Payment Made To Non-Resident Marketing Partners for Sale Services is FTS: ITAT

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has held that payment made by the assessee to non-resident marketing partners for providing pre and post-sale services related to software solutions is in the nature of fees for technical services (FTS).

The two-member bench of V. Durga Rao (Judicial Member) and G. Manjunatha (Accountant Member) has observed that since the assessee has failed to deduct TDS when payments are made to non-residents, the CIT(A) has rightly disallowed payment under Section 40(a)(i) of the Income Tax Act.

The appellant/assessee company is in the business of providing software solutions and services to diversified industries. The assessee company had entered into a marketing agreement with SSG Technologies, LLC, Dubai, w.e.f. January 1, 2015, for marketing its product in middle-eastern Asian countries.

As per the terms of the agreement, the assessee authorised its partner to market, promote, and distribute the products to the customers and also provide sales support services only in accordance with the assessee's policies and procedures. The agreement specified that the marketing partner would not alter the products or product information without prior written approval from the assessee. The assessee will train the partner resources for carrying out the pre-sale activity and also for implementation and support services.

As per the agreement between the parties, the marketing partner will retain 25% of the project value as charges for rendering services. During the course of assessment proceedings, the AO noticed that the assessee had remitted charges for rendering services to non-resident marketing partners without deduction of TDS. Thus, services rendered by marketing partners are in the nature of FTS. Thus, the AO rejected the arguments of the assessee and disallowed payments made to marketing partners under Section 40(a)(i).

The assessee preferred an appeal before the CIT (A). The CIT held that services rendered by the marketing partner to sell the assessee's products in terms of the agreement between the parties are in the nature of FTS as per Explanation-2 to Section 9(1)(vii). The CIT (A) upheld the findings of the AO in disallowing the sum paid by the assessee without deduction of TDS.

The assessee submitted that the scope of services rendered by the partner is in the nature of simple marketing services without any technical knowledge, and thus, it cannot be classified as FTS.

The department contended that in order to give pre-sale and post-sale services to the product, the partner requires expertise in products manufactured by the assessee and thus, services come under FTS.

As per Explanation 2 to Section 9(1)(vii) of the Act, FTS means any consideration (including lump sum consideration) for the rendering of any managerial, technical, or consulting services. However, it does not include consideration for any construction, assembly, mining, or like project undertaken by the recipient or consideration that would be income for the recipient chargeable under the heading "salaries."

The ITAT held that services rendered by SSG Technologies, LLC, are covered under FTS. The scope of the agreement clearly specifies the nature of services to be rendered by the marketing partner, and as per the agreement, the assessee will train the resources of the marketing partner to provide pre-sale and after-sale product services to the customers. Since the assessee is in the business of providing software solutions and services to various industries, the services definitely require technical expertise and knowledge.

The ITAT upheld the findings of CIT(A).

Case Title: M/s.Sunsmart Technologies Pvt. Ltd. Versus The Asst. Commissioner of Income Tax

Citation: ITA No.2791/Chny/2019

Date: 02.11.2022

Counsel For Appellant: Advocate D. Anand

Counsel For Respondent: Varuvooru Sreedhar

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