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TMI Blog2022 (5) TMI 670X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. - ITA No. 229/Bang/2019 - - - Dated:- 27-4-2022 - SHRI N. V. VASUDEVAN , VICE PRESIDENT AND MS. PADMAVATHY S , ACCOUNTANT MEMBER For the Appellant : T. Suryanarayana , Senior Advocate For the Respondents : Susan D. George , CIT ( DR ) ORDER Per N. V. Vasudevan , Vice President This is an appeal by the assessee against the order dated 03.12.2018 of CIT(A)-3, Bengaluru, relating to Assessment Yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nceptualization and scope of work to be performed by iRunway Inc. was determined by the assessee. Further, the assessee took the overall responsibility for the deliverables, it being the primary contractor for rendering services to its client. In connection with the services availed by the assessee from iRunway Inc during the financial year relevant to AY 2015-16, the assessee incurred outsourcing charges of Rs. 71,110,315. 5. The assessee did not deduct taxes u/s. 195 of the Act on such outsourcing charges on the basis that the same did not constitute 'sum chargeable to tax' in India. Under the provisions of Sec. 40(a)(ia) of the Act, where tax is deductible at source on a payment under Chapter XVII B of the Act and where tax has not been so deducted at source, then the sum so paid by an assessee without deduction of tax at source, will not be allowed as an expenditure while computing income from business. 6. The AO called upon the assessee to show-cause as to why outsourcing charges should not be disallowed u/s. 40(a)(i) of the Act for alleged non-deduction of tax at source. The assessee took a stand that the said charges did not qualify as 'Fees for Technical S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain services as included in section A of the Agreement. In summary, the services availed by the assessee included the following: a) Technology analysis for litigation [e.g., source code review, technical document review and analysis, accused system experimentation, and research; b) Patent Patent portfolio analysis; c) Technology research due diligence; d) Consulting services and assistance in anticipation and in support of litigation; and e) Developing evidentiary support for affirmative infringement contentions. 10. The assessee explained that in the US, the patent litigation matters are governed under the Export Administration Regulations issued by the Bureau of Industry and Security, US Department of Commerce. As per the applicable law. a) A Party to any patent dispute is allowed to access confidential information including documents, testimony, or information containing or reflecting proprietary, trade secret, and/or, commercially sensitive information of the other Party, under a process called 'Discovery'. The confidential information that is accessed under the 'Discovery' process is referred to as 'Discovery Material'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 14] of the Protective Order issued by the US District Court: i) The source code produced in Discovery process by BMC Software was to be made available for inspection, in electronic form at the Dallas, Texas, or Houston, Texas office of its outside counsel McKool Smith PC, or any other location mutually agreed to by the Parties; and ii) Any source code that is produced by Service Now Inc. was to be made available for inspection at the Palo Alto, California office of its outside counsel, Cooley LLP or any other location mutually agreed to by the Parties. Given the legal restrictions in the US a) the source code produced by the Parties were not allowed to be verified at any other location other than the US; and b) were allowed to be verified by only those who were permanent resident of the US and identified as a protected individual under the Immigration and Naturalization Act. Accordingly: a) the assessee requested iRunway Inc. for services whereby the employees of iRunway Inc. [who were legally qualified to access the Protective Material] would access the Protective Material in the US to perform relevant activities, and provide a report/memo of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility of FTS in India, viz., Exclusion 1 - FTS paid by a resident in respect of services utilised for the purposes of a a) business or profession carried on by such resident outside India; and b) Exclusion 2 - FTS paid by a resident in respect of services utilised for the purposes of making, or earning, any income by such resident from any source outside India. The assessee submitted that the outsourcing charges paid to iRunway Inc. ought to be regarded as being towards services utilised by the Assessee in its 'business carried on outside India', since, the services of iRunway Inc. are utilised in the project undertaken by the Assessee outside India; the customers of the Assessee are located outside India; and activities relating to the portion of the project with the customer, for which the subcontracting charges are paid to iRunway Inc, are undertaken outside India. Without prejudice to the above, the outsourcing charges paid by the Assessee to iRunway Inc. ought to be regarded as being towards services utilised by the Assessee 'for making or earning of income front any source outside India', since: i) the customers of the Assessee are located out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en stated to mean advisory services. Also, the MoU states that the categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. Further, the