The Authority for Advanced Ruling (AAR) has clarified that tax is not liable to be deducted from the payments made to a non-resident if the transaction is a sale of equipment and repairs that took place outside India. The AAR is a quasi-judicial body for settling tax dispute.

The AAR ruled this on an application filed by the Airports Authority of India (AAI) regarding its transactions with US-based Raytheon. However, the AAR said tax is required to be deducted on a software maintenance contract AAI had with Raytheon. The agreement between AAR and Raytheon was for supply of equipment and training facilities. It also had an agreement for hardware repair and software maintenance.

The critical question put up before the AAR is this: Whether AAI is required to deduct tax in a case in which all activities took place outside the country? The AAI pointed out that all the activities including transfer of equipment and installation took place outside India. A substantial part of the activities related to software maintenance also took place outside India, except that an engineer was sent from India for the purpose of installation.

The AAR held that the payments made for hardware maintenance were not taxable in India and hence no need to deduct tax from the payment made to Raytheon. The AAR’s reasoning for this decision is based on the fact that hardware and equipment were sold outside India.

It also said the repair work was undertaken outside India. The AAR said having sent an engineer from India does not make a permanent establishment in India, under the terms of India-US Double Taxation Avoidance Agreement. But the AAR held that in case of payments made under the software development contract between the two, tax is liable to be deducted before making payment to Raytheon.