A recent ruling of the Authority of Advance Ruling (AAR) [2010-TIOL-06- ARA-IT] in the case of M/s Laird Technologies India Pvt. Ltd. (Applicant) on the issue of tax ability of fees received by a US company (US Co) for assigning contractual rights to the Applicant to supply products in India.
The AAR held that the fee received by US Co from the Applicant is in the nature of business profits of US Co and the same is not taxable in India in the absence of US Co constituting a permanent establishment (PE) in India under the India-US tax treaty (Tax Treaty). Further, the Applicant is not required to withhold taxes under the Indian Tax Law (ITL) while making remittance to US Co as it has not derived any income chargeable to tax in India.
Background and facts of the case
- The Applicant, a company incorporated in India, is engaged in the business of designing and manufacturing antenna and battery packs for the mobile phone industry. The Applicant is a group company of a UK company, the ultimate parent company, which is a leading international supplier of custom-designed electronic components and solutions to the global electronic industry. The Applicant is UK company’s first manufacturing facility in India.
- US Co, a tax-resident of USA and another group company of UK company, is a globally known designer and manufacturer of antenna, data communications etc. US Co has entered into a product purchase agreement (PPA) to manufacture and supply products to Nokia Corporation (Nokia) globally, including India.
- In connection with the supplies of products to Nokia’s group company in India (Nokia India) under the PPA, US Co entered into an assignment agreement (Agreement) with the Applicant for a period of 5 years. Under the Agreement, US Co irrevocably assigned all its beneficial rights, title, interest, obligations and duties in connection with the supplies to Nokia India under the PPA in favor of the Applicant. In consideration to above, the Applicant agreed to pay a lump sum amount to US Co (Assignment fee).
- The Applicant was of the view that the Assignment fee received by US Co under the terms of the Agreement is not taxable in India under the ITL or the Tax Treaty and hence it was not required to withhold taxes on the remittance of the Assignment fee.
Issues before the AAR
