TaxTMI 
TaxTMI 
2026 (7) TMI 123
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.... of Income Tax, Special Range-6, Bengaluru, [ the ld. AO] was partly allowed. Aggrieved by the same, the assessee is in appeal before us. 3. The assessee has raised grounds challenging the disallowance of US branch payments amounting to Rs.10,09,20,143 under section 40(a)(i) read with section 195 of the Act; the disallowance of payment to Forrester Research Ltd., United Kingdom, amounting to Rs.7,13,486 under section 40(a)(i) read with section 195; the disallowance under section 14A read with Rule 8D; and the disallowance of deduction under section 80G in respect of CSR donations. 4. The assessee is engaged in the business of telecom software services. It filed its original return of income on 29 November 2017 declaring total income of Rs.47,18,17,670 and later revised the return on 12 February 2019 declaring total income of Rs.45,80,60,670. The return was selected for scrutiny and statutory notices were issued. 5. The Assessing Officer noted that the assessee had made payments through its US branch amounting to Rs.10,90,59,330 on which tax had not been deducted at source. He therefore disallowed the same under section 40(a)(i), holding that the payments to foreign entitie....
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....ich tax had not been deducted at source were described as US branch payments. He identified 23 such payments aggregating to Rs.10,90,59,332. The assessee explained that it provides onsite and offshore software services to its customers and that overseas onsite services are rendered through its foreign branches. For providing such services, the foreign branches incurred expenditure towards subcontracting certain processes. The assessee furnished copies of the relevant agreements and submitted that these expenses were incurred by its overseas branches to earn overseas onsite revenue in the respective countries. It further stated that the related customers' revenues were first booked in the overseas branch and, therefore, the payments were made for the purpose of earning income from sources outside India. 14. The Assessing Officer rejected the assessee's explanation. He held that, being an Indian company operating under an onsite-offshore development model, the assessee had engaged non-resident subcontractors in connection with income accruing or arising in India. Referring to the master service outsourcing agreements between the assessee and the entities rendering services to its ....
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....uiring the consultants, at their own expense, to periodically deliver information relating to data, designs, diagrams, specifications, acceptance criteria and other material necessary for carrying out the work. He further noted that ownership of the intellectual property rights vested with Sasken and that the agreements also contained non-compete and non-disclosure obligations. According to him, the inclusion of such clauses showed that technical knowledge, skill, experience or know-how had been made available to the service recipient; otherwise, there would have been no reason to incorporate such protective provisions. He observed that each contractor was bound by non-disclosure obligations in respect of information communicated by, or brought to its knowledge through, the other party during implementation of the agreement. On this basis, he inferred that technology had been made available to the assessee and required protection so that it did not pass beyond the assessee, the client and the contractor. The Assessing Officer also relied on the decision of the coordinate bench in Filtrex Technologies Pvt. Ltd., 47 SOT 69 (Bangalore), where a similar view was taken. He held that, fo....
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....d on the agreements referred to in paragraph 14 of the assessment order, the judicial precedents cited therein, and the master service outsourcing agreements discussed by the learned CIT(A). He submitted that the authorities below rightly held that the assessee was required to deduct tax at source under section 195. He further contended that the exclusion under section 9(1)(vii)(b) was unavailable, as the payments were made by the assessee through its branches in connection with business carried on in India. It was further submitted that the learned assessing officer has given a reason that why the above payment is considered as fees for technical services and how they make available test is satisfied. 21. We have considered the rival submissions and examined the orders of the lower authorities. The record shows that the assessee made payments to 23 parties, aggregating to Rs.10,19,59,332, for onsite software development services. These payments were routed through the assessee's US branch. The assessee provides both onsite and offshore software services, including overseas onsite services through its foreign branches. To render such services and earn overseas onsite revenue, th....
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....tion architects, project managers or consultants. These subcontractors gathered client requirements, on the basis of which the assessee prepared project specifications and executed the projects. The Assessing Officer further observed that software development is a highly specialised technical field and that the subcontractors continuously provided technical inputs to the assessee after obtaining feedback from clients. The agreements with the subcontractors also contained provisions relating to intellectual property rights, contractor responsibilities, non-compete obligations and confidentiality. Considering these clauses and the nature of the services, we find that the services rendered by the subcontractors were technical in nature. Accordingly, the consideration paid by the assessee through its US branch falls within the scope of fees for technical services and is chargeable to tax in the hands of the contractors. We therefore uphold the orders of the Assessing Officer and the learned CIT(A) on this issue. 24. The third issue is whether the "make available" test is satisfied in respect of these payments. This question is material because, even if the payments fall within the d....
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....d to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied." 26. The above principles make it clear that the service must result in the transfer of technical knowledge, experience, skill, know-how or processes to the recipient; the recipient must obtain an enduring benefit; and it must be able to apply such knowledge independently in future without the service provider's assistance. 27. It is not necessary to infer alwa....
