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TMI Blog2004 (12) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... aintaining the equipments on its own without any assistance from RC. Having been in operation for 4-5 years, some assemblies failed, which needed repairs and it was also felt that repairs would be needed from time to time so the applicant entered into two separate contracts with RC on February 4, 2003 for: (a) Repair of equipment (hardware) of MATS systems - subject matter of AAR/624/2003 (b) Modifications and anomaly resolution of the software of the MATS system. - subject matter of AAR/625/2003 The method and the manner in which RC will discharge its obligations under these contracts are summarized in the paras that follow. 2. In the case of repair of hardware, after detecting default, the applicant has to fill Site Anomaly Report (SAR) form and send the same to RC. The applicant has also to collect and supply additional failure data as and when required by RC. It is the responsibility of the applicant to pack properly and ship the failed parts to RC's facility which is outside India. The failed parts will be repaired by RC subject to certain maximum limit. If they are not repairable, RC would provide a compatible replacement. Repaired hardware part would be sent back to Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t proposed questions to seek advance rulings of the Authority in AAR/624/2003 and AAR/625/2003, filed under section 245Q(1) of the Income-tax Act, 1961 (for short the "Act"). In AAR/624/2003 the proposed questions are as follows:- (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? • If the answer to question No. 1 is in affirmative, at what rate the income-tax will be chargeable in India and at what rate tax at source is deductible by the applicant ? In AAR/625/2003 the following questions are proposed: • Whether under the facts and circumstances of the case, deputation of an engineer by the 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; • 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? • If the answer to question No. 2 is in affirmative, at what rate the income -tax will be chargeable in India, and at what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of 1993 contracts as they were obviously not considered essential and inextricably linked to the operation of the MATS system. The payments made by the applicant to RC will also fall within the meaning of 'fee for included services under article 12(4)(a). 6. Mr. Salil Gupta, Addl. DIT (International), who appeared for the Commissioner raised preliminary objection in regard to the maintainability of the applications on two grounds: (i) question No.2 in AAR/624/2003 and Question No.3 in AAR/625/2003 are substantial questions which deal with the tax liability of the applicant and not of non-resident, therefore the applications are not maintainable under sec. 245N(a)(ii) of the Act; (ii) the applicant did not obtain clearance from COD for seeking advance ruling of the Authority. We shall advert to the preliminary objections presently while dealing with contentions on merits. Mr. H.P. Aggarwal who appeared for the applicant urged the following contentions: repair of the hardware under the 2003 contract would require despatch of defective parts to RC facilities in USA or Canada where repairs would be done or replacement part will be supplied, so the amount received by the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance ruling in respect of tax liability of RC, a non-resident, within the meaning of section 245N (a) (ii) of the Act. This, in our view, does not require clearance from the COD, having regard to the order of the Hon'ble Supreme Court in Oil and Natural Gas Commission & Another v. Collector of Central Excise (IA Nos.1 & 2 in Civil appeal Nos.2058-59 of 1988, decided on 11 th October,1991) and Office Memorandum of Government of India No. 53/3/6/91-Cab. dated 31.12.1991 and No.53/3/10/94-Cab dated the 24 th January, 1994 . 7. Now reverting to the aforementioned question, it would be useful to refer to the relevant provisions of the Treaty. Articles 7 and 12 deal with 'business profits' and 'royalties' and 'fees for technical services' respectively. Paras 1 and 7 of article 7 which are material for our purpose, are as follows:- Article 7: Business profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contacting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including income from the furnishing of services other than included services as defined in article 12 (royalties and fees for included services) and including income from the rental of tangible personal property other than described in paragraph 3(b) of article 12 (royalties and fees for included services). The second limb of para 7 is not relevant for the present discussion. The amount that is being paid by the applicant to RC is for repairs of hardware (including replacement of defective parts) and services for repairing. If such services fall within the meaning of included services as defined in article 12, the amount cannot be classified 'business profits'. It would, therefore, be necessary to see whether the amount in question satisfies the requirement of "fees for included services". Paragraphs 1, 2, 3, 4, 5 and 7 of article 12 which deals with Royalties and fees for included services, are relevant and they may be reproduced here:- Article 12: Royalties and fees for included services • Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State . • However, such royalties a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for the included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. (b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting State, the royalties or fees for included services shall be deemed to arise in that Contracting State. A plain reading of para 1 of article 12 discloses that it enables the other Contracting State to tax 'Royalties' and 'fees for included services' arising in a Contracting State and paid to a resident of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude amounts paid for services enumerated in sub-paras (a) to (e) and employee of the person making payment referred to in sub-para (e). We are concerned with sub-para (a) which speaks of amount paid for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property other than a sale described in paragraph 3(a) (definition of royalties). The exclusionary clause, para 5(a), would apply to the amount paid for services that are ancillary and subsidiary as well as inextricably and essentially linked to sale of property which is not in connection with the royalties. In passing, we may mention that sub-para (a) of para 7 of article 12 incorporates the source rule; it says that royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Inasmuch as the payer in the instant case is State within the meaning of Article 12 of the Constitution or at any rate a resident of India , therefore, the payment if construed as "royalties" and "fees for included services" shall be deemed to arise in India. A perusa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the contractor to the applicant which were in the possession of RC, were developed on the basis of proprietary concepts contained in those documents which shall be the property of RC. Clause (c) relates to computer software and technical documentation required to operate equipment to be sold under the Contract. It is provided therein that the contractor shall grant license to the applicant to use such computer software and technical documentation on the ATS. The license would indicate that the computer software and technical documentation are: (1) the property of Her Majesty, the Queen in Right of Canada; (2) they are to be used or copied only for the purpose of operating the article or thing in which they are contained. Para 2.18.4 contains the stipulation by the applicant agreeing that the technical data as referred to in para 2.18.1 shall only be used, reproduced, adapted or otherwise modified by the applicant for the purposes of Delhi and Mumbai ATS systems. It further provides that the license agreement shall be entered into with RC or other relevant proprietors of such rights for use at other locations of the applicant. The above discussion leads us to the conclusion that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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