2010 (5) TMI 523 - AT - Income Tax

Payments to foreign lab for bauxite testing are Fees for Technical Services under section 9(1)(vii) and Article 12, taxable

ITAT, MUMBAI upheld that payments made by an Indian company to a Chinese entity for bauxite testing constitute fees for technical services under section ... Ascertainment of tax withholding liability on the appellant in respect of a payment made to a China - concept of territorial nexus, for determining the tax liability - Indian company, entered into an agreement with a Chinese company for bauxite testing services - Whether Bauxite testing charges is a nature of ‘fees from technical services’ under Article 12 of the Indo China tax treaty, as also under section 9(1)(vii) of the Indian Income Tax Act,1961 - case of the assessee, however, is that since the services are not rendered in India, the provisions of Section 9(1)(vii) cannot be invoked - HELD THAT:- In the case of Clifford Chance [2008 (12) TMI 30 - HIGH COURT OF BOMBAY], the appellant, an English law firm, was rendering legal services in connection with three projects in India. While the claim of the assessee was that only such portion of the fees received, in connection with these projects is taxable in India as is attributable to services performed in India, the Assessing Officer opined that the total fees received for the India Project, whether the work was done in India or outside India, was taxable in India. When this dispute finally travelled before the Hon’ble Bombay High Court, it was, inter alia, contended by the assessee that “the place of utilization of service is not relevant but place of performance of the service is what Hon’ble Supreme Court’s judgment in the case of Ishikawajima Harima Heavy Industries Ltd. [2007 (1) TMI 91 - SUPREME COURT], Their Lordships noted that the taxability is to be determined under section 9(1)(vii) of the Act. Reading the provision in its plain sense, as per the apex court it requires two conditions to be met-the services which are rendered in India, as well as utilized in India, to be taxable in India. Both the above conditions have to be satisfied simultaneously. Thus for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. The concept of territorial nexus, for the purpose of determining the tax liability, is relevant only for a territorial tax system in which taxability in a tax jurisdiction is confined to the income earned within its borders. Under this system, any foreign income that is earned outside of its borders is not taxed by the tax jurisdiction, but then apart from tax heavens, the only prominent countries that are considered territorial tax systems are France, Belgium, Hong Kong and the Netherlands, and in those countries also this system comes with certain anti abuse riders. It is clear that Hon’ble Bombay High Court’s judgment in the case of Clifford Chance, is no longer good law, as there have been amendments in law in consonance with the school of thought discussed above and these amendment unambiguously negate the principle of territorial nexus which is the understructure of line of reasoning adopted by the Hon’ble Courts above. It is no longer necessary that, in order to invite taxability under section 9(1)(vii) of the Act, the services must be rendered in the Indian tax jurisdiction. In our considered view, therefore, the income of the Chinese company, by way of impugned receipt of fees for technical services from an Indian company, is to be deemed to accrue or arise in India under Section 9(1)(vii) of the Act. It is accordingly liable to be taxed in India under the domestic tax law. Whether or not the income earned by the Chinese company is liable to be taxed in India under Article 12 of the India China tax treaty. - deeming fiction under Article 12(6) - A plain reading of the above treaty provisions show that under Article 12 (4) shows that what is covered by the basic definition of the expression ‘fees for technical services’ is the “provision of services of managerial, technical or consultancy nature” by a resident of a Contracting State in the other Contracting State. A literal interpretation to a tax treaty, which renders treaty provisions unworkable and which is contrary to the clear and unambiguous scheme of the treaty, has to be avoided. In any case, even on merits, we are of the considered view that the scope of the expression ‘provision for services’ is much wider in scope that the expression ‘provision for rendering of services’ and will cover the services even when these are not rendered in the other contracting state, as long as these services are used in the other contracting state. Therefore, the technical services in question are clearly covered by Article 12(4) of the treaty. This position is further clarified, and is specifically covered by the deeming fiction under Article 12(6) as well. The impugned payment to the Chinese company, therefore, is covered by the scope of “fees for technical services” within meanings assigned to that expression under Article 12 of the Indian China tax treaty, and is taxable in India as such. Thus, we are of the considered view that the impugned payment was taxable in India under the provisions of the Indian Income Tax Act, 1961, as also under the provisions of the applicable India China tax treaty. The tax withholding liability of the appellant, under section 195, being in the nature of vicarious liability, therefore, did extend to deduction of tax at source therefore, approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. In the result, the appeal is dismissed. Issues Involved:1. Taxability of payment made to a foreign company for technical services under the India-China Double Taxation Avoidance Agreement (DTAA) and the Indian Income Tax Act, 1961.2. Requirement to deduct tax at source from foreign remittance under Section 195 of the Income Tax Act, 1961.Issue-wise Detailed Analysis:Issue 1: Taxability of Payment under DTAA and Indian Income Tax Act, 1961The appellant, an Indian company, entered into an agreement with a Chinese company for bauxite testing services, paying US $1,000,000. The appellant argued that the payment was business income for the Chinese company and not taxable in India as the Chinese company did not have a permanent establishment in India. They contended that the payment did not constitute 'fees for technical services' under Article 12 of the India-China DTAA and Section 9(1)(vii) of the Income Tax Act, 1961, as the services were rendered outside India.The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) held that the payment was taxable as 'fees for technical services' under both the DTAA and the Income Tax Act. The AO concluded that the Indian company was to withhold tax at 10% on the gross amount of the remittance to the Chinese company.The Tribunal noted that Section 9(1)(vii) deems income by way of fees for technical services payable by a resident to accrue or arise in India, except where the fees are payable for services utilized in a business or profession carried on outside India. The Tribunal also referenced the retrospective amendment to Section 9(1) by the Finance Act, 2010, which clarified that it is not necessary for the services to be rendered in India for the income to be taxable in India.The Tribunal discussed the principle of territorial nexus and noted that the amendment negated the judicial precedents that required services to be rendered in India for taxability. The Tribunal concluded that the income of the Chinese company was deemed to accrue or arise in India under Section 9(1)(vii) and was taxable in India.Issue 2: Requirement to Deduct Tax at Source under Section 195The appellant argued that under Article 12(4) of the India-China DTAA, the payment was not taxable in India as the services were not rendered in India. They contended that Article 12(6) of the DTAA, which deems fees for technical services to arise in the state of the payer, should not apply unless the services are rendered in the source state.The Tribunal examined Article 12 of the DTAA, which defines 'fees for technical services' and includes a deeming provision under Article 12(6) that fees for technical services shall be deemed to arise in the state of the payer. The Tribunal rejected the appellant's argument that the deeming provision should not apply if the services are not rendered in the source state, noting that such an interpretation would render Article 12(6) meaningless.The Tribunal emphasized that the India-China DTAA follows the source rule, and the payment made by the Indian company to the Chinese company was deemed to have arisen in India under Article 12(6). The Tribunal concluded that the payment was taxable in India as 'fees for technical services' under Article 12 of the DTAA and that the appellant was required to deduct tax at source under Section 195.Conclusion:The Tribunal upheld the conclusions of the AO and the Commissioner of Income Tax (Appeals) that the payment made by the Indian company to the Chinese company was taxable in India as 'fees for technical services' under both the India-China DTAA and the Indian Income Tax Act, 1961. The appellant's obligation to deduct tax at source under Section 195 was affirmed. The appeal was dismissed.