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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 ..... ome for AY 2015-16 on 27 November 2015 declaring a total income of Rs. 52,289,620 under the normal provisions of the Income Tax Act, 1961 (Act). The AO passed the assessment order dated 26 December 2017 u/s. 143(3) of the Act making the following additions to the total income declared in the return of income by the assessee: (i) Outsourcing charges of Rs. 71,110,315 payable to iRunway Inc 'were treated as 'fees for technical services' FTS1 and disallowed u/s. 40(a)(i) of the Act by alleging that the Assessee had not deducted tax u/s. 195 of the Act; (ii) Sales commission of Rs. 4,505,685 payable to Neeraj Gupta was treated as FTS and disallowed u/s. 40(aXi) of the Act by alleging that the Assessee had not deducted tax u/s. 195 of the Act; and (iii) Provision of Rs. 1,170,000 created towards professional charges was disallowed u/s. 37 and u/s. 40(a)(ia) of the Act. On appeal by the Assessee, the CIT(A) confirmed the order of the AO. Hence, this appeal by the Assessee before the Tribunal. 4. The first issue that requires consideration in this appeal is as to whether the Revenue authorities were justified in disallowing a sum of Rs. 7,11,10,315/- being outsourcing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into by the assessee with one of its US customers and documents/e-mails exchanged between iRunway Inc and the assessee w.r.t. such contract. 7. The AO however held that the outsourcing charges as taxable as Fees for Technical Services (FTS) under the Act and as Fees for Included Services (FIS) under the India-US Tax Treaty and since the assessee had not deducted tax at source u/s. 195 of the Act, the expenditure was disallowed u/s. 40(a)(i) of the Act. 8. Before CIT(A), it was submitted that section 195 of the Act casts an obligation on an Indian company that is liable to make payment of a sum chargeable to income-tax in India to a non-resident to withhold tax at source at the applicable rates in force. A foreign company is liable to income-tax in India, inter alia, on income that is deemed to accrue or arise in India. The assessee submitted that outsourcing charges paid to iRunway Inc. will not qualify as FTS u/s. 9(1)(vii) of the Act and as FIS under the India-US Tax Treaty, and hence not taxable in India, for it to warrant tax deduction u/s. 195 of the Act by the assessee. The assessee explained that it enters into contract with its customers which are primarily located in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not: * lawfully admitted for permanent residence in the US; or * identified as a protected individual under the Immigration and Naturalization Act. d) Each party receiving the Protected Material is required to comply with all applicable export control statutes and regulations. e) The above prohibition extends to Protected Material (including copies) in physical and electronic form. The viewing of Protected Material through electronic means outside the territorial limits of the US is similarly prohibited 11. The assessee provided Sample contract between the assessee and its customers and the manner of rendering services. a) The assessee entered into an Agreement for Services [AFS] with McKool Smith, a law firm, on 11 August 2014.. As per the AFS, the Assessee was required to provide consulting services to McKool Smith in relation to complaint for patent infringement to be filed by BMC Software [i.e., a client of McKool Smith] against Service Now, Inc. [i.e., the client of Cooley LLP, a law firm in California]. Pursuant to the AFS, the Assessee was required to provide various services w.r.t. patent litigation, inter alia, including patent review, patent infringement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the outsourcing charges does not qualify as FTS under the Act. In this regard the assessee submitted that as per section 9(1)(vii) of the Act, income by way of 'Fees for Technical Services ['FTS'] is deemed to accrue or arise in India if it is payable by a resident of India. Explanation 2 to section 9(1)(vii) of the Act defines the term FTS' to mean any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries '" FTS has been defined in an exhaustive manner u/s. 9(1)(vii) of the Act to mean consideration, inter alia, for rendering of any managerial, technical or consultancy service. Further, section 9(1)(vii) of the Act provides for certain exclusions wherein FTS earned by a nonresident taxpayer will not be taxable in India. As per sub-clause (b) of clause (vii) of sub-section (I) to section 9 of the Act, income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to accrue or arise in India and as a result of which there would be no liability to deduct tax at source in respect of such payment and hence such expenditure ought not to be disallowed u/s. 40(a)(i) of the Act. 14. Without prejudice to the assessee's contention above, even assuming while denying that outsourcing services are taxable u/s. 9(1)(vii) of the Act, the assessee submitted that such charges ought not to be taxable as FIS in India under the India-US Tax Treaty. The assessee pointed out that Section 90(2) of the Act provides that the Act shall prevail over the provisions of the relevant Tax Treaty, wherever the provisions of the Act are more beneficial to the tax payer. As a corollary, the provisions of the relevant Tax Treaty shall prevail over the corresponding provisions of the domestic law to the extent they are more beneficial to the taxpayer. The assessee