A composite payment to a foreign vendor and a running bill to the Indian erector both go out this month. Which section applies to each line, on what amount, and what does it cost me if I have it wrong?
The client is a mid-size auto-components manufacturer at Chakan near Pune, assessed in the Pune range, installing a new heat-treatment line. Two contracts run alongside each other. The first is a single purchase order dated 14 May 2026 on a company resident in the Netherlands for Rs 9.6 crore, one lump-sum price with an internal cost sheet splitting it as Rs 7.2 crore for the furnace and controls delivered ex-works abroad, Rs 96 lakh for supervision of erection and commissioning by the vendor's own engineers over eleven weeks at the plant, Rs 24 lakh for operator training on site, Rs 72 lakh for a three-year remote condition-monitoring subscription, and Rs 48 lakh described as reimbursement at cost of the engineers' travel, hotel and per diem. The control software is licensed with the machine and is priced nowhere in the order. Two of the vendor's engineers are additionally seconded to the client for those eleven weeks under a two-page letter; they stay on the Dutch payroll, and the client reimburses their salary cost of Rs 62 lakh with no mark-up. Rs 5.76 crore has already gone out on 6 February 2026 against the equipment, with no deduction and a declaration filed that the sum was not chargeable; the second tranche of Rs 3.84 crore, covering the services, the subscription and the reimbursement, is due to be remitted on 28 September 2026. The second contract, dated 2 June 2026, is with a Pune contractor for Rs 2.4 crore for civil work, structural fabrication, erection and testing, with a separate schedule for hire of a 200-tonne crawler crane and a site office cabin at Rs 18 lakh, freight of Rs 34 lakh billed separately against the transporter's own invoices, and an order-procurement fee of Rs 12 lakh to an Indian intermediary who introduced the vendor. The first running bill of Rs 1.1 crore is passed for payment on 30 September 2026. The file is thin in specific places: there is no tax residency certificate for the Dutch vendor for the relevant period and no Form 10F; nobody has called for the licence terms behind the embedded software, only the purchase order; there is no working paper of any kind behind the February declaration of non-chargeability; the secondment letter says nothing about who may recall the engineers, who fixes their pay or where they go at the end; the third-party invoices behind the Rs 48 lakh and the Rs 34 lakh have not been called for; and the Indian rate schedule does not separate the crane from the erection rate. The February tranche falls in the year ended 31 March 2026, assessment year 2026-27; everything now going out falls in assessment year 2027-28.
Do the characterisation before you open the rate table, and do it line by line rather than contract by contract. Both payments are composite, and in each of them the section, the base and the rate all follow from what the payee actually supplied - not from the vendor's trade description, the narration on the invoice, or the single figure at the foot of the order. On the foreign leg there is a prior question the resident leg does not have: whether the sum is chargeable to tax in India at all, because chargeability is the condition on which the obligation is fastened, and it is answered on the charging and deeming provisions read with the treaty. That analysis has to exist in writing before the money moves. A file assembled after the notice arrives proves nothing about what was decided beforehand, and a deductor who forms his own view of non-chargeability without either a recorded analysis or a determination from the officer carries the entire risk himself. Two housekeeping points belong in the same first hour. The sections used throughout this note are the 1961 Act numbers the authorities are written in; the library records that for payments from 1 April 2026 the deduction obligations are consolidated into the corresponding provisions of the 2025 Act, with the remittance forms and the accountant's certificate renumbered, so the section and form references on the challan and the statement have to be checked against the current text before anything is filed. And take every rate and threshold from the statute as it stands for the year of payment, not from a note or from last year's working paper.
