TMI Blog2004 (12) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... into two contracts - (1) supply contract and (2) service contract - with M/s. Raytheon Company, USA (for short RC) for supply and installation of equipment (together with spares, training, documentation, software etc.) on 19th March, 1993. Pursuant to those contracts, RC handed over equipment software etc. at Delhi in March, 1998 and at Mumbai in June 1999 and thereafter the applicant has been operating and maintaining the equipments on its own without any assistance from RC. Having been in operation for 4-5 years, some assemblies failed, which needed repairs and it was also felt that repairs would be needed from time to time so the applicant entered into two separate contracts with RC on February 4, 2003 for: (a) Repair of equipment (hardware) of MATS systems - subject matter of AAR/624/2003 (b) Modifications and anomaly resolution of the software of the MATS system. - subject matter of AAR/625/2003 The method and the manner in which RC will discharge its obligations under these contracts are summarized in the paras that follow. 2. In the case of repair of hardware, after detecting default, the applicant has to fill Site Anomaly Report (SAR) form and send the same to RC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RC does not have a permanent establishment (PE) in India for performing the contract and all activities in connection with the performance of the contract are carried out outside India. The case of the applicant is that the amount paid by it under the said contracts is the business profits of RC and the same will not be liable to tax in India in view of article 7 of the treaty. In the backdrop of these facts the applicant proposed questions to seek advance rulings of the Authority in AAR/624/2003 and AAR/625/2003, filed under section 245Q(1) of the Income-tax Act, 1961 (for short the "Act"). In AAR/624/2003 the proposed questions are as follows:- (i) Whether payment received by M/s. Raytheon company under the transaction mentioned in Annexure I is liable to tax in India in the hands of the recipient non-resident US company? • If the answer to question No. 1 is in affirmative, at what rate the income-tax will be chargeable in India and at what rate tax at source is deductible by the applicant ? In AAR/625/2003 the following questions are proposed: • Whether under the facts and circumstances of the case, deputation of an engineer by the M/s. Raytheon Company to India for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant under 1993 contracts are construed as sale of property, the exclusion under article 12(5)(a) would not be applicable. The applicant operated the MATS system after its installation till entering into contracts in February, 2003. The original contracts provide for maintenance of spares etc. for the MATS system for a period of 15 years but the services in respect of repairs and maintenance of the hardware and software are not made part of 1993 contracts as they were obviously not considered essential and inextricably linked to the operation of the MATS system. The payments made by the applicant to RC will also fall within the meaning of 'fee for included services under article 12(4)(a). 6. Mr. Salil Gupta, Addl. DIT (International), who appeared for the Commissioner raised preliminary objection in regard to the maintainability of the applications on two grounds: (i) question No.2 in AAR/624/2003 and Question No.3 in AAR/625/2003 are substantial questions which deal with the tax liability of the applicant and not of non-resident, therefore the applications are not maintainable under sec. 245N(a)(ii) of the Act; (ii) the applicant did not obtain clearance from COD for seeki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Mr.Gupta has submitted that these questions relate to tax liability of the applicant who is resident in India and not to tax liability of RC. However, Mr. Aggarwal has set the controversy at rest by not pressing these questions. Regarding the second objection which relates to obtaining clearance from COD before approaching the Authority, it is evident that there is no lis between the applicant and the Revenue. The applicant is seeking advance ruling in respect of tax liability of RC, a non-resident, within the meaning of section 245N (a) (ii) of the Act. This, in our view, does not require clearance from the COD, having regard to the order of the Hon'ble Supreme Court in Oil and Natural Gas Commission Another v. Collector of Central Excise (IA Nos.1 2 in Civil appeal Nos.2058-59 of 1988, decided on 11 th October,1991) and Office Memorandum of Government of India No. 53/3/6/91-Cab. dated 31.12.1991 and No.53/3/10/94-Cab dated the 24 th January, 1994 . 7. Now reverting to the aforementioned question, it would be useful to refer to the relevant provisions of the Treaty. Articles 7 and 12 deal with 'business profits' and 'royalties' and 'fees for technical services' respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is held to be business profits of RC, it would not be taxable in India . Further this concession will also cover deputation of an engineer by the RC to India for the purpose of installation and testing of repaired software. It follows that such deputation cannot constitute RC's permanent establishment in India . The expression "business profits" is defined in para 7 of article 7, referred to above, to mean income derived from any trade or business including income from the furnishing of services other than included services as defined in article 12 (royalties and fees for included services) and including income from the rental of tangible personal property other than described in paragraph 3(b) of article 12 (royalties and fees for included services). The second limb of para 7 is not relevant for the present discussion. The amount that is being paid by the applicant to RC is for repairs of hardware (including replacement of defective parts) and services for repairing. If such services fall within the meaning of included services as defined in article 12, the amount cannot be classified 'business profits'. It would, therefore, be necessary to see whether the amount in question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r included services" does not include amounts paid:- • for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3 (a). • to (e) x x x x x x x x 6. x x x x x x x x x x x x 7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for the included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. (b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scribed in paragraph 3 is received; sub-para (b) thereof embraces services which make available technical knowledge, experience, skill, know-how or processes, or services which consist of the development and transfer of a technical plan or technical design. The second part of para (b) would not be relevant here. Para 5 which is an adjunct to para 4, commences with a nonobstante clause and says that irrespective of contents of para 4, "fee for included services" does not include amounts paid for services enumerated in sub-paras (a) to (e) and employee of the person making payment referred to in sub-para (e). We are concerned with sub-para (a) which speaks of amount paid for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property other than a sale described in paragraph 3(a) (definition of royalties). The exclusionary clause, para 5(a), would apply to the amount paid for services that are ancillary and subsidiary as well as inextricably and essentially linked to sale of property which is not in connection with the royalties. In passing, we may mention that sub-para (a) of para 7 of article 12 incorporates the source rule; it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, Mr. Gupta invited our attention to clause 1.15 of the supply contract of 1993 to show that supplies means equipments, material, software and services, specified in the contract including spares and documentation and contended that what was transferred was only the right to use the goods and that the property in the goods did not pass to the applicant. Para 2.18 of the contract deals with reproduction and license. Para 2.18.2(a) and (b) shows that documents furnished by the contractor to the applicant which were in the possession of RC, were developed on the basis of proprietary concepts contained in those documents which shall be the property of RC. Clause (c) relates to computer software and technical documentation required to operate equipment to be sold under the Contract. It is provided therein that the contractor shall grant license to the applicant to use such computer software and technical documentation on the ATS. The license would indicate that the computer software and technical documentation are: (1) the property of Her Majesty, the Queen in Right of Canada; (2) they are to be used or copied only for the purpose of operating the article or thing in which they ..... X X X X Extracts X X X X X X X X Extracts X X X X
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