Income Tax Appellate Tribunal - Chennai
Laserwords Us Inc, Puducherry vs Dcit, International Taxation-1(2), ... on 10 May, 2024
आयकर अपीलीय अिधकरण, 'डी' यायपीठ,चे ई IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, CHENNAI ी महावीर सह, उपा य एवं ी अिमताभ शु ला, लेखा सद य के सम BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.: 45/CHNY/2021 िनधारण वष/Assessment Year: 2017-18 Laserwords US Inc., The Deputy Commissioner C/o. SPI Technologies India Pvt. Vs. of Income Tax, Ltd., International Taxation -1(2), "Gothi Industrial Estate", Chennai.
R.S.No.415 & 416, Vazhudavur, Kurumbapet Revenue Village, Puducherry - 605 009.
PAN: AABCL 8781F
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से/Appellant by : Shri Ashik Shah, CA
यथ क ओर से/Respondent by : Shri A. Sasikumar, CIT
सुनवाई क तारीख/Date of Hearing : 07.05.2024
घोषणा क तारीख/Date of Pronouncement : 10.05.2024 आदेश /O R D E R PER MAHAVIR SINGH, VICE PRESIDENT:
This appeal by the assessee is arising out of the final assessment order dated 17.03.2021, passed by the Deputy Commissioner of Income Tax, International Taxation 1(2), Chennai for the assessment year 2017-18 u/s.143(3) r.ws. 144C(13) of the
-2- IT(TP)A No.45 /Chny/2021 Income Tax Act, 1961 (hereinafter the 'Act') in pursuant to the directions of the Dispute Resolution Panel-2, Bengaluru dated 12.02.2021,.
2. At the outset, it is noticed that this appeal by assessee is barred by limitation by 89 days. The impugned order i.e., final assessment order dated 17.03.2021 passed by AO u/s.143(3) r.w.s. 144C(13) of the Act, as per Form 36 was communicated to the assessee on 17.03.2021 itself. The assessee has to file appeal before the Tribunal against the impugned order on or before 16.05.2021 but assessee actually filed this appeal on 13.08.2021, thereby there was a delay of 89 days. When this was confronted to ld.AR for the assessee, he stated that the period is falling under the pandemic period of Covid-19 and the Hon'ble Supreme Court in Miscellaneous Application No.665 of 2021 vide order dated 23.03.2020 has given directions that the delay are to be condoned during this period 15.03.2020 to 14.03.2021 and they have condoned the delay up to 28.02.2022 in Miscellaneous Application No.21 of 2022 vide order dated 10.01.2022. Since the Hon'ble Supreme Court has condoned the delay during said period, respectfully following the same, we condone the delay and admit the appeal.
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3. The only issue in this appeal of assessee is as regards to the order of AO passed u/s.143(3) r.w.s 144C(13) of the Act, framed in lieu of directions issued by the DRP dated 12.02.2021 u/s.144C(5) of the Act holding that the sales commission received by assessee amounting to Rs.17,21,74,839/- as accrued to the assessee in term of section 9(1) of the Act and taxable in India and also held that the same are in the nature of 'fee for included services'. For the above issue, the assessee has raised various grounds which are argumentative and exhaustive and hence, need not be reproduced.
