Supervisory work on an installation project can create a permanent establishment, with technical fees taxed under domestic rules.

Supervisory activities carried on in connection with an installation or assembly project can create a service permanent establishment under the relevant DTAA clause even when the project does not belong to the non-resident, provided the six-month threshold is met. Control or ownership of the site is not a necessary condition. Once the treaty exemption for fees for technical services does not apply, the income attributable to the permanent establishment is computed under article 7 and the applicable domestic provisions for the relevant period, with no deduction of expenditure under section 44D(b) and tax charged at 30 per cent under section 115A; section 44DA was held inapplicable for that assessment period.

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Issues: (i) Whether supervisory activities carried on in connection with an installation or assembly project, though the project did not belong to the assessee, constituted a permanent establishment under article 5(2)(i) of the DTAA. (ii) Whether, after such a finding, the income from fees for technical services had to be computed under article 7 of the DTAA read with sections 44D(b) and 115A of the Income-tax Act, 1961.

Issue (i): Whether supervisory activities carried on in connection with an installation or assembly project, though the project did not belong to the assessee, constituted a permanent establishment under article 5(2)(i) of the DTAA.

Analysis: The relevant treaty provision was read as creating a service permanent establishment where supervisory activities are carried on in connection with an installation or assembly project for more than six months. The control or ownership of the installation site by the assessee was not treated as a necessary condition. The clause was understood to cover supervisory services rendered at the site of another enterprise when the duration threshold was satisfied.

Conclusion: The existence of a permanent establishment was held to be established against the assessee.

Issue (ii): Whether, after such a finding, the income from fees for technical services had to be computed under article 7 of the DTAA read with sections 44D(b) and 115A of the Income-tax Act, 1961.

Analysis: Once the exclusion under article 12 could not apply, the profits attributable to the permanent establishment were required to be computed under article 7 in accordance with domestic law. For the relevant agreement period, section 44D(b) applied and disallowed deduction of expenditure or allowance in computing income by way of fees for technical services, while section 115A fixed the applicable rate at 30 per cent. The later provision in section 44DA was held inapplicable to the assessment period in question.

Conclusion: The assessee was held liable to deduction of tax at 30 per cent and not at the lower treaty rate.

Final Conclusion: The appeals failed because the assessee was found to have a permanent establishment in India and the resulting technical-fee income was taxable under the domestic-law computation regime, with no deduction of expenditure and tax deductible at 30 per cent.

Ratio Decidendi: Supervisory activities carried on for more than six months in connection with an installation or assembly project constitute a permanent establishment under the relevant treaty provision, and once article 12 is excluded, fees for technical services are computed under domestic law subject to section 44D(b) and section 115A.

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