FRACTAL ANALYTICS P.LTD,MUMBAI vs. DCIT 8(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य,राजे�� के अनुसार लेखा सद�य राजे�� के अनुसार -Per Rajendra,AM: लेखा सद�य लेखा सद�य राजे�� के अनुसार राजे�� के अनुसार Challenging the order dated 27/02/2015 of the CIT(A)-16, Mumbai the assessee has filed the present appeal.Assessee-company,engaged in the business of providing of predictive analytics for the retail financial services,insurance, consumer packaged goods and telecom, filed its return of income on 30/09/2008, declaring total income at Rs.15.80 lakhs.The Assessing Officer (AO) completed the assessment on 31/01/2014 u/s. 143(3) r.w.s. 147 of the Act, determining its total income at Rs.1.33 crores.The assessee has raised jurisdictional issue i.e.justification of issue of notice u/s.148 of the Act and the consequent completion of reassessment proceedings.It has also challenged the order on merits. 2.During the year under consideration,the assessee engaged Fractal Singapore(FS),its wholly owned subsidiary,for providing marketing and business development services to it.The AO found that the assessee had entered in to an agreement with FS for providing Customer Co- ordination Services on its behalf,that the Singapore entity did not have the authority to conclude any agreements or make any commitments on behalf of the assessee.He called for further details in that regard and held that income had escaped assessment,that the provisions of Section 9(1)(vii) of the Act were applicable in the instant case,that payments made to FS were taxable under the head Fees for Technical Services(FTS),that it was consideration for the services in the nature of managerial, technical, or consultancy,and that same would be subject to tax under India-Singapore tax treaty provisions.

3511/M/15 Fractal Analytics Pvt.Ltd.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authorith(FAA)and made elaborate submissions about the reopening of the case as well as on merits of the case.It also relied upon certain case laws.After considering the available material,he held that the services provided by FS to the assessee company fell within the definition of FTS as provided u/s. 9(l)(vii) of the Act and the Explanation 2 inserted in the above said section w.e.f. 01.06.1976 made it categoric in such cases that it would not be necessary for the non-resident to have residence or place of business or business connection in India,that the AO rightly reopened the assessment.He referred to the order of ITAT delivered in the case of Evolv Clothing Company Pvt.Ltd.(ITA/2100/Mds/ 2012)wherein it was held that the assesses was liable to deduct TDS as per the provisions of the Act,that failure of which would entail disallowance under section 40(a)(ia)of the Act.Finally,he upheld the order of the AO. 4.Before us,the Authorised Representative (AR) argued that no fresh material was available with the AO that could justify reopening,that even in the AY.2007-08 there was no new material in that regard,that there was no base to believe that income had escaped assessment.He referred to page 60 of the paper book and relied upon the cases of Orient Craft Ltd.(354 ITR 536), . 4.1.On merits of the case,he contended that the scope of services revealed that the services provided by FS to the assessee were in the nature of marketing,business development and customer co-ordination support services,that services were provided by FS outside India through its employees who would provide assistance to the assessee in identifying the potential customers through market studies and establishing communication with such prospects by conducting meetings and holding discussions with potential customers,as per the requirements by the assessee,that the provisions of Section 9(1)(vii) of the Act were not applicable to the facts of the case,that the exception envisaged in clause (b) of Section 9(1) (vii)of the Act was squarely covering the situation of the assessee,that the fees paid to FS were for the purpose of earning income from any other source outside India,that the services provided by FS were not FTS,as same were not in the nature of managerial, technical or consultancy services,that FS was neither engaged in controlling,directing,managing or administrating the business of the assessee in any manner,that any portion of rendering of marketing and support services by FS did not involve the application of industrial or other services, that the assessee did not seek any sort of advice from FS, 3511/M/15 Fractal Analytics Pvt.Ltd.

