IRunway India Private Limited Vs DCIT (ITAT bangalore)
Facts- The assessee filed its ROI 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’ r 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.
Conclusion- The conclusion of the revenue authorities that iRunaway 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 iRunaway 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.
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.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal by the assessee against the order dated 03.12.2018 of CIT(A)-3, Bengaluru, relating to Assessment Year 2015-16.
2. The assesee is engaged in the business of providing technology, consulting and litigation support services with focus on intellectual property domain, especially patent, to companies, law firms and other technology investment and licensing firms. The assessee provides technology related analysis, comments and information in the following three key areas:
a. patent litigation;
b. patent portfolio management; and
c. technology due diligence services.
In October 2008, the assessee set-up a 100% subsidiary, viz., iRunway Inc., in the United States of America.
3. The assessee filed its return of income 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’ r 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 charges paid by the assessee to its 100% subsidiary M/s. IRunway Incorporation, USA, for non-deduction of tax at source and by invoking the provisions of section 40(a)(ia) of the Act. During FY 2014-15, the assessee entered into contracts with its customers located in the U.S.A. Portion of the services that it agreed to provide to its customers was outsourced to its 100% subsidiary, iRunway Inc., US. For this purpose, the assessee entered into a Services Agreement dated 1 April 2012 with iRunway Inc. for availing itself of certain services. The conceptualization 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 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. The assessee provided the following documents:
a) The service agreement executed by iRunway Inc. and the assessee along with the list of services which was included in section A of the said service agreement;
b) Copy of invoices raised by iRunway Inc. on the assessee towards sub-contracting fee;
c) Brief write-up on the relevant legal framework in the US for governing patent litigation; and
d) Sample contract entered 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 the US. A portion of the services that it agrees to undertake to its customers is outsourced by it to its 100% subsidiary, iRunway Inc., US. The conceptualization and scope of work to be performed by iRunway Inc. is determined by the assessee. Further, the assessee takes the overall responsibility for the deliverables, it being the primary contractor for rendering services to its client.
9. For the above purpose, the assessee has entered into a Services Agreement dated 1 April 2012 with iRunway Inc. for availing itself of certain 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’.
b) The confidential information that is accessed under the ‘Discovery’ process is referred to as `Discovery Material’.
The Parties are required to obtain an Order from the US Court that will lay down the conditions for treating, obtaining and using such Discovery Material. The access to Discovery Material is given only to those people who sign the Protective Order issued by the US Court.
c) Generally, the Protective Order will, inter alia, provide the manner in which the Discovery Material [also known as Protective Material] is to be stored/ maintained by the Parties and the location / place where such Material will be available to be accessed by the Parties.
The Protected Material is not allowed to leave the territorial boundaries of the US or be made available to any foreign national who is not:
