Our French engineering group will build a turnkey plant in India, with some work done here and a great deal done abroad. Can India tax the work done abroad, and are the payments royalties, technical fees or business profits?
Mostly against the applicant. The Authority ruled that the French company's Indian project headquarters and site office together were a permanent establishment; that the payments under the seven agreements were royalties and fees for technical services within articles 13.3 and 13.4 of the India-France agreement; and that the outside activities were effectively connected with that permanent establishment, so the receipts fell to be taxed under article 7 read with article 13.6 as business profits. Only profits referable to operations carried out in India were taxable. Payments to head office for licensed technology and subcontracted services were not deductible reimbursements. The ruling binds only that applicant.
Pronounced by the Authority for Advance Rulings (S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members) on 1995-08-23, reported as [1997] 228 ITR 487 (AAR). It bears on section 9(1)(i), section 9(1)(vi), section 9(1)(vii), section 44D, section 115A, section 195, section DTAA art 5, section DTAA art 7, section DTAA art 13 of the Income Tax Act 1961, in Residence & Treaty Benefit, Assessment & Scrutiny and Deductions & Disallowances matters.
This is the fullest early AAR treatment of a composite cross-border turnkey contract, and it is worth reading for its structure rather than its result. Thirteen questions are taken in order - residence, permanent establishment, characterisation, effective connection, beneficial ownership, attribution, deductibility, withholding and rate - and that sequence is still the right way to take apart a project contract. Two points travel. First, work done outside India that is integrally directed at installing a plant in India can be effectively connected with the Indian permanent establishment, which cuts against a simple offshore/onshore split. Second, a contractor does not lose beneficial ownership of its royalties and fees merely because it subcontracts the work. The computation limbs, resting on sections 44D and 115A, have since been overtaken.
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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A French engineering and construction company, referred to in the ruling as ABC, proposed to contract with two Indian companies for complete project services - from transfer of technology through to commissioning of a manufacturing plant and an industrial complex. Seven agreements were contemplated: umbrella services, licence and basic engineering, engineering services, equipment supply, buying services, site services and assistance, and project management. ABC would maintain a project headquarters office and a site office in India employing between 200 and 400 people, while some 800 of its people worked on the project outside India. The consideration comprised royalties and technical fees for designs, engineering, procurement and site assistance, part of the underlying activity being performed in India and part abroad. Thirteen questions were put, covering treaty residence, whether the two Indian offices were a permanent establishment from day one, characterisation of the payments, effective connection of the outside activities, beneficial ownership, attribution of profits, deductibility of head office payments, withholding on payments to foreign suppliers, and the rate and mode of computation.
The Authority held that ABC was resident in France under article 4; that the project headquarters and site office together constituted its permanent establishment; that the payments were royalties or fees for technical services within articles 13.3 and 13.4; and that the royalties and fees referable to the outside activities were effectively connected with the Indian permanent establishment. ABC remained the beneficial owner both of the licensed technology payments and of the payments for engineering and buying services, notwithstanding that it subcontracted. The payments were therefore taxable under article 7 read with article 13.6 as business profits, but only that part of the profits referable to operations carried out in India was liable to Indian tax. The restrictions in article 7.3(a) applied beyond section 44C to the other provisions of the Act. Payments made to head office for licensed technology and for subcontracted services were not deductible as reimbursements. ABC was not liable to withhold Indian tax on its payments to foreign suppliers. On rate, the Authority distinguished approved and unapproved agreements and dealt separately with construction and assembly receipts.
The Authority's method was to settle the permanent establishment first and let characterisation follow. Once the project headquarters and site office were held to be a fixed place through which ABC carried on business, article 13.6 came into play: where the beneficial owner of royalties or technical fees carries on business in the source State through a permanent establishment and the right or contract is effectively connected with it, the receipts are removed from the withholding article and taxed as business profits under article 7. The contested question was effective connection, because a great deal of the design and procurement work was done in France. The Authority answered it by looking at purpose rather than geography: all the outside activities were directed at the installation of the plant and complex in India, and though carried out elsewhere they were integrally connected with the Indian project. On beneficial ownership the Authority refused to let subcontracting break the chain - that ABC had to seek similar help from others and pay for it could not detract from its ownership of the royalties and fees it received. Attribution was then confined by article 7.1 and 7.2 read with paragraph 3 of the protocol: only profits referable to operations carried out in India could be taxed, which is the limit that keeps the effective-connection finding from becoming a charge on worldwide profit. Deductibility and rate were worked out under the Act, subject to the treaty's restrictions on head office expenditure.
