2004 (12) TMI 13 - AAR - Income Tax

For Modernisation of Air Traffic Services (MATS) in Delhi and Mumbai the applicant entered into two contracts-(1) supply contract and (2) service contract-with USA company for supply and installation of equipment held that the payment received by USA Company under the transaction mentioned in annexure I is not liable to tax in India in the hands of the recipient non-resident US company - deputation of an engineer by Company to India will not constitute Company s PE in India

Summary

Issues Involved:
1. Tax liability of payments received by M/s Raytheon Company for hardware repair services.
2. Tax liability of payments received by M/s Raytheon Company for software modification and anomaly resolution services.
3. Determination of whether the deputation of an engineer by M/s Raytheon Company constitutes a permanent establishment in India.

Issue-wise Detailed Analysis:

1. Tax Liability of Payments for Hardware Repair Services:
The applicant, Airports Authority of India, entered into a contract with M/s Raytheon Company (RC) for the repair of hardware of the MATS system. The hardware repair process involved the applicant detecting faults, filling out a Site Anomaly Report (SAR), and shipping the defective parts to RC's facilities outside India. RC would repair or replace the parts and send them back to India.

The core question was whether the payments made to RC for these repairs would be considered business profits under Article 7 of the Treaty between the USA and India. Since RC did not have a permanent establishment (PE) in India, the profits from these services would not be taxable in India. The Authority concluded that the payment received by RC for hardware repair does not fall under the definition of income from furnishing services as per Article 12 and thus constitutes business profits. Consequently, these payments are not taxable in India as RC has no PE in India.

2. Tax Liability of Payments for Software Modification and Anomaly Resolution Services:
The applicant also contracted RC for software modification and anomaly resolution services. This involved the applicant sending anomaly reports and data to RC, which would then analyze and resolve the issues. If the software required changes, RC generated System Trouble Reports (STRs), made necessary modifications, and sent updated software builds to India. RC engineers would visit India for verification and testing of these software updates.

The Authority examined whether these payments would be classified as "fees for included services" under Article 12 of the Treaty. According to Article 12(4)(a), fees for included services encompass payments for technical or consultancy services ancillary and subsidiary to the application or enjoyment of the right, property, or information. The Authority determined that the payments for software services fall under this category, as they are ancillary to the use of the software initially supplied by RC. Therefore, these payments are taxable in India under Article 12 of the Treaty.

3. Determination of Permanent Establishment:
The applicant questioned whether the deputation of an RC engineer to India for the installation and testing of repaired software would constitute a PE. The Authority concluded that since RC did not have a PE in India and the engineer's visit was temporary and incidental, it did not constitute a PE under the Treaty. Hence, the deputation of an engineer by RC does not establish a PE in India.

Conclusion:
- In AAR/624/2003, the Authority ruled that the payment received by M/s Raytheon Company for hardware repair is not liable to tax in India as it constitutes business profits and RC has no PE in India.
- In AAR/625/2003, the Authority ruled that the deputation of an engineer does not constitute a PE in India. However, the payment received for software modification and anomaly resolution services is liable to tax in India as it falls under "fees for included services" per Article 12 of the Treaty.

The Authority declined to pronounce advance rulings on the questions regarding the tax rate and source deduction as they were not pressed by the applicant.