Section 195 withholding applies only to income chargeable in India; supply contracts with incidental services were not turnkey contracts.

Section 195 applies only to the portion of a remittance representing income chargeable in India, and the financing or constructive payment route does not by itself remove the payer's withholding obligation. The contracts were held to be contracts for sale of goods, with only incidental supervision, testing, commissioning and local installation; the limited service element alone could be attributed to the non-resident's Indian PE, not the full contract value. Grossing up under section 195A was rejected because the contracts contained no tax-bearer clause. The Revenue's objection on the BHEL payment under section 194C also failed.

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Issues: (i) Whether the assessee was obliged to deduct tax at source under section 195 on remittances made under the supply arrangements with the non-resident supplier and consultant, including payments routed through the special financing mechanism and constructive payment mode; (ii) whether the contracts were turnkey/work contracts or contracts of sale of goods, and whether any part of the contract receipts was taxable in India as attributable to a permanent establishment so as to justify deduction at source; (iii) whether grossing up under section 195A was permissible in the absence of any contractual assumption of the tax burden; and (iv) whether the payments to BHEL attracted section 194C.

Issue (i): Whether the assessee was obliged to deduct tax at source under section 195 on remittances made under the supply arrangements with the non-resident supplier and consultant, including payments routed through the special financing mechanism and constructive payment mode.

Analysis: The payment obligation under section 195 depends on the factum of payment or credit in relation to income chargeable in India, and the financing arrangement by itself does not alter the assessee's responsibility where the payment is made for and on behalf of the assessee under the contractual framework. The mode of remittance, even if routed through banking and governmental arrangements, does not displace the payer's liability where the assessee is the contracting buyer and the payment is made in pursuance of the contract.

Conclusion: The obligation under section 195 was attracted.

Issue (ii): Whether the contracts were turnkey/work contracts or contracts of sale of goods, and whether any part of the contract receipts was taxable in India as attributable to a permanent establishment so as to justify deduction at source.

Analysis: The contract terms, read as a whole, showed that the core bargain was the supply of plant and equipment manufactured abroad, with only incidental supervision, testing, commissioning, and local installation elements. The supervisory component was comparatively small and did not convert the arrangements into turnkey or works contracts. The situs and dominant elements of the transactions were found to be outside India, and the receipts for supply were not chargeable in India merely because the goods were brought to India and assembled there. As regards the DTAA, the non-resident had a permanent establishment in India, but only the limited supervisory/service component could be attributed to it, not the entire contract value.

Conclusion: The contracts were contracts of sale and only the limited service element, not the whole contract value, was potentially attributable to the permanent establishment; the assessee succeeded on the substantive chargeability issue.

Issue (iii): Whether grossing up under section 195A was permissible in the absence of any contractual assumption of the tax burden.

Analysis: Grossing up presupposes a contractual or legal undertaking by the payer to bear the non-resident's tax liability. The contracts contained no such undertaking by the assessee and, on the contrary, the assessee had denied any obligation to bear the tax. In the absence of a tax-bearer clause, the entire premise for grossing up failed.

Conclusion: Grossing up under section 195A was not permissible.

Issue (iv): Whether the payments to BHEL attracted section 194C.

Analysis: The payment to BHEL did not establish a basis for treating the assessee as liable under the provision pressed by the Revenue, and the record did not justify upsetting the first appellate finding on that aspect.

Conclusion: The Revenue's challenge on the BHEL payment issue failed.

Final Conclusion: The assessee was not liable to bear tax on the full remittances as chargeable income in India, grossing up was unwarranted, and the Revenue's appeal on the BHEL issue also failed; consequently, the assessee's appeals were allowed and the Revenue's appeals were dismissed.

Ratio Decidendi: Under section 195, tax is deductible only on the portion of a remittance that represents income chargeable in India, and a supply contract with only incidental supervisory services does not become a turnkey contract or make the entire consideration taxable merely because the goods are assembled or installed in India.

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