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Withhold 10 per cent tax on Software Maintenance Contract

AIT News Network

NEW DELHI.Authority for Advance Rulings(Income Tax) vide a ruling dated 28th February 2008 AIT-2008-81-AAR has ruled the rate at which the tax has to be withheld in relation to the payments made to non-resident company on the Software Maintenance Contract should be ten per cent, TDS apart from the applicable surcharge.

                The advance ruling was sought primarily on the issue whether the applicant is under an obligation to deduct tax at source under sec. 195 of the Income-tax Act in connection with two contracts (i) Hardware Repair Support Contract; and (ii) Software Maintenance Support Contract, which the applicant entered into on 26th April, 2006 (in continuation of previous Contracts of 2003) with Raytheon Company, USA, which is a non-resident foreign company.

The questions the applicant were:

In application No. AAR/753/2007:

 (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 M/s. Raytheon Company?

It was held that the applicant is not legally required to deduct tax on the payments made to Raytheon Company, USA

In application No. AAR/754/2007:

(i)            Whether, under the facts and circumstances of the case, deputation of an engineer by M/s. Raytheon Company to India for the purpose of installation and testing of the repaired software will constitute Raytheon's permanent establishment in India.

(ii)           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?

(iii)          Whether any tax is required to be deducted at source by the applicant on payments to be made to M/s. Raytheon Company? If yes, then what is the rate of withholding tax applicable?

Authority also held that there is no bar, either express or implied against a resident applicant falling within the scope of sub-clause (iii) the jurisdiction of this 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 (b)(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.

(Click here for full text of Ruling AIT-2008-81-AAR)

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