In April 1999 the Authority for Advance Rulings (AAR), India published an advance ruling which raises interesting problems for foreign companies doing business in India.  We have researched this issue as below.

• An Indian company, IndiaCo, was providing technical services (data management, data analyses, etc) to a group of companies, say ABC Group, which was doing a credit-card business  in Asia, Europe and elsewhere.
• A United States company, USCo, was operating a telecoms processing centre in the US.  USCo had super computers in the US which were used by its clients for very high speed data storage and processing.  IndiaCo used USCo's computers to complete some of the data processing it was carrying out.  IndiaCo had contracted to use some of USCo's software.  The contract provided that the sum to be paid by IndiaCo could if appropriate be reduced by the applicable withholding tax.
• IndiaCo performed credit-card and travellers cheque processing for its clients, sent the information to USCo who processed it and sent it back to IndiaCo via satellite connection.
• According to USCo the payments it received from IndiaCo were business profits and under the US-India double tax treaty, there would be no withholding tax on the "business income".
• The Indian tax authority maintained that the payments were royalties for the use of UsCo's software by IndiaCo and accordingly withholding tax should be applied to the payments from India.

This case has very wide implications for eCommerce business done in India and illustrates the "erratic" nature of some tax rules in India.  If  kit or equipment were located in India, there is a danger the Indian authorities could argue the equipment constitutes a permanent establishment of the foreign company in India under the relevant treaty with India.

Moreover, India is not yet a member of the OECD.  Its treaties follow the UN model where there is not much guidance on this issue.  Even at OECD level the position regarding location of computer servers is not clear.  This has lead some Indian tax counsels to argue that where location of a server in India leads to substantial business in India or business or profits accruing as a result, then there could be a tax problem.

This is merely an outline and We would be pleased to provide a full report stating more precise circumstances where a server location in India could represent tax problems.  Please contact us for further details.