pointed out that as per Article 12 of the India-US Tax Treaty, technical services are construed as lee for included services' only if such services: * are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that while rendering services, iRunway Inc. did not make available any technical knowledge, know-how, experience, skill or processes to the assessee which will enable the assessee to apply any such technical knowledge, etc. by itself in its business without recourse to iRunway Inc. For every new project/new customer, the assessee has to invariably sub-contract the relevant portion of the Project to iRunway Inc. Hence, the outsourcing charges will not qualify as FIS under the India-US Tax Treaty hence, the payment of the same to iRunway Inc. did not warrant TDS u/s. 195 of the Act. 17. The CIT(A) however did not agree with the aforesaid submissions made by the assessee. He held that the services rendered were in the nature of technical services within the meaning of Sec. 9(1)(vii) of the Act and are taxable in India even though the services were not rendered in India. Thereafter the CIT(A) went into the question whether the services rendered by iRunway Inc., USA made available technical knowledge skill to the assessee so as to satisfy the requirements of Article 12(4)(b) of the Indo-US treaty. The CIT(A) analyzed the terms of the Agreement between the assessee and iRunway Inc., US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Ltd., (2015) 60 taxmann.com 187 (Delhi) in which the Hon'ble Delhi High Court took the view that second part of exclusion contemplated vide section 9(1)(viii)(b) of the Act would be attracted. That was the case in which the assessee was an Indian resident who was engaged in wet leasing of aircrafts to foreign companies, on international routes. The assessee entered into an overhaul agreement with German Co., to carry out maintenance repairs was to be excluded since the source of income of the assessee was outside India and the maintenance charges were paid for the purpose of earning income from a source outside India. The Hon'ble Delhi High Court held that the Tribunal held that the overwhelming or predominant nature of the assessee's activity was to wet-lease the aircraft to, a foreign company. The operations were abroad, and the expenses towards maintenance and repairs payments were for the purpose of earning abroad. In these circumstances, the Tribunal's factual findings that the source of income of the assessee was outside India cannot be faulted. On the question whether the services in question made available in technical knowledge skill to the assessee, l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of a technical plan or technical design. It was submitted by learned DR that without prejudice to the findings of the Revenue authorities that the technical services provided by the AE made available technical knowledge, experience, skill, the services involved development and transfer of a technical plan or a technical design by the assessee's foreign subsidiary in the form of reports of IPRs. In this regard, learned DR pointed out that the agreement between the assessee and Mckool Smit involved decoding of software and doing so was equivalent to making available technology to the assessee. On the applicability of the exclusion clause in section 9(1)(vii)(b) of the Act, learned DR submitted that the assessee's source of income is in India and not USA. The fact that the assessee's clients are in USA will not mean that the assessee's source is from USA. In so far as the reliance placed by the learned Counsel for the assessee on the decision in the case of Lufthansa Cargo Pvt., (supra) is concerned, learned DR submitted that in the case of Lufthansa Cargo Pvt. Ltd., (supra), the activities were carried out outside India and therefore the aforesaid decision will n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services of technical or other personnel) if such services: a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3 is received; or b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. 22. The case of the assessee is that in terms of Article 12(4)(b) of the Indo US treaty, only rendering of technical or consultancy services as 'make available' technical knowledge, experience, skill or know-how etc can be taxed in India in the hands of iRunway Inc. In other words, in order to attract the taxability of an income under Article 12(4)(b), not only the payment should be in consideration for rendering of technical or consultancy services, but in addition to the payment being consideration for rendering of technical services., the services so rendered should also be such that 'make available' technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. These worlds are 'which make ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that case, the Tribunal was dealing with the scope of Article 13(4)(c) of the Indo-UK tax treaty which is admittedly in pari materia with Article 12(4) of the India-USA tax treaty with which we are presently concerned. The majority view was that in order to attract the provisions of the said article of the tax treaty, not only the services should be technical in nature but should be such as to result in making the technology available to person receiving the technical services in question. The Tribunal also referred to with approval the extracts from protocol to the Indo-US tax treaty to the effect that 'generally speaking, technology will be considered made available, when the person acquiring the service is enabled to apply the technology. 