2010 (5) TMI 523 - AT - Income Tax

DTAA - TDS International charges Whether Bauxite testing charges is a Fees for technical services - 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 - The Assessing Officer thus concluded that in terms of the treaty provisions, the Indian company was to withhold tax @ 10% of the gross amount of remittance to the Chinese company - 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 border - 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 - 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 - 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 - . In the case of Hindalco Industries Ltd Vs ACIT this Tribunal had an occasion to set out the principles on the basis of which tax treaties are to be interpretated 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 The appeal of the assessee 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, 1961

The 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 195

The 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.

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