All the outside activities are directed towards the installation of the manufacturing plant and industrial complex in India. Though carried out elsewhere, they are integrally connected with the project in India.
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Handle my notice → Ask a CA on WhatsAppMostly against the applicant. The Authority ruled that the French company's Indian project headquarters and site office together were a permanent establishment; that the payments under the seven agreements were royalties and fees for technical services within articles 13.3 and 13.4 of the India-France agreement; and that the outside activities were effectively connected with that permanent establishment, so the receipts fell to be taxed under article 7 read with article 13.6 as business profits. Only profits referable to operations carried out in India were taxable. Payments to head office for licensed technology and subcontracted services were not deductible reimbursements. The ruling binds only that applicant. This was decided by the Advance Ruling (S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members) and bears on section 9(1)(i), section 9(1)(vi), section 9(1)(vii), section 44D, section 115A, section 195, section DTAA art 5, section DTAA art 7, section DTAA art 13 of the Income Tax Act 1961. It is reported as [1997] 228 ITR 487 (AAR). This is the fullest early AAR treatment of a composite cross-border turnkey contract, and it is worth reading for its structure rather than its result. Thirteen questions are taken in order - residence, permanent establishment, characterisation, effective connection, beneficial ownership, attribution, deductibility, withholding and rate - and that sequence is still the right way to take apart a project contract. Two points travel. First, work done outside India that is integrally directed at installing a plant in India can be effectively connected with the Indian permanent establishment, which cuts against a simple offshore/onshore split. Second, a contractor does not lose beneficial ownership of its royalties and fees merely because it subcontracts the work. The computation limbs, resting on sections 44D and 115A, have since been overtaken. If it applies to you, the first step is this: Take a turnkey contract apart in the order this ruling does; do not argue characterisation before you have settled the permanent establishment.
A French engineering and construction company, referred to in the ruling as ABC, proposed to contract with two Indian companies for complete project services - from transfer of technology through to commissioning of a manufacturing plant and an industrial complex. Seven agreements were contemplated: umbrella services, licence and basic engineering, engineering services, equipment supply, buying services, site services and assistance, and project management. ABC would maintain a project headquarters office and a site office in India employing between 200 and 400 people, while some 800 of its people worked on the project outside India. The consideration comprised royalties and technical fees for designs, engineering, procurement and site assistance, part of the underlying activity being performed in India and part abroad. Thirteen questions were put, covering treaty residence, whether the two Indian offices were a permanent establishment from day one, characterisation of the payments, effective connection of the outside activities, beneficial ownership, attribution of profits, deductibility of head office payments, withholding on payments to foreign suppliers, and the rate and mode of computation. The matter was decided on 1995-08-23 by the Advance Ruling (S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members). On those facts the Advance Ruling held as follows. The Authority held that ABC was resident in France under article 4; that the project headquarters and site office together constituted its permanent establishment; that the payments were royalties or fees for technical services within articles 13.3 and 13.4; and that the royalties and fees referable to the outside activities were effectively connected with the Indian permanent establishment. ABC remained the beneficial owner both of the licensed technology payments and of the payments for engineering and buying services, notwithstanding that it subcontracted. The payments were therefore taxable under article 7 read with article 13.6 as business profits, but only that part of the profits referable to operations carried out in India was liable to Indian tax. The restrictions in article 7.3(a) applied beyond section 44C to the other provisions of the Act. Payments made to head office for licensed technology and for subcontracted services were not deductible as reimbursements. ABC was not liable to withhold Indian tax on its payments to foreign suppliers. On rate, the Authority distinguished approved and unapproved agreements and dealt separately with construction and assembly receipts.
The Authority's method was to settle the permanent establishment first and let characterisation follow. Once the project headquarters and site office were held to be a fixed place through which ABC carried on business, article 13.6 came into play: where the beneficial owner of royalties or technical fees carries on business in the source State through a permanent establishment and the right or contract is effectively connected with it, the receipts are removed from the withholding article and taxed as business profits under article 7. The contested question was effective connection, because a great deal of the design and procurement work was done in France. The Authority answered it by looking at purpose rather than geography: all the outside activities were directed at the installation of the plant and complex in India, and though carried out elsewhere they were integrally connected with the Indian project. On beneficial ownership the Authority refused to let subcontracting break the chain - that ABC had to seek similar help from others and pay for it could not detract from its ownership of the royalties and fees it received. Attribution was then confined by article 7.1 and 7.2 read with paragraph 3 of the protocol: only profits referable to operations carried out in India could be taxed, which is the limit that keeps the effective-connection finding from becoming a charge on worldwide profit. Deductibility and rate were worked out under the Act, subject to the treaty's restrictions on head office expenditure. In the words reproduced by the source cited on this page: "All the outside activities are directed towards the installation of the manufacturing plant and industrial complex in India. Though carried out elsewhere, they are integrally connected with the project in India."
