BEFORE THE AUTHORITY FOR ADVANCE RULINGS
(INCOME
TAX)
Airports
Authority of
Justice
P.V. Reddi, Chairman
A.
Sinha and Rao Ranvijay Singh, Members
A.A.R.
No. 753-754 of 2007
February
28, 2008
Section 245R of the Income-tax Act, 1961 - Advance ruling - Procedure
on receipt of application for - Applicant seeks advance ruling in respect of
its obligation to deduct tax under section 195 in connection with contracts
entered into by it with a foreign company ‘R’ - Revenue challenges maintainability
of application contending that since identical question regarding R’s liability
to pay income-tax in India was pending before appellate authority, application
for advance ruling is liable to be rejected in limine - Whether applicant’s
right to have recourse to advance ruling on point of tax deduction cannot be
defeated by reason of pendency of an appeal filed by ‘R’, though a related
issue has to be decided in that appeal and, therefore, application is
maintainable and is not hit by embargo laid down in clause (i) of proviso to section 245R(2) -
Held, yes
Section 90 and section 195 of the Income-tax Act, 1961, read with
article 7 of the DTAA between India and USA - Double taxation relief - Where
agreement exists - Applicant entered into two contracts of hardware repair and
software maintenance with a foreign company ‘R’ - Applicant seeks advance
ruling in respect of its obligation to deduct tax under section 195 in
connection with those contracts and rate at which tax has to be withheld in relation
to payments made to ‘R’ on software maintenance contract - Whether payments
received by ‘R’ from applicant in connection with hardware repair contract were
not liable to be taxed in India by virtue of article 7 of DTAA and, therefore,
applicant is not liable to deduct tax on payments made in respect of such
contract - Held, yes - Whether payment received by ‘R’ in respect of software
maintenance contract was liable to tax in India in its hands and tax was to be
withheld by applicant in relation to that payments at rate of 10 per cent -
Held, yes
Section 245N of the Income-tax Act, 1961 - Applicant - Whether a
resident who has entered into a transaction with a non-resident is an applicant
within meaning of section 245N(b) and such applicant can approach Authority of
Advance Ruling to determine a question which has bearing on tax liability of
non-resident collaborator - Held, yes
The applicant, a statutory authority, entered into two
contracts namely hardware repair support contract and software maintenance
support contract of modernization of air traffic services (MATS) with a foreign
company ‘R’. The two contracts were in
continuation of previous contracts of the year 2003. The applicant in the
instant application seeks advance ruling primarily on issue as whether it is
under an obligation to deduct tax at source under section 195 in connection
with the two contracts and the rate at which the tax has to be withheld in
relation to payments made to ‘R’ on software maintenance contract. However, the
applicant had approached the AAR earlier for giving ruling on similar issues
arising out of similar contracts entered into between the applicant and ‘R’ on
4-2-2003. The applicant has perceived the need to obtain the ruling afresh
probably for the reason that the transaction evidenced by the contract is
technically a fresh one and secondly for the reason that the concerned
Income-tax authority had taken a different view in the course of assessment
proceedings of ‘R’ which might have repercussions on the applicant as
well. The Authority in the earlier
ruling held that payments received by ‘R’ from the applicant in connection with
hardware repair contract were not liable to be taxed in
In view of DTAA between India and USA, and that the deputation of an
engineer by ‘R’ for the purpose of installation and testing of the repaired
software will not constitute ‘R’ permanent establishment in India and the
payment received by ‘R’ under this transaction is liable to tax in India in the
hands of the recipient i.e. ‘R’. The revenue seeks to canvas the correctness of
the conclusion reached by the authority in the earlier ruling on the ground
that the Authority was not apprised of the relevant facts relating to the
existence of PE, and that the subsequent investigation in the context of
assessment proceedings of ‘R’ revealed the existence of PE even in regard to
hardware repair contract. The revenue has challenged the maintainability of the
application for advance ruling by contending that the applicant cannot invoke
the jurisdiction of the authority in view of the embargo laid down in clause (i)
of the proviso to section 245R(2). The revenue contended that since
the identical question regarding ‘R’ liability to pay income-tax in
The reasons given in the earlier ruling pronounced by the authority in
the case of applicant itself, squarely applies to the instant applications as
well. [
There is nothing in the assessment orders relating to ‘R’ which
substantiates the revenue’s version that there was a permanent establishment of
‘R’ in India in connection with the hardware repairs support contract or for
that matter the software maintenance contract both of which originated in 2003
and were renewed in 2006. In fact, there is no definite finding supported
by reasons which throws light on the existence of P.E. in connection with the
execution of these contracts. [
There is nothing in the assessment order or the statement of ‘M’, or in
the terms of the instant contracts which unerringly point to the existence of
P.E. On the other hand, the probability is that as the entire activity of
repair of equipment and rectification of anomalies took place outside
Therefore, the earlier ruling does not require reconsideration on the
ground that the concession given by the department was wrong or that the
applicant did not make frank disclosure of material facts on the issue of PE.
