TaxTMI 
TaxTMI 
2010 (5) TMI 523
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.... as per the provisions of Section 9(1)(vii) of the Income Tax Act, 1961; 2. should have appreciated that the final report of the bauxite testing in respect of the same sent by appellant from India, was prepared by the foreign company in China, and hence the income does not accrue or arise in India and not taxable in the hands of the foreign party; and foreign company is in the nature of business income and since the foreign company does not have a permanent establishment in India, the income is not chargeable to tax in India and no liability to deduct tax on part of the appellant has arisen. 2. The material facts, giving rise to this appeal before us, are as follows. The appellant before us is an Indian resident company by the name of Ashapura Minichem Limited (hereinafter referred to as 'AML' or 'the Indian company') and this company entered into an agreement, on 5th April 2007, with a China based company by the name of China Aluminum International Engineering Corp Ltd (hereinafter referred to as 'CAIECL' or 'the Chinese company'). Under the said agreement, the Indian company, which was in the process of building a alumina refinery with a capacity of 1000 kt/y using B....
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....essing Officer, the Indian company challenged this tax withholding liability and carried the matter in appeal before the Commissioner (Appeals ), but without any success. The assessee is aggrieved and is in further appeal before us. 3. The basic thrust of assessee's contentions is that, since no part of the testing services was rendered in India, the Chinese company did not have any tax liability in India in respect of the bauxite testing charges. By way of a detailed note, it is submitted that in order to attract taxability under section 9 (1)(vii) of the Income Tax Act, 1961, not only that the services should be utilized in India, but should also be rendered in India. In support of this proposition, learned counsel for the assessee has made a reference is made to the Hon'ble Supreme Court judgment in the case of Ishikawajima Harima Heavy Industries Ltd. vs. DIT [2007] 288 ITR 408 and of Hon'ble jurisdictional High Court's judgment in the case of Clifford Chance Vs counsel primarily relies upon his exhaustive written submissions filed before us. Coming to the taxability under the applicable treaty provisions, it is submitted that even in terms of the provisions of Article 12 of I....
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....', for the purpose of Article 12 (6), cannot have any other meaning than the meaning assigned under article 12(4) and, under article 12(4), place of performance test is to be satisfied before FTS can be taxed in the source state. It is repeatedly emphasized that Article 12 (6) can come into play only when the 'fees for technical services' meets the definition assigned to the said term under Article 12 (4) and since 'place of performance test' must be met in order to meet the definition Contracting State, the same cannot be covered by Article 12 (6). When it is pointed out by us that this approach will render Article 12(6) meaningless, since, in such a case, deeming clause to the effect that 'services are deemed to have arisen in the other Contracting State' can only be invoked when services are performed in that other Contracting State - something which is patently absurd, learned counsel submits that if words of the treaty result in an absurdity, at best, to that extent, it is to be treated as unworkable. We cannot change the entire complexion of treaty provision in the name of making a segment thereof workable. Learned counsel thus urges us to hold that, in terms of the provision....
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....rix of the case as also the applicable legal position. 5. As regards the taxability under the domestic law, we have noted that section 9(1)(vii) provides that " income by way of fees for technical services payable by, inter alia, "a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India" will be deemed to accrue or arise in India. There is also no dispute that the fees received by the assessee is covered by the scope of 'fees for technical services' under Explanation 2 to Section 9(1)(vii) which provides that " for purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel)". There is also no attracted. 6. The 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. The main support for this proposition is as....
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....on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income". According to the apex court, the global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance with 90 days rule. As per the above judgment of the apex court, the interpretation with reference to the nexus to tax territories also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and the DTAA, no extended meaning can be given to the words "income deemed to accrue or arise in India" as expressed in section 9 of the Act. Section 9 incorporates various heads of income on which tax is sought to be levied by the Republic of India. Whatever is ....
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....business connection in India; or (b) the non‐resident has rendered services in India. It is thus no longer necessary that, in order to attract taxability in India, the services must also be rendered in India. As the law stands now, utilization of these services in India is enough to attract its taxability in India. To that effect, recent amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its taxability in India 10. 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. In other major tax systems, the source and residence rules are concurrently followed. On a con....
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....xed in India under Article 12 of the India China tax treaty. 13. Article 12 of the India China tax treaty provides as follows: Royalties and fees for technical services 1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties of fees for technical services. 3. The term "royalties" as used in this Article means payment of any kind received as a consideration for the use of or the right to use, any cinematograph films and films or tapes for radio or television broadcasting, any parent, trade mark design or model, plan secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific expe....
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.... provisions of this Agreement. 14. 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. In other words, technical services being provided by resident of one of the contracting state in the other contracting state is what will be covered by the basic rule under Article 12 (4). The expression 'provision of services' is not defined or elaborated anywhere in the tax treaty. The argument of the learned counsel is that 'provision of services' should be construed as 'rendition of services', but we will come to that aspect a little later. 15. It is also important to take note of the deeming fiction under Article 12(6) of the treaty. This article, inter alia, provides that, "Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that Contracting State, a political subdivision a local authority thereof or a resident of that Contracting State". I....
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....scope of the said basic definition. It is only after 12(4) is satisfied that the deeming fiction can be invoked. He invites our attention to corresponding article of China Pakistan tax treaty, i.e. Article 13, which does not have any such deeming fiction but which provides that "the term 'fees for technical services', as used in this Article, means any consideration (including any lump sum consideration) for the provision of rendering of any managerial, technical or consultancy services by a resident of one of the contracting state in the other contracting state". It is pointed out that in China Pakistan tax treaty, there is no additional source rule, i.e. deeming fiction, for the fees for technical services, even though there is a deeming treaties, which do not generally have 'fees for technical services' clause, have a 'place of performance test', or negation of source rule, in several tax treaties. We are urged to recognize this underlying principle in Chinese tax treaties. It is also pointed out that this phenomenon is not unique to Chinese tax treaties. Our attention is invited to India Israel tax treaty11 which provides, under Article 13(5), that 'fees for technical services'....
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....ermanent establishment or fixed base in the other contracting state, there is no such corresponding clause in China that while India China tax treaty follows the source rule in the matter of fees for technical services, Pakistan China tax treaty does not do so. That's a conscious choice by the respective Governments, and just because China Pakistan have negotiated a bilateral tax treaty in a particular manner, it does not mean that India China tax treaty should also be construed on the same basis. 18. We have also noted that any other meaning being assigned to the scope expression 'fees for technical services' will render Article 12(6) meaningless. When we put this proposition to the learned counsel for the assessee, he could not point out any situations in which, in such a situation, Article 12(6) will have any application but then he added that merely because a provision will be rendered infructuous, he should not be shy of giving the treaty a correct literal interpretation. We donot think that will be a correct approach for us. In the case of Hindalco Industries Ltd Vs ACIT14 this Tribunal had an occasion to set out the principles on the basis of which tax treaties a....