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TMI Blog2025 (5) TMI 274X X X X Extracts X X X X X X X X Extracts X X X X ..... (4)(b) of the Double Taxation Avoidance Agreement (DTAA) between India and USA which says that payment of any kind made to a person in consideration for rendering technical services are taxable in India if such services consist of development and transfer of a technical plan or technical design? 2) Whether on the facts and in the circumstances of the case and in law, the CIT(A) was justified in relying on the ITAT order by ignoring the correct applicability of the section 9(1)(vii)(b) of the Act in this case as assessee's source of income is in India but not USA through clients of assessee are in USA and ignoring the aspect that merely because customers of the assessee are outside India that cannot be the basis to say that the source of income is in USA? 3) Whether on the facts and in the circumstances of the case and in law, the CIT(A) was justified in relying on the ITAT order which inturn relied on Hon'ble Delhi High Court in the case of DTT VS. Lufthansa Cargo India Ltd., (2015) 60 taxmann.com 187 (Delhi), wherein the activities were carried out outside India and in this case assessee carries on business in India notwithstanding that his clients are from USA and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's own case in respect of the regular income tax assessment proceedings has held that the disallowance made in respect of the above u/s 40(a)(ia) of the Act cannot be sustained and is directed to be deleted. 6. Ld. D.R. on the other hand, vehemently submitted that assessee's USA based subsidiary has provided technical services to the assessee and the transaction attract provisions of article 12 (4)(b) of the Double Taxation Avoidance Agreement (DTAA) between the India and USA. Further ld. D.R. submitted that the ld. CIT(A) was not justified in relying on the ITAT order by ignoring the correct applicability of section 9(1)(vii)(b) of the Act in this case as assessee's source of income is in India but not USA. Further, the ld. D.R. submitted that CIT(A) was not justified in relying the ITAT order which in turn relied on Hon'ble Delhi High Court in the case of DTT Vs. Lufthansa Cargo India Ltd., (2015) 60 taxmann.com 187 (Del). Lastly, the ld. D.R. submitted that the ld. CIT(A) erred in relying on the ITAT order in rendering benefit to Article 15 of the Indo-US Treaty though the services of non-resident towards (sales commission) will not fall under the category of "p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide 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 Treaty. The relevant articles in the treaty are is Article 12 which deals with taxability of Royalties and fees for included services. In terms of Article 12(1) Royalties and fees for included services arising in a Contracting State (USA in this case) and paid to a resident of the other c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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, skill, etc. from the person rendering services to the person utilizing the same is contemplated by the article. Some sort of durability or permanency of the result of the 'rendering services' is envisaged which will remain at the disposal of the person utilizing the services. The fruits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 iRum;vay 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. Before CIT(A) the assessee explained as to why sales commission paid to Mr. Neeraj Gupta is not taxable in India. The assessee pointed out that it entered into an agreement called iRunway Sales Contractor Agreement' with Mr. Neeraj Gupta wherein it availed itself of certain sales consulting services. As per the said agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsonal 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 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 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 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 nei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x 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 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'. The above provision towards expenses payable was reversed upon receipt of actual invoice and an accounting entry recording exact liability for such expenses were recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ITAT 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 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 woul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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