Permanent establishment test bars Indian tax on non-resident business profits, so no withholding arose on the remittance.

Assignment consideration received by a non-resident for contractual rights was treated as business profits rather than capital gains, because the assignment was ineffective against the original counterparty for lack of valid consent. Even so, the income was not taxable in India under the treaty since no fixed place permanent establishment, dependent agent permanent establishment, or agency permanent establishment in India was established. In the absence of a permanent establishment, Article 7 barred Indian taxation of the business profits. As the receipt was not chargeable to tax in India, section 195 withholding did not apply to the remittance, and the Indian payer had no tax deduction obligation.

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Issues: (i) Whether the consideration received by the non-resident for assignment of contractual rights was taxable in India as capital gains or business profits. (ii) Whether the Indian payer was required to deduct tax at source on the remittance.

Issue (i): Whether the consideration received by the non-resident for assignment of contractual rights was taxable in India as capital gains or business profits.

Analysis: The assignment was treated as ineffective against the original contracting counterparty for want of valid consent, so the transaction could not be upheld as a transfer of a capital asset situated outside India. Even so, the amount paid under the agreement was held to be income in the nature of business profits in the hands of the non-resident. The decisive further question was whether such profits were taxable in India under the domestic law and the treaty. On the facts, no fixed place permanent establishment in India was established, and the Indian company was not found to be a dependent agent or agency permanent establishment of the non-resident. In the absence of a permanent establishment, Article 7 of the treaty prevented taxation of those business profits in India.

Conclusion: The consideration was not taxable in India in the hands of the non-resident.

Issue (ii): Whether the Indian payer was required to deduct tax at source on the remittance.

Analysis: Tax deduction at source under section 195 arises only when the sum remitted is chargeable to tax in India. Since the non-resident's receipt was held not taxable in India because it was not attributable to any permanent establishment, the remittance did not attract withholding obligation.

Conclusion: The Indian payer was not required to deduct tax at source.

Final Conclusion: The ruling accepted the applicant's position that the remittance was outside Indian taxation in the absence of a permanent establishment, and consequently no withholding obligation arose.

Ratio Decidendi: Business profits of a non-resident are taxable in India under the treaty only if they are attributable to a permanent establishment in India; absent such permanent establishment, no withholding under section 195 is required on the remittance.

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