Treaty override and royalty characterization: installation activity may still create a permanent establishment and tax exposure.

Consideration paid to a French non-resident enterprise for know-how, engineering services, imported equipment, supervision, erection, commissioning and training was examined under the applicable treaty and Income-tax Act. The receipts were treated as not amounting to royalties, because they were not merely for the use of, or right to use, patents, designs, secret processes, formulae or similar rights. The treaty provisions were applied as more beneficial than the domestic law where relevant. However, the agreement also contemplated installation assistance, and the treaty's installation and construction provisions could create a permanent establishment if the required conditions were met. That issue had not been fully examined and required reconsideration.

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Issues: Whether the consideration remitted to the non-resident French enterprise for know-how, basic engineering services, imported equipment, supervision, erection, commissioning, and training was taxable in India as royalties or whether it fell within industrial or commercial profits under the applicable Double Taxation Avoidance Agreement, and whether the installation-related activity could create a permanent establishment requiring further examination.

Analysis: The relevant agreement and the Double Taxation Avoidance Agreement were examined together. The receipts were found not to be consideration for mere use of, or right to use, patents, designs, secret processes, formulae, or similar rights in the sense of royalties. The treaty provisions were held to prevail over the general provisions of the Income-tax Act where they were applicable and more beneficial. At the same time, the agreement also indicated that the French enterprise was to assist in installation of the plant, and the treaty contained specific provisions on installation and construction activity that could amount to a permanent establishment if the stipulated conditions were satisfied. That aspect had not been considered by the lower authorities.

Conclusion: The earlier conclusion that no tax was deductible was not finally affirmed or rejected on the existing record, and the matter required reconsideration on the question whether the installation activity created a permanent establishment and consequential tax liability.

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