2004 (8) TMI 103 - AAR - Income Tax

Applicant received amount of funds as a grant for funding a feasibility study on the proposed CNS/ATM project in India - Since the source of payment to Innovative Solutions is the grant made by the Government of the USA the royalties/fees for included services shall be deemed to arise in the USA and subject to tax only in that State - Therefore payments made to Innovative Solutions are not taxable in India either under the Income-tax Act or under the DTAA between India and the USA.

Summary

Issues Involved:
1. Tax liability of payments received by a non-resident US company under the transaction.
2. Applicability of Section 5(2) and Section 9(1)(vi) & (vii) of the Income-tax Act, 1961.
3. Interpretation of Double Taxation Avoidance Agreement (DTAA) between India and USA.

Detailed Analysis:

Issue 1: Tax Liability of Payments Received by a Non-Resident US Company
The primary issue was whether the payment received by M/s. Innovative Solutions International under the feasibility study contract is liable to tax in India. The applicant argued that the payments are neither "royalty" nor "fees for included services" under Articles 12(3) & 12(4) of the DTAA between India and USA. The applicant also contended that the payments do not qualify as "business profits" under Article 7(7) of the DTAA, given that the contractor has no permanent establishment (PE) in India.

Issue 2: Applicability of Section 5(2) and Section 9(1)(vi) & (vii) of the Income-tax Act, 1961
The Revenue contended that the payments should be considered under Section 5(2) of the Act, as the income is accruing and arising to the contractor from India. They argued that the payments fall under Section 9(1)(vi) and 9(1)(vii) of the Act because the payments, though made through TDA, are on behalf of the applicant, a resident in India. However, the Authority concluded that no part of the income can be said to have been received or deemed to be received or to have accrued or arisen in India under Section 5(2) of the Act.

Issue 3: Interpretation of Double Taxation Avoidance Agreement (DTAA) between India and USA
The Authority examined whether the payments could be deemed to accrue or arise in India under the DTAA. The Revenue argued that the payments fall under Articles 12(3) and 12(4) of the DTAA as they involve information concerning industrial, commercial, or scientific experience. However, the Authority determined that the payments are not taxable under the DTAA. They noted that the payments are essentially made by the Government of USA through TDA, and according to Para 7(a) of Article 12 of the DTAA, royalties and fees for included services are deemed to arise in the state where the payer is located, which in this case is the USA.

Conclusion:
The Authority ruled that the payments received by M/s. Innovative Solutions International are not liable to tax in India. The payments do not fall under Section 5(2) or Section 9(1)(vi) & (vii) of the Income-tax Act, nor under the DTAA between India and USA. The source of payment being the Government of USA, the royalties/fees for included services are deemed to arise in the USA and are subject to tax only in that state.

Final Ruling:
"The payment received by M/s Innovative Solutions International in the transaction under consideration is not liable to tax in India in the hands of the recipient."

Pronouncement:
The ruling was pronounced by the Authority on the 13th day of August, 2004.