The taxation of payments by Indian companies for importing defence material and oil and gas equipment from various countries like Russia, Ireland, Greece and Georgia will now become easier following an Income Tax Appellate Tribunal order.

The Bangalore Bench of the ITAT has ruled that the money paid by state-run Hindustan Aeronautics Ltd for procurement of "prototype engine" does not amount to technical services. Since the money paid is not fees for technical services, it does not attract the provision of tax deducted at source under Section 195 (1) of the Income Tax Act or according to the provisions of the double taxation avoidance agreement between India and Russia.

This may set a precedent for other deliveries made by foreign players to Indian companies where payments are often assumed to be fees for technical services even if the design specifications are tailor-made for the Indian entity, say experts.

The ruling will be particularly beneficial for deals with Russia, Ireland, Greece and Georgia as, sources say, a majority of Indian defence and oil and gas imports are from these countries.

HAL was assessed for two assessment years - 2006-07 and 2007-08 - and had remitted around Rs 26 crore (Rs 260 million), on which tax and interest amounted to Rs 3.04 crore (Rs 30.4 million).

The payment was made to Rosoboronexport in Russia to purchase aircraft engines. According to the company, the services involved were outright purchase of engines in accordance with the technical requirement of HAL and provided by it. Each engine was unique with its own designs, intellectual property and technical know-how.

If the assessee wants to copy or reproduce the material and documentation developed on the present contracts, it has to enter another licence. Therefore, the company argued that no technical services were rendered by the foreign company.

The assessment officer, on the other hand, was of the view that the contract was for carrying out research and design and the work was classified as technical services.