TaxTMI 
TaxTMI 
2015 (10) TMI 954
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.... provisions of Income Tax Act read with Double Taxation Avoidance Agreement between Government of India and People‟s Republic of China, the amount of service fee received/receivable by the applicant from Usha International Limited in terms of Agreement dated 16.11.2012 for providing services in connection with procurement of goods by Usha International Limited from vendors in China and other related services provided in China is taxable in India and the applicant is liable to pay tax thereon in India? (2) Without prejudice to Question No.1 hereinabove in case in view of Hon‟ble Authority for Advance Ruling, service fee received by the applicant is chargeable to tax in India, whether same is chargeable to the extent of full amount received by it or only to the extent of mark up received @ 10% over and above the actual cost incurred by it in providing services in China? (3) In case the amount of service fee whether wholly or in part is chargeable to tax in India in the case of the applicant, what would be the nature of the same for the purpose of taxability and what rate of income tax same will be chargeable? 3. The applicant company had entered into a MOU dated 1.7.....
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....ase where the amount of the actual costs incurred will be different from the budgeted amount already invoiced to UIL during the relevant calendar year and the Services Fees shall be computed as follows: Service Fees = Actual Services Costs + (Actual Services Costs x Mark-Up Rate)" 5. The UIL while making the payment of service fee to the applicant company has already deducted tax at source at the rate of 10% considering the payment in the nature of fees for technical services in terms of Article 12 of Double Taxation Avoidance Agreement (DTAA) between Government of India and China. 6. The applicant‟s counsel submitted that the applicant is carrying on its business operations in China and its activities are being fully carried on in China only. According to him the income of the applicant company on account of rendering services to UIL is not taxable in India as per provisions of section 5 of the Income-tax Act because the same is neither accruing nor arising in India and cannot be deemed to have accrued or arisen in India. He also pointed out that the income is neither being received nor deemed to have been received in India. He further mentioned that in terms of Article....
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....No.79 & 80/2001(Delhi H.C.) - Ishikawajima Harima Heavy Industries Ltd. v DIT (2007) 208 ITR 408 (S.C) - Clifford Chance v. DCIT (2009) 318 ITR 237 (Bom.) The applicant‟s counsel strongly relied on the decision of the Hon‟ble Supreme Court in the case of Carborandum Company vs. CIT (supra) wherein the services rendered by the American Company were in the foreign territory and it was held that the technical service fee received by the American Company from the Indian company during the accounting year relevant to the Assessment Year 1957-58 did not accrue or arise in India nor would be it deemed to have accrued or arisen in India. He also relied upon the decision of the Hon‟ble High Court in the case of CIT vs. M/s Voest Alpine AG (supra) in which it was noted that Article VII of DTAA between India and Austria provided that amounts paid by an enterprise of one of the territories for technical services furnished by an enterprise of the other territory shall not be subject to tax by the first mentioned territory except in so far as such amounts are attributable to activities actually performed in the first mentioned territory and it was held that payments made for....
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....lowing points:- a) As UIL lacks the information/knowledge and the technical expertise about certain aspects of procuring goods from China, it has retained the applicant to "identify" "evaluate", "review", "monitor", "inspect" and "test" the new products and new ideas and other aspects of the Chinese Market from where UIL wants to source materials/products. It also does not have the information "on the new developments in China with regards to technology/product/processes upgrade" etc. for which it is dependent on the non-resident applicant whose one of the expected deliverables is "information sharing". Further, it also requires the applicant to "coordinate" with its vendors in the matters of "resolution of price issues". b) The applicant is acting as a consultant to UIL and providing consultancy services in a specialized field i.e. the Chinese Market, by identifying and evaluating the products and ideas available for buying by UIL from that market. As held by the Supreme Court in GVK Ind & Ors vs ITO, where the non-resident person provided services using its skill, acumen and knowledge in the specialized field, it was acting like a consultant and the services so rendered would f....
