In a recent ruling on Worley Parsons Services, the Authority for Advance Rulings (AAR) revisited the principles of international taxation governing the treatment of royalty payments made for services rendered by a non-resident in India, as well as the established principles of territorial nexus governing the taxation of such payments. The applicant in the present case, Worley, is an Australian company which had entered into three agreements to provide engineering and procurement services which were mainly performed in Perth. Only 20% of the total services was performed in India.
The main point for consideration by the AAR was whether the services performed were connected to a permanent establishment (PE) in India. In the event of such a connection, only that part of the profit attributable to the PE would be tax-liable in India. The AAR held that this connection must be “real and intimate”. Due to the lack of such a connection, the services could not be categorized as business profits and were thus liable to be taxed as royalty payments on the services provided by Worley.
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
