2008 (2) TMI 31 - AAR - Income Tax

The payment, related to hardware repair, which is covered by the provisions of DTAA and not liable to be taxes in India as per DTAA, the person making payment is not liable to deduct TDS on such payment. Mere deputation of an engineer by foreign Company to India for the purpose of installation and testing of the repaired software can not constitute foreign company s permanent establishment in India. TDS is to on software maintenance contract is liable to be deducted @10%

Issues Involved:
1. Obligation to deduct tax at source under section 195 of the Income-tax Act, 1961.
2. Tax liability of Raytheon Company, USA, on payments received.
3. Existence of a permanent establishment of Raytheon in India.
4. Maintainability of the application before the Authority for Advance Rulings (AAR).

Detailed Analysis:

1. Obligation to Deduct Tax at Source under Section 195:
The primary issue was whether the applicant (a statutory authority) was obligated to deduct tax at source under section 195 of the Income-tax Act for payments made to Raytheon Company, USA, under two contracts: hardware repair support and software maintenance support. The Authority ruled that the payments made under the hardware repair contract were not liable to be taxed in India as all activities took place outside India, and Raytheon had no permanent establishment in India. Therefore, the applicant was not required to deduct tax at source for these payments. For the software maintenance contract, the Authority confirmed that the payments were considered "fees for included services" and were subject to a 10% withholding tax.

2. Tax Liability of Raytheon Company, USA:
The Authority referred to its previous ruling (AAR/624/2003) and reiterated that the payments received by Raytheon under the hardware repair contract were not taxable in India as business profits under Article 7 of the India-USA Double Taxation Avoidance Agreement (DTAA), given the absence of a permanent establishment. For the software maintenance contract, the payments were deemed taxable as "fees for included services" under Article 12 of the DTAA.

3. Existence of a Permanent Establishment:
The Authority examined whether Raytheon had a permanent establishment in India in connection with the contracts. The Revenue's counsel argued that there was a permanent establishment, citing a liaison office and an agreement with Grintex (India) Ltd. However, the Authority found no substantial evidence to support this claim. The liaison office's activities were deemed preparatory and auxiliary, and the agreement with Grintex did not indicate any role in the implementation of the contracts. Therefore, it was concluded that Raytheon did not have a permanent establishment in India.

4. Maintainability of the Application:
The Revenue's counsel contended that the application was not maintainable under clause (i) of the proviso to section 245R(2) because the question of Raytheon's tax liability was pending before the appellate authority. The Authority, however, distinguished between the applicant's obligation to deduct tax at source and Raytheon's tax liability. It held that the question of tax deduction at source was not pending before the appellate authority, and thus, the application was maintainable. The Authority emphasized that the applicant's right to seek an advance ruling should not be defeated by the pendency of an appeal filed by Raytheon.

Conclusion:
The Authority ruled that the applicant was not required to deduct tax at source on payments made to Raytheon under the hardware repair contract, as these were not taxable in India. For the software maintenance contract, the applicable withholding tax rate was confirmed to be 10%. The Authority also concluded that Raytheon did not have a permanent establishment in India in relation to the contracts and upheld the maintainability of the application for an advance ruling.

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