SUNKU SATYANARAYAN SANAJY,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(2)(1), BANGALORE
Income Tax Appellate Tribunal, “B” BENCH: BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI SOUNDARARAJAN K.Assessment year: 2018-19
Per Prashant Maharishi, Vice President 1. This appeal is filed by Sunku Satyanarayana Sanjay (the assessee/appellant) for the assessment year 2018-19 against the appellate order passed by the National Faceless Appeal Centre, Delhi (NFAC) [ld. CIT(A)] dated 10.7.2024 wherein appeal filed by assessee against the assessment order passed u/s. 143(3) of the Income-tax Act, 1961 (the Act) dated 22.3.2021 by the National e-Assessment Centre, Delhi [ld. AO] was dismissed. Page 2 of 9
The assessee has raised the following grounds of appeal:- “1. That the order of the Learned Commissioner of Income Tax (Appeals) in so far it is prejudicial to the interests of the Appellant is bad and erroneous in law and against the facts and circumstances of the case. 2. That the learned lower authorities erred in law and on facts, in not giving an opportunity for personal hearing via video conference inspite of requesting the same, which is against the principle of natural justice 3. That the learned CIT(A) erred in law and facts in confirming the disallowance of Rs. 5,40,96,815/- u/s 40(a)(i) of the Act on the ground that the appellant has not deducted tax at source u/s 195 of the Act. 4. That the learned CIT(A) erred in law and facts in holding that the contention of the appellant that the provisions of section 195 of the Act are not applicable and has no relevance. 5. That the learned CIT(A) erred in law and facts by failing to appreciate the applicability of provisions of DTAA and thereby ignored the binding tax treaty. 6. That the learned CIT(A) erred in law and on facts in holding that the services rendered by M/s Tavelon satisfies the definition of "Fees for Included Services" even though the said services does not amount to make available knowledge to the appellant. 7. That the learned CIT(A) erred in law and facts by not taking into account the non-applicability of make available in the instant case and restricted the transaction to applicability of provisions as per Income Tax Act. 8. That the learned CIT(A) erred in law and on facts in holding that the appellant has intentionally modified the definition by deleting a phrase in Article 12(4) of Indo-US DTAA even though it is not intentional on part of the appellant. 9. That the learned CIT(A) erred in law and on facts, in holding that the appellant has intentionally modified the definition by deleting a phrase in Article 12(4) of Indo-US Page 3 of 9
DTAA even though the above phrase has no relevance to the present facts of the case.
10. That the learned revenue authorities erred in law and on facts in holding that the services rendered by the M/s
Tavelon are in the nature of services of technical or other personnel and such facts are perverse and not connected with the facts of the case.
11. That the learned CIT(A) erred in law and on facts in holding that the services rendered by the appellant do not fall under the exclusion provided under Article 12(5) of Indo-US
DTAA and therefore, the services are technical in nature.
12. That the learned CIT(A) erred in law and on facts in uploading the recommendation of the learned assessing officer for initiation of proceedings u/s 201(1) of Act in the assessment order u/s 143(3) of the Act.”
3. The brief facts of the case show that assessee is carrying on business activity of export of software development and distinct services as Proprietor of Versatiletech. He filed return of income for AY 2018-19 on 29.9.2018 declaring total income of Rs.12,14,54,330. Return of income was picked up for scrutiny for the reason of compliance with TDS provisions and also foreign outward remittances. It was found that assessee has remitted
Rs.5,40,96,815 to Tavelon LLC USA without tax deduction at source. The claim of assessee is that same is not chargeable to tax in the hands of recipient in India and therefore the provisions of section 195 does not apply. A show cause notice was issued on 29.11.2021 asking the assessee to justify why tax is not deducted at source on the above payment and why above amount so remitted is not to be disallowed u/s. 40(a)(i) of the Act.
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The assessee submitted that payment made to Tavelon LLC is for services rendered for business development, project management, marketing and related services in procuring projects and introducing clients. Assessee submitted a copy of the services agreement and the AO found that said service agreement is not visible [ sic legible] at all. According to the AO, the amount is chargeable to tax in the hands of the recipient. The ld. AO further rejected the contention of the assessee that the above payment falls into definition of fees for included services as per Article 12(4) of Indo-US treaty and as such services does not make available any technical expertise, skill, know-how or process and same cannot be taxed in India. The ld. AO held that the same falls into definition of fees for technical services chargeable to tax as per Income tax Act and therefore tax was required to be deducted at source. Therefore it was held that assessee is liable to deduct tax at source on payment of Rs.540,96,815 to Tavelon LLC as it is in the nature of fees for technical services and failure to do so resulted into disallowance u/s. 40(a)(i) in the assessment order dated 22.32.2021 wherein total income was determined at Rs.17,55,54,145. 5. The assessee preferred appeal before the ld. CIT(A) wherein vide para 4.3 contention of the assessee was recorded. The ld. CIT(A) rejected the contention of the assessee that income earned by Tavelon LLC, USA is business profit, therefore in the absence of a Permanent Establishment [PE] in India, same is chargeable to tax only in the country of residence i.e. USA. Therefore the action of Page 5 of 9
the ld. AO was upheld. In para 4.3.2 he held that in the absence of any Article dealing with fees for technical services under the DTAA, income of the non-resident is exigible to tax under the provisions of domestic law. Accordingly the appeal of the assessee was dismissed.
