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THE Authority of Advance Rulings (AAR) has ruled that fees received by a foreign company for assigning contractual rights to an Indian entity is not taxable in India.

   The ruling of the AAR –– a quasi-judicial forum deciding queries on matters of international taxation — came on a query from an Indian company that had paid a foreign company for assigning part of a global contract with Nokia Corporation for supplying equipment.

   Laird Technologies Inc, USA had entered into a product purchase agreement (PPA) with Nokia Corporation. It entered into an assignment agreement with India-based Laird Technologies Pvt Ltd, under which all its beneficial rights, title, interest and obligations were made in favour of the Indian firm. The US company was paid a lump sum as assignment fee.

   The AAR was asked if the assignment fee received by the US company was taxable under the Indian law. The AAR held that consideration received for assignment of contractual rights should be treated as business profits and hence was not taxable in India. It also held that in the absence of a permanent establishment for the US company, Laird India was also not required to withhold tax under the income-tax law while making the remittance of the fees.
   While rulings of AAR are binding only on the applicant, it has a persuasive value on courts and the tax authorities do recognize the principles laid down by it while deciding similar cases.

   Earlier, Laird India had contended that it did not act as an agent of
the US company and its supplies to Nokia India was on a principal-to-principal basis. It was also argued that the Indian firm has been carrying on its business by itself and was not dependent on the US company for finance or management affairs; an contention which was opposed by the tax department.

   The decision of the AAR may just prove beneficial for foreign companies bidding for infrastructure or turnkey projects in India, feel experts. “The ruling seeks to give foreign companies flexibility to operationalise their business in India,” said Amitabh Singh, partner, tax and regulatory services at Ernst & Young.

   While bidding in India, foreign companies often prefer not to set up their subsidiaries and rather participate directly from overseas. If the bid is won by them, the foreign firm often assigns the project to an Indian entity as per contractual terms between them and get fees in return. With assignment contracts commonly found in infrastructure projects like power, roads and telecom, the decision could safeguard foreign firms from saving their revenue and also keep away from tax litigations.

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