same to the assessee
who in turn was to carry out the work through its team by
connecting to the clients network using Virtual Private Network and
Virtual Desktop Image. There remains no dispute to the fact that
apart from the work of procurement orders for the assessee no
other services were rendered by “SII”. Software services were
rendered by the assessee directly to the customers by logging in
directly with the clients network. Though in the agreement the
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
payment is nomenclated as consulting services but it is only paid as
a commission for procuring orders from the customers. “SII” has
not rendered any service except directing the customers to the
assessee for supply of software services. “SII” do not have any
interface in supplying such services. There is no evidence to show
that SII was having any role of providing technical services in the
work performed between assessee and its clients. For getting the
orders the agent normally gets commission and reimbursement of
expenses on the basis of actual time spent. In short “SII” simply
obtains the orders on the basis of nature of services to be provided
by the assessee and nature of services required by the client. Once
both these things are matched the orders are procured and
communicated to the assessee who thereafter develops the software
in India as per the need of the client. In view of the above
discussions we are of the considered view that Non resident
company M/s System Integration Inc. has not provided any
technical services to the assessee and the alleged amount received
by it were only for the commission and incidental expenses for
liaison work and procurement order.
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
As far as provision of Section 9 of the Act are concerned which
in the instant case has been applied by both the lower authorities.
Most specifically Section 9(1)(vii) which reads as follows:-
(vii) income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non- resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:
Explanation (2) to section 9(1).-
For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”
Explanation after Sec. 9(2)
For the removal of doubts, it is hereby declared that for the purpose of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub- section(1) and shall be included in the total income of the non- resident, whether or not – (i) The non-resident has a residence or place of business connection in India; or A. (ii) The non-resident has rendered services in India.] 16. Section 9(1)(vii) provides for accrual of income only for the “fee
for technical services” which includes specialized services like
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managerial, technical and consultancy. But in the instant case
“SII” has not rendered any technical or managerial services to the
assessee but is merely project work procurement agent. In the case
of Dr. Reddy Laboratories Ltd (supra) it has been held that service
fees payable by the applicant to DRL Russia under the agreement
for promotion of goods cannot be regarded as fees for technical
services under section 9(1)(vii) or under article 12 of the India-
Russia treaty.
In light of above discussion and in the given facts and
circumstances of the case we are of the considered view that the
alleged payment made by the assessee to Non resident company SII
is not for any fee “for technical services” and the payment was only
towards commission for procurement of orders and reimbursement
of incidental charges incurred. Since the payment was not for “fees
for technical services” and further the payment was made to the
Non residential company having no permanent establishment or
business connection in India, the alleged payment for procurement
of orders are not subject to deduction of tax at source u/s 195 of
the Act. Thus Ld. CIT(A) erred in confirming the action of the Ld.
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
A.O. We set aside the finding of Ld. CIT(A) and allow the grounds
raised by the assessee by holding that the alleged payments of
Rs.17,98,000/- and Rs.42,14,000/- to SII in USA during Financial
Year 2014-15 and 2015-16 respectively are only towards the
charges for procurement or orders and reimbursement of expenses
and are not in the nature of “fees for technical services” and thus
do not fall in the ambit of Section 9 of the Act and thus Section 195
of the Act is not applicable in these payments. Revenue is thus
directed to delete the demand for default of TDS and interest levied
u/s 201(1A) of the Act.
In the result both the appeals ITA No.448 & 449/Ind/2019 of
the assessee are allowed.
The order pronounced in the open Court on 16.09.2020
Sd/- Sd/- ( KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER नांक /Dated : 16 September, 2020 /Dev Copy to: The Appellant/Respondent/CIT concerned/CIT(A) concerned/ DR, ITAT, Indore/Guard file.
By Order, 15
ITANo.448 & 449/Ind/2019 Sanp Computer Systems Pvt. Ltd
Asstt.Registrar, I.T.A.T., Indore