My Swiss company is assigning its rights under an Indian supply agreement to a new Indian subsidiary and the deed is signed in Switzerland. Is the assignment fee taxable in India?
No. The Authority ruled that the consideration for assigning the turbocharger development and supply agreement did not accrue or arise in India. The assignment was a transaction distinct from the work under the supply agreement itself; the applicant had no business connection in India in respect of it; the deed was executed in Switzerland on 23 February 2006 and the consideration was payable outside India. Nor was the receipt royalty: none of the clauses of Explanation 2 to section 9(1)(vi) was attracted, because the agreements concerned the supply of a product and transferred no patent, know-how or technical information. The second question did not survive, and with nothing chargeable, section 195 did not apply.
Pronounced by the Authority for Advance Rulings (Syed Shah Mohammed Quadri, J. (Chairman) and A. S. Narang, Member) on 2006-08-21, reported as [2007] 289 ITR 438 (AAR). It bears on section 9(1)(i), section 9(1)(vi), section 195 of the Income Tax Act 1961, in TDS Defaults and How Tax Law Is Read matters.
Useful when the Revenue treats the assignment of a contract as though it were the contract. The Authority kept the two apart: income from performing an Indian supply agreement and income from selling the right to perform it are different streams, and the business connection that supports the first does not by itself support the second. It also gives a clean statement that section 195 has nothing to bite on where the sum is not chargeable, distinguishing Transmission Corporation on the footing that an advance ruling is a final determination rather than a tentative one - the ground the Supreme Court later took in GE India Technology Centre. The 2012 amendments have since narrowed the space this reasoning occupies.
Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them.
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The applicant, called ABC Ltd in the published ruling, was a company incorporated in and tax resident of Switzerland, part of the D group. On 6 August 2004 it entered into a turbocharger development and supply agreement with XYZ Ltd, an Indian company, for the manufacture and supply of turbochargers. The group then decided that the work should be carried on by an Indian company, and the applicant proposed to assign all its rights, interests and obligations under that agreement to J (P) Ltd, a newly formed Indian subsidiary, for a consideration payable in instalments through F Bank. The deed of assignment was executed on 23 February 2006 in Switzerland and the consideration was receivable outside India. The applicant asked whether the receipt on the proposed assignment was taxable in India under the Act and the agreement with Switzerland; if so, to what extent and in which years; and if not, whether the assignee had to withhold tax under section 195 on the remittance.
The Authority answered the first question in the negative: the receipt on the assignment was not taxable in India. Section 9(1)(i) deems income to arise in India through a business connection, but the applicant had no business connection here in relation to the assignment, because the income under the supply agreement and the fee for assigning that agreement were distinct, and the negotiations preceding the deed did not attach the assignment to India. The deed having been executed in Switzerland and the consideration being payable outside India, no profit on the assignment could be said to arise here. The consideration was also not royalty, because none of the clauses of Explanation 2 to section 9(1)(vi) was attracted by an agreement for the supply of a product. The second question, on extent and year of taxability, did not survive. On the third, since the sum was not chargeable under the Act, section 195 was not attracted and the assignee need not withhold.
The Authority began by fixing what income was in question. The Revenue's case ran the two together: because the applicant had contracted to develop and supply turbochargers to an Indian company, everything flowing from that contract had an Indian source. The Authority would not have it. A business connection requires a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activities within them, and that relation must be tested against the income actually in issue. The income in issue was the price of parting with the contract, not the price of performing it. Preliminary negotiations for the assignment did not supply the connection, because they went to how the parties reached their bargain and not to where the income arose. The Authority then took the situs of the transaction: the deed was executed in Switzerland and the money was payable into an account outside India, so on ordinary principles the profit accrued outside India. On royalty it worked through Explanation 2 to section 9(1)(vi) clause by clause and found nothing that fitted an agreement to supply a manufactured product - no patent, invention, model, design, secret formula, process or information transferred. Section 195 then failed for want of a chargeable sum, and the Authority declined to apply Transmission Corporation, which addressed a tentative deduction pending assessment, whereas a ruling settles the matter for the Revenue.
