Chennai Tribunal held rules payment for marketing services which requires technical knowledge of products, qualifies as FTS under the ITL

31 Dec 2022 PDF
Subject Alerts
Categories Direct Tax Tax
Jurisdictions India

In case of Sunsmart Technologies Pvt. Ltd.[1]  (Taxpayer), an Indian company, was engaged in the business of providing software solutions and services to diversified industries. The Taxpayer entered into a marketing agreement with a Dubai-based company, SSG Technologies LLC (SSG), for marketing Taxpayer’s product in middle east Asian countries. In terms of agreement, SSG was required to market, promote, and distribute the software products of the Taxpayer. SSG was also required to render pre-sale and post-sales support services in accordance with the policies and procedures set out by the Taxpayer. SSG retained 25% of product value as a commission for rendering the services.

The Taxpayer was of opinion that services of SSG are in the nature of simpliciter marketing services and not fees for technical services (FTS). The Taxpayer did not withhold tax on such payments in absence of taxability under the Indian Tax Laws (ITL).

The tax authority, however, was of view that pre-sale and post-sale services rendered by SSG requires expertise in the Taxpayer’s products. Accordingly, the tax authority held that payment was in the nature of FTS taxable in India and on failure to comply with withholding requirement by the Taxpayer, the tax authority disallowed deduction of commission expense in the hands of the Taxpayer.  This view was upheld by the first appellate authority. 

On further appeal by the Taxpayer, Chennai Income Tax Appellate Tribunal (the Tribunal) held that the Taxpayer was engaged in the business of providing software solutions and services and such a business requires technical expertise and knowledge. The Tribunal noted that SSG was involved in providing pre-sale and post-sale services in middle east Asian countries and for rendering such services the employees of SSG should have expertise in technical knowledge of software products. Basis these observations, the Tribunal ruled in favor of the tax authority. It held that payment was in the nature of FTS and in absence of withholding of taxes thereon, the disallowance of expense in hands of the Taxpayer was correct.

[1] [TS-853-ITAT-2022(CHNY)]