Territorial nexus for technical services controls Indian taxability of offshore feasibility study fees

For a non-resident, consideration for a feasibility study report is not taxable in India as fees for technical services unless the services have the required territorial nexus with India and are rendered and utilised in India. Where the preparatory and finalisation work is carried out outside India, the payment is not treated as an outright sale of a report, and the absence of a permanent establishment in India reinforces the position that sections 5(2) and 9(1)(vii) of the Income-tax Act, 1961 do not apply.

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Issues: Whether the consideration received for preparing the feasibility study report was fees for technical services taxable in India, or business profits not chargeable in India in the absence of a permanent establishment.

Analysis: The agreement showed that the assessee was required to prepare the feasibility report as part of technical and economic studies for the Indian mine project, but the assessee had no establishment in India and the preparatory and finalization work was carried out outside India. On the facts, the receipt was not treated as an outright sale of a report. Following the principle that offshore services are taxable only when they are rendered and utilized in India, and applying the Supreme Court's territorial nexus test, the receipt could not be brought to tax merely because the Indian party made payment. As the assessee had no permanent establishment in India and the services were rendered outside India, neither section 5(2) nor section 9(1)(vii) of the Income-tax Act, 1961 was attracted.

Conclusion: The amount received for the feasibility study report was not taxable in India and the assessee succeeded on the substantive issue.

Final Conclusion: The payment was held to be outside Indian taxability on the facts, and the addition was deleted.

Ratio Decidendi: For a non-resident, income from technical services is not taxable in India unless the services have the required territorial nexus with India, namely that they are rendered in India and utilized in India; the absence of a permanent establishment and offshore performance of the services prevents Indian taxation under sections 5(2) and 9(1)(vii).

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