Karnataka HC rejects income tax appeal against Sony India software centre

Bengaluru: The Karnataka High Court dismissed an Income Tax Appeal filed by the Income Tax Department against Sony India Software Centre Private Limited, Bengaluru. The appeal challenged the orders dated June 12, 2024, issued by the Commissioner of Income Tax (Appeals), Bengaluru, which partially allowed the assessee's appeal against the Assessment Order dated May 19, 2021, for Assessment Year 2017-18.

The said order was confirmed by the Income Tax Appellate Tribunal, Bengaluru, on December 13, 2024.The controversy relates to two additions made by the Assessing Officer under Sections 28(iv) and 40(a)(i) of the Income Tax Act. The first addition of Rs 1,44,73,422 pertained to assets received by Sony India Software Centre from its overseas Associated Enterprises without cost. The second, disallowance of Rs 9,59,334, related to payments made to M/s J L Services and Consultancy, a Singapore-based entity, for conducting workshops for employees, without deduction of tax at source (TDS).

Sony India Software Centre declared an income of Rs 40,11,80,350 under the head profits and gains from business and income from other sources in its return for AY 2017-18. The Assessing Officer amended this to Rs 44,81,52,116 by adding the value of assets and disallowing the professional fees paid to the foreign consultant. The assessee argued that the assets were prototypes provided for testing purposes and were not income under Section 28(iv).

Additionally, it contended that the payments to the Singapore resident were for independent personal services and not subject to TDS under the India-Singapore Double Taxation Avoidance Agreement.The Commissioner of Income Tax (Appeals) deleted the addition related to the fixed assets, citing an Advance Pricing Agreement that accounted for depreciation. It also ruled that the payments to M/s J L Services and Consultancy were not fees for technical services under Section 9(1)(vii) of the Act.

However, the Income Tax Department maintained that the payments constituted fees for technical services and should attract TDS under Section 195.In their judgment, a division bench comprising Chief Justice Vibhu Bakhru and Justice CM Joshi upheld the decisions of the CIT(A) and the Income Tax Appellate Tribunal. The bench noted that there was no dispute regarding the return of the free assets to the Associated Enterprises and accepted the assessee’s explanation regarding the nature of the assets.

It also concluded that the payments for workshops did not amount to technical services under the India-Singapore DTAA and hence were not subject to TDS.The court also observed that the training workshops were general programmes aimed at employee development and did not involve the transfer of technical knowledge or expertise. Consequently, the appeal filed by the Income Tax Department was rejected.