I-T must for foreign firms sans local base

In a landmark judgement, the Income-Tax Tribunal has ruled that the income of a foreign company could be taxed if it is earned from operations related to a project in the year in which the company had a permanent establishment (PE).

The recent judgement, in a case concerning the Netherlands-based Van Oord Dredging and Marine Contractors, makes it clear that the income is taxable even if the money is received subsequent to a foreign company ceasing to have a permanent establishment in India.

It is not necessary that the foreign company should have base in India in the year of receipt of the income.

This ruling will make foreign engineering and construction turnkey contractors liable to pay tax on income for job done during their permanent establishment in India, even if the money is actually received by them subsequently.

This effectively means foreign companies having an establishment in India for execution of a contract will have to pay income tax on payments received for the work after they leave the Indian shores.

According to income-tax sources, the ruling sets a precedence for similar cases of other foreign companies especially in the construction sector and removes anomalies in applying the concept of permanent establishment for taxation of their income in India.

Van Oord, a marine contractor, had received a payment of Rs 30.78 crore in 2001-02 from New Mangalore Port Trust for a project which was completed in the financial year 1995-96 and the Netherlands company's permanent establishment also ended in the same year.

The marine company had appealed to the tribunal that since the income was received in 2001-02 when it did not have a permanent establishment at the port site, it should be exempt from paying tax. The income was received for additional work performed by the contractor after the project was over.

The tribunal, in delivering the judgement, relied on the fact that there is no condition in double taxation avoidance treaty signed between the Netherlands and India, which specifies that income could only be earned when there is a permanent establishment.