term 'make available' has been explained in the Memorandum of Understanding 'MOU'] to the India-US Tax Treaty. As per the said MOU, technology will be considered' made available' when the recipient of the service is enabled to apply the technology. The assessee pointed out that (a) iRunway Inc. had provided services to the assessee from the US; (b) The activities involved were such that the employees of iRunway Inc. alone could access the confidential information and at the locations which are approved by the US District Court under a Protective Order; (c) Given the Protective Order, the source code could not be reviewed from any other location other than US; (d) iRunway Inc. is legally bound and restricted from accessing the Protective Material from any location/in any manner other than what is approved by the District Court under the Protective Order. Therefore, iRunway Inc, would never have an occasion to transfer or make available th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /target scouting for licensing/litigation, technical document review and analysis, claim chart preparation, Expert witness support, COMPASS tool/patent data base support, patent portfolio analysis and Patenting valuation/damage assessment. The agreement also provided that the intellectual protect rights (IPR) would remain with the assessee. The above aspects, according to the CIT(A), would be enough to hold that the US company made available to the assessee, which in turn was used by the assessee to further service it's clients. The CIT(A) also referred to the warranty clauses 8.1 and 8.2 of the Agreement between the assessee and iRunway inc., USA which provided that the assessee would indemnify iRunway Inc., USA against any liability, claims, law suits, losses, demands, cost and expenditure relating directly or indirectly to the IPR or the design, sale or use of any embodiment of the IPR. According to the CIT(A), all these aspects would show that the service provider made available to the assessee knowledge, skill to the assessee and therefore the 'make available' clause of the Indo-US treaty was satisfied. 18. On the argument of the assessee that the source of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy which they can use in rendering services, then it falls with definition of fee for technical services. Where however, if technology is not made available along with technical services whereas what is rendered is only technical services and technical knowledge is withheld, then, such a technical service would not fall within definition of technical services in DTAA and not liable to tax. In that case the assessee for the purpose of carrying out geophysical survey, for its mining company entered into an agreement with a Dutch company. Services included air borne survey for providing high quality, high resolution, geophysical data regal-dig diamond bearing mineral deposits. Assessing Officer treated consideration paid to Dutch company as fees for technical services. Since assessee had failed to deduct tax on payments made to Dutch company, Assessing Officer treated assessee as assessee-in-default. Dutch company performed services using technical knowledge and expertise and it had given data, photographs and maps to assessee but they had not made available technical expertise, skill or knowledge in respect of collection or processing of data to assessee, which assessee could apply i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the recipient of the payment 'makes available' technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. We have already set out the details of the services which iRunway Inc., USA was to provide to the assessee. These are contained in paragraph 9 to 11 and 14 to 16 of this order. The services so provided were (a) Technology analysis for litigation [e.g., source code review, technical document review and analysis, accused system experimentation, and research; (b) Patent portfolio analysis; (c) Technology research due diligence; (d) Consulting services and assistance in anticipation and in support of litigation; and (e) Developing evidentiary support for affirmative infringement contentions. In short it was in the nature of services in connection with patent registration, patent litigation and procuring evidence for patent litigation and similar services. The customers of the Assessee are based in USA. iRunway Inc., USA is a tax resident of USA and therefore the taxability of the payment received from the Assessee has to be tested on the basis of the relevant clauses of the Indo US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which' the use of this relative pronoun as a conjunction is to denote some additional function the 'rendering the services' must fulfill. And that is that it should also 'make available' technical knowledge, experience, skill etc. The word which occurring in the article after the word 'services' and before the words 'make available' not only described or defines more clearly the antecedent noun '(services') but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, ski ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nc. independently in the future, due to absence of the requisite knowledge. Therefore the revenue has incorrectly interpreted rendition of an output, i.e., analysis performed by iRunway Inc. based on technical knowledge as, it having made available technical knowledge itself, to the assessee. It is also the case of the revenue that as per the US court