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2025 (5) TMI 1091 - AT - Income TaxIncome deemed to accrue or arise in India - Treating fabrication charges received - Fees for Technical Services ( FTS ) u/s 9(1)(vii) of the Act as well as Article 12 of the India-Singapore - HELD THAT - Fees for Technical Services ( FTS ) under section 9(1)(vii) of the Act as well as Article 12 of the India-Singapore - HELD THAT - As decided in Owens Corning (Singapore) PTE Ltd 2022 (7) TMI 1396 - ITAT MUMBAI an arrangement regarding situs of entities providing different facilities in connection with a transaction of the multinational group is done in a tax-efficient manner cannot be reason enough to disregard the arrangement. 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. In view of these discussions 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.
The core legal questions considered by the Tribunal in this appeal are:
1. Whether the fabrication charges received by the assessee from its Indian associated enterprise constitute "fees for technical services" (FTS) taxable under section 9(1)(vii) of the Income-tax Act, 1961 and Article 12 of the India-Singapore Double Taxation Avoidance Agreement (DTAA)? 2. Whether the income from such fees for technical services should be taxed at the rate prescribed under section 115A of the Act or at the beneficial treaty rate under Article 12 of the India-Singapore DTAA? 3. Whether interest under section 234B of the Income-tax Act is leviable on the tax demand arising from the addition of fabrication charges as FTS? Issue 1: Taxability of Fabrication Charges as Fees for Technical Services Relevant Legal Framework and Precedents: The primary statutory provisions under consideration are section 9(1)(vii) of the Income-tax Act, 1961, which governs the taxation of fees for technical services, and Article 12 of the India-Singapore DTAA, which defines and regulates the tax treatment of FTS income. Article 12(3) deals with royalties, while Article 12(4) defines fees for technical services, subdividing the definition into clauses (a), (b), and (c) dealing with ancillary services, making available technical knowledge, and transfer of technical plans or designs, respectively. Article 9 of the DTAA addresses associated enterprises and transfer pricing adjustments. Precedents include multiple coordinate bench decisions of the Tribunal in the assessee's own case for various assessment years (2012-13, 2015-16, 2016-17, 2017-18, 2018-19, 2019-20, 2020-21, and 2021-22), where the Tribunal held that the fabrication charges do not amount to FTS under Article 12(4) of the DTAA. Court's Interpretation and Reasoning: The Tribunal examined whether the fabrication charges fall under the definition of FTS under Article 12(4). The assessee contended that the services rendered were neither ancillary and subsidiary to the application or enjoyment of any right or property for which royalty payments are made under Article 12(3), nor did they "make available" any technical knowledge, skill, or know-how as required under Article 12(4)(b). Further, no transfer of technical plans or designs occurred as per Article 12(4)(c). The Tribunal relied on the coordinate bench's earlier rulings which emphasized that the fabrication charges relate to refurbishing activities that do not involve transfer or making available of technical knowledge or rights. It was noted that the assessee does not receive any royalty payments under Article 12(3), a precondition for invoking Article 12(4)(a). The revenue's attempt to invoke Article 9 to attribute payments made to an associated enterprise (OC-US) to the assessee was rejected as beyond the scope of Article 9, which is limited to neutralizing transfer pricing distortions and cannot restructure transactions or extend treaty provisions beyond their plain meaning. The Tribunal highlighted that the distinct legal identities of the assessee and OC-US, their operations in different jurisdictions, and the bona fide commercial arrangements could not be disregarded merely because they are part of the same multinational group. The Tribunal further observed that acceptance of tax liability in preceding years does not estop the assessee for subsequent years. Key Evidence and Findings: The assessee's status as a Singapore tax resident without a permanent establishment in India was undisputed. The fabrication charges were received from Indian associated enterprises, but no royalty payments were made to the assessee. The refurbishing services did not involve transfer of technical knowledge or rights. No material change in facts or law was brought forth by the revenue for the assessment year under consideration. Application of Law to Facts: Applying the plain language of Article 12 and the principles established in prior Tribunal decisions, the Tribunal concluded that the fabrication charges do not qualify as FTS. The revenue's reliance on Article 9 to extend the scope of Article 12(4)(a) was found impermissible. Treatment of Competing Arguments: The revenue argued for taxability based on the prior assessments and invoked Article 9 to link payments made to associated enterprises. The Tribunal rejected these contentions, emphasizing the limited scope of Article 9 and the necessity to adhere to the treaty's explicit wording and intent. The assessee's submissions, supported by precedent, were accepted. Conclusion: The Tribunal held that the fabrication charges received by the assessee are not taxable as fees for technical services under section 9(1)(vii) of the Act or Article 12 of the India-Singapore DTAA. The addition made by the AO was deleted. Issue 2: Tax Rate on Income from Fees for Technical Services This issue became academic and infructuous following the Tribunal's ruling on Issue 1, as the income was held not taxable as FTS. Hence, no separate adjudication was required. Issue 3: Levy of Interest under Section 234B This ground was consequential to the tax demand arising from the addition of fabrication charges as FTS. Since the addition was deleted, the levy of interest under section 234B was also not sustainable and required no separate adjudication. Significant Holdings The Tribunal succinctly stated: Core principles established include:
The Tribunal's final determination was to allow the appeal, delete the addition of Rs. 18,73,16,820 as FTS income, and consequently render the issues of tax rate and interest under section 234B academic.
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