4.2.With regard to the Explanation inserted by Finance Act 2007 w.r.e.f 1.06.1976, he contended that it would have no impact on the taxability of the disputed amount,that the Explanation covered only such income of non-resident which was earned by rendering services in India irrespective of whether such non-resident had a residence or place of business connection in India,that it did not cover the income of non-resident where the services were rendered by such non-resident outside India,that an amendment made retrospectively was to be regarded as in existence from the specified date,that in judging the consequences of disallowances position as actually existed at the relevant time had to be considered,that holding a bonafide tax payer in default-for his inability to adhere to provisions when such provisions did not exist at the time when payment was made-would akin to expecting the impossible from an assessee, that withholding liabilities of the assessee on payments made by it to FS should be determined only on the basis of law prevalent at the time when liability to deduct tax on such payment arose i.e. on payment or credit, whichever is earlier, that no sum was chargeable to tax,that during the previous year relevant to the AY under consideration the assessee had bonafide reasons to believe that no income was chargeable to tax in India,that the provisions of Section 195 were not triggered and hence it had not defaulted in not deducting taxes on the payments made by it ,that it was not liable to deduct tax at source when payment was credited to the account of or paid to the non-resident rendering services as the services were neither rendered in India nor utilized in India,that an amendment made retrospectively is to be regarded as in existence from the specified date,that during the previous year relevant to the AY under consideration the assessee had bonafide reasons to believe that no income was chargeable to tax in India,that the provisions of Section 195 for withholding of taxes on such remittance were not applicable,that the payments made to FS were not subject to tax in India, that holding the assessee in default for its inability to adhere to provisions to deduct taxes when such provisions did not exist at the time when the payment was made by the taxpayer would be akin to expecting the impossible from an assessee. 4.3.He further stated that services rendered by the assessee did not pass the 'make available' test as expounded in clause 4(b) of Article 12 of the India Singapore DTAA. Referring to the provisions of Section 90(2) of the Act,he stated that a non-resident had the option to be governed either by the provisions of the Act or the treaty whichever was more beneficial,that FS was a tax resident of Singapore, that it was eligible to claim the benefit under India- Singapore tax treaty.He also stated that facts of the case relied upon by the FAA were totally 3511/M/15 Fractal Analytics Pvt.Ltd. different from the facts of the case under consideration,that the assessee was rendering services as per the agreement. He relied upon the cases of Haldor Topsoe (59 ITD 313),TUV Bayern (India) Limited (ITA/4944/ Mum/2002),De Beers India Mineral Pvt. Limited(115 ITD 191);Skycell Communication Ltd.(119 Taxman 496); Lehman Brothers(67 taxmann.com.225),Jindal Thermal Power Co.Ltd.(321ITR31);Sun Microsystems India Pvt.Ltd. (125ITD196);Virola International(147 ITD 519)and Ishikawajima -Harima Heavy Industries Ltd.(158 Taxman 259). 4.4.The DR heavily relied upon the cases of the FAA and stated that no regular assessment was passed,that the AO had issued intimation u/s.143(1)of the Act,that reassessment proceedings were initiated as per the provisions of the Act,that reasons for reopening were recorded,that the services availed by the assessee were FTS. 5.We have heard the rival submissions and perused the material before us.We find that basic issue to be decided is as to whether the services rendered by FS and availed by the assessee would fall under the category FTS. As per the agreement (Pg. 97-98 of the PB)FS had agreed to provide FI various services to the assessee namely providing general market information;conducting market studies and research, preparing market reports;providing assistance to FI in identifying the potential customers and establishing communication with them, assisting FI in developing marketing collateral such as brochures, CDs, presentations for potential customers,conducing meeting and holding discussions with potential customers based on the instructions provided by FI and assisting FI in finalization of the commercial terms with the prospective customers.A perusal of services reveal that FS was helping FI in the areas of business development,that the services were being provided from Singapore.It is a fact that FS had no PE in India and it had no authority to conclude any contract on behalf of the assessee. We find that the FAA held that same were FTS,as same would fall in the category of managerial,technical or consultancy.We find that the terms managerial/technical/ consultancy have not been defined either under the India-Singapore tax treaty or under the Act,so interpretation based on dictionary meaning and judicial pronouncement had to be applied,that the definition of the term FTS connoted that the services envisaged must involve a degree of skill and expertise on the part of the service provider and comprise administrative, technical or advisory work.We are of the opinion that the marketing services are an art rather than a science,that same are wholly dependent on the skill of the employees