TaxTMI 
TaxTMI 
2010 (3) TMI 110
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.... The contract specifically provides that the title and risk in the property (hardware and software) shall pass to AAI outside India. AAI is responsible for payment of import duties and customs clearances. As regards software and documentation, the contract grants to AAI a non-transferable, non-exclusive, royalty free licence for using the software only at Delhi. The applicant contends that the essence of the contract is only purchase of certain copyrighted software and hardware on outright basis subject to certain end-use restrictions. The applicant points out that the consideration stipulated for installation is approximately 0.10% of the total contract value. It is the case of the applicant that the amounts received by Raytheon for supply of hardware, software and support services are in the nature of business profits and would not be taxable in India in the absence of Permanent Establishment (PE) in India, having regard to the provisions of Art.7 of DTAA (Tax 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. 2. The applicant has furnished a No....
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....e owner of the installed software (customized according to its requirements), AAI does not have any right to use the software at another location. Raytheon is free to supply the standardized software (Autotrac) to AAI for other locations and also to other parties 3. The following questions are formulated by the applicant for seeking advance ruling: (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? (ii) Whether any tax is required to be deducted at source by the applicant on payments to be made to the recipient non-resident US company? If yes, then what is the applicable rate of withholding tax? 4. Practically, the questions raised in this application are covered by the earlier rulings of this Authority in the case of the same applicant which is reported in 304 ITR 216 and the earlier rulings in 299 ITR 102 and 273 ITR 437. We shall now refer to those rulings. 5. The applicant's authorized representative has submitted that the ruling of this Authority in so far as software is concerned, requires reconsideration in the light of subseq....
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.... 9. In regard to the software and documentation, it was observed that the applicant had acquired a right to use the same subject to certain conditions and, therefore, it was not a case of outright sale. On the point whether the payment received by Raytheon for the repair of software answered the description of 'fees for included services' within the meaning of sub-para (a) of para 4 of Article 12 of the Treaty, it was held to be so. In other words, it was held that the payment fell within the scope of sub-para (a) of para 4 of Article 12. However, sub-para (b) of para 4 of Article 12, i.e. making available the technical knowledge, experience, etc, was held to be not applicable. Sub-para (a) of para 4 speaks of amount paid for services which are ancillary and subsidiary to the application or enjoyment of the right, property or information for which the payment described in para 3 is received. Para 3 of Article 12, it may be noted contains the definition of 'royalty'. Thus, the consideration received in providing software under the Ist contract of 1993 was viewed as 'royalty'. However, there is no discussion on this point and no specific reasons for th....
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....ion display data (S-SDD)." It is clear from the foregoing that the documents and their copies supplied under the contract to AAI are to remain the property of RC. However, AAI will have the right to use those documents for the purpose of the contract. As regards the software and technical documentation, RC has granted a licence to AAI on a non-transferable and non-exclusive basis to use the executable software code and technical documentation." Thus, the licence for use of software is not royalty free as claimed by the applicant; the contract price is inclusive of consideration for royalty. We have already observed from the provisions of the contract that RC has not transferred ownership in the documents and software supplied to AAI which has only been given the right to use them for the purpose and in the manner provided in the contract. It is significant to note that AAI has been given the non-exclusive right of use and it has no right of sale, public distribution and circulation of the computer programme delivered to it. But the contract does not contain any similar restrictions in respect of items of hardware supplied under it, which appear to have been outrightly sold to....
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....irectly be put to use. The applicant has stated that the software is customized in the sense that it requires site specific modifications/adaptations, which are done at the spot. However, this point of distinction alone would not help us to distinguish the ruling in AAI's case and in Dassault Systems. Suffice it to state that some of the points and legal aspects highlighted in Dassault Systems have missed the attention of this Authority and to the extent it goes against the principles laid down in the latest ruling in Dassault case, it is not safe to decide the matter on a mere reiteration of the view taken in the 3rd Airport Authority case. We have, therefore, examined the issue from a different angle and on such consideration, we reach the same conclusion on the applicability of Art.12 of the Treaty, but through a different route. 16. The crucial question is: What is the real nature and substance of the contract with which we are concerned? Can it be considered to be primarily a contract for the supply of customized software or is it a contract that falls within the scope and sweep of royalty and included services dealt with under Art.12 of the India-US Treaty ? Section 9(1)(v....
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.... means the software system delivered to the AAI under the contract. Raytheon grants the AAI a "licence on non-transferable, non-exclusive, royalty-free basis to use the executable software code and technical documentation for use in the automation system at Delhi". (vide cl 10.4) The responsibilities of Raytheon are specified in cl.3.1 as follows: "3.1 Raytheon Responsibilities: Raytheon shall be responsible for the following scope: * Deliverable hardware, including consoles are listed in SOW, Enclosure (2) * System integration of Deliverable HW, Enclosure (2), with Automation system with DG-R contract (NS/DG-R/01-06) Interim Build or Final Build which ever is operational at site at the time of this contract delivery. * Automation system integration with new co-mounted ASR/MSSR system. * Upgraded Delhi adaptation data * SAT/S-SAT conduct * Remote Technical system Transition support 18. Then, Raytheon is bound to provide the necessary information to operate, maintain and repair the system delivered under the contract (cl 10.1). The installation is done after suitably modifying and adapting the software on physical verification and the study of various fact....
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....uch does not really make a difference. The expression used is: "make available technical knowledge, experience or skills". The substance of the transaction, in our view, is rendering of technical and consultancy services which make available to AAI the technical knowledge, experience and skills possessed by Raytheon in the field and the provision of software system is only part of that exercise. The delivery of software and the specification of the cost of software cannot be viewed in isolation. Software is a part of the package of setting up upgraded automation system and as stated earlier, it has no value unless the supplier shares the technical knowledge, informations and experience with the user and suitably equip the personnel of AAI to handle the system by themselves. It needs training and imparting of valuable informations and instructions. Viewed in this background, we are of the view that the payment made towards software can be legitimately brought within the fold of Art.12(4)(b) of the Tax Treaty, if not Art.12(3). As regards installation services, there is no dispute about its taxability. 20. As regards hardware, we reiterate the view taken in the earlier rulings tha....