AAR to impose tax on software supply from U.S.

By SiliconIndia   |   Wednesday, 30 July 2008, 12:00 Hrs
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New Delhi: U.S based defence major Raytheon, will now have to pay taxes over its supply of software to the Airport Authority of India (AAI). According to a fresh ruling by Authority for Advanced Rulings (AAR), an income tax authority, the payment received by 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 the Double Taxation Avoidance Agreement.

AAR also stated that though income tax ruling is binding only on the AAI, it can have implications on other similar contracts. Payment 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 (Raytheon) does not have a permanent establishment in India.

AAR ruling said that Raytheon 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. It also mentioned that if at any future point of time, the rate prescribed under the DTAA (double taxation avoidance agreements) is more favorable to the applicant; the applicant can avail of that benefit.

The AAR further said that ownership of the copyright in the software would remain with Raytheon. "The AAI would only get the right to use the copyright, without having rights of copying, distribution or public display and AAI would pay royalty to Raytheon in lieu of the right to use the copyright software," the ruling said.

According to the contract signed by AAI and Raytheon 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. Apart from that, relating to modernization 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.

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