2022 (7) TMI 1396 - AT - Income Tax

Income taxable in India - Fabrication charges Receipts as fees for technical services - DTAA between India and Singapore - taxability under Article 12(4)(a) on the ground that one of the group companies, i.e. OC-US, has received such payments from the Indian affiliate - HELD THAT - There is no dispute that the assessee is entitled to the benefits of the Indo-Singapore tax treaty, that the assessee does not have any permanent establishment in India, and that, accordingly, income earned by the assessee cannot be taxed as business profits under article 7 of the Indo Singapore tax treaty. The OC US and the assessee, a Singapore-based entity, are distinct entities and, they have distinct legal existences. The mere fact that these entities are part of the same multinational group does not require, or justify, ignoring the distinct identities of these entities, or the fact that the operations of these entities are in different jurisdictions. It is also not even the case of the revenue authorities that the refurbishing work is not carried out in Singapore. While a lot of emphases is paid by the revenue authorities on the fact that on the same transaction the assessee had paid taxes in India in the immediately preceding year, and the fact that it is part of overall common arrangements that the leasing is done from one jurisdiction and the refurbishing or bushing is done is another jurisdiction. Nothing, however, turns on these arguments also. The acceptance of tax liability in one year does not constitute estoppel against the assessee for the other years, and it is for the group to organize a multinational group to organize its activity, as long as it is a bonafide arrangement, in a manner as deemed commercially expedient. We are satisfied that so far as the income of the assessee from the refurbishing of the bushes is concerned, it is not taxable in India as the provisions of Article 12(3) cannot be invoked in this case, and that, so far as the provisions of Article 12(4)(a) are concerned, these provisions cannot be invoked as the assessee has not rendered these services in connection with the services for which a payment described in paragraph 3 is received by the assessee. As also bearing in mind the entirety of the case, we uphold the plea of the assessee, and delete the impugned addition - Decided in favour of assessee.

Issues Involved:
1. Taxability of fabrication charges received by the assessee as 'fees for technical services' under the Indo-Singapore Double Taxation Avoidance Agreement (DTAA).
2. Application of Article 12(4)(a) of the Indo-Singapore DTAA.
3. Relevance of Article 9 (Associated Enterprises) in determining tax liability.
4. Consistency of tax treatment across different assessment years.

Issue-wise Detailed Analysis:

1. Taxability of Fabrication Charges as 'Fees for Technical Services':

The primary issue was whether the amount of Rs 4,84,44,048 received by the assessee for bushing and fabrication services should be taxed as 'fees for technical services' (FTS). The assessee argued that these charges were not taxable in India since they did not have a permanent establishment in India and the services did not qualify as FTS or royalties under the treaty provisions. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) disagreed, stating that the services were ancillary and subsidiary to the application or enjoyment of the right, property, or information for which a payment described in Article 12(3) was received by an associated enterprise (OC-US).

2. Application of Article 12(4)(a) of the Indo-Singapore DTAA:

The AO and DRP relied on Article 12(4)(a) of the Indo-Singapore DTAA, which defines FTS as payments for services of a managerial, technical, or consultancy nature that are ancillary and subsidiary to the application or enjoyment of the right, property, or information for which a payment described in paragraph 3 is received. They argued that the fabrication services facilitated the effective application or enjoyment of the bushings, thus qualifying as FTS. However, the tribunal found that the services did not make available technical knowledge, experience, skill, know-how, or processes to the Indian affiliate, and hence, did not qualify as FTS under Article 12(4)(a).

3. Relevance of Article 9 (Associated Enterprises):

The AO and DRP invoked Article 9, which deals with associated enterprises, to argue that the transaction between the Indian affiliate and OC-US should be treated as a transaction with the assessee. The tribunal rejected this approach, stating that Article 9 is meant to neutralize the impact of intra-AE relationships on profits but does not allow for restructuring the transaction itself. The tribunal emphasized that the OC-US and the assessee are distinct legal entities, and the mere fact that they are part of the same multinational group does not justify ignoring their separate identities.

4. Consistency of Tax Treatment Across Different Assessment Years:

The tribunal noted that the acceptance of tax liability in one year does not constitute estoppel against the assessee for other years. The tribunal found that the assessee's arrangement was bona fide and commercially expedient, and the income from refurbishing the bushes was not taxable in India as per the provisions of Article 12(3) and Article 12(4)(a) of the Indo-Singapore DTAA.

Conclusion:

The tribunal upheld the assessee's plea and deleted the impugned addition of Rs 4,84,44,048, concluding that the fabrication charges were not taxable in India. This decision was applied mutatis mutandis to the remaining two appeals for the assessment years 2016-17 and 2017-18, resulting in the deletion of the impugned additions for those years as well. All three appeals were allowed in favor of the assessee.

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