Non-resident lessor does not have Permanent Establishment (PE) or business connection in India on account of leased assets used in India but delivered outside India, provided the lease agreement is entered on principal-to-principal basis.

Non-resident lessor does not have Permanent Establishment (PE) or business connection in India on account of leased assets used in India but delivered outside India, provided the lease agreement is entered on principal-to-principal basis.

•  Taxpayer, an Indian company (ICO), entered into an agreement with a UK Company (FCO) for hiring certain machinery on lease. ICO paid hiring charges to FCO without deducting any tax at source u/s.195.
•  The Tax Authority alleged that FCO had ‘business connection’ with ICO in India and consequently disallowed deduction for hiring charges u/s.40(a) (ia) as ICO had failed to deduct tax at source on lease rentals paid to FCO.
•  ICO contended that FCO was the sole, lawful and absolute owner of the machinery. Also, under terms of the lease agreement, the machinery was to be delivered outside India and all risks and rewards of ownership continued to vest in FCO. Hence FCO did not constitute a PE or business connection in India.

•  An analysis of terms of the lease agreement revealed that all the risk and rewards of ownership continued with FCO. Further, as per the lease agreement, the assets were to be delivered outside India. The agreement was also, on ‘principal-to-principal’ basis and it did not create a partnership or joint venture between parties to the lease transaction.
•  FCO, therefore, did not have a PE or business connection in India. Further, there was no material on record to indicate FCO’s presence in India.
•  Hence, lease rentals were not chargeable to tax in India. In the absence of liability to tax in India, provisions of section 195, requiring deduction of tax at source, were not applicable.