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Payments by local cos for foreign software in tax net
November, 29th 2006

Periodic payments by local firms to overseas companies for the use of software will be subject to tax here under the double taxation avoidance agreement (DTAA) between India and the US.

The Authority for Advanced Ruling (AAR) has in a recent ruling made this clear. The case related to the New Delhi-based IMT Lab (lndia), which entered into an agreement with an overseas firm Conversagent USA and secured the licence of Smarterchild application software.

The company, in return, has to pay a licence fee for the software to the overseas firm.The AAR dismissed the companys plea that Conversagent, the overseas firm does not have a permanent establishment in India, and therefore, the payments received by the foreign firm (Conversagent) from the applicant, for download and use of software are covered under the provisions of the DTAA with USA (i.e business profits). These are not chargeable to tax in India was the contention of the company.

The AAR has said that royalties as used in the Indo-US DTAA (in sub-clause (b) of Para (3) of Article 12) means payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment. In this case, licence fee is paid for a scientific equipment.

The Smarterchild application software on the Conversagent Server Platform is a scientific equipment, licensed to be used for commercial purposes. Therefore, payments made for using this platform would be covered by the expression royalties as used in Article 12 of the DTAA, the authority said.

Further, the technical and consultancy services being rendered by the provision of services of technical personnel and e-mail support is covered by the description of Fees for included services. These are ancillary and subsidiary to the application and enjoyment of the use of, or the right to use, the scientific equipment for commercial purposes. Hence , the license fee to be paid monthly can be termed as :royalty payments.

The AAR made it clear that periodical payments (being Royalties and fees for included services), made to the overseas firm, having no office or establishment in India, in connection with the use of software developed by him on internet are subject to tax deduction at source, under the DTAA with USA.

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