In a significant ruling an income tax authority AAR on Tuesday held that payments made towards supply of software by US-based defence major Raytheon to the Airports Authority of India will be taxed in India.

"The payment received by Ratheon Company (from AAI) in respect of software and provision of services of installation, testing and training shall be taxable under the Income Tax Act, 1961, read with the DTAA (Double Taxation Avoidance Agreement)," said Authority for Advanced Rulings (AAR).

Though the income tax ruling is binding only on the AAI and the income tax, it can have implications on other similar contracts.

"It is a disappointing ruling and plethora of precedents supports an opposite view", opined Diljeet Titus, senior partner of law firm Titus and Co.

The AAR ruling comes on questions raised by Airports Authority whether the payments made by it to the Rathyeon, in respect of contracts for supply and testing of Surveillance Situation Display Data (S-SDD), DG Servers and related software, would be taxed in India.

The supply of equipment and software relates to contracts entered by the Airports Authority with Ratheyon on behalf of Indian Air Force.

According to AAR, only payments relating to purchase of hardware by Airports Authority would be exempt from tax in India as "it is in the nature of business income and... the non-resident company (Ratheyon) does not have a permanent establishment in India."