tax notes international - Tuck School of Business - Dartmouth College

ut will insist on offsetting tax cuts in one area with
increases in another, such as with the VAT increase to
offset the payroll tax reduction.
Peter Szijjarto, spokesman for the right-wing opposition
Hungarian Civic Union, labeled Gyurcsany’s
January 25 meeting a failure, according to a January
26 report in The Budapest Times.
The Alliance of Free Democrats, a fellow left-wing
party to Gyurcsany’s Hungarian Socialist Party, said in
a statement that while it applauds Gyurcsany’s desire
to reduce taxes and contributions, it questions his earnestness
in light of a December 2008 statement in
which he said that tax cuts in 2009 or 2010 would be
impossible. The Alliance of Free Democrats called
Gyurcsany’s inconsistency ‘‘harmful’’ to the Hungarian
economy.
The parties were scheduled to meet in an extraordinary
session of parliament on January 29 to discuss
the worsening economy and the government’s proposed
legislation. The government plans to submit the
most pressing bills to the parliament by mid-March to
facilitate an effective date of July 1, Gyurcsany said in
a statement.
India
♦ Randall Jackson, Tax Analysts.
E-mail: rjackson@tax.org
Indian PE Not Responsible for
Withholding, Tax Tribunal Says
The Mumbai Income Tax Appellate Tribunal on
December 5 issued its ruling in DCIT v. Stock Engineer
and Contractors BV, clarifying the withholding tax obligation
on payments made to nonresidents by an Indian
permanent establishment of a Dutch company, as well
as the deductibility of some expenses for such a PE.
In the case at issue, which related to assessment
year 2000-2001, Stock Engineer and Contractors (the
assessee), a company incorporated in and resident of
the Netherlands, was engaged in the design and construction
of oil, gas, and petrochemical plants. It
signed a contract with an Indian oil company for the
engineering, procurement, and construction of a facility
in India on a turnkey basis. For that purpose, the
assessee set up project and site offices in India (an Indian
PE) after obtaining the due regulatory approval.
The assessee in turn subcontracted a part of the work
to its Malaysian subsidiary.
Under that agreement, the Malaysian subsidiary was
to supply personnel to the assessee for the purpose of
INDIA
executing the Indian project. Those personnel stayed in
India for a period of more than six months during the
year under consideration.
Separately, the assessee also engaged a U.K. company
to deploy employees for supervision of the Indian
project, and another Dutch company to provide engineering
services. Both of those companies were unrelated
to the assessee.
The personnel of the U.K. company were deployed
in India for 135 days. The assessee did not withhold
any Indian income tax when paying the Malaysian,
U.K., and Dutch suppliers. (The assessee also had
some employees at its head office who dedicated part
of their time providing technical support to the Indian
PE; however, none of those employees visited India for
the project work.)
During the 2000-2001 assessment year, the assessee
deducted the payments it made to the Malaysian subsidiary
and the unrelated U.K. and Dutch companies
in computing the Indian PE’s taxable income. The assessee
also deducted part of the salary cost incurred by
the head office for its employees based on the number
of hours the employees spent on the Indian project.
In the course of assessment proceedings, the tax
officer concluded that the assessee was subject to a
withholding tax obligation on the payments it made to
the various service suppliers. Because no tax was withheld,
those payments were not deductible in computing
the taxable profits of the Indian PE, 1 the tax officer
said.
In particular, the tax officer took the position that
the Malaysian subsidiary had a PE in India under article
5(4)(a) of the India-Malaysia income tax treaty,
which states that a PE is created if supervisory activities
are carried out in India for more than six months
in connection with a construction, installation, or assembly
project in India.
The tax officer also held that the U.K. company had
a PE in India under article 5(2)(k) of the India-U.K.
income tax treaty, which states that a services PE is
created if the aggregate stay of the personnel in India
exceeds 90 days.
Regarding the payment to the Dutch company, the
tax officer held that it constituted a payment for technical
services, which is subject to tax under the India-
Netherlands income tax treaty.
1 Failure to meet the withholding tax obligation leads to,
among other things, the denial of a tax deduction for the payment
in question (ITA section 40(a)(i)). The withholding tax obligation
in the case of payment to a nonresident is triggered under
ITA section 195 if the payment is subject to Indian income
tax in the hands of the recipient.
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 395
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