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Background
The Authority for Advance Rulings (“AAR”) in the case of the Airports Authority of India1 (“AAI”) has held that consideration in respect of software supplied as well as installation and other services provided for the software is taxable as Fees for Included Services (“FIS”) under the Agreement for the Avoidance of Double Taxation between India and the United States (“tax treaty”).
However, consideration for the hardware, which was sold outside India with the title and risk in property passing outside India, would not be subject to tax in India.
Facts
AAI is a public sector undertaking set up under The Airports Authority of India Act, 1994. It had entered into a Contract with Raytheon Company, USA (“RC”), which involved RC supplying hardware (consoles and equipments), software (customer off-the-shelf software,
1 Airports Authority Of India, In re [2010-TIOL-19-ARA-IT]
Raytheon’s ATC automatic application software), and providing services in connection with the installation of the software.
As regards the software and documentation, the Contract granted to AAI a non-transferable, non- exclusive royalty-free licence for using the software at the New Delhi airport only. Some support activities relating to installation and site inspection tests were to be rendered in India.
Issues
The following issues were before the AAR:
• Whether payments received by RC, a non-resident US Company under the transaction were liable to tax in India
• Whether any tax had to be deducted at source by the Applicant on payments to be made to RC? If yes, then what was the applicable rate of withholding tax
Taxability of consideration received for supply of hardware, software and installation services Tax & Regulatory Services
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Applicant’s contentions
The applicant contended that the Contract was essentially one for the purchase of certain copyrighted software and hardware. This being the case, the consideration for the Contract was in the nature of business profits in the hands of the recipient.
As regards software, it was contended that the cost of the software was a major component of the Contract. The consideration for installation services was approximately 0.10% of the total contract value and was connected with the installation of the hardware and the software.
The Contract also specifically provided that the title and risk in the property (hardware and software) were to pass to AAI outside India. AAI was responsible for the payment of import duties and customs clearances, and the consignments were to be shipped directly to AAI by RC.
The applicant also contended that although it was the owner of the installed software system, it did not have any right to use the software at another location. In fact, RC was free to supply the standardised software to AAI for use in other locations and also to other parties.
It was therefore contended that the consideration, being in the nature of business profits, was not taxable in India, in the absence of a Permanent Establishment of RC in India under Article 7 of the DTAA.
AAR’s observations and ruling
After examining the clauses of the Contract with RC, the AAR held as follows:
• The consideration towards the supply of software and the installation services was held to fall within the scope of Article 12(4)(b) of the tax treaty and hence to constitute FIS.
• The consideration towards the supply of hardware was held not to be taxable in India.
Taxability of software and installation services
In arriving at the above conclusions, the AAR, as regards the installation services, observed as follows:
• RC is bound to provide the necessary information to operate, maintain and repair the system delivered under the Contract.
• The software as such has no value to AAI, unless RC in close collaboration with AAI makes the system functional at all times, even without the presence of RC’s technicians.
• By means of various technical services provided by RC’s personnel and the sharing of their technical knowledge and experience with AAI’s personnel at the time of integration with the existing system, the site acceptance test, the technical manuals and data furnished for putting the system to effective use, RC is making available to AAI its technical knowledge and skills. In the ultimate analysis, the recipient of the service is enabled to apply the technology.
• As seen from another perspective, the Contract also involves the transfer of a technical plan, in devising and activating the upgraded automation system.
As regards the software, the AAR held that the fact that the applicant had not been provided with the technology for developing the software itself as such did not really make any difference. The words used in the DTAA are ‘make available’. The substance of the transaction is the rendering of technical and consultancy services which make available to AAI the technical knowledge, experience and skills possessed by RC in the field and the provision of the software system is only part of the exercise. The delivery of the software and specification of the cost of the software cannot be viewed in isolation.
The AAR further observed that the software was part of the package for setting up the upgraded automation system, and it had no value unless the supplier shared the technical knowledge, information and experience with the user and suitably equipped the personnel of AAI to handle the system by themselves. This required training and the imparting of valuable information and instructions.
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Thus the payment made towards software and the installation system fell within the scope of Article 12(4)(b) of the tax treaty.
Taxability of hardware
In respect of hardware, the AAR ruled that the consideration was not taxable in India in accordance with the earlier rulings in the case of AAI, and also, as outlined in the Contract:
• there were specific stipulations that title and risk in property were passed to AAI outside India,
• AAI was responsible for import duties and customs clearance, and,
• consignments were shipped directly to AAI at the cost of RC.
Accordingly, the applicant was held to be liable to deduct tax at source on the payments made to RC other than those for hardware.
Conclusion
The ruling has again brought to the fore the fact that the taxability of software and installation services rendered in relation to software is highly dependent on the specific facts of the transaction in question.
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