Treaty make-available test controls taxability of outsourcing, commission, and provision-based professional charges under withholding rules.

Technical or consultancy payments to a US recipient are taxable in India under treaty provisions only if the services make available technical knowledge, experience, skill, know-how, or processes so the recipient can apply them independently later. On that test, outsourcing charges for patent litigation support were held not to be fees for included services or fees for technical services, because reports and analysis did not transfer usable technical capability, and the disallowance was deleted. Sales commission for commercial solicitation and coordination was also held not taxable, as the services did not make available technical knowledge or skills, and that disallowance was deleted. A year-end provision for professional charges remained subject to tax deduction at source, with protection against double disallowance on reversal.

---

---

Issues: (i) Whether outsourcing charges paid to a US subsidiary were liable to disallowance for non-deduction of tax at source; (ii) Whether sales commission paid to a US resident was liable to disallowance for non-deduction of tax at source; (iii) Whether provision made for professional charges was liable to disallowance for non-deduction of tax at source.

Issue (i): Whether outsourcing charges paid to a US subsidiary were liable to disallowance for non-deduction of tax at source.

Analysis: The payment had to be tested first under the treaty, since treaty protection would prevail where more beneficial. The services rendered in connection with patent litigation and related technical support were held not to have resulted in any transfer of technical knowledge, skill, know-how, or process to the assessee. Mere preparation of reports, analysis, and deliverables did not establish that the recipient was enabled to perform such work independently in future. The protective-order restrictions also showed that the confidential source code remained subject to US-side access constraints, and the service provider did not make available any technical knowledge to the assessee.

Conclusion: The outsourcing charges were not chargeable to tax in India as fees for included services or fees for technical services, and the disallowance was deleted in favour of the assessee.

Issue (ii): Whether sales commission paid to a US resident was liable to disallowance for non-deduction of tax at source.

Analysis: The commission was linked to sales procured and was paid for commercial solicitation and coordination services. The mere fact that the recipient was technically qualified did not convert the commission into technical services. The services did not make available technical knowledge, experience, skill, know-how, or processes to the assessee. The recipient also did not satisfy the conditions for taxation under the relevant independent personal services/article-based framework relied upon for treaty protection.

Conclusion: The sales commission was not taxable in India on the facts found, and the disallowance was deleted in favour of the assessee.

Issue (iii): Whether provision made for professional charges was liable to disallowance for non-deduction of tax at source.

Analysis: The assessee had created a year-end provision in the mercantile system because invoices had not yet been received and the actual liability was crystallised later upon receipt of bills. The statutory obligation to deduct tax at source was held to arise even where the expense is routed through a provision or suspense account. However, the assessee's apprehension of double disallowance on reversal of the provision in the next year was accepted, and the assessing authority was directed to avoid duplicating the disallowance.

Conclusion: The disallowance on the provision was sustained, subject to protection against double disallowance on reversal, and the issue went against the assessee.

Final Conclusion: The appeal succeeded on the two payment-disallowance issues relating to outsourcing charges and sales commission, while the provision-for-expense disallowance was maintained with a safeguard against double disallowance, resulting in a partial relief to the assessee.

Ratio Decidendi: For treaty purposes, technical or consultancy services are taxable as fees for included services only when they make available technical knowledge, experience, skill, know-how, or processes to the recipient so that the recipient can apply them independently in future; mere rendering of services or delivery of an analytical output is insufficient.

---