INDIA BUSINESS WORLD - AUGUST (16^th - 31^st) 2007
The Month that was ...

INCOME TAX DEPARTMENT MOVES SC AGAINST AUTHORITY FOR ADVANCED RULINGS ON TAXING ASSIGNMENT PAYMENTS

THE income-tax department has moved the Supreme Court challenging the findings of the Authority for Advanced Rulings, which had said that the foreign firms are not liable to pay tax on the assignment amount charged from their Indian subsidiaries if the contract was signed outside the country.

The quasi judicial body gave this ruling in a case concerning Swiss firm Honeywell Technologies SARL, which had received a fee from Honeywell Turbo India for supplying equipment to Tata Motors.

Solicitor general G E Vahanvati appearing for the Revenue said that the AAR ruling would have a snowballing effect as this could lead to similar innovations by foreign companies. This would deprive the Indian exchequer of legitimate taxes, said Vahanavati.

A bench headed by Justice Ashok Bhan issued notice to Honeywell Technologies asking it to respond to the petition.

The AAR, on an application by the Swiss company, had early this year ruled that since the assignment contract with Honeywell Turbo was entered into in Switzerland, the assignment amount was not covered under the Income Tax Act, 1961.

Honeywell group had entered into a pact with Telco (now Tata Motors) in September 2003 for supply of turbochargers for its passenger car. The group later transferred its rights and interests in the Indian business to its 100% subsidiary Honeywell Turbo for 7.5 million euros.

According to Revenue, the AAR was wrong in holding that Honeywell had no business connection in India and the assignment fee was a consideration received in lieu of transfer of these rights and interest to the Indian unit.

The tax department has said that AAR failed to evaluate the profit earned by Honeywell from sale of engines to Tata Motors and income to be earned from Indian operations.