Dredger hire charges were not royalty or technical fees, so no tax withholding arose and default treatment failed.

Payments for use of the dredger under the subcontract were held not to be royalty or fees for technical services because the dredger remained under the foreign enterprise's custody, control and supervision, with its own crew operating it, and the assessee acquired no right to use the equipment. The arrangement was only for execution of dredging work, so the sums were treated as hire charges for work performed and not as consideration for use of equipment under section 9(1)(vi) or the treaty provisions. As the amounts were not chargeable to tax in the recipient's hands, no obligation to deduct tax at source arose under section 195, and the assessee could not be treated as an assessee in default under section 201. The foreign enterprise's business income was also not taxable in India absent a permanent establishment.

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Issues: Whether payments made for use of the dredger Ketam under the subcontract arrangement were royalty or fees for technical services chargeable to tax in India, so as to require deduction of tax at source under section 195 of the Income-tax Act, 1961, and to justify treatment of the assessee as an assessee in default under section 201.

Analysis: The dredger remained under the custody, control and supervision of the foreign enterprise, with its own crew operating the equipment. The assessee did not itself use the dredger or acquire any right to use it; the arrangement was only for execution of dredging work and the payments were hire charges for the work performed. On those facts, the payments did not fall within the meaning of royalty under section 9(1)(vi) of the Income-tax Act, 1961 or the relevant treaty provisions, and they were also not fees for technical services. In the absence of chargeability in the hands of the recipient, the obligation to deduct tax at source did not arise. The business income of the foreign enterprise was also not taxable in India in the absence of the requisite permanent establishment.

Conclusion: The payments were not taxable as royalty or fees for technical services, and the assessee was not liable to deduct tax at source or be treated as an assessee in default.

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