4. Brief facts are that the assessee is a non-resident company in India and resident of USA. The assessee is engaged in providing services of e-publishing which falls under information technology enabled services (ITES) involving software and digital technology. The AO noticed from the return of income and from Form No.3CEB whereby note was attached giving reasons for not offering the receipts accrued in India in the computation of income for tax. Hence, the same was selected for scrutiny assessment under CASS by issuing notice u/s. 143(2) of the Act dated 13.08.2018. Notices u/s.142(1) of the Act along with show-cause notice was issued calling for details on further dates also. During the course of assessment proceedings, the AO asked the assessee to file details of
-4- IT(TP)A No.45 /Chny/2021 sales commission which was disputed by the assessee before ITAT for assessment year 2015-16 and the ITAT set aside the issue to the file of the AO for reconsideration. The assessee filed details vide its reply dated 09.09.2019 and narrated the facts that the assessee company has entered into a marketing agreement with its holding company SPI Technologies India Pvt. Ltd. As per the agreement, the assessee company is responsible for carrying out marketing functions like executing and implementing marketing strategy and providing support in identifying customers, understanding their requirements and liaise between the customers and the company. In consideration for the marketing services provides, the assessee company receives sales commission from SPI Technologies India Pvt. Ltd. The AO after considering the above reply issued notice to SPI Technologies India Pvt. Ltd., u/s.133(6) of the Act calling for certain details including the nature of receipt paid to the assessee. SPI Technologies India Pvt. Ltd., submitted details vide reply dated 20.08.2019 and the relevant reply reads as under:-
"Nature of payments made to Laserwords US Laserwords US Inc., An associated enterprise of the company, has entered into a marketing services agreement with the company. As per the agreement, Laserwords US Inc is responsible for carrying out marketing functions like executing and implementing marketing strategy and providing support in identifying customers, understanding their requirements and liaise between the customers and the company. In
-5- IT(TP)A No.45 /Chny/2021 consideration for the marketing services provide, the Company pays sales commission to Laserwords US Inc."
4.1 The AO noted that assessee has received a sum of Rs.17,21,74,389/- during financial year 2015-16 relevant to assessment year 2016-17 as well as commission which is held to be accrued and arise in India as per the provisions of section 9(1) of the Act and taxable in India. The assessee has claimed that he has not offered the same to tax in view of Marketing Service Agreement dated 01.04.2019 between Laser Words Private Ltd., and the assessee i.e., Laserwords US Inc. The reason given by assessee was that the services undertaken by assessee under the contract shall include without limitation i.e., marketing services but the AO was not convinced with the explanation of the assessee and held that the marketing service includes training staff also to understand the beneficial aspect like e-publishing, data processing which include data capturing, XML data conversion, automation tools, technologies, single copy edition, style editing, etc. The AO noted that the above noted skills are essential to understand the customer requirements and then only, marketing people can convince the clients/customers and sell domain focused technical business process outsourcing like e-publishing. Further, he noted that the marketing staff of M/s. Laser Word USA Inc [SPI USA] collects the
-6- IT(TP)A No.45 /Chny/2021 customer requirements and shares with Laser Words Pvt. Ltd., [SPI India]. This clearly indicates that the marketing staff of M/s. Laser Word US Inc [SPI USA] make available the customer requirements to Laser Words Pvt. Ltd., [SPI India] to plan the execution of project. In view of the above, he held that the nature of services are 'fee for included services' instead of claimed by assessee as 'sales commission'. The assessee submitted information in regard to nature of services rendered and these are claimed to be marketing services. The relevant submission submitted by the assessee is reproduced in the assessment order and for the sake of clarity, same are being reproduced as it is:-
"d. Proprietary Information 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 agreement entered into in connection herewith, weather or not such information is the subject of protection under any intellectual property law, and including without limitation, marketing expertise, related experience, drawing blueprint, specifications, engineering marketing and cost data, engineering and design information, testing and quality control procedures, operating techniques, processes, computer and information programs , business plan and budgets The Parties agree that Proprietary Information shall exclude:
1. Information which is or becomes part o, the public domain, provided such information has not been directly or indirectly disclosed into the public domain as a consequence of any breach of this agreement by the party receiving the information.
2. Information which was in possession of or independently developed by the other party.
3. Information received from, another source (not directly or indirectly related to the Party providing such information) without restriction on use or disclosure."
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Marketing Services
"2. The Marketing services to be provided by LW USA to LWI shall be through the team of sales and account management personnel and shall include without limitation, the following services:
1. Marketing services such as assistance and guidance in connection with setting up a marketing network and sales force, including without limitation, Selection of the appropriate sales stall required to set up, maintain and operate the marketing network.
• Training the marketing staff on the latest marketing techniques available and employed world-wide.