The situs of the deed being of Switzerland (outside India), the income or profit if any, accruing or arising to the applicant on account of deed of assignment cannot therefore be said to arise in India.
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Handle my notice → Ask a CA on WhatsAppNo. The Authority ruled that the consideration for assigning the turbocharger development and supply agreement did not accrue or arise in India. The assignment was a transaction distinct from the work under the supply agreement itself; the applicant had no business connection in India in respect of it; the deed was executed in Switzerland on 23 February 2006 and the consideration was payable outside India. Nor was the receipt royalty: none of the clauses of Explanation 2 to section 9(1)(vi) was attracted, because the agreements concerned the supply of a product and transferred no patent, know-how or technical information. The second question did not survive, and with nothing chargeable, section 195 did not apply. This was decided by the Advance Ruling (Syed Shah Mohammed Quadri, J. (Chairman) and A. S. Narang, Member) and bears on section 9(1)(i), section 9(1)(vi), section 195 of the Income Tax Act 1961. It is reported as [2007] 289 ITR 438 (AAR). Useful when the Revenue treats the assignment of a contract as though it were the contract. The Authority kept the two apart: income from performing an Indian supply agreement and income from selling the right to perform it are different streams, and the business connection that supports the first does not by itself support the second. It also gives a clean statement that section 195 has nothing to bite on where the sum is not chargeable, distinguishing Transmission Corporation on the footing that an advance ruling is a final determination rather than a tentative one - the ground the Supreme Court later took in GE India Technology Centre. The 2012 amendments have since narrowed the space this reasoning occupies. If it applies to you, the first step is this: Separate the assignment from the underlying contract in the documents and in the reply, and identify the business connection said to support each.
The applicant, called ABC Ltd in the published ruling, was a company incorporated in and tax resident of Switzerland, part of the D group. On 6 August 2004 it entered into a turbocharger development and supply agreement with XYZ Ltd, an Indian company, for the manufacture and supply of turbochargers. The group then decided that the work should be carried on by an Indian company, and the applicant proposed to assign all its rights, interests and obligations under that agreement to J (P) Ltd, a newly formed Indian subsidiary, for a consideration payable in instalments through F Bank. The deed of assignment was executed on 23 February 2006 in Switzerland and the consideration was receivable outside India. The applicant asked whether the receipt on the proposed assignment was taxable in India under the Act and the agreement with Switzerland; if so, to what extent and in which years; and if not, whether the assignee had to withhold tax under section 195 on the remittance. The matter was decided on 2006-08-21 by the Advance Ruling (Syed Shah Mohammed Quadri, J. (Chairman) and A. S. Narang, Member). On those facts the Advance Ruling held as follows. The Authority answered the first question in the negative: the receipt on the assignment was not taxable in India. Section 9(1)(i) deems income to arise in India through a business connection, but the applicant had no business connection here in relation to the assignment, because the income under the supply agreement and the fee for assigning that agreement were distinct, and the negotiations preceding the deed did not attach the assignment to India. The deed having been executed in Switzerland and the consideration being payable outside India, no profit on the assignment could be said to arise here. The consideration was also not royalty, because none of the clauses of Explanation 2 to section 9(1)(vi) was attracted by an agreement for the supply of a product. The second question, on extent and year of taxability, did not survive. On the third, since the sum was not chargeable under the Act, section 195 was not attracted and the assignee need not withhold.
The Authority began by fixing what income was in question. The Revenue's case ran the two together: because the applicant had contracted to develop and supply turbochargers to an Indian company, everything flowing from that contract had an Indian source. The Authority would not have it. A business connection requires a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activities within them, and that relation must be tested against the income actually in issue. The income in issue was the price of parting with the contract, not the price of performing it. Preliminary negotiations for the assignment did not supply the connection, because they went to how the parties reached their bargain and not to where the income arose. The Authority then took the situs of the transaction: the deed was executed in Switzerland and the money was payable into an account outside India, so on ordinary principles the profit accrued outside India. On royalty it worked through Explanation 2 to section 9(1)(vi) clause by clause and found nothing that fitted an agreement to supply a manufactured product - no patent, invention, model, design, secret formula, process or information transferred. Section 195 then failed for want of a chargeable sum, and the Authority declined to apply Transmission Corporation, which addressed a tentative deduction pending assessment, whereas a ruling settles the matter for the Revenue. In the words reproduced by the source cited on this page: "The situs of the deed being of Switzerland (outside India), the income or profit if any, accruing or arising to the applicant on account of deed of assignment cannot therefore be said to arise in India."
