Foreign Subsidiary Company not providing Technical Knowledge to Assessee: ITAT holds Outsourcing Charges are not Taxable as FTS or FIS [Read Order]

The Bangalore Bench of Income Tax Appellate Tribunal ( ITAT ) has held that foreign subsidiary company not providing technical knowledge to the assessee and holds that outsourcing charges are not taxable as Fees for Technical Services (FTS) under the Act and as Fees for Included Services (FIS) under the India-US Tax Treaty.

The appellant M/s. IRunway India Private Limited 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 appellant 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 assesse and assessee takes the overall responsibility for the deliverables, it being the primary contractor for rendering services to its client.

The AO held 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.On appeal by the Assessee, the CIT(A) confirmed the order of the AO. Hence, the assessee filed appeal before the ITAT.

The assessee submitted that the outsourcing charges paid to iRunway Inc. ought to be regarded as being towards services utilised by the Assessee in its 'business carried on outside India', since, the services of iRunway Inc. are utilised in the project undertaken by the Assesseeoutside India; the customers of the Assessee are located outside India; and activities relating to the portion of the project with the customer, for which the subcontracting charges are paid to iRunwayInc, are undertaken outsideIndia.Accordingly, the underlying income would not be deemed to accrue or arise in India and as a result of which therewould be no liability to deduct tax at source in respect of such payment andhence such expenditure ought not to be disallowed u/s 40(a)(i) of the Act

The Tribunal observed that 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. 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.

The Coram of Mr. N. V. Vasudevan andMrs. Padmavathy S has held that “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”.

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