4.2 In view of the above, after verifying the list of customers and breakup of sales commission paid to customers, the AO held that these are 'fee for included services' as per Article 12(4) of Indo- USA- DTAA sub-clause (b). Finally, the AO held that the assessee has undertaken services in addition to the services stated to be marketing services. Therefore he held that these marketing services is only inseparable part of the whole services rendered to the ultimate client for which there exists contract between the assessee and the client. Therefore it is held that the said sales commission paid at 15% cannot be held to be wholly attributable to the marketing services as contended by the assessee. The services rendered to the clients in USA as per the agreements made with the customers include inter alia the marketing services which cannot be separated and paid as commission. The same is treated as fees for included services and is brought to tax in India.
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5. The ld.AR for the assessee took us through the DRP order and stated that the DRP only relied on the earlier order of DRP for assessment year 2015-16 and apart from that they have not carried out basic exercise and finally rejected the objection of the assessee by a non-speaking order that there is no reason to deviate from the directions already given in assessment year 2015-16. The relevant finding given in para 2.5 of DRP reads as under:-
2.5 We find no reason to deviate from the direction already given in A.Y.2015-16 by the DRP therefore, the objections 1, 2 and 3 are rejected."
Aggrieved, now assessee is in appeal before the Tribunal.
6. At the outset, the ld.AR made clear that the final assessment order passed by the AO following directions of DRP for assessment year 2015-16 was challenged before ITAT and ITAT on jurisdictional issue of non-mentioning of DIN on the body of the order, quashed the final assessment order as well as DRP's order and hence, on merits nothing was examined. Hence, he requested that the entire material is to be examined on merits afresh. However, the ld.AR stated that the entire facts dealt with by the DRP in assessment year 2015-16 and the similar payments were made to SPI Technologies India Pvt. Ltd., through its marketing management team i.e., market services of Rs.13,04,05,037/- and held by DRP as taxable.
-9- IT(TP)A No.45 /Chny/2021 The ld.AR took us through the decision of this Tribunal in the case of Co-ordinate Delhi Bench in the case of SPI Global US Inc in ITA No.1912/Del/2023, order dated 13.03.2024, wherein the Tribunal has considered the issue in para 9 to 11, which reads as under:-
"9. Grounds No.4.5 & 4.6 are against the action of the lower authorities in concluding that services were made available to the recipient, without appreciating the meaning of the term 'make available' as defined in the Memorandum of Understanding to India-USA DTAA and various judicial precedents. Without prejudice to the above, the AR contended that the lower authorities erred in adjudicating sales commission along with sub- contracting charges and therefore erred in not giving a separate direction/finding in respect of sales commission. The Ld. Counsel for the assessee submitted that since main services of the assessee has not satisfied the 'make available' condition as envisaged under Article 12(4) of the India
-USA DTAA, connected service of sales and marketing support service also does not satisfy the make available condition and hence is not taxable. In this regard, the assessee placed reliance on the order of the decision of the Co-ordinate Bench in the case of Sheraton International, LLC [142 taxmann.com 520]. Thus, submitted that the grounds No.4.5 and 4.6 deserves to be allowed.
10. Per contra, the Ld. DR relied upon the order of the lower authorities.
11. We have heard the parties and perused the material available on records. The assessee renders services relating to e-publishing work in the nature of editorial services including page composition, language polishing, indexing, correcting faulty grammar and punctuation etc. We have held that the said sub-contracting charges do not come within the purview of "Fees for Included Services" ("FIS") under the India-USA DTAA the connected service of sales and marketing support service also does not satisfy the make available conditions and hence, is not taxable. Accordingly, we allow grounds. No.4.5 & 4.6 of the assessee and delete the addition."