It was decided by the Advance Ruling on 2006-08-21 and is reported as [2007] 289 ITR 438 (AAR). Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them. An advance ruling binds only the applicant who sought it, only for the transaction it was sought on, and only the Commissioner and the officers under him in relation to that applicant and that transaction — and only until the law or the facts change. That is section 245S, and it means the ruling is not a precedent and binds nothing in your case. You cite it because the Authority reasoned the point out, often first and most fully, and the Tribunal and the courts treat a considered ruling as persuasive. Check before you rely on one: most of these were pronounced before 2009, and a great deal of cross-border tax has been rewritten since by amendment, protocol and judgment. On section 9(1)(i), section 9(1)(vi), section 195, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Authority answered the first question in the negative: the receipt on the assignment was not taxable in India. Section 9(1)(i) deems income to arise in India through a business connection, but the applicant had no business connection here in relation to the assignment, because the income under the supply agreement and the fee for assigning that agreement were distinct, and the negotiations preceding the deed did not attach the assignment to India. The deed having been executed in Switzerland and the consideration being payable outside India, no profit on the assignment could be said to arise here. The consideration was also not royalty, because none of the clauses of Explanation 2 to section 9(1)(vi) was attracted by an agreement for the supply of a product. The second question, on extent and year of taxability, did not survive. On the third, since the sum was not chargeable under the Act, section 195 was not attracted and the assignee need not withhold. It arises in TDS Defaults and How Tax Law Is Read matters, on section 9(1)(i), section 9(1)(vi), section 195 of the Income Tax Act 1961, and was decided by Syed Shah Mohammed Quadri, J. (Chairman) and A. S. Narang, Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Record where the deed is executed and where the consideration is payable, and keep the evidence; that is what the Authority relied on. Test the receipt against Explanation 2 to section 9(1)(vi) clause by clause before conceding it is royalty, and read Explanations 4 and 5 as they now stand. If you are the payer, run the section 195 point: no chargeable sum, no obligation, on the authority of GE India Technology Centre.
Superseded by amendment. The section 195 limb has been strengthened rather than displaced: the Supreme Court in GE India Technology Cen. P. Ltd v. CIT, decided 9 September 2010, held that the obligation to deduct arises only when there is a sum chargeable under the Act, and read Transmission Corporation as the Authority read it. The source limb is another matter. I checked the current official text of section 9: Explanation 5 to section 9(1)(i) now deems an asset being a share or interest in a company registered or incorporated outside India to be, and always to have been, situated in India in the circumstances it describes, and Explanations 4 and 5 to section 9(1)(vi) declare that royalty includes and has always included consideration that the Authority would not have treated as royalty in 2006. A 2006 analysis of an offshore assignment cannot be carried across without being tested against those provisions. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The ruling is published in anonymised form, so the parties and the assignee's group are given only as initials, and Indian Kanoon prints no AAR application number. The input note described the ruling accurately. I did not check whether the India-Switzerland agreement, which the applicant invoked but which the Authority did not need to apply, has since been amended in a way that would bear on these facts. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Authority answered the first question in the negative: the receipt on the assignment was not taxable in India. Section 9(1)(i) deems income to arise in India through a business connection, but the applicant had no business connection here in relation to the assignment, because the income under the supply agreement and the fee for assigning that agreement were distinct, and the negotiations preceding the deed did not attach the assignment to India. The deed having been executed in Switzerland and the consideration being payable outside India, no profit on the assignment could be said to arise here. The consideration was also not royalty, because none of the clauses of Explanation 2 to section 9(1)(vi) was attracted by an agreement for the supply of a product. The second question, on extent and year of taxability, did not survive. On the third, since the sum was not chargeable under the Act, section 195 was not attracted and the assignee need not withhold.
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