9911796707
TMI Blog2008 (2) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... e advance ruling is sought primarily on the issue whether the applicant is under an obligation to deduct tax at source under section 195 of the Income-tax Act in connection with two contracts (i) hardware repair support contract ; and (ii) software maintenance support contract, which the applicant entered into on April 26, 2006, (in continuation of previous contracts of 2003) with Raytheon Company, USA, which is a non-resident foreign company (hereinafter referred to as "Raytheon"). In fact, this is the second round of proceedings initiated by the applicant before this authority . The applicant approached the AAR earlier for giving a ruling on similar issues arising out of similar contracts entered into between the applicant and Raytheon on February 4, 2003. In fact, the contracts of 2003 were extended in 2006 on substantially similar terms and conditions for a period of three years pursuant to clause 11 contained in the previous con tracts of 2003. The applicant has perceived the need to obtain the ruling afresh probably for the reason that the transaction evidenced by the con tract is technically a fresh one and, secondly, for the reason that the concerned income-tax authority ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 5.1). 4 The scope of work under the contract for software maintenance support broadly is to resolve anomalies and modify the software supplied by Raytheon under the MATS-BD Agreement of 1993. 5 In the earlier application (AAR /624/2003) Airports Authority of India, In re [2005] 273 ITR 437 (AAR), two questions were raised in relation to the hardware repair contract which were as follows (page 441) "(i) Whether payment received by M/s. Raytheon Company under the transaction mentioned in annexure I is liable to tax in India in the hands of the recipient, non-resident US company? (ii) If the answer to question No. 1 is in the affirmative, at what rate the income-tax will be chargeable in India and at what rate tax at source is deductible by the applicant ?" 6 In relation to the software contract, the following three questions were framed (page 442) "(i) Whether, under the facts and circumstances of the case, deputation of an engineer by M/s. Raytheon Company to India for the purpose of installation and testing of the repaired software will constitute Raytheon's permanent establishment in India ? (ii) Whether payment received by M/s. Raytheon Company under the transaction m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable 2 9 Ultimately, the applicant's counsel invited the ruling of this authority on question No. (ii) Of application No. AAR1624/2003 (AAR/75312007?) and the second part of question No. (iii) in application No. AAR / 754/2007. 10 A brief factual background which led to the two contracts for repair of hardware and rectification of defective software imbedded in the Modernized Air Traffic System (MATS) in Delhi and Mumbai, entered into in the year 2003 may be noted. 11 The applicant entered into two contracts with Raytheon Company, USA on March 19, 1993: one was a supply Contract and another was a service contract. Supply and installation of equipment together with provision of It was the contention of the applicant before this authority that the payments made by the applicant to Raytheon under the terms of contract did not give rise to income-tax liability in India as all the activities took place outside India and even the property in the equipment passed outside India and the installation of the equipment was done by the applicant itself. In the case of the software maintenance support contract also, it was the contention f the applicant that a substantial part of the activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Raytheon were in the nature of business profits and the same will not be liable to tax in indian in view of article 7 of the convention as Raytheon had no permanent establishment (PE) in India. 13 This Authority referred to the provisions of the said Convention in extensor and accepted the contention of the applicant that the payments received by Raytheon from the applicant in connection with the hardware repair contract were not liable to be taxed in India under the Income-tax Act, 1961. This authority held that the hardware and other equipment were the subject-matter of outright sale in favour of the applicant and that the repair of hardware undertaken by Raytheon outside India did not amount to furnishing services as defined in article 12 of the Convention. The payment was held to be in the nature of business profits within the meaning of article 7 and in view of the admitted case that Raytheon had no permanent establishment in India, it was ruled that the payments under the hardware repair contract were not taxable in India by virtue of article 7 of the treaty. On the point of permanent establishment, the Authority observed thus (page 445 of 273 ITR) "Mr. Gupta has conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground that this Authority was not apprised of the relevant facts relating to the existence of a permanent establishment that the con cession made by the Revenue's counsel appearing in that case was wrong and that the subsequent investigation in the context of assessment proceedings of Raytheon revealed the existence of a permanent establishment even in regard to the hardware repair support contract. In order to satisfy ourselves whether the assertion and contention of the Revenue's counsel on the permanent establishment issue is prima facie sustainable and whether the ruling requires reconsideration on that grounds we have gone through the assessment orders relating to Raytheon placed before us by the Revenue's counsel and the material referred to therein. 17 We find nothing in those orders which substantiates the Revenue's version that there was a permanent establishment of Raytheon in India in connection with the hardware repairs support contract or for that matter the software maintenance contract both of which originated in 2003 and were renewed in 2006. In fact, there is no definite finding supported by reasons which throws light on the existence of a permanent establishme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce outside India and the applicant or its agent took delivery of the repaired equipment, there was very little part which the liaison office could have played in the implementation of the contracts in question. Moreover, under article 5(3) of the DTAA with the USA, preparatory and auxiliary type of work stands excluded from the purview of permanent establishment. 