order, the confidential codes could be given to the counsel's support personnel which would be assessee's personnel in the instant case and doing so was making available technology, skill etc. We are of the view that the 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 wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his commission was arrived at on the basis of fixed percentage of sales. The AO called upon the assessee to show cause as to why sales commission paid to Mr. Neeraj Gupta should not be disallowed u/s. 40(a)(i) of the Act for alleged non-deduction of tax at source. The assessee submitted its response vide letter dated 21 November 2017 as to why the said charges did not qualify as 'income' or FTS' under the Act, and therefore did not constitute 'sum chargeable to tax' in India for it to be subjected to TDS. Along with the letter dated 21 November 2017, the assessee had also appended the following documents: a) A copy of the iRunway Sales Contractors Agreement' executed between Mr. Neeraj Gupta and the assessee; and b) Details of sales commission recorded as payable by the assessee during FY 2014-15. 26. However, in the impugned order, disregarding the assessee's submission as above, the AO held that the services provided by Mr. Neeraj Gupta qualified as FTS under the Act and as FIS under the India-US Tax Treaty. By alleging that the assessee had not deducted tax at source u/s. 195 of the Act, the AO the same u/s. 40(a)(i) of the Act. 27. Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable in India; iii) Sales commission payable by the Assessee was not taxable as FIS under Article 12 of the India -- US Tax Treaty as the services did not make available any technical knowledge to the Assessee; iv) Sales commission is also not taxable under Article 15 of the India-US Tax Treaty as it was in the nature of Independent personal service. 29. The submission with regard to point (i) to (iii) above are identical to the submissions as was made on the first issue of disallowance u/s. 40(a)(ia) of the Act of payments made to iRunway Inc., USA which we have already dealt with in the earlier paragraph. As far as point (iv) above is concerned, the submission was that Article 15 of the India-US Tax Treaty provides that income derived by a person from the performance of professional services, 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. It was submitted that Mr. Neeraj Gupta did not satisfy the criteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that technical services were not only rendered by Mr. Neeraj Gupta but those services made available technical skill, etc., to the assessee. She therefore submitted that the sum in question cannot be regarded as sales commission and was rightly treated as fees for technical services by the Revenue authorities. 32. We have given a careful consideration to the rival submissions. We shall take up the argument on the issue with reference to Indo US treaty, first. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use as to why provision for expenses of Rs. 1,170,000 should not be disallowed u/s. 37 of the Act by holding it to be contingent in nature and u/s. 40(a)(ia) of the Act since the assessee had not deducted tax at source on the provision made. The assessee submitted vide letter dated 21 November 2017 the basis on which such provision for expenses did not warrant a tax deduction at source as that the expense was recorded on estimate basis and that the actual invoices were not received. However, the AO disallowed provision for expenses u/s. 40(a)(ia) of the Act since the assessee had not deducted tax at source on the provision made. 35. Before CIT(A), the assessee submitted that the assessee follows mercantile system of accounting as per which it would record for any expenses/income on accrual basis in its books of account. Accordingly, the assessee has recorded a 'provision' towards certain expenses as at 31 March 2015. These amounts represented expenses for which services were availed of by the assessee during FY 2014-15 and thus, under the mercantile system of accounting the expenses were to be accrued during FY 2014-15 itself. In the absence of invoices from the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that provision towards professional charges ought to be disallowed u/s. 40(a)(ia) of the Act, the AO erred in disallowing 100% of the provision made, instead of 30%, as required u/s. 40(a)(ia) of the Act vide amendment made by Finance Act, 2014 w.e.f. 1 April 2015. Without prejudice to the above grounds, and even assuming while denying, that provision towards professional charges ought to be disallowed u/s. 37/40(a)(ia) of the Act for AY 15-16, a deduction for the corresponding reversal of provision in the subsequent year, viz., AY 2016-17 ought to be allowed to the Assessee. 37. The CIT(A) however upheld the order of the AO by following the decision of IT AT Bangalore in the case of IBM India (P) Ltd. (2015) 59 taxmann.com 107 wherein it was held that even in respect of provision for expenses made in the books of accounts, the assessee had to deduct tax at source at the time of entry to the suspense account. Hence the present appeal by the assessee before the Tribunal. Learned Counsel for the assessee reiterated submissions made before the Revenue authorities. Learned DR relied on the order of the CIT(A). 38. We are of the view that the statutory provisions require de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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