INDIA BUSINESS WORLD - JULY 1st - JULY 31st - 2008
PAYMENT TO FOREIGN COS FOR SERVICES IS TAXABLE IN INDIA
EARNINGS of foreign companies through supply of software and providing technical services to domestic entities will be taxed in India. The Authority for Advance Rulings (AAR) has held that payments made to foreign players towards cost of procuring the software and fees towards their installation, testing and training is ‘royalty’, hence taxable in India. Since the Income-tax Act provides for taxing royalty payments, classification of an income under the head ‘royalty’ could have significant revenue implication for corporates.
The ruling was in reference to a tax clarification sought by state-owned Airports Authority of India (AAI) on payments made to US-based defence major Raytheon for procuring software and installing them as part of two separate contracts. While in one case the AAI paid to Raytheon $21,79,018 towards supply, installation and testing of surveillance situation display data (S-SDD) for use by the Indian Air Force, in the other, a payment of $1,64,13,874 was made for getting software for modernising air traffic services in Delhi and Mumbai.
Though, the foreign company granted the AAI licence to use the software code and technical documentation, the documents remained the property of Raytheon.
“We are of the view that income related to the supply of documents and software under the present contract answers to the description of royalty, as the documents and software in question are copyrights which have been given to AAI for use and a licence has also been granted to AAI,” the ruling said. While payments received by Raytheon for its software supply shall be charged as ‘royalty’, its receipts for installation, testing and training of the software shall be made as fees for technical services, under the provisions of the Income-tax Act read with Indo-US double tax avoidance agreement (DTAA).
In its ruling, the AAR, headed by P V Reddi, however, declared the receipts made for supplying hardware as tax exempt, being part of Raytheon’s ‘business income.’ Earlier, the AAI had argued that supply of software should be treated as sale of goods and income deriving out of it ‘business income.’ The AAR in its decision brushed aside the contention of AAI that the present case involved sale of copyrighted articles. The revenue had challenged the AAI’s contention by saying that there was no sale of software, but only a right to use the software.
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