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....business connection of the non-resident in India, which is not the case here. Secondly, the judgment was in the context of Income Tax Act 1922, which did not have any provision on the"fees for technical services‟ which under the Income Tax Act of 1961 (w.e.f. 01.06.1976) are to be deemed to accrue or arise in India, regardless of the place where the services were rendered. And, most importantly, the judgment of the Apex Court in Carbonrandum‟s case and other similar judgments that have been relied upon by the applicant have been overtaken by the amendment in the Act through which an explanation was inserted (w.e.f. 01.06.1976) in section 9 that deems fees for technical services to accrue or arise in India regardless of the place where the services are rendered. (ii) Reference has been made to the case of CIT Vs Toshuku Ltd to liken the case of the applicant to that of the export agents operating on behalf of Indian exporters outside India, commission paid to whom was decided to be not taxable in India. The status of the applicant is much different from that of the export agent as is evident from the service agreement between the applicant and UIL which was on a princip....
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.... by the deeming fiction under Article 12(6) as well. The applicant‟s counsel, in his rejoinder to the arguments put forward by Shri Sanjay Puri, pointed out that the reliance of the Revenue on the notification for the purpose of service tax dated 20th June, 2012 is for levy of tax on services provided and is not relevant here. As regards the decision of ITAT, Mumbai Bench in the case of Ashapura Minichem Limited, he stated that the language of Article 12(4) of India-China DTAA is very clear and specific and needs to be given its literal interpretation and, secondly, the ITAT has wrongly observed that by giving interpretation to clause 4 to Article 12 to the effect that only income for services rendered in India will be taxable in India, will render Article12(6) meaningless. According to the applicant‟s counsel Article 12(6) is a deeming provision and will have its applicability only if the payment is covered in the definition of fee for technical services as defined in Article 12(4), and, moreover, Article 12(6) is for the purpose of avoiding any dispute as regards accrual of income which provides that income will be deemed to arise in India if the payer is in India. H....
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.... or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 6) 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. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 7) Where by reason of a special relationship between the payer and the beneficial owner or between both of them and some....
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.... Contracting State." In other words irrespective of the situs of the technical services having been rendered, according to this treaty provision, the fees for technical services will be deemed to have accrued in the tax jurisdiction in which person making the payment is located. That is typical manifestation of the source rule that we have discussed earlier in this order in the context of domestic law provision, and which in principal, requires taxability of an income in the tax jurisdiction in which it is sourced. Normally, the source of an income is the country in which person making the payment is located. There could, of course, be situations in which a payment related to business or profession being carried out in one country is being made by a resident of another country who is carrying out such business or profession in the first country. In these situations, even though the payment is not received from a resident of the first country, the true source of earning is located in the first country. Second limb of Article 12 (6) takes care of such situations and makes the manifestation of source rule even more unambiguous. It provides that even when person making the payment is n....
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.... 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 India-China tax treaty and is taxable in India as such. Above is the position highlighted by the ITAT, Mumbai. We are in the agreement of the view taken." 17. We respectfully agree with the rulings given as above. The expression"provision of services‟ is not defined anywhere in the tax Treaty. The applicant‟s counsel has relied on the judgement of Hon‟ble Supreme Court in the case of Carborandom Company (supra) which was decided on the basis of provision of the relevant sections of the then Income-tax, 1922, as it existed, which did not have any provision on the"fees for technical services‟ which under the Income Tax Act of 1961 are to be deemed to accrue or arise in India, regardless of the place where the services were rendered. He also does not get any support from the judgements of Hon‟ble Supreme Court in the case of Ishi....
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.... only identifying the products but also generating new ideas for UIL after conducting market research. It is also evaluating the credit, organization, finance, production facility etc. and based on this evaluation it is giving advice in the form of a report to UIL. Such evaluation can be given only by an expert in the specific area. The applicant company is also providing information on the new developments in China with regard to technology/product/process upgrade. These are specialized services requiring special skill, acumen and knowledge. These services are definitely in the nature of consultancy services. What is to be seen in such cases whether the recipient (i.e. UIL) intended and desired to utilize expert services of qualified and experienced professionals in the absence of its own ability to evaluate and review technical and financial competence of various organizations. As UIL was unable to do this on its own and could not find any professional in India for these purposes, it had to approach the applicant located in China, who offered their services. The Hon‟ble Supreme Court in the case of GVK Industries & Anr vs ITO & Anr(2015) TIOL-10(SC-IT) l-10(SC-IT) had noted....