Foreign supply contract payments escape withholding where no income accrues in India and no permanent establishment exists.

Payments under a foreign supply contract were not chargeable to tax in India where the contract was principally for manufacture and supply of a plant outside India, title passed outside India, and the Indian erection and commissioning work was carried out through local contractors. In the absence of evidence that the non-resident supplier itself assembled or commissioned the plant in India, and with no permanent establishment or income accruing or arising in India under the Act or the India-Italy treaty, no withholding obligation arose under section 195. The payer was therefore not treated as an assessee-in-default.

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Issues: Whether payments made to the Italian non-resident for supply of a manufacturing plant with incidental supervision services were chargeable to tax in India so as to require deduction of tax at source under section 195 of the Income-tax Act, 1961.

Analysis: The contract was examined as a whole and found to be principally one for supply of the plant manufactured outside India. The plant was delivered in movable packages, title passed outside India on shipping documents, and the erection and commissioning in India were carried out with the assistance of local contractors engaged by the assessee. No documentary material established that the foreign supplier itself assembled or commissioned the plant in India. In the absence of evidence of income accruing or arising in India, and in the absence of any permanent establishment of the foreign enterprise in India, the payment was not taxable in India either under the Act or under the India-Italy tax treaty. The obligation to withhold tax under section 195 therefore did not arise.

Conclusion: The payment was not liable for deduction of tax at source, and the assessee was not an assessee-in-default.

Ratio Decidendi: Where a contract is found on facts to be a foreign supply contract with only incidental supervisory activities in India, and no income of the non-resident accrues or arises in India or is attributable to a permanent establishment in India, no tax withholding obligation arises under section 195.

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