Fees for technical services used in an Indian business remain taxable in India despite some services being rendered abroad.

Payments by a resident assessee to a foreign collaborator for consultancy, engineering and validation services were treated as fees for technical services deemed to accrue or arise in India under section 9(1)(vii)(b) because the services were used in an Indian business. The statutory exception applies only where the services are utilised in a business or profession carried on outside India, or for earning income from a source outside India; export activity alone does not make the source foreign. The services were also not construction, assembly, mining or a like project within Explanation 2. Accordingly, tax was deductible at source.

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Issues: Whether the payment made to the foreign collaborator for consultancy, engineering and validation services was liable to tax deduction at source as fees for technical services deemed to accrue or arise in India under section 9(1)(vii)(b) of the Income-tax Act, 1961, and whether the exclusion in Explanation 2 to section 9(1)(vii) for construction, assembly, mining or like projects applied.

Analysis: The payment was made by a resident assessee for services obtained to secure regulatory approval and enable manufacture and export of pharmaceutical products. The statutory exception in section 9(1)(vii)(b) applies only where the services are utilised in a business carried on outside India or for earning income from a source outside India. The assessee's business was carried on in India, and export activity did not convert the source of income into one outside India. The services rendered were consultancy and technical services, not construction, assembly, mining or a like project, and therefore did not fall within the exclusion in Explanation 2. The place where some services were rendered abroad did not alter the statutory character of the payment when the services were utilised in the Indian business.

Conclusion: The payment fell within section 9(1)(vii)(b) and was chargeable as fees for technical services deemed to accrue or arise in India; the assessee was liable to deduct tax at source.

Ratio Decidendi: For section 9(1)(vii)(b), the relevant test is whether the services are utilised in a business or profession carried on outside India or for earning income from a source outside India; consultancy or technical services used in an Indian business remain taxable in India notwithstanding that some services are rendered abroad.

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