We send faulty equipment abroad for repair by a US supplier and separately pay it to maintain the software. Do we deduct tax on either, and at what rate?
It depends on which contract. The Authority ruled that the payment to Raytheon for hardware repair support was not taxable in India and that the applicant was not required to deduct tax on it: the repairs were done outside India, delivery was taken outside India and Raytheon had no permanent establishment here, so article 7 left those business profits to the United States. The software maintenance contract went the other way. The deputation of an engineer created no permanent establishment, but the payments were fees for included services under article 12, the applicant having a conditional right to use the software rather than an outright purchase. Tax was to be withheld at 10 per cent apart from surcharge.
Pronounced by the Authority for Advance Rulings (P. V. Reddi, J. (Chairman), A. Sinha and Rao Ranvijay Singh, Members) on 2008-02-28. It bears on section 195, section 9(1)(vii), section 245R(2), section DTAA art 5, section DTAA art 7, section DTAA art 12 of the Income Tax Act 1961, in TDS Defaults and How Tax Law Is Read matters.
A worked example of splitting a mixed equipment-and-services relationship, and of arguing the two halves differently. Hardware bought outright in 1993 remained business profits when it came back for repair, and with the repair done abroad and no permanent establishment the treaty took it out of the Indian net; a liaison office with no role in the contracts and an Indian logistics agent confined to activity outside India did not change that. Software licensed rather than sold was a different asset, and its maintenance fell into the included services article. The maintainability holding is useful too: a resident's own question about its section 195 obligation is not the same question as the non-resident's liability pending in the non-resident's appeal.
Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them.
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The Airports Authority of India had bought a MATS-BD air traffic management system from Raytheon Company of the United States under supply contracts of 19 March 1993. On 4 February 2003 it entered into two further contracts with Raytheon, extended on 26 April 2006 for three years: one for hardware repair support and one for software maintenance support. Under the first, defective components were sent outside India, repaired there and returned, and the applicant took delivery outside India. Under the second, Raytheon modified the software and resolved anomalies, its engineers coming to India intermittently for testing, four or five people making visits of fourteen to twenty-five days over three years. Payment was in US dollars and the applicant bore all taxes and duties. Raytheon had had a liaison office in India since 1995 for group company business, and an agreement with Grintex (India) Ltd for in-country logistics. The applicant asked whether the payments were taxable in Raytheon's hands, whether the deputation created a permanent establishment, whether it had to deduct tax and at what rate.
On the hardware repair contract the Authority ruled that the payment received by Raytheon was not liable to tax in India in the hands of the recipient, and that the applicant was not legally required to deduct tax on it. The receipts were business profits, the hardware having been sold outright under the 1993 contract, and Raytheon had no permanent establishment in India: the repair work was done outside India, the visits of four or five technical people over three years were too sporadic, the liaison office had no role in executing these contracts and was in any event within the preparatory or auxiliary exclusion in article 5(3), and the Grintex agreement confined Raytheon's activities to outside India. Article 7 therefore left the profits taxable only in the United States. On the software maintenance contract the deputation did not create a permanent establishment either, but the payments were fees for included services within article 12, because the applicant had acquired a conditional right to use the software rather than an outright purchase, and tax was to be withheld at 10 per cent apart from applicable surcharge. The Authority also rejected the Revenue's objection to maintainability.
The Authority treated the two contracts as answering different questions because the underlying assets were different. The hardware had been bought outright in 1993. What Raytheon supplied afterwards was a repair service performed abroad on the applicant's own property, with delivery taken abroad - an ordinary trading receipt, so the case fell under article 7 and turned entirely on permanent establishment. The Authority took each candidate in turn. The physical visits were too thin: four or five people, visits of fourteen to twenty-five days spread over three years, and most of them relating to the software rather than the hardware. The liaison office, though it had existed since 1995, played no part in executing these contracts and its functions were preparatory or auxiliary within the exclusion in article 5(3). The Grintex arrangement was not a dependent agency, the agreement expressly confining Raytheon's activities to outside India. No permanent establishment meant no Indian taxing right. Software was different in kind. What the applicant had was a licence, a conditional right to use, not a thing it owned; maintaining and modifying that software was therefore not work done on the applicant's own asset but consideration falling within the included services article, which operates whether or not there is a permanent establishment. On maintainability the Authority held that a resident's question about its own obligation to deduct under section 195 is distinct from the non-resident's substantive liability then pending in Raytheon's appeal, and that the embargo in the proviso to section 245R(2) must be construed strictly.
