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Important Ruling on Taxability of Services Regarding Machinery in India

12 Jan 2011

The Mumbai Tribunal has delivered an important ruling on taxability of consideration paid to a non-resident company for supervisory services, in connection with assembly, erection and commissioning projects in India. Taxand India highlights the ruling and the impact it will have on multinationals looking to reassemble and commission their machinery in India. It is also particular interest to those companies operating within Italy.

Taxand's Take

This Tribunal ruling elaborates on the interplay between supervisory PE rule and the FTS definition [and exclusions from FTS definition] under the tax treaty. The ruling is important as the Tribunal has applied the earlier ruling of the AAR in the Horizontal Drilling case, dealing with the overlap on account of potential taxability of certain income under more than one Article of the tax treaty.

Whilst the ruling affirms the earlier AAR ruling insofar as taxability of income from supervisory activities is concerned under the tax treaty with a supervisory PE rule under Article 5; however, it is still not adequately clear whether same view can be taken even if the relevant tax treaty does not bear the supervisory PE rule under Article 5.

The Tribunal ruling further clarifies, and to certain extent affirms the Revenue's contemporary view, that exclusion category under the FTS definition in the Act shall apply if the non-resident service provider carries out assembly, installation or like project; consideration for mere rendering of services without carrying out any assembly or installation project could not be excluded from the FTS definition under the Act.

Your Taxand contact for further queries is:
Bobby Parikh
T. +91 22 3021 7010

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Taxand's Take Author