ITAT: Non-Resident Deals for Partners Considered as Fee for Services

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that payment that the taxpayer has made to the non-resident marketing partners for filing the before or after-sale services concerned with the software solutions would have the character of fees for technical services (FTS).

The two-member bench of V. Durga Rao (Judicial Member) and G. Manjunatha (Accountant Member) has seen, the taxpayer has unable to deduct the TDS on the payments incurred to the non-residents, the CIT(A) would not permit the payment of TDS under section 40(a)(i) of the Income Tax Act.

The petitioner’s company is engaged in the business of furnishing software solutions and services to diversified industries. The taxpayer’s company would be in the marketing agreement with SSG Technologies, LLC, Dubai, which came into force from the date January 1, 2015, for marketing its product in middle-eastern Asian countries.

Under the agreement, the taxpayer has authorized its partner to market, promote and distribute the products to the customers, and furnishes the sales support services merely as per the policies and methods of the taxpayer. According to the agreement, the marketing partner shall not change the product or its details without written approval from the taxpayer before. The taxpayer shall guide the partner resources to carry out the pre-scale activity along with the execution and support services.

In an agreement between parties, the marketing partner takes 25% of the value of the project as levied for providing the services. In the assessment proceedings, the AO sees that the taxpayer has paid the charges towards furnishing the services to the non-resident marketing partners without a TDS deduction. Hence the services provided via marketing partners would have the FTS nature. Hence the AO has denied the taxpayer’s arguments and disallowed the payments incurred to the marketing partners under section 40(a)(i).

The taxpayer desired to appeal to the CIT (A). The CIT stated that services that the marketing partner has provided to sell the taxpayer’s products as per the agreement between the parties have the character of FTS according to Explanation-2 to Section 9(1)(vii). The CIT (A) kept the findings of the AO in disallowing the sum filed via taxpayer without TDS deduction.

Taxpayer, the scope of services generated via partner has the nature of simple marketing services excluding having the technical knowledge, and therefore the same could not be categorized as FTS.

FTS indicates any consideration (along with lump sum consideration) for generating any managerial, technical, or consulting services, according to explanation 2 to Section 9(1)(vii) of the Act. But the same shall not comprise acknowledgement for any construction, assembly, mining, or like project initiated through the recipient or consideration that is the income for the recipient levied beneath the heading salaries.

Recommended: ITAT: Assesses Payment to Non-resident Supplier Constitutes Royalty & Eligible for TDS Deduction

ITAT ruled that the services provided via SSG Technologies, LLC, would come beneath FTS. The future of the agreement mentioned the kind of services yielded via the marketing partner under the agreement the taxpayer shall instruct resources of the marketing partner to furnish the pre-scale and post-sale product services to the customers. As the taxpayer would be in the business of furnishing software solutions and services to distinct industries, the services need technical skills.

The findings of CIT(A) are sustained by the ITAT.