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 in a case concerning Swiss firm Honeywell [Get Quote] Technologies SARL, which had received a fee from Honeywell Turbo India for supplying equipment to Tata Motors [Get Quote].

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.