Fees for technical services on foreign testing reports remain taxable in India despite services being performed abroad

Payment for bauxite testing and report preparation was treated as fees for technical services under section 9(1)(vii) and Article 12 of the India-China tax treaty. The commentary states that, after the retrospective amendment to the Explanation to section 9(1), such income is deemed to accrue or arise in India even if the services are not rendered in India. It further notes that Article 12(4) covers technical services and Article 12(6) supports source-based taxation where the payer is resident in India. On that basis, the absence of a permanent establishment was considered irrelevant and tax was required to be withheld under section 195.

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Issues: Whether the payment made to the foreign company for bauxite testing and preparation of reports was chargeable to tax in India as fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961 and Article 12 of the India-China tax treaty, and consequently whether tax was required to be withheld under section 195.

Analysis: The payment was for technical testing and report preparation and fell within the scope of fees for technical services. The earlier view that services had to be both utilized and rendered in India was held no longer to govern the domestic provision after the retrospective amendment to the Explanation to section 9(1), which clarifies that non-resident income covered by clause (vii) is deemed to accrue or arise in India whether or not services are rendered in India. On the treaty issue, Article 12(4) was read as covering the provision of managerial, technical or consultancy services by a resident of one Contracting State in the other Contracting State, and Article 12(6) was treated as a source-rule deeming provision that reinforces taxability where the payer is resident in India. The absence of a permanent establishment was held irrelevant because the receipt was characterized as fees for technical services and not business profits.

Conclusion: The payment was taxable in India under both the Income-tax Act and the applicable treaty, and the appellant was obliged to deduct tax at source under section 195.

Ratio Decidendi: After the retrospective amendment to section 9(1), fees for technical services paid by a payer are taxable in India even if the services are not rendered in India, and a treaty provision deeming such fees to arise in the payer's State supports source-based taxation irrespective of the payee's permanent establishment.

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