The library's note on payments to non-residents records the structure the whole foreign leg hangs on: the obligation attaches to a sum chargeable to tax in India, there is no monetary threshold and no small-payment relief, and the trigger is chargeability rather than size. That is not the same as saying every remittance is safe. The corpus holds a Supreme Court decision that the words 'any other sum chargeable' are not confined to pure income profits and reach a sum with income hidden or embedded in it; it was decided on a composite equipment-and-erection price paid to non-residents, and the payer who had decided for himself that the price was mostly cost was held to be in default. Its second limb matters as much: the obligation is confined to the appropriate proportion of the chargeable income, and the machinery for fixing that proportion is an application to the officer, not a view taken in the accounts department. The corpus also holds a High Court entry that where the recipient's own assessment establishes there was nothing chargeable, the payer is not in default and no disallowance follows. Read that entry's warnings before leaning on it: it is marked partly overruled, the paragraph in it that made the payer's position conditional on the foreign company's reopened assessment was set aside on appeal, and the Supreme Court expressly kept the construction of the section open, so it is not settled at that level. Its other limb runs against the client: a payer who was required to deduct will not be heard, in his own assessment, to argue that the sum was never chargeable.
Five different characterisations are sitting inside one purchase order: an offshore supply of equipment, control software licensed with the machine, supervision of erection, operator training, and a three-year remote monitoring subscription. The library's note on cross-border software payments sets out why the software line cannot be answered by a slogan. On the Act alone the right to use software is deemed royalty, and what displaces that is the treaty definition, which turns on whether an interest in the copyright passed or only a limited right to use a copyrighted article, so the licence clause has to be read and the reading recorded. The same note warns that where software is supplied embedded in equipment it is better left as one supply, because carving out a separate licence fee invites a royalty characterisation the bundled supply would not have attracted - which is the client's present position and should not be disturbed. It also says in terms that the leading decision does not cover subscriptions, hosting or data access, where the department's alternative case is equipment royalty or technical fees; the monitoring subscription is squarely in that uncovered space, and the note records that as where the argument runs rather than as authority. Unbundling is also what the Supreme Court decision on composite payments requires: the payer may not apply his own estimate of the taxable proportion to a lump sum, so either the components are priced and characterised or the proportion is fixed by the officer.
The corpus holds the tribunal decision that fixed the meaning of 'make available' in Indian practice: rendering a technical or consultancy service is not enough, because the relative pronoun in the article does additional work, and something must pass to the payer and remain with him in concrete shape after the engagement ends, so that he can do it himself without going back to the provider. A High Court applied the same test to geophysical survey work and held that handing over the fruit of the expertise - data, maps, reports - is not making the expertise available, and that the question is one of fact gathered from the contract, the nature of the services and what is transmitted at the end. Two warnings travel with that High Court entry. It is marked unverified in the library, with no later decision applying it traced. More seriously, it reached the make-available test by reading the explanation from another treaty into the applicable one through the most-favoured-nation clause in the protocol, without any notification - and that route is now closed. The Supreme Court has held that a notification under the treaty-implementation provision is a mandatory condition before any court, authority or tribunal may give effect to a treaty or to a protocol that alters existing law, so a most-favoured-nation clause does not import a later treaty's lower rate or narrower scope by itself, and that the third state must have been an OECD member when it signed with India. The library's note on that judgment adds the practical consequence: the demand for the shortfall lands on the Indian payer with interest, not on the foreign recipient. So find the notification before applying any imported restriction, and if there is none, work from the article as notified. Two documents gate the treaty claim before any of this matters: the library records that a non-resident is not entitled to claim relief under a treaty unless he obtains a residence certificate from his own government, that the prescribed declaration supplements it particular by particular, and that the certificate is necessary but - on the Supreme Court's later view - neither sufficient nor conclusive, so the department may still examine substance with material. Neither document is on this file. On the training line the test runs against the client in any event: teaching the operators to run the line is the clearest case of knowledge passing across and staying.
