Construction project receipts are business profits, not technical fees, and are taxable in India only with a permanent establishment.

Consideration for executing a construction or installation project was held not to fall within fees for technical services under the India-France treaty, because Article 13 had to be read harmoniously with the business profits and permanent establishment articles. The contract was treated as a single pipeline installation project, and receipts arising from such execution were characterised as business profits under Article 7. As the project did not continue for more than six months, no permanent establishment arose under Article 5(3), so the receipts were not taxable in India. The domestic exclusion for construction, assembly, mining or similar projects in section 9(1)(vii) was also relied on.

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Issues: Whether consideration received under the contract was taxable as fees for technical services under the India-France tax treaty, or as business profits taxable in India only if the non-resident had a permanent establishment in India.

Analysis: The contract was examined as a whole and treated as a project for installation of underground pipelines through horizontal drilling. The Authority held that the treaty definition of fees for technical services could not be read so widely as to cover every payment made in the course of executing a project, especially where the payment was really for the execution of a construction or installation project. It further held that Article 13 had to be harmonised with Article 7 and Article 5 of the treaty. Where the receipt arose from business carried on through a permanent establishment, Article 7 applied; where the project did not continue for more than six months, no permanent establishment arose under Article 5(3). The Authority also relied on the exclusion in Section 9(1)(vii) of the Income-tax Act, 1961, which excludes consideration for construction, assembly, mining or like projects from the domestic concept of fees for technical services.

Conclusion: The contract receipts were not fees for technical services under Article 13 but business profits under Article 7. As the project did not last long enough to constitute a permanent establishment in India, the receipts were not taxable in India.

Ratio Decidendi: Consideration for execution of a construction or installation project is not fees for technical services where the treaty provisions are read harmoniously with the permanent establishment and business profits articles, and such receipts are taxable in India only if the non-resident has a permanent establishment there.

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