6.1 Now before us, the ld.AR filed copy of agreement dated 01.04.2010 entered with SPI Technologies India Pvt. Ltd., and the
- 10 - IT(TP)A No.45 /Chny/2021 relevant marketing Service rendered by the assessee are depicted as under:-
"After going through the Transfer Pricing study submitted by the assessee, the following pots are noted:-
1 The marketing services include training of the staff also, The marketing staff must be trained to understand the beneficial aspects like e-publishing, data processing which include data capturing, AO data conversion, automation tools, technologies, single copy edition, style editing etc. 2 The above soil skills as per point I above arc essential to understand the customer requirements. Then only the marketing people can convince the clients/customers and sell domain focused technical business process outsourcing like e-publishing.
3. The marketing staff of the Ms Laser Word USA Inc (Spi USA] collects the customer requirements and shares with Ms Laser Words Private Limited [Spi India] (The contract of the same is given above in 4.1.4 of the TP study). This clearly indicates that the marketing staff of the M/s Laser Word USA ne (Spi USA) make available the customer requirements to M/s Laser Words Private Limited [Spi India) to plan the execution of the project.
4. The point to be emphasized here is the customer requirements are in the nature of Technical Inputs.
5. Ms Laser Word USA Inc (Spi USA) provides M/s Laser Words Private Limited [Spi India] with technical inputs, data & customer needs and services relating to the business activities & account management of M's Laser Words Private Limited [ Spi India], so as to enable it to promote & improve its business.
6. Ms Laser Word USA Inc (Spi USA] also perform account management & customer relationship. These details can be shared through electronic medium to M/s Laser Words Private Limited [Spi India]. The customer database accounts are made available to Ms Laser Words Private Limited [Spi India] whenever it needs.
- 11 - IT(TP)A No.45 /Chny/2021 Relevant extracts of Para 4.1.2 and 4.14 of the Transfer Pricing study submitted by the assessee is reproduced, as it is, below:
4.1.2 Marketing & Sales Prospective customers are identified are identified by SPi US. SPi US act as a liaison between the ultimate customer and SPi India. It provides business solutions such as client workflow requirements. These functions are performed through dedicated marketing and sales team maintained by SPi US and Corporate support team of APi Philippines undertake the activity of requirement analysis, Contract negotiation and finalization of contracts. The market support service include the following functions:
Development of sales channel Selection of the appropriate sales staff for setup, maintain marketing channels and training of marketing personnel. Account Management and customer relationship.
4.1.4 Planning, Requirement Gathering and Analysis The requirements of the customer are first understood so as to enable providing the right solution to address the need of the customer. SPi US employees interact with the customers and understands its exact requirement and deliverable expected hy the client. The information collated by Spi US is shared with SPi India, based on which SPi India plans the execution of the project."
Further going through the Marketing Service agreement between Ms Laser Words Private Limited and Ms Laser Word USA Inc submitted by the assessee and its Proprietary Information clause & Marketing services Para, the following points re noted:-
7. The proprietary information clause in the marketing services agreement clearly indicate that information like intellectual property, marketing expertise, related experience, drawing blueprint, specifications, engineering marketing and cost data, engineering and design information, testing and quality control procedures, operating techniques, processes, computer and information programs, business plan and budget re shared and made available by the parties to each other.
8. The point to be noted here in case of business process outsourcing like e-
publishing include engineering and design, testing and quality procedure,
- 12 - IT(TP)A No.45 /Chny/2021 operating techniques, processes, computer and information programs, blueprints, specifications.
9. The marketing staff also set-up, maintain and operate the marketing network.
10. The confidentiality clause cleanly indicates that the processes (mentioned in point 7 and 8 above) made available by the parties should be kept confidential.
The only dispute, according to ld.AR now before us is what is the nature of services, whether these services falls within the definition of included services in term of section 9(1) of the Act and can be held as 'fee for included services'. The ld.AR argued that once Tribunal in SPI Global US Inc, supra has considered that these are purely sale commission and can be treated as 'fee for included services' in term of Article 12(4) of Indo-USA DTAA. The ld.AR stated that the assessee has filed copy of service agreement for both i.e., sub-contract charges and sales commission. From the very nature of agreement, the ld.AR argued that the sales commission whether it is continuous payment or paid to already existing contracts, it is in the nature of sales commission and it cannot be held as 'fee for included services' to be taxable @ 15%.