A cost-only recharge with no mark-up, engineers working under the client's daily control, foreign payroll retained - that is the fact pattern on which the corpus holds two entries, both against the payer. The advance ruling asks three questions of the papers: who may recall and replace the person, who fixes what he is paid, and where he goes when the assignment ends. On those, the foreign entity remained the real employer, what it supplied was the services of technical or other personnel, the money was its service income and not the individuals' salary, and the word 'reimbursement' did not help because the recipient was the company and not the employees. The High Court decision on closely similar facts went further: it asked who the employee could sue for his salary, whose retirement and social security plans he stayed in, and who could end the employment as against merely ending the secondment; it held that a nil mark-up cannot remove the charge, that diversion of income by overriding title does not apply because the two obligations arise under different contracts, and that a service permanent establishment followed. The corpus note on permanent establishments is the reminder that this is a second and separate exposure with its own ingredients - the service limb turns on personnel furnished in India and a day count that varies treaty by treaty, and the installation limb can be reached by eleven weeks of supervision on site if that treaty's period is short enough, so the treaty's own article has to be read rather than a model. Both case entries are marked unverified and the High Court text in the corpus is clipped in the middle, so the full route is not readable; the direction of travel is not in doubt. The client's two-page letter answers none of the questions that decide the point, which is the thing to fix now.
A High Court construed an erection, testing and commissioning contract clause by clause and held that the payments did not become fees for technical services merely because the contractor deployed qualified engineers: the personnel were deployed by the contractor for its own benefit, to satisfy the customer that what it supplied met the specification, and not to render a service to the payer. The same decision holds that the professional-fees provision is not a residuary clause - the two provisions are independent, and it does not follow from a contract falling outside one that it falls inside the other, so the officer must positively establish professional or technical services rather than reason by elimination. Another High Court followed that and held that a composite contract for setting up a plant may not be broken down to discover an assumed technical-services component where there is neither an internal tool in the contract nor any provision enabling the dissection, and that the dominant object of the contract governs and subsumes its other clauses. Read both with their limits. The first expressly declined to decide whether the contract fell within the contract provision at all, because the assessee had conceded it, so it is authority on what the payment is not; the second is marked unverified in the library, and its own note warns against stretching it to arrangements where the technical work is separately contracted and separately priced - which is exactly what the client's rate schedule does with the crane line. One caution about the library itself: its overview note on these two provisions describes the first decision as having gone the other way, against the payer. Work from the entry on the decision, not from the summary.
The rent definition is deliberately wide - any payment, by whatever name called, under any lease or any other agreement or arrangement for the use of land, building, plant, machinery, equipment, furniture or fittings, whether or not the payee owns them - and the library's note records that the rate differs between plant and equipment on one side and land, building, furniture and fittings on the other. So a single figure covering a crawler crane and a site cabin has to be split in the agreement or the invoice, or the deductor must be able to explain the view he took. What takes a payment out of the provision is that the payer never gets the use of an identified asset: a High Court held that carrying power over somebody else's network is not rent, because every arrangement contemplated by the definition carries an element of possession and even a mere right to use is vested with an element of possessory control. That entry comes with a limit the library publishes alongside the holding - the conclusion on rent was expressly confined to that payer in view of the public function it discharges - so the possession argument has to be built on the client's own facts. A crane placed at the client's disposal on its site is on the wrong side of that line, and a cabin is a building. On the intermediary, the commission provision turns on agency: a High Court held that the words 'on behalf of' are the gateway, and that where there is no agreement at all and the person was never appointed an agent, the provision does not apply; it distinguished the decision the department invariably cites on the footing that there the agency was created by a written appointment with the principal bound by the agent's acts. That entry is unverified and the corpus copy of the judgment breaks off before the operative order, so it is an argument to be run on the engagement terms, not a safe answer.