The applicant is not legally required to deduct tax on the payments made to Raytheon Company, USA
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Handle my notice → Ask a CA on WhatsAppIt depends on which contract. The Authority ruled that the payment to Raytheon for hardware repair support was not taxable in India and that the applicant was not required to deduct tax on it: the repairs were done outside India, delivery was taken outside India and Raytheon had no permanent establishment here, so article 7 left those business profits to the United States. The software maintenance contract went the other way. The deputation of an engineer created no permanent establishment, but the payments were fees for included services under article 12, the applicant having a conditional right to use the software rather than an outright purchase. Tax was to be withheld at 10 per cent apart from surcharge. This was decided by the Advance Ruling (P. V. Reddi, J. (Chairman), A. Sinha and Rao Ranvijay Singh, Members) and bears on section 195, section 9(1)(vii), section 245R(2), section DTAA art 5, section DTAA art 7, section DTAA art 12 of the Income Tax Act 1961. A worked example of splitting a mixed equipment-and-services relationship, and of arguing the two halves differently. Hardware bought outright in 1993 remained business profits when it came back for repair, and with the repair done abroad and no permanent establishment the treaty took it out of the Indian net; a liaison office with no role in the contracts and an Indian logistics agent confined to activity outside India did not change that. Software licensed rather than sold was a different asset, and its maintenance fell into the included services article. The maintainability holding is useful too: a resident's own question about its section 195 obligation is not the same question as the non-resident's liability pending in the non-resident's appeal. If it applies to you, the first step is this: Split the contract before the officer does: identify separately what was bought outright and what was licensed, and price each.
The Airports Authority of India had bought a MATS-BD air traffic management system from Raytheon Company of the United States under supply contracts of 19 March 1993. On 4 February 2003 it entered into two further contracts with Raytheon, extended on 26 April 2006 for three years: one for hardware repair support and one for software maintenance support. Under the first, defective components were sent outside India, repaired there and returned, and the applicant took delivery outside India. Under the second, Raytheon modified the software and resolved anomalies, its engineers coming to India intermittently for testing, four or five people making visits of fourteen to twenty-five days over three years. Payment was in US dollars and the applicant bore all taxes and duties. Raytheon had had a liaison office in India since 1995 for group company business, and an agreement with Grintex (India) Ltd for in-country logistics. The applicant asked whether the payments were taxable in Raytheon's hands, whether the deputation created a permanent establishment, whether it had to deduct tax and at what rate. The matter was decided on 2008-02-28 by the Advance Ruling (P. V. Reddi, J. (Chairman), A. Sinha and Rao Ranvijay Singh, Members). On those facts the Advance Ruling held as follows. On the hardware repair contract the Authority ruled that the payment received by Raytheon was not liable to tax in India in the hands of the recipient, and that the applicant was not legally required to deduct tax on it. The receipts were business profits, the hardware having been sold outright under the 1993 contract, and Raytheon had no permanent establishment in India: the repair work was done outside India, the visits of four or five technical people over three years were too sporadic, the liaison office had no role in executing these contracts and was in any event within the preparatory or auxiliary exclusion in article 5(3), and the Grintex agreement confined Raytheon's activities to outside India. Article 7 therefore left the profits taxable only in the United States. On the software maintenance contract the deputation did not create a permanent establishment either, but the payments were fees for included services within article 12, because the applicant had acquired a conditional right to use the software rather than an outright purchase, and tax was to be withheld at 10 per cent apart from applicable surcharge. The Authority also rejected the Revenue's objection to maintainability.