7. On the other hand, the ld.CIT-DR vehemently opposed the plea of assessee and argued that from the very nature of service
- 13 - IT(TP)A No.45 /Chny/2021 rendered by assessee, the assessee's case is squarely covered by sub-clause (b) of Article 12(4) of Indo-USA DTAA as 'fee for included services' considering the nature of services provided by assessee to its clients including its Indian entity. According to him, the assessee renders information technology enabled services and also provides training and knowledge building to the workforce who undertakes services to the clients in USA. These services according to him cannot be considered as mere marketing services for which commission is paid rather these are in the nature of 'fee for included services' and rightly taxed by the AO on the directions of DRP at the rate of 15%. In view of the above, he supported the order of DRP and that of the AO.
8. We have heard rival contentions and gone through facts and circumstances of the case. First of all, we noted from the above services reproduced above that the services are in the nature of marketing services. These marking services are rendered by the assessee through agreement dated 01.04.2010 with SPI Technologies India Pvt. Ltd. As per agreement, these services are noted by us in above para 6.1 and also the relevant marketing and sales service in term of agreement between Laser Words Pvt. Ltd., and the assessee i.e., Laserwords US Inc. In our view, these
- 14 - IT(TP)A No.45 /Chny/2021 services rendered by assessee in no way can be called as 'fee for included services' whereas these payments are for marked services. We noted from the facts of the case that the assessee has entered into a contract with SPI Technologies India Pvt. Ltd., who consequently entered into contract with end customers located in USA. However, assessee is not party to the master service agreement with the customers. All service contracts with customers in USA are entered by SPI Technologies India Pvt. Ltd., and it is SPI Technology India Pvt. Ltd., who is solely responsible for undertaking and executing the e-publishing work. Here, it is to be clarified that the role of the assessee is limited to liaising with the customers, understanding their workflow requirements and communicating the same to SPI Technologies India Pvt. Ltd., who undertakes the project execution. It is to be clarified that the DRP and the AO wrongly noted that the amalgamation with the assessee and SPI Technologies India Pvt. Ltd., w.e.f. 01.04.2014 whereas actual facts are that the Laserwords Pvt. Ltd., merged with SPI Technologies India Pvt. Ltd., w.e.f. 01.04.2014 and McGraw-Hill Companies Inc., w.e.f. 27.04.2010, who is the end customer of SPI Technologies India Pvt. Ltd. We noted that it is not a disputed fact that assessee receives sales commission as percentage of sales from new customers as well as existing customers on monthly basis. The role
- 15 - IT(TP)A No.45 /Chny/2021 of assessee is not limited to identification of prospective / new customers in USA and once customer is onboard, the assessee interacts with the customer on a regular basis to understand the customer requirements. Hence, customer acts as a front-end contact point for the customers and the role of the assessee to understand the workflow requirements of the customers and communicate these requirements to the executives located in SPI Technologies India Pvt. Ltd., and for this, assessee charge commission on total sales and disclose this as sales commission. We noted that the nature of work executed on activities carried out cannot be equated with 'fee for included services' as mentioned in 12(4) clause (b) of Indo-USA DTAA and hence, it cannot be taxed in India. It is to be considered as sales commission only. Hence, we delete the addition and allow the appeal of assessee on this issue.
9. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 10th May, 2024 at Chennai.
Sd/- Sd/-
(अिमताभ शु ला) (महावीर सह )
(AMITABH SHUKLA) (MAHAVIR SINGH)
लेखा सद य/ACCOUNTANT MEMBER उपा य /VICE PRESIDENT
चे ई/Chennai,
दनांक/Dated, the 10th May, 2024
RSR
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आदेश क ितिलिप अ ेिषत/Copy to:
1. अपीलाथ /Appellant
2. यथ /Respondent
3. आयकर आयु /CIT
4. िवभागीय ितिनिध/DR
5. गाड फाईल/GF.