Delhi High Court cancels AARs ruling on tax

Delhi High Court cancels AARs ruling on tax

Providing access to the computer software not liable to be taxed under the India-UK agreement

The Delhi High Court has quashed the ruling given by the Authority of Advance Ruling (AAR). It held that the payment received by the London-based firm Ernst & Young (E&Y) providing access to computer software to the Indian member firms did not amount to royalty that was liable to be taxed.

The division bench of Justice Navin Chawla and Justice Manmohan held that the payment received by Ernst Young Global Services Limited (EYGSL), UK, could not be taxed in India under the provisions of the Income Tax Act, 1961 and the India-UK Double Taxation Avoidance Agreement (DTAA).

The petitioner, EYGS is engaged in providing technology, support services and software licences to the member firms of the E&Y network in various countries across the world. All these firms use the brand name EY. The petitioner entered into contracts with various third-party vendors for the procurement of software. It also entered into a contract with EY member firms to provide support services and/or deliverables.

The EY Global Business Services (EYGBS), India, engaged in providing back-office support and data processing services, entered into an agreement with EYGSL whereby it received the "right to benefit from the deliverables and/or services."

In the Memorandum of Agreement (MoU), EYGBS merely receives the right to use the software (procured by the London firm) from third-party vendors. The consideration paid for the use, could not, therefore, be termed as royalty as held by the Supreme Court in the Engineering Analysis Centre.