Foreign firms earning through underwriting services in India without having a permanent establishment here will not be required to pay tax on that income, tax tribunal said in a ruling.

Income Tax Appellate Tribunal (ITAT) gave this ruling in case of over Rs nine crore payment by auto maker Mahindra and Mahindra to the investment banking arm of France-based Paribas group Banque Paribas which acted as lead manager for the company's Global Depository Receipts in 1993 and 1996.

"The entire amount paid by the assessee (M&M) in relation to the FCCB issue, viz, management , selling and underwriting commission along with the reimbursement of expenses cannot be taxed in the hands of the non-resident (Banque Paribas) and resultantly there can be no obligation on the assesee to deduct tax at source," ITAT said in the order.

Mahindra and Mahindra Limited came out with Euro FCCB issues of the size of USD 74.75 million and USD 100 million dollars in November 1993 and July 1996 respectively for funding upgradation of its operations in India.

The company had paid a sum of Rs 8,21,00,838 as marketing and underwriting commission as well as selling commission to Paribas and a further sum of Rs 88,74,971 for expenses on travel, telephone, legal advisors etc.

Management and underwriting commission was to be provided at 1.5 per cent of the issue price and selling commission at the rate of 2 per cent. Such commission was to be retained by the lead managers from the issue price of GDRs.

The revenue authorities in their contention pointed out that M&M was liable to deduct tax at source for the payment made to the lead manager. According to them, tax liability stood at Rs 4.10 crore for the first issue and Rs 4.87 crore for the second offer, including interest for delay in payment.

The ITAT order said even if the income by way of underwriting commission is taken to be business profit by Banque Paribas, it has to be taxed only to the extent which is attributable to the permanent establishment of the firm in India.