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2022 (5) TMI 670 - AT - Income TaxTDS u/s 195 - Outsourcing charges payable treated as 'fees for technical services' - assessee took a stand that the said charges did not qualify as 'Fees for Technical Services' (FTS) under the Act as well as 'Fees for Included Services' FIS under the India-US Tax Treaty, and therefore did not constitute 'sum chargeable to tax' in India for it to be subjected to TDS - HELD THAT - AO has incorrectly interpreted that the US Court's Protective order provided access to confidential source code to counsel's support personnel which includes assessee's employees, although no reference to the access being granted to the assessee or its employees has been made in the Protective order. In this regard, one cannot forget the fact that 'Undertaking of Experts or Consultants regarding Protective order' signed by the relevant employees of iRunway Inc. who were given access to the protective information under the protective order specifically provides that the authorized person will not divulge information to anyone. These individuals are employees of iRunway Inc. and fulfill the criteria of the relevant US statutory requirements to be able to access the protective information. None of these individuals are employees of the assessee as incorrectly alleged by the revenue. AO failed to appreciate that owing to the legal restrictions in the US, iRunway Inc. or its employees did not have an opportunity or any occasion to 'make available' any technical knowledge to the assessee or its employees while rendering services. As far as agreement for services with McKool Smith entered by the assessee for providing services in relation to patent litigation matters, do not mention about outsourcing of any kind of services including protective order clearance. The conclusion of the revenue authorities that iRunway Inc., made available technical knowledge to the assessee or its employees is neither correct nor sustainable. The other services rendered were purely litigation oriented or services with regard to patent registration or patent search process and these services by no stretch of imagination can be considered as making available any technical knowledge to the assessee. In view of the fact that the services provided by iRunway Inc., did not make available any technical knowledge to the assessee, the same cannot be regarded as taxable in India. Consequently, there was no obligation on the part of the assessee to deduct tax at source at the time of making payment. Hence, the disallowance made u/s. 40(a)(ai) of the Act cannot be sustained and is directed to be deleted. Whether the Revenue authorities were justified in disallowing a sum being sales commission paid by the assessee to one Mr. Neeraj Gupta, a non-resident and tax-resident of USA, by invoking the provisions of section 40(a)(ia) of the Act and for non deduction of tax at source and the payments made to Mr. Neeraj Gupta? - The findings on applicability of Article 12(4)(b) of the Indo US treaty while deciding the disallowance of sums paid to iRunway Inc., USA, will equally apply to this disallowance also, ie., the disallowance of payments made to Mr. Neeraj Gupta u/s. 40(a)(ia) of the Act. Mr. Neeraj Gupta was paid commission on the basis of sales orders procured. Merely because he was technically qualified, sales commission paid for enabling sale cannot become payment for rendering technical services. Even in terms of Article 15 of the Indo US Treaty, the sum in question qualifies as that income derived by a person from the performance of professional services and therefore shall be taxed in the country of which he is resident except where the professional has a fixed base regularly available to him in India for the purpose of performing his activities or has stayed in India for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year. Admittedly, Mr. Neeraj Gupta did not satisfy the criteria as provided in Article 15 of the India-US Tax Treaty since neither he had a fixed base regularly available to him in India, neither he stayed even for a single day in India. Accordingly, sales commission paid to Mr. Neeraj Gupta is not taxable under Article 15 also of the India-US Tax Treaty as it does not satisfy either of the criteria specified therein. We therefore hold that the disallowance of the sum paid to him u/s. 40(a)(ia) of the Act cannot be sustained and the addition is directed to be deleted. Whether the Revenue authorities were justified in disallowing under section 40(a)(ia) of the Act on the ground that the assessee did not deduct tax at source on the provisions created towards professional charges? - We are of the view that the statutory provisions require deduction of tax at source even when the nomenclature used by the assessee for describing as an expenditure as in the nature of suspense account or a profession. The learned Counsel for the assessee however made a prayer that if the disallowance is upheld, the same amount should not be disallowed when the provision is reversed on the first day of April of the subsequent Assessment Year as doing so would result in double disallowance. The prayer so made by the learned Counsel for the assessee is accepted and the AO is directed to ensure that there is no double disallowance of the same amount. With these observations, we dismiss this issue also.
Issues Involved:
1. Disallowance of outsourcing charges paid to iRunway Inc., USA. 2. Disallowance of sales commission paid to Neeraj Gupta. 3. Disallowance of provision for professional charges. 4. Levy of interest under sections 234B and 234C. Issue-wise Detailed Analysis: 1. Disallowance of Outsourcing Charges Paid to iRunway Inc., USA: The primary issue was whether the outsourcing charges of Rs. 71,110,315 paid by the assessee to its 100% subsidiary, iRunway Inc., USA, should be disallowed under section 40(a)(i) of the Income Tax Act, 1961, for non-deduction of tax at source. The assessee argued that the charges did not qualify as 'Fees for Technical Services' (FTS) under the Act or 'Fees for Included Services' (FIS) under the India-US Tax Treaty, thus not requiring tax deduction under section 195. The services provided by iRunway Inc. included technology analysis for litigation, patent portfolio analysis, and technology research. The assessee contended that these services did not 'make available' technical knowledge, skill, or processes to the assessee, as required under Article 12(4)(b) of the India-US Tax Treaty. The CIT(A) disagreed, holding that the services rendered were technical and made available technical knowledge to the assessee. The Tribunal, however, found that the services provided by iRunway Inc. did not make available any technical knowledge to the assessee and thus were not taxable in India. Consequently, there was no obligation to deduct tax at source, and the disallowance under section 40(a)(i) was deleted. 2. Disallowance of Sales Commission Paid to Neeraj Gupta: The second issue involved the disallowance of Rs. 4,505,685 paid as sales commission to Neeraj Gupta, a non-resident and tax-resident of the USA, under section 40(a)(i) for non-deduction of tax at source. The assessee argued that the commission did not qualify as FTS under the Act or FIS under the India-US Tax Treaty and was not taxable in India. The services rendered by Neeraj Gupta were sales consulting, assisting in acquiring new customers, and managing communications. The CIT(A) held that the services were technical and made available technical knowledge to the assessee. The Tribunal disagreed, stating that the commission paid for enabling sales could not be considered payment for rendering technical services. Additionally, under Article 15 of the India-US Tax Treaty, the income derived from professional services by Neeraj Gupta was taxable in the USA, as he did not have a fixed base in India or stay in India for the requisite period. Therefore, the disallowance under section 40(a)(i) was deleted. 3. Disallowance of Provision for Professional Charges: The third issue was the disallowance of Rs. 1,170,000 under section 40(a)(ia) for non-deduction of tax at source on the provision for professional charges. The assessee argued that the provision was made on an estimated basis, and the exact liability was recorded upon receipt of invoices. The CIT(A) upheld the disallowance, following the decision in IBM India (P) Ltd., which required tax deduction at source even for provisions. The Tribunal agreed with the CIT(A) but directed the AO to ensure no double disallowance when the provision is reversed in the subsequent year. 4. Levy of Interest under Sections 234B and 234C: The final issue was the levy of interest under sections 234B and 234C, which was purely consequential. The Tribunal directed the AO to give consequential relief. Conclusion: The appeal was partly allowed, with the Tribunal deleting the disallowances under sections 40(a)(i) for outsourcing charges and sales commission but upholding the disallowance for the provision for professional charges, subject to ensuring no double disallowance. The levy of interest under sections 234B and 234C was directed to be adjusted consequentially.
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