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....ht to use, intellectual property such as copyright, trademark or similar property. Since the assessee had not deducted tax at source, the amount was disallowed under section 40(a)(i). 31. On appeal, the learned CIT(A) confirmed the disallowance, holding that the assessee had obtained a licence to access Forrester's website and to use material bearing its logo and corporate credentials. The learned CIT(A) held that the payment was in the nature of royalty and relied on the decision in Engineering Analysis Centre of Excellence Pvt. Ltd. and the provisions of Explanation 4 and Explanation 5 to section 9(1)(vi) of the Act. Accordingly, this ground of appeal was dismissed. 32. The learned authorised representative submitted that the services rendered by Forrester Research Ltd. were in the nature of market support services for generating business leads. Referring to the India-UK DTAA and relying on judicial precedents, he contended that the payment was not chargeable to tax in India and, therefore, no tax was required to be deducted at source. He placed specific reliance on the decisions in ITO (International Taxation) v. Vida Clinical Research Pvt. Ltd., DIT v. Guy Carpenter & Co.....
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....rned authorised representative proceed on the footing that the payment was fees for technical services and must satisfy the "make available" test. However, the Assessing Officer treated the payment as royalty. The decisions relied upon by the assessee relate to fees for technical services and the requirement of making technical knowledge available. That test has no application to royalty payments, either under the domestic law or under the India-UK Double Taxation Avoidance Agreement. Since the payment is in the nature of royalty, we find no infirmity in the orders of the Assessing Officer and the learned CIT(A) in making the disallowance under section 40(a)(i) of the Act. Accordingly, Ground No. 3 of the assessee's appeal is dismissed. 37. The next ground [ Ground no 4] relates to disallowance under section 14A read with Rule 8D. During the year, the assessee earned exempt income and made a Suo motu disallowance of Rs.19,78,314. The Assessing Officer observed that the assessee had substantial investments, including investments in mutual funds and other noncurrent and non-trade investments. Having regard to the volume of investment activity, he held that the disallowance offered....
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....s unsustainable and should be deleted. 40. The learned Departmental Representative supported the orders of the lower authorities and referred to paragraph 5.3 of the assessment order. He submitted that the Assessing Officer had duly recorded satisfaction that the disallowance offered by the assessee was not in accordance with section 14A of the Act. He further contended that the Assessing Officer had considered the assessee's accounts before recording such satisfaction. Accordingly, he submitted that the Assessing Officer was justified in making the disallowance under section 14A. 41. We have carefully considered the rival contentions and perused the orders of the lower authorities. During the year, the assessee earned exempt income of Rs.11,94,22,510 and made a suo motu disallowance of Rs.19,78,314 under section 14A of the Act. In paragraph 5.3 of the assessment order, the Assessing Officer stated that he was not satisfied with the correctness of the assessee's claim after having regard to the accounts. However, the order does not show which accounts were examined or how the assessee's computation was found to be incorrect. The Assessing Officer merely observed that the asse....
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....ported the orders of the lower authorities. He submitted that the expenditure was incurred towards CSR obligations and was specifically disallowable under section 37(1). According to him, allowing deduction under section 80G for the same expenditure would defeat the statutory restriction on CSR expenditure. He therefore contended that the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) was justified. 45. We have considered the rival submissions and perused the orders of the lower authorities. The assessee incurred CSR expenditure of Rs.1,37,50,000, which was disallowed under section 37(1) in view of Explanation 2 read with section 135 of the Companies Act, 2013. However, the record shows that the assessee made donations to eligible entities and claimed deduction under section 80G of the Act. There is no specific bar in the Act denying deduction under section 80G merely because the donation forms part of CSR expenditure. The coordinate bench decisions relied upon by the learned authorised representative, including First American India Pvt. Ltd. in ITA No. 1762/Bang/2019 and JMS Mining Pvt. Ltd. v. Principal Commissioner of Income Tax, 130 taxmann.co....
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....s for technical services under Explanation 2 to section 9(1)(vii), as it related only to contract staffing or manpower supply. The assessee accordingly submitted that no tax was required to be deducted at source. 54. The Assessing Officer rejected the explanation. He held that the assessee, an Indian company operating under an offshore-onsite development model, had subcontracted a substantial part of its software development work to non-residents. He observed that the assessee retained control over all stages of client contracts, from negotiation to completion, and remained responsible for deliverables and contractual risks. The decision to engage foreign entities and direct them to perform onsite software development work was also taken by the assessee. After examining the agreements, the Assessing Officer concluded that the services were not confined to activities outside India and that the source of income was in India. He further held that the services constituted fees for technical services and satisfied the "make available" condition. Accordingly, he held that the assessee was required to deduct tax at source under section 195. 55. Before the learned CIT(A), the assesse....