6. Assessee, aggrieved with the appellate order, has preferred this appeal. The claim of assessee is that assessee has entered into agreement with Tavelon LLC for receiving the services of business development, project management, marketing & related services in procuring the projects and introducing the clients. The assessee further referred that project management includes carrying out the project efforts between the assessee and client of the assessee i.e.,
Oracle teams. He referred to the scope of services rendered reproduced by the ld. CIT(A) in his appellate order page nos. 3 to 10. It was further claimed that Tavelon LLC does not have any permanent establishment in India as the services rendered by Tavelon LLC are considered to be business services, those are to be chargeable to tax in US. He further submitted that the services provided by Tavelon LLC to the assessee are not at all technical services. He further submits that the recipient of the income also does not provide any services of technical or other personnel.
Therefore, the services provided by Tavelon, USA cannot be considered as fees for included services in terms of Article 12(4) of the DTAA. Therefore, according to the ld. AR, the above income is not chargeable to tax in the hands of Tavelon, USA in India,
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therefore no tax is required to be deducted at source u/s. 195 of the Act.
7. The ld. AR also submitted a paperbook containing 46 pages wherein the agreement with above entity dated 28.4.2016 along with typed copy of agreement was placed as the ld. AO has determined the issue only on the basis of illegible agreement, copies of invoices and declaration from Tavelon LLC that they do not have any permanent establishment in India. He submits that as without looking at the agreement the ld. AO has held it to be a Technical services and rejected that same is business income of the recipient only.
8. The Ld. DR reiterated the findings of the ld. AO and CIT (A)
9. We have considered the rival contentions and perused the orders of the ld. lower authorities. The issue involved in this case is that assessee an individual, carrying on business of software development and testing services. It is receiving services from M/s. Tavelon LLC USA of project management, business development, marketing and other related services. The services are stated to be in the nature of co-ordinating the efforts between the assessee and the clients of the assessee outside India. This is based on Agreement dated 28.11.2016. The service provider was to raise the bills on the basis of rate per hour in US $ on various persons. The invoices raised by assessee are on rate basis only.
During the year it paid to Tavelon LLC USA a sum of Rs.
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54096815/-, on which it did not deduct any tax sources u/s 195 of the Act. Before the ld. AO, the assessee produced the agreement which was not legible. Therefore the AO construed the nature of services and held it to be chargeable to tax in India, hence, assessee should have deducted tax sources u/s 195 of the Act, which assessee di not deduct and hence disallowed u/s 40 (a) (i) of the Act. The ld. CIT(A) confirmed the same. Now before us, the assessee has submitted a legible copy of the Agreement along with the copies of invoices and no PE certificate of the recipient of income i.e. Tavelon LLC USA. The claim of assessee is that it is a business income of Tavelon LLC in India which is chargeable to tax only in the state of residence of Tavelon LLC in USA as Tavelon LLC does not have any PE in India in terms of Article 5 &
7 of India-US DTAA. The contention of the assessee is also that the above services does not fall into definition of fees for included services under Article 12(4) of the DTAA and the services received by the assessee are not chargeable to tax in India. Even otherwise under Article 12(4) for the reason that it does not ‘make available’
knowledge to the assessee. It was further stated that for AY
2017-18 identical services was considered by the ld. AO as sales &
marketing services, where there was no tax deduction at source and in the assessment order dated 31.10.2019 the same was accepted and no disallowance was made. It has also been stated before us that in assessment order dated 31.10.2019 for AY 2017-18 the case of the assessee was selected for scrutiny also for remittances made
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by assessee to Tavelon LLC and no addition was made. Therefore, it is apparent that similar issue has been accepted in the case of assessee by the ld. AO in the assessment order passed u/s. 143(3) of the Act for AY 2017-18 wherein in para 6 similar facts are noted.
10. However, we find that the services emanating from the Agreement dated 28.11.2016 was not placed in legible from before the ld. AO, therefore, the ld. AO could not look at correct nature of services.
The issue that identical matter has been examined in AY 2017-18
were emanating from the same Agreement or not was also not known to the AO nor the ld. CIT(A). The No PE certificate submitted by the assessee now was also not available with lower authorities. It is contended that except agreement, nothing else was asked for by the ld. AO. Now it has been submitted before us, legible agreement, no PE certificate of Tevlon LLC USA, therefore, we restore the whole issue back to the file of ld. AO with a direction to the assessee to show that the income of Tevlon
LLC USA is business income as per Article 5 & 7 of the DTAA as business income applies to it. Alternatively, the Assessee may also prove that provisions of Article 12(4) of that including ‘make
Available test’ applies to the facts of the case. In view of this, the solitary issue raised spread over in 12 grounds of appeal is restored back to the ld. AO.
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In the result, the appeal filed by the assessee is allowed for statistical purposes. Pronounced in the open court on this 15th day of January, 2025. ( SOUNDARARAJAN K.) VICE PRESIDENT
Bangalore,
Dated, the 15th January 2025. /Desai S Murthy /
Copy to:
Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order