19 In paragraph 4.1 of annexure A to the contract for hardware repair support, under the heading "other AM responsibilities", it is stipulated that AAI (applicant) will supply necessary details and test equipment to Raytheon engineers while they are at site. In response to our query, the deputy general manager of the applicant has filed an affidavit giving the details of visits of personnel in connection with both contracts between the financial years 2003 and 2006. Four or five technical personnel deputed by Raytheon made visits for 14 days, 18 days, 25 days, respectively, during those 3 years. The learned authorised representative clarified that most of the visits were in connection with the software maintenance contract. From these sporadic visits of Raytheon's personnel for a few days, it is difficult to draw any infe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers or in the comments of the Department or written submissions filed by him about the activities done under the aegis of the alleged permanent establishment in connection with the hardware repair contract. We could not get satisfactory reply from counsel on this aspect. 22 We are, therefore, of the view that the earlier ruling reported in [2005] 273 ITR 437 does not require reconsideration on the ground that the con cession given by the Department was wrong or that the applicant did not make frank disclosure of material facts on the issue of permanent establishment. The endeavour of the Revenue's counsel to project some doubts on the correctness of the earlier ruling has proved to be an infructuous exercise. 23 The Revenue's counsel, faced with the difficulty of assailing the correct- 23 ness of the earlier ruling of this authority, has concentrated more on the point of maintainability of the application by contending that the applicant cannot invoke the jurisdiction of this authority in view of the embargo laid down in clause (i) of the proviso to section 245R(2). It is the contention of learned counsel that the identical question regarding Raytheon's liability to pay income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed to be undertaken by a non-resident applicant; or (ii) a determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction which has been I undertaken or is proposed to be undertaken by a resident applicant with a such non-resident, and such determination shall include the determination of any question of law or of fact specified in the application; (iii) a determination or decision by the Authority in respect of an issue relating to computation of total income which is pending before any income-tax authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or of fact relating to such computation of total income specified in the application Provided that where an advance ruling has been pronounced before the date on which the Finance Bill, 2003, receives the assent of the President, by the Authority in respect of an application by a resident applicant referred to in sub-clause (ii) of this clause as it stood immediately before such date, such ruling shall be binding on the persons specified in section 245S. (b) 'Applicant' means any person who— (i) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on the tax liability of its non-resident collaborator under sub- clause (ii) of clause (a). There is no bar, either express or implied against a resident applicant falling within the scope of sub-clause will working the jurisdiction of this Authority for a determination under .sub lause (ii) of clause (a) of the same section. The f that such resident is a public sector undertaking notified under sub-clause (iii) of clause (b) would not make any difference. In addition to clause (iii), a public sector undertaking, being a resident, can very well fall within the sweep of clause i(ii) of section 245N if it has undertaken a transaction with a non-resident and it can seek a ruling in respect of tax liability of non-resident as per (a) (ii) of section 245N. In fact, this position is conceded by learned counsel for the: Revenue 27 There was some debate on the question whether the applicant being a notified resident falling under sub-clause (iii) of clause (b) of section 245N can invoke the exception contained in clause (i) of the second proviso to section 245R(2). It is pointed out by the Revenue's counsel that the exception comes into play only in a case of determination falling unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... theon's liability to pay income-tax looms large in the proceedings before this Authority also but the decision on this question is incidental to the determination of the applicant's Obligation to deduct tax at source. They may be inter-related or allied issues but the question raised before this Authority cannot be said to be identical nor can it be said to be the very same question pending determination by the appellate authority. This distinction, though appears to be subtle, is real. The applicant's right to have recourse to an advance ruling on the point of tax deduction cannot be defeated by reason of pungency of an appeal filed by Raytheon, though a related issue has to be decided in that appeal. The embargo under the proviso to section 245R(2) should be strictly construed so that an eligible applicant is not denied the remedy to have an early ruling in the matter. The applicant need not be called upon to go on deducting and paying income-tax until and unless the appeal of Raytheon is decided. Assuming that the applicant has the alternative remedy of filing an application before the Income-tax Officer under section 195(2), it does not operate as a legal bar to the maintainabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuted by a third party for a declaration that the decree in the previous suit was fraudulent and collusive would necessarily have a bearing on the declaration of title to the property claimed as wakf property in the earlier suit and, therefore, the subsequent suit is also a suit or proceeding "in relation to" wakf property. The learned judges of the Madras High Court referred to dicta of Suleiman, C. J. in Shyamlal v. M. Shayamlal, AIR 1933 All 649 [FB] to the effect that "matters may not, strictly speaking, be the subject-matter of the suit itself as brought, and yet they may relate to the suit". 32 The above exposition of the meaning of the crucial phrase clearly points to the conclusion that the issue relating to tax deduction at source regarding which determination is sought by the applicant, is an issue "in relation to" the tax liability of non-resident, namely, Raytheon. Therefore, it falls within the purview Of sub-clause (ii) of clause (a) to section 245N. 33 With a view to overcome the bar under clause (i) of the proviso to section 245R (2), counsel for the applicant has also argued that in order to attract the said proviso, the issue shall be pending in the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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