and other personnel 3511/M/15 Fractal Analytics Pvt.Ltd. engaged in marketing activity.In this background if we analyse the terms of the agreement entered in to by the assessee with FS,it becomes clear that that the services rendered by FS could not be said to have applied methods which were used in a particular activity,that marketing services would not follow a common set of methods but were rendered using various tactics and negotiation strategies,that the same were personal in nature and not technical,that the services provided by the employees of FS to the assessee do not fall under the category of managerial services in nature,that the services provided by the employees of FS to Fractal India (FI) did not also fall under the category of technical services, that the expression Consultancy service involved giving of an advice or advisory services by a professional, that the assessee did not seek any sort of advice from FS and hence the services provided by the employees of FS to FI would not fall under the category of consultancy also.In short,the services provided by FS did not fall under the category of 'managerial', 'technical' or 'consultancy' in nature. 5.1.We also hold that requirement of Article 12 of India-Singapore tax treaty-i.e. making available of services in the nature of managerial,technical or consultancy-was not satisfied. For a service to be made available, the service recipient should be able to make use of the knowledge, by itself in its business for its benefit and without the recourse to the service provider in future and for this purpose a transmission of the skill from the service provider to the service recipient is necessary.We find that in the case before us,the services availed by the assessee were in the nature of marketing,business development and customer co-ordination support services provided by FS and those services were rendered by employees of FS outside India,that the assessee was not enabled to independently perform such functions and had only consumed the services of FS,that the expertise and knowledge would still remain with FS.So,it can safely be said that the assessee was only reaping the rewards of the functions carried out by FS and was making payment for availing such services and not towards the skill of business development or marketing as such skills had not been made available to the assessee by the non-resident entity.So,we hold that payment made by it to FS was business income of FS,that FS did not have PE in India,that services were rendered outside India,that payment received by the FS was not taxable in India. 5.2.We further hold that as per the law prevailing at the time in force no income was arising in India by virtue of these services,so,the provisions of Section 195 for withholding of taxes on such remittance were not applicable.In the case of Virola International (147 ITD 519),the Tribunal has held that a retrospective amendment in law would not change the tax withhold - 3511/M/15 Fractal Analytics Pvt.Ltd. ing liabilities with a retrospective effect,that the withholding obligations from payments made to non-residents would depend on the law as it stood on the date obligation to withhold tax arose. Considering the above,we hold that SG Business Development expenses paid to FS, amount - ing to Rs. 1.18 crores,was neither taxable in India as FTS under Article 12 of India-Singapore tax treaty nor was it taxable as Business Income under Article 7 of India-Singapore DTAA, that there was no liability of the assessee to withhold taxes on such payments made to FS and it was not a disallowable expenditure u/s. 40(a)(i) r.w.s.195 of the Act.First two grounds of appeal are decided in favour of the assessee. 6.Third ground of appeal deals with disallowance of business expenses ignoring the Circular 23 of 1969 dated 23/07/1969. During the assessment proceedings, the assessee referred to the circular wherein various clarifications were issued by the Board on the applicability of section 9 of the Act. The assessee argued that services rendered by FS were similar to the services rendered by a commission agent, that the AO had also held that payment was of the nature of commission payment. However, the AO held that the assessee was not able to substantiate its plea that the payment of Rs. 1.18 crore on account of omission was not liable for TDS as required under section 195 of the Act, that the commission paid to FS was nothing but was FTS, that the circular was withdrawn by the Board on 22/10/2009. The FAA dismissed the ground without deliberating upon it. 6.1.Before us,the AR argued that the Circular was effective during the year under considera - tion,that withdrawal of the circular at a later date could not be held to be retrospective, that the benefit of the provisions laid down by the circular were available to the assessee, that the income of FS was not taxable in India, that no tax was required to be deducted on the payment made by the assessee. He relied upon the case of Armayesh Global(51 SOT 564) and Angelique International Ltd.(219 Taxman 104). The DR left issue to the discretion of the bench. 6.2.We find that identical issue was deliberated upon and decided by the honorable Delhi High Court in the case of Angelique International Ltd.(supra) wherein it was held that withdrawal of the circular and 2009 could not be held to be retrospective and could not be classified as explaining or clarifying the earlier circular issued in 1969, that the circular was in force till it was withdrawn. Respectfully following the above judgment, we decide GOA 3 in favour of the assessee.