Foreign firm's royalty income taxable in India: AAR

Royalty income that accrues to a foreign firm in India for provision of services to domestic firms is taxable in in this country in full as royalty if the firm does not have a permanent establishment here, according to the Authority for Advance Ruling (AAR).

Giving its ruling in the case of Australia-based Worley Parsons Services Pty Ltd, the Authority said, ''Services rendered and the work undertaken by the applicant (Worley Parsons) in terms of the agreement for basic engineering and procurement services fall within the scope of 'royalties'...and the receipts are taxable in India."

Worley Parsons, a company incorporated in Australia and engaged in the business of providing professional services to the energy and resource industries, had contracts with Reliance Petroleum to provide engineering services.

Reliance Petroleum proposed to lay cross-country pipelines for transportation of hydro-carbons from Jamnagar to Bhopal and from Goa to Hyderabad.  It was awarded the contract for providing various services, like engineering and procurement, project management   and construction and commissioning advisory services. 

The Australian company had entered into three agreements with Reliance during the year 2001. However, the contract was terminated mid-way, ie, in March 2003 and no services were performed under the third third agreement (construction and commissioning advisory). 

''For the purposes of this agreement, the term ''permanent establishment'' means a fixed place of business through which the business of an enterprise is wholly or partly carried on,'' the Authority said, adding ''the term `permanent establishment' shall include especially: a place of management, a branch, an office, a factory, a workshop, …  a building site or construction, installation or assembly project, or supervisory activities in connection with a site or project, where that site or project exists or those activities are carried on separately or together with other sites, projects or activities for more than 6 months''.
 
The applicant had a fixed place of business in Mumbai at the office of local engineering contractor of Reliance, i.e, Jacobs Engineering Works and it admits of no doubt that the business of the enterprise was partly carried on from there.  Quite a number of employees, mostly technical personnel, stayed and attended to the work for a considerable number of days during the later part of the year 2001-02 and in 2002-03.  As the construction or installation work did not take place by the date of termination of contract, it is doubtful whether the establishment of the applicant can also be brought within the scope of the above, it said.

In any case, the Authority noted, that in view of the common ground that the applicant maintained a permanent establishment in India for the purpose of carrying out certain functions related to the contract with Reliance, there is no need to delve further into this aspect. ''However, we would like to indicate at this stage that the question of nexus of PE to the first Agreement is in issue and will be discussed later,'' it said.

While para 1 of the scheme of taxation on royalties under Article XII entitles the state of residence of the person who receive royalty to tax the royalty income, para 2 preserves the power of the state of source of royalty also to tax the royalty income subject to the ceiling of rates as provided in clauses (a) and (b), the AAR ruled, adding, ''Of course, the assessee who suffers tax in one of the states will be eligible to get credit of tax paid in the other country on the same income in accordance with the Provisions of DTAA.''

The firm had sought a ruling by AAR on the taxability of its royalty income in India. Worley had asked whether the income would be taxable in India and if yes, at what rate.

The Australian firm had contended that the receipts, which are attributable to the Permanent Establishment (PE) of the company in India should only be taxed as business income.

However, giving the ruling, AAR said that only a part of the income of Worley Parsons would be taxable at the rate of 15 per cent as royalty income, as for that part of the service the company had failed to provide proof of having a PE in India.