TDS exemption granted for bareboat hire charges under tax treaty but transfer pricing adjustment upheld for technical service fees

The ITAT Chennai ruled on TDS obligations and transfer pricing adjustments. Regarding bareboat hire charges, the tribunal held that under the India-France tax treaty and subsequent protocol with Sweden, payments for equipment hiring are not taxable in India, exempting the assessee from TDS obligations under section 195. However, on transfer pricing, the tribunal upheld the DRP's downward adjustment of technical service fees paid to associated enterprises, finding the assessee had computed fees advantageously rather than per the agreement terms. The appeal was partly allowed.

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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.

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