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2008 (7) TMI 17 - AAR - Income TaxAmount received by a non-residents towards software and provision of services of installation testing and training even if only part activity is being performed in India. It will be taxable as royalty and fee for technical services @10% U/s 115A. Obtaining software under license can not be held as purchase but should be treated as transaction of right to use
Issues Involved:
1. Tax liability of payments received by Raytheon Company under two separate contracts with the Airports Authority of India. 2. Classification and taxability of payments for software, hardware, and services (installation, testing, training). Detailed Analysis: Issue 1: Tax Liability of Payments Received by Raytheon Company Application No. AAR/755/2007: The Airports Authority of India (AAI) entered into a contract with Raytheon Company (RC) for procuring Surveillance Situation Display Data (S-SDD). The contract involves RC providing software documentation, software, hardware, installation, testing, and training. The total contract value is US$ 2,348,120, with US$ 169,102 for hardware and US$ 2,149,018 for software, and US$ 30,000 for installation, testing, and training. Application No. AAR/756/2007: AAI entered into another contract with RC for supplying DG Servers and related software for modernizing air traffic services. The total contract value is US$ 17,900,458, with US$ 1,486,584 for hardware, US$ 16,313,874 for software, and US$ 100,000 for installation, testing, and training. Issue 2: Classification and Taxability of Payments Supply of Hardware: The income from the supply of hardware is considered business profits. Under Article 7.1 of the DTAA between India and the USA, this income is not taxable in India as RC does not have a permanent establishment in India. Supply of Software: The applicant argued that the software should be treated as goods, citing the Supreme Court's decision in Tata Consultancy Services vs. Union of India. However, the Authority found that the software and documentation provided by RC are not outrightly sold but are licensed for use by AAI. The contract explicitly states that the software remains the property of RC, and AAI only has a non-transferable, non-exclusive license to use it. Therefore, the payment for the software is considered royalty under section 9(1)(vii) of the Income-tax Act and Article 12(3) of the DTAA. Installation, Testing, and Training Services: The services rendered in India by RC's engineers are considered 'fees for technical services' under section 115A of the Income-tax Act. These services are ancillary and subsidiary to the enjoyment of the right to use the software, thus falling under 'fees for included services' as per paragraph (4) of Article 12 of the DTAA. Conclusion: 1. Payments for Software and Services: - The payments received by RC for software and the provision of services (installation, testing, and training) are taxable under the Income-tax Act, 1961, read with the DTAA. - These payments are classified as royalty and fees for technical services, respectively. 2. Tax Rate: - The payments shall be charged at the rate of 10% as per section 115A of the Income-tax Act, plus applicable surcharge and cess. - If the rate prescribed under the DTAA is more favorable, the applicant can avail of that benefit. Pronouncement: The ruling was pronounced on 28th July 2008, confirming the taxability of payments received by RC for software and related services under the specified rates and conditions.
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