The Income Tax Appellate Tribunal, Bangalore, has clarified a critical boundary in international tax compliance by holding that payments made by an Indian company to foreign contractors for onsite software services do not attract tax deduction at source under Section 195 unless the 'make available' condition under the India-US Double Taxation Avoidance Agreement is satisfied. This decision provides much-needed doctrinal clarity for IT and software services firms operating under the global delivery model.
Background & Facts
The Dispute
M/s. Sasken Technologies Ltd., an Indian company engaged in telecom software services, faced disallowances under Section 40(a)(i) read with Section 195 of the Income-tax Act, 1961, for payments made to foreign entities for software development services rendered overseas. The Assessing Officer treated these payments as fees for technical services, requiring tax deduction at source, and disallowed the expenses due to non-compliance. The dispute centered on whether such payments constituted taxable income in India and whether the 'make available' condition under the India-US DTAA was met.
Key Facts
- The assessee operates under an onsite-offshore software development model, serving global clients.
- For Assessment Year 2017-18, the assessee made payments aggregating ₹10,90,59,332 to 23 non-resident entities through its US branch for onsite software services.
- The payments were routed via the US branch, but the contracts were negotiated, managed, and controlled from India.
- The foreign contractors performed roles such as solution architects, project managers, and consultants, directly interacting with clients.
- The agreements contained clauses on confidentiality, intellectual property, non-compete, and non-disclosure.
- The assessee claimed that the services were rendered for business carried on outside India and did not involve transfer of technical knowledge.
- For Assessment Year 2020-21, a similar payment of ₹47,38,170 was made to Tangent International, UK, for contract staffing services, with disputed nature of services.
- The assessee also paid ₹7,13,486 to Forrester Research Ltd., UK, for access to its market research content and branding rights.
- The assessee earned exempt income of ₹11,94,22,510 in AY 2017-18 and ₹8,34,15,000 in AY 2020-21, and claimed deductions under Section 80G for CSR donations of ₹1,37,50,000 in each year.
Procedural History
- 29 November 2017: Original return filed for AY 2017-18 declaring income of ₹47,18,17,670.
- 12 February 2019: Revised return filed declaring income of ₹45,80,60,670.
- 23 December 2019: Assessment order passed under Section 143(3) by the Assessing Officer, disallowing payments under Sections 40(a)(i), 14A, and 80G.
- 31 July 2025: Order passed by the National Faceless Appeal Centre (CIT(A)) partly allowing the appeal.
- 07 April 2026: Hearing held before ITAT Bangalore.
- 29 June 2026: Judgment pronounced.
The Parties' Positions
For the Assessee
- Contended that payments to US contractors were for services rendered outside India and fell within the exclusion under Section 9(1)(vii)(b).
- Argued that no technical knowledge, skill, or know-how was transferred to the assessee; the services were merely execution of tasks under client direction.
- Relied on CIT v. De Beers India Minerals Pvt. Ltd. to argue that the 'make available' test was not satisfied.
- Submitted that the Forrester payment was not royalty but marketing expenditure, governed by Article 7 of the India-UK DTAA.
- Argued that Section 80G deduction for CSR donations cannot be denied merely because the donation is part of CSR obligations.
- Contended that the Assessing Officer failed to record objective satisfaction under Section 14A(2) before invoking Rule 8D.
For the Revenue
- Maintained that the services were sourced in India as the assessee controlled the contracts, deliverables, and client relationships.
- Held that the contractual clauses on IP, confidentiality, and deliverables indicated transfer of technical knowledge, satisfying the 'make available' condition.
- Treated the Forrester payment as royalty under Explanation 4 and 5 to Section 9(1)(vi), requiring deduction under Section 195.
- Argued that CSR expenditure is statutorily barred from deduction under Section 37(1), and allowing Section 80G would circumvent this restriction.
- Asserted that the Assessing Officer had recorded satisfaction under Section 14A(2) by referring to the financial statements.
Relief Sought
The assessee sought deletion of disallowances totaling ₹10,09,20,143 (US branch payments), ₹7,13,486 (Forrester), ₹1,73,53,008 (Section 14A), and ₹1,37,50,000 (Section 80G), and reversal of interest under Section 234B.
The Legal Issue
The central questions were: (1) Whether payments to foreign contractors for onsite software services constitute fees for technical services under Section 9(1)(vii) and satisfy the 'make available' condition under the India-US DTAA; (2) Whether payment for access to branded market research content qualifies as royalty; (3) Whether Section 80G deduction is permissible for CSR donations despite Section 37(1) disallowance; and (4) Whether the Assessing Officer recorded objective satisfaction under Section 14A(2) before computing disallowance under Rule 8D.