The Authority treated the two contracts as answering different questions because the underlying assets were different. The hardware had been bought outright in 1993. What Raytheon supplied afterwards was a repair service performed abroad on the applicant's own property, with delivery taken abroad - an ordinary trading receipt, so the case fell under article 7 and turned entirely on permanent establishment. The Authority took each candidate in turn. The physical visits were too thin: four or five people, visits of fourteen to twenty-five days spread over three years, and most of them relating to the software rather than the hardware. The liaison office, though it had existed since 1995, played no part in executing these contracts and its functions were preparatory or auxiliary within the exclusion in article 5(3). The Grintex arrangement was not a dependent agency, the agreement expressly confining Raytheon's activities to outside India. No permanent establishment meant no Indian taxing right. Software was different in kind. What the applicant had was a licence, a conditional right to use, not a thing it owned; maintaining and modifying that software was therefore not work done on the applicant's own asset but consideration falling within the included services article, which operates whether or not there is a permanent establishment. On maintainability the Authority held that a resident's question about its own obligation to deduct under section 195 is distinct from the non-resident's substantive liability then pending in Raytheon's appeal, and that the embargo in the proviso to section 245R(2) must be construed strictly. In the words reproduced by the source cited on this page: "The applicant is not legally required to deduct tax on the payments made to Raytheon Company, USA"
It was decided by the Advance Ruling on 2008-02-28. Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them. An advance ruling binds only the applicant who sought it, only for the transaction it was sought on, and only the Commissioner and the officers under him in relation to that applicant and that transaction — and only until the law or the facts change. That is section 245S, and it means the ruling is not a precedent and binds nothing in your case. You cite it because the Authority reasoned the point out, often first and most fully, and the Tribunal and the courts treat a considered ruling as persuasive. Check before you rely on one: most of these were pronounced before 2009, and a great deal of cross-border tax has been rewritten since by amendment, protocol and judgment. On section 195, section 9(1)(vii), section 245R(2), section DTAA art 5, section DTAA art 7, section DTAA art 12, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. On the hardware repair contract the Authority ruled that the payment received by Raytheon was not liable to tax in India in the hands of the recipient, and that the applicant was not legally required to deduct tax on it. The receipts were business profits, the hardware having been sold outright under the 1993 contract, and Raytheon had no permanent establishment in India: the repair work was done outside India, the visits of four or five technical people over three years were too sporadic, the liaison office had no role in executing these contracts and was in any event within the preparatory or auxiliary exclusion in article 5(3), and the Grintex agreement confined Raytheon's activities to outside India. Article 7 therefore left the profits taxable only in the United States. On the software maintenance contract the deputation did not create a permanent establishment either, but the payments were fees for included services within article 12, because the applicant had acquired a conditional right to use the software rather than an outright purchase, and tax was to be withheld at 10 per cent apart from applicable surcharge. The Authority also rejected the Revenue's objection to maintainability. It arises in TDS Defaults and How Tax Law Is Read matters, on section 195, section 9(1)(vii), section 245R(2), section DTAA art 5, section DTAA art 7, section DTAA art 12 of the Income Tax Act 1961, and was decided by P. V. Reddi, J. (Chairman), A. Sinha and Rao Ranvijay Singh, Members. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Record where the repair work is done and where delivery passes, because both were decisive here. Show what a liaison office and a local logistics agent actually do under the contract in question, not merely that they exist. Take the rate from the Finance Act in force and from the treaty article you rely on, not from this ruling; rates for royalty and fees for technical services have changed since 2008.
Superseded by amendment. The rate holding cannot be carried forward. The 10 per cent the Authority fixed came from the Finance Act schedule then in force, and the rate for royalty and fees for technical services under section 115A has been changed more than once since 2008, so it must be taken from the Finance Act in force for the year in question. I also checked the official text of section 44DA, inserted by the Finance Act 2003 with effect from 1 April 2004, which governs royalty and fees for technical services under agreements made after 31 March 2003 where the non-resident carries on business in India through a permanent establishment; that is directly in point, the maintenance contracts having been made on 4 February 2003 and extended in 2006. The permanent establishment reasoning under articles 5 and 7 is untouched by anything I found, and I found no court decision dealing with this ruling. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Indian Kanoon prints no law-report citation for this ruling; the citation that appears on the page, [2005] 273 ITR 437, belongs to the Authority's earlier ruling in the same applicant's A.A.R. Nos. 624 and 625 of 2003, to which this ruling refers. I did not verify the present rate for fees for included services under article 12 of the India-USA agreement against the treaty text. The input note described the ruling accurately. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
On the hardware repair contract the Authority ruled that the payment received by Raytheon was not liable to tax in India in the hands of the recipient, and that the applicant was not legally required to deduct tax on it. The receipts were business profits, the hardware having been sold outright under the 1993 contract, and Raytheon had no permanent establishment in India: the repair work was done outside India, the visits of four or five technical people over three years were too sporadic, the liaison office had no role in executing these contracts and was in any event within the preparatory or auxiliary exclusion in article 5(3), and the Grintex agreement confined Raytheon's activities to outside India. Article 7 therefore left the profits taxable only in the United States. On the software maintenance contract the deputation did not create a permanent establishment either, but the payments were fees for included services within article 12, because the applicant had acquired a conditional right to use the software rather than an outright purchase, and tax was to be withheld at 10 per cent apart from applicable surcharge. The Authority also rejected the Revenue's objection to maintainability.
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