Treaty rate for supervisory fees upheld where no effective permanent establishment connection was proved

Supervisory receipts were treated as taxable at the treaty rate for fees for technical services because the Revenue did not establish that the contracts were effectively connected with a permanent establishment in India. The Tribunal noted that the liaison office did not constitute a permanent establishment for the supervisory services, the purchase orders and supervision contracts were separate and severable, and the relevant treaty threshold for supervision was not exceeded. A fresh plea that the supervision fee formed part of the equipment supply contract was rejected because it required new factual inquiry not available on record and had not been raised before the lower authorities. Interest under sections 234B and 234C was held not leviable where tax was deductible at source.

---

---

Issues: (i) Whether the assessee could raise, for the first time before the Tribunal, the contention that the supervision fee formed part of the equipment supply contract and was therefore not separately taxable; (ii) whether the supervision fee received from MUL was taxable at 20% under the treaty or at 30.25% on the footing that the assessee had a permanent establishment in India and the receipts were effectively connected with such permanent establishment; (iii) whether interest under sections 234B and 234C was chargeable.

Issue (i): Whether the assessee could raise, for the first time before the Tribunal, the contention that the supervision fee formed part of the equipment supply contract and was therefore not separately taxable?

Analysis: The new plea required investigation of facts not available on record, including the terms of the purchase orders and the parties' intention. The assessee had consistently offered the supervision fee as fees for technical services in the return and before the lower authorities. The Tribunal held that a fresh factual controversy could not be introduced at the appellate stage after such delay.

Conclusion: The contention was rejected and the assessee was not permitted to raise the new claim.

Issue (ii): Whether the supervision fee received from MUL was taxable at 20% under the treaty or at 30.25% on the footing that the assessee had a permanent establishment in India and the receipts were effectively connected with such permanent establishment?

Analysis: The Tribunal held that the liaison office, on the facts, did not constitute a permanent establishment for the supervisory services. The supervisory contracts were separate and severable, each purchase order stood on its own, and the supervision period under each contract did not exceed the treaty threshold. The Revenue's approach, which aggregated disparate contracts and treated all receipts as attracted to the alleged permanent establishment, was inconsistent with the treaty's requirement of real and effective connection. The material on record did not show that the supervision fee arose from business carried on through a permanent establishment so as to displace the treaty rate applicable to fees for technical services.

Conclusion: The supervision fee was taxable only at 20% under the treaty and not at 30.25%.

Issue (iii): Whether interest under sections 234B and 234C was chargeable?

Analysis: The income was subject to tax deduction at source by the payer. Applying the settled principle that a non-resident is not liable for advance-tax interest where the tax was deductible at source, the Tribunal held that no liability for interest arose.

Conclusion: Interest under sections 234B and 234C was not leviable.

Final Conclusion: The principal tax dispute was decided in favour of the assessee on the rate of tax and on interest, while the newly raised alternative factual claim was declined for want of record and delay. The connected appeal on interest alone was dismissed as infructuous.

Ratio Decidendi: For treaty purposes, supervisory receipts are taxable at the treaty rate unless the Revenue proves that the contract is effectively connected with a permanent establishment; separate and independent contracts cannot be aggregated to create a treaty permanent establishment by applying a force of attraction approach where the convention does not permit it.

---