Arguments Presented
For the Appellant
The assessee relied on CIT v. De Beers India Minerals Pvt. Ltd. to argue that mere use of technical services does not equate to transfer of enduring technical knowledge. It emphasized that the contractors acted as extensions of the client’s team, not as knowledge providers to the assessee. The payment to Forrester was characterized as sales and marketing expenditure, not royalty, citing ITO v. Vida Clinical Research and Raymond Ltd. v. DCIT. For Section 80G, it cited coordinate bench decisions in First American India Pvt. Ltd. and JMS Mining Pvt. Ltd., asserting no statutory bar exists against claiming both CSR and Section 80G benefits. Regarding Section 14A, it invoked Maxopp Investment Ltd. and Hindustan Aeronautics Ltd. to argue that mere reference to financial statements without specific analysis of the assessee’s computation does not satisfy the statutory requirement of objective satisfaction.
For the Respondent
The Revenue contended that the assessee’s control over contracts, deliverables, and client relationships established India as the source of income. It relied on Infosys Technologies Ltd. and Wallace Pharmaceuticals Pvt. Ltd. to argue that the confidentiality and IP clauses in the agreements demonstrated transfer of technical knowledge. For the Forrester payment, it cited Engineering Analysis Centre of Excellence Pvt. Ltd. and the definitions under Explanation 4 and 5 to Section 9(1)(vi) to classify the payment as royalty. On Section 80G, it argued that allowing deduction would defeat the legislative intent behind Section 37(1) and the Companies Act, 2013. For Section 14A, it pointed to paragraph 5.3 of the assessment order as sufficient satisfaction.
The Court's Analysis
The Tribunal undertook a meticulous analysis of the nature of services, contractual terms, and treaty obligations. It began by distinguishing between mere service provision and the transfer of technical knowledge.
"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."
The Tribunal held that while the contractors provided technical inputs, there was no evidence that the assessee acquired the capability to independently replicate the work without continued reliance on the contractors. The inclusion of confidentiality clauses, while indicative of proprietary information, did not, by itself, establish that the knowledge was imparted to the assessee for future independent use. The Tribunal distinguished De Beers as directly on point and rejected the Revenue’s reliance on Filtrex Technologies, noting that the facts in that case involved transfer of proprietary software designs, which was absent here.
Regarding the Forrester payment, the Tribunal found no merit in the assessee’s argument that it was fees for technical services. The payment was for access to copyrighted content bearing Forrester’s branding and logo, which clearly fell within the definition of royalty under Explanation 4 and 5 to Section 9(1)(vi). The Tribunal emphasized that the India-UK DTAA does not contain a 'make available' clause for royalties, and thus the domestic law applied.
On Section 14A, the Tribunal held that the Assessing Officer’s reference to the financial statements without specific analysis of the assessee’s computation was insufficient. Citing Maxopp Investment Ltd., it reiterated that Section 14A(2) mandates objective satisfaction based on the assessee’s own books and records, not general observations about investment size.
On Section 80G, the Tribunal found no statutory prohibition against claiming deduction for CSR donations. It noted that Section 37(1) bars business expense treatment, but Section 80G is a separate incentive provision. Coordinate bench decisions supported this view, and the Revenue failed to cite any provision denying Section 80G benefits for CSR.
For the Tangent International payment in AY 2020-21, the Tribunal noted the absence of the scope of work. Without evidence of whether the services were manpower supply or technical consultancy, the issue could not be resolved. The Tribunal granted a 90-day window for the assessee to submit the relevant documentation.
The Verdict
The assessee succeeded on three key grounds. The disallowance of ₹10,09,20,143 for US branch payments under Section 40(a)(i) was deleted as the 'make available' test was not satisfied. The disallowance of ₹1,73,53,008 under Section 14A was deleted for failure to record objective satisfaction. The disallowance of ₹1,37,50,000 under Section 80G was allowed, subject to verification of eligibility. The disallowance of ₹7,13,486 for the Forrester payment was upheld as royalty. For the Tangent International payment of ₹47,38,170, the issue was remanded: the assessee must submit the scope of work within 90 days, failing which the disallowance shall stand. The appeal for AY 2020-21 was partly allowed on identical grounds.
What This Means For Similar Cases
The 'Make Available' Test Requires More Than Technical Input
- Practitioners must now demonstrate that the recipient gains the ability to independently use the transferred knowledge after the contract ends.
- Merely having skilled contractors or using proprietary tools does not satisfy the test.
- Agreements with confidentiality clauses alone are insufficient; evidence of knowledge absorption is required.
Royalty vs. Fees for Technical Services Must Be Clearly Differentiated
- Payments for access to copyrighted content, logos, or branded materials are royalty under Section 9(1)(vi).
- The 'make available' test under DTAA does not apply to royalty; domestic law governs.
- Tax advisors must review contract language to classify payments correctly before determining TDS obligations.
Section 80G Deduction for CSR Is Permissible
- Companies can claim Section 80G deduction for CSR donations even if the expense is disallowed under Section 37(1).
- The two provisions operate independently; one is a disallowance, the other a deduction.
- Assessing Officers must not conflate the two; denial under Section 37(1) does not imply denial under Section 80G.
Procedural Compliance Under Section 14A Is Non-Negotiable
- The Assessing Officer must record specific, objective satisfaction based on the assessee’s own accounts.
- General references to investment size or lack of separate books are inadequate.
- Failure to comply renders the Rule 8D computation void, regardless of the quantum.
