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2010 (3) TMI 110 - AAR - Income TaxProcurement of hardware and software from USA with installation service Permanent establishment DTAA with USA - The contract specifically provides that the title and risk in the property (hardware and software) shall pass to AAI outside India. AAI is responsible for payment of import duties and customs clearances. As regards software and documentation, the contract grants to AAI a non-transferable, non-exclusive, royalty free licence for using the software only at Delhi. The applicant contends that the essence of the contract is only purchase of certain copyrighted software and hardware on outright basis subject to certain end-use restrictions. The applicant points out that the consideration stipulated for installation is approximately 0.10% of the total contract value. It is the case of the applicant that the amounts received by Raytheon for supply of hardware, software and support services are in the nature of business profits and would not be taxable in India in the absence of Permanent Establishment (PE) in India, having regard to the provisions of Art.7 of DTAA (Tax treaty) between India and USA. It is submitted that the payments received by Raytheon cannot be construed as giving rise to income by way of royalty and/or fees for technical services. Held that Income from hardware is not taxable especially in view of specific stipulations that the title and risk in the property passed on to AAI outside India, that AAI was responsible for import duties and customs clearance and that the consignments were shipped directly to AAI at the cost of Raytheon. Withholding tax is required to be deducted on payment except payment for hardware and COTS software that go with the hardware which are not liable to be taxed in India. - The rate of withholding tax is governed by Section 115A(1)(b)(BB) which is more beneficial to the tax payer when compared to the rate prescribed in Art.12 of the Treaty
Issues Involved:
1. Taxability of payment received by Raytheon Company under the contract. 2. Requirement and applicable rate of tax deduction at source by AAI on payments to Raytheon. Detailed Analysis: 1. Taxability of Payment Received by Raytheon: The contract between AAI and Raytheon involves the supply of hardware, software, and related services for the automation upgrade of the third runway at IGI Airport, New Delhi. The primary contention is whether the payments made to Raytheon are taxable in India under the provisions of the India-US DTAA (Double Taxation Avoidance Agreement). The applicant argues that the payments are business profits and not taxable in India due to the absence of a Permanent Establishment (PE) of Raytheon in India, as per Article 7 of the DTAA. The contract stipulates that the title and risk in the property (hardware and software) pass to AAI outside India, and AAI is responsible for import duties and customs clearances. In previous rulings concerning similar contracts with Raytheon, it was held that payments for hardware were not taxable in India as they constituted outright sales. However, payments for software and related services were considered royalties or fees for included services under Article 12 of the DTAA. The current ruling reaffirms that the payments for hardware are not taxable in India, as the title and risk pass outside India, and AAI handles customs duties. However, payments for software and related services are taxable under Article 12 of the DTAA. The ruling emphasizes that the software is customized for site-specific requirements and involves technical services that make available technical knowledge, experience, and skills to AAI, thus falling within the scope of Article 12(4)(b). The ruling also references the MOU example under the US-India Tax Treaty, which supports the view that technical services for modifying software are considered fees for included services. The delivery of software and related technical services is seen as a package that equips AAI with the necessary technical skills and operational efficiency. 2. Requirement and Applicable Rate of Tax Deduction at Source:The applicant is required to deduct tax at source on payments made to Raytheon for software and related services, as these payments fall within the scope of Article 12 of the DTAA. The applicable rate of withholding tax is governed by Section 115A(1)(b)(BB) of the Income Tax Act, which is more beneficial to the taxpayer compared to the rate prescribed in Article 12 of the DTAA. The ruling concludes that the applicant must deduct tax at source on payments for software and related services, but not for hardware. The rate of withholding tax is determined by the provisions of Section 115A(1)(b)(BB). Conclusion:The ruling affirms that the payments for hardware are not taxable in India, while payments for software and related services are taxable under Article 12 of the DTAA. The applicant must deduct tax at source on payments for software and related services at the rate specified in Section 115A(1)(b)(BB). The ruling is pronounced on the 18th day of March, 2010.
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