2025 (8) TMI 455 - HC - Income Tax

HC upholds AO's treatment of free assets under section 28(iv) and rules workshop payments aren't technical service fees

The HC upheld the AO's treatment of free-of-cost assets received from overseas Associate Enterprises under section 28(iv) for transfer pricing, including ... Treatment of free of cost of assets u/s 28(iv) received from Associate Enterprises (AE) located overseas - benefits derived from the business and considering depreciation costs on these free of cost of assets as operating expenses while computing operating profit margin under TP - HELD THAT:- The addition was not made on account of payments made to seconded employees under secondment agreement. AO had held that the payment made for professional services by M/s. J L Services & Consultancy was in the nature of fees for technical services, which was covered under Article 12 of India Singapore – DTAA. We find no infirmity with the impugned order as the grounds of appeal set out by the Revenue before ITAT did not arise from the assessment order. The AO had not found that any employees were seconded to the Assessee by any overseas entity. There was no issue raised regarding payments made to seconded employees. Having stated above, it is also clear that the payments made by the Assessee to JL Services & Consultancy for conducting workshops cannot be considered as fee for technical services under Article 12 of the India – Singapore DTAA. In Engineering Analysis Centre of Excellence Pvt. Ltd. [2021 (3) TMI 138 - SUPREME COURT] reiterated that the meaning of terms and expressions defined under the double taxation avoidance treaties, were not to be controlled by definitions of those terms under the Act. Thus, the expression ‘fee for technical services’ would necessarily confine to the meaning ascribed under Paragraph 4 of the India - Singapore DTAA. Plainly, training workshop for performance management, and career management for employees are general training programs that cannot be considered as technical services. There is no transfer of technical knowledge, technical knowhow, experience, skill or process. No substantial question arises. ISSUES: Whether the addition of the value of assets received free of cost from an Associated Enterprise (AE) overseas under Section 28(iv) of the Income Tax Act, 1961 constitutes double taxation when depreciation on such assets is also considered as operating expenses under Transfer Pricing (TP) computations.Whether professional consultation charges paid to a foreign entity for conducting workshops are liable for deduction of tax at source (TDS) under Section 40(a)(i) and Section 195 of the Act, considering the nature of the services and provisions of the India-Singapore Double Taxation Avoidance Agreement (DTAA).Whether the assessee is liable to deduct TDS on payment of professional consultancy charges without examining the nature of the transaction. RULINGS / HOLDINGS: The Tribunal correctly held that treating the free-of-cost assets as benefits derived from business under Section 28(iv) and simultaneously considering depreciation on these assets as operating expenses for computing operating profit margin under TP results in double taxation; hence, no addition is warranted.The Tribunal rightly held that professional consultation charges paid to a foreign entity for conducting employee workshops do not constitute 'fees for technical services' under Section 9(1)(vii) of the Act or Article 12 of the India-Singapore DTAA, and therefore, no TDS deduction under Section 40(a)(i) or Section 195 is required.The Tribunal correctly found that the assessee is not liable to deduct TDS on such payments without a proper examination of the nature of the transaction, which in this case, did not amount to fees for technical services. RATIONALE: The legal framework applied includes Section 28(iv), Section 40(a)(i), and Section 195 of the Income Tax Act, 1961, along with the India-Singapore DTAA, particularly Articles 12 (Fees for Technical Services) and 14 (Independent Personal Services).The Court relied on the Advance Pricing Agreement (APA) which factored in the Arms Length Price (ALP) including depreciation on assets used, thus negating the need for additional income inclusion under Section 28(iv).The Court interpreted the term 'fees for technical services' strictly as defined in Paragraphs 4 and 5 of the India-Singapore DTAA, emphasizing that training workshops on performance and career management do not transfer technical knowledge, experience, skill, or know-how, and therefore, do not qualify as fees for technical services.The Supreme Court precedent was cited to affirm that definitions under DTAA prevail over domestic Act definitions for treaty interpretation.The Court noted that the grounds of appeal raised by the Revenue concerning seconded employees and reimbursement payments were not part of the assessment order and, thus, did not arise for consideration.