Dated : 28-2-2008
2. S. 195, S. 245N, S. 245R, Income-tax Act; Articles 5, 7,
12, India-USA DTAA.
Issue :
Obligation to deduct tax and rate for deduction of tax on
Hardware Contract and Software Contract.
Facts :
The applicant was a PSU operating airports in India. It had
entered into two separate contracts, named Hardware Repair Support Contract
(‘Hardware Contract’) and Software Maintenance Support Contract (‘Software
Contract’), with an American company. In respect of contracts having
substantially similar terms and conditions, the applicant had sought ruling of
AAR earlier (see 273 ITR 437). The possible reasons for seeking a fresh ruling
were that technically the transaction is a separate transaction and that in case
of the American company, the tax authorities had taken a different view in the
course of its assessment proceedings.
The Hardware Contract provided that : the applicant shall
send the hardware to the American company outside India; the American company
shall repair the hardware outside India; and the applicant shall take delivery
of hardware duly repaired by the American company outside India.
In the context of the Hardware Contract, the issues raised
for determination were :
(a) Whether the payment received by the American company
was liable to tax in its hands in India, and
(b) If the payment was taxable in the hands of the American
company, what should be the rate at which tax should be deducted by the
applicant ?
In the context of the Software Contract, the issues raised
for determination were :
(a) Whether deputation of engineers by the American company
to India for installation and testing of required software constituted its PE;
(b) Whether the payment received by the American company
was liable to tax in its hands in India; and
(c) If the payment was taxable in the hands of the American
company, what should be the rate at which tax should be deducted by the
applicant ?
In its earlier ruling, the AAR had held that the American
company did not have a PE in India (which was also conceded by the counsel for
the Revenue). In respect of Hardware Contract, the payment received by it was
not income from furnishing services as defined in Article 12 of India-USA DTAA,
but it was business profits within the meaning of Article 7(7) of India-USA DTAA
and since it did not have a PE in India, it was not taxable in India. In respect
of the Software Contract, the applicant had contended that the defects in the
software would also be attended to outside India and that the visit of the
American company’s engineer is only for a short period and incidental. Hence,
amount paid for repair of software should also represent business income and
should not be chargeable to tax in India. Even if the payment was treated as
‘fees for included services’, as per MOU appended to India-USA DTAA, the visit
would not be covered within the meaning of ‘included services’. Even if the
amount is so treated, in view of limited number of visits, it may be apportioned
between ‘fees for included services’ and ‘business income’. The Revenue had
contended that the payment was ‘fees for included services’ under Article
12(4)(a), as well as ‘royalty’ under Article 12(3(a), of India-USA DTAA, since
the applicant’s agreements of 2003 are only supplementary to the original
agreements of 1993. The AAR had then proceeded to consider Article 7 and Article
12, and had concluded that insofar as software and documentation were concerned,
the applicant had acquired a right to use the same subject to certain
conditions, and as regards repair of software, payment received by the American
company would be ‘fees for included services’ under Article 12(4)(a) and would
be outside the purview of Article 7(7). Accordingly, in view of Article 12(2)
the payment would be taxable in India.
In case of the present ruling, the Revenue contended that for
earlier ruling, the AAR was not apprised of the facts relating to PE and that
its counsel had wrongly conceded and further that subsequent investigation in
the course of assessment proceedings revealed the existence of PE. To satisfy
itself about prima facie sustainability of the Revenue’s contention, the
AAR examined the assessment orders relating to the American company. It observed
that there was no definite finding supported by reasons on the existence of PE.
The fact that the American company admitted having an installation PE had no
bearing on the aspect whether a PE was set up in the context of the Hardware
Contract and the Software Contract. The AAR expressed the probability that since
the entire activity of hardware repair took place outside India and as the
hardware was sent outside India and its delivery after repair was also taken
outside India by the applicant, there was very little part which the liaison
office could have played. Further, from the sporadic visits of a few days by the
American company’s personnel, it was difficult to draw the inference of
existence of PE.
As regards the Revenue’s contention about the American
company having a dependent agent PE, the AAR observed that there was nothing in
the agreement which indicated that the agent was assigned any role or
responsibility under the Hardware Contract. The AAR did not get any satisfactory
reply from the counsel of the Revenue on the request to clarify whether any
activity related to the contract was undertaken by the so-called PE. The AAR
declined to reconsider its earlier ruling on the ground that the Revenue’s
counsel had wrongly conceded or that the applicant had not made proper
disclosure on the issue of PE.
The AAR then considered the Revenue’s contention about the maintainability of the application and the AAR’s jurisdiction in view of the embargo in proviso (i) to S. 245R(2), on the ground that the question raised in the application was already pending before the Income-tax authority. The AAR observed that the question of tax deduction cannot be said to be pending before the Income-tax authority and hence, the application was not hit by the embargo. It further observed that the issue relating to tax deduction at source was ‘in relation to’ the tax liability of the American company and therefore, it was within the purview of the definition of ‘advance ruling’ in S. 245N(a) and (b).
The counsel for the applicant stated that it was desirous of getting answer to the second question regarding its obligation to deduct tax at source and once that was answered, it was not desirous of getting answer to the first question. Hence, the AAR treated the first question as withdrawn by the applicant. Similarly, in respect of the Software Contract, only the question regarding the rate of tax deduction survived as other questions were not pressed.
Held:
(i) As regards the Hardware Contract, the applicant was not legally required to deduct tax on payments made by it to the American company.
(ii) As regards the Software Contract, the tax was required to be deducted @ 10%.
