In a significant ruling, an income tax authority, Authority for Advanced Rulings (AAR), today held that payments made towards supply of software by US-based defence major Raytheon to the Airports Authority of India (AAI) will be taxed in India. “The payment received by Ratheon Company in respect of software and provision of services of installation, testing and training shall be taxable under the Income-Tax Act, 1961, read with the Double Taxation Avoidance Agreement,” AAR said.
Though the income tax ruling is binding only on the AAI, it can have implications on other similar contracts. “It is a disappointing ruling and plethora of precedents support an opposite view,” opined Diljeet Titus, senior partner of law firm Titus and Co.
he AAR ruling comes on questions raised by the AAI whether the payments made by it to the Rathyeon, in respect of contracts for supply and testing of Surveillance Situation Display Data (S-SDD), DG Servers and related software, would be taxed in India.
The supply of equipment and software relates to contracts entered by the AAI with Ratheyon on behalf of Indian Air Force.
According to the AAR, only payments relating to purchase of hardware by the AAI would be exempt from tax in India as “it is in the nature of business income and... the non-resident company (Ratheyon) does not have a permanent establishment in India”.
Giving the ruling in the Airports Authority case, the AAR held that payments made to Ratheyon towards supply of software and other services will be charged a royalty and fee for technical services at the rate of 10 per cent plus surcharge and cess under Section 115A of the Income-Tax Act.
However, the AAR also made it clear that “if at any future point of time, the rate prescribed under the DTAA is more favourable to the applicant, the applicant can avail of that benefit”.
The AAR further said that as ownership of the copyright in the software would remain with Ratheyon, the Airports Authority would only “get the right to use the copyright, without having rights of copying, distribution or public display etc. AAI would pay royalty to RC (Ratheyon Company) in lieu of the right to use the copyright software”.
The case relates to two contracts which the AAI signed with Ratheyon amounting to more than $20 million. In the first contract, executed on behalf of Indian Air Force, the AAI is required to pay $2.35 million, of which more than $2 million will be towards software and installation fee.
Similarly, in the second contract relating to modernisation of air traffic services at Mumbai and Delhi, the software component was more than $16 million out of the total contract size of $17.90 million.
