Foreign cos royalty income from India to be taxed, says AAR

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New Delhi: The Authority for Advance Ruling has held that basic engineering and procurement services provided by Australian company Worley Parsons Services, for projects to Reliance Petroleum Ltd and Sterlite Industries fall within the scope of royalty income and the receipts are taxable in India.

For foreign companies working in India through permanent establishments, this could imply a larger tax outgo. This could mean that if there is no effective connection between their PE and the services they provide in the country, their entire royalty income for the project can be held taxable in India.

However, giving them a partial breather, the AAR ruling also upheld the principle that business income in relation to activities done by a PE in India will only be taxed. �It is not all the revenue but only the part accruing to India that will be held taxable in the country,� a tax expert said.

Worley Parsons Services, an Australian service provider to energy, resource and complex service provider industries, had sought a clarification from the Authority whether royalty income received by it for income received by it mostly from Australia and partly in India is liable to be taxed in India, in keeping with the India- Australia Double Tax Avoidance Agreement (DTAA).

The AAR in its ruling held that while the entire receipts under the basic engineering and procurement agreement will be taxed as royalty income on gross basis at the rate of 15%, receipts from the process management services agreement, shall be treated as business income. �It will be taxable only to the extent they are attributable to the operations of PE in India. The permissible deductions and rate of tax concerning business income will be applicable,� it held.

The authority observed that the services rendered and the work undertaken by Worley Parsons basic engineering and procurement fall within the scope of �royalties� as defined in DTAA and are taxable. Though the company had set up a PE in India in October 2001, there is no proof that the services in the Agreement were in any way connected with the PE and so there is �no effective connection between the PE and the royalty generating services.