IN RE: ABC LTD. Vs. STATE

JUDGEMENT

(1.) IN this application under Section 245Q(1) of the IT Act, 1961 (for short "the Act"), the applicant is a company incorporated in Switzerland and is a tax resident of that country. It is a part of the D Group of companies. E Ltd. is one of the D Group of companies. It was incorporated in UK and it is a tax resident of UK. The said company was engaged in the business of manufacturing of turbochargers and providing engineering services. XYZ Ltd. issued a letter of intent ('LOT') duly specifying the key terms and conditions for the supply of turbochargers in favour of E Ltd. for the purchase of turbochargers for 1 litres diesel engines in September, 2003. The D Group took up a restructuring exercise with the objective of centralizing key functions in Switzerland whereunder E Ltd. transferred its business of manufacturing turbochargers on a going concern basis to the applicant w.e.f. 1st Jan., 2004. Thereafter the applicant is engaged in the business of manufacture of turbochargers for passenger and commercial vehicles. Under the arrangement the LOI issued by XYZ Ltd. to E Ltd. for the purchase of turbochargers was transferred by it (E Ltd.) to the applicant as a successor. The applicant entered into a turbocharger development and supply (TDS) agreement with XYZ Ltd. for manufacturing and supply of turbochargers for vehicles manufactured by XYZ Ltd. using L litres diesel engines. The applicant proposes to establish an Indian subsidiary named J (P) Ltd. to be incorporated under the Indian Companies Act, which would be engaged in the business of supplying of turbochargers to customers including XYZ Ltd. as per the TDS agreement. J (P) Ltd. would manufacture locally and supply turbochargers to XYZ Ltd. For that purpose the applicant would assign its rights, interests and obligations in the TDS agreement to J (P) Ltd. on agreed consideration to be paid to the applicant in installments. As part of the agreement the applicant proposes to provide a volume guarantee to J (P) Ltd. to the effect, should the volumes under the TDS agreement fail to materialize from XYZ Ltd. at the prices indicated thereunder, the applicant would source additional turbochargers from J (P) Ltd. to make good such deficiency. In this backdrop the applicant has set forth the following questions to seek advance rulings of the Authority:

(2.) IF the answer to (1) above is in affirmative, then, to what extent and in which year/s would the receipt be taxable in India having regard to the provisions of the Act and the DTAA?

(3.) MR . T.N. Chopra, learned Counsel appearing for the CIT, has contended that the assignment fee has nexus with the running of business and therefore, is in the nature of revenue profits in the hands of the applicant and is taxable. It is not a case of simpliciter assignment without carrying on any activity in India. The Indian subsidiary set up by the applicant is merely a projection of foreign enterprise on the soil of India and the assignment fee is, therefore, liable to tax under Section 9(1)(i) of the Act as well as Article 7 of the treaty. What is purportedly labelled as assignment fee is in the nature of royalty liable to tax under Section 9(1)(vi) of the Act as well as Article 12 of the treaty. Since deduction of tax at source under Section 195 of the Act is tentative and provisional subject to final determination at the time of regular assessment, Section 195 of the Act is attracted at the time of payment of so -called assignment fee.