24. It is the allegation of the revenue that iRunway Inc. had made available to the assessee, the knowledge generated in the course of rendering technical and consultancy services on the basis that the employee of iRunway Inc. prepared a rebuttal memo which was reviewed by the employee of the assessee company to 'make use' of the same in the final deliverable given to the client. We are of the view that the AO has made incorrect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 25. The next issue that arises for consideration is as to whether the Revenue authorities were justified in disallowing a sum of Rs. 45,05,685/- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aj Gupta was a tax resident of the US for FY 2014-15. The services under the aforesaid agreement were rendered by Mr. Neeraj Gupta from the US. Mr. Neeraj Gupta did not visit India during FY 2014-15 for the purposes of rendering services to the assessee under the said agreement; and Sales commission at a fixed % on the amount of revenue earned from the relevant client which was solicited by Mr. Neeraj Gupta was payable by the assessee. In consideration of the above services availed, sales commission of Rs. 4,505,685 was payable by the assessee to Mr. Neeraj Gupta for FY 2014-15. 28. The assessee pointed out that under Section 195 of the Act an obligation exists on the assessee making payment of a sum chargeable to income-tax in India to a non-resident to withhold tax at source at the applicable rates in force. A non-resident Company is chargeable to income-tax in India, inter alia, on income that is deemed to accrue or arise in India. The assessee submitted that sales commission paid to Mr. Neeraj Gupta did not qualify as 'sum chargeable to tax' in India and therefore assessee did not have an obligation to deduct tax at source u/s. 195 of the Act, for the following reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable in India as it is deemed to have accrued and arisen to the non-resident in India. On the application of make available clause in Article 12(4)(b) of the Indo us treaty, the CIT(A) held that Mr. Neeraj Gupta had experience in patent litigation management and his services rendered to the assessee made available technical skill knowledge etc., to the assessee. The CIT(A) did not render any finding with regard to non taxability of the sum in India in the hands of Mr. Neeraj Gupta by virtue of Article 15 of the Indo US treaty. 31. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. Learned Counsel for the assessee reiterated the submissions made before the lower authorities. Learned Counsel for the assessee drew our attention to the invoices raised by Mr. Neeraj Gupta and pointed out that none of the services were rendered in India. Copy of the invoices is at page 327 of the assessee's Paper Book. Learned DR pointed out that Mr. Neeraj Gupta is a highly respected professional in IP world and IP litigation. Hence, the sales commission cannot be merely said to be sales commission and is in the nature of FTS. Learned DR drew our attention to cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the Revenue authorities were justified in disallowing a sum of Rs. 1,19,305/- 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. The facts as far as the aforesaid grounds is concerned are that during the financial year relevant to AY 2015-16, the assessee incurred certain expenses in the nature of professional charges. As per the mercantile system of accounting followed by it, the assessee had to accrue these expenses in its books of account as at 31 March 2015. In the absence of invoices from the relevant vendors, instead of crediting the 'liability account', the assessee recorded a provision for expenses of Rs. 1,170,000 as at 31 March 2015. On 1 April 2015, the assessee reversed the above provision for expenses of Rs. 1,170,000 and recorded the actual expenditure upon receipt of the relevant vendor invoice at a subsequent date. In the absence of invoices from the relevant vendors and the exact amount of expense, instead of recording these expenses by crediting a 'liability', the assessee had made a provision for expense by crediting 'expenses payable& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, inter alia, held that: "It is only, thereafter, at the time of credit of any income to the account of the payee or at the time of payment thereof that the liability to deduct income-tax at source would arise on the part of the assessee." (Our emphasis supplied) b) Decision of the jurisdictional Bangalore bench of the ITAT in the case of Telco Construction Equipment Co. Ltd. [DCIT v. Telco Construction Equipment Co. Ltd. ITA No. 478/Bang/2012]. In this case: * The assessee company had recorded provision towards sales commission based on the sales made during the relevant year and the company did not deduct any tax on such provision since the same was not credited to the account of the agent. * The ITAT held that, at the time of recording such expenditure, the company had credited the amount to provision account and not to the credit of respective agent's account. It further affirmed that the agents would get vested right to receive the commission only when they fulfill the obligations under the agreement for commission and accordingly held that provisions of section 194H of the Act could be applied only when the amount is credited to the agent account. (Our emphas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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