Territorial nexus for fees for technical services limits taxability; payer may contest TDS-linked liability and treaty exemption failed.
The payer was held entitled to challenge the tax demand linked to its TDS obligation because the statutory scheme allows objection to the underlying liability, not only by the non-resident recipient. For fees for technical services, taxability under section 9(1)(vii)(c) continued to depend on services being rendered and utilised in India; on the facts, pure offshore technical services were not taxable, but start-up services and overall responsibility performed through Indian supervision were taxable and required TDS. Treaty exemption was denied because the assessee failed to prove that the service fee was inseparably linked to equipment supply.
Issues: (i) whether the payer had locus standi to challenge the tax demand raised in respect of the non-resident payee and the obligation to deduct tax at source; (ii) whether the payments made to the non-resident for technical services, start-up services and overall responsibility were chargeable to tax in India under section 9(1)(vii)(c) of the Income-tax Act, 1961 read with the Explanation to section 9(2); and (iii) whether the payments were exempt as being ancillary to and inextricably linked with the supply of equipment under the Double Taxation Avoidance Agreement.
Issue (i): whether the payer had locus standi to challenge the tax demand raised in respect of the non-resident payee and the obligation to deduct tax at source.
Analysis: The obligation under section 195 of the Income-tax Act, 1961 to deduct tax at source may fall on the payer, but the statutory scheme in sections 195, 201, 246(1)(i) and 248 recognises that the payer may question the underlying tax liability in order to avoid vicarious consequences. The right to appeal was therefore not confined to the non-resident recipient alone.
Conclusion: The objection to locus standi was rejected in favour of the assessee.
Issue (ii): whether the payments made to the non-resident for technical services, start-up services and overall responsibility were chargeable to tax in India under section 9(1)(vii)(c) of the Income-tax Act, 1961 read with the Explanation to section 9(2).
Analysis: The statutory phrase governing fees for technical services continued to require both rendition and utilisation of services in India for taxability under section 9(1)(vii)(c), and the Explanation to section 9(2) did not remove that territorial requirement. On the facts, the contractual services could be split: the pure technical services were rendered wholly off-shore, while the start-up services and overall responsibility were performed under direct supervision through agents in India and satisfied the territorial nexus for taxation. The payer therefore had a duty to deduct tax at source only in relation to the latter two components.
Conclusion: The technical-services component was not taxable in India, but the start-up services and overall responsibility component was taxable and TDS was deductible in favour of the Revenue.
Issue (iii): whether the payments were exempt as being ancillary to and inextricably linked with the supply of equipment under the Double Taxation Avoidance Agreement.
Analysis: The assessee did not produce customs duty documents to establish that the technical-service remuneration formed part of the equipment cost. In the absence of such proof, the payments could not be treated as inseparably linked with the supply price so as to attract treaty exemption.
Conclusion: The claim for treaty exemption was rejected.
Final Conclusion: The appeal succeeded only to the limited extent that the pure offshore technical-services payment was held not chargeable to tax, while the balance demand relating to start-up services and overall responsibility was sustained.
Ratio Decidendi: For fees for technical services under section 9(1)(vii)(c), the territorial requirement of services rendered in India and utilised in India remains operative, and the payer may contest the tax liability to which its TDS obligation is attached.