Treaty protection for machinery installation charges barred Indian tax withholding where services were ancillary and no permanent establishment existed.

Treaty provisions prevailed over the domestic charging and withholding rules to the extent they were more beneficial to the non-resident recipient. Installation and commissioning charges paid to foreign suppliers for machinery were treated as ancillary and subsidiary to the sale of machinery; for the France remittances, no treaty permanent establishment arose and the receipts were not business profits, while for the United Kingdom remittances the services were expressly excluded from fees for technical services. As the income was not chargeable to tax in India under the applicable DTAA provisions, no obligation to deduct tax at source arose under section 195.

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Issues: Whether installation and commissioning charges paid to foreign suppliers for machinery were taxable in India as fees for technical services or business profits under the applicable Double Taxation Avoidance Agreements, and consequently whether tax was deductible at source under section 195 of the Income-tax Act, 1961.

Analysis: The applicable treaty provisions prevailed over the Act to the extent they were more beneficial to the assessee by virtue of section 90(2) of the Income-tax Act, 1961. For the France payments, the installation project did not exceed the treaty threshold for a permanent establishment under Article 5(3) of the India France Double Taxation Avoidance Agreement dated 29 September 1992, and the receipts were not attributable to business profits under Article 7. The services rendered were held to be ancillary and subsidiary to the sale of machinery and therefore outside the scope of fees for technical services under Article 13, read with the protocol. For the United Kingdom payments, the commissioning services were likewise ancillary and subsidiary to the sale of machinery and were expressly excluded from fees for technical services by Article 13(5)(a) of the India United Kingdom Double Taxation Avoidance Agreement. Since the underlying income was not chargeable to tax in India under the relevant treaties, no obligation to deduct tax at source arose under section 195.

Conclusion: The remittances were not taxable in India under the relevant treaties and tax was not deductible at source. The assessee succeeded and the Revenue's appeals were rejected.

Ratio Decidendi: Where installation or commissioning services are ancillary and subsidiary to the sale of machinery and the foreign recipient has no treaty permanent establishment in India, the associated receipts are not taxable as fees for technical services or business profits, and no tax is deductible under section 195.

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