Acceptance test not relevant to taxability

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Dismissing an appeal in DIT v Ericsson AB, Ericsson Radio Systems AB and M/s Metapath Software International Ltd, Delhi High Court recently held that the performance of an acceptance test in India on equipment supplied from overseas is not relevant for determining if income had accrued in India in terms of section 5(2)(b) of the Income Tax Act, 1961.

The court also ruled that payment for software supplied under a licence was not taxable as royalty either under the Income Tax Act or a double-taxation avoidance agreement (DTAA) between India and Sweden.

Ericsson had signed contracts in India with cellular operators to supply hardware equipment and software. Customers were to accept the goods only after an acceptance test was done in India. Ericsson argued that the income arising from these contracts was not taxable in India.

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The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.

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