Non-resident service fees were held outside Indian tax when paid directly abroad with no Indian control or establishment.

AAR held that grant-funded fees payable to a non-resident contractor for a feasibility study were not taxable in India. The payment was made directly by a United States agency in the United States, the applicant only approved invoices, and the contractor had no office or establishment in India. On those facts, no income was received or deemed to be received in India, and no income accrued or arose in India under domestic law. The same result followed under the treaty because the effective payer and source of the payment were outside India. The ruling therefore negated Indian taxability of the receipt.

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Issues: Whether the amount receivable by the non-resident contractor under the grant-funded feasibility study contract was liable to tax in India.

Analysis: The payment was to be made directly by the United States agency to the contractor in the United States, while the applicant's role was limited to approval of invoices. The work was substantially performed outside India, the contractor had no office or establishment in India, and the amount was not payable by the applicant in substance. On these facts, no part of the income could be said to be received or deemed to be received in India, and no income could be deemed to accrue or arise in India under the domestic charging provisions. The same result followed under the treaty provisions, since the payer was effectively the Government of the United States and the payment source lay outside India.

Conclusion: The payment was not chargeable to tax in India in the hands of the non-resident recipient.

Final Conclusion: The ruling negated Indian taxability of the grant-funded payment and answered the reference in favour of the applicant.

Ratio Decidendi: Where the payer in substance is outside India and the payment is directly disbursed abroad without the amount coming under the Indian payer's control, the income is neither received nor deemed to accrue or arise in India and is not taxable in India.

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