TMI Blog2010 (3) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... x treaty) between India and USA. It is submitted that the payments received by Raytheon cannot be construed as giving rise to income by way of royalty and/or fees for technical services. Held that – Income from hardware is not taxable especially in view of specific stipulations that the title and risk in the property passed on to AAI outside India, that AAI was responsible for import duties and customs clearance and that the consignments were shipped directly to AAI at the cost of Raytheon. Withholding tax is required to be deducted on payment except payment for hardware and COTS software that go with the hardware which are not liable to be taxed in India. - The rate of withholding tax is governed by Section 115A(1)(b)(BB) which is more beneficial to the tax payer when compared to the rate prescribed in Art.12 of the Treaty - 819 of 2009 - - - Dated:- 18-3-2010 - Mr Justice. P.V. Reddi and Mr. J. Khosla, JJ. For Appellant - H.P Agrawal , Ashish Kumar Gupta, Yogesh Jain and Anurag Sharma. For Department - Ashish Kumar. RULING The applicant (hereafter referred to as 'AAI') which is a Public Sector Undertaking set up under the Airport Authority of India Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations). New hardware (including equipments and consoles) and corresponding software has been supplied by Raytheon to set up the said 7 additional working positions. As a result of the said contract, additional new working positions have been set up, resulting in upgradation of the capabilities and capacity of the existing Automation System to cater to the increased operations on account of the 3rd runway. The Automation System supplied under the contract broadly consists of the under mentioned items: Hardware * Consoles (i.e. the specialized furniture into which the operational equipment is fitted into) * Equipments (i.e. the servers, printers, LAN equipment, etc.) Software documentation Customer-off-the-shelf (COTS) software required to run the system (e.g. Acrobat Reader, Solaris operating system, Netscape, etc.) Raytheon's ATC Automation application software (i.e. Autotrac) along with documentation. Installation/Services The copyrights in the COTS software would be belonging to the concerned party. The copyrights in Raytheon's ATC Automation application software belong to Raytheon. The Autotrac ATC Automation software is a standardized soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n would legitimately fall within the scope of Art.12 of India-US Tax Treaty ("Royalties and fees for included services") will have to be considered. 7. First, we may refer briefly to the three rulings relating to the applicant (Airport Authority of India) in connection with different contracts entered into with Raytheon. 8. In the first case reported in 273 ITR 437, one of the items in the contract was for modifications and anomaly resolution of the software of the MATS [Modernization of Air Traffic System] in Delhi and Mumbai. The repairs or modifications were in respect of the software etc. supplied by Raytheon in the year 1998 pursuant to a contract of 1993. The repairs of equipments (hardware) of MATS System was also the subject matter of consideration in that ruling. In regard to the hardware, it was held that there was out-right sale of hardware and other equipments and, therefore, the income does not fall under Article 12 of India-USA Treaty dealing with 'royalty' and 'fees for included services'. It was observed that "hardware and other equipments were the subject-matter of outright sale in favour of the applicant. It follows: that in regard to repair of hardware, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was concerned, the applicant acquired a right to use the same subject to certain conditions whereas in the case of hardware, there was an outright sale under the 1993 contract. The reasons given and the ruling pronounced by the Authority in the case of the applicant itself (AAR Nos. 624 and 625 of 2003), squarely applies to the present applications as well." 11. In the said ruling, the question whether or not there was 'Permanent establishment' of Raytheon loomed large and it was held that in this regard, the earlier ruling in 273 ITR did not require reconsideration on the ground that the concession made by the Department was wrong. 12. The 3rd ruling is reported in 304 ITR p.216. In that case, the contract with Raytheon was to provide Surveillance Situation Display Data (S-SDD). It involved delivery of software and software documentation, hardware, installation, testing and training. The cost of (customized) software, hardware and fee for installation and testing was split up. It is substantially a similar case. Almost similar clauses were there in that contract. 13. The following passages in that ruling may be noted: "As could be seen article 10.2 states that : " thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary. 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." 14. This Authority proceeded on the basis that there was transfer of right to use intellectual property (vide observation at p.231). Then, it was held that Tata Consultancy case (271 ITR 401(SC) ) relied upon by the applicant's counsel to contend that software shall be treated as 'goods' and such goods have been transferred to the applicant, but not copyright, was inapplicable. The same argument has been raised by the applicant's counsel in the present case also and the same is liable to be rejected. Whether or not the floppies/disks containing software programme are goods for the purpose of Sales Tax Act was the subject-matter of discussion in that case by the Supreme Court and it has no direct bearing on the issue arising in this application. 15. Though in the 3rd ruling (304 ITR), certain reasons are given, it appears that the line of reasoning adopted by AAR in that case is apparently at variance with the latest ruling in Dassault Systems. In Dassault Systems (AAR No 821/2009)[Mann - AR/0002/2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and 4. For the purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design." 17. We are of the view that the receipts under the contract attributable to software and installation and other services are definitely covered by cl.(b) of para 4. It might also enter the arena of cl (a) of para 3 in so far as it speaks of information concerning industrial, commercial or scientific experience. We are leaving aside the question whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided by Raytheon's personnel and the sharing of their technical knowledge and experiences with AAI personnel at the time of integration with the existing system and the site acceptance test and the technical manuals and data furnished for putting the system to effective use, Raytheon is making available to AAI its technical knowledge and skills. In ultimate analysis, the recipient of service is enabled to apply the technology. Viewed from another angle, the transfer of a technical plan is also involved in devising and activating the upgraded automation system. In this context we may refer to Example 5 of the MOU concerning fees for included services appended to US-India Tax Treaty. It reads thus: Example 5 Facts: An Indian firm owns inventory control software for use in its chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company's wares. The company wants to modify its software to permit the salesmen to assess the company's central computers for information on what products are available in inventory and when they can be delivered. The Indian firm hires a U.S. com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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