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I-T moves SC on foreign firms' tax-liability ruling
August, 18th 2007
The income tax department has moved the Supreme Court, challenging the findings of the authority for advanced rulings (AAR), which had said foreign firms were 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 GE Vahanvati, appearing on behalf of the revenue department, said 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 a notice to Honeywell Technologies, asking it to respond to the petition.

AAR, on an application by the Swiss company had, earlier 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 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 E7.5 million.

According to the revenue department, 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 AAR failed to evaluate the profit earned by Honeywell from sale of engines to Tata Motors and income to be earned from Indian operations.
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