INCOME TAX OFFICER, INTERNATIONAL TAXATION, WARD-1(2), BENGLAURU, BENGALURU vs. UNITEDLEX INDIA PVT. LTD. (EARLIER KNOWN AS I-RUNWAY INDIA PRIVATE LIMITED), BENGALURU

Before us, the ld. A.R. of the assessee completely relied upon the order of the ld. CIT(A)/NFAC and submitted that as per the provisions of the section 9(1)(vii)(b) of the Act, the income shall not be deemed to accrue or arise in India for the purposes of making or Unitedlex India Pvt. Ltd., Bangalore Page 4 of 14 earning any Income from any source outside India & therefore the question of deduction of Tax does not arise. Further the ld. AR of the assessee submitted that as the ITAT has already in the assessee’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.

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 “professional services” as per the clause 15(2) of the Indo-US Treaty.

We have heard the rival submissions and perused the materials available on record. In the present case, the AO held that as per section 195 of the Act, the assessee was required to deduct tax at source on payment made to non-resident entity. The AO found that tax has not been deducted at source thereon either at the time of crediting the amount or subsequently. As the assessee company failed to discharge its obligation to deduct tax at source, Unitedlex India Pvt. Ltd., Bangalore Page 5 of 14 as stipulated u/s 195 of the Act, the AO as per the provisions contained in section 201 (1) of the Act, held the assessee company as “assessee in default” in respect of tax not deducted at source on payment made to the non-resident for the fees for technical consultancy. The AO has also held that the assessee is liable to pay the tax deductible along with the interest u/s 201(1A) of the Act. Further, ld. AO held that as per provisions contained in section 206AA of the Act, which begins with non-obstante clause therefore it over-rights the other sections of the Act including section 90(2) of the Act and accordingly a higher rate of tax for FTS @25% as per section 115A of the Act was applied being the higher rate as provided in section 206AA of the Act and the appropriate EC and SC is also applied. Before us, the revenue has raised various grounds on the merit of the case which in our opinion, has already been decided by this Tribunal in dated 27.4.2022 in the case of M/s. IRunway India Private Limited i.e. in assessee’s own case for the same assessment, which was followed by the ld. CIT(A) in deciding the appeal in favour of the assessee, wherein it was held as under:

We have given a very careful consideration to the rival submissions. We shall first take up for consideration argument of the assessee that the sum paid by the assessee to iRunway Inc., USA cannot be brought to tax in India even assuming that the nature of the payment was FTS within the meaning of the Act because under the Indo US Treaty, FTS is taxable in India only when 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 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 available’. The meaning of the expression make available were considered by the Tribunal in the case of Raymond Ltd. Vs. DCIT (2003) 80 TTJ (Mum) 120. The Tribunal after elaborate analysis of all the related aspects observed that :-

In the Raymond’s case (supra), the Tribunal also held that rendering of technical services cannot be equated with making available the technical services. In the case of CESC Ltd. Vs. DCIT (2003) 80 TTJ (Cal) (TM) 806: (2003) 87 ITD 653 (Cal)(TM) also the question regarding the scope of expression making available came up for the consideration of the Tribunal. In that case, the Tribunal was dealing with the scope of Article 13(4)(c) of the Indo-UK tax treaty which is admittedly in parimateria 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.

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 interpretation of 'make use' to be equivalent to 'make available' of technical knowledge. The analysis provided in the memo prepared by the employee of iRunway Inc. was only made a part of the final deliverable. The same did not result in the employee of the assessee being enabled to be in a position to arrive at the analysis done by the employee of iRunway Inc. 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 Unitedlex India Pvt. Ltd., Bangalore Page 8 of 14 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. Further, the 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 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 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. The facts as far as this addition is concerned are that the assessee had entered into an iRunway Sales Contractors Agreement' with Mr. Neeraj Gupta, wherein the assessee availed itself of certain sales consulting services. In consideration thereof, sales commission of 8% to 10% aggregating to Rs. 4,505,685 was payable by the assessee to Neeraj Gupta for FY 2014-15. This 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 Unitedlex India Pvt. Ltd., Bangalore Page 9 of 14 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.

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.

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 agreement, Mr. Neeraj Gupta would: a) assist the assessee in acquiring new customers or acquire new business from existing customers of the assessee; b) work closely with Assessee's legal department to ensure that all terms and conditions for proposed sale is being approached in a manner consistent with the Assessee's policies and objectives; and c) ensure timely collection of payment and manage communications with and retention from the customers introduced by him.

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:

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 therein.

The CIT(A) however upheld the order of the AO. He held that u/s.5(2)(b) of the Act, income that is deemed to accrue or arise to a person who is non-resident, in India is taxable in India. He held that the non- resident did not merely procure orders for the assessee but negotiated price and terms of the contact, opening of LC, shipment and payment and attend to queries in regard to shipment. Therefore the non-resident provided technical and consultancy services and hence the sum in question is 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.

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 Unitedlex India Pvt. Ltd., Bangalore Page 11 of 14 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 clause 13 of the agreement of rendering services between the assessee and Mr. Neeraj Gupta dated 01.04.2015 wherein it was specifically provided that the assessee will be the owner of the IPR in all inventions conceived in whole or in part by the services of Mr. Neeraj Gupta. According to the Learned DR, this clause is clear evidence 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.

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 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.

The next issue that arises for consideration is as to 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 Unitedlex India Pvt. Ltd., Bangalore Page 12 of 14 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'. Further, since the vendor's right to receive such professional fees arose only after 31 March 2015 when an invoice was raised by it, the assessee did not deduct any taxes at source at the time of recording a provision as at 31 March 2015.

During the assessment proceedings, the AO directed the assessee to show- cause 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.

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 recorded as and when invoices were received from the relevant Vendors. Based on the above , the Assessee submits that there was no requirement to deduct tax on provision for professional fee and that it did qualify for deduction u/s 37 of the Act. The Assessee also placed reliance on the following decision in this regard: a) Decision of the jurisdictional Karnataka High Court in the case of ACTT v. Motor Industries Company (249 ITR 141). In the context of section 195 of the Act, the Hon'ble High Court, 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."

Without prejudice to the above, it was submitted 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.

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.

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.”

In the result, appeal of the revenue is dismissed.