It was decided by the Advance Ruling on 1995-08-23 and is reported as [1997] 228 ITR 487 (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 9(1)(vii), section 44D, section 115A, section 195, section DTAA art 5, section DTAA art 7, section DTAA art 13, 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 cuts both ways and is cited by both sides. The Authority held that ABC was resident in France under article 4; that the project headquarters and site office together constituted its permanent establishment; that the payments were royalties or fees for technical services within articles 13.3 and 13.4; and that the royalties and fees referable to the outside activities were effectively connected with the Indian permanent establishment. ABC remained the beneficial owner both of the licensed technology payments and of the payments for engineering and buying services, notwithstanding that it subcontracted. The payments were therefore taxable under article 7 read with article 13.6 as business profits, but only that part of the profits referable to operations carried out in India was liable to Indian tax. The restrictions in article 7.3(a) applied beyond section 44C to the other provisions of the Act. Payments made to head office for licensed technology and for subcontracted services were not deductible as reimbursements. ABC was not liable to withhold Indian tax on its payments to foreign suppliers. On rate, the Authority distinguished approved and unapproved agreements and dealt separately with construction and assembly receipts. It arises in Residence & Treaty Benefit, Assessment & Scrutiny and Deductions & Disallowances matters, on section 9(1)(i), section 9(1)(vi), section 9(1)(vii), section 44D, section 115A, section 195, section DTAA art 5, section DTAA art 7, section DTAA art 13 of the Income Tax Act 1961, and was decided by S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members. 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. Do not assume an offshore/onshore split survives: show that the outside work was severable and not directed at the Indian installation. Expect the beneficial ownership objection to fail where the applicant subcontracts but remains contractually entitled to the receipts. Compute under section 44DA, not section 44D, for any agreement made after 31 March 2003.
Superseded by amendment. The permanent establishment and effective-connection reasoning is untouched by anything found, and the India-France articles 5, 7 and 13.6 stand as published at incometaxindia.gov.in. The computation limbs do not survive. Section 44DA was inserted by the Finance Act 2003 with effect from 1 April 2004 and governs royalties and technical fees effectively connected with a permanent establishment under agreements made after 31 March 2003, displacing the section 44D and section 115A scheme the Authority worked through in answering questions 9 to 13. The Explanation below section 9(2) as it now stands also deems such income to accrue in India whether or not services were rendered here. Searched Indian Kanoon for later judicial treatment of the ruling and found none. The Authority itself was replaced by the Board for Advance Rulings from 1 September 2021 (Finance Act 2021; Notification 96/2021), whose rulings are appealable to the High Court under section 245W, and the Income-tax Act 1961 was replaced by the Income-tax Act 2025 from 1 April 2026. 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 note we were given describes this as dealing with 'the split between offshore supply and onshore services'. The Authority in fact rejected a split for the activities in issue, holding the outside activities effectively connected with the Indian permanent establishment. The claim that it is the 'earliest' full treatment of a composite contract was not verified. The applicant and the Indian companies are anonymised in the ruling, so no party names are available, and the reported citation comes from the Indian Kanoon text. 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 held that ABC was resident in France under article 4; that the project headquarters and site office together constituted its permanent establishment; that the payments were royalties or fees for technical services within articles 13.3 and 13.4; and that the royalties and fees referable to the outside activities were effectively connected with the Indian permanent establishment. ABC remained the beneficial owner both of the licensed technology payments and of the payments for engineering and buying services, notwithstanding that it subcontracted. The payments were therefore taxable under article 7 read with article 13.6 as business profits, but only that part of the profits referable to operations carried out in India was liable to Indian tax. The restrictions in article 7.3(a) applied beyond section 44C to the other provisions of the Act. Payments made to head office for licensed technology and for subcontracted services were not deductible as reimbursements. ABC was not liable to withhold Indian tax on its payments to foreign suppliers. On rate, the Authority distinguished approved and unapproved agreements and dealt separately with construction and assembly receipts.
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