The Income Tax Department has moved the Supreme Court against the ruling by a quasi-judicial body which held that foreign firms are not liable to pay tax on assignment amount charged from their Indian subsidiaries if contracts are signed outside the country.
The I-T department challenged the decision of Authority of Advance Ruling (AAR) in a case concerning Swiss firm Honeywell Technologies SARL, which had received a fee from Honeywell Turbo India for supplying equipment to Tata Motors.
In its appeal, the department represented by Solicitor General G E Vahanvati 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, it said.
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 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 per cent subsidiary Honeywell Turbo for 7.5 million euros.
According to Vahanvati, 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 argued 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.
According to the petition filed through B V Balram Das, the consideration of 7.5 million euros received by Honeywell from its Indian subsidiary was taxable as this was profit taken in advance.
The department has argued that payments made by Honeywell Turbo to its parent firm would be from the profits earned by it and such remittances would include taxable profits.