Non-resident liable to tax on Payment for software, installation, testing & training

AIT News Network

NEW DELHI. Authority for Advance Rulings (Income-Tax) vide AIT-2008-248-AAR ruling dated 28^th July has ruled that the payment received by a non-resident US company  Raytheon 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 DTAA. The said payment shall be charged as royalty and fee for technical services respectively at the rate of 10 per cent as per section 115A plus applicable surcharge and cess under the Income-tax Act, 1961. It is made clear that if at any future point of time the rate prescribed under DTAA is more favourable to the applicant, the applicant can avail of that benefit.

Airports Authority of India filed these applications in the capacity as a ‘resident’, seeking ruling on the tax liability of a non-resident US company, namely, RC(Raytheon Company) with which it has entered into two separate contracts. Under these contracts, RC will provide software documentation, software, hardware, installation, testing, training, etc., to the applicant.

Applications involved supply and testing of Surveillance Situation Display Data (S-SDD) and supply of DG Servers and related software.

T H E   R U L I N G:

The present case is not limited to copying of a computer programme, but extends to actually operating the automation system with its help. Paragraph 15 of the commentary deals with a situation where consideration is paid for the transfer of the full ownership of the rights in relation to copyright. According to this paragraph, such a consideration will also be business income. We observe that in the case before us, only the right of user of copyright in software has been given to the applicant; there is no transfer of ownership in copyright. Apart from this distinction, we notice that though the definition of royalty under article 12 of the OECD Model Tax Convention and the definition contained in Article 12 of DTAA are similar, the tax treatment given to royalty in the two are dissimilar.  Under the OECD Model Tax Convention, royalty is taxable in the State of the beneficial owner’s residence, the only exception being where beneficial owner carries on business in the other State through a permanent establishment, and royalty payment is effectively connected to such permanent establishment.  In that case, the royalty income attributable to the permanent establishment is to be taxed as business income by that other State. On the other hand, under DTAA, royalty may be taxed in both the States, i.e. in the State of residence of the beneficial owner and in the State where royalty payment arises, subject to the credit being given to the tax, if any paid, in the other State. Moreover, we find that there is no unanimity even among member countries of OECD, let alone non-members, with regard to the above interpretation of paragraphs 14 and 15.

Now coming to installation, testing and training services, these primarily relate to software and they are in the nature of ‘technical services’ as per section 9 of the Act and ‘included services’ as per paragraph (4) of Article 12.   According to Explanation (2) to clause (vii) of sub-section (1) of section 9, ‘fees for technical services’  means any consideration for the rendering of any managerial, technical or consultancy services, including provision of services of technical personnel. This income is chargeable to tax @ 10 per cent as per section 115A(1)(b)(BB) of the Act.  It may be seen from the  paragraph (4) of Article 12 that the  payment made in respect of rendering of any technical or consultancy services, including making available the services of technical or other personnel, is regarded as ‘fees for included services’ provided such services are ancillary and subsidiary to the enjoyment of right described in paragraph (3) of that article.  Paragraph (3) of article 12 deals with royalties. As we have already held, payments made in respect of supply of software to be royalty income, the technical services rendered in connection with installation, testing and training in relation to the supply of software would be ancillary and subsidiary to the enjoyment of copyright in the software. Thus the payment made in respect of these services would be fees for ‘included services’ under paragraph (4) (a) of article 12 and would attract tax @ 15 per cent as per paragraph 2(a)(i)(b)(ii) of that Article.

Under the relevant contract No.  NS/DG-R/01-06 dated 26.4.2006, RC is to supply DG servers and related software in connection with modernization of air traffic services at Delhi and Mumbai.  The total cost of contract comes to US$ 17,900,458. The software is the major component in this contract too, costing US$ 16,313,874. The cost of hardware and services of installation, testing and training are US$ 1,486,584 and US$ 100,000 respectively.  Like in the earlier contract, most of the activities under this contract also shall take place outside India. Only the activities relating to installation, testing and training will take place in India. The personnel of RC will visit India for installation, etc., services for a total of 40 days – 20 days at Delhi and 20 days at Mumbai. Like in the earlier contract, the ownership in the copyright contained in the software would remain with RC. AAI would only get the right to use the copyright, without having any rights of copying, distribution or public display, etc. AAI would pay royalty to RC in lieu of the right to use the copyright.  In this case too only the payments made in respect of supply/use of software and provision of services of installation, testing and training in respect thereof shall be taxable in India.

(Click here for full text of Ruling AIT-2008-248-AAR)

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