The Supreme Court has held on the contract provision that what is deducted is a percentage of the sum credited or paid to the contractor and not of his income component, that it is neither possible nor permissible for a payer to work out how much of what he pays is the recipient's income, and that Parliament cannot be taken to have cast so impractical a burden on him. On the facts of that case the contract itself provided for reimbursement of the excess wage cost the contractor paid his own workers, and the Court held there was nothing in the language permitting that to be excluded from the sum paid. That is the answer to any base argument built on margins, and it is why the freight line cannot be left out simply because it is described as a recovery. The corpus does hold a tribunal order the other way on separately billed recoveries carrying no profit or service element, which distinguished the Board circular the department relies on as applying only where a consolidated bill covers both the contract payment and the reimbursement together - but that entry is unverified, the order could not be located in a full-text research database, no paragraph of it has been read, and the library's own note says an answer built on it is for the years before the benefit-or-perquisite provision came in. On the foreign leg the ground is firmer: the Supreme Court entry on refund interest to a deductor records that on very similar facts - foreign technicians' service charges billed alongside their expenses - the first appellate authority held the reimbursement of expenses was not part of income for the purposes of the non-resident provision, and the tax on it was refunded. So separate billing against the third-party invoices is worth doing on both legs, and the invoices have to be on the file before the payment rather than produced at assessment.
The two legs fail differently and the client should see both numbers. On the resident leg a wrong section is short deduction: the library records that the demand is computed on the shortfall alone with interest at the lower monthly limb, that a deductor who deducted correctly and paid late sits in the higher limb instead, and that where the resident payee has filed a return, taken the sum into account and paid the tax, an accountant's certificate takes the deductor out of default and the second proviso brings the disallowed expenditure back. Interest still runs, capped at the date the payee filed. Whether a shortfall also costs thirty per cent of the expense is contested: one High Court holds that deduction under a wrong provision is not deduction under the Chapter at all, so the disallowance follows; another holds the opposite, that a shortfall is answered by the default provision and the disallowance addresses expenditure on which nothing was deducted. The library records that the first is under appeal to the Supreme Court with leave granted and the matter pending, and that the second is a dismissal for want of a substantial question of law in which the disallowance had already been deleted before the Court spoke - so neither is a safe footing, and which High Court governs the client decides the advice. On the foreign leg none of that relief exists: the disallowance is of the whole sum and not thirty per cent, the accountant's-certificate route is confined to resident payees, and the library records that the time limit for passing default orders has been held not to apply to non-resident payments, so the February tranche does not become safe with age. Where a line is genuinely arguable the statutory answer is an application by the payer to have the chargeable proportion determined, or an application by the payee for a lower or nil certificate; and if that certificate comes back at a rate nobody can explain, the corpus holds a High Court decision that such an order is quasi-judicial, must engage with the prescribed factors, must have its reasons communicated, and cannot be passed on a superior officer's dictation - the relief there is a fresh reasoned decision, not a rate fixed by the court. Do not deduct 'to be safe' instead: the Supreme Court has held that a deductor who deducted under a determination and then succeeded on appeal gets the tax back with interest running from the date it was deposited, which tells you over-deduction is recoverable, but only after an appeal and only by the party who has to fund it in the meantime.
Files like this are rarely litigated as such; they are decided at a desk in an afternoon and surface three or four years later as a survey on the deductor followed by an order for the differential with interest. Where the characterisation was recorded before payment and the contract supports it, the composite erection contract usually survives at the contract rate, because the officer has to make out a positive case for professional or technical fees and has no power to dissect an indivisible contract to find one. Where nothing was recorded, the resident leg turns almost entirely on whether the payees can be shown to have filed returns, offered the receipts and paid the tax: if they can, the demand reduces to interest and the disallowance is recovered; if they cannot, it is the shortfall, interest, and a thirty per cent disallowance whose availability depends on which High Court governs. The foreign leg lands differently and worse. The training charge and the seconded engineers are the two lines the department wins most often; the make-available answer on the supervision charge holds only if the restriction is in the treaty as notified rather than imported through a protocol clause; and the monitoring subscription is genuinely open, with the department's alternative characterisations untested in this library. What decides the whole file in the end is documentary: whether the licence terms, the residency certificate, the secondment agreement, the third-party invoices and the written characterisation existed before the money left, or were assembled afterwards.