The endeavour of the revenue to project some doubts on the correctness of
earlier ruling has proved to be an infructuous exercise. [
As regards the objection of the revenue that the applicant could not
invoke jurisdiction of authority, it is true that the question as to whether
‘R’ is liable to pay income-tax in India on the payments received by it under
the contract with the applicant was decided by the Assessing Officer in the
case of ‘R’ under section 147, read with section 143(3) for two assessment
years, i.e., 2003 to 2005 and aggrieved by such assessments, ‘R’ filed
appeals which are now pending. [
Sub-clause (ii) of clause (a) of section 245N envisages
determination by the authority in relation to the tax liability of a non-resident
arising out of a transaction, which had been undertaken or is proposed to be
undertaken by a resident applicant with such non-resident. Sub-clause (ii)
to clause (b) of section 245N confers the qualification of ‘applicant’
on such resident. Thus, a resident who has entered into a transaction
with a non-resident, as in the instant case, is an applicant within the meaning
of section 245N(b) and such applicant can approach the authority to
determine a question which has bearing on the tax liability of its non-resident
collaborator under sub-clause(ii) of clause (a).
There is no bar, either express or implied against a resident applicant falling
within the scope of sub-clause (iii) invoking the jurisdiction of the
authority for a determination under sub-clause (ii) of clause (a)
of the same section. The fact that such resident is a
PSU notified under sub-clause (iii) of clause (b) should not make
any difference. In addition to clause (iii), a PSU, being a resident,
can very well fall within the sweep of clause (ii) of section 245N if it
has undertaken a transaction with a non-resident and it can seek a ruling in
respect of tax liability of non-resident as per clause (a)(ii) of
section 245N. [
The question raised by the applicant relating to tax deduction at source
is not the question which is pending for consideration by the appellate
authority. The obligation of the applicant to deduct tax at source at the
prescribed rate and to make it over to the department is cast under section 195(1). Failure to deduct the tax and pay it to the
Government entails serious consequences under the provisions of section 40(a)
and section 271C. That is why the applicant is before the
authority. Section 195(1) pre-supposes that the sum payable to the
non-resident/foreign company must be chargeable to tax under the provisions of
the Act. That means the question of tax deduction is linked up with the
tax liability of the non-resident/foreign company to whom the payment has to be
made by the applicant under the transaction entered into with the
non-resident. The applicant, therefore, seeks determination that the
foreign company - ‘R’ is not liable to pay income-tax in
Therefore, the application is not hit by the embargo laid down in the
first part of clause (i) to the 2nd proviso to section
245R(2). [
The issue relating to tax deduction at source regarding which
determination is sought by the applicant, is an issue ‘in relation to’ the tax
liability of non-resident, namely, ‘R’. Therefore, it falls within the purview
of sub-clause(ii) of clause(a) to section 245N. [
Regarding the applicant’s obligation to deduct tax at source. The
applicant is not legally required to deduct tax on the payments made to ‘R’ in
respect of hardware repair contract. Further, the rate at which the tax has to
be withheld in relation to the payments made to ‘R’ on the software maintenance
contract should be 10 per cent, apart from the applicable surcharge. [