Setback to Sony India as ITAT dismisses Low Tax Effect Plea in non-TDS/TCS Deduction in Double Taxation Matter [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore bench, has recently dismissed Sony India Software Centre Pvt. Ltd.'s plea to quash a tax dispute based on low tax effect, ruling that the matter involves international taxation and the interpretation of the Double Taxation Avoidance Agreement (DTAA).

The dispute arose from Assessment Year 2017-18, during which the Assistant Commissioner of Income Tax (ACIT), Circle 6(1)(1), Bangalore, made two significant additions to Sony India's taxable income. The first concerned an addition of ₹1.44 crore under Section 28(iv) of the Income Tax Act, related to assets received free of cost from its Associated Enterprises (AEs). The second involved the disallowance of ₹9.59 lakh under Section 40(a)(i) for non-deduction of Tax Deducted at Source (TDS) on payments made to a Singapore-based training consultant. 

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Sony India argued that the assets in question were not owned by them but were temporarily received for testing purposes. These assets, primarily prototypes provided by AEs for software validation, were either returned after testing or discarded. The company also contended that the depreciation costs on these assets had already been included in its Transfer Pricing Agreement (APA), making any further taxation a case of double addition.

It was argued by the representative of the department that the appeal is not covered by the Circular No.3/2018 and Circular No.5/2024 for the reason that the litigation is arising on TDS/TCS in International Taxation on interpretation of Double Taxation Avoidance Agreement.

The ITAT bench, citing a precedent in the Tesco Bengaluru Pvt. Ltd. case, ruled in favor of Sony India, holding that Section 28(iv) was not applicable since the company did not derive any taxable business benefit from the assets. 

The second issue related to the ₹9.59 lakh payment made to M/s JL Services & Consultancy, a Singapore-based firm, for conducting employee training workshops. The tax authorities contended that this payment qualified as Fees for Technical Services (FTS) and was liable for TDS deduction under Section 195. However, Sony India argued that under Article 14 of the India-Singapore DTAA, such payments were not taxable in India since the consultant had no fixed base in India. The Tribunal agreed with this view and ruled that the Section 40(a)(i) disallowance was unjustified, thereby allowing Sony India’s claim. 

Get a Handbook on TDS Including TCS as Amended up to Finance Act 2024, Click Here

Despite these victories, Sony India’s plea for dismissal of the revenue’s appeal on grounds of low tax effect was rejected. The company cited a CBDT Circular, arguing that the total tax effect in the case was only ₹53.40 lakh, which falls below the threshold for litigation.

However, the ITAT bench of Prakash Chand Yadav, Judicial Member And Prashant Maharishi, Vice President clarified that the case involved matters of international taxation and DTAA interpretation, which are exceptions to the low tax effect rule. 

Ultimately, while Sony India successfully got to overturn the taxability of free-of-cost assets and the TDS disallowance, the case involved matters of international taxation and DTAA interpretation, which are exceptions to the low tax effect rule.

To Read the full text of the Order CLICK HERE

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