2016 (7) TMI 1699 - AT - Income Tax

TDS u/s 195 - bareboat hire charges for non-deduction of tax at source - Addition u/s 40(a)(i) - HELD THAT - Payments for use of equipments under Article 13 of the treaty between India and France, if any convention or agreement or protocol are signed after 01.09.1989 between India and a third State which is a member of OECD, then for the purpose of taxation in India, the scope of taxation shall be restricted to such treaty signed after 01.09.1989 if its terms are beneficial to the assessee and as rightly pointed out by the assessee India has signed a treaty with Sweden subsequently wherein payments made for hiring equipments are excluded from taxing in the contracting State. Therefore, as claimed by the assessee income arising out of the payment made by the assessee towards hiring equipments will not be taxable in India, accordingly assessee will not be liable for deducting tax at source. Needless to mention that protocol will form an integral part of the convention and it has to be duly respected as the same is signed between two countries under agreement for avoidance of double taxation. Therefore, the assessee succeeds in its appeal on this issue. Determining ALP by making downward adjustment in respect of excess fees paid for technical services to AEs - HELD THAT - DRP has only computed the correct fee payable by the assessee to its AE in accordance with the rate prescribed towards the eligible turnover while as the assessee had computed the fee according to their convenience and advantage disregarding the agreement with its AE. For the irrational payment made by the assessee over and above the terms of the agreement between the assessee and its AE the DRP/TPO has revised the profit of the assessee by downward adjustment. Therefore, we do not find it necessary to interfere with the orders of the learned DRP and the learned Assessing Officer. Accordingly, this issue is decided against the assessee. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of Rs. 50,80,13,185/- being bareboat hire charges for non-deduction of tax at source u/s 195 by invoking the provisions of section 40(a)(i) of the Act.
2. Determining ALP by making downward adjustment of Rs. 2,23,00,288/- in respect of fees paid for technical services to AEs.

Summary:

Issue 1: Disallowance of Rs. 50,80,13,185/- being bareboat hire charges for non-deduction of tax at source u/s 195 by invoking the provisions of section 40(a)(i) of the Act:

The learned Assessing Officer observed that the assessee made a payment of Rs. 50,80,13,185/- to M/s. Societe De Dragage International, France for bareboat charter hire rental charges without deducting TDS, invoking the provisions of section 40(a)(i). The assessee argued that protocol 7 of the India-France treaty restricts the scope of the treaty to subsequent treaties signed after 01.09.1989 with OECD members, which in this case, exempts the payment from being taxed in India. However, the learned Assessing Officer and the learned DRP disagreed, stating that the payment constitutes "royalty" under Article 13 of the India-France treaty and is thus taxable in India. The tribunal, upon reviewing the Indo-France treaty protocol 7, agreed with the assessee, stating that the protocol restricts the scope of taxation to subsequent treaties beneficial to the assessee, such as the India-Sweden treaty, which excludes payments for hiring equipment from being taxed. Consequently, the tribunal concluded that the assessee is not liable for deducting tax at source, allowing the appeal on this issue.

Issue 2: Determining ALP by making downward adjustment of Rs. 2,23,00,288/- in respect of fees paid for technical services to AEs:

The learned DRP noted that the assessee paid Rs. 10,20,34,943/- as fees for technical services to its AE, M/s. Tideway BV, which was in excess by Rs. 2,41,82,289/- as per the agreement, which stipulated a payment of 3% of the project turnover amounting to Rs. 7,78,52,654/-. The TPO determined the ALP at Rs. 7,78,52,654/- and proposed a downward adjustment of Rs. 2,41,82,289/-. The tribunal found that the learned DRP correctly computed the fee payable according to the agreement and upheld the downward adjustment, deciding against the assessee on this issue.

Conclusion:

The appeal of the assessee is partly allowed, with the tribunal ruling in favor of the assessee on the issue of disallowance of bareboat hire charges but against the assessee on